The central government needs to create a funding source akin to DARPA (Defence Advance Research Projects Agency) in USA. This entity should have a large enough budget so that important scientific advancements can received ample funding as well as allowing the possibility for funding multiple sources such as private companies, R&D labs, universities, startups, etc. The agency's efforts need to be channelized along multiple "tracks," e.g.
1. Basic Scientific Research -- i.e. bleeding edge ideas.
2. Advanced Research & Prototyping -- ideas that are more mature and can be commercialized in the immediate future.
3. Weird/Alternate Research areas -- ideas that are extremely radical and "out there"
This agency should also fund startup ideas by entrepreneurs, faculty, students, engineers, etc. to see the research concepts move to the commercial sphere. This funding agency should not be tied to any existing institutions (e.g. DRDO). The administrators of such an agency should also not be political and free of such influences. All funding decisions must be decided after a competitive, blind, peer-review process. International experts (e.e. faculty members in reputed international universities) who do not have a "stake" in the matter can be paid to provide independent assessments of the proposal ideas as a secondary check mechanism -- this will be in addition to the peer review process inside the country and need only be carried out for the top 5% of the proposals, say.
The agency can incentivize investment by the private sector in R&D and research labs, but providing part of the funding for such centers in various parts of the country, especially if they are allied with existing research-oriented academic institutions. This will improve the collaborations between academia and industry as well as provide ready talent for the latter for these newly set up research labs. A stipulation must be made, of course, that either the research results from such enterprises must be made public (research publications, journals, etc.) OR patents must be filed in India