Innovation: Trending Up but Needs Thrust, Especially from the Private Sector | Economic Survey & Government Reports - UPSC PDF Download

 Page 1


CHAPTER
08
“If a rare opportunity occurs, while it lasts, let a man do that which is rarely 
to be accomplished (but for such an opportunity)”.
? Thirukural, Chapter 49, verse 489.
India entered the top 50 innovating countries for the first time in 2020 since the inception 
of the Global Innovation Index (GII) in 2007, by improving its rank from 81 in 2015 to 
48 in 2020. To herald this significant achievement while setting out the path for further 
progress, the Survey examines India’ s innovation performance on various dimensions. 
India ranks first in Central and South Asia, and third amongst lower middle-income 
group economies. Among the seven pillars of the GII, India ranks 27
th
 in knowledge and 
technology outputs (KTO); 31
st
 in market sophistication; 55
th
 in business sophistication; 
60
th
 in human capital and research (HCR); 61
st
 in institutions; 64
th
 in creative output; and 
75
th
 in infrastructure. Among sub-pillars, India ranks tenth in knowledge diffusion and 15
th
 
in trade, commerce and market scale. Among parameters, India ranks first in ICT services 
exports; third in domestic market scale (PPP); ninth in government’ s online services; 
ninth in growth rate of productivity; 12
th
 in science and engineering graduates; 13
th
 in 
ease of protecting minority investors; 15
th
 in e-participation; 16
th
 in average expenditure 
of top three global R&D companies; and 19
th
 in market capitalisation.
India’ s ranking on innovation outputs improved from 69 in 2015 to 45 in 2020. Its 
ranking on KTO almost halved from 49 in 2015 to 27 in 2020 while ranking on creative 
outputs improved from 95 in 2015 to 64 in 2020. India’ s innovation input sub-index 
ranking improved from 100 in 2015 to 57 in 2020. This improvement was led by business 
sophistication, where ranking improved from 116 in 2015 to 55 in 2020. India’ s ranking 
on Institutions improved from 104 in 2015 to 61 in 2020. Its ranking on HCR improved 
from 103 in 2015 to 60 in 2020. Its ranking on market sophistication improved from 72 
in 2015 to 31 in 2020. India’ s ranking on infrastructure improved from 87 in 2015 to 75 
in 2020. 
The GII also highlights areas with scope for improvement. India ranks 107
th
 on education 
sub-pillar, mainly on account of ranking 118
th
 on pupil-teacher ratio in secondary 
education; 115
th
 on new business per thousand population in ages 15-64; 108
th
 on tertiary 
Innovation: Trending Up but needs 
thrust, especially from the Private 
Sector
Page 2


CHAPTER
08
“If a rare opportunity occurs, while it lasts, let a man do that which is rarely 
to be accomplished (but for such an opportunity)”.
? Thirukural, Chapter 49, verse 489.
India entered the top 50 innovating countries for the first time in 2020 since the inception 
of the Global Innovation Index (GII) in 2007, by improving its rank from 81 in 2015 to 
48 in 2020. To herald this significant achievement while setting out the path for further 
progress, the Survey examines India’ s innovation performance on various dimensions. 
India ranks first in Central and South Asia, and third amongst lower middle-income 
group economies. Among the seven pillars of the GII, India ranks 27
th
 in knowledge and 
technology outputs (KTO); 31
st
 in market sophistication; 55
th
 in business sophistication; 
60
th
 in human capital and research (HCR); 61
st
 in institutions; 64
th
 in creative output; and 
75
th
 in infrastructure. Among sub-pillars, India ranks tenth in knowledge diffusion and 15
th
 
in trade, commerce and market scale. Among parameters, India ranks first in ICT services 
exports; third in domestic market scale (PPP); ninth in government’ s online services; 
ninth in growth rate of productivity; 12
th
 in science and engineering graduates; 13
th
 in 
ease of protecting minority investors; 15
th
 in e-participation; 16
th
 in average expenditure 
of top three global R&D companies; and 19
th
 in market capitalisation.
India’ s ranking on innovation outputs improved from 69 in 2015 to 45 in 2020. Its 
ranking on KTO almost halved from 49 in 2015 to 27 in 2020 while ranking on creative 
outputs improved from 95 in 2015 to 64 in 2020. India’ s innovation input sub-index 
ranking improved from 100 in 2015 to 57 in 2020. This improvement was led by business 
sophistication, where ranking improved from 116 in 2015 to 55 in 2020. India’ s ranking 
on Institutions improved from 104 in 2015 to 61 in 2020. Its ranking on HCR improved 
from 103 in 2015 to 60 in 2020. Its ranking on market sophistication improved from 72 
in 2015 to 31 in 2020. India’ s ranking on infrastructure improved from 87 in 2015 to 75 
in 2020. 
