THE
INDIAN
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INDIAN
TIFFIN
EDITION LVII
The end of the Indian summer also witnessed the culmination of the general elections in the country, which yielded a surprise as the incumbent political party did not secure a clear majority as was predicted by the exit polls. However, with support from two important allies, the Prime Minister, Mr Narendra Modi, continues to lead the country into a historic third term of five years. Against the backdrop of the fragility of alliances, political stability will have a strong bearing on the economic growth and reform agenda that is now in a critical phase.
Despite the scorching heat and the elections, the economic macros delivered well in the first quarter of the fiscal year, with a strong performance delivered by the manufacturing sector. Tax collections remained buoyant. The consensus from leading multilateral institutions, including the International Monetary Fund, is that the Indian economy is poised to grow at 7% during FY 2024-25, putting India in a sweet macroeconomic spot, achieving the highest growth rate amongst large economies globally. Also, the fiscal scenario appears comfortable as the current account recorded a surplus in the last quarter of FY 2023-24, primarily due to a revenue upside from (higher-than-expected) the Reserve Bank of India dividends and healthy tax revenues.
The unveiling of the Annual Budget by the Finance Minister, Ms Nirmala Sitharaman was a significant event. The budget addressed major concerns with its grounded provisions. India’s ability to generate enough jobs to keep unemployment in check took centre stage, exacerbated by the election results that highlighted the issue as a significant emerging concern.
The concern is that despite a high growth rate, the scale of hiring may not be enough to meet the expectation gap. Unsurprisingly, the Annual Budget put forth several measures to increase employment and upskilling. The Economic Survey that was released a day before the Annual Budget highlighted that the Indian economy needs to generate an average of nearly 8 million jobs annually until 2030 in the non-farm sector to cater to the rising workforce. Needless to add, the heavy lifting insofar as job creation is concerned will need to mainly be done by the private sector.
Critical to unlocking India’s rural economic potential are several qualitative aspects of employment generation, such as targeted skill development. Currently, only 4.4% of the young workforce is formally skilled. Importantly, rising youth and female participation in the workforce is a significant opportunity to tap the demographic and gender dividend. Also, the agro-processing and care economy are promising candidates for generating large-scale employment. A combination of job creation, complemented by upskilling, will deliver on the enormous expectation from the Indian economy.
Another industry that can create large-scale employment opportunities is electronic manufacturing; it can possibly create 5.5 - 6 million jobs. A robust electronic manufacturing ecosystem is essential to helping India become part of the global value chain. The initiative would involve incentivising research and development, design, infrastructure development, and other aspects. It will need to be backed by a conducive business environment and robust policy support, including fiscal incentives and non-fiscal interventions. In the coming five years, the potential of this sector is estimated at USD 500bn in value terms; with USD 350bn from finished goods manufacturing and USD 150bn from components manufacturing. The export potential itself is a staggering USD 240bn with a domestic value addition of up to 35%.
As India addresses the electronic manufacturing challenge, the Digital Public Infrastructure (DPI) continues to make waves in other countries that could look at a similar transformation in their economies. India’s G20 task force has suggested that countries use the plug-and-play models to deploy certain DPIs to make their existing infrastructure universally applicable for the common good, while also ensuring their sovereignty and data ownership. In a recent report, the task force has highlighted that the country’s fast-growing DPI has enabled it to achieve in nine years what would have taken it fifty years to realise without the DPI. The achievement is measurable as India achieved 1.4 billion Aadhaar enrolments (a 12-digit unique identity number), facilitated more than 10 million daily e-KYC transactions, granted access to bank accounts to about 500 million individuals, and effected direct benefit transfers across various schemes that helped the government save a whopping USD ~41bn by plugging leakages.
Interestingly, the scale of opportunity in almost every sector seems to expand exponentially, which in turn acts as a catalyst for the economy to grow. Going by the announcements in the recent Annual Budget, India’s economic agenda for the next twenty-three years is full of multiple, high-intensity initiatives that will help pave the way for India to fulfil its aspiration of becoming a developed nation by 2047.
M&A Tax and Regulatory
Deal Advisory Services
Between 31 May 2024 and 30 July 2024, around 100 M&A deals were announced of which 32 M&A deals were closed. The aggregate value of deals announced is USD 6,324.75mn; dominated by 75 domestic deals (USD 5,165.01mn) and 25 cross-border deals (USD 1,159.74mn).
In terms of sectors (considering only closed deals), the Materials sector saw deals worth USD 58.15mn, followed by the Information Technology sector with deals worth USD 25.18mn and the Consumer Discretionary sector with deals worth USD 21.26mn.
Over the past few decades, India has been pivotal in transforming Global Capability Centres (GCCs), from cost-saving hubs into mature centres for innovation, R&D initiatives, and talent acquisition and management. Despite a slowdown in the IT industry, the country has emerged as a leading destination for GCCs by commanding over 50% of the global market share. Leveraging its talent abundance, India is poised to play a pivotal role in creating an ecosystem for global majors.
Evolution from Shared Service Centres to Global Capability Centres
The late 1990s in India saw the emergence of Shared Service Centres (SSCs), with the advent of Texas Instruments in the country. Initially, these centres focused on centralising repetitive and transactional functions such as Finance, IT, HR, and Procurement to achieve cost efficiency through economies of scale, reducing redundancies, and optimising resource utilisation.
Over the past decade, SSCs have evolved into GCCs, marking a shift from cost-saving units to value-adding entities. This transformation aims to enhance GCC capabilities by driving innovation, improving product development, and moving beyond operational efficiencies by harnessing India's abundant talent pool and technology resources.
