Innovation in Indian Enterprises
Innovation has been a topic of considerable discussion in Indian enterprises, especially within IT services. The rapid advancements in AI have further intensified these conversations, leading to declining valuations for major Indian IT companies and cultivating widespread speculation about their future.
Understanding Innovation and Its Impact
To fully grasp the situation, it is essential to define the term “innovation” in the context of Indian enterprises. A nuanced perspective on the systemic, cultural, and sociological factors affecting innovation is imperative.
The Global Innovation Index and India’s Position
The Global Innovation Index (GII), compiled by WIPO, is frequently referred to when evaluating a country’s innovative capabilities. However, while it serves as a composite measure, it can obscure sector-specific weaknesses and differences in national scale.
India’s rise in the GII reflects the nation’s significant progress over the past decade, supported by data regarding the number of patents filed. A substantial reason for this improvement is the dynamic technology startup ecosystem driven by young entrepreneurs who tackle complex challenges using innovative tech solutions.
Redesigning Products and Processes
India has shown it is capable of reinventing products, processes, and delivery systems by effectively leveraging its core strengths and market dynamics. Examples include the Global Delivery Model in IT services, affordable generic pharmaceuticals, digital public infrastructure, cost-efficient space missions, and precise engineering solutions for the automotive and aerospace sectors. These achievements are noteworthy, merging technical expertise with a comprehensive understanding of costs, constraints, social, and business challenges.
Challenges in Innovation Leadership
Despite these positive advancements, India has not produced a substantial number of globally leading, domestically-owned firms in research-intensive industries, which its talent pool and economic potential would suggest. The country has faced difficulties in transforming scientific research into market-ready products, in sustaining long-term manufacturing learning curves, and in securing funding for ambitious innovations that might take years to develop.
These indicators do not reflect the capabilities of Indian talent; numerous global corporations have established research centres in India, and Indian professionals employed in multinational companies contribute significantly to their innovative capacities.
It becomes evident that Indian talent is constrained by specific structural challenges, which must be addressed in order to further enhance the country’s innovation standing.
Underinvestment in Research and Development
The underinvestment in R&D in India compared to countries like China, South Korea, and Israel is a significant issue. Although these nations began with similar economic foundations, they have massively outpaced India in developing their R&D capabilities.
Historical Context of Indian Industry
Until the liberalisation in 1991, Indian industry was constrained by a licensing system where connections with the government played a crucial role in obtaining licenses for factory establishment. Government regulations dictated production capacities, creating a culture primarily focused on securing permits rather than fostering innovation.
With government-set price controls across many industries, including pharmaceuticals, the incentive to innovate was virtually non-existent. Companies often faced steep taxation rates, at times reaching as high as 94%, dissuading entrepreneurs from pursuing creative ventures.
For 44 years post-independence, the prevailing mindset encouraged operating within a limited capacity, where businesses could sell whatever they produced, rather than innovating for growth. Furthermore, the political and business climate was unfavourable for foreign investments, which also stunted competition and broke the complacency of Indian firms.
The Education System and Industry Disconnect
The Indian education system largely emphasises rote memorisation instead of fostering lateral thinking and creativity. Success is predominantly measured through exam scores rather than conceptual grasp, with students prioritising maximum marks for progress into higher education.
This focus on predetermined questions discourages innovation and punishes experimentation. While India and China produce a considerable number of STEM graduates, India lags behind in research output and active researchers per million, especially compared to nations like South Korea, Japan, the US, and Israel.
The ‘brain drain’ exacerbates this issue, as many Indian researchers migrate abroad, making Indian-born engineers the largest foreign STEM workforce in countries like the US, UK, Canada, and Australia.
A severe disadvantage for India lies in the fragmented relationship between industry and academia. In more developed countries, industry often funds university research, ensuring that academic efforts align with market needs. In contrast, Indian firms have a poor track record of engaging in foundational research case work.
Need for Collaborative Efforts
To bridge this gap, collaboration among policymakers, industries, and academic research is vital to stimulate innovation. Successful case studies globally should inspire Indian enterprises to improve research and development output.
Understanding the Indian Consumer
Lastly, let us consider the behaviour of the Indian consumer, often labelled as a value buyer or price-sensitive. Their purchasing decisions and preferences also play a critical role in shaping the landscape of innovation.
India’s Innovation Gap: R&D, Capital and Industry Challenges
Pricing a product accurately is crucial for market sustainability. An average Indian consumer, even those from wealthy backgrounds, often does not hesitate to purchase pirated books or counterfeit music and films. The notion that someone’s creativity is being infringed upon rarely occurs to them.
