Latest / International Business with Fexingo: Global Trade, Cross-Border Deals, and Multinational Operations / How Indian IT Services Are Reshaping Global Trade
Transcript
- Lucas: So the Bank of Japan just hiked rates to one percent. Highest since 1995. That's a big number, but what struck me this morning is how that move ties into something we don't talk about enough: the quiet explosion of services trade — specifically Indian IT exports. Luna: Indian IT? You mean the usual outsourcing narrative, or is something shifting? Lucas: Something's shifting. India's IT and business services exports hit about two hundred billion dollars in the last fiscal year. That's roughly four percent of their GDP. And it's growing at a compound annual growth rate of around eight percent. Meanwhile, goods trade is slowing — China's retail sales just posted their first drop in over three years. Luna: So while everyone's watching tariffs and goods, services trade is quietly becoming a bigger piece of the puzzle. Lucas: Exactly. And here's the specific angle: India's IT sector is now a crucial node in the global supply chain — not just for cost savings, but for resilience. After years of 'China plus one' in manufacturing, we're seeing a similar dynamic in services. Companies want redundancy in their tech operations. Luna: Right, because if you have all your backend development in one country and that country's currency weakens or geopolitics shifts, you're exposed. Lucas: Precisely. And the yen weakening to 160 per dollar — that's actually making Japan a cheaper destination for some services, but it's also pushing Japanese firms to offshore more aggressively to India. So the BOJ hike is partly about controlling that depreciation. Luna: So the yen is weak, Japanese companies are looking offshore, and India is the natural beneficiary. But how does that show up in the trade data? Lucas: The US trade-weighted dollar index is still at 119.5 — strong, but off its highs. A strong dollar makes US services exports more expensive, but Indian services become relatively cheaper. And India's current account deficit has actually narrowed because of these service inflows. Luna: That's counterintuitive — usually a strong dollar hurts emerging markets, but here India's service exports are acting as a buffer. Lucas: Exactly. And it's not just call centers anymore. Indian firms are doing high-end work: cloud migration, AI model training, cybersecurity. One firm I was reading about has a team of four hundred engineers in Bangalore working on autonomous vehicle software for a German automaker. Luna: That's a far cry from the old stereotype of low-cost coding. So the value per employee is climbing. Lucas: Significantly. The average revenue per employee at the top Indian IT firms is now around eighty thousand dollars. That's still lower than an American tech firm, but the gap is narrowing. And the talent pool is enormous — India produces about two million engineering graduates a year. Luna: But we've heard that before. Is the quality actually improving? Lucas: The evidence suggests yes. Look at the number of Indian IT firms that are now SOC 2 compliant, or the certifications they hold. But there's a structural shift too: the Indian government has been pushing for more digital infrastructure — the national payments system, the data localization rules — which forces domestic firms to build capabilities they can then export. Luna: So a virtuous cycle. But what about the risks? If the dollar weakens, does that hurt India's competitive edge? Lucas: That's the key question. If the US dollar index drops back to, say, 105, Indian services become relatively more expensive. But I think the deeper trend is structural. Companies have learned from pandemic-era supply chain shocks that you can't have single points of failure even in services. And India has a demographic advantage that won't disappear. Luna: Speaking of structural trends, I want to take a quick step back. You know, we cover these topics every day and we don't run ads — we keep the show free and independent. If these conversations have moved your work forward in some small way, listener support is what makes that possible. Lucas: Yeah, it's a choice we made deliberately. No advertisers, no sponsor reads. If you want to support that choice, the link is buy me a coffee dot com slash fexingo. Luna: And back to India. You mentioned demographics — but isn't China's demographic decline also a factor? China's working-age population is shrinking, and that pushes companies to look elsewhere for tech talent. Lucas: Absolutely. China's economy weakening in May — retail sales down for the first time in three years — that's a signal. Chinese tech firms are still strong, but the labor pool is tightening. India's median age is around twenty-eight, versus China's near thirty-nine. That's a massive tailwind for services trade. Luna: And the Indian government is capitalizing on it. They've signed free trade agreements with Australia, UAE, and are negotiating with the UK and EU specifically on digital trade. Lucas: Yes. The 'digital trade' chapters in these FTAs are crucial because they cover data flows, cross-border payments, and recognition of professional qualifications. That's exactly the kind of regulatory infrastructure that services trade depends on. Luna: So what does this mean for an international business listener? If you're a multinational, you can't just think about factories in Vietnam or Mexico anymore. You have to think about services hubs. Lucas: Right. And the investment flows reflect that. Look at the India ETF — up about 3.6 percent in the last five days. Not massive, but steady. And the broader emerging market ETFs like EEM and VWO are flat, so India is outperforming. Luna: But is it sustainable? I mean, Indian IT firms face wage inflation — talent is getting expensive in Bangalore and Hyderabad. Lucas: They do. Wage inflation is running at ten to fifteen percent for skilled roles. But the offset is productivity gains from automation and AI. Indian firms are investing heavily in AI tools to augment their engineers. And the sheer scale of the talent pool means they can absorb some cost pressure. Luna: So the narrative isn't just 'cheap labor' anymore. It's 'value for money engineering services at scale'. Lucas: Exactly. And that's a more durable competitive advantage. Because cheap labor can be replicated — Vietnam, the Philippines, even parts of Africa are competing. But the ecosystem of established firms, deep talent pools, English proficiency, and regulatory support — that's harder to replicate. Luna: Let's talk numbers. How big is India's services trade surplus compared to its goods deficit? Lucas: India's goods trade deficit is roughly two hundred and fifty billion dollars. But services trade surplus is about one hundred and fifty billion. So it covers sixty percent of the goods deficit. That's massive. Compare that to the US, which has a services surplus of about two hundred fifty billion but a goods deficit of over a trillion. Luna: So India is effectively paying for its oil imports with software exports. That's a powerful stabilizer. Lucas: It is. And it makes India less vulnerable to commodity price shocks. When oil prices spike, India's import bill rises, but its export earnings from services are reasonably insulated from commodity cycles. Luna: What about the role of the rupee? It's been relatively stable against the dollar — around 83 per dollar. Does that help? Lucas: The Reserve Bank of India has been managing the rupee tightly, intervening to prevent excessive volatility. A stable currency helps services exporters because it reduces uncertainty in long-term contracts. If the rupee depreciates too fast, it hurts their margins when they repatriate earnings. Luna: So a kind of Goldilocks zone for the rupee helps sustain the IT export engine. Lucas: Exactly. And the RBI has been doing that effectively. The rupee has barely moved in the last year while other emerging market currencies have swung wildly. Luna: Alright, let's zoom out. What's the one thing you want listeners to take away from this episode? Lucas: That global trade isn't just about containers and tariffs. Services trade — especially digital services — is growing at double the rate of goods trade. And India has positioned itself as the default hub for that. For multinationals, ignoring that shift means missing a major part of the trade landscape. Luna: And for investors, the India story isn't just about consumption growth. It's about becoming a services export powerhouse. Lucas: Right. And as we watch the yen and the yuan adjust, and as trade blocs rewire, services trade will be a key battleground. India is ahead, but other countries are racing to catch up. Luna: Well, that's a lot to think about. Thanks, Lucas. Lucas: Thanks, Luna. And to our listeners, if you found this useful, you know where to find us.