Promoting Innovation Among Private Sector in India

Kartik Bhatt - IGNOU

Innovation In India


In 1991, the industrial policy of India moved towards Privatization, Liberalization and Globalization. Since then, the private sector has been growing. It has increased its influence in almost every sector. But the growth of private sector is not solely dependent on liberalization and privatization, it is based on the ability of the private sector to innovate.


In 2010, Mrs Pratibha Patil, the then President, claimed the decade 2010-2020 as “the decade of innovation”. India is a country with over 1.2 billion people, 379 million (31%) of which are between the ages of 18 and 35 (Census of India, 2011). Despite being educated the youth is unable to get jobs.


For example, only one in every four urban males under 29 years is employed even though they hold at least a certificate or diploma (National Sample Survey Office, 2013). The aim of the government has been to create employment opportunities for youth while focusing on rapid economic growth. Entrepreneurship development is one of the mechanisms adopted by the Government of India towards the creation of job opportunities.


The government's assumption is that support for innovation will enhance entrepreneurship development, which will in turn accelerate economic growth. The government of India has taken many initiatives towards strengthening the innovation ecosystem, the most important of which are: i) the establishment of the National Innovation Council, whose mandate is to coordinate various innovation-related activities, and ii) the new Science, Technology and Innovation Policy 2013, which is intended to promote entrepreneurship and science-led solutions for sustainable and inclusive growth.


Policy tables turned when in 2014 the NDA government took over Congress. Since then a lot of emphasis has been given to promote innovation. The following policies have been introduced since then:

i) Skill India program ii) Start Up India iii) Stand Up India .


Problems


The problem with innovation in India is rooted in its past. Since, colonial times the foundations of various systems like legal, education, bureaucratic governance have all been inherited from Britishers. Even the complex public research system has been adopted from Britishers only. After Independence the nation opted for a closed economy and hence the public sector has become so vast. This led to incompetency in Indian industries and hence after 1991 need for innovation arose among the private sector.


The challenges of the present are as follows:


1. Multiple, complex and fragmented policies: There has been no comprehensive policy focusing on innovation and entrepreneurship so far. Also, the mechanisms to operate existing, fragmented policies were not uniform, which resulted in gaps in understanding and failure to achieve the desired effects of such policies. The intense bureaucratic environment leads to ‘Red Tapeism’.


2. Funding of Research & Development: Little budgetary funding is available for R&D: in 2020 it was only 0.88% of gross domestic product (National Science and Technology Management Information System, 2013). Consequentially, even less funding is available to the academic and R&D institutions. Out of the total R&D expenditure incurred in the country, about 63% of the expenditure is incurred by the government itself and the total R&D expenditure incurred by industry altogether is equivalent to the amount just one global multinational spends on its in-house R&D (National Science and Technology Management Information System, 2013).


3. Difficult and lengthy funding procedures: Although funding is available from banks and public sources the procedures for accessing such funding are seldom complex, cumbersome, lengthy, and bureaucratic, in other words, not conducive to innovation and entrepreneurship. Moreover, despite these difficult and lengthy procedures, the system seeks immediate returns. However, the returns from innovation are often uncertain, late, or not quantifiable immediately.


4. Angel, venture capital, and seed funding: Despite 100 angel networks operating in India (e.g., Indian Angel Network; Mumbai Angels), only tens of deals are made each year, according to the "Report of the Committee on Angel Investment & Early Stage Venture Capital" (Planning Commission, 2012). For such a populous country, this number of deals is very low compared to the numbers from abroad and fall short of India’s requirements. The report also indicates low levels of early-stage venture capital investment: around US$ 240 million per year. And, here also, there are only few hundred deals per year. Indian angels are constrained by regulations that make investment and exit cumbersome (Planning Commission, 2012).


5. Weak linkages between stakeholders: The linkages between industry, especially MSMEs and R&D or academic institutions are weak. Industry requires proven technologies, but the institutions can only offer technologies at considerably earlier stages (i.e., at mostly a laboratory or pilot scale), meaning there is still much work to be done to bring the technologies to market. There is also considerably less funding and mentorship support available from the private sector. There is no interchangeability of manpower between the industries and academia or R&D institutions, which limits their capacity for mutual understanding and technology transfer.


6. Non-conducive education system: The general education system is still too focused on grades and careers and is not oriented toward innovation and entrepreneurship. This situation is further worsened by the inherent problems of lack of infrastructure and good facilities in the educational institutions; delays in the funding system; and delays in the funds or other support reaching innovation projects. While industry craves solutions to their problems, the academic institutions are generally too busy performing routine academic exercises, churning out educated manpower that is often ill suited to either innovative industries or entrepreneurship. However, exceptions to this general view include a few high-end academic institutions such as Indian Institutes of Technology and similar institutions. Skill development is not being focused and the youth though graduate is ill-equipped for employment.


