© The Indian Express Pvt Ltd
Tags:
Journalism of Courage
Nearly a fifth of the world’s chip designers are in India, with almost all major design companies having a research centre in the country — Amazon’s biggest backoffice in the world is in Hyderabad, while nearly 20 per cent of Goldman Sachs’s staff are in Bengaluru and Hyderabad. And while these global capability centres (GCCs) already represent close to 40 per cent of India’s services exports, making them its biggest export category after IT services, there could be a growing overlap between these two categories. And this overlap has a section of India’s policymakers worried.
Concerns around outsourcing replaceable work, potential threat to the IT services sector and lack of intellectual property coming India’s way — even as the government looks keen on promoting the country as a destination for GCCs, these are some questions it is battling internally, worried that the growth of these centres is coming at the cost of domestic IT firms, undermining the very ecosystem they had helped establish.
An analysis of the type of the work undertaken by in-house GCCs and that executed by outsourced service providers such as the Indian IT and software companies have similarities: both essentially seem to be focused on tapping into outsourceable work and moving them in varying degrees to India. Some of this, in very small amounts, includes instances of multinational firms vertically integrating their activities and bringing them in-house. Other than some rare cases, which could include automotive companies and semiconductor design firms, there is a feeling in policy circles that most of what is being done is still not a significant upgrade to what IT services companies are doing — that it is not non-outsourceable, high-end work that leads to intellectual property being vested in the Indian entity.
And while many in the government view the proliferation of GCCs as a net positive for the country, there are concerns on the quality of jobs that are being created, and whether they will ever become core to a company’s function in a way that is difficult to relocate. One yardstick that is being used to gauge the level of technology-mature work being done in Indian GCCs is to ask the question if the chief technology officer of the parent company, or any of the key subordinates of the CTO are in India. Or if any cutting edge patents are vested with Indian entity. Chances are that most of the GCCs would draw a blank on these counts.
“We are seeing a trend across several smaller GCCs that rather than hiring engineering graduates, they are paying a lower amount to hire those with a degree in science. That’s definitely a concern,” a senior IT Ministry official said. “But some GCCs are actually doing good work, and more importantly, the real benefit is that many of the people employed here don’t have to leave for other countries,” he added. There are renewed calls for a policy push to pivot India towards becoming a ‘product nation’, a reference to the need for a further upgrade in the quality of work being done by entities such as GCCs to ensure that it is not just a cost arbitrage advantage that can dissipate overnight as tools such as AI get more potent. The immediate threat might be faced by IT companies, but the sheer speed of AI diffusion could pose a threat to the work being done at GCCs, if a calibrated upgrade is not orchestrated.
Back in the early 90s, India made a name for itself at the global stage as the back office of the world. Today, more high-tech services are being exported from India, with firms offshoring tasks such as data analysis to research and development, helping fuel a new wave of services-led growth for India.
With close to 1,600 GCCs of multinational companies in various sectors, India has become to the world what China is for tech hardware. Leading companies from across sectors — modern trade, apparel, finance, consumer electronics, automobile, and shipping — have opened big headquarters in India from where they manage a number of functions including designing, inventory and supply chain management and transportation.
The movement has come on the back of some key trends: the country’s large pool of engineers, availability of relatively cheap labour, low real estate and rental costs compared to other Asian destinations, and comparatively simpler labour laws which allow for longer working hours.
For policy makers, the challenge is that the growth in GCCs is primarily going to undercut the work done by India’s IT companies in key markets abroad, unless there is significant upgrade in the quality of work by the former. And if the US walks the talk on H-1B visas, chances are that the losses to Indian IT companies could be potential gains for GCCs. For the country as a whole, this could become a zero-sum game, one neutralised by the other.
India’s IT services sector, which has driven the global digitalisation for nearly four decades, finds itself at a crossroads: the age of artificial intelligence (AI) has cast a dark shadow over fungible skillsets that many in the industry possess, with a general feeling of the sector having stopped producing any real innovation in decades. The recent layoffs of 12,000 employees of Tata Consultancy Services (TCS) was seen as a symptomatic outcome of the underlying strategic risks that face the industry today — many in the industry lack crucial skills to adapt to the frequently changing technology requirements, and because business has thus far thrived on serving as the world’s backoffices, there has been little room for creating value in a way that could take the sector ahead.
The IT Ministry official said that in a way to address this growing challenge, many IT services companies are moving to incubate GCC type functions, and spin them off as separate GCCs when they reach a critical stage. “But, the reality is that GCCs do pose a challenge to the health of IT services companies and they have to respond to this reality by elevating the work they currently do,” he said.
Also, just as China’s rise in manufacturing triggered a backlash, so might India’s growth in services, which is a clear and present danger. The best guarantee against this is if the work is something that cannot be done elsewhere, or if the intellectual property (IP) vests in India.
“We’ve had several meetings with companies on how to localise not just design and manufacturing, but IP. As part of framing the second version of the incentive scheme (DLI 2.0) for chip designing, we are actively asking companies why more IP is not being accrued to India. We might make it a mandatory requirement for foreign companies to locate some IP within Indian companies,” a second IT Ministry official said.
