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22 October, 2019
India has long branded itself as the world's leading outsourcing destination for global companies, particularly for those in the technology sector – but in the Fourth Industrial Revolution, the time is ripe for the world's most populous country to reinvent itself.
There is a burgeoning start-up and innovation culture, as shown by the Global Innovation Index, where India has improved its ranking from 81 to 52 between 2015 and 2019. In addition, the country has improved its reputation in terms of the risk posed to foreign investments and, in 2019, ranked third in the world in terms of attracting investment for technology transactions.
To maintain this momentum, India needs to further improve government regulations to encourage support for technological innovation, train tech talent and incentivize it to stay in the country and continue to improve its risk profile by attracting significant foreign and domestic investment in technology. Provided these favourable conditions can be met, India has unmatched potential to become the world's next Silicon Valley.
Global protectionism – the fuel for innovation in India?
India has been a destination for low-cost, outsourced software and support services since the late 1980s when the labour arbitrage model became a cost-effective solution for multinational companies. Historically, this outsourcing has boosted the country's wealth, while also providing much-treasured employment and fuelling urbanization.
The country’s outsourcing industry was recently valued at $150 billion. Nevertheless, India's traditional big-ticket outsourcing contracts are under pressure owing to a combination of the changing technology climate; competition from other outsourcing destinations, such as the Philippines; a shift back to insourcing in nations, such as the UK; and, increasingly, the global shift towards protectionism.
Protectionist policies have been particularly prominent under the current administration in the US, which was historically one of the largest outsourcers to India. This protectionist approach and the rise in tax breaks for domestic job creation are beginning to erode the appeal of outsourcing.
But could this situation also prove to be an opportunity for India? A decrease in revenue from outsourcing might provide an unexpected incentive for the country to shake the stereotype that its workforce is a pool of reactive problem-solvers for the tech industry. It could help India to rebrand itself as a hub of technology innovation. As a country, India has leapfrogged many stages of tech development, even as it took Western nations several decades to experience the same progress.
Innovation needs people
The Fourth Industrial Revolution is blurring the lines between what was thought possible and impossible, connecting the physical, digital and even biological spheres. Against the backdrop of technological changes wrought by this transformation, India has become a place of both unique problems and increasingly innovative solutions.
India has already started to undergo a technological transformation. Its population has moved along an exponential technology curve from barely any connectivity in 2014 to being the second most connected nation in the world, with 560 million internet users, as of this year, surpassed only by China. This technology penetration and connectivity was enabled by the increase the country has seen in smartphone users, from 86 million five years ago to 450 million today.
The spread of technology has also created a fertile ground for start-ups. India was recently ranked as having the third-largest start-up ecosystem in the world, as the country now has 26 start-up companies valued at more than $1 billion each. This success rate has encouraged interest in digital entrepreneurship as a career path, which can help build a tech-savvy workforce. In a recent survey of young people in India, a third of the respondents indicated interest in entrepreneurship as a career.
Certainly, the country has all the right conditions for entrepreneurial growth supported by a combination of changing demographics and economic trends. Firstly, India has an unrivalled youth population (more than 65% of India's 1.3 billion people are under the age of 35, with more than 50% under 25). Secondly, India is experiencing tremendous urbanization, with a rise in the migration of young people from rural areas to cities. From a consumer point of view, this creates a young, middle-class demographic with increased spending power and heightened interest in digital innovation. From a business perspective, this is also an appealing source of talent for the workforce.
How to become the next Silicon Valley
If India can continue to develop its urban centres and promote a Silicon Valley spirit of entrepreneurship, it could be in a prime position to achieve global tech hub status. Bengaluru (formerly Bangalore) in the south and Gurgaon in the north are two tech-savvy cities emblematic of India's rapid urbanization. The country is set to become the largest contributor to the world's urban population.
