India is now a global technology hub due to
a rising middle class and a flurry of political incentives and private investment.
By Michael Megarit.
4 Reasons Why India is Now a Global Technology Hub
India has long been recognized as a tech-savvy country.
Strong governmental support, a good English based education system, a large talent pool and an open market made it the go-to destination for Western outsourcing.
However, India has become much more than that: With an Information Technology (IT) sector employing more than 4.5 million people, it is now a full-fledged technology hub.
Obviously, this did not happen overnight. It is the result of explosive economic development and long-term political planning.
In February 2021, Harsh Cardhan, India’s Science and Technology Minister revealed the Government’s ambition of making the country “science and technology centric”.
Indeed, the Indian government has long identified these two sectors as being key drivers of economic growth. So far, the efforts seem to be paying off as India ranks third among the most attractive investment destinations for technology transactions in the world.
Accounting for 8% of GDP, India’s IT and Business Process Management (BPM) sectors could very well be the drivers of future socio-economic growth.
Here are 4 reasons why India is becoming a global leader in technological innovation.
1 – India’s Economy is Thriving
The Growing Middle Class is Driving Demand for Technology
India’s economic growth is nothing short of spectacular.
In just 20 years, the country’s GDP has grown by more than 200%, reaching a peak of $2.9 trillion in 2019. In comparison, the nation’s GDP was less than $880 billion in 2000.
The direct result of this economic expansion is the emergence of a thriving middle class. In fact, it is estimated that India’s middle class will soon be proportionately as large as that of the US’ today. Currently, nearly 55% of the country’s population is middle class – and if growth continues, this number will rise to 80% by 2030. If these projections become reality, then India’s middle class will be the largest in the world by 2025.
Naturally, India’s growing middle class is starting to dictate consumption trends. Private consumption represents nearly 60% of the country’s GDP and has accounted for 70% of all growth since 2000. By 2030, it will drive 75% of consumer spending.
India’s middle class is eager to access technology and this is arguably the single greatest factor driving technological advancements in the country.
By 2030, one billion Indians will be using the internet and almost all of them will be using smartphones.
The World Economic Forum anticipates that India will witness a 4x growth in consumer spending by 2030. In particular, the WEF believes that digitally influenced consumption will become the norm, with more than 40% of all purchases being digitally influenced by 2030, up from 20% today.
The WEF’s study concluded that “India in 2030 will be a playground for growth and innovation for consumer businesses — both Indian and global, established and emerging. The transformations in the Indian consumer’s income, propensity for consumption, awareness and tech-savviness will create massive opportunities”.
Since the middle class is demanding more technology products, R&D spending is increasing.
Research & Development Spending is Increasing
Gross Domestic Expenditure on R&D (GERD) as a percentage of Gross Domestic Product (GDP) is the total amount of capital spent on R&D during a specific period expressed as a percentage of GDP of the national territory.
India’s gross expenditure in R&D has tripled between 2008 and 2018 and its GERD as a percentage of GDP stands at 0.65%.
While this figure is still below other BRIC countries (Brazil: 1.3%, Russia: 1.1%, China: 2.1% and South Africa: 0.8%), the situation has improved tremendously over the past 20 years:
- Per capita R&D expenditure increased 60% from 2008-2018
- Women participation in extramural R&D projects increased to 24% in 2017 from 13% in 2000
- The number of researchers per million population increased to 255 in 2017 from 218 in 2015 and 110 in 2000.
- India ranks 3rd in terms of the number of Ph. D’s awarded in Science and Engineering
- India’s Patent Office stands at the 7th position among the top 10 patent filing offices in the world (source: WIPO).
Every objective metric points to a growing R&D industry.
As a result, the country’s IT sector is in full growth mode.
2 – India Boasts a Historically Dynamic IT Sector
India is a global IT leader
India is a well established leader in the world of IT:
- In 2020, its IT market represents 8% of GDP.
- IT spending is estimated to reach $98 billion in 2022.
- The Indian IT market is expected to reach $100 billion by 2025.
Furthermore, Indian IT firms have delivery centers across the world and are well diversified across verticals such as Banking Financial services and Insurance (BFSI). Also, it is important to mention that India remains a preferred destination for IT & BPM in the world and remains a leader in the global sourcing industry, with a 52% market share in services exports from the country.
In fact, a recent survey showed that 80% of European and US outsourcing firms ranked India as their number one sourcing destination. Further, the National Association of Software & Service Companies (NASSCOM), reported that nearly 50% of all Fortune 500 companies choose to outsource software development to Indian outsourcing firms. Overall, India’s outsourcing industry is experiencing an incredible growth rate of 25-30% per year.
