Liberalisation

Eroding research base

Print edition : August 19, 2016

Researchers at work in a laboratory of Eisai Pharmaceuticals in Visakhapatnam, a file picture. In recent years, the pharma industry, faced with litigation on its generic formulations from MNCs for patent infringement, seems to be slowly giving the ground it had held for decades. Photo: K.R. DEEPAK

An analysis of data shows that economic liberalisation has not, as its proponents said it would, boosted domestic investment or expenditure in R&D or spurred innovation in indigenous product development.

THE necessity of the economic liberalisation process initiated in 1991, or “economic reforms” as its proponents would prefer to call it, for the industrial sector had the following logic behind it. The impact of opening domestic markets to imported products and foreign firms/multinational corporations (MNCs) by reducing regulatory barriers would be more positive than negative as the domestic industry would be forced to become more competitive, propelled to make more R&D investments in an effort to innovate and survive in a “globalised” industrial ecosystem, which would enable it participate in world markets and gain global footprints by increasing export capacity.

Besides the dismantling of regulatory barriers to the entry of foreign products and foreign companies, at the level of industrial policy, self-reliance as the cornerstone of technological development, even as a political slogan, was dumped altogether. Today, the R&D base that was built up during the late 1960s, the 1970s and the early 1980s towards indigenous technology development and to realise the Nehruvian ideology and vision stands completely eroded, except in the areas of defence, space and atomic energy, largely because of continuing technology control regimes in these strategic sectors. So, this raises the question, if self-reliant technology development can be realised in these sectors, why can the same approach not be adopted for the other areas of technology development as well? But, for neoliberal policy advocates, self-reliance amounts to self-denial of technology advances.

Easing imports had actually begun much before total liberalisation became the official economic policy. It started in 1985 during the Rajiv Gandhi regime, but in select areas of technology. However, notwithstanding the weak linkages between knowledge generation in R&D institutions and technology development in the domestic industry, self-reliance was still being articulated, at least as a policy-level rhetoric, and was also seen to be important for some vital areas of technology.

To support and give a fillip to domestic R&D and indigenous product development, the R&D Cess Act was passed in 1986. The Act (as amended in 1995) requires that a cess, at rates not exceeding 5 per cent, be levied on all payments made towards the import of technology—lumpsum, royalties and dividends —and credited to the Consolidated Fund of India (CFI). The Act further says: “The Central government may... pay to…[the Technology Development] Board, from time to time, from out of such proceeds... such sums of money as it may think fit for being utilised for the purpose of the… Board [which is technology development].” The idea was that the R&D cess collected from industry was to be ploughed back into industry, specifically for technology development.

The R&D cess began to be collected from 1988-89. However, before the Technology Development Board (TDB) was established in 1996 under the Department of Science & Technology (DST) through a 1995 Act of Parliament, such sums from the annual cess collection as deemed fit by the government were being paid into IDBI Bank’s Venture Capital Fund (VCF). After seven years of the IDBI route, the TDB began to receive these cess funds from 1996-97 onwards. The actual R&D cess money credited into the CFI every year gives one an indication of the scale of technology imports: that figure is 20 times the R&D cess collected. For example, the value of technology imports in the last financial year was a whopping Rs.914.81 crore × 20 = Rs.18,296 crore. In comparison, India ranks low (47th) in the export of high-technology goods —such as in aerospace, computers, pharmaceuticals, scientific instruments and electrical machinery, which are products with high R&D intensity (discussed below)—valued at about Rs.3,000 crore, which accounts for only about 8-9 per cent of its manufactured goods exports. Compare with the corresponding figures for China (25.37 per cent), South Korea (26.88 per cent), Vietnam (26.93 per cent), France (26.09 per cent), United States (18.23 per cent), Germany (16 per cent) and Japan (16.69 per cent). This means that the bulk of manufactured goods in India are still of low technology.

Table 1 (a&b) shows the amounts collected and the actual payments made from 1988 onwards, initially into IDBI’s VCF (which included five years after liberalisation) and later, from 1996-97, into the TDB’s fund for technology development and commercialisation. One can see that with liberalisation, technology imports increased dramatically. In terms of rates of increase in these imports, four distinct phases can be discerned: The initial five years of liberalisation between 1991-92 and 1995-96 (before cess money began to be paid to the TDB), when the growth rate was 29.67 per cent; the slowing down between 1996-97 and 2003-04, when it was just 7.02 per cent; the increase between 2003-04 and 2008-09, when it increased sharply to 31.93 per cent; and a relatively small drop between 2008-09 and the present to 27.83 per cent. While, there is, however, no immediate explanation for the slow-growth phase, in the last 12-13 years, at least, imports have been increasing roughly at a rate of about 30 per cent.

