India’s innovation challenge: How a democracy can fund the future

India today stands at a critical crossroads. It is the world’s most populous nation, one of the fastest-growing major economies, and home to a vast pool of engineers, scientists and entrepreneurs. Yet when measured by breakthrough technologies, globally valuable intellectual property, frontier patents, deep scientific research and world-leading technology companies, India continues to trail both China and the United States by a considerable margin.

The explanation is often reduced to a familiar statistic. India spends roughly 0.7 per cent of GDP on research and development, while China spends more than 2.5 per cent and the United States more than 3 per cent. But the problem is deeper than spending levels alone. The real difference lies in how nations organise themselves to take technological risks.

Innovation is fundamentally different from conventional investment. A road, bridge, refinery or power plant can be evaluated using established models. The outcomes are relatively predictable. Frontier research is different. Most projects fail. Many generate no commercial return for years. Some may take decades before their value becomes apparent. Yet a single breakthrough can create industries worth trillions of dollars.

The uncomfortable reality is that nations seeking technological leadership must be willing to fund failure.

This is where democratic governments face a challenge that authoritarian systems do not.

In a democracy, every rupee spent on speculative research competes with visible and immediate public needs. Citizens naturally ask whether scarce resources should fund uncertain technologies when there are roads to build, schools to improve, hospitals to modernise and welfare commitments to fulfil. If a government-backed research project fails after consuming hundreds or thousands of crores, questions are raised in Parliament, audits are conducted, headlines are written and political accountability follows.

As a result, bureaucracies often become risk-averse. Civil servants are rarely rewarded for supporting a project that succeeds fifteen years later. They are often criticised for supporting one that fails today.

China operates under a different model. It can evaluate innovation as a portfolio. If seventy projects fail, twenty survive and ten transform industries, the overall programme is considered successful. Democratic systems often focus on individual failures rather than portfolio outcomes.

Yet India does not need to imitate China’s political structure to compete with China technologically. Democracies have solved this problem before.

The United States built much of its technological leadership through institutions that were specifically designed to take risks. Agencies funded research that eventually led to the internet, GPS, semiconductors, advanced aerospace systems and biotechnology. Importantly, they accepted that many projects would fail.

India’s challenge is therefore not a shortage of talent or ambition. It is a shortage of institutions designed to absorb technological risk.

The country should consider creating a multi-decade National Frontier Technology Mission capitalised initially at ?1 lakh crore. Such a mission should focus on artificial intelligence, advanced materials, semiconductors, robotics, energy storage, quantum technologies, biotechnology and other strategic sectors that are likely to define economic leadership in the coming decades.

Equally important is how such a mission is governed.

Investment decisions should be kept at arm’s length from routine ministerial and bureaucratic processes. Scientists, technologists, entrepreneurs, investors and industry experts should evaluate proposals through independent committees. Governments should define national priorities and provide capital, but they should not attempt to micromanage scientific decision-making.

The objective should not be to eliminate failure. The objective should be to ensure that failures occur within a disciplined portfolio designed to maximise long-term national returns.

India should also explore a new framework for sharing innovation risk.

Today, a promoter can obtain financing for a warehouse, commercial property or conventional manufacturing facility because the risks are understood and the assets can serve as collateral. Frontier technologies operate differently. A new battery chemistry, semiconductor architecture, biotechnology platform or artificial intelligence infrastructure project may require ten years of investment before producing meaningful revenue.

Banks cannot finance such risks. Insurance companies are not designed to do so. Mutual funds require liquidity and predictable returns. Venture capital funds play a critical role but often operate within finite fund cycles and cannot shoulder every long-duration scientific risk.

The result is a financing vacuum precisely where the nation needs investment the most.

One solution may be a combination of recoverable grants and innovation insurance. Under such a system, approved research projects would receive support from the state. If successful, part of the support could be repaid through royalties, revenue-sharing or licensing income. If the project fails despite meeting agreed scientific and technical milestones, the loss would be treated as part of the national innovation portfolio.

Such a framework would encourage entrepreneurs to pursue ambitious technologies without transferring all risk to private capital.

At the same time, the state should expand funding for institutions such as ISRO, IISc, national laboratories and leading universities. Around the world, many transformative technologies originated not inside corporations but inside publicly funded laboratories and research institutions.

However, governments should recognise an important distinction. The state is often effective at funding invention but less effective at commercialisation. The government’s comparative advantage lies in financing scientific uncertainty. The private sector’s comparative advantage lies in scaling products, serving customers, building markets and creating globally competitive businesses.

Rather than attempting to become a commercial operator, the state should focus on creating intellectual property and licensing it to industry wherever appropriate.

India must also address another structural issue: talent incentives.

Many of the country’s brightest engineers face a simple economic reality. Commercial careers often offer significantly higher compensation than research careers. If India expects more people to devote their lives to scientific discovery, advanced engineering and frontier research, the financial rewards must become more competitive. A nation cannot aspire to technological leadership while systematically underpaying many of the individuals responsible for creating it.

Finally, innovation thrives in ecosystems rather than isolation. China’s rise was not built solely on funding. It was built on clusters where universities, laboratories, suppliers, manufacturers, investors and logistics networks were located within the same regions. Such ecosystems dramatically reduce the cost and complexity of experimentation.

India should build similar deep-technology clusters around its strongest research institutions and industrial centres.

The twenty-first century will not be dominated simply by nations with large populations or low-cost labour. It will be shaped by countries that generate valuable intellectual property, create transformative technologies and build institutions capable of financing uncertainty over decades rather than quarters.

India already possesses the talent, entrepreneurial energy and capital required to compete. What remains to be built is an innovation architecture capable of supporting risk at scale. The question is no longer whether India can afford to invest aggressively in research and development. The more important question is whether it can afford not to.

Writer is a Managing Director of Hemraj Group; Views presented are personal.