India’s rise as GCC hub shows way forward

In India, Global Capability Centres (GCCs) have escaped attention because MNCs do not publish separate balance sheets for offshore operations. However, Nasscom projects that by 2025 India could have 2,000 GCCs employing 2 million and generating $60 billion.

De-globalisation has become a common theme after global value chains were severely disrupted by Covid and geopolitical events such as US sanctions on China and western sanctions on Russia. What some call hyper-globalisation of the early 21st century may well have ended, and some once-outsourced industries and services are being onshored. But globalisation is still alive and kicking.

One form of globalisation is progressing rapidly without much recognition. This is the rise of Global Capability Centres (GCCs). Nasscom (National Association of Software and Service Companies) estimates that by 2021 more than 1,400 MNCs (multinational corporations) set up GCCs in India, employing 1.3 million highly skilled people with a revenue of $36 billion. Nasscom projects that by 2025 India could have 2,000 GCCs employing 2 million people and generating $60 billion of revenue.

Many Indian start-ups have been created by former employees of the GCCs. Thus, skills nurtured by GCCs spill over into other sectors. This helped India create 100 unicorns (unlisted start-ups with an estimated market value of over one billion dollars).

The rise of GCCs has escaped attention because MNCs do not publish separate balance sheets for offshore operations, in India or anywhere else. Many MNCs have no interest in highlighting the growth of their GCCs because it might open them to accusations of exporting jobs to low-wage countries. Once, high-level skills were available only in advanced economies. Today MNCs cannot get enough skilled staff in their home countries and so search the world. They find India is a major source of talent.

Back in the 1990s, foreign companies began offshoring low-level work like call-centres and medical transcriptions to India and other developing countries. Next computer software and business processes were offshored on a large scale after 1998. Much offshored work went to Indian companies but an increasing amount was also done by captive centres of MNCs in India, an in-house form of offshoring. These centres have now risen in sophistication and technical excellence to become GCCs that are global hubs for design and R&D. Nasscom estimates that 42% of employees in GCCs are in engineering R&D.

Ironically, education in India is terrible overall. Schools and colleges produce millions of semi-literate students who are unemployable. Yet India also has some world-class educational institutions that are expanding in both the public and private sectors. MNC managers say that no other country (save China) produces half a million engineering graduates of decent quality every year. Doing business in India can be tough, but fierce competition for talent obliges MNCs to come to India, in services if not manufacturing. Deloitte estimates that 45% of the world’s GCCs are in India. Accenture, the world’s biggest consultancy company, recently revealed that of its 700,000 employees worldwide, no less than 300,000 were in India. Goldman Sachs reportedly plans to expand its Indian GCC to 2,500 employees by 2023. IBM and CapGemini have over 100,000 employees in India.

Historically pharma MNCs were reluctant to expand for fear of losing their intellectual property rights to Indians who were seen as expert “copycats.” Today Indian skills have gone well beyond mere copying and so MNCs are beefing up their R&D centres in India. AstraZeneca had a great collaboration with Serum Institute of India to produce anti-Covid vaccines that saved millions of lives globally. AstraZeneca now plans a GCC in India.

The government is spending billions in subsidies to promote manufacturing in order to create jobs. This is a mistaken approach. Rising automation means that manufacturing is capital intensive and yields few jobs. The government has offered a 50% subsidy for silicon wafer fabrication factories costing billions, which will employ very few workers. Far more will be employed in chip design, where India is globally competitive.

Rigid labour laws inhibit manufacturing investment. To overcome this, the government is looking for ways to increase hire-and-fire rules to units with up to 300 workers, against 100 workers today. These are puny employment numbers compared with what is happening in services.

India cannot compete with developing countries like Bangladesh and Vietnam in labour-intensive industries based on cheap labour. But it has proved highly competitive in skilled labour. Bharat Forge, India’s largest auto ancillary company, once tried to compete globally on the basis of cheap labour and failed. It then shifted dramatically to having zero blue collar workers: its entire workforce now consists of engineers. This hugely improved productivity made Bharat Forge a global powerhouse. High skills are important not just for services but manufacturing.

This alone cannot solve the problem of unemployment. But it is healthy for the balance of payments. And it is vital for services of the future such as artificial intelligence and the internet of things.

This article was originally published in The Times of India on July 10, 2022.

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