06 February 2025 : Indian Express Editorial Analysis

1. Turning point, cutting edge

(Source – Indian Express, Section – The Ideas Page – Page No. – 11)

Analysis of the news:

Early Emphasis on State-Led Science and Technology

• From the very beginning, India’s visionaries placed immense importance on science, technology, and the cultivation of a scientific temper.
• In the early phases, the Indian state took charge of research and innovation, absorbing previously private institutions such as the Tata Institute of Fundamental Research (TIFR) and the Bhabha Atomic Research Centre (BARC).
• This centralized approach yielded notable successes, including India’s first nuclear test in 1974.
• However, over time, the limitations of a solely state-driven innovation ecosystem became evident, necessitating a broader and more inclusive policy framework.

The Shift Towards a Holistic Innovation Ecosystem

• Over the years, Indian innovation policy has evolved from a narrow focus on state-driven research to a more comprehensive, all-of-society approach.
• True innovation requires intellectual capital not just within government organizations but also across private firms and universities.
• Economic strength and technological leadership depend on widespread research capabilities embedded in private enterprises, universities, and independent research labs.
• In leading economies like France and the United States, government-funded research is frequently executed by private firms and universities.
• For example, 80% of NASA’s budget is allocated to private contractors, while the Jet Propulsion Laboratory (JPL), originally founded at Caltech, has played a pivotal role in NASA’s space exploration missions.
• Similarly, China’s DeepSeek innovation emerged from private expertise honed in algorithmic trading.

The Benefits of Private Sector Involvement in Research

• Indians take great pride in ISRO’s achievements, such as its lunar missions.
• However, a more profound societal impact can be realized when knowledge is disseminated through private institutions and applied in diverse sectors.
• A 2024 research paper emphasized the advantages of channeling taxpayer resources into private firms and universities, arguing that private sector participation enhances research efficiency and fosters competition.
• Unlike government institutions, private firms have a direct commercial interest in research outcomes, ensuring a higher commitment to quality and applicability.
• This also allows multiple entities to explore different research pathways, increasing the likelihood of breakthroughs while minimizing wasteful expenditures.

Institutional Reforms and the Role of ANRF

• The shift toward private sector-driven research is now being institutionalized through new initiatives like the Anusandhan National Research Foundation (ANRF).
• With an annual budget of ₹2,800 crore, ANRF aims to distribute research grants to private firms and universities, enabling them to undertake high-risk, high-reward research projects.
• This marks a significant departure from the traditional model of government-controlled research institutions and is expected to accelerate India’s scientific progress.

Policy Milestones in 2025: A Turning Point for Indian Science

• The 2025 budget represents a crucial moment in India’s science policy, allocating ₹20,000 crore for private sector-driven research, development, and innovation.
• Additionally, ISRO’s recent decision to procure launch vehicles from private firms signals a fundamental shift in how public funds are utilized for cutting-edge engineering.
• Similarly, the Ministry of Electronics and Information Technology (MEITY) has embraced this new paradigm by distributing 18,693 GPUs to private IT infrastructure firms, allowing AI researchers to access these resources at a minimal cost.
• This reflects a broader strategy of “buy, not make,” ensuring efficient resource allocation and fostering an ecosystem of technological advancement.

Challenges and the Road Ahead

• While the shift towards privatized research funding is promising, effective implementation remains a challenge.
• Unlike conventional procurement, research contracts involve inherent risks—failure is an essential part of scientific discovery.
• Developing legal frameworks, establishing performance evaluation mechanisms, and restructuring public finance strategies will be crucial for success.
• The transition from state-led to private-sector-driven research must be carefully managed to ensure accountability, transparency, and sustained innovation.

Conclusion

• India stands at a defining moment in its scientific evolution.
• The traditional model of government-led research is giving way to a more dynamic, decentralized approach where private firms and universities play a pivotal role.
• With strategic policy shifts, increased funding, and institutional support through ANRF, India is poised to unlock greater innovation potential and global competitiveness in science and technology.

