The same forces that increasingly divide the United States and China are now pushing the United States and India closer together. Although getting its own house in order remains America’s top global competitiveness priority, few, if any, bilateral relationships match the potential of closer U.S./India alignment. There is clearly a great deal of speculation and enthusiasm, but what can we realistically expect over the long course of the 2020s? Can leveraging India really help the United States countervail today’s rapidly rising China?
The surface case for India as an alternative to China is compelling. While these two nations couldn’t be much more different historically, politically, and culturally, both countries also have much in common: Decades-long efforts to lift their people out of poverty; vast domestic markets; huge numbers of skilled scientists, engineers, and technicians; large supplies of low-cost labor; a global diaspora of multilingual students, professionals, and entrepreneurs; and deep information technology (IT) capabilities.
The surface case for closer U.S./India alignment is also compelling. Both are democracies, with strong linguistic, legal, and cultural affinities. And like the United States, India sees China as a geopolitical and military rival. Moreover, India has the potential to become an important global manufacturing hub for U.S. companies seeking an alternative to China, and the giants of the U.S. technology industry are well positioned to succeed in what will soon be the world’s most populous nation.
Yet, there is another, potentially more worrisome parallel. Although COVID-19 has made America all too aware of its dependence on China for many essential manufactured goods, our rapidly increasing reliance on India for important hi-tech services gets far less attention, even as most of America’s leading companies have either set up large technology operations in India or continue to rely heavily on India-based IT capabilities. The similarities between the way American enterprises depend on India for IT services and China for manufacturing are striking. Moreover, even if India becomes a stronger partner and ally now, this does not mean they will remain one in the years ahead.
Looking forward, America must also see these dynamics through the eyes of India, which has its own self-reliance movement (Atmanirbhar Bharat) and history. While India greatly values the ready access to the U.S. market its large technology services firms (e.g., HCL, Infosys, TCS, and Wipro) enjoy, it’s also wary of becoming too dependent on companies such as Google, Facebook, Amazon, Walmart, and Microsoft. And like the United States, India needs to carefully balance its own fears, opportunities, dependencies, and tensions with China.
Taken together, the interplay between the United States, India, and China will shape global competition and digital innovation for years to come. This paper systematically assesses the outlook for the U.S./India relationship using the framework shown in figure 1 and addressing the eight questions shown. We argue that, although the “India as a supplier” dimension is the most important today, all four dimensions will prove critical over the course of the 2020s, with each requiring a different set of supporting government policies. While there is a wide range of possible scenarios, two things are clear: India should be an essential part of U.S. efforts to compete with and reduce its dependence on China, and this will inevitably expand America’s global dependencies from manufacturing to services.
Figure 1: Leveraging India—key strategic questions
Table 1 provides comparative statistics for India, China, the United States, and the European Union. Although definitions of terms such as Internet users, literacy rates, speaking English, e‑commerce, and what counts as a STEM (science, technology, engineering, and math) degree vary widely, the data reveals some significant messages, including:
- China has vastly outperformed India over the last 30 years, and now has an economy and per capita incomes roughly five times as large as India’s. China has also outperformed India in infrastructure, transportation, mass education, literacy, public health, e‑commerce, work opportunities for women, and other domains. India clearly has a lot of catching up to do, and many doubt that it will close these gaps with China anytime soon. However, given India’s younger demographics, the long-term picture may prove considerably brighter.
- Much of the disparity between China and India pertains to productivity growth. For example, China started off with one-third of India’s productivity level in 1970; four decades later, China’s labor productivity level is 67 percent higher than India’s. Fortunately for India, it is much easier for a nation to grow productivity faster when it is lagging behind, as opposed to being closer to the forefront.
