U.S.-India partnership, one of the greatest economic opportunities of the next decade: BACEI study



As India shifts from being a global back office to a technology co-creator, the U.S.-India partnership represents one of the greatest economic opportunities of the coming decade.

This is one of the predictions made by the Bay Area Council Economic Institute (BACEI) in its third major study that has researched India’s economy and its Silicon Valley connections. The study titled ‘Seismic Shift: Economic Growth and Strategic Alignment between the Bay Area and India’ assesses key developments in India’s economy and the outlook for closer business and economic ties.

“India now has the fastest-growing major economy in the world, with a dynamic startup environment and massive digitalization that is powering innovation, economic development, and inclusiveness. The growing geo-political alignment between the United States and India serves as a backdrop. In this evolving relationship, India’s relationship with the San Francisco, Silicon Valley Bay Area is unique,” said Sean Randolph, Senior Director of Bay Area Council Economic Institute who has developed and written the report.

“The US-India relationship builds on trust, shared interests, and opportunity. The challenge and opportunity on both sides are how to develop deeper research and industrial collaboration, with shared networks and resources, that builds a pipeline of innovative technologies and applications. A strong innovation corridor between India and the United States—in which the Bay Area will play a key role—is critical to achieving this goal,” the study summarizes.

Synergies between the Bay Area and India’s robust innovation ecosystem, the study says, suggest a wide range of opportunities for collaboration. Key thematic areas include defense, critical and emerging technologies (enabled by iCET), standards, state-level collaboration on climate and energy, cross-national support for startups, AI and digital development, skilled immigration, trade, and supply chain integration.

In its executive summary, the report states: “Once distant, U.S.-India relations have drawn progressively closer. New economic reforms have created large markets and reduced barriers to foreign investment. This economic engagement parallels a growing strategic alignment between the two countries, driven by the shared perception of a growing threat from China. Alignment is built on a foundation of shared democratic values, the rule of law, and economies built on market principles. In this new environment, India is not an ally in the formal sense—there is no mutual defense treaty between the U.S. and India—and it continues to protect its ability to maneuver as an independent actor. But on a practical level, the interests and challenges shared by the United States and India are drawing both nations closer together.”

Except for a pause in 2020 due to the pandemic, two-way U.S. goods trade with India has steadily grown since 2018, reaching $133 billion in 2022. U.S. exports to India have increased to $47.3 billion. With imports from India of $85.6 billion, the bilateral deficit was $38.3 billion. In 2021, the U.S. became India’s top trading partner, surpassing China. “Globally, services account for more than 40% of India’s exports, with the U.S. being its largest market,” the study says.

On the growing geo-strategic alignment between the two nations, the study says that alignment is reflected in a range of national, bilateral, and multilateral initiatives, including the United States’ Indo-Pacific Strategy, the Quad (linking the United States, Japan, India, and Australia), the U.S.-India Climate and Energy Agenda 2030 Partnership, the United States-India Trade Policy Forum, the U.S.-India Initiative on Emerging and Critical Technologies (iCET), and deepening exchanges on global supply chains.

The IMF estimates that India’s economy grew 6.8% in 2022 and will grow 6.1% in 2023. This makes India the fastest-growing major economy in the world, ahead of China’s estimated growth of 3.0% in 2022 and 5.2% in 2023. With a population of 1.4 billion, India is still a lower-middle-income economy with an average income level of $2,000 ($7,150 at purchasing power parity). While this is a challenge, a median age of 28.4 gives India a young workforce, an advantage over China, where the workforce is aging rapidly. Technology, supported by foreign direct investment (FDI), is a major driver of growth as government reforms have greatly reduced barriers. Annual FDI, which stood at $60.22 billion in FY 2016–17, has grown to $83.57 billion in FY 2021–22.

“To sustain economic growth at a high level (above 8%), India needs investment in manufacturing, technology, infrastructure, and agriculture. Economic reforms surged at the start of Prime Minister Narendra Modi’s first term, followed by a slowing of activity, and then accelerated at the end of his second term. Reforms must continue for India to meet its aggressive development goals,” the study says.