Bengaluru has previously been ranked by JLL’s 2017 City Momentum Index as the most dynamic city in the world, based on factors like technology and innovation. While initially an outsourcing hub, the city has successfully moved away from this past focus, embracing entrepreneurship and emerging technologies. This has allowed it to position itself as India's tech capital. In 2018 alone, there were 153 new start-ups founded in Bengaluru, which has the necessary level of talent and venture capital to create the conditions for start-up success.
The city of Gurgaon has transformed from a former agricultural wasteland into an urban sea of skyscrapers. It attracts multinational companies and global tech giants such as Google, Facebook, Zomato, Uber, Booking.com and TripAdvisor, as well as local businesses. It has also quickly emerged as a hub for numerous services, from IT software and finance, to consulting.
Not enough talent for innovation?
Despite its promising young workforce, India still has a significant skills gap when it comes to securing a future of technological innovation. India ranks eighth in the world in terms of the number of students graduating in science and engineering, but it appears enough is not being done to educate them in the right areas.
A recent employability report on engineers in India showed that fewer than 4% have the technical, cognitive, and language skills necessary for technology start-ups and only 3% have new-age skills in areas like artificial intelligence, machine learning, data science and mobile development.
India has also suffered a persistent brain drain of talent. There are numerous successful Indian individuals who've been appointed to high-profile posts in tech companies, abroad from Sundar Pichai, CEO of Google, to Shantanu Narayen, CEO of Adobe, to Satya Nadella, CEO of Microsoft.
Recent government records do suggest, however, that the number of Indian scientists coming back to India to pursue research opportunities has increased, and the booming tech industry will continue to encourage the return of many expats. From 2012 to 2017, 649 Indian scientists have returned to pursue research opportunities back home. This is more than double the number of scientists that returned between 2007 and 2012 – but is this rate of return enough?
The shortage of tech-ready workers afflicting the private sector is at odds with the significant levels of youth unemployment in the country. The private sector needs to work with the government and the Department of Education to address this issue by creating more training programmes that match industry requirements.
Investments and innovation – a winning duo
With government support, foreign and domestic investments can help launch India as the next global tech hub.
In terms of foreign investment, market commentators believe that India's influence is set to grow. Respondents in a recent Baker McKenzie survey feel positively about India's ability to maintain economic growth and development.
As the US-China trade disputes rage on, India is arguably becoming a more attractive alternative. Additionally, increasing the skilled workforce could put India in a favourable position to compete with China for market dominance.
While global investors have traditionally been hesitant about investing in Indian companies because the country was ranked as high risk, Indian start-ups have recently attracted more than $33.4 billion of funding through foreign direct investment.
Domestic investment is also on the rise, as Indian companies understand first-hand the opportunities presented by the country's exponential digital transformation.
Government support is lagging
Our Asia Pacific survey also suggests that 83% of senior executives from Indian companies believe that "policy-makers were behind the curve in terms of the laws they passed relating to technology and innovation”. Regulators could partner with private sector firms to understand rapid technological advances and explore better ways for passing legislation that can stimulate innovation.
This is already happening in pockets: in early 2016, the Indian government launched the Startup India initiative to support entrepreneurs and build a robust start-up environment. Another high profile programme, Make in India, was designed by the government to promote self-reliance, foster innovation, enhance skill development and build a best-in-class manufacturing infrastructure. Finally, Digital India is a government project that aims to digitally empower society and double the size of India's digital economy.
India has the conditions and tools necessary to take a leading position on the global technology stage, but it needs to overcome several roadblocks in order to realize its potential. Encouraging more foreign investment, offering tailored training programmes, making an effort to retain home-grown talent, as well as creating the right regulatory infrastructure are all vital to successful digital growth. The path to being a global player in the technology and innovation sphere is not straightforward, nor without strong competition from around the world, but India is on its way to becoming a real contender.
First published in World Economic Forum 2 October 2019.
For further information, please contact:
Ashok Lalwani, Partner, Baker & McKenzie
ashok.lalwani@bakermckenzie.com
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