Daft RDI Scheme: Innovation Needs Risk Capital, Not Moneylenders
India's ₹1-trillion RDI scheme for R&D sounds bold, but it's built on distributing loans, not risk capital, and on the wisdom of wizened bureaucrats to select and fund projects. India deserves better
The government’s new Research, Development and Innovation (RDI) scheme is half-hearted hope masquerading as policy. True, it talks big money: Rs 1 trillion, for private sector R&D, which, at present, is vanishingly small, and certainly needs a policy-induced boost. But the tentativeness of the scheme, and the failure to put flesh on an admittedly weak skeletal structure even 14 months after the Budget announced this grand corpus for R&D in 2024, and the proposal to disburse funds as loans, rather than as equity or grants, offer little reassurance.
It would have been useful, if those in charge of policymaking had paid some attention to how the government boosted R&D in the US, home of the brave and land of the free market, during and after World War II. But that would have meant admitting that history is important, and not just science, technology, engineering and mathematics, and history that does not glorify ancient Bharat, at that.
Reinventing the wheel is a metaphor for redundancy. To revisit Mesopotamia, ancient Iraq, where the wheel was first used -- to make pottery, rather than move a load -- some 6,500 years ago, might be to overdo it, but trying your own hand at making a perfectly round, hardy object capable of accommodating one end of an axle in the middle might give you some insights into geometry, materials, friction and tools, besides giving you the ability to move beyond a simple wheel to things like sprockets and pulleys.
The US was on the winning side of World War II, everyone knows. Most people also know that war production, the lend-lease programme to supply allies, including the Soviet Union, and for its own war effort after Pear Harbor in 1942, pulled the US out of the Great Depression and into the trajectory of growth that made it the world’s largest and most innovative economy. But far less known is the role of scientific research in the war effort, of which the Manhattan Project, leading to the development of atomic weapons, was but one programme. Advances in machine guns, small arms, stabilized guns for tanks, blood transfusion, mass production of penicillin, advanced jet engines and aerospace design that yielded the massive B29 bomber, the flu vaccine – the list is long. While the RADAR was originally a British invention, it gained sophistication and designs for mass production at MIT’s Radiation Laboratory.
Vannevar Bush, engineer, inventor, entrepreneur — he founded in 1922 the company that evolved into Raytheon — and Dean of MIT’s school of engineering, played a key role in marshalling the intellects of some 6,000 scientists across America’s campuses and research institutions in aid of the war effort, in his role as head of the Office of Scientific Research and Development, reporting directly to President Roosevelt and receiving the administration’s unstinted policy and financial support for technology projects relating to defence. Bush was also the prime mover in setting up the National Science Foundation, which has been funding basic research in American universities in areas other than medicine. Or, rather, had been, until its recent gutting at the hands of Donald Trump.
The defence establishment set up its own technology funding agency, called Advanced Research Projects Agency (ARPA), whose effort to communicate among the different institutions funded by it and working on similar projects led to ARPANET, the prototype network of computers that switched packets of data amongst themselves, and evolved into the Internet.
ARPA was renamed Defense Advanced Research Projects Agency. DARPA and other defence agencies created what later was called Silicon Valley, by giving contracts and grants to Stanford University departments and faculty, who were encouraged to respond to the defence establishment’s technology and product requisitions, by setting up businesses alongside, in the university’s own research parks and in the neighbourhood of Mountain View. Fred Terman, who became Provost at Stanford, persuaded many companies to set up shop at Stanford’s research parks. These included Hewlett Packard, and a company founded by the inventor of the transistor, Willian Shockley. Shockley was a nasty boss and a team of eight broke away to form Fairchilds Semiconductor. From there, people walked away to found Intel and other companies.
All of them were sustained by contracts and grants from the defence establishment, including DARPA. It was not just entrepreneurial free spirits and roving wisps of the American Dream that fuelled the flourishing of a technology cluster around Stanford and Mountain View. Government funding, meant to generate diverse solutions to problems identified and specified by the armed forces, played a crucial role.
That and enabling policy – absence of non-compete provisions that allowed employees to migrate to other companies or start up on their, changing of pension fund regulation in California to permit pension funds to invest in venture capital, efficient grant and protection of intellectual property, and tax policy that promoted venture funding, and employee stock options, all played a role.
This short detour into history is to debunk the idea of promoting research through loans, however soft, as the RDI scheme proposes to. Loans have to be repaid. Research can succeed, research can fail. Should the researchers be obliged to repay the loan that funded their failed research? Only grants and risk capital or firm contracts to purchase the output of successful research can sustain research.
A committee of secretaries will decide, in the new RDI scheme, what projects to fund, what technologies to focus on. Some of our civil servants are very bright, no doubt, but do they know whether to fund laser weapons to shoot down invading drones or microwave bursts to cook their electronics? Would it not be better to let specialist wings of the armed forces, and the DRDO determine what projects to fund? Israel is a leader in defence tech because of the compulsory military service that exposes most young Israelis to the defence ecosystem, and what it lacks or could use.
The RDI corpus will finance a set of financial intermediaries, who would disburse soft loans to research outfits. Equity could be considered in the case of startups. Why this tentativeness a year and more after the corpus was first announced?
Junk the current scheme. Do the following. Use the corpus to set up a number of what advocates of making India a manufacturing nation, like Ajai Chowdhry, cofounder of HCL and head of the Quantum Mission, call Focused Research Organisations, with the equipment and personnel capable of carrying out diverse research specified by private companies. Set up FROs in different regions. Since established Indian companies have a physical deformity that prevents them from looking up at any angle larger than needed to see low-hanging fruit, research requests can come only from startups and ambitious SMEs.
Make a pool of venture capital available to such research-oriented startups and SMEs. Ask the Employees’ Provident Fund Organisation and the National Pension System to include, in the list of asset classes from among which retirement savers can choose where all to deploy their savings, venture capital as a new category. Let fund managers launch venture funds, to which the investing public can allocate a share of the capital they pour into mutual funds chasing the same set of companies.
Let the defence establishment publish the general and specific sets of problems to which they seek solution, and offer contracts, grants and collaborative arrangements. Enough of humming and hawing on R&D. Lights, Camera, Action!