India has manufacturing scale and knowledge depth, but lacks the firm-level R&D intensity needed to command strategic technologies.
Economic Survey presents innovation as a binding constraint in India’s industrial transition
The Economic Survey 2025-26 marks a material shift in India’s industrial policy diagnosis. Innovation is no longer treated as a residual outcome of growth or as a long-run aspiration contingent on income convergence. Instead, it is framed as a binding constraint on India’s transition from scale-based manufacturing towards technologically indispensable participation in global value chains (GVCs). Where the Survey is more circumspect is in fully articulating the institutional and political-economy implications of this diagnosis.
A useful way to interpret Chapter 8 is through four analytical propositions: (i) the decoupling of manufacturing expansion from value capture; (ii) the divergence between knowledge production and industrial control; (iii) the centrality of private-sector risk absorption in innovation outcomes; and (iv) the limits of scale-led industrial policy in the absence of firm-level R&D deepening.
Recent global manufacturing trends further highlight the Survey’s concern. By the third quarter of 2025, manufacturing output growth was concentrated in emerging regions, while developed economies in Europe and North America experienced stagnation. However, this shift reflects the relocation of production capacity, not the relocation of value creation. Within emerging economies themselves, medium- and high-technology manufacturing segments have expanded faster than low-technology production, growing at approximately 1.7% and 1.4%, respectively. These segments are inherently R&D-, data-, and IP-intensive. UNCTAD has explicitly noted that investment in digital technologies and innovation ecosystems constitutes the primary driver of manufacturing value addition, even when physical production is geographically dispersed. The implication is that control over upstream technological assets, rather than factory location, increasingly determines returns.
India’s upstream knowledge indicators have improved sharply. The country now ranks third globally in scholarly publications, up from seventh in 2010. The number of Indian institutions represented in the QS World University Rankings increased from 11 in 2015 to 54 in 2026, placing India among the most represented countries worldwide. India’s ranking in the Global Innovation Index improved from 66th in 2019 to 38th in 2025, the highest among lower-middle-income economies.
India has also emerged as a significant global participant in intellectual property filings, ranking fourth in trademarks, sixth in patents, and seventh in industrial designs. Patent applications have nearly doubled since FY20, while design registrations have increased 2.5-fold. Medium- and high-technology activities now account for 46.3% of manufacturing value added, and the number of DPIIT-recognised startups has grown to over 200,000 since the launch of Startup India.
Yet these indicators coexist with limited global manufacturing presence (approximately 2.9% of global manufacturing value added and 1.8% of global merchandise exports). From the standpoint of structural transformation theory (Rodrik, 2013; Hausmann et al., 2007), this suggests that India’s constraint lies not in sectoral reallocation but in the depth of technological capability embedded within production. The Survey’s observation that Indian innovation performance weakens at TRL 7-9 is consistent with this diagnosis.
The Survey identifies India’s low R&D intensity as a central weakness. Gross Expenditure on R&D stands at 0.64% of GDP, substantially below levels observed in the United States (3.48%), China (2.43%), and South Korea (4.91%). More consequential than the aggregate level is the funding structure: only 41% of India’s R&D expenditure is financed by the business sector, compared with 75-79% in advanced economies.
This asymmetry has well-established implications in the innovation literature. Public research expands the technological frontier, but private R&D determines the rate of diffusion and commercial embodiment. Where private firms underinvest in long-horizon, high-uncertainty innovation, economies tend to exhibit high research output with weak productivity transmission—a pattern evident in India.
The Survey’s emphasis on expanding GERD through institutional mechanisms such as the Anusandhan National Research Foundation and the Rs 1 lakh crore Research, Development and Innovation Fund implicitly acknowledges this failure. These instruments are explicitly designed to crowd in private capital at higher technology readiness levels, particularly in deep-tech sectors characterised by long gestation periods and uncertain returns.
The semiconductor sector illustrates the broader argument. Semiconductors are among the most R&D-intensive manufactured products globally. R&D expenditure as a share of sales is approximately 17.7% in the United States and 11-12% in South Korea and Taiwan. These economies together account for nearly 80% of global chip design revenues, reflecting sustained firm-level investment in design and process innovation.
India’s semiconductor mission represents a strategic attempt to overcome structural underinvestment by private firms. The Survey is explicit that such interventions are justified even in the absence of immediate cost competitiveness, reflecting acceptance of a learning-externalities framework rather than a static efficiency benchmark.
The limits of private R&D investment are particularly acute among MSMEs, which account for 35.4% of manufacturing output, nearly 49% of exports, and over 31% of GDP. MSMEs anchor Tier-2 and Tier-3 supply chains but lack the balance-sheet capacity to invest in piloting, testing, and certification infrastructure. Without access to shared translational facilities, clusters remain assembly-oriented and weakly embedded in global value chains.
The Survey’s proposal to establish Translational Research Centres reflects recognition of this meso-institutional gap. Innovation systems literature identifies such institutions as critical for bridging the TRL 3-7 “valley of death”, particularly in manufacturing-intensive sectors where experimentation costs are high and learning is cumulative.
The Economic Survey 2025-26 is right to treat innovation as a binding constraint. India has manufacturing scale and knowledge depth, but lacks the firm-level R&D intensity needed to command strategic technologies. Without shifting innovation risk decisively onto private balance sheets, India risks remaining stuck in a high-capability, low-conversion equilibrium.
