New Delhi, April 27 -- In the early 2000s, when India aimed to indigenize its multi-barrel rocket-launcher capability, the Union ministry of defence broke new ground by awarding procurement-linked development contracts not to public sector units, but to private firms like Tata Power SED and Larsen & Toubro. Appointed as lead system integrators, they invested heavily in research and development (R&D), driven by firm procurement commitments.

This success was enabled by the active role played by the government in shaping the market. The 'invisible hand' of the market often fails to efficiently allocate resources for R&D due to several structural challenges.

For one, innovation typically involves long gestation periods and entails a high ri...