Financing of industrial innovations in India: how effective are tax incentives for R&D?

The paper surveys the instruments that are available for innovation financing in India. It identifies three such instruments, namely research grants and loans, venture capital and tax incentives. The effectiveness of all these instruments are then examined in some general fashion, but one of the instruments, namely tax incentives are subject to a detailed empirical scrutiny in terms of its effectiveness. We have constructed a dataset containing firm belonging to four different industries which have claimed these tax incentives. For these firms we estimated the elasticity of R&D expenditure with respect to tax foregone. The resulting analysis showed that while the instruments have been targeted well at the right sort of industries its effect in spurring additional investments in R&D is open to question.