“Computer software and hardware is the leading sector for investment, with a 25% share, followed by the services and automotive sectors. Investment in manufacturing has also been strong. Among India’s states, Karnataka, with its technology capital Bangalore, is the largest recipient of FDI with 38% of total invested equity, confirming the strong orientation of overseas investors toward technology. The largest overseas investors were Singapore (27%), the United States (18%), and Mauritius (16%). Singapore and Mauritius, however, serve primarily as tax platforms, and India’s government data doesn’t report the original FDI source countries. This makes the United States India’s largest known overseas investor,” the study points out.

While measuring competitiveness, the study says that India ranks #37 out of 63 countries in the 2022 IMD World Competitiveness Ranking, advancing six places from 2021. The 2022 Global Innovation Index (GII) ranks India #40 out of 132 countries globally, up from #46 in 2021, and #1 among lower-middle-income countries (up from #2 in 2021.) India also places among a handful of countries as an “innovation achiever” (an economy that performs above expectations relative to its level of development).

The India Innovation Index measures the competitiveness of Indian states by a range of measures: human capital, investment, knowledge 2 Seismic Shift: Economic Growth and Strategic Alignment Between the Bay Area and India workers, R&D activity, business environment, and safety and legal environment, as well as knowledge output and knowledge diffusion. In 2021, the top five states were Karnataka, Telangana, Haryana, Maharashtra, and Tamil Nadu.

The study also suggests that Bay Area and California investors need to look beyond the national level to consider the business, infrastructure, human capital, technology orientation, and business environment of India’s states.

Under rules developed in 2020, FDI in India falls under either the Automatic Route or the Government Route (which requires an application). Most sectors are now fully open to foreign investment through the Automatic Route, with 100% foreign ownership permitted in a broad range of industries; the government route allows up to 100% foreign ownership in certain sectors.

“The Make in India campaign launched in 2014, aims to transform India into a global manufacturing center. Investment in the electronics manufacturing sector is supported by the Production Linked Investment Scheme (PLI) for Large Scale Electronics Manufacturing, launched in 2020, which has offered incentives (a percentage of incremental sales) for products manufactured in India in target industries. The promotion of domestic manufacturing has been particularly successful in the electronic components sector and in mobile phones, where India has become the second-largest mobile phone manufacturer in the world. Apple is now assembling its flagship iPhone 14 in India at a facility operated by its supplier Foxconn on the outskirts of Chennai. Production of electronic goods has more than doubled from $30 billion in 2014–15 to $75 billion in 2019–20,” the study pointed out.

While shifting focus to the startups in India, the study says that the startup activity rose to prominence with the 2016 launch of Startup India, an initiative to support startup growth through regulatory reforms, entrepreneurial skills development, and programs to showcase promising companies. Since then, India’s startup scene has taken off. A pivotal year for the startup scene, 2021 saw more than 50,000 active startups, over $400 billion in valuation across the ecosystem, and venture investment reaching $38.5 billion. India’s share of global venture funding nearly doubled, from 3% to 5.6%. In the same period, 44 new unicorns (private companies valued at over $1 billion) were minted. This brought India’s overall count of privately held active unicorns to 73, making it the world’s third-largest home to unicorns after the United States (500) and China (170). Consumer technology, fintech, and SaaS were the leading sectors, accounting for more than 75% of all investments.

“Investment momentum was driven by the maturing of India’s digital infrastructure, cheap and ubiquitous data, growing depth in the startup ecosystem, and investor confidence supported by successful exits. Venture interest has also been stimulated by crackdowns in China on large tech companies and in sectors such as edtech and gaming, which has discouraged entrepreneurial activity and led to capital flight. Approximately 90% of venture investment in tech is coming from international investors and 10% from domestic investors, but a growing number of Indian LPs are investing through Indian GPs. In the two years from February 2021 to February 2023, the Bay Area’s Sequoia Capital was the top venture investor with 107 deals, Accel was the ninth largest with 70, Y Combinator was eleventh with 54, Matrix Partners was twelfth with 52, Nexus Venture Partners was 26th with 31 deals, and Lightspeed Venture Partners was 31st with 27 deals,” the study highlighted.

