Navigating the Role of Technological Innovation on India’s Economic Growth Trajectory and Desired Government Interventions

Navigating the Role of Technological Innovation on India's Economic Growth Trajectory and Desired Government Interventions
Navigating the Role of Technological Innovation on India's Economic Growth Trajectory and Desired Government Interventions

Examining data on technological innovation, as evidenced by Indian patents, and economic growth in India reveals a consistent upward trajectory in the number of patents filed by Indian residents.

Sustained economic growth hinges on technological innovation, with research and development (R&D) playing a pivotal role in fostering innovation and its resultant advantages. The foundation for creating new technologies lies in existing scientific knowledge and the generation of novel ideas, both of which undergo rigorous R&D processes, ultimately contributing to the expansion of scientific knowledge. This progression elevates the R&D capabilities of nations, underscoring that, beyond R&D, the progression of technological knowledge is integral to the innovation continuum.

Numerous emerging economies are actively striving for technological self-sufficiency by investing substantially in affordable technologies tailored for the burgeoning middle class. India, in particular, has ascended as one of the globe’s fastest-growing economies. The implementation of liberalization policies in 1991 catalyzed significant strides in technological development, propelling India to a leadership position in technology-intensive sectors like software and pharmaceuticals. Within the realm of new, affordable, and smart technologies, India has established itself as a focal point for innovation and cost-effective solutions among emerging economies. A transformative technology in India’s landscape is the digital payments revolution, propelled by the Unified Payments Interface (UPI), marking a paradigm shift. Notably, in response to public expectations and the escalating demands of the middle class, there has been a pronounced upswing in R&D activities across both the public and private sectors, evident in the escalating R&D expenditure. The increasing involvement of the private sector in the innovation ecosystem introduces a compelling facet, given the historical dominance of public sector-driven R&D initiatives. While private R&D participation is still trailing public efforts, trends indicate a rapid convergence. International corporations such as Samsung, IBM, Microsoft, and others have established research institutes in India, underscoring the country’s attractiveness for innovation. Despite the positive impact on economic growth, the specific role of technological innovation in the Indian context has remained relatively unexplored. Against the backdrop of India’s swift technological advancements, now is a promising moment to delve into the role of innovation in shaping our economic growth trajectory.

Examining data on technological innovation, as evidenced by Indian patents, and economic growth in India reveals a consistent upward trajectory in the number of patents filed by Indian residents. In 1980, the figure stood at a modest 1207, but by 2020, it had surged exponentially to 23,141 (refer to Figure 1). Utilizing the same dataset to explore the correlation with real GDP growth, the findings indicate a clear and positive relationship between these two variables. Moreover, an analogous pattern of a correlated relationship is evident when comparing the growth rates of gross fixed capital formation and patent growth rates over the same time span.

Picture1 1

Note: PATG represents the growth rate of the number of patents filed by resident Indians, GDPG represents the growth rate of the real gross domestic product, and GFCFG represents the growth rate of the gross fixed capital formation. The observations are figures of percentage changes year over year. The sample period is from 1980 to 2019. The correlation between PATRG and GDPG is 0.261, while the correlation between PATRG and GFCFG is 0.287.

Source: Authors’ own calculations

Figure 1: Time Series Plot of Growth Rates (PATR, GDP, and GFCF)

Despite the importance of technological progress in shaping India’s economic development, there is a noticeable dearth of research that comprehensively elucidates the nature of this relationship. Consequently, policymakers in India may not fully embrace or grasp the positive connection between technological progress and economic development, leading to a disconnect between the existing research and its application in practice. While empirical evidence from various countries suggests that R&D activities contribute to increased productivity and employment across industries, However, in India, as a still-developing nation, labor is still a highly valued resource for the production process. In the pursuit of technological advancement, there are concerns that innovation may result in the displacement of human labor with machines in economic activities. This poses a significant challenge for a transitioning economy like India, particularly given the predominantly informal nature of its workforce.

In a recent publication in the academic journal “Economics of Innovation and New Technology,” we explored the role of technological innovation in driving economic growth in India and discussed the specific pathway through which innovation influences this growth. The crucial interplay between technological innovation and gross capital formation sheds light on the channel through which innovation propels India’s economic development. Analysis reveals that positive changes in patent applications exert a significantly more substantial positive impact on India’s economic growth, emphasizing the constructive influence of innovation on its trajectory. Additionally, the study also highlights the negative impact of technological progress on employment, posing significant concerns for an emerging economy like India. In the evolving economic landscape, where technology-driven industries reshape the labor market, it becomes imperative to equip the workforce with the skills needed to adapt effectively to these challenges.

Given the positive association between innovation and economic growth, to harness the enhanced synergy between technological capacity development, investments, and economic growth, the government of India should formulate forward-thinking and supportive Science, Technology, and Innovation (STI) policies and move away from the current trajectory of STI policies. Current STI policies in India are primarily shaped by intuition rather than evidence-based strategies. Moreover, we need to emphasize the pivotal role of investment as the stream through which technological innovation fuels economic growth. Nevertheless, it is essential to acknowledge that the majority of R&D investments are government-driven. Therefore, STI policies should actively promote private sector R&D investments and incentivize them to enhance their R&D capabilities.

Moreover, it is imperative for these policies to bolster investments in burgeoning sectors like biotechnology, software, and automotive technology. Additionally, upcoming STI policies should take a proactive stance toward fostering strong and dynamic collaborations between academia and industry. This approach aims to cultivate a highly skilled workforce and nurture the potential for innovation. Therefore, in the current phase of fluctuating economic growth, to capitalize on the heightened interplay between technological capacity building, investments, and economic development, India should devise forward-looking and supportive STI policies.

This article is authored by Rituparna Kaushik & Debasis Rooj, Faculties of Economics at FLAME University.

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