The GII also highlights areas with scope for improvement. India ranks 107
th
 on education 
sub-pillar, mainly on account of ranking 118
th
 on pupil-teacher ratio in secondary 
education; 115
th
 on new business per thousand population in ages 15-64; 108
th
 on tertiary 
Innovation: Trending Up but needs 
thrust, especially from the Private 
Sector
238 Economic Survey 2020-21   V olume 1
inbound mobility; 108
th
 on ICT access as well as ICT use; 105
th
 on ease of starting a 
business; and 101
st
 on females employed with advanced degrees. Also, as the 5th largest 
economy, India’ s aspiration must be to compete on innovation with the top ten economies. 
The business sector in India contributes much less to gross expenditure on R&D (about 
37 per cent) when compared to businesses in each of the top ten economies (68 per 
cent  on average). This is despite the fact the tax incentives for R&D were more liberal 
in India when compared to those in the top ten economies. The Government does a 
disproportionate amount of heavy-lifting on R&D by contributing 56 per cent of the gross 
expenditure on R&D, which is three times the average contributed by governments in 
the top ten economies. Yet, India’ s gross expenditure on R&D at 0.65 per cent of GDP is 
much lower than that of the top 10 economies (1.5-3 per cent of GDP) primarily because 
of the disproportionately lower contribution from the business sector. Indian government 
sector contributes the highest share of total R&D personnel (36 per cent) and researchers 
(23 per cent) amongst the top ten economies (nine per cent on average). Indian business 
sector’ s contribution to the total R&D personnel (30 per cent) and researchers (34 per 
cent) in the country is the second lowest amongst the top ten economies (over 50 per 
cent on average). Indian residents contribute only 36 per cent of patents filed in India as 
compared to 62 per cent on average in the top ten economies. Indian firms also perform 
below expectation on innovation for their level of access to equity finance, which is the 
most crucial for innovation.
India must significantly ramp up investment in R&D if it is to achieve its aspiration to 
emerge as the third largest economy in terms of GDP current US$. Mere reliance on 
“Jugaad innovation” risks missing the crucial opportunity to innovate our way into the 
future. This requires a major thrust on R&D by the business sector. India’ s resident firms 
must increase their share in total patents to a level commensurate to our status as the fifth 
largest economy in current US$. India must also focus on strengthening institutions and 
business sophistication to improve its performance on innovation outputs. 
As Economic Survey 2019-20 discussed in the chapter “Entrepreneurship and Wealth 
Creation at the Grassroots”, the Startup India campaign of the Government of India 
recognises entrepreneurship as an increasingly important strategy to fuel productivity 
growth and wealth creation in India. This assumes greater importance in the context of 
enhancing private participation in innovation in India - in terms of contribution to gross 
expenditure on R&D, R&D personnel and researchers, and share in patents filed in the 
country. The lessons drawn therein on the crucial role of literacy, education, physical 
infrastructure and policies enabling ease of doing business, as drivers of new firm creation 
and entrepreneurship, remain relevant in this analysis. 
WHY INNOV ATION MATTERS 
8.1 A vast body of literature in economics extols the role of innovation and technological 
progress in growth and development. Box 1 presents a selective review of literature highlighting 
the importance of innovation.
Page 3


CHAPTER
08
“If a rare opportunity occurs, while it lasts, let a man do that which is rarely 
to be accomplished (but for such an opportunity)”.
? Thirukural, Chapter 49, verse 489.
India entered the top 50 innovating countries for the first time in 2020 since the inception 
of the Global Innovation Index (GII) in 2007, by improving its rank from 81 in 2015 to 
48 in 2020. To herald this significant achievement while setting out the path for further 
progress, the Survey examines India’ s innovation performance on various dimensions. 
India ranks first in Central and South Asia, and third amongst lower middle-income 
group economies. Among the seven pillars of the GII, India ranks 27
th
 in knowledge and 
technology outputs (KTO); 31
st
 in market sophistication; 55
th
 in business sophistication; 
60
th
 in human capital and research (HCR); 61
st
 in institutions; 64
th
 in creative output; and 
75
th
 in infrastructure. Among sub-pillars, India ranks tenth in knowledge diffusion and 15
th
 
in trade, commerce and market scale. Among parameters, India ranks first in ICT services 
exports; third in domestic market scale (PPP); ninth in government’ s online services; 
ninth in growth rate of productivity; 12
th
 in science and engineering graduates; 13
th
 in 
ease of protecting minority investors; 15
th
 in e-participation; 16
th
 in average expenditure 
of top three global R&D companies; and 19
th
 in market capitalisation.
