Why India is Still Perceived as a ‘High Volume, Low Cost’ Location For Setting Up GCCs
For Talent

Why India is Still Perceived as a ‘High Volume, Low Cost’ Location For Setting Up GCCs

By 
Aushini
|
November 29, 2024
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5
 minute read

Executive Summary

India's enduring reputation as a prime destination for Global Capability Centers (GCCs) is often characterized by its perceived strengths in high-volume, low-cost operations. This perception has roots in historical, economic, and infrastructural factors that have shaped India’s role in the global business landscape. 

This blog explores the reasons behind this perception, evaluates how it has evolved, and offers strategic insights for future positioning

Historical Perspective

The beginning of the Indian IT industry

India’s IT services industry was born in 1967 with the creation of Tata Consultancy Services. In 1974, Burroughs (an American mainframe manufacturing company) asked TCS (its India sales agent then) to provide programmers to install system software for an American client. This led to the birth of the Indian outsourcing industry. 

Simultaneously, the first software export zone, SEEPZ – a precursor to the modern-day IT park – was established in Mumbai in 1973

It has been almost five decades since then, and the IT industry has come a long way. It not only provides critical support and services to thousands of companies worldwide, but it is also the largest private-sector employer in the country.

The beginning of GCCs 

The history of captives in India started in 1985, with Texas Instruments (TI) setting up its R&D center in Bengaluru. TI was attracted to India because of the country’s engineering talent and cost advantage. 

What followed was an avalanche of global companies setting up their GCC in India, initially as cost centers, that have now evolved into full-grown centers of innovation and IP creation. 

The initial focus on cost efficiency attracted multinational corporations seeking to leverage India’s affordable labor and large talent pool. Key milestones such as the establishment of major IT parks and favorable policies cemented India’s status as a go-to location for GCCs.

Cost Advantages

India remains competitive in operational costs due to its favorable cost structure compared to Western countries and some emerging markets. 

The cost of setting up and running GCC operations in India, including salaries, real estate, and utility costs, continues to be significantly lower than in more developed economies.

How is the Tax incentives and economic policies of India is changing?

Tax incentive for employment generation 

Increase the salary limit to widen the scope of employment incentives that a taxpayer can currently claim. An increment in the ceiling will enable the enterprise to claim a weighted deduction, enabling an increment in cash flow.

Most Favored Nation clause (MFN) – Taxability of dividend 

Clarification on the applicability of the MFN clause under some of India’s tax treaties as it will greatly benefit many GGCs and is likely to avoid unwanted litigation spread over many years.

Equalisation Levy (EL)

The government should clarify the applicability of EL on intra-group transactions/carve out exceptions for such transactions to avoid additional tax burden (for the global corporation) arising on account of input services into GCCs 

Intercorporate transfer of employees 

Given tax litigation is one of the key deterrents for global companies considering establishing a presence in India, the government should come out with comprehensive clarifications surrounding issues to secondment.

Labor Market Dynamics

India is still perceived as a ‘high volume, low cost’ location compared with countries such as Singapore, Israel, and Ireland.

Availability of Skilled Workforce

India's labor market is a significant factor in its reputation as a ‘high volume, low cost’ location for setting up Global Capability Centers (GCCs). The country boasts a vast and diverse talent pool, with a steady influx of graduates from its numerous engineering, technology, and management institutions. This availability of skilled professionals is underpinned by several key elements:

Educational Institutions: India is home to a large number of prestigious educational institutions, including the Indian Institutes of Technology (IITs), Indian Institutes of Management (IIMs), and a plethora of engineering and business schools. These institutions produce a high volume of graduates with technical and managerial skills, essential for supporting GCC operations.

Technical Expertise: The country's focus on STEM (Science, Technology, Engineering, and Mathematics) education ensures a continuous supply of professionals equipped with technical expertise. This aligns with the needs of GCCs in sectors such as information technology, software development, and engineering services.

Upskilling and Reskilling Initiatives: In response to the evolving needs of global businesses, India has seen a rise in upskilling and reskilling programs. Industry partnerships with educational institutions and specialized training programs help bridge skill gaps and ensure that the workforce remains competitive in emerging technologies like AI, machine learning, and data analytics.

Talent Pool Size: India’s large and diverse labor force provides GCCs with the flexibility to scale operations rapidly. This extensive talent pool supports high-volume operations and offers a broad range of skills, from entry-level to highly specialized roles.

Wage Trends and Labor Costs

India's labor cost dynamics play a crucial role in its perception as a ‘high volume, low cost’ location:

Comparative Cost Advantage: Compared to developed economies such as Singapore, Israel, and Ireland, India offers a significant cost advantage in terms of labor costs. The wages for skilled professionals in India are typically lower, making it a more attractive destination for companies seeking to manage costs while accessing a high-quality workforce.