- Total U.S. imports and exports for physical goods to and from India are just one-sixth of those with China. The official story is similar regarding services, with U.S. government data showing the United States importing some $30 billion of all types of services from India in 2019, and running a $5.4 billion annual services deficit. However, we believe the services deficit figure is greatly understated. The respected India IT industry trade organization, the National Association of Software and Services Companies (NASSCOM) says that India exported $136 billion in IT services in 2019, with over 60 percent of this business coming from U.S. firms (which would mean over $80 billion in IT services exports alone to the United States). As discussed in the India as a Supplier section, IT services are provided, paid, and accounted for in many different ways—some of which seem to have eluded the official trade definitions. Having to acknowledge the real services deficit with India would provide a much-needed U.S. wake-up call.
- Europe is less worried about digital technology competition from China than the United States is for three main reasons. As shown in the figure, Europe has roughly equal imports and exports to and from China, so it is much less concerned about its overall balance of trade. Additionally, Europe has long been heavily dependent on the United States and Asia in many key technology areas, so its rising dependence on China is much less of a fundamental change. Third, Europe is generally more successful than the United States in exporting advanced industry products to China (although if China continues to progress on its self-sufficiency goals, this may change). These three factors explain why getting Europe to be “tough on China” will likely be harder than many people think.
Table 1: Global players at a glance*
In determining how things might change in the future, three key questions emerge: 1) Will India significantly close today’s vast gross domestic product (GDP) gap with China; 2) how will India’s booming digital economy evolve and will U.S. firms succeed in it; and 3) can the United States expand its exports to and business within India to reach China-like scale? Each of these questions is briefly addressed ahead, showing that there are both real opportunities and some unrealistic expectations. (America’s large trade deficit with India in IT services is discussed in the sections on “India as a Supplier” and “India as a Competitor.”)
India’s Impact on the Overall U.S. Economy Will Be Modest in the 2020s
Forecasts regarding India’s economic outlook vary considerably—and of course, no one knows how the world economy will perform. While some experts praise many of the economic incentives and reforms initiated by Prime Minister Narendra Modi, others lament what they see as increased cronyism and widening societal divisions. Although there has been an uptick recently, COVID-19 cases, hospitalizations, and deaths are still down sharply from their peak, and this—along with recently announced government budgetary plans—has led to increasing optimism regarding the next few years, after the steep economic declines of 2020.
Most long-term GDP growth forecasts for India are in the range of 5–8 percent annually. If results end up being in the lower end, India won’t gain much if at all on China; and even at the higher end, only a modest closing will likely occur in the 2020s. For example, if India grows at 8 percent for the next ten years, and China just 4 percent, the Chinese economy will go from being five times as large as India’s in 2020 to four times as large in 2030. Thus, it seems fair to say that the size of India’s economy will not come close to rivaling that of China—or the United States or Europe—in the 2020s. However, over the longer term (say, by 2050), much bigger shifts are possible, particularly since India still has major “low-hanging fruit” productivity gain possibilities, of the sort China has exploited over the last 30 years. Indeed, “overstaffing” in India is still rampant, and, with political will, could be a source of large, rapid productivity gains.
The Prospects for Large U.S. Technology Firms Within India Are Currently Excellent
Ever since 1947, when Jawaharlal Nehru, the prime minister of the newly independent India, began showing a deep personal interest in science and technology, as well as a wariness about becoming too dependent on global business forces, the market for IT products and services within India has had an unusual and still-revealing history. Strict import and foreign exchange restrictions and other barriers resulted in the so-called “License Raj” that often made it very difficult for Western firms to do business the way they normally would, while forcing India to meet many of its own IT needs. This digital isolation also motivated many of India’s most talented IT and engineering professionals to pursue opportunities in the United States and elsewhere.