India’ s ranking on innovation outputs improved from 69 in 2015 to 45 in 2020. Its 
ranking on KTO almost halved from 49 in 2015 to 27 in 2020 while ranking on creative 
outputs improved from 95 in 2015 to 64 in 2020. India’ s innovation input sub-index 
ranking improved from 100 in 2015 to 57 in 2020. This improvement was led by business 
sophistication, where ranking improved from 116 in 2015 to 55 in 2020. India’ s ranking 
on Institutions improved from 104 in 2015 to 61 in 2020. Its ranking on HCR improved 
from 103 in 2015 to 60 in 2020. Its ranking on market sophistication improved from 72 
in 2015 to 31 in 2020. India’ s ranking on infrastructure improved from 87 in 2015 to 75 
in 2020. 
The GII also highlights areas with scope for improvement. India ranks 107
th
 on education 
sub-pillar, mainly on account of ranking 118
th
 on pupil-teacher ratio in secondary 
education; 115
th
 on new business per thousand population in ages 15-64; 108
th
 on tertiary 
Innovation: Trending Up but needs 
thrust, especially from the Private 
Sector
238 Economic Survey 2020-21   V olume 1
inbound mobility; 108
th
 on ICT access as well as ICT use; 105
th
 on ease of starting a 
business; and 101
st
 on females employed with advanced degrees. Also, as the 5th largest 
economy, India’ s aspiration must be to compete on innovation with the top ten economies. 
The business sector in India contributes much less to gross expenditure on R&D (about 
37 per cent) when compared to businesses in each of the top ten economies (68 per 
cent  on average). This is despite the fact the tax incentives for R&D were more liberal 
in India when compared to those in the top ten economies. The Government does a 
disproportionate amount of heavy-lifting on R&D by contributing 56 per cent of the gross 
expenditure on R&D, which is three times the average contributed by governments in 
the top ten economies. Yet, India’ s gross expenditure on R&D at 0.65 per cent of GDP is 
much lower than that of the top 10 economies (1.5-3 per cent of GDP) primarily because 
of the disproportionately lower contribution from the business sector. Indian government 
sector contributes the highest share of total R&D personnel (36 per cent) and researchers 
(23 per cent) amongst the top ten economies (nine per cent on average). Indian business 
sector’ s contribution to the total R&D personnel (30 per cent) and researchers (34 per 
cent) in the country is the second lowest amongst the top ten economies (over 50 per 
cent on average). Indian residents contribute only 36 per cent of patents filed in India as 
compared to 62 per cent on average in the top ten economies. Indian firms also perform 
below expectation on innovation for their level of access to equity finance, which is the 
most crucial for innovation.
India must significantly ramp up investment in R&D if it is to achieve its aspiration to 
emerge as the third largest economy in terms of GDP current US$. Mere reliance on 
“Jugaad innovation” risks missing the crucial opportunity to innovate our way into the 
future. This requires a major thrust on R&D by the business sector. India’ s resident firms 
must increase their share in total patents to a level commensurate to our status as the fifth 
largest economy in current US$. India must also focus on strengthening institutions and 
business sophistication to improve its performance on innovation outputs. 
As Economic Survey 2019-20 discussed in the chapter “Entrepreneurship and Wealth 
Creation at the Grassroots”, the Startup India campaign of the Government of India 
recognises entrepreneurship as an increasingly important strategy to fuel productivity 
growth and wealth creation in India. This assumes greater importance in the context of 
enhancing private participation in innovation in India - in terms of contribution to gross 
expenditure on R&D, R&D personnel and researchers, and share in patents filed in the 
country. The lessons drawn therein on the crucial role of literacy, education, physical 
infrastructure and policies enabling ease of doing business, as drivers of new firm creation 
and entrepreneurship, remain relevant in this analysis. 
WHY INNOV ATION MATTERS 
8.1 A vast body of literature in economics extols the role of innovation and technological 
progress in growth and development. Box 1 presents a selective review of literature highlighting 
the importance of innovation.
239 Innovation: Trending Up but needs thrust, especially from the Private Sector
Box 1: Literature on Innovation, R&D and Growth
The importance of technological progress in economic growth began with the Solow model (Solow 
1956), which highlighted that output per worker mainly depends on savings, population growth and 
technological progress. This model was empirically extended by Barro (1991); Barro and Sala-i-
Martin (1991, 1992), and Mankiw, Romer and Weil (1992), identifying technological progress as the 
key determinant of long-term economic growth.