Now what needs to be seen is whether this increase in imports, as the liberalisation rationale had it, resulted in increased R&D investment by Indian industry. While the political rhetoric of increasing national R&D expenditure to 2 per cent of the gross domestic product (GDP) continues year after year, this ratio (national R&D intensity as it is called) has never crossed even the desired level of 1 per cent (Figure 1). After significant growth between 1996-97 and 2000-01 (to 0.81 per cent), there was a slide until 2003-04 (to 0.77 per cent), when it again picked up to reach 0.88 per cent in 2005-06 and since then it has hovered around 0.87-0.88 per cent. According to the latest R&D statistics of the DST, it was 0.87 per cent in 2011-12. Table 2 shows the international comparison of national R&D intensity between select countries; India is clearly poorly placed in this respect.

Shoring up R&D expenditure to reach the desired levels requires much more enhanced investment in R&D by the industrial sector. While in developed economies, it is industry that makes the larger share of investment in R&D, in India it has been the obverse (Figure 2), with three-fourths coming from the government sector and less than a fourth from industry.

While the situation has improved marginally in recent years, and R&D expenditure by industry has increased in absolute terms (with a growth rate of about 33 per cent), its share of the total national R&D expenditure remains low, notwithstanding the many fiscal incentives that have been extended to industry over the years, particularly after liberalisation. It remains greatly less than the level of the major industrial economies and significantly less than even growing economies such as China and Brazil.

But a more appropriate measure for R&D spending in industry is the firm-level R&D intensity, which is defined as the ratio of a company’s annual R&D expenditure to its annual sales turnover. This metric is considered particularly useful for a sectoral comparison of a company’s innovative capacity. To quote Wikipedia: “R&D intensity is a measure of a company’s R&D spending toward activities aimed at expanding sector and product knowledge, manufacturing, and technology, and so aimed at spurring innovation in and through basic and applied research.” High-technology industries such as aerospace or pharma are characterised by high R&D intensity. At the gross industry level, an R&D intensity of at least 4 per cent is considered good. A typical advanced Western pharma company spends 10-15 per cent of its sales revenue on R&D.

If increased access to global products and technology was supposed to spur innovation in the domestic industry, this, as gauged from the R&D intensity in Indian industry between 1995-96 and 2010-11 (unfortunately, Reserve Bank of India bulletins do not give companies’ R&D figures after 2010-11), has clearly not happened. As Table 3 shows, for the domestic industry as a whole, the average figure is extremely low by global standards, and only a very marginal increase is discernible over the period considered.

A 2008 analysis of R&D intensity data of 2006-07 across industrial sectors by scientists of the National Institute of Science, Technology and Development Studies (NISTADS) of the Council of Scientific & Industrial Research (CSIR), however, found that some select sectors of Indian industry performed much better than the average figure of 0.35: “Manufacture of transport equipment” (1.3 per cent), “Manufacture of electronics and communication equipment” (0.94 per cent), “Chemicals and chemical products [including pharmaceuticals]” (0.85 per cent) and “Manufacture of motor vehicles”(0.82 per cent). But in absolute global terms, these figures too are very low. Barring these sectors, the R&D intensity in other sectors has been abysmally low. While liberalisation did result in increased technology imports, a commensurate increase in R&D intensity (and a consequent increase in the manufacture and export of high-technology goods) has not happened.

From Table 1, one will note that while, with increasing imports, R&D cess collection has increased significantly over the years, payments into the TDB (IDBI in the earlier phase) have been extremely low; in the last 10 years, amounts paid annually to the TDB have been less than 10 per cent of the annual collections. Overall, against a total R&D cess collected since 1995-96 (of Rs.6,787.08 crore), only about 8.5 per cent (Rs.579.17 crore) has been paid to the TDB as grants-in-aid until March 2016 even as the TDB has disbursed Rs.1,297.56 crore to date and has a commitment to provide financial assistance of Rs.1,521.84 crore for technology development and commercialisation.

