India aims to lift its research and development spending to 2% of GDP by 2036, up from 0.84% in 2023-24. While the private sector now contributes over 50% of this spend, the heavy reliance on multinational corporations and a few select sectors poses a challenge. Investors should track future tax policy changes and whether domestic firms can bridge the innovation gap to meet these ambitious growth targets.
India has set an ambitious goal to reach a research and development (R&D) expenditure-to-GDP ratio of 2% by 2036. As of the 2023-24 period, the country's Gross Expenditure on Research and Development (GERD) stood at 0.84% of GDP, representing an investment of approximately ₹2.45 lakh crore. While this marks an improvement from 0.64% in 2020-21, policy experts and industry analysts point out that sustaining this momentum is vital for shifting India from a service-driven economy to a more resilient, technology-led industrial power.
The Shift to Private Sector Participation
A critical evolution in the landscape is that the private sector has overtaken the government in research funding, now accounting for 51.8% of total expenditure. However, the composition of this spending is highly concentrated. Data indicates that multinational corporations are the primary drivers, contributing over 71% of the private sector's business R&D in 2023-24. For investors, this creates a specific dynamic: while high-end research is happening within the country, much of it is tied to global mandates rather than local, broad-based industrial innovation. The challenge lies in expanding this research intensity—the ratio of research spending to total sales—among domestic firms, particularly small and medium-sized enterprises (MSMEs).
The Policy Lever and Tax Architecture
The pace of innovation is heavily influenced by fiscal policy. In previous years, a 200% weighted tax deduction for in-house R&D acted as a strong catalyst for firms to increase their research budgets. The subsequent reduction of this benefit to 100% has, according to sector observers, dampened the enthusiasm for patenting and new product development among smaller, cash-sensitive firms. For these companies, the cost of funding long-term research projects directly impacts their immediate profit margins and cash flow. Market analysts frequently cite the restoration of aggressive, tiered tax incentives as a potential trigger that could force a faster move toward higher-value products.
New Funding Avenues and Future Monitorables
To bridge the gap between current spending and the 2% target, the government has introduced structures like the ₹1 lakh crore Research, Development and Innovation (RDI) Fund and the Anusandhan National Research Foundation (ANRF). These initiatives are designed to foster deeper collaboration between academia and the private sector. However, the ultimate test will be whether this capital translates into commercial manufacturing and technological self-reliance.
Investors looking at this sector should monitor how these policy initiatives develop. Key factors to track include the R&D-to-revenue ratio of portfolio companies, especially in specialized manufacturing, and whether upcoming budget cycles offer renewed tax support for domestic innovation. The ability of Indian firms to move beyond low-cost services and into high-value intellectual property will determine the long-term success of the 2036 innovation roadmap.