India’s R&D expenditure low at 0.6-0.7% of GDP, should be raised to 2%: CareEdge

India’s import bill has been rising steadily with the government now looking to curb non-essential imports, but a key reason for domestic manufacturing capabilities not keeping pace with economic growth could be low spending on research and development (R&D).

India’s R&D expenditure remains low at about 0.6–0.7% of GDP, significantly below global innovation leaders, said a new paper by CareEdge Ratings. Countries like the US spend nearly 3-3.5% of GDP on R&D, while China spends close to 2.5% and South Korea about 4-5%, it said.

According to the report, R&D spending among listed Indian companies is concentrated only in a few sectors, primarily automobiles, pharmaceuticals, chemicals, and metals, while the broader industrial base remains under-invested.

Further, innovation that emerges from this spending tends to be incremental rather than path-breaking, with Indian firms generally following global developments instead of leading them. “As a result, the country has yet to secure a meaningful first-mover advantage in novel discoveries. For example, top innovator pharma companies on an average spend about 20% of revenue on R&D, which remained at nearly 6% for top Indian pharma companies,” said the report.

MUST READ: Historic low! Rupee at 100 against dollar soon? What's behind INR's free fall against USD?

It contended that low R&D investment in India has also limited the development of advanced manufacturing, keeping the economy focused on low-to-mid-tech production. This makes it harder for India to compete with innovation-driven exporters such as China, South Korea, and developed economies such as the US, Germany, and Japan.

For instance, China has leveraged sustained R&D investment to transition into high-technology sectors such as electric vehicles, advanced battery materials, drones, semiconductors, and telecommunications, while South Korea demonstrated strong corporate-led innovation through private firms that can underpin global export competitiveness, it said.

“India should target to increase its R&D spend to ~2% by 2035 in line with its Asian peers, to enhance the share of manufacturing in GDP, which will require, greater private-sector participation, stronger innovation ecosystems and improved research-to-commercialisation pipelines,” said Ranjan Sharma, Senior Director, CareEdge Ratings.

MUST READ: India’s AI-first GCCs are reshaping global enterprise strategy: Nasscom’s Rajesh Nambiar

Despite several measures from the government, manufacturing output in India has not expanded significantly. The report, in fact, pointed out that India’s manufacturing output increased to $493 billion in 2024 from $328 billion in 2015, but its share in GDP declined to 13% from 16% in the same period.

“India’s manufacturing growth has been largely volume-driven so far; but sustaining global competitiveness will require a decisive shift towards innovation and R&D-led industrialisation. Strengthening private-sector participation and improving research commercialisation will be critical to unlocking higher value addition,” said Krunal Modi, Director, CareEdge Ratings.