India’s IT services industry has deep roots in this history. For example, Tata Consultancy Services (now TCS) initially thrived by servicing IBM and Burroughs mainframes in India, especially after IBM famously exited the India market from 1977–1992 because of differences with the Indian government. Similarly, in the late 1970s, Hindustan Computers Limited (now HCL) began making microcomputers and calculators for domestic market use. Likewise, in the early 1980s, Western India Palm Refined Oil (now Wipro) launched its technology businesses by making Intel-based mini and microcomputers. But mostly because of high import tariffs on components and lack of scale, these domestic hardware efforts could not keep up with global competition, so both HCL and Wipro wisely shifted to IT services.
Even today, India’s biggest technology companies and most-influential digital leaders are focused primarily on the global IT services business. This has helped create space for U.S. tech giants to build strong positions within India’s potentially vast domestic Internet market, as only in recent years have major Internet players and a vital start-up culture emerged from within India. Contrast this with China, which more than a decade ago essentially blocked Google and Facebook from the mainland China market, creating space and time for Baidu, Alibaba, Tencent, and others to become what they are now.
How well positioned are the U.S. giants in India? Consider the following:
- Google dominates in search and streaming video (YouTube) and with mobile-phone software as Android phones comprise most of the Indian market. Google Pay has also become a market leader. The company has an 8 percent stake in Reliance Jio, India’s largest Internet service provider, and is investing heavily in a wide variety of venture capital and market development activities. It doesn’t hurt that Google CEO Sundar Pichai was born in Madurai, India.
- Facebook has some 300 million users in India, roughly a 10 percent stake in Reliance Jio, and a very strong position in digital advertising. WhatsApp also has a major presence in India and may prove to be a springboard into various e-commerce and payment opportunities.
- Despite India’s often byzantine retail e-commerce regulations, Amazon and Flipkart (which is 75 percent owned by Walmart) are currently the two leading retail e-commerce players in India, although large Indian conglomerates such as Reliance and Tata are seeking to change this. Amazon’s AWS has a very strong cloud computing position in India, especially within the software development community. Amazon is also investing in Indian supermarkets and department stores, and Prime Video is gaining momentum. The company is believed to have over 60,000 employees in India.
- Like Amazon, Microsoft is a major supplier of cloud computing and office automation services to the leading Indian IT services firms as well as many large Indian companies. Last year, some 10 million Windows PCs were sold in India; and, of course, Microsoft CEO Satya Nadella (born in Hyderabad) is among the most famous and respected people in all of India.
- Netflix, Uber, and Twitter are also well established in India.
This strong U.S. presence suggests a scenario wherein American Internet companies could combine their Western market success with solid positions in what will be the world’s most populous nation, resulting in a larger total market opportunity than China’s Internet leaders are likely to serve. The timing of this scenario seems especially good, as India’s digital markets are still in a high-growth phase, triggered some five years ago by the availability of low-cost mobile phones and sharply reduced wireless data prices. Many within India now expect an additional phase of strong digital growth led by agricultural, health care, and educational services, although these applications have been relatively slow to catch on in many nations.
Notably missing in the above list is Apple, which has been less successful in India, with a market share of only around 3 percent in mobile phones. Indeed, there is just one Apple store in all of India, versus 42 in China. Apple’s MacIntosh personal computer market share is also lower than it is in most Western markets. Apple’s high prices are clearly a barrier, as is the predominance of Microsoft Windows within Indian IT services firms. Perhaps Apple’s iPhone assembly efforts in Bangalore (through India-based Wistron) and Chennai (through Taiwan-based Foxconn) will help improve its prospects.
Apple aside, today’s upbeat outlook for U.S. technology firms is reinforced by Alibaba’s and Tencent’s recent scaling back of their once ambitious India efforts. Largely due to the current geopolitical tensions between India and China, both companies are now much more focused on the potentially lucrative ASEAN (Association of Southeast Asian Nations) region. Whether Chinese technology firms will aggressively return to the India market at some point and whether India will eventually establish its own cloud and e-commerce giants are discussed later in this paper. For now, the prospects for America’s leading cloud and Internet firms are encouraging, although India’s equalization levies and other taxes, yet-to-be-finalized data privacy laws, and other regulations could make operating within India more difficult for some U.S. companies.