2. Let the money flow

(Source – Indian Express, Section – The Ideas Page- Page No. – 11)

Analysis of the news:

Projected Economic Growth and Investment Needs

• India’s GDP is expected to nearly double from $3.7 trillion in 2023-24 to $7 trillion by 2030-31.
• This growth will be driven by sound fiscal and monetary policies, along with investments in world-class physical and digital infrastructure.
• However, financing this expansion requires significant capital, estimated at $2.5 trillion, which demands an investment-to-GDP ratio of 34%.
• Since the government runs deficits, much of this investment burden falls on the private sector, which has been reluctant to deploy its surplus.
• The decline in corporate investment, from 114% of operating cash flow in 2008-09 to 56% in 2023-24, indicates low confidence in future demand and geopolitical uncertainties.

Challenges in Capital Mobilization and Credit Distribution

• While large corporates access funds through equity markets, bonds, and bank credit, MSMEs struggle to secure their fair share of credit.
• Over the years, household savings allocated to banks have declined from 50% to 40%, as investors chase better returns in pension funds and mutual funds.
• Regulatory preemptions further constrain banks’ lending capacity. Banks must maintain 26% of deposits in statutory liquidity ratio (SLR) securities and 4% as cash reserve ratio (CRR), effectively locking up 30% of total deposits, thereby reducing lendable funds and increasing borrowing costs.

Impact of Liquidity Requirements on Banking Efficiency

• Banks’ adherence to liquidity coverage ratio (LCR) requirements compels them to hold more liquid assets, further reducing available credit.
• Unlike global practices where only LCR is mandated, India enforces both LCR and SLR, increasing capital constraints.
• Additionally, government surpluses held with the RBI reduce overall banking liquidity, leading to market volatility.

Revisiting Priority Sector Lending and Risk-Based Pricing

• The priority sector lending (PSL) requirement of 40% needs reassessment to align with evolving economic priorities.
• Pricing of PSL loans should reflect credit risk, rather than being influenced by regulatory mandates.
• A transition to cash-flow-based lending and risk-based pricing is crucial to expanding financial access without distorting market dynamics.
• Overly restrictive lending policies could exclude large sections of the population from organized finance.
• Instead, AI-driven supervision and targeted action against outliers can ensure compliance without stifling the system.

Need for Credit Growth to Match Economic Expansion

• A key concern is that credit growth remains lower than nominal GDP growth.
• A comprehensive review of banking regulations, market structures, and liquidity provisions is necessary to address systemic inefficiencies.
• Additionally, defending the rupee against a strong dollar by draining liquidity should be reconsidered, as it overvalues the rupee without effectively stabilizing the currency.

Strengthening Bank Balance Sheets and Investment in Technology

• Banks must raise both debt and equity from investors to sustain credit expansion, necessitating the freedom to price risk and processing costs adequately.
• Meanwhile, Indian banks are making significant investments in technology, with large banks allocating around 5% of their annual spending to digital transformation.
• This is critical, as global banks spend nearly 9% on technology, outpacing their revenue growth.
• Furthermore, social responsibility costs, such as zero charges on UPI transactions, should be reconsidered for long-term financial sustainability.

Deepening India’s Government Bond and Derivatives Markets

• India’s government bond market is the third-largest among emerging markets, yet its global index inclusion remains low at 3% compared to Indonesia’s 14.5%.
• To enhance liquidity, regulators like IRDAI, PFRDA, and SEBI should encourage large investors to utilize derivatives alongside cash instruments.
• Reducing regulatory preemptions and fostering secondary market liquidity will further support the development of India’s financial ecosystem.

Conclusion

• India’s ambitious goal of becoming a $7-trillion economy by 2030-31 hinges on boosting capital efficiency, reforming banking regulations, and expanding credit access.
• Addressing regulatory constraints, encouraging private investment, and optimizing financial intermediation will be crucial in achieving sustainable economic growth.