7. Rural India and Infrastructure: Basic infrastructure facilities such as electricity, internet, roads and rail, and even the availability of a skilled workforce, are not evenly distributed in India and often weak in smaller cities or towns and rural parts of the country. Thereby, there is less scope for innovation and entrepreneurship to flourish in such areas. In most cases, innovators and entrepreneurs must travel long distances – at their own expense – to receive mentorship or other support. Agricultural innovation is almost zero. Traditional and subsistence farming is practiced by more than 80% of the total framers. This is due to the unequitable distribution of land. This hampers the innovation in the sector.


8. Risk aversion among entrepreneurs: Indian entrepreneurs often seek established technology as a basis for starting their business; they are hesitant to take on innovative ideas because of the risks involved, including the low availability and high cost of funds that often arrive too late. As a result, they look for minimum risk and quick returns. The potentially higher returns from innovation take time to realize, and not enough entrepreneurs are willing (or able) to accept the risks. Even the banking procedures are too complex that it scares off the green projects.


9. Inadequate protection of intellectual property rights: In India, the intellectual property regime is weak. Innovators do not generally seek protection for their intellectual property unless forced to. For most entrepreneurs, patents and other forms of protection take too long and cost too much. Patent literacy is very low, even among educated innovators, and there is a lack of expert help available, except in the medicine and pharmaceutical industry.


Policy Initiatives So Far


The Government of India declared 2010-2020 as the "Decade of Innovation", for which the roadmap would be prepared by the newly established National Innovation Council (NInC; innovationcouncil.gov.in). The National Innovation Council is "the first step in creating a crosscutting system which will provide mutually reinforcing policies, recommendations and methodologies to implement and boost innovation performance in the country" (Nation Innovation Council, 2010).


Below, the key initiatives of this policy are explored in light of the challenges identified in the previous section:


1. Funding: The policy announces an increase in the gross expenditure in research and development (GERD) from less than 1% to 2% of the gross domestic product over the next five years. It also states that a National Science, Technology and Innovation Foundation will be established "as a public-private partnership (PPP) initiative for investing critical levels of resources in innovative and ambitious projects" (Ministry of Science and Technology, 2013), thus attracting private sector investments in R&D. It further announces the establishment of a fund for innovations for social inclusion, "small idea-small money", and a "risky idea fund". These funds are designed to address the funding-related challenges described in the previous section. The policy does not mention angel or venture capital funding but the above measures will fulfill some of the requirements of innovators and entrepreneurs and the innovation ecosystem overall. It also addresses the "rigidities" in centrally developed plans for investment and assures a flexible approach that allows fine tuning of the government's five-year plans in response to rapidly changing science and technology, and it addresses the challenge of outdated procedures adopted for funds disbursement for innovative projects.


2. Strengthening the linkages between stakeholders: The policy calls for "special and innovative mechanisms for fostering academia–research–industry partnerships" and facilitating the "mobility of experts from academia to industry and vice versa" (Ministry of Science and Technology, 2013). This initiative should help address the challenge related to linkages and should facilitate understanding within such partnerships.


3. Scientific Research: The policy promotes the spread of scientific interest and understanding across all sections of society. The policy will "further enable school science education reforms by improving teaching methods, science curricula, motivating science teachers and schemes for early attraction of talent to science" (Ministry of Science and Technology, 2013). In these ways, the policy addresses the need for educational reforms.


4. Risk taking ability: The policy accepts risk as an integral part of a vibrant innovation system. The policy emphasizes risk sharing by the government, which is slated to "significantly increase private sector investment in R&D and technology development" and "new financing mechanisms would be created for investing in enterprises without fear of failure" (Ministry of Science and Technology, 2013).


5. Intellectual property: The policy will seek to "establish a new regulatory framework for data access and sharing [and for the] creation and sharing of intellectual property. The new policy framework will enable strategic partnerships and alliances with other nations through both bilateral and multilateral cooperation in science, technology and innovation. Science diplomacy, technology synergy and technology acquisition models will be judiciously deployed based upon strategic relationships" (Ministry of Science and Technology, 2013). Thus, this initiative is very important for international collaborations.


