Latest / The Emerging Markets Podcast with Fexingo: Developing Economies, Growth, and Investment / How Indian IT Services Became the Worlds Back Office
Transcript
- Lucas: So the World Cup is driving prediction market volumes to record highs — that was one of the big headlines over the weekend. And it got me thinking about the technology behind those platforms. Luna: Right, because those prediction market sites aren't built by the leagues or the betting companies themselves in most cases. Lucas: Exactly. A huge chunk of the infrastructure — the real-time data pipelines, the user authentication, the fraud detection — is built and maintained by Indian IT services firms. And that's a story that's been quietly reshaping global business for the last decade. Luna: It's fascinating. And it ties into something we hear a lot from listeners: how does a country go from being seen as a low-cost call center destination to the backbone of global digital operations? Lucas: That's exactly the question for today. If walking through the economy with us has made something click for you over the past episodes, it's worth knowing that listener support is what keeps this show ad-free. People who find value here can throw a few dollars our way at buy me a coffee dot com slash fexingo. Every bit helps us keep digging into these stories. Luna: And it honestly makes a difference. We hear from listeners who say a particular episode changed how they think about a market — that's the kind of impact we're trying to have. Lucas: So back to India's IT evolution. The origin story is well-known: in the 1990s, Indian firms like Infosys and Tata Consultancy Services, or TCS, started doing Y2K remediation work for Western companies. Cheap, reliable, English-speaking engineers. Luna: Right, the classic labor arbitrage model. But that's not what they're doing today. Lucas: No, it's a completely different business. Today, Indian IT services firms are strategic partners for the world's biggest companies. They're not just writing code to order — they're designing entire digital transformation roadmaps. TCS, for example, helped build the UK's digital tax platform. Infosys runs the IT backbone for a major global bank. Luna: So the shift is from 'we'll do what you tell us' to 'we'll tell you what to do and then do it'. Lucas: Exactly. And that shift has been incredibly profitable. The Indian IT sector's revenue hit about 250 billion dollars in the last fiscal year. That's roughly 8 percent of India's GDP. And it's been growing at a compound annual growth rate of nearly 8 percent over the past decade. Luna: Those are huge numbers. But what's driving that growth now? I mean, the low-hanging fruit of cost savings has been picked. Lucas: Two big drivers. First, cloud migration. Companies are moving their data and applications off their own servers and onto Amazon Web Services, Microsoft Azure, Google Cloud. That's a massive, multi-year project for any large organization, and Indian firms have deep expertise in managing those transitions. Luna: And the second driver? Lucas: Artificial intelligence. Not just building AI models, but integrating them into business processes. For instance, a retailer might want AI to optimize its supply chain. An Indian IT firm will come in, assess the data, build the model, and deploy it into the existing systems. That's high-value consulting. Luna: So AI is actually creating more work for them, not automating them out of a job? Lucas: That's the argument the industry makes, and so far the numbers support it. Infosys reported a 12 percent increase in revenue from ai related projects last quarter. The fear that AI would kill outsourcing jobs hasn't materialized — instead, it's expanding the scope of what they can offer. Luna: But there's a counter-narrative, right? Some analysts say that as AI gets more capable, companies will need fewer people to do the same work. That could hit Indian IT hard. Lucas: It's a real risk. But the industry's track record suggests they adapt. When automation hit the call center business a decade ago, Indian firms moved up the value chain into analytics and process automation. I suspect we'll see the same pattern with generative AI. Luna: Let's talk about the talent pipeline. India produces something like 1.5 million engineering graduates a year. But there's a lot of debate about quality — are they actually job-ready? Lucas: That's the big challenge. The top-tier institutions like the Indian Institutes of Technology produce world-class graduates. But many engineering colleges churn out students with outdated skills. The IT firms themselves have massive training programs — Infosys has a dedicated campus in Mysore that can train 15,000 people at a time. They essentially bridge the gap. Luna: So the firms are investing heavily in their own talent factories. That's a competitive advantage that's hard to replicate. Lucas: Exactly. And it's one reason why countries like Vietnam or the Philippines, despite having lower costs, haven't been able to capture the same high-value work. The ecosystem — the scale, the experience, the institutional knowledge — is unique. Luna: We've seen some interesting moves recently. TCS announced a big partnership with a European telecom to build a 5G network management platform. That's not traditional IT outsourcing — that's deep domain expertise. Lucas: Right. And Infosys acquired a German engineering firm last year to get more European clients. The strategy is to localize while keeping the core delivery in India. That's a smart hedge against geopolitical risks and trade friction. Luna: What about the potential backlash? We've seen political rhetoric in some Western countries about bringing jobs back home. Lucas: It's a concern, but the reality is that reshoring is expensive and slow. Most companies that have tried it find that the talent and cost advantages in India are too compelling to give up. Plus, Indian firms now have significant operations in the US and Europe — they're local employers too. Luna: So the model is becoming more integrated, less 'us versus them'. Lucas: Exactly. And that integration is a strength. When you look at the numbers — Indian IT services firms employ over 5 million people directly, and support millions more indirectly — it's a massive engine for the Indian economy. But it's also critical for global business operations. Without them, a lot of the digital infrastructure we take for granted would be much harder to maintain. Luna: Where do you see the next frontier? Is it still services, or will India eventually produce its own software products that compete globally? Lucas: That's the billion-dollar question. India has produced some successful software products — Zoho, for instance, is a global player in business software. But the IT services model is deeply entrenched. The margins are lower than pure product companies, but the revenue is more predictable. I think we'll see a slow shift, with more Indian firms launching their own platforms on top of their service offerings. Luna: So services become the R&D lab for products. Lucas: That's the hope. And if they pull it off, it could transform India's economic story yet again. From a back office to an innovation hub — it's a journey that's still unfolding. Luna: We'll be watching. Thanks Lucas.