Greater rivalry and social trust can make Indian capital deliver

Indian firms have been underinvesting in innovation and R&D because of policy and social settings

- NITIN PAI

A few days ago, Pratap Bhanu Mehta offered a searing indictment of Indian capitalism in the Indian Express. At a time when tectonic shifts in world politics require Indian capital to step up, he finds that it "shows little appetite for risk, no courage, little ambition for leadership, and little confidence in its own ability to build." He echoes what Naushad Forbes has argued for a long time: that India's top companies underinvest in R&D. At a mere 0.3% of GDP, private spending on R&D is a fifth of the world average. India's ten most profitable firms invest a mere 2% of their profit in research, compared to 29-55% invested by their counterparts in the US, China, Japan and Germany. Alphabet, BMW and Huawei individually invest more in R&D than India's entire private sector does.

Two questions follow: Why is this the case and what can be done about it? Of the many causes, I want to focus on two that I think are most important.

The easier one first: Indian firms are sheltered from competition and have few incentives to innovate. Why invest in R&D when you can sell the same stuff to millions of new customers emerging across the vast country every year? Why venture into something risky—be it R&D or a foreign market—when there are returns to be had by serving the growing domestic market? Substantial parts of the domestic economy remain walled off with FDI restrictions and import tariffs.