There are two key pre-requisites. One, India has to support innovation and the creation of intellectual property at multiple levels: of policy, import duty, financial outlays and legal support. Two, Indian entrepreneurs must show ambition to operate on global scales of quality and quantity.
Create Intellectual Property:
It is welcome the government proposes to reduce the tax break for R&D to 100%. This must be supplemented with subsidy to the extent of 100% for valid research, whether in-house, contracted out to specialized labs or university departments. Subisdies are scrutinized and audited far better than tax exemptions.
India’s import duties are inefficient, often ‘inverted’, meaning, the duty on components is higher than that on the finished product—it is cheaper to import the final product than to assemble it locally using imported components. A higher tax on the finished good than on components will certainly encourage import of components and local assembly. But the resultant value addition would be make-believe, not made in India, the product of the duty differential.
Take phone components, with zero import duty and zero countervailing duty (CVD). The phone itself has a 12% CVD, alongside zero import duty. So Indian brands import semiknocked down kits from China at zero duty, add negligible value and sell at a mark-up while pocketing a fat excise duty concession.
To avoid both killing domestic production with inverted duties as well as spurious local value addition that reaps duty differentials, and to promote true manufacture in India, which takes advantage of proximity to India’s huge market and low wage costs, import duty has to be the exact self-same rate on all imports, whether raw material, component or finished good, each of which will enjoy that rate of real effective protection. And this rate should be kept low.
Build Judicial Capacity
To develop innovation, R&D is not enough. The legal system must support it, by protecting the transient monopoly for the creator granted via intellectual property. In the case of fast-changing technology, there is probably a case for sharply lowering the patent period from the 20 years of the pharma world, but this has to be done via global consultation. But for Indian companies to be in a position to license technologies and claim royalty, they will have to begin by licensing others’ technologies, building them into their products, paying royalty for the privilege, and learn to improve on these on their own.