Role of Government in Promoting Innovation in the Enterprise Sector An Analysis of the Indian Experience

The purpose of the paper is to analyse the role of the Indian state in promoting innovations in enterprise or manufacturing sector. The country's manufacturing sector is dominated by the Chemicals and pharmaceutical sector which also accounts for the largest share in R&D investments and in the number of patents granted. The paper begins by mapping out the broad external environment within which innovative activities of firms are encouraged. This environment consists of a series of policies. A detailed analysis of them showed that policies lack specificity in targets, the time dimension and budget. Four possible dimensions of the innovation system are considered, namely the (a) policies with respect to the supply of technically trained human resource for R&D; (b) the physical technological infrastructure; (c) fiscal incentives for encouraging innovation; and (d) promotion of technology-based ventures through venture capital funds. The country suffers from a chronic shortage of research scientists and engineers of the type that is required for R&D. The basic cause of this could be traced to the quality of science and engineering education in the country and to the ever-increasing brain drain. A network of government research institutes, which have been undergoing a major restructuring, specifically since 1996, dominates the physical technological infrastructure. However they continue to depend upon governmental grants and projects for their sustenance and their interaction with the domestic manufacturing sector is very limited. India does not have any major research grant schemes and even the one that it has, in actual operation, is directed largely at public sector enterprises. Most of the schemes are research loan schemes. In other words the extent of public subsidies for private sector R&D is quite low in the country. The country has a variety of direct and indirect tax incentives for R&D. However both a macro and micro exercise revealed that most enterprises do not perceive its existence as important. In most cases the level of R&D performed would be the same even in the absence of direct tax incentives. Finally an examination of the operation of venture capital funds showed that they conform to the ideal model of providing, by and large, equity support to technology-based ventures in their early stages. The paper also makes some critical comments on the quality of India's R&D statistics and makes suggestions for their improvement.