Technological innovation also comes from the pharmaceutical sector.
Indeed, Big Pharma invests billions every year to develop cutting edge technology. In this regard, India is also performing incredibly well.
India ranks 3rd worldwide for pharmaceutical production by volume and ranks 14th for pharmaceutical production by value. It is the largest provider of generic drugs globally and supplies 50% of the global demand for various vaccines. Further, India’s domestic market is estimated to be worth $42 billion in 2021 and is expected to reach $65 billion by 2024 and $120-130 billion by 2030.
The country’s biotech industry, which comprises biopharmaceuticals, bio-services, bio-agriculture, bio-industry ad bioinformatics, is valued at $64 billion in 2019 and is expected to reach $150 billion by 2025.
The low cost of production and R&D boosts the efficiency of Indian companies, which leads to competitive exports. In FY2021, Indian pharmaceutical exports reached nearly $25 billion.
In sum, pharma spending in India is projected to grow 9-12% over the next five years, which will make the country one of the top 10 countries in terms of medicine spending.
This means more R&D spending, which will further boost technological innovation.
A Booming Scientific Research Field
India’s booming R&D sector is made possible by the Country’s active research community.
India ranks third globally for the number of peer-reviewed Science and Engineering Publications. In 2019, India published 135,788 articles, a 177% increase from 2008. In fact, India represents more than 5% of the total world publications in science and engineering. Only China and the US do better.
In recent years, there is an acceleration of advanced research and development in India. We can cite a few examples:
- Motorola’s two R&D facilities which helped produce a sub-$40 cell phone.
- Microsoft’s launch of its 3rd international R&D center in India.
- Intel has 800 India-based engineers working on software and hardware designs for its communication and semiconductor lines.
- Other US companies are operating in Bangalore, India’s Silicon Valley.
In total, more than 150 international companies are doing R&D in India, and this is just the beginning of the movement that will make India an international R&D powerhouse.
How can we explain the rapid expansion of the IT sector and flurry of R&D activity? The answer is actually quite simple: well-targeted political efforts.
3 – A Political Agenda Centered on Promoting Innovation
Technological innovation in India is mainly driven by political support.
Intellectual Property and Technology Transfers
In 2020, the Indian Institutes of Information Technology Laws (Amendment) Bill declared that five IT institutions established under Public-Private Partnership mode, as well as fifteen other such institutes, are now considered institutions of national importance. These institutes now have the power to grant degrees to their students.
In parallel, the Indian government is implementing legislation to push IP protection and encourage tech transfer. Strong and comprehensive patent protection encourages foreign firms to transfer tech and ultimately increases foreign direct investment and R&D spending.
Indian lawmakers are implementing schemes, policies and regulations to encourage innovation and facilitate knowledge sharing. For example, it declared 2010-2020 as the decade of innovation and adopted important incentives such as the Make in India and Start-up India policies.
There is a demonstrated correlation between patent grants and an increase in innovation.
Shri Piyush, who was minister of Commerce and Industry between 2014 and 2018, claims that patent examination increased significantly in recent years:
- Patents granted went up to 28,391 in 2021 from 6,326 in 2015.
- Trade Marks registration shot up to 255,993 in 2021 from 65,045 in 2015
- Copyrights granted rose to 16,402 in 2021 from 4,505 in 2015.
This illustrates the government’s efforts to enhance the innovation ecosystem, provide a favorable environment for startups and increase foreign confidence in India’s investment environment.
As a result, India’s ranking in the Global Innovation Index improved: the country climbed 33 places from 81st position in 2015 to 48th position in 2020.
In addition to implementing positive IP legislation, the government of India is enacting various production linked schemes to increase industrial technological output.
Production Linked Incentives
The Production-Linked Incentive (PLI) Scheme for IT Hardware seeks to boost India’s manufacturing capacity for laptops, tablets, all-in-one PCs, and servers, as well as attract greater foreign investment.
The scheme, which is worth $10 billion, is expected to boost local hardware manufacturing and attract significant foreign investment as the country’s local ecosystem becomes more sophisticated.
As of July 1st, 2021, the Indian government announced that 14 companies, including Dell, lava, Dixon, Wistron and Foxcon have all been approved as beneficiaries under the scheme.
The government believes that over the next 4 years, these companies will fuel a total production worth more than $15 billion and generate direct employment opportunities for over 36K people.
In addition to these efforts, local governments are also enacting legislation to attract investments.