While the Solow model treats technological progress as exogenous, the new growth theory endogenises 
technological progress and suggests several determinants of the same. These include human capital 
(Lucas, 1988); search for new ideas by profit-oriented researchers  (Romer, 1990); infrastructure 
(Aschauer 1989); and improving quality of existing products (Grossman and Helpman 1991; Aghion 
and Howitt 1992). Endogenous growth has also been explained using the Shumpeterian model of 
creative destruction, where innovative products brought to the market by entrants lead to replacement/
destruction of the old ones produced by the incumbents (Aghion, Akcigit, & Howitt, 2013).
The relation between innovation and research sector received attention with endogenous growth 
models (Romer, 1990 and Aghion & Howitt, 1992). Some postulated that R&D activities could make 
long run growth possible (Jones, 1995) and R&D effects on aggregate production functions were 
tested (Sveikauskas, 2007). Research showed that small enterprise R&D activities brought large 
returns to the national economy through new technologies (Comin, 2004). More recently, studies 
have focused on patenting and economic growth (Westmore, 2013; Acharya and Subramanian, 
2009, Acharya et al. 2013). Studies have also established a relationship between entrepreneurship 
innovation and economic growth (Galindo & Méndez, 2014). An increase of 10 per cent in R&D 
investment has been associated with productivity gains ranging from 1.1 per cent to 1.4 per cent 
(Donselaar and Koopmans, 2016).
Figure 1: Positive Correlation between GDP per capita (2019) and Past Innovation
A) Innovation (2016) B) Innovation (2014)
BR
CA
CH
FR
GR
IT
JP
UK
US
India 66
3 3.5 4 4.5 5
Log 10 (GDP per capita 2019, PPP Current Int $)
120 100 80 60 40 20 0
Rank - Global Innovation Index 2016
GDP per capita and Global Innovation Index
BR
CA
CH
FR
GR
IT
JP
UK
US
India 76
3 3.5 4 4.5 5
Log 10 (GDP per capita 2019, PPP Current Int $)
120 100 80 60 40 20 0
Rank - Global Innovation Index 2014
GDP per capita and Global Innovation Index
Source: The World Bank and Global Innovation Index database
Note: Highest possible rank is 1. Figure shows India’s innovation rank. US = USA, CH = China, JP = Japan, GR = 
Germany, UK = United Kingdom, FR = France, IT = Italy, BR = Brazil and CA = Canada.
8.2 The positive correlation between past innovation performance and current GDP per capita 
can be examined empirically. Figure 1 shows the positive correlation between past innovation 
performance (three-years ago in 2016 and five years ago in 2014) with GDP per capita in PPP 
Page 4


CHAPTER
08
“If a rare opportunity occurs, while it lasts, let a man do that which is rarely 
to be accomplished (but for such an opportunity)”.
? Thirukural, Chapter 49, verse 489.
India entered the top 50 innovating countries for the first time in 2020 since the inception 
of the Global Innovation Index (GII) in 2007, by improving its rank from 81 in 2015 to 
48 in 2020. To herald this significant achievement while setting out the path for further 
progress, the Survey examines India’ s innovation performance on various dimensions. 
India ranks first in Central and South Asia, and third amongst lower middle-income 
group economies. Among the seven pillars of the GII, India ranks 27
th
 in knowledge and 
technology outputs (KTO); 31
st
 in market sophistication; 55
th
 in business sophistication; 
60
th
 in human capital and research (HCR); 61
st
 in institutions; 64
th
 in creative output; and 
75
th
 in infrastructure. Among sub-pillars, India ranks tenth in knowledge diffusion and 15
th
 
in trade, commerce and market scale. Among parameters, India ranks first in ICT services 
exports; third in domestic market scale (PPP); ninth in government’ s online services; 
ninth in growth rate of productivity; 12
th
 in science and engineering graduates; 13
th
 in 
ease of protecting minority investors; 15
th
 in e-participation; 16
th
 in average expenditure 
of top three global R&D companies; and 19
th
 in market capitalisation.
India’ s ranking on innovation outputs improved from 69 in 2015 to 45 in 2020. Its 
ranking on KTO almost halved from 49 in 2015 to 27 in 2020 while ranking on creative 
outputs improved from 95 in 2015 to 64 in 2020. India’ s innovation input sub-index 
ranking improved from 100 in 2015 to 57 in 2020. This improvement was led by business 
sophistication, where ranking improved from 116 in 2015 to 55 in 2020. India’ s ranking 
on Institutions improved from 104 in 2015 to 61 in 2020. Its ranking on HCR improved 
from 103 in 2015 to 60 in 2020. Its ranking on market sophistication improved from 72 
in 2015 to 31 in 2020. India’ s ranking on infrastructure improved from 87 in 2015 to 75 
in 2020. 
