India: From Back Office to Innovation Hub
India: From Back Office to Innovation Hub
PM Modi's dynamic leadership aspires to transform India from an outsourcing shop to a global manufacturing hub, including semiconductors.
Introduction
Global business has long viewed India as the world’s “back office”. Popular culture, through movies like Outsourced (2006) and Slumdog Millionaire (2008), cemented this perception, focusing on India's role in providing economical business services such as call centres. By the 2010s, however, the emergence of Indian IT giants—from Tata Consultancy Services (TCS) to Infosys—became impossible to overlook. Today, with TCS’s market capitalisation of $167bn surpassing that of IBM, India's IT sector stands as a formidable force. Yet, these IT giants have traditionally been absent from the research and development and design work that drive innovation in global firms. This analysis, adapted from Arjun Ramani’s latest open-source free newsletter from The Economist, is enriched with our own perspectives.
The Quiet Evolution of Indian IT
Quietly, India is levelling up. As reported by The Economist’s Tom Easton, India now boasts nearly 1,600 “global capability centres” of multinational firms, up from 700 in 2010. Collectively, they employ some 2-3 million of India’s best and brightest, often undertaking mission-critical work from research to core-software development. For example, data scientists in Lululemon’s Indian office direct operations from the Middle East to New York, while Mercedes-Benz’s R&D centre, with nearly 6,000 employees, received 32 patents last year. This shift marks a significant transformation from India’s traditional back-office image.
Economic Impact
The total value of this evolution is hard to measure, but a recent estimate from Wizmatic, a consultancy, suggests it could be $120bn, representing a third of India’s overall services exports. Two big questions, however, loom over the future of Indian services. First is the impact of AI. Some AI experts speculate that chatbots could disrupt the tech-services industry. This concern is valid, as computer programming is the forte of large-language models, which are improving rapidly.
Potential Disruptions and Government Initiatives
One significant risk is that India’s growing dominance in services could one day prove as disruptive to the global economy as Chinese manufacturing has been. Massive inflows of manufacturing foreign direct investment (FDI) into China in the 2000s laid the groundwork for the rise of firms like BYD and Shein, which now dominate global markets. China received advanced technology, and its workers were trained extensively. The rise of global capability centres in India today appears strikingly similar. Western firms are investing heavily in Indian talent, and it is conceivable that the best designers from the 85 semiconductor firms with offices in India could eventually start their own ventures. This would pit Western white-collar workers against Indian ones, adding tension to global trade.
Strategic Responses and Challenges
The Indian leadership under Prime Minister Narendra Modi has been acutely conscious of the importance of manufacturing, launching the national mission of "Make in India" to project the country as an international manufacturing hub. Recently, the government has introduced generous packages to attract semiconductor manufacturing, providing substantial subsidies and attracting many international players. One notable example is the Tata Group's proposed ₹29,000 crore semiconductor manufacturing plant in Assam, where the foundation stone has already been laid. Other significant projects, including two in Gujarat, are also on the anvil1.
However, challenges remain, particularly regarding bureaucratic approvals, especially at the state level. Despite the central government’s proactive measures, the bureaucratic hurdles at various administrative levels continue to pose significant challenges. Streamlining these processes is crucial for India to fully realise its potential as a global manufacturing powerhouse and mitigate the risks associated with its growing services sector.
A Reason to Be Cheerful
Yet, there are also reasons to be optimistic. After speaking with global businesses and the Indian IT firms they collaborate with, it becomes clear that the threat from AI could also be an opportunity. While AI will disrupt Indian techies, it could also generate significant demand. Businesses are increasingly relying on their Indian arms to integrate AI into their operations, a process with no foreseeable end. Furthermore, the growth of Indian services has been consistent rather than abrupt, suggesting that its rise may not provoke as much hostility as Chinese manufacturing.
Strong Leadership and Election Context
In the backdrop of these economic transformations, India's political landscape is witnessing a crucial phase. Prime Minister Narendra Modi's strong leadership has been instrumental in steering the country towards consistent economic growth. With the ongoing Lok Sabha elections entering their final phases, Modi is widely expected to secure another term. His administration's policies have fostered a conducive environment for business and innovation, further propelling India’s growth story.
Looking Forward
India’s evolution from a back-office hub to a centre of innovation is a testament to its growing economic prowess. As global capability centres proliferate and AI integration accelerates, India is poised to play an increasingly pivotal role in the global economy. With robust leadership and a strategic vision, India is not just a beneficiary of globalisation but an emerging powerhouse shaping its future.
Key Semiconductor Manufacturing Initiatives in India
India is making significant strides in the semiconductor manufacturing sector with several key initiatives currently underway:
Tata Semiconductor Assembly and Test Pvt Ltd (TSAT) in Morigaon, Assam:
Project: Semiconductor ATMP (Assembly, Test, Marking, and Packaging) unit.
Investment: INR 27,000 crore.
Capacity: 48 million units per day.
Technology: Advanced semiconductor packaging technologies, including flip chip and ISIP (integrated system in package) technologies.
Applications: Automotive, electric vehicles, consumer electronics, telecom, and mobile sectors.
Foundation Stone: The foundation stone for the semiconductor packaging plant in Assam has already been laid, marking a significant milestone in the state's semiconductor manufacturing journey.
Tata Electronics and Powerchip Semiconductor Manufacturing Corp (PSMC) in Dholera, Gujarat:
Project: Establishment of a semiconductor fabrication facility.
Investment: INR 9100 billion (US$109.71 billion).
Capacity: 50,000 wafer starts per month.
Technology: High-performance compute chips with 28 nm technology and power management chips for various sectors.
Timeline: First semiconductor chip expected by the end of 2026.
Micron Technology in Sanand, Gujarat:
Project: Assembly and testing facility for semiconductor chips.
Investment: Up to US$825 million.
Products: D-RAM and NAND products.
Timeline: Facility expected to open in early 2025.
CG Power, Renesas Electronics Corporation, and Stars Microelectronics:
Project: Assembly, testing, marking, and packaging (ATMP) unit.
Investment: INR 76 billion (US$917 million).
Capacity: Up to 15 million chips per day.
Applications: Consumer, industrial, automotive, and power applications.
Samsung Semiconductors India Research:
Project: Expansion of existing semiconductor research and development base in India.
These initiatives are part of a broader strategy to diversify semiconductor manufacturing across different regions in India, leveraging regional competitive semiconductor policies and resource advantages.