Learning from China to save India’s edge in ITeS - Hindustan Times

Learning from China to save India’s edge in ITeS

ByJanmejaya Sinha,
Apr 20, 2024 10:00 PM IST

While the ITeS industry is likely to take a hit from generative AI, the potentially more threatening long-term trend is geopolitics. India must be prepared

The Information Technology enabled Services (ITeS) industry is vital for the Indian economy. With revenues of $253.9 billion (and exports of $199 billion), it provides more than six million white-collar jobs and covers our import bill for petroleum crude and gas of $208.5 billion. Thus, the growth compression from 8.4% last year to just 3.9% this year, has rightfully raised alarm bells.

FILE PHOTO: An AI (Artificial Intelligence) sign is seen at the World Artificial Intelligence Conference (WAIC) in Shanghai, China July 6, 2023. REUTERS/Aly Song/File Photo(REUTERS) PREMIUM
FILE PHOTO: An AI (Artificial Intelligence) sign is seen at the World Artificial Intelligence Conference (WAIC) in Shanghai, China July 6, 2023. REUTERS/Aly Song/File Photo(REUTERS)

One of the poster children of India’s economic rise, the ITeS industry grew at an astounding 28% per annum post the dotcom boom, during 2000-2010. Even though growth has moderated thereafter, the industry has helped create an Indian services brand. The other part of the industry, the Global Capability Centers (GCCs), saw a growth spike after Covid-19, with 150 new companies setting up their GCCs in India, employing 1.6 million people. Gratifyingly, the share of higher-end work is increasing and engineering research and development itself is forecasted to grow at 21% between 2023 and 2030. However, even the GCCs saw a slowdown in employment, which increased by only 50,000 to 1.65 million people last year.

Is there any underlying trend that suggests a reason for India to worry?

We believe there are at least two factors we need to keep a close watch on. The first is the arrival of Generative Artificial Intelligence (Gen AI) and its transformative potential. The second trend is the rise of protectionism and dependence anathema in the disturbed geopolitical environment in the world today.

Fareed Zakaria insightfully distinguishes between the “industrial revolution”, an energy revolution where living energy sources (horses) were replaced by inanimate energy generated by the steam engine from the current “information revolution (especially developments in Generative Artificial Intelligence)”, of bits and bytes using data, that has the potential of being able to replace the work of thousands of people by computers working through massive data sets in minutes. Developments in Gen AI have within them the potential to fundamentally transform industries much more powerfully than the steam engine. The full impact will get clear over the coming decade and so it is too early to assess its net impact on the ITeS industry.

The other question that AI has re-sparked is the eternal debate between “outsourced” and “in-house”. The logic for “in-house” revolved around control, transparency, intellectual property, and risk. Outsourced providers, over the past decades, had largely convinced client company CXOs about the robustness of their firewalls, data segregation, Chinese walls, and storage protocols to allay concerns. Just when it appeared that outsourced had won the argument versus inhouse (as measured by the scale of the respective vectors in India or globally), Gen AI is raising questions on data security, privacy, and ownership risks and the sharp rise in GCCs being set up, reveals the strength of such concerns. However this plays out ultimately, it does not challenge the India location advantage, nor does it threaten domestic employment or Gross Domestic Production (GDP) contribution. It only impacts Indian exports and Indian ITeS companies’ revenues.

The potentially more threatening, long-term trend for the ITeS industry is geopolitics. Is there a lesson worth learning from the China experience? The rise of China began with its entry into the WTO, facilitated by the United States in 2001. The US supported China to obtain concessions for not fully complying with WTO standards and encouraged US companies to move their supply chains to China. China became the best country for scale manufacturing. American consumers and, in fact, the world over, benefited from the low prices at which Chinese goods became available. By 2010, China had become the global manufacturing powerhouse of the world and today accounts for 31% of total global manufacturing. The Chinese GDP rose from $1.2 trillion to $6.5 trillion by 2010. By Obama’s second term in 2012, signs of tension with China started to appear. With the election of Donald Trump as the US president, the tension boiled into a major trade conflict. So much so that the only bilateral issue on which today, there is total consensus in the US Congress is containing China. China’s decision to challenge the US’s supremacy as a competing global superpower and the adoption of a muscular foreign policy towards other important countries was possibly mistimed and has proved costly to its economy but has provided a significant opportunity for India.

What lessons must India learn and what actions should it take? India’s economic rise given its size does not offer any room for complacency. India must anticipate the challenges its rise may create. Thus, it must act with alacrity on four fronts to take advantage of the current global animosity towards China:

One, India must build on its current geopolitical advantage and retain its strategic autonomy to pursue its interests while ensuring strong relations with the US to prevent any potential US backlash.

Two, it must reassure western companies of the integrity of its data standards and the ability to find legal recourse with speed in case of conflict.

Three, it must create and fund research facilities and encourage partnerships with top US universities to move up the research and development ladder with AI and engineering skills so that it cannot be shut out from technological advancements.

Four, it must undertake in mission mode a reskilling drive for its STEM (science, technology, engineering and mathematics) graduates. Only about a million of India’s 12 million STEM graduates seem to secure jobs of any quality. The others need upskilling in partnership with the industry. A national STEM exam to sort and categorise STEM graduates by skill level would be enormously helpful. It will allow the creation of a differentiated skill market for STEM graduates.

We cannot be complacent and assume India’s economic rise will not cause concern to the existing world order. The Boy Scout motto “Be Prepared” should be our mantra.

Janmejaya Sinha is chairman, India BCG, and Rajiv Gupta is senior partner and managing director, BCG. The views expressed are personal

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