India Needs a Tax-Led Push to Revive Private Sector R&D

India’s Chief Economic Advisor, V Anantha Nageswaran, recently explored the antecedents of low industry expenditure on R&D in India, highlighting multiple causes such as a large captive market, colonial deindustrialisation, premature financialisation of Indian companies, and so on. Identifying these barriers is important as R&D increasingly emerges as a strategic imperative for a nation to gain future global leadership.

India’s R&D expenditure presents various conundrums that buck global trends. For one, gross expenditure on R&D (GERD) as a percentage of gross domestic product has been falling since 2008, from 0.86% of GDP to 0.65% in 2020, meaning that far from exceeding the pace of GDP growth and leading innovation, it is lagging way behind world R&D intensity at 2% in 2024. 

Two, within this, the shares of the public and private sectors are skewed, with the public sector accounting for 64% of the total spend, while the private industry contributes 36% as of 2020-21. In OECD countries, business share adds up to 73% of total GERD, with the share of government expenditure slowly declining over the years.

Three, in terms of government support to businesses for R&D, India prefers to deploy instruments of direct funding rather than tax support. In OECD countries, over half the total support for business R&D came through tax incentives. The Chinese government's tax relief for R&D as a percentage of GDP tripled between 2017 and 2022, with direct support staying at the same level.  

India’s R&D effort is notable, with patent filings from domestic entities surging in recent years. The country has also built one of the largest startup ecosystems since the launch of Startup India in 2016, with about 240,000 recognised startups, and ranks third in the number of unicorns created. 

However, the government’s promotional structure for R&D activity among businesses has noticeably shifted from tax incentives to direct funding support. Earlier, India offered a super deduction through a weighted tax deduction of 200% for scientific research expenditure under section 35 of the Income Tax Act. This was lowered to 150% in 2017 and then to 100% in 2020, despite protests from industry.

 The significance of this comes out clearly in the government receipts budget annex 7 for various years, which displays the revenue impact of major tax incentives for corporates. Under the head of ‘deduction/weighted deduction for scientific research’, the revenue foregone through this incentive came to Rs 112 billion in 2016-17; it collapsed to Rs 38 billion for 2023-24. This steep drop reflects the sharp fall in corporate India’s R&D expenditure as a result of the new policy.

Research shows that such tax incentives earlier helped boost R&D expenditures in Indian firms by 11% during 1992-2007 and by as much as 71% in firms that had in-house R&D facilities. Large firms witnessed 6.5x growth in R&D spending. The withdrawal of this tax benefit at a time when other leading innovation economies were raising taxation support to businesses could have contributed to declining private sector R&D intensity.

Funding vs Tax Sops
Direct support to R&D comes from the launch of major initiatives such as the Anusandhan National Research Foundation (ANRF) in 2024 and the Research, Development and Innovation (RDI) scheme in November 2025. ANRF promotes R&D in universities, research institutions and R&D laboratories, offering Rs 500 billion over 2023-28. As of March 2026, it had sanctioned projects under 14 programs, including 77 core research grants, 35 startup research grants and 20 Prime Minister Early Career Research Grants, among others. 

The RDI fund with an outlay of Rs 1 trillion over six years is expected to incentivise private sector research and innovation in strategic technology sectors, deep technologies, AI, life sciences and the digital economy. Sector-specific programs and missions are also underway with dedicated government funding. Progress has been made in encouraging private sector participation in advanced technologies such as defence manufacturing, space, AI and semiconductors through policy changes.

The direct support model adds a layer of bureaucratic burden to the R&D endeavour, being targeted at specific areas of research, to be undertaken by specified entities, and through long and complex approval processes by designated committees. While it offers patient and risk capital to investors, direct support is better deployed for priority sectors identified by the government.

To enhance general R&D spending by businesses, tax benefits offer companies greater flexibility and potential to scale. They permit self-selection of research projects and are easier to administer. 

A range of tax benefits should be considered, including restoring the weighted tax deduction to 200%, increasing patent box incentives, widening the scope of research activities covered, and special tax relief for MSME units. These should be aligned to best practices in major innovative economies with the clear target of raising total R&D intensity to 2% and building the share of the private sector to over 50% within 5 years.

Given the structural and cultural reasons for low private sector R&D investment highlighted by the Chief Economic Adviser, the government must adopt a more enabling approach to overcome these barriers. Empowering businesses with greater autonomy by restoring and enhancing R&D tax incentives, rather than relying primarily on bureaucratic direct funding mechanisms, would represent an effective and scalable policy strategy.