In India, social and economic constraints hinder substantial investment in research and the development of advanced products. Take the pharmaceutical sector as an example. In developed nations, regulations allow pharmaceutical companies to freely set prices for their new drugs, enabling them to profit from these innovations for two decades. This serves as a strong incentive for companies to significantly invest in research and development.
Regulatory Challenges in India
The current environment in India prevents similar regulations from being established. Any government introducing laws that may be perceived as capitalist could face severe political backlash. Moreover, if a company does succeed in creating an innovative product, it will soon be met with cheaper counterfeit or imitation products. Indian consumers, often focused on value, might choose these lower-cost alternatives over original innovations.
The Indian judiciary’s poor record in enforcing intellectual property rights further disheartens innovators. Consequently, the overall consumer attitude in India does not encourage companies to pursue innovative pathways.
The Generic Drug Market
As a result, the Indian pharmaceutical market is largely driven by companies manufacturing generic medications. While this fosters export revenue, there is a noticeable gap in innovative solutions like new pharmaceuticals addressing chronic health issues.
Indian consumers and enterprise buyers tend to prioritise affordability, leading firms to focus on innovation in packaging, distribution, access, and operational effectiveness. This explains the successes seen in various sectors including generics, sachetised products, low-cost telecommunications, digital payment systems, frugal healthcare solutions, and more. India stands as the world’s largest supplier of generic medications, accounting for about 20% of the global supply.
The Role of Regulators
The stance taken by regulators is another crucial factor influencing innovation. Effective regulators can foster innovation through supportive legislation. The pharmaceutical regulations in developed regions highlight this approach.
To illustrate, consider the restrictive ‘angel tax’ in the startup sector. When a founder creates a promising concept and garners investor interest, it’s natural for them to seek a premium on their idea. This premium reflects the perceived value of the innovation. Unfortunately, the government’s imposition of an ‘angel tax’ treating share premiums as revenue has discouraged such entrepreneurial pursuits.
Such counterproductive regulations often harm innovation, despite claims of improved business facilitation. The complex procedures involved in starting and closing a business are often overwhelming, particularly for innovators who wish to pivot quickly after a setback.
Recent Government Initiatives
Nevertheless, the Indian government should be commended for establishing a fund of funds, designed to support innovation through investments in venture capital funds. Additionally, the RDI Fund, with a corpus of ₹1 Lakh Cr, marks a positive step towards fostering advanced innovation.
A comparison of R&D spending across India, China, and emerging markets reveals disparities rooted in the perspectives of Indian shareholders. The question arises: Are Indian shareholders prepared to allow a company to forgo dividends for years while it develops new molecules? The answer appears clear.
Shareholders in India often demand consistent earnings, limiting a company’s ability to innovate. In stark contrast, companies like SpaceX, led by Elon Musk, enjoy the support of shareholders who accept minimal oversight in exchange for long-term innovation potential.
If Indian firms aim to compete in global markets, they must find ways to secure this kind of patient capital. Unlike in the USA, where pension funds and endowments support ventures with long-term horizons, Indian investors typically do not provide such backing, despite the establishment of government initiatives like the RDI Fund.
The AI Funding Gap
Furthermore, despite India’s tech startups securing considerable funding, only a small fraction has been directed towards AI ventures. While the country ranked third globally in funding, only 4% —approximately $0.6 billion out of $16 billion—was allocated to AI startups in 2025, in stark contrast to the over $150 billion invested in the US AI sector.
Global Competitiveness through Innovation
Historically, successful nations have innovated in response to significant challenges or to enhance competitiveness. China has established itself as a formidable player, controlling global supply chains and mastering technologies such as EV batteries. Its automotive sector sees rapid advancements, with over 70% of vehicles sold being electric, thus enhancing oil resilience.
Israel exemplifies innovation, especially in agricultural and defence technologies, while Taiwan has developed a robust semiconductor ecosystem that the world relies on.
Identifying critical sectors for innovation and investing in them is imperative for India. Innovation requires systemic change and cannot occur overnight. Addressing both structural and behavioural issues is essential for the nation to become truly innovative.
The term ‘jugaad,’ while showcasing ingenuity, reflects a tendency to seek quick fixes rather than pursuing persistent problem-solving efforts. Changing this mindset is crucial.
The collective attitude of consumers, regulators, employees, and shareholders will determine whether India cultivates a conducive atmosphere for innovation. It is the maturity and long-term vision of these stakeholders that will shape a genuinely innovative society. Without addressing fundamental challenges, India cannot aspire to be a leader in innovation.