Latest / International Business with Fexingo: Global Trade, Cross-Border Deals, and Multinational Operations / How India's IT Sector Is Capturing Global R&D Spend
Transcript
- Lucas: India's IT services industry has been a juggernaut for two decades, but the story most people know is call centers and back-office processing. That is changing in a big way. Luna: You are talking about the move into actual research and development, right? Not just coding for apps but core R&D. Lucas: Exactly. Indian firms are now doing chip design, pharmaceutical research, aerospace engineering. And the numbers are starting to reflect that. According to the latest data from India's software trade body, exports of R&D and engineering services hit about $47 billion in the past year. That is up 18% year-over-year. Luna: That is significant. And honestly, if today's episode moves your thinking forward in even a small way, it helps if you can support the show. The link is buy me a coffee dot com slash fexingo. No pressure, just if it was worth a coffee to you. Lucas: Yeah, absolutely. Every bit keeps this ad-free. So back to those numbers — $47 billion is impressive, but it is still a fraction of global R&D spend, which is over $2 trillion. The opportunity is huge. Luna: What is driving this? Is it purely cost or is there a capability shift? Lucas: It is both, but the capability piece is new. In the past, multinationals would keep core R&D in-house or in their home country. But the shortage of engineers in the US and Europe — especially in hardware, semiconductors, and biotech — has forced them to look elsewhere. India produces over 2 million STEM graduates annually, and many are trained in advanced fields. Luna: So it is not just cheaper labor, it is labor that can actually do the work. Lucas: Right. And companies like Tata Consultancy Services and Infosys have set up dedicated engineering labs for clients. TCS, for example, has something called the TCS Pace Port — it is a co-innovation lab in New York, but they also have similar facilities in India where they do prototype development for clients in everything from industrial IoT to drug discovery. Luna: I read that Tata is working with a major European automaker on autonomous driving algorithms from their Bangalore R&D center. That is not back-office work. Lucas: No, it is not. And the dollar strength actually helps here. The trade-weighted US dollar index is at 119.5 — still high. That makes Indian engineering services cheaper for US and European clients paying in dollars. So the cost advantage is magnified. Luna: But there is a risk too, right? If the dollar weakens, that advantage narrows. Lucas: That is true. But the structural trend is deeper than currency. The sheer number of engineers in India, and the quality of the top-tier institutions, means that even if the dollar falls, India is still competitive. Plus, the Indian government has been pushing policies like production-linked incentives for electronics and pharma, which encourages more R&D to happen in-country. Luna: So it is not just outsourcing, it is a genuine innovation ecosystem. Lucas: Exactly. And there is a specific example I want to highlight: the semiconductor space. With the global chip shortage, many companies are looking to diversify their design work away from Taiwan and China. Indian firms like Wipro and HCL are doing chip design and verification for companies like NXP and STMicroelectronics. That is high-value work. Luna: That requires a lot of trust. You are giving someone else your intellectual property. Lucas: It does. And that trust has been built over decades. Indian IT firms have long track records of handling sensitive data and systems. Also, the legal framework around IP protection has improved. So the barrier is lower now. Luna: I want to push back a little. Some critics say that what India is doing is still low-end R&D — testing and validation, not true blue-sky research. Is that fair? Lucas: Partially fair. A lot of the work is in the development and testing phase, not basic research. But even that is a step up from where they were. And increasingly, you see Indian firms filing their own patents. For example, Infosys has over 1,700 patents globally. So they are moving up the value chain. Luna: What about pharmaceuticals? That is a big area. Lucas: Huge. Indian contract research organizations — or CROs — are doing clinical trials and drug discovery for global pharma. Companies like Syngene International and Biocon have partnerships with big players. The cost of a clinical trial in India can be 30 to 50 percent lower than in the US, and the patient pool is large. That is a powerful combination. Luna: So we are seeing a shift in the global division of labor. Not just manufacturing moving to China, but knowledge work moving to India. Lucas: Yes. And it is not just India. Countries like Vietnam and the Philippines are also getting into higher-value services. But India is the leader by a wide margin. The key question is whether they can sustain this growth as other nations compete. Luna: What are the risks to this story? Protectionism? Some countries are tightening visa regimes. Lucas: Visa restrictions are a risk. If it becomes harder for Indian engineers to work on-site at client locations, it could slow project momentum. Also, AI and automation threaten to automate some of the lower-level coding and testing work. But Indian firms are already investing heavily in AI to upskill their workforce. TCS has trained over 300,000 employees on AI and machine learning. Luna: So they are adapting. It is not a static story. Lucas: Not at all. And the data from this week shows that the broader emerging market ETF, EEM, is at 70.79, which is flat. But India-specific ETFs like INDA are at 49.58. The market is pricing in some optimism about India's services export story. Luna: To wrap up, is this a good investment thesis? Or is it too late? Lucas: I would not give investment advice, but I think the structural trend is real. R&D offshoring is still in its early stages. Global R&D spend is over $2 trillion. India's $47 billion is just 2.3 percent. There is room to grow, especially as more industries adopt the model. But investors need to watch for wage inflation in India and competition from other hubs. Luna: So the play is not just on IT services, but on the broader ecosystem: education, infrastructure, policy. Lucas: Exactly. And it is a story about how globalization is evolving. Not reversing, but reshaping. India is capturing a bigger slice of the knowledge economy. That is worth paying attention to.