According to the DST, there are two reasons for this. One, the number of good proposals for the TDB to support has been very small because of which even the TDB’s total commitment amounts to only 22.4 per cent of the total R&D cess fund. This low fund-absorbing capacity of Indian industry for technology development, innovation and commercialisation is in itself a telling commentary on the impact of liberalisation on R&D. The imperative for indigenous technology just does not seem to be there when anything can be imported.

The reports of the Comptroller and Auditor General (CAG) have repeatedly highlighted this low utilisation of the R&D cess fund. According to CAG sources, the cess proceeds have been partly used over the years to finance the burgeoning revenue deficit, which itself is the fallout of the neoliberal policies of the government. The TDB is currently in the process of working out the modalities of establishing a separate Technology Development Fund (TDF) into which the entire R&D cess collection will be credited from the CFI, and the entire amount will be available to the TDB depending on the commitment on hand, instead of piecemeal and niggardly disbursements by the Department of Economic Affairs of the Finance Ministry.

With Indian industry’s offtake of the R&D cess fund being low, a recent 2013 report of the DST, titled “White Paper for Stimulation of Investment of Private Sector Into R&D in India” by a joint committee of industry and government, made the following interesting recommendation: “A special fund (generated from R&D cess received by [the] government) on Global Partnerships may be launched where Indian industry will partner with global partners for R&D, technology acquisitions, deployment/commercialisation of technologies, capacity building of human resources. This fund may be administered by Global Innovation & Technology Alliance [GITA] on a 50:50 funding mechanism on project to project basis.” GITA was launched as a joint initiative of the Confederation of Indian Industry (CII) and the DST in 2007-08 in order to stimulate the private sector’s investment in R&D. Clearly, this is in keeping with globalisation, a cornerstone of the neoliberal policies of the government. But clearly, any outcome of such a partnership will throw up complex issues of ownership of the technology developed, intellectual property rights, manufacturing rights, exploiting for the export market, etc. However, to date there has been no further movement on the report’s recommendations.

One of the most important outcomes of globalisation was India’s accession to the World Trade Organisation (WTO) and becoming party to the Trade-related Aspects of Intellectual Property Rights (TRIPS) agreement under the WTO, which came into effect in 1995. This meant the dismantling of the domestic patenting law governed by the Indian Patents Act of 1970, which, by allowing patents only for process innovations and not products, had been phenomenally instrumental in the growth of the Indian chemical and pharmaceutical industry, a sector that remains to this day one of the strengths of Indian industry. In particular, in the area of generic drugs, India emerged as the global leader. However, in more recent years, even the pharma industry, faced with litigation on its generic formulations from big pharma MNCs for patent infringement, seems to be slowly giving the ground it had held for decades, both domestically and globally.

While R&D investment is an important measure of innovation by industry, translation of this expenditure to the generation of novel processes and products for the marketplace is a complex process marked by uncertainties and failures. With a new patent Act put in place in 2005 in line with TRIPS, which provides for product patents, in the last decade both policymakers and scientocrats of the Indian S&T establishment have been viewing patenting activity as a major yardstick of Indian industry’s innovative capability. But recent data show that patents granted by the Indian Patent Office are still dominated by foreign patents (Figure 3), which had a strong spurt after the modified Indian Patents Act of 2005 and peaked in 2008-09.

The trend of patents by Indians has, however, remained almost flat. Further, patenting by Indians is also highly skewed, with about 20 organisations accounting for two-thirds of the patents (2004 data). The major share of patenting was by industry and research organisations, while universities accounted for only about 3.5 per cent. Within industry, the bulk of the patents (about 55 per cent), as was perhaps only to be expected given the historical evolution of the sector thanks to the Indian Patents Act of 1970, were by the drugs and pharmaceuticals and chemicals sector. As noted above, this (greater innovative capacity) is a reflection of the higher R&D intensity of the pharma sector in Indian industry.