For example, the 6 key states involved in IT are enacting ambitious incentives, which are driving phenomenal economic growth:
- Andhra Pradesh is home to over 20% of India’s IT manufacturers. The India Business Process Outsourcing Scheme helped create 12,234 new jobs and is facilitating the expansion of IT and BPO companies in Tier-2 and Tier-3 cities across India.
- Karnataka is the country’s 4th largest technology cluster, which includes over 3,500 companies that contribute over $32 billion in exports. Its various schemes encourage foreign investments and the region is expected to become the largest IT cluster globally.
Maharashtra. Since 2016, the state government has helped fund the development of 37 IT parks and approved 472 others. Further, the state’s industrial policy offers incentives for investments made in various infrastructure projects, such as new knowledge parks. From 2017-2020, the state’s policies attracted over $800 million of IT-related investments and the revenues earned from the industry’s total exports rose to nearly $130 billion, from $118 billion in 2014.
- New Delhi is another IT-friendly district, with state officials enacting various incentives, such as Special Economic Zones (SEZs), which have attracted a host of multinational IT hardware companies, such as Barco, Samsung, and Toshiba.
- Tamil Nadu is a region which employs more than 400K IT professionals. The state government offers capital subsidies to invite investments and the region contributes over 10% of the country’s total IT exports.
Telengana boasts over 1,500 IT companies which contribute 10% of the country’s total IT exports. Much like Tamil Nadu, Telengana offers a number of incentives for businesses to invest and employ talent.
4 – A Flurry of Private Investments
Centers of Excellence (CoEs)
In 2020, the Software Technology Park of India (STPI) announced a plan to open 21 Centers of Excellence (CoE) to promote emerging technologies. Over the past few years, several CoEs specializing in AI were established to help the country facilitate R&D for business and society.
We can cite the opening of the following CoEs in 2020:
- Accenture opened a 300,000 square feet innovation hub in Hyderabad with more than 2,000 professionals with expertise in AI, security, extended reality, automation, and Blockchain. The hub will also hose a Nano Lab that offers clients a window into the latest breakthroughs in AI, AR, IoT and Blockchain technology.
- Tech Mahindra, an Indian tech giant, announced the launch of a dedicated Google Cloud CoE to drive the digital transformation of enterprises globally. The hub will help businesses accelerate their migration to cloud.
- IBM inaugurated its Automation Innovation Center in Pune that is specialized on Intelligent Automation and the Future of Work. The facility will house work on industry vertical solutions in banking, insurance, retail, CPG, telcos, healthcare, etc.
Finally, it’s important to mention the New Millenium Indian Technology Leadership Initiative (NMITLI). This is the largest public-private-partnership effort within the R&D domain in India. It looks beyond today’s technology and aims to build, capture and retain a leadership position by synergizing the best competencies of publicly funded R&D institutions, academia and private industry.
Basically, the government will consciously and deliberately identify, select and support potential winners in order to catalyze innovation centered scientific and technological developments. Ultimately, the goal is to transform India into a global R&D leader.
The Emergence of Private Equity
The last factor driving technological innovation in India is the rise of Private Equity over the past decade.
From 2011-2020, the Private Equity/Venture Capital (PE/VC) industry grew from a relatively insignificant, alternative asset class to a mature ecosystem totaling more than $230 billion. In fact, it grew at a CAGR of 19% from 2010 to 2020 and now affects all investment classes and strategies.
As in the rest of the world, the COVID-19 pandemic led to the adoption of technology across companies and governments, which brings into focus the need for investments in such sectors as edtech, healthcare, pharmaceuticals, technology, and e-commerce. These sectors are expected to be among the most popular receiving investments in the coming decade.
In fact, large corporations acquiring start-ups to increase their e-commerce and technology capabilities will be the man driver of PC/VC exists in the coming decade. Reliance Group’s recent acquisition of Netmeds, an online pharmacy platform and Tata Group’s $1.2 billion acquisition of Bigbasket are indicative of this emerging trend.
In conclusion, the data reveals that India is one of the countries attracting the most technology investments in the world.
Impressive economic growth, strong political will and private investments have transformed the nation into a high-skilled technological hub.
However, for the time being, much of this technological activity is driven by foreign companies.
Will India’s rise to the top of the tech innovation lead to the emergence of its own transnational FAANG companies?
About the Author
Michael Megarit is a partner with Cebron Group.
With over 25 years of domestic and international corporate finance experience,
he provides M&A and capital advisory to high-growth technology companies.