The GII also highlights areas with scope for improvement. India ranks 107
th
 on education 
sub-pillar, mainly on account of ranking 118
th
 on pupil-teacher ratio in secondary 
education; 115
th
 on new business per thousand population in ages 15-64; 108
th
 on tertiary 
Innovation: Trending Up but needs 
thrust, especially from the Private 
Sector
238 Economic Survey 2020-21   V olume 1
inbound mobility; 108
th
 on ICT access as well as ICT use; 105
th
 on ease of starting a 
business; and 101
st
 on females employed with advanced degrees. Also, as the 5th largest 
economy, India’ s aspiration must be to compete on innovation with the top ten economies. 
The business sector in India contributes much less to gross expenditure on R&D (about 
37 per cent) when compared to businesses in each of the top ten economies (68 per 
cent  on average). This is despite the fact the tax incentives for R&D were more liberal 
in India when compared to those in the top ten economies. The Government does a 
disproportionate amount of heavy-lifting on R&D by contributing 56 per cent of the gross 
expenditure on R&D, which is three times the average contributed by governments in 
the top ten economies. Yet, India’ s gross expenditure on R&D at 0.65 per cent of GDP is 
much lower than that of the top 10 economies (1.5-3 per cent of GDP) primarily because 
of the disproportionately lower contribution from the business sector. Indian government 
sector contributes the highest share of total R&D personnel (36 per cent) and researchers 
(23 per cent) amongst the top ten economies (nine per cent on average). Indian business 
sector’ s contribution to the total R&D personnel (30 per cent) and researchers (34 per 
cent) in the country is the second lowest amongst the top ten economies (over 50 per 
cent on average). Indian residents contribute only 36 per cent of patents filed in India as 
compared to 62 per cent on average in the top ten economies. Indian firms also perform 
below expectation on innovation for their level of access to equity finance, which is the 
most crucial for innovation.
India must significantly ramp up investment in R&D if it is to achieve its aspiration to 
emerge as the third largest economy in terms of GDP current US$. Mere reliance on 
“Jugaad innovation” risks missing the crucial opportunity to innovate our way into the 
future. This requires a major thrust on R&D by the business sector. India’ s resident firms 
must increase their share in total patents to a level commensurate to our status as the fifth 
largest economy in current US$. India must also focus on strengthening institutions and 
business sophistication to improve its performance on innovation outputs. 
As Economic Survey 2019-20 discussed in the chapter “Entrepreneurship and Wealth 
Creation at the Grassroots”, the Startup India campaign of the Government of India 
recognises entrepreneurship as an increasingly important strategy to fuel productivity 
growth and wealth creation in India. This assumes greater importance in the context of 
enhancing private participation in innovation in India - in terms of contribution to gross 
expenditure on R&D, R&D personnel and researchers, and share in patents filed in the 
country. The lessons drawn therein on the crucial role of literacy, education, physical 
infrastructure and policies enabling ease of doing business, as drivers of new firm creation 
and entrepreneurship, remain relevant in this analysis. 
WHY INNOV ATION MATTERS 
8.1 A vast body of literature in economics extols the role of innovation and technological 
progress in growth and development. Box 1 presents a selective review of literature highlighting 
the importance of innovation.
239 Innovation: Trending Up but needs thrust, especially from the Private Sector
Box 1: Literature on Innovation, R&D and Growth
The importance of technological progress in economic growth began with the Solow model (Solow 
1956), which highlighted that output per worker mainly depends on savings, population growth and 
technological progress. This model was empirically extended by Barro (1991); Barro and Sala-i-
Martin (1991, 1992), and Mankiw, Romer and Weil (1992), identifying technological progress as the 
key determinant of long-term economic growth.
While the Solow model treats technological progress as exogenous, the new growth theory endogenises 
technological progress and suggests several determinants of the same. These include human capital 
(Lucas, 1988); search for new ideas by profit-oriented researchers  (Romer, 1990); infrastructure 
(Aschauer 1989); and improving quality of existing products (Grossman and Helpman 1991; Aghion 
and Howitt 1992). Endogenous growth has also been explained using the Shumpeterian model of 
creative destruction, where innovative products brought to the market by entrants lead to replacement/
destruction of the old ones produced by the incumbents (Aghion, Akcigit, & Howitt, 2013).
The relation between innovation and research sector received attention with endogenous growth 
models (Romer, 1990 and Aghion & Howitt, 1992). Some postulated that R&D activities could make 
long run growth possible (Jones, 1995) and R&D effects on aggregate production functions were 
tested (Sveikauskas, 2007). Research showed that small enterprise R&D activities brought large 
returns to the national economy through new technologies (Comin, 2004). More recently, studies 
have focused on patenting and economic growth (Westmore, 2013; Acharya and Subramanian, 
2009, Acharya et al. 2013). Studies have also established a relationship between entrepreneurship 
innovation and economic growth (Galindo & Méndez, 2014). An increase of 10 per cent in R&D 
investment has been associated with productivity gains ranging from 1.1 per cent to 1.4 per cent 
(Donselaar and Koopmans, 2016).