6. Addressing the innovation value chain: The policy also enables a holistic approach to the complex value chain of innovation by providing science and technology interventions at all levels of research, technology and manufacturing, and services in the areas of socioeconomic importance. In this way, the policy has a very positive note and expresses a desire to shape the future of India. With the advantages of a "large demographic dividend" and a "huge young talent pool", the policy foresees the achievement of national goals for sustainable and inclusive growth (Ministry of Science and Technology, 2013).


7. Participation in Global R&D Infrastructure: The policy proposes the creation of "high-cost global infrastructure in some fields through international consortia models. Indian participation in such international projects will be encouraged and facilitated to gain access to facilities for advanced research in cutting edge areas of science. This will also enable the Indian industry to gain global experience and competitiveness in some high-technology areas with spin-off benefits" (Ministry of Science and Technology, 2013).


After 2013, the new NDA government, in the year 2014, brought some drastic changes in the policies to promote innovation one notch up. These policies are as follows:


1. Startup India: An action aimed at promoting bank financing for start-up ventures to boost entrepreneurship and encourage start ups with job creation. The campaign was first announced by PM Narendra Modi in his 15th August,2015 address from Red Fort.


2. Stand Up India: This scheme aims at promoting entrepreneurship among women and scheduled castes and tribes. The scheme, anchored by Ministry of Finance, facilitates bank loans between Rs 10 lakhs and Rs 1 crore to at least one Scheduled Caste or Scheduled Tribe and at least one woman borrower per bank branch for setting up a greenfield enterprise.


3. Skill India: Skill India is a campaign with an objective of training over 40 crore people in the country under different skills by 2022. The scheme looks forward to imbibe skills as desired by a person. This is done by organising vocational training and/or courses which are vocational like ITI to uplift entrepreneurial spirit in the people by acquiring these skills.

The various initiative undertaken: • National Skill Development Mission • National Policy for Skill Development and Entrepreneurship,2015 • Pradhan Mantri Kaushal Vikas Yojana (PMKVY) • Rural India Skill • Skill Loan Scheme

Future Approach


India secured 48th rank in Global Innovation Index 2020. The Director General of World Intellectual Property Organization, Francis Gurry, applauded India’s effort in promotion of innovation through deliberate policy action. This means we are on right track and the policy framework is fine. This leaves the onus of success on efficient and expedite implementation of the policy framework.


Below are some suggestions for a multi-pronged approach to boost innovation in private sector:


1. Policy Framework: Though aligned, India doesn’t yet have a designated policy for innovation only. The interchangeability of workforce among industries, academia and research and development units is still an unanswered issue. Why is the policy framework so important? With undesignated policy the issue of multiple policies occurs. The funds get distributed and a spear-heading effort is not possible. It is also difficult to analyse the beneficiaries if a designated policy is not formed. This is what happened with labour laws for so many years. Contradictory laws made industrial relations worse. Now that the multiple laws have been scraped off and 4 codes have been introduced, the interpretation of law and resolution of disputes has become manageable. Below is an example of how a policy could be framed to resolve the issue:


(1) Aim: The policy with an aim to increase innovation in Private sector should be formulated.


(2) Vision: The government should decide a target and vision to accomplish greater innovation in private sector in a given time frame. It is shameful that the innovation expenditure from private sector is so low as the annual turnover of just one MNC in India.


(3) Resources: The resources that would be allocated to such a policy should be transparently displayed on a website created for the same.


(4) Promotion: The policy should be aptly promoted to spread awareness among the people and to build trust among stakeholders. The public-private relationship should rise above the ground of compliance and should fly in the sky of mutual trust, co-operation and mutual gain.


(5) Departmentalisation: A separate department for Innovation, Research and Development (Private Sector) should be created for fast track issue resolution, single window clearances and timely actions on related issues.


2) Innovation Sectors: As per the key findings of the Global Innovation Index include concerns that public expenditure on research and development – a major element in basic and ‘blue-sky” research, which are crucial for future innovations – is stagnating. The report also notes that, unless it is contained, increased economic protectionism will lead to a slowdown of growth in innovation productivity. To resolve this issue the government should start minimalizing itself and rather focus on governance. Further, sectors like space, defence artilleries etc should be opened to private sector as well. Switzerland that topped the Innovation index has a strong belief in the bottom-up approach when it comes to innovation. State support and policy focuses on providing the framework conditions for innovation to flourish without dictating technology or sector-specific investments in innovation.


3) Preventing Brain Drain: The sharpest of the minds in the world belong to Indians yet the atmosphere of the country promotes brain drain to developed nations. Poor research and development infrastructure, greater public sector intervention, absence of state of art testing labs and innovation centres is the reason why the brightest minds fly abroad. The Indian diaspora is about 17.5 million people globally. This leads to drain of talent from the country. The New Education Policy is an innovative step in that direction but only the results will decide the fate of Indian students after complete implementation of that policy.