Wage Trends: While wages in India have been rising, especially in major urban centers like Bengaluru, Hyderabad, and Pune, they remain lower relative to many Western and high-cost Asian markets. This trend is partly driven by economic growth and increased demand for skilled labor. Despite these increases, India's wage levels continue to offer substantial cost savings compared to regions with higher living costs.

Labor Costs in Labor-Intensive Sectors: India’s dominance in labor-intensive sectors, such as IT services and BPO, has historically contributed to its reputation for low labor costs. These sectors leverage the country’s large pool of relatively low-cost labor to perform high-volume, repetitive tasks efficiently.

Impact on Overall Perception: The lower wage levels, combined with the high availability of skilled workers, reinforce India’s image as a cost-effective destination. For companies seeking to optimize their operational costs while maintaining service quality, India presents a compelling value proposition.

Dominance of Labor-Intensive Sectors

India’s historical focus on labor-intensive sectors has cemented its reputation as a ‘high volume, low cost’ location:

IT and BPO Sectors: The Indian IT and BPO sectors have been central to the country’s GCC landscape. These sectors rely heavily on large volumes of labor to deliver services such as customer support, software development, and data entry. This concentration on labor-intensive processes contributes significantly to India’s cost perception.

Scale of Operations: The scale at which these sectors operate in India enables economies of scale, further reducing operational costs. Companies can leverage large teams to manage extensive, repetitive tasks more cost-effectively than in higher-cost regions.

Impact on Overall Perception

The combination of a skilled workforce, competitive wage trends, and a focus on labor-intensive sectors contributes to India’s perception as a ‘high volume, low cost’ location. This perception has several implications:

Competitive Advantage: For many multinational corporations, the cost savings achieved by operating in India are significant, making it an attractive option for setting up GCCs focused on high-volume processes.

Strategic Value: While the cost advantage remains a key factor, there is an increasing recognition of India’s potential for delivering strategic value. However, the strong association with low-cost operations can overshadow these higher-value contributions.

Opportunities for Diversification

As India continues to evolve, there are opportunities to shift from a purely cost-centric model to one that emphasizes value-added services:

Expansion into High-Value Services: GCCs in India are increasingly focusing on areas such as research and development, data analytics, and strategic decision-making. This diversification helps reposition India’s role in the global business landscape.

Innovation and Technology: Investing in advanced technologies and innovation can enhance the strategic capabilities of GCCs. This shift allows India to capitalize on its skilled workforce to drive high-value projects and innovations.

Sector Diversification: Moving beyond traditional labor-intensive sectors to include industries such as fintech, biotech, and high-tech manufacturing can help India leverage its existing strengths while broadening its service offerings.

In summary, while India’s perception as a ‘high volume, low cost’ location is rooted in its labor market dynamics, including skilled workforce availability and competitive wage trends, there are significant opportunities to diversify and enhance its global position. Emphasizing high-value services and innovation will be crucial for evolving this perception and sustaining growth in the GCC sector.

How is the Talent Landscape in India Changing?

India's Strengths in the Global Talent Landscape

  • World's highest youth population: 24% of India is under the 20-34 age group.
  • Highest STEM graduates and 2nd largest English language proficiency: 34% of students are under STEM and 48% employability rate in AI/ML roles.
  • Promising R&D activities: Ranked 4th globally for research output, R&D growth of 54% between 2017 and 2022, and globally ranked 3rd for scientific publications.
  • Start-up ecosystem: 31,000 active tech start-ups and the 3rd largest tech start-up ecosystem.
  • Eightfold growth in the number of patents granted during 2014-15 to 2023-2024.

Hire, build, and Scale: For Strategic Areas

This entails assessing the current workforce, actioning the skill gaps through reskilling programs and influencing the future pipeline through collaborations with academia to shape curriculum.

Borrow-Augment: For Short-Term Requirements

GCCs are leveraging the gig workforce through vendor partners and staffing services that provide a very competitive workforce model.

The evolving hybrid operating model, where GCCs increasingly work with their vendor partner ecosystem, provides an agile and optimal option to balance talent needs.

Co-Create

To support and enable rapid scale-up, the assisted build or Build – Operate – Transfer (BOT) model has been seeing a significant uptake.

The industry has experienced the mushrooming of GCC-as-a-service provider, a new category, which also enables talent fulfillment.

This is also a model adopted by GCCs in the quest to establish deep capabilities, which requires high-end, niche talent, allowing for rapid scale-up of GCC operations by leveraging niche expertise.

