RBI Policy Maker Calls for Budget Boost to Research and Manufacturing Funding

In a significant pre-Budget recommendation, a member of the Reserve Bank of India’s (RBI) rate-setting panel has urged the government to introduce strong policy measures to fuel innovation and manufacturing. Dr. Nagesh Kumar, an external member of the Monetary Policy Committee (MPC), has highlighted the need for dedicated financial institutions and tax incentives to secure India’s long-term economic growth.

The MPC is the committee responsible for deciding India’s key interest rates. While its primary mandate is controlling inflation, its members often provide insights on broader economic requirements. Dr. Kumar’s suggestions focus on structural reforms beyond monetary policy, targeting the upcoming Union Budget for implementation.

Reviving Tax Incentives for Research and Development

A central proposal from Dr. Kumar is the restoration of a generous tax benefit for corporate research and development (R&D) spending. He specifically recommended bringing back the 200% weighted tax deduction on R&D expenditure. This policy, which was previously phased out, allowed companies to deduct twice the amount they actually spent on R&D from their taxable income.

For example, under such a scheme, if a pharmaceutical company invested 10 crore rupees in developing new drugs, it could deduct 20 crore rupees from its profits before calculating tax. This powerful incentive makes innovation significantly cheaper for businesses. Dr. Kumar argues that reinstating this deduction is crucial for boosting India’s competitiveness in high-technology sectors and moving up the global value chain.

Creating a Specialized Bank for Manufacturing

Beyond tax breaks, Dr. Kumar identified a critical gap in long-term financing for the manufacturing sector. He proposed the establishment of a specialized development finance institution dedicated solely to providing long-term capital for manufacturing projects.

Manufacturing, especially in areas like semiconductors, electric vehicles, and advanced electronics, requires massive upfront investment with returns spread over many years. Regular commercial banks often hesitate to lend for such long tenures due to asset-liability mismatches. A dedicated national institution could fill this void, providing patient capital that matches the long gestation periods of large-scale industrial projects.

This idea echoes past successful institutions but would be tailored for contemporary manufacturing challenges. Such a bank could help fund the greenfield factories and expansive supply chains needed to make India a global manufacturing hub, aligning with the government’s existing ‘Make in India’ and production-linked incentive (PLI) schemes.

Context and Expected Impact

These recommendations come at a time when the Indian government is actively seeking to attract foreign investment and increase the share of manufacturing in the country’s GDP. Global corporations are looking to diversify their supply chains away from China, presenting a major opportunity for India.

However, to seize this opportunity, analysts say India must enhance its innovation ecosystem and ensure easy access to low-cost, long-term funding. Dr. Kumar’s twin proposals directly address these two needs. A revived R&D tax benefit would encourage domestic firms and multinationals to set up more research centers in India. Simultaneously, a specialized finance institution would de-risk large capital-intensive projects, making them more viable for both Indian and international investors.

The upcoming Union Budget, expected in late July, will reveal whether the government incorporates these suggestions into its fiscal policy. If adopted, these measures could mark a strategic shift towards strengthening the foundational pillars of industrial growth and technological self-reliance.