Maximize the Innovation Fund’s impact by focusing on key national goals

Pharmaceuticals and medical devices was the predominant category of Indian exports held back by FDA intervention from 2019 to 2023. (HT_PRINT)
Pharmaceuticals and medical devices was the predominant category of Indian exports held back by FDA intervention from 2019 to 2023. (HT_PRINT)

Summary

  • The 1 trillion fund must focus on high-tech manufacturing, industrial decarbonization and export competitiveness.

The Innovation Fund announced in the interim budget could be a potential game-changer for the innovation ecosystem in India. Such enablers are critical, as only 4.3% of private sector firms in India spend on research and development (R&D), which is low compared to the world average of 14% (World Bank data).

Financing has been a key barrier for innovation in the country. Nearly 40% of firms surveyed by the United Nations Industrial Development Organization and India’s department of science and technology reported lack of credit as a domestic barrier for innovation. It also identified this as a particularly acute challenge in sectors such as machinery and equipment, chemical and chemical products, rubber and plastic products, among others. So, an innovation fund that offers long-term loans at low or nil interest rates could narrow funding gaps.

The government’s corpus of 1 trillion promises a significant boost. The scope and detailed objectives of the fund are yet to be announced. To maximize its impact, it will be crucial to align the fund’s focus with the country’s current priorities and goals.

First, at a broad level, it would be important to focus on manufacturing, particularly innovation-driven high-tech manufacturing. The broad factory sector’s share in India’s gross value-added has remained in a range of 14-18% for several decades. While the government is undertaking initiatives such as the production linked incentive (PLI) scheme to boost tech-intensive manufacturing, nurturing competitive and innovative firms is essential for greater localization of value chains.

Apart from tech-intensive manufacturing, another focus could be on export competitiveness. India has set a target of $2 trillion of exports by 2030. This goal could be realized by increasing the volume of exports to established destinations (go intensive, i.e.), exporting new products to existing markets, or expanding exports to new geographies (an extensive approach). Innovation and development of innovation-supporting infrastructure would be key drivers for growth in exports across both intensive and extensive endeavours.

The ability of companies to commercialize new products and processes and move up the technology curve could be a key determinant of extensive growth success in exports. Innovation and its support infrastructure would also be crucial for intensive growth, especially in the light of growing non-tariff measures (NTM) affecting Indian exports.

Indian exporters find themselves grappling with market-access problems in developed markets on account of NTMs. In 2023, they encountered the highest number of import refusals by the US Food and Drug Administration (FDA) among all exporting countries. Pharmaceuticals and medical devices was the predominant category of Indian exports held back by FDA intervention from 2019 to 2023. Similarly, in the European Union, information from its rapid alert system, which details measures against non-food dangerous products, indicates that Indian companies ranked fifth in risk alerts on exported products among non-European countries during 2019-2023. These risk alerts spanned diverse sectors, such as machinery and equipment, automotive products, toys, textiles and clothing, and chemical products. These rejections are lost export opportunities for Indian companies and also mars the reputation of our exporters.

Innovation activities could have an accelerator effect on quality standards, thereby improving export prospects for Indian companies. The new fund could focus on innovations aimed at meeting technology-based technical barriers to trade (TBT), as also performance-based TBTs, which allow for flexibility in approach but often entail a high burden of proof on exporting firms. A popular example of performance-based trade barriers is the EU’s Carbon Border Adjustment Mechanism, under which the EU will charge a carbon levy based on embedded emissions in imported products. Further, the fund could also focus on strengthening the research and testing infrastructure in India to ensure compliance of exported products with mandated standards.

A portion of the fund could also support innovations related to decarbonization across industries. Meeting our ambitious climate targets requires both leveraging existing technologies and accelerating innovation. The International Energy Agency has estimated that almost half of necessary global emission reductions by 2050 will depend on technologies yet to be commercialized. These innovations and their commercialization are often characterized by prohibitive upfront costs, technical hurdles, long payback horizons and untested business models, making them a perfect fit for the long-tenor, concessional financing envisaged under the fund.

While the Innovation Fund holds immense potential, its success ultimately hinges on its design and implementation. By aligning its focus with the government’s key priorities—boosting the manufacturing sector, achieving an ambitious $2 trillion export target, and transitioning to net-zero emissions by 2070—the fund can act as a powerful catalyst for progress.

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