How is the Business Environment and Regulatory Landscape Changing in India?

Overview of the top five regulations

  • Corporate Tax: Guidelines ensuring fair pricing in transactions between affiliated entities
  • SEZ and STPI Compliance: Incentives and regulations governing operations within designated special economic zones and technology parks.
  • Labor Laws: Legislation governing employment practices, including hiring, working conditions, and dispute resolution
  • DPDPA: Legislation recognizing the rights of individuals to protect their privacy and governing the processing of digital personal data

FEMA: Regulations overseeing foreign exchange transactions and cross-border investments

Initiatives by GOI to improve the 'Ease of Doing Business

The Government of India has undertaken various initiatives to enhance the ease of doing business and improve regulatory frameworks. Efforts include streamlining processes, digitizing compliance procedures, providing customs duty and GST exemptions for SEZ/STPI units, and amending labor laws to promote flexibility and efficiency. 

These initiatives underscore India's commitment to fostering a conducive environment for GCCs to thrive.

  • Flexibility to operate IT/ITeS operations from demarcated areas of the SEZ zone
  • Establishing an international arbitration center at GIFT City - to speed up dispute resolution.
  • Setting up of centers to process accelerated corporate exit in case of voluntary winding-up of companies (established in May 2023).
  • Reduction in the withholding tax rate on dividends from ~20 percent to 5 to 15 percent based on applicable tax treaty to encourage fresh investments.
  • Extension of tax holiday exemption for start-ups to encourage innovation.
  • As part of the reducing compliance burden exercise and based on data uploaded on the regulatory compliance portal, more than 3,600 compliances have been decriminalized and more than 41,000 compliances have been reduced by various ministries/departments and states/union territories.
  • Insolvency and bankruptcy code to ensure the process of insolvency is completed within 90 days with a maximum grace period of 45 days.
  • A reduction in construction permit costs from 23.2 percent to 5.4 percent of the economy's per capita income.
  • Introduction of a single window for obtaining building permissions through an online permission system
  • Further, GoI is moving towards centralized KYC and PAN as Single Business Identity and Regulatory Impact Assessment, thereby giving impetus to FDI in the country and domestic manufacturing activities
  • Automation of import and export procedures through a paperless compliance system - for instance: SPICE plus, Agile Pro forms for incorporation of companies
  • The upcoming labor codes aim to consolidate 29 central laws, offering beneficial provisions for employees and employers and propose streamlining compliance requirements.
  • Digital India Act (DIA) sets a framework for implementing a standard set of practices leveraging DPDPA, the DIA rules, the National Data Governance Policy, and IPC amendments for cyber crimes. The Digital India Act is set to replace the IT Act

Strategic Recommendations from Crewscale

Invest in Advanced Technologies

  • Adopt Emerging Technologies: Implement AI, ML, Blockchain, and IoT within GCCs to drive efficiency and innovation.
  • Promote R&D: Establish R&D centers and collaborate with academic institutions for continuous technological advancement.
  • Enhance Cybersecurity: Strengthen data protection measures to ensure global trust and security.

Elevate Talent Management

  • Upskill Workforce: Develop programs for upskilling and reskilling to keep pace with technological changes.
  • Focus on Leadership: Invest in leadership development to build strategic and managerial capabilities.
  • Attract and Retain Talent: Improve recruitment and retention through competitive compensation, career growth, and flexible work options.

Diversify Sectoral Focus

  • Expand into High-Value Services: Target sectors like financial services, healthcare, and high-tech manufacturing for higher-value contributions.
  • Foster Innovation Ecosystems: Support collaborations between startups, corporates, and research institutions to drive innovation.
  • Promote Industry Collaboration: Facilitate partnerships to explore new market opportunities.

Enhance Global Marketing and Branding

  • Showcase Success Stories: Highlight GCC success cases that deliver strategic value and innovation.
  • Strengthen Global Networks: Engage in international forums and conferences to boost visibility.
  • Unified Brand Messaging: Craft and communicate a brand message emphasizing innovation and strategic capabilities.

Promote Sustainability and CSR

  • Adopt Sustainable Practices: Implement eco-friendly technologies and waste reduction initiatives.

Engage in CSR: Participate in social responsibility programs to enhance global reputation.

Conclusion

India’s reputation as a ‘high volume, low cost’ location for GCCs is underpinned by historical advantages, economic factors, and a strong talent pool. However, the evolving business landscape and strategic shifts are gradually reshaping this perception. By leveraging emerging trends and addressing key challenges, India can further solidify its position as a strategic hub for GCCs

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