4) The Swiss Model: Apart from funding R&I projects in Switzerland, there is a strong emphasis on mentoring, coaching, teaching business knowledge and entrepreneurship skills as well as proving small companies and start-ups with a network of partners in the R&I sector as well as along their value chain. Support is also available for export and internationalisation. Indian entrepreneurs are risk averse and that is justified due the absence of the invisible hand. What must be learnt from the Swiss model is internationalisation of start ups. There 28 soonicorns (soon to be unicorn start up) in 2020 from Switzerland. India should too promote its start up ideas on global platforms.


5) Decentralising Innovation: In Switzerland apart from the federal institutions, the 26 cantons have their own innovation strategies and offer numerous regional innovation promotion initiatives. Their support mechanisms can vary according to geographic location, sector, or type of company. India is a vast land with different ethnicities, cultures, infrastructure etc. thus, states should be given the autonomy to frame individual policy framework on the lines of National Framework to ease innovation among private players. This doesn’t mean that Central Government shall have no onus. Instead it should focus on making the ends meet through state of art infrastructure.


6) Funding: The public sector funding is very low in comparison to what is reflected and suggested through global reports. As per Economic survey of India, India should increase its research and development funding from present 07% to 2% of the GDP. Along with public sector spending policy should try to increase funding inflows from private sector funds like angel, seed and venture funds, incubations etc. It should also aim to increase the FIIs (FDIs+ FPIs) in Indian start-ups.


7) Exit Policy: ‘It is often said that absence of an exit policy is a cog in the wheels of liberalization.’ The averseness to invest in a business due to absence of an exit mechanism in case of business failure is the main reason of why innovation is seeing a dead end in the voyage of India’s inclusive innovation drive. Policy should provide an easy exit mechanism to start-ups. This is not the first time that this shall happen. In case of National Manufacturing Zones, the government provides easy exit options through a job loss policy and a sinking fund or a combination of both. A similar structure could and should be implemented here too to promote innovation without the risk of getting stuck after entering the market.



8) Academia: Innovation should be promoted at the very basic education level. Work space, funds and incubations should be provided for the start-up ideas of young under graduate and graduate students. Public organisations like UGC, CSIR does provide grants to research work in academia but it is insufficient. Hence, private sector and global institutions should be called in to help youth experiment with ideas without worrying about funds, infrastructure, mentorship etc.


Conclusion


India has a large, demographically diverse population, with youth seeking employment. The country is on a path to development, but the rate has been slow. The government has realized the roots of the basic problems and made appropriate reforms, mainly in the areas of administration, economy, and labour, as it tries to free itself from negative aspects of its colonial legacy. There has been a substantial inclination toward science, technology, and innovation in past many years, and many initiatives have been undertaken in that direction. However, the investments in science, technology, and innovation are not yet translating into the desired reality. Realizing that the innovation-led entrepreneurship development holds promise for growth, the government has taken major policy initiatives with a strong innovation agenda. There are intimidating challenges in realizing the goal but the policy action by governments is a big step in the right direction, because it addresses most of the key challenges in developing an effective innovation ecosystem. The main initiatives are provision of funds and removing the sluggishness in the ecosystem for innovations by improving linkages and making it coruscate in a comprehensive way. The policy with a little amendments and vision; would be successful if its implementation is effective. Some time will be needed before conclusions can be drawn about such a policy's ultimate effects on the growth path. However, a new direction would reflect strong growth aspirations and would resonate with the zeal and zest of the youth who wish to journey on the risky path of innovation-based entrepreneurship.


References:

1) The Government of India's Role in Promoting Innovation through Policy Initiatives for Entrepreneurship Development, Ravinder Abhyankar, August 2018. https://timreview.ca/article/818 2) The Indian Economy, Sanjiv Verma, Unique Publishers (I) Pvt. Ltd, 2020


3) Swiss Core : https://www.swisscore.org/swissknowledge/innovation


4) Economic Survey of India 2021 https://www.indiabudget.gov.in/economicsurvey


5) Census of India. 2011. Population Enumeration Data. Government of India: Office of the Registrar General & Census Commissioner https://www.censusindia.gov.in/2011census/population_enumeration.aspx


6) NSTMIS. 2013. Research and Development Statistics at a Glance 2011-12, Government of India: National Science and Technological Management Information System http://www.nstmis-dst.org/


7) National Innovation Council, 2010, Decade of Innovation. Government of India: National Innovation Council