Outside of the Digital World, U.S. Opportunities Within India Are Less Favorable
As noted earlier, total U.S. exports to India are about one-third of those to China, and the scale of U.S. operations within India is typically much smaller as well. Consider that Starbucks has 190 outlets in India and over 4,000 in China; there are 160 McDonalds in India and over 2,000 in China; Hollywood’s sales in India are a fraction of those in China, and, because of the huge popularity of cricket, the same is true of the NBA. As with China, doing business in India is still often difficult, with lots of red tape, preferences for local firms, and still-widespread intellectual property concerns. According to the World Bank, India ranks 63rd in terms of its ease of doing business, up from 77th the previous year, but short of its goal of being in the top 50.
As it took the United States more than 20 years to get into its current mess with China, it might take a similar period of time to fully turn things around in India.
U.S. government statistics show that the main American exports to India are for defense, aircraft, machinery, mineral fuels (oil, gas, coal), precious metals, and chemicals, areas in which growth expectations are generally modest. In major consumer markets such as cars, appliances, electronics, and other areas, the competition from entrenched Japanese, South Korean, Chinese, and local companies is fierce. Even in pharmaceuticals, wherein the United States is highly competitive and the potential market is large, India already manufactures many U.S. pharma products, and local Indian pharma companies are becoming increasingly competitive (in part because of weak intellectual property protections), so the upside seems modest.
The bottom line is, outside of the digital world wherein the opportunities are excellent—providing the Indian government does not follow the path of China—leveraging the potentially vast Indian economy to reduce the importance of China as a market in the 2020s will be challenging for most U.S. companies and industries due to India’s smaller market size, strong international competition, and preferences and protections for its own companies and institutions. As it took the United States more than 20 years to get into its current mess with China, it might take a similar period of time to fully turn things around.
Policy Goals and Recommendations
- Make sure U.S. firms, especially technology and Internet firms (including e-commerce and payments) have the same access to the India market as India does to the U.S. market in terms of licenses, taxes, tariffs, data usage/storage, e-commerce, privacy, etc. India greatly values its access to the U.S. IT services market, so this is a very powerful bargaining chip that should be used as needed to ensure relatively fair and balanced trade between the two nations. For example, imposing taxes on India’s IT services sales in the United States could be used to offset any digital services taxes imposed on U.S. firms operating in India, as opposed to the tariffs on imported physical goods from India that the Biden administration has recently proposed.
- Develop joint U.S./India technology policies, rules, and regulations in the above areas as a potentially powerful alternative to the EU—and China—in terms of setting global norms. As many of India’s policies in these areas are being developed now, the Biden administration should make this an immediate priority.
- Reinstate and strengthen the U.S.-India Strategic and Commercial Dialogue, an annual forum for policy discussions between the governments of the United States and India, which the Obama administration started and the Trump administration did not continue.
- Seek a limited U.S./India free trade agreement focused on key technology areas, including having India join the ITA-2 agreement and establishing agreements on cross-border data flows.
Table 2: India is a major IT supplier to every private sector industry
Large U.S. Companies Are Becoming Increasingly Dependent on India for IT
Table 2 looks at the situation within individual industries, showing which sectors view India mostly as a market, a supplier, a competitor, or some combination. Obviously, reducing such vast and diverse industries to a binary yes or no judgment greatly oversimplifies things, but having shown this figure to numerous industry participants, we think the assessments generally hold.
The issue of “India as a market” is discussed in the previous section, and the emergence of “India as a competitor” is addressed in the following one. In this section, we focus on columns two, three, and four of table 2: India as a supplier of IT services, India as a supplier of things other than IT services, and how these two supply-side situations compare and relate to the supply-side challenge from China.
