Start with the theoretical rationale for having a strong regimen of intellectual property rights protection. Innovation is a vitally important part of economic growth. By increasing the stock of knowledge in the economy, research and development (R&D) helps to increase the efficiency with which labour and capital are used in the economy. In the long run, this is the only way to prevent diminishing returns to an increase in the use of labour and capital.

But researching and developing a new product involves a largeinitial cost. This is a fixed cost in that this outlay does not vary with the quantity of the good produced. Often, R&D costs run into tens of millions of dollars. On the other hand, once the breakthrough has been achieved, the marginal cost of producing is much lower. There is then an incentive for firms to wait for someone else to innovate and copy this product. Under our laws, firms are only allowed a process patent and not a product patent. This means that any firm can take a product, break it down to see how it ticks and then "reverse engineer" to make an imitation of the product. The copy-cat firms have an advantage here in that they do not have to price the R&D cost into their selling price. Their selling price will thus be lower than the firm that developed the product in the first place.

Unless firms are allowed monopoly rights for their inventions, there is no incentive for them to sink so much money into researching and developing a new product.

By steadfastly refusing to introduce productpatents, what we have achieved is to encourage shameless copying on the part of domestic firms. Indian firms spend only 1.8 per cent of their turnover on R&D. Compare this to American firms that spend slightly more than 16 per cent of their turnover on research. This is reflected in our record of innovations. More than 70 per cent of the patents filed in India were by foreign firms. Even so, foreign firms, wary of ineffective property rights protection, have hesitated to invested in R&D facilities in India. Foreign direct investment (FDI) inflows have suffered as a result. In a survey of 46 countries to indicate success in securing patent rights abroad, India was ranked a low 38th. Obviously we need to change our laws.

Specifically, we have to allow product patenting at the earliest. There is considerable cross-country evidence to suggest a strong correlation between a transition to a product-patent regime and a rise in R&D expenditure. In any case, we are obliged to do so under the TRIPS agreement of theWTO.

As always, there are persuasive agreements against good sense. Critics charge that by allowing product patents, the government will encouraging the build up of monopoly power with individual firms. This, they argue, will lead to very high prices for vital drugs and commodities. Much of this is true in the short run. But these arguments ignore the long-term effects of discouraging innovation. By reducing FDI inflow and research in the country, the economy's capacity to innovate and, therefore, reduce costs in the long term is compromised. Besides, there may be ways of reconciling the need to respect Intellectual property rights and restricting monopolies.

One thing the Government could try in future is to buy off the patent rights for selling a product in India. The Government could offer a small premium for these rights. Since the rights are being bought at a premium, the company would have an incentive to sell off it's patent rights to the Government. The Government could then turn around and selloff these rights to a large number of companies. This would, of course, cost the Government a bit of money, but not as much as you might suppose at first.

Average incomes in India are not very high. This immediately limits the profit the company expects to make by selling the product in India. This, of course, means that the patent rights for a particular product would be worth much less here than in an advanced economy like the United States. It should follow that the firm would be prepared to sell off it's rights in India for a much lower sum. The Government could recoup much of this cost by selling license rights to this product to a large number of firms. In effect, the Government would be distributing the high fixed costs across a larger number of firms in the economy. As a result, the product can be sold at a rate nearer it's marginal cost of production.

Innovation would become a much more lucrative activity as firms will be paid the real worth of their products. Private firms would then have a muchlarger incentive to invest in R&D. Competition between firms for patent sales should help the economy shift to a high value-added product mix.

This will also act as a way of subsidising R&D in the economy. International evidence suggests that governments are nowhere as competent as private firms in identifying fruitful areas of reseaerch. By offering to buy off patents from private firms, the Government would basically be outsourcing research to firms which are best equipped to handle it. It could then sit back and choose from the best innovations. It would avoid the wastage normally associated with the government directly entering research and development.