India is moving beyond call centers and IT support – but can it work?

If China was the “world’s factory,” then  India would be the “world’s back office.” For years, multinationals have been setting  up labor-intensive operations here in India. Think services like IT support, mobile  app development, or call centre services. But despite being one of the fastest growing  economies in the world, India’s position on the global value chain remained weak. When we look at global value chains, two and a half decades ago, all of it was focused on shared services, back-offi

ce accounting, grunge work that could be cheaply done. Because we have a skilled, educated population. But then, slowly, businesses started realising that hang on, we can actually do a lot more. We can set up high-end research and development. Many everyday products such as cars  and smartphones have several stages of development, from its design, sourcing of raw  materials, to the assembly and distribution. In today’s interlinked world, these activities  often involve multiple countries across

several regions, which makes a global value chain. In fact, nearly 70% of international trade today involves global value chains, or GVCs. For developed countries like the United States, their participation in GVCs might involve high-value activities like research & development, while developing countries like India used to specialise in lower-value activities like product assembly or office support. However, India’s position on the global value chain is shifting, due to government  incentives a

nd a digitally savvy economy. It is now moving up the pecking order  in the kind of services that it provides. By our estimate, many of the Fortune 500 companies have 50% to 60% of their global engineering and R&D work, they’re getting it done in India. The society has delivered incredible software development skills, incredible innovation,  startup and entrepreneurial skills. We’ve seen all of that  happen in the last 28 years. It helps that India has a huge domestic market,  aiding its rise to

be an economic powerhouse. But is that alone enough to propel  India up the value chain and provide meaningful jobs for its growing middle class? India is the world’s fifth-largest economy, after it overtook the United Kingdom in 2023. In a single decade, the country doubled its GDP to more than $3.7 trillion. But the journey didn’t happen overnight – and it could be an important case study for other developing countries looking to grow their services industry. According to a survey conducted i

n 2022, more than 70% of MNCs were planning to invest in India in the next 3-5 years. Adit Jain is the founder of IMA India, an economic think tank providing insights into the Indian market. If you want access to what will become a $7 trillion economy, and what will become a $4.5  trillion consumer market in private consumption. That is India's perceived longer-term  strength, the size of the domestic market. Adit tells me that the rising attractiveness  of the Indian market can also be likened

to the government’s carrot-and-stick approach to enhance India’s manufacturing capabilities. The carrot, really, is the Production-Linked  Incentive, where you get a subsidy based on the amount of production that you have achieved. The stick, on the other hand, could have to do with the imposition of very high tariffs for the import of products. However, there have been roadblocks to  India’s ambition to be an export hub. India's Production-Linked Incentive  scheme covers 14 manufacturing sect

ors ranging from pharmaceuticals to textiles. The scheme, which was launched in 2020 offering $24 billion worth of incentives, has had underwhelming response from businesses in some sectors such as solar modules, steel products and car components. Less than half a billion dollars have been claimed three years after the scheme was launched, mostly paid out to industries like electronics and food products. We have 1500 clients in India, and we recently did a study on how the  PLI scheme has trans

lated into reality. Actually, it was much more positive in terms  of the feedback than I had earlier suspected. Rajat Dhawan, India’s Managing Partner from  global consulting firm McKinsey, tells me that overnight success should not be expected. It takes decades to really become globally competitive in many of these value chains. So given the geopolitics around this, given the domestic push around PLI-oriented incentives, also the increasing domestic consumption, I think the forces are now conve

rging. We’re seeing the rise of the manufacturing sector. One such sector on the rise is its electronics  industry, making India the world’s second-largest mobile phone producer after China. Samsung has been manufacturing phones in India since 2007 and inaugurated the world’s largest mobile factory near New Delhi in 2018. Similarly, the main assembler of Apple's  iPhone, Foxconn, has plans to scale up its manufacturing capabilities in India. Apple reportedly hopes to produce 25% of its iPhones i

n India by 2025. Foxconn, officially known as Hon Hai, has a factory in Tamil Nadu which employs 40,000 people, and there are plans to double its workforce in 2024. In recent years, India’s digital transformation has also won the vote of big businesses looking to expand in the country. According to Nasscom, an association  that represents India’s IT industry, India is home to 40% of technology centers  for large corporations, driving high-value activities like product innovation and AI. Banking

behemoths like Goldman Sachs, Wells Fargo and JP Morgan have centers across the country. What would be there for the banking sector would be slightly different for a mobility company, it would be different for a healthcare company, but by and large, specialised functional support  could come from these global captive centres. The creation of global captive centres,  also known as global capability centres, are part of a wider trend by MNCs in India, says Rajat. These GCCs could lead to cost savi

ngs  of between 100 million dollars up to a billion dollars for their bottom lines. Just to baseline where we are today, there are 1,600 global captive centers of global corporations that are operating out of India. There are about 1.7 million people who  are working in these global captive centers in India. Today, many of these centres in India  are now handling more complex office functions for their parent organizations. Tech giants like Amazon and Microsoft are investing billions of dollars

in data centers, while other companies like Verizon, Nokia and Cisco are doubling down on India. Dave West, Cisco’s APAC president, says that the ease of doing business in India has improved  over the company’s 28-year history in the country. At some point in calendar year 24, you will  see Cisco manufacture in southern India. We’re going to be manufacturing our  best in class, routers and switches. The new investments that MNCs are undertaking,  many of them to de-risk their supply chains, are

happening in locations like Vietnam,  like India, Eastern Europe, Mexico. We build a very agile, very  resilient supply chain. We look around the world  with where we need to supply. We're very encouraged by what's happening  in India in terms of manufacturing. Anand Goonibeedu from American food  giant Mondelez shared that sentiment. All chocolate and beverage innovation and  development happens from our technical center here in Mumbai, India, for Mondelez globally. One of the challenges for a

lot of big businesses to come in to invest is infrastructure. How are MNCs navigating those challenges? Year after year, I see the infrastructure  becoming much more reliable, much more quality. And if it wasn’t there, we  wouldn’t be manufacturing in India. Every developing economy will have  its share of challenges to manage. One of the things we could complain  about is the lack of landlines in India, but what it did was allow us to leapfrog  to be one of the top countries in the world with a

mobile phone footprint. India’s preparing itself to also develop and manufacture semiconductors. You need robust infrastructure to be able to do that. High speed connectivity, a reliable power grid. In 2021, India announced its plans  to spend $1.4 trillion to develop infrastructure such as roads, railways  and airports over the next 5 years. These I believe, are the game-changing  props, one of the reasons why India’s economy is now growing at 7 and a half percent. What are the characteristics

you’re seeing that’s making the Indian market a very attractive place right now for a lot of investors and MNCs? The kind of digital savviness that we’re  seeing in our country, they’re the ones who are really driving innovation. India has always had the vision to be high value in terms of what they're doing. Now look at some of the things that have come out of the India market. Paytm, Flipkart. We made a few acquisitions out of the India market, CloudCherry, July Systems. So that tells me that

India has moved from the back office supporting, to now delivering really rich, innovative creative services, that will not be just valuable for the domestic  Indian market, but for the rest of the world.