The most telling part of table 2 is the 11–2 total shown. Nearly every U.S. private sector industry now relies on Indian IT services in one way or another. The only sectors that tend not to are defense and education, which prefer to do most of their own IT, use domestic-based partners, or both. Overall, U.S. companies source IT services from India in four main ways:
- Contracting directly with an Indian IT services supplier such as TCS, Infosys, Wipro, HCL, Cognizant, or others. India’s service companies have historically offered lower-cost back-office IT operations, but in recent years these firms have also moved up the value chain into more strategic areas such as cloud migration, business analytics, process automation, artificial intelligence (AI), machine learning, the Internet of things, and other forms of “digital transformation.”
- Sourcing indirectly from India by procuring services from Western companies such as Accenture, IBM, Deloitte, DXC, and others that do much of the actual work in India. As is discussed in the next section, these four U.S. organizations alone employ some 400,000 people in India.
- Setting up company-owned operations in India. Sometimes this is called “in-sourcing,” sometimes Global In-House Centers, and sometimes Global Capability Centers (GCCs). But whatever one calls it, over 1,200 U.S. multinational organizations have set up their own India operations that are used for everything from low value back-office IT and call centers to strategic innovation and R&D. (In this paper, we will use the term GCCs.)
- Bringing Indian citizens to the United States to work for their company. There are over 400,000 non-U.S. residents working in the United States through the H1-B visa program. Roughly three quarters of them—overwhelmingly in IT—are from India.
These four distinct business models help explain why getting accurate services trade data is more difficult than in many manufacturing markets. They also show how U.S. reliance on India for hi-tech services has expanded over the last 20 years. More than 2 million people of Indian nationality (some 600,000 of whom are highly skilled digital professionals) are now working to meet the IT needs of U.S. corporations. (This doesn’t count the great number of American citizens and permanent residents of Indian heritage now working in tech hubs such as Silicon Valley, research institutes, universities, and other sources of digital innovation.) As only an estimated 5 million U.S. citizens are IT professionals, it’s clear that India is now an essential part of America’s digital ecosystem.
Looking back, the parallels with China are remarkable. The rise of China was given a great boost by its admission into the World Trade Organization in 2001. Similarly, India’s major IT services companies substantially increased their global business and reputation by doing much of the work needed to manage the “Y2K” challenge that dominated the IT agenda from 1998–2000. Today, some U.S. companies have set up their own capabilities in India (much like they do in China), while others use local companies. And, as with China, over time, these operations have evolved into hard-to-replace talent and experience pools.
In some ways, the United States’ reliance on India is greater than it is on China. As shown in table 2, only five U.S. industry sectors—all manufacturing based—have become dependent on China, whereas just about every industry now relies on India for IT. Most of these industries are doubly dependent in that they also increasingly rely on Amazon and Microsoft (and to a lesser extent Google) for the cloud computing services that enable their businesses to function—and these three U.S. cloud providers have their own dependencies on India for talent, leadership, and ongoing support.
Indeed, many manufacturing organizations now face three levels of dependency: China for physical goods, India for legacy IT services, and the U.S. cloud giants for their core digital infrastructure. All three of these developments have taken place in less than 20 years, and although being dependent on India is not nearly as scary as being dependent on a geopolitical rival such as China, it is dependency nonetheless. We return to this theme in this paper’s concluding section.
Outside of IT, India Can Help the United States Reduce Its Manufacturing Dependency on China
Since COVID-19, most of the discussion about India as a supplier has focused on whether U.S. companies can move some of their China-based manufacturing to India or other low-cost nations such as Mexico, Vietnam, the Philippines, and Indonesia. Japan, South Korea, and Taiwan now offer substantial reshoring incentives, and America should do much more in this area if it wants to significantly reduce its China dependencies, as many U.S. companies will need to be pushed, incented, and even shamed into reducing their current China footprints.
The parallels with the way the United States has become dependent on China for manufacturing are clear.