Figure 1: Positive Correlation between GDP per capita (2019) and Past Innovation
A) Innovation (2016) B) Innovation (2014)
BR
CA
CH
FR
GR
IT
JP
UK
US
India 66
3 3.5 4 4.5 5
Log 10 (GDP per capita 2019, PPP Current Int $)
120 100 80 60 40 20 0
Rank - Global Innovation Index 2016
GDP per capita and Global Innovation Index
BR
CA
CH
FR
GR
IT
JP
UK
US
India 76
3 3.5 4 4.5 5
Log 10 (GDP per capita 2019, PPP Current Int $)
120 100 80 60 40 20 0
Rank - Global Innovation Index 2014
GDP per capita and Global Innovation Index
Source: The World Bank and Global Innovation Index database
Note: Highest possible rank is 1. Figure shows India’s innovation rank. US = USA, CH = China, JP = Japan, GR = 
Germany, UK = United Kingdom, FR = France, IT = Italy, BR = Brazil and CA = Canada.
8.2 The positive correlation between past innovation performance and current GDP per capita 
can be examined empirically. Figure 1 shows the positive correlation between past innovation 
performance (three-years ago in 2016 and five years ago in 2014) with GDP per capita in PPP 
240 Economic Survey 2020-21   V olume 1
terms (2019) across countries. It may be seen that India has performed below expectation for its 
past innovation performance in terms of recent GDP per capita.
HOW DOES INDIA PERFORM ON INNOV ATION?
8.3 India ranks 48
th
 amongst 131 countries in terms of its innovation performance as measured 
using the Global Innovation Index (GII) 2020. See Box 2 for a description of the GII, which is 
further sub-divided into the innovation output sub-index and innovation input sub-index. India 
ranks 45
th
 and 57
th
 on the output and input sub-indices respectively. India entered the top 50 
innovating countries for the first time since the inception of the index in 2007. Along with three 
other economies – Vietnam, Republic of Moldova and Kenya, India has the rare distinction of 
being an innovation achiever for ten consecutive years.
Box 2: The Global Innovation Index (GII)
The GII is co-published by Cornell University, INSEAD, and the World Intellectual Property 
Organization (WIPO), a specialized agency of the United Nations. It seeks to assist economies in 
evaluating their innovation performance. 
GII has two sub-indices: the Innovation Input Sub-Index and the Innovation Output Sub-Index, and 
seven pillars, each consisting of three sub-pillars, further divided into a total of 80 indicators. The 
Innovation Input sub-index and the Innovation Output Sub-Index have equal weight in calculating 
the overall GII. The Innovation Input sub-index has five pillars: (i) Institutions; (ii) Human Capital 
and Research; (iii) Infrastructure; (iv) Market Sophistication; and (v) Business Sophistication. The 
Innovation Output Sub-Index has two pillars (i) Knowledge and Technological outputs and (ii) 
Creative outputs. GII was first conceptualised in 2007.
Source: GII
GII 2020 includes 131 countries/economies, which represent 93.5 per cent of the world’s population 
and 97.4 per cent of the world’s GDP in purchasing power parity current international dollars.
Page 5


CHAPTER
08
“If a rare opportunity occurs, while it lasts, let a man do that which is rarely 
to be accomplished (but for such an opportunity)”.
? Thirukural, Chapter 49, verse 489.
India entered the top 50 innovating countries for the first time in 2020 since the inception 
of the Global Innovation Index (GII) in 2007, by improving its rank from 81 in 2015 to 
48 in 2020. To herald this significant achievement while setting out the path for further 
progress, the Survey examines India’ s innovation performance on various dimensions. 
India ranks first in Central and South Asia, and third amongst lower middle-income 
group economies. Among the seven pillars of the GII, India ranks 27
th
 in knowledge and 
technology outputs (KTO); 31
st
 in market sophistication; 55
th
 in business sophistication; 
60
th
 in human capital and research (HCR); 61
st
 in institutions; 64
th
 in creative output; and 
75
th
 in infrastructure. Among sub-pillars, India ranks tenth in knowledge diffusion and 15
th
 
in trade, commerce and market scale. Among parameters, India ranks first in ICT services 
exports; third in domestic market scale (PPP); ninth in government’ s online services; 
ninth in growth rate of productivity; 12
th
 in science and engineering graduates; 13
th
 in 
ease of protecting minority investors; 15
th
 in e-participation; 16
th
 in average expenditure 
of top three global R&D companies; and 19
th
 in market capitalisation.