“A cutback in venture investment began in 2022, and 2023 will remain challenging for the ecosystem as India tracks with the retrenchment of venture investment seen across the globe. Dealmaking has become more measured as investors refocus on quality assets, valuations have dropped, and the volume of IPOs has fallen as investors confront volatile equity markets. However, even as startups tighten their belts, the underlying strength of India’s ecosystem remains intact, offering attractive opportunities,” it added.

The study points out that the economic bridge between California and India is broad and multifaceted. One aspect of this connection is academic. Universities in California and India collaborate on research and other exchanges. “CSU-Monterey Bay and San Francisco State University support joint degree programs in information technology with Indian universities. Other Bay Area universities are actively engaged in technical, policy, and entrepreneurial cooperation ranging from electric vehicles to life sciences. The India ZEV Research Centre, led by the Institute of Transportation Studies (ITS) at UC Davis, is working to advance research and policy in transportation decarbonization, focusing on electric vehicles. ITS also partners with government and research organizations to strengthen state-level action,” the study points out.

Launched in 2007, the Stanford-India Biodesign program was a first-of-its-kind collaboration between four Seismic Shift: Economic Growth and Strategic Alignment Between the Bay Area and India Stanford University, the All India Institute of Medical Sciences (AIIMS), and the Indian Institute of Technology (IIT), aiming to train a first generation of medical technology innovation leaders and stimulate India’s nascent medtech industry. After a successful nine-year track record that developed new technologies and launched companies, the program’s India partners transitioned to independent status, becoming the School of International Biodesign at AIIMS.

Another very important aspect of the connection are leading Bay Area Companies in India like Cisco (with its second global headquarters in Bangalore); Google (which in 2021 accounted for 99.6% of mobile searches in India and plans to invest $10 billion in India over 5–7 years); Meta (for which India is its largest WhatsApp market, with 487.5 million users in early 2023); Twitter (which currently has 24.45 million active users in India, the company’s third largest market in the world after the U.S. and Japan); Salesforce (with 7,500 employees India, making it the company’s second largest employment center after the United States); LinkedIn (with members in 2022 numbering more than 90 million in India, LinkedIn’s second largest market after the United States); Apple (which is expanding production of the iPhone 14 in Chennai and Tamil Nadu); and Intel (which operates nine design and engineering facilities with 14,000 employees in India, including its largest design and engineering center outside the United States).

Highlighting investment Flows from the Bay Area to India, the study says that Foreign Direct Investment (FDI) by Bay Area companies in India builds on decades of investment by the region’s technology companies in offshore R&D and engineering centers. “Through the first seven months of 2022, FDI was on track to be the largest in recent history in terms of dollar amount and deals. The top sector for Bay Area investment is ICT & Electronics ($875.4 million, or 64.6% of the total in 2021), continuing the strong focus on R&D, software, and engineering. This came primarily from Silicon Valley (Santa Clara County) followed by San Francisco.” In 2022, the top five Indian states receiving investment were Karnataka, Maharashtra (Mumbai), Telangana (Hyderabad), Tamil Nadu (Chennai), and Haryana (Gurgaon).

Investment flow from India to the Bay Area is largely concentrated in Silicon Valley (Santa Clara County) and San Francisco and is much lower than investment in the opposite direction. “This imbalance between inbound and outbound investment points to an opportunity for deeper engagement by Indian companies in the region’s technology and innovation economy,” the study suggests.

India’s leading ITC companies—Infosys, Wipro, Cognizant, and TCS (Tata Consultancy Services)— all have a Silicon Valley presence to support and co-innovate with clients (TCS with 1,900 employees and an active program of educational philanthropy). Tech Mahindra, with 1,000