India is keen to attract manufacturers interested in moving work out of China by both building on its current manufacturing strengths and positioning itself for the growth markets of the future. It also wants to shift from its long history of viewing domestic manufacturing primarily as a means for import substitution to directly targeting global export markets. Industries wherein Indian manufacturing is now strong include chemicals, pharmaceuticals, plastics, textiles, apparel, and steel. The future target list includes mobile phones, semiconductors, medical devices and supplies, automobile parts, batteries, telecom equipment, food products, white goods, textiles, defense production, electronics, solar panels, and most recently, toys. Just about all of these are major areas of Chinese manufacturing today.
To demonstrate that it wants to support global manufacturers, India emphasizes its direct financial support through its Production Linked Incentive (PLI) scheme (which provides cash incentives for volume manufacturing increases), competitive corporate tax rates, approvals of both joint ventures and 100 percent-ownership structures, infrastructure improvements, low-cost labor, land-use reforms, access to the domestic India marketplace, the rule of law, the use of the English language, and free trade agreements with most major markets. Some of these features, particularly the rule of law, could be especially appealing to firms seeking to move from China.
This all sounds good, and progress should be made over time, but many believe that India must improve considerably in most of these areas. As China’s domestic wages rise, its youth are less willing to work in factories, and it seeks to move up the value chain, China is also exploring offshore possibilities, mostly within the ASEAN region as well as within participating Belt and Road nations. Additionally, China still has significant advantages in infrastructure, just-in-time supply chains, reliable electrical power, shipping and logistics, practical manufacturing skills and experience, robotic automation, and related capabilities and services. For example, with mobile phones, India is mostly doing basic assembly for only the Indian market, whereas China is deeply involved in just about every part of the global manufacturing value chain. Whether India can move up the smartphone value chain and compete in export markets against China and Vietnam will likely be an important test of its overall manufacturing potential. It has a long way to go.
The bottom line is that U.S. use of and dependence on India-based IT services is by far the most important aspect of the India-as-a-supplier dimension. The parallels with the way the United States has become dependent on China for manufacturing are clear.
Policy Goals and Recommendations
- Include software and services dependencies in any U.S. national self-sufficiency and supply chain initiatives.
- Collect much more accurate and detailed IT services trade data that fully accounts for services provided to U.S. customers by Indian IT services firms, U.S. services firms doing their work in India, GCCs set up in India by U.S. firms, and services provided by Indian individuals working in the United States via an H1-B or other visa.
- Incentivize and encourage U.S. firms seeking low-cost production alternatives to China to select India if this work can’t be moved back to the United States.
The East Asian economic development model has now been in place for more than 50 years, having been successfully adopted by Japan, Singapore, South Korea, Taiwan, and most recently China. Of course, there are important national differences, but these countries have all prioritized education (especially technical education), infrastructure, global export markets, and a strong, supportive, and strategically engaged state. All five nations also started with commodity manufacturing and then moved up the value chain to become global leaders in various advanced technology markets. In this sense, China can be seen, economically, as a giant Taiwan, and the fact that it is a communist system may be less central to its economic success than many commentators believe (although clearly communism remains central to China’s political system).
In all of these cases, U.S. firms chose to use Asian manufacturing because it made them more competitive in the short run. In the case of China, the U.S. motivation was both to compete better with Japan and South Korea and to gain access to the massive China market, which the Chinese government often made contingent on setting up local manufacturing operations. The potential long-term dependency implications of these decisions were a secondary factor at best.
Like Japan, Singapore, South Korea, and Taiwan, India’s global focus was on exports, usually ones relatively low in the value chain, and then moving upward over time. While the Indian government has generally been less directly engaged than in the big four Asian countries, NASSCOM, founded in 1988, has played a similarly important role in promoting and steering the Indian IT sector. As with Asia, the reason U.S. firms choose to use India is it makes them more competitive in the short term. Once again, the long-term implications have been largely ignored.
Table 3: Leading players in India’s five key IT/digital market sectors