With the U.S. being the biggest and most important export market, patenting in the United States Patents and Trademarks Office (USPTO) is often viewed as an indicator of the competitive capability of a country in the global marketplace and is used as a yardstick for inter-country comparisons. According to 2005 data of the USPTO as analysed by a NISTADS study, India’s patenting in the U.S. was low compared with Taiwan, South Korea (which were significantly higher), Israel and China. The data also reveal (Figure 4) that the majority of U.S. patents in the case of Israel, South Korea and Taiwan were held by domestic industry and institutions. In the case of India and China, on the other hand, it is the MNCs (located in the respective countries) that had a higher share of U.S. patents, implying that Indian local scientific manpower is being used by MNCs to increase their patent profile; indirectly this means, as the NISTADS study has observed, that following liberalisation and the greater entry of MNCs into India, the Indian R&D system is losing this domestic human resource to MNCs.

One of the main focuses of the economic reforms has been to woo foreign direct investment (FDI) in every possible sector. Following the reforms, there has been an increase in the number of MNCs setting up R&D centres in India as part of internationalisation of R&D, a consequence of globalisation. These centres are seen to be set up around centres of excellence in science and engineering, such as the Indian Institutes of Technology (IITs), universities and even local firms, which givse them access to human resource and other S&T/R&D infrastructure already in place as part of the Indian S&T ecosystem. It is interesting to look at their linkages with Indian institutions and the impact these centres have had on the Indian R&D ecosystem, corporate R&D and the production system in particular. Two important analyses have been made: one by the Technology Information, Forecasting and Assessment Council (TIFAC), a wing of the DST, in 2002 (later updated in 2010) of 706 MNCs that made R&D investments between 2003 and 2009; and the other by Sunil Mani and Rakesh Basant for the Indian Institute of Management (IIM), Ahmedabad, in 2012.

R&D in the period of study accounted for 8.25 per cent of the total inflow of FDI into the country. According to the TIFAC study, these MNC centres invested a total of $29.44 billion in the period of study. The software and information technology (I.T.) sector had a share of 50.36 per cent of the total R&D investment, followed by the auto and pharma industries, with 9.88 per cent and 9.24 per cent respectively. However, it was found that there were a large number of small investments (less than $50 million) and a very small number of large investments. As R&D in high-technology areas requires large investment, this already suggests that India is still not considered as the destination for high-end R&D, thus proving wrong the rhetoric that India is an R&D hub.

The important conclusions from the study included the following: Linkages with educational institutions were the most prominent one and were basically for recruitment of manpower and for training and skill development. Linkages with national research institutions and with Indian firms were rare. The I.T. sector dominated in the linkages with the IITs, the Indian Institutes of Information Technology, the Indian Institute of Science and other universities. The study also pointed out that though national laboratories were better equipped in terms of resources and infrastructure to leverage such linkages with foreign R&D centres, such linkages were rare.

In the pharma sector, unlike the I.T. sector, since human resource was not an issue of concern for the MNCs, linkages with local institutions in the field were not seen as important. Linkages with R&D institutions were mainly for clinical trials. An interesting observation by the study is that MNCs tended to tie up with Indian firms that had secured patent rights in some pharma/medicine areas. However, the study noted that such linkages failed to produce significant R&D outputs from such R&D centres.

The IIM-A study made similar observations. “The primary objective of MNC R&D centres in India is not market seeking….Development of new technologies for global and regional markets is more important for these centres than modifying/adapting technologies for local market needs or manufacturing requirements. The activities of these centres are more ‘knowledge augmenting’ than ‘knowledge exploiting’. Availability of quality scientists and engineers at considerably low compensation levels compared to their home countries is one of the important determinants of their location in India.”

T. Jayaraman of the Tata Institute of Social Sciences, Mumbai, has argued in his 2009 paper “Science, Technology and Innovation Policy in India under Economic Reform: A Survey”, that the stagnation of Indian patenting activity as seen from Figure 3 suggests FDI R&D’s spillover effects (in its different aspects), an indicator of domestic innovative activity, are minimal in contrast to what has been observed in China. But the IIM-A study observed that these centres had become the locus for creating “reverse innovations”, which refers to innovations first created in India and then exported back to their parent firms for use both in developed and developing country markets, and gave medical devices industry as an example where this trend was evident. Since any innovation made in these centres using Indian scientific manpower is not largely aimed at the domestic market, patenting in India is perhaps not seen as a necessity.

Impact on R&D, as discussed above, is only one component of the adverse impacts that economic reforms have had on the entire Indian S&T system over the last 25 years. A different article is needed to look at the other aspects.

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