U.S. Needs to Balance Dependency on India for IT Services

As America looks for strategies to countervail today’s rapidly rising China, no nation is more important than India. Only India can match China’s vast population, low-cost labor availability, and deep base of world-class technical talent.

The United States and India have strong political, cultural, and linguistic affinities, and both nations see China as a military and geopolitical rival. While American and Indian interests are not always aligned, the potential synergies, including moving manufacturing from China to India, are real.

But there is another, more worrisome, dynamic. Although COVID-19 has made the U.S. all too aware of its dependence on China for many essential manufactured goods, our reliance on India for information technology (IT) and other high-tech services gets far less attention. This growing digital dependency takes five main forms:

  • America is the largest market for Indian IT services suppliers such as TCS, Infosys, Wipro, HCL, Cognizant and others, which collectively enjoyed some $50 billion in sales to the U.S. in 2020.
  • American IT services companies such as Accenture, IBM, Deloitte and DXC do much of their actual work in India. These four firms alone employ some 400,000 people in India.
  • More than 1,000 U.S. companies have set up their own operations in India, employing some 1 million people for everything from back-office IT and call centers to strategic innovation and research and development.
  • There are more than 400,000 non-U.S. residents working in the United States through the H-1B visa program. Roughly three-quarters are from India, and they are overwhelmingly in IT.
  • Americans of Indian heritage have a large and high-profile presence in Silicon Valley, as do Indian students and professors at America’s elite universities, especially in STEM fields.

The first three of the above items account for some $80 billion in imported IT services annually, much less than the over $400 billion in goods that America imports from China each year, but a huge amount for a single industry sector. Additionally, there is one way in which America’s reliance on India is greater than it is on China. With China, U.S. dependence is limited to manufacturing industries. But just about every U.S. industry sector now relies on India for IT support. And although being dependent on India is not nearly as scary as being dependent on a geopolitical rival such as China, this is dependency nonetheless.

There is a second troubling parallel. During the past 30 years, China has evolved from a contract manufacturer of commodity products to a global market leader in many strategic sectors. Similarly, India’s IT services industry began by providing low cost back-office services. However, in recent years it has expanded into cutting edge fields such as artificial intelligence, machine learning, analytics, cloud migration, the internet of things and other forms of “digital transformation.” A great deal of “U.S. innovation” is now outsourced to India, especially in digital technologies and the life sciences.

If India-U.S. relations continue to strengthen and America looks out for its interests, these dependencies should prove manageable and will definitely help the U.S. (and the free world) to compete with China. But there are at least two scenarios where today’s dependencies pose significant risks.

The first area is reciprocity. Indian IT services companies greatly value their ability to easily do business in the United States. Although America’s technology giants, especially Google, Amazon, Microsoft and Facebook, are well positioned in India’s fast-growing domestic market, doing business in India remains challenging. The U.S. and India often disagree sharply about IP protection, taxation, regulation, data governance, privacy, preferences for local firms and other policy areas.

More broadly, India has its own self-sufficiency, the Hindi-phrased “Atmanirbhar Bharat” movement popularized by Prime Minister Narendra Modi that seeks to reduce India’s dependencies on foreign firms. When negotiating in these complex areas, it’s never a good idea to be dependent upon the folks across the table.

The second scenario involves China. While the India-U.S. relationship has improved significantly in recent years, there is no guarantee this will continue. India has a long history of non-alignment, and the current tensions with China might well fade over time. If they do, the enormous economic potential of the India-China relationship could come to the fore. The nightmare scenario for the U.S. would be the combination of China’s manufacturing prowess and India’s IT services and English-language capabilities. It’s not hard to imagine how the world’s economic center of gravity could shift decisively to the East.

For far too long, the U.S. ignored its growing dependence on a rising China. So far, it has done the same with India. America needs to leverage India’s vast capabilities to effectively take on China. But having lived through one dependency, the U.S. would be wise to avoid another. As with China, this starts with admitting there is a problem, getting one’s own house in order, insisting upon trade reciprocity, and finding a way to leverage global capabilities while remaining in control of one’s own fate.

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