The innovation deficit: Quick fixes to quantum leaps

In a recent remark that stirred both criticism and contemplation, the Commerce Minister stated, “What are India’s start-ups of today? We are focused on food delivery apps, turning unemployed youths into cheap labour so the rich can get their meals without moving out of their house.”

Though seemingly harsh at first glance, the Minister’s words highlight a deeper concern with India’s current startup ecosystem: “Innovation Deficit in future technologies”. This is due to the growing imbalance between convenience-driven start-ups and truly innovation-led ventures.

Despite India being the third-largest startup ecosystem in the world after the US and China, a significant chunk of companies are focused on consumer convenience rather than transformative technological innovation.

This stems primarily from India’s consumption-driven economy, which incentivises entrepreneurs to focus on sectors characterized by high consumerism. These sectors often include gig economy services such as e-commerce, food and grocery delivery, and small-scale food production like confectioneries. The entrepreneurial spirit runs high in these industries, as they tend to offer relatively quick returns.

However, innovation in fields such as deep tech, artificial intelligence, biotechnology, or space technology are not prioritised by entrepreneurs due to their long gestation period. While the government has made several policy announcements to reverse this trend, the real challenge lies not in policy vision but in policy execution.

Strong announcements, weak implementation

The government has introduced several noteworthy initiatives to promote an innovation-driven economy. These include the establishment of the National Research Foundation (NRF), the launch of the National AI Mission, and the announcement of a ₹10,000 crore “Fund of Funds” for deep-tech startups. However, the gap between policy announcement and implementation is glaring.

Take the Fund of Funds for Startups (FFS) managed by SIDBI. While ₹9,121 crore has been committed to Alternative Investment Funds (AIFs), only ₹3,931 crore (43%) has been disbursed as of April 2023. In some years, utilisation rates dipped even lower for instance in 2018, only ₹168 crore was deployed out of ₹920 crore (18%) committed.

Similarly, the Self-Reliant India (SRI) Fund announced in 2020 with a bold target of ₹50,000 crore in equity infusion for MSMEs has, so far, supported only 577 MSMEs out of nearly 5.93 crore registered enterprises in the country. The pattern is clear, well-intentioned funds exist, but their real-world impact is limited by poor implementation.

This same challenge haunts India’s research and development ecosystem. The NRF was allocated ₹50,000 crore over five years in the 2021-22 Union Budget. Yet, by 2024-25, the allocation was slashed to a mere ₹200 crore, with little on-ground progress. Meanwhile, India’s Gross Expenditure on R&D (GERD) continues to decline from 0.82% of GDP in 2009-10 to just 0.64% in 2020-21. By contrast, China spends 2.24% of its GDP on R&D, while Germany and the US invest over 3% of their GDP.

Time to turn announcements into action

To address innovation deficit in technology sectors as pointed out by the Minister, India must ensure that policy announcements are followed by meaningful implementation. This will help transform India from investment-driven to an innovation-driven economy.

First, India must boost its supply of “patient capital”. It is a long-term, risk-tolerant investment essential for nurturing deep-tech ventures. India’s household assets total $11.1 trillion, however, 65% of these are held in physical assets. This indicates the presence of a large domestic capital pool however the risk appetite and incentivisation to invest them in innovative technologies is minimal. Hence, measures such as creating localized stock exchanges, introducing long-term financial instruments, and incentivising capital reallocation to sectors with long gestation periods can help address the country’s innovation deficit.

Second, the ₹10,000 crore fund for deep-tech startups should not follow the underperformance of earlier Funds of Funds. Streamlining application processes, increasing transparency in fund allocation, and improving coordination between daughter funds and startups are essential.

Third, tax incentives can accelerate private investment in deep-tech innovation. In 2024 China slashed $361 billion in taxes and fees for high-tech firms, including $80.7 billion in R&D deductions. In contrast, India’s 2025-26 budget set aside just ₹20,000 crore to kickstart private R&D investment which is less than 5% of China’s R&D spend.

The road ahead

India’s startup landscape is dominated by ventures catering to consumer convenience which are useful, but insufficient for long-term technological leadership. Implementing these solutions can potentially change the start-up ecosystem discourse and reduce the innovation deficit. Therefore, the observations made by the Honourable Minister, though sharp, are not off the mark.

The realignment of global supply chains and geopolitical shifts are opening new doors. The world is actively seeking alternatives to traditional innovation hubs. India has the talent, the market, and the capital. What it needs now is the will to turn its announcements into action.

Approving and implementing the draft National Deep Tech Startup Policy must be the first step in this direction. By backing policy with effective execution, India can transform from a land where unemployed youth are seen as cheap labour to a country where innovative youth pioneer future-ready technologies. This will ensure Indian startups move away from “quick fixes” and make “quantum leaps”.

Authored by Lavu Sri Krishna Devarayalu. The author is a member of the Lok Sabha and the TDP Parliamentary Chairperson.

Views are personal and do not represent the stand of this publication.