Amidst the changes brought on by the pandemic and the slowdown in IT markets, GCCs are experiencing remarkable growth rates, attributable to shifting priorities to value-creation and innovation, playing a strategic role, and focussing on providing knowledge-intensive services - KPOs. This shift underlines the importance of GCCs as an integral part of global MNC strategies to consolidate innovation and talent.
Benefits and challenges in establishing GCCs in India
India has emerged as one of the preferred destinations for MNCs looking to establish GCCs, opening up numerous benefits for both organisations and the country. Notable advantages of having GCCs in India include the availability of a skilled workforce, enhancement of India’s brand image globally and a strong start-up ecosystem.
Despite India being a hotspot, GCCs have encountered several hurdles. Challenges such as complexities in regulatory and tax compliance, limitations in infrastructure, constraints in R&D capabilities, and difficulties in acquiring and retaining personnel have posed notable obstacles for GCCs in the country.
Initiatives by Central and State Governments
With the number of GCCs in India showing an upward trend, the Government has introduced various initiatives like the ‘Digital India’ programme; streamlining policies for ease of doing business through online approvals and licensing processes for GCCs, announcing progressive tax regulations and flexible labour laws, etc. Moreover, in recent years, the Government has focused on improving digital infrastructure (high-speed internet, data centres, etc.) which will significantly benefit GCC operations.
While there are substantial efforts by the Central Government, equal focus by the state governments is also providing a fillip to the local ecosystems. The Government of Karnataka’s, Karnataka Digital Economy Mission (KDEM) aims to increase the state's contribution to the digital economy to USD 300bn by 2026 by enabling holistic growth of the technology sectors and start-ups through the development of tech clusters beyond Bengaluru to achieve higher contribution. The Government of Tamil Nadu has launched 'Tamil Nadu R&D Policy 2022' and introduced a special scheme focusing on GCCs by establishing a Hi-Tech Corridor and Innovation Cluster and subsidising payroll costs to emerge as a GCC magnet. The Government of Telangana has announced plans to form a Lifesciences GCC Consortium bringing together all the Lifesciences GCCs across India and has launched the Centre for the Fourth Industrial Revolution in Life Sciences (C4IR).
Despite the existing challenges, the strategic government initiatives and robust digital infrastructure provide support to GCCs, positioning India as a preferred destination for these value centres.
The Indian Global Capability Centre (GCC) ecosystem has emerged as a symbol of growth and innovation due to its substantial expansion. Over the years, India has played a pivotal role in establishing service centres, initially serving as back-end offices and IT centres. With advancements in technology, these centres have evolved to accommodate research facilities and various strategic business functions across different industries and scales.
During the early 2000s, several technology industries gravitated towards setting up cost-effective and high-productivity centres in India. This transition has since positioned India as a talent powerhouse equipped with cutting-edge technology. The progression and proliferation of software companies in India have been indicative of the transformation in their roles and responsibilities over time.
Harnessing Talent
As companies increased their investments in Indian GCCs, they assumed more strategic roles, with headquarters transferring decision-making responsibilities to Indian managerial staff. The impact on employment extends beyond job creation, as GCCs also play a significant role in generating indirect employment through their supply chains, support services, and related industries. Therefore, most GCC leaders identify talent management as a crucial priority for the success of a GCC, alongside the adoption of emerging technologies.
Knowledge-sharing within GCCs encourages best practices and learning across different functions. This culture of learning and innovation positively affects the wider ecosystem by facilitating the sharing of knowledge and skills across the industry.
Although talent shortage is a risk across all industries, the new flexible work locations and hybrid work environments in GCCs have created opportunities for available talent in smaller cities.
Technology Transformation
GCCs are essential for empowering parent companies to embrace cutting-edge technological initiatives and drive innovation. Their resilience and adaptability make them ideal for navigating the uncertain post-pandemic business environment. With the ability to swiftly iterate new product and service development, these capability centres facilitate rapid innovation. Moreover, the growing emphasis on digitisation reduces physical infrastructure requirements, prompting businesses to repurpose their workspaces into collaborative hubs.
GCCs play a pivotal role in enabling parent companies to revamp their operational models and adopt the latest digital technology. As we advance towards an AI-driven future, capability centres are instrumental in seamlessly rolling out AI models in backend operations with minimal disruption to front-office functions.
Challenges
Cultural integration and regulatory compliance are significant challenges for new GCCs, which can be effectively mitigated through comprehensive employee training initiatives and the establishment of a robust legal compliance framework.
Meanwhile, the volatile geopolitical landscape and macroeconomic uncertainty may exert an influence on investment prospects in the GCCs. Nevertheless, a strategic re-evaluation of talent requirements, particularly in the context of emerging technologies such as AI and machine learning, has contributed to a consistent inflow of projects to India.
India has over 1500 GCCs, employing millions and significantly impacting India's economic growth. These centres play a crucial role in overcoming challenges and driving technology adoption in businesses. GCCs are expected to grow exponentially, and their dominance will not be limited to the IT sector but will diversify across financial services, manufacturing, healthcare, and consulting.
Looking ahead, GCCs may embrace a ‘Hybrid GCC’ model, combining in-house expertise with strategic ecosystem partnerships. This approach can help GCCs optimise resource allocation, talent and focus on high-impact activities.
The root of innovation is to always push limits and try new things
Global capability centres (GCCs) have assumed a critical role in enabling global businesses to operate more efficiently, innovate continuously, and remain competitive in a dynamic global market. As GCCs continue to evolve, the questions around cross-border integration, operations and flexibility gain more significance.
In this video, Bruce Starnes President, Target India, and Kalavathi GV, SVP, Global Head of Software-as-a-Service & Software Center of Excellence, Royal Philips talk about the role of GCCs in creating local values from talent-rich regions that can be expanded globally, the importance of integration among the teams at the delivery region and the sourcing region, and the value of data analytics and technology, among other crucial points.
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