India’ s ranking on innovation outputs improved from 69 in 2015 to 45 in 2020. Its 
ranking on KTO almost halved from 49 in 2015 to 27 in 2020 while ranking on creative 
outputs improved from 95 in 2015 to 64 in 2020. India’ s innovation input sub-index 
ranking improved from 100 in 2015 to 57 in 2020. This improvement was led by business 
sophistication, where ranking improved from 116 in 2015 to 55 in 2020. India’ s ranking 
on Institutions improved from 104 in 2015 to 61 in 2020. Its ranking on HCR improved 
from 103 in 2015 to 60 in 2020. Its ranking on market sophistication improved from 72 
in 2015 to 31 in 2020. India’ s ranking on infrastructure improved from 87 in 2015 to 75 
in 2020. 
The GII also highlights areas with scope for improvement. India ranks 107
th
 on education 
sub-pillar, mainly on account of ranking 118
th
 on pupil-teacher ratio in secondary 
education; 115
th
 on new business per thousand population in ages 15-64; 108
th
 on tertiary 
Innovation: Trending Up but needs 
thrust, especially from the Private 
Sector
238 Economic Survey 2020-21   V olume 1
inbound mobility; 108
th
 on ICT access as well as ICT use; 105
th
 on ease of starting a 
business; and 101
st
 on females employed with advanced degrees. Also, as the 5th largest 
economy, India’ s aspiration must be to compete on innovation with the top ten economies. 
The business sector in India contributes much less to gross expenditure on R&D (about 
37 per cent) when compared to businesses in each of the top ten economies (68 per 
cent  on average). This is despite the fact the tax incentives for R&D were more liberal 
in India when compared to those in the top ten economies. The Government does a 
disproportionate amount of heavy-lifting on R&D by contributing 56 per cent of the gross 
expenditure on R&D, which is three times the average contributed by governments in 
the top ten economies. Yet, India’ s gross expenditure on R&D at 0.65 per cent of GDP is 
much lower than that of the top 10 economies (1.5-3 per cent of GDP) primarily because 
of the disproportionately lower contribution from the business sector. Indian government 
sector contributes the highest share of total R&D personnel (36 per cent) and researchers 
(23 per cent) amongst the top ten economies (nine per cent on average). Indian business 
sector’ s contribution to the total R&D personnel (30 per cent) and researchers (34 per 
cent) in the country is the second lowest amongst the top ten economies (over 50 per 
cent on average). Indian residents contribute only 36 per cent of patents filed in India as 
compared to 62 per cent on average in the top ten economies. Indian firms also perform 
below expectation on innovation for their level of access to equity finance, which is the 
most crucial for innovation.
India must significantly ramp up investment in R&D if it is to achieve its aspiration to 
emerge as the third largest economy in terms of GDP current US$. Mere reliance on 
“Jugaad innovation” risks missing the crucial opportunity to innovate our way into the 
future. This requires a major thrust on R&D by the business sector. India’ s resident firms 
must increase their share in total patents to a level commensurate to our status as the fifth 
largest economy in current US$. India must also focus on strengthening institutions and 
business sophistication to improve its performance on innovation outputs. 
As Economic Survey 2019-20 discussed in the chapter “Entrepreneurship and Wealth 
Creation at the Grassroots”, the Startup India campaign of the Government of India 
recognises entrepreneurship as an increasingly important strategy to fuel productivity 
growth and wealth creation in India. This assumes greater importance in the context of 
enhancing private participation in innovation in India - in terms of contribution to gross 
expenditure on R&D, R&D personnel and researchers, and share in patents filed in the 
country. The lessons drawn therein on the crucial role of literacy, education, physical 
infrastructure and policies enabling ease of doing business, as drivers of new firm creation 
and entrepreneurship, remain relevant in this analysis. 
WHY INNOV ATION MATTERS 
8.1 A vast body of literature in economics extols the role of innovation and technological 
progress in growth and development. Box 1 presents a selective review of literature highlighting 
the importance of innovation.
239 Innovation: Trending Up but needs thrust, especially from the Private Sector
Box 1: Literature on Innovation, R&D and Growth
The importance of technological progress in economic growth began with the Solow model (Solow 
1956), which highlighted that output per worker mainly depends on savings, population growth and 
technological progress. This model was empirically extended by Barro (1991); Barro and Sala-i-
Martin (1991, 1992), and Mankiw, Romer and Weil (1992), identifying technological progress as the 
key determinant of long-term economic growth.
