The manufacturing activity’s share in the GDP has declined to 13 per cent in 2024 compared to 16 per cent in 2015, Careedge Ratings said, adding that this illustrates “structural challenges” in scaling value-added production.
Countries like Bangladesh and Vietnam have been able to expand the manufacturing share of GDP in the same period.
The manufacturing activity has grown at 5 per cent per year during the same period, but increasing the share of manufacturing in the GDP is not sufficient, it said, adding that low R&D spending of 0.6-0.7 per cent of GDP is among the factors hampering the growth in the high-employment sector.
“India should target to increase its R&D spend to 2 per cent 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,” it said.
Efforts need to include strengthening the STEM (science, technology, engineering, mathematics) education, deeper industry-academia collaboration, higher private-sector R&D investment, and integrated innovation-led industrial ecosystems to build long-term global competitiveness, the rating agency said.
Its senior director Ranjan Sharma acknowledged that recent policy initiatives have strengthened production capabilities, but added that the long-term competitiveness will depend on the ability to transition to innovation-driven manufacturing that leads to greater value addition.With R&D spending at just 0.6-0.7 per cent of GDP, India remains significantly behind global peers, Sharma said.
The US spends over 3 per cent of GDP on R&D, China 2.5 per cent, and South Korea’s up to 5 per cent, the report said.
India’s share in patents stands only at 4 per cent globally, which is low because of low researcher density and weak industry-academia collaboration, it added.
R&D spending among listed Indian companies is concentrated in a few sectors like automobiles, pharmaceuticals, chemicals, and metals, while the broader industrial base remains under-invested, the rating agency said.
The innovation, which emerges from the spending, tends to be incremental rather than path-breaking, which forces Indian firms to be followers of global developments instead of leading them and deprives the country’s firms of the first-mover advantage.
Structural constraints on R&D, including low private-sector participation in R&D, risk aversion, talent outflow, and scale-first growth strategies, have hindered the transition towards innovation-led manufacturing, the report said.
Elaborating on education, the report said the per capita expenditure on the sector remains “alarmingly low” at around Rs 6,000, resulting in limited learning outcomes and skill development, particularly in technical and vocational training.
Other aspects, which can help innovation, would be expanding tax incentives for R&D, improving access to risk capital, introducing performance-linked funding models, and encouraging large business groups to invest in innovation and subsequently commercialise the same, Careeedge said.