While the Solow model treats technological progress as exogenous, the new growth theory endogenises 
technological progress and suggests several determinants of the same. These include human capital 
(Lucas, 1988); search for new ideas by profit-oriented researchers  (Romer, 1990); infrastructure 
(Aschauer 1989); and improving quality of existing products (Grossman and Helpman 1991; Aghion 
and Howitt 1992). Endogenous growth has also been explained using the Shumpeterian model of 
creative destruction, where innovative products brought to the market by entrants lead to replacement/
destruction of the old ones produced by the incumbents (Aghion, Akcigit, & Howitt, 2013).
The relation between innovation and research sector received attention with endogenous growth 
models (Romer, 1990 and Aghion & Howitt, 1992). Some postulated that R&D activities could make 
long run growth possible (Jones, 1995) and R&D effects on aggregate production functions were 
tested (Sveikauskas, 2007). Research showed that small enterprise R&D activities brought large 
returns to the national economy through new technologies (Comin, 2004). More recently, studies 
have focused on patenting and economic growth (Westmore, 2013; Acharya and Subramanian, 
2009, Acharya et al. 2013). Studies have also established a relationship between entrepreneurship 
innovation and economic growth (Galindo & Méndez, 2014). An increase of 10 per cent in R&D 
investment has been associated with productivity gains ranging from 1.1 per cent to 1.4 per cent 
(Donselaar and Koopmans, 2016).
Figure 1: Positive Correlation between GDP per capita (2019) and Past Innovation
A) Innovation (2016) B) Innovation (2014)
BR
CA
CH
FR
GR
IT
JP
UK
US
India 66
3 3.5 4 4.5 5
Log 10 (GDP per capita 2019, PPP Current Int $)
120 100 80 60 40 20 0
Rank - Global Innovation Index 2016
GDP per capita and Global Innovation Index
BR
CA
CH
FR
GR
IT
JP
UK
US
India 76
3 3.5 4 4.5 5
Log 10 (GDP per capita 2019, PPP Current Int $)
120 100 80 60 40 20 0
Rank - Global Innovation Index 2014
GDP per capita and Global Innovation Index
Source: The World Bank and Global Innovation Index database
Note: Highest possible rank is 1. Figure shows India’s innovation rank. US = USA, CH = China, JP = Japan, GR = 
Germany, UK = United Kingdom, FR = France, IT = Italy, BR = Brazil and CA = Canada.
8.2 The positive correlation between past innovation performance and current GDP per capita 
can be examined empirically. Figure 1 shows the positive correlation between past innovation 
performance (three-years ago in 2016 and five years ago in 2014) with GDP per capita in PPP 
240 Economic Survey 2020-21   V olume 1
terms (2019) across countries. It may be seen that India has performed below expectation for its 
past innovation performance in terms of recent GDP per capita.
HOW DOES INDIA PERFORM ON INNOV ATION?
8.3 India ranks 48
th
 amongst 131 countries in terms of its innovation performance as measured 
using the Global Innovation Index (GII) 2020. See Box 2 for a description of the GII, which is 
further sub-divided into the innovation output sub-index and innovation input sub-index. India 
ranks 45
th
 and 57
th
 on the output and input sub-indices respectively. India entered the top 50 
innovating countries for the first time since the inception of the index in 2007. Along with three 
other economies – Vietnam, Republic of Moldova and Kenya, India has the rare distinction of 
being an innovation achiever for ten consecutive years.
Box 2: The Global Innovation Index (GII)
The GII is co-published by Cornell University, INSEAD, and the World Intellectual Property 
Organization (WIPO), a specialized agency of the United Nations. It seeks to assist economies in 
evaluating their innovation performance. 
GII has two sub-indices: the Innovation Input Sub-Index and the Innovation Output Sub-Index, and 
seven pillars, each consisting of three sub-pillars, further divided into a total of 80 indicators. The 
Innovation Input sub-index and the Innovation Output Sub-Index have equal weight in calculating 
the overall GII. The Innovation Input sub-index has five pillars: (i) Institutions; (ii) Human Capital 
and Research; (iii) Infrastructure; (iv) Market Sophistication; and (v) Business Sophistication. The 
Innovation Output Sub-Index has two pillars (i) Knowledge and Technological outputs and (ii) 
Creative outputs. GII was first conceptualised in 2007.
Source: GII
GII 2020 includes 131 countries/economies, which represent 93.5 per cent of the world’s population 
and 97.4 per cent of the world’s GDP in purchasing power parity current international dollars.
241 Innovation: Trending Up but needs thrust, especially from the Private Sector
Figure 2: Global Leaders in Innovation in 2020
Source: GII 2020 Report
8.4 India performed particularly well regionally and in its income category, ranking first in 
the GII rankings in Central and South Asia, and third amongst lower middle-income group 
economies (see Figure 2). India performed above expectation for its level of development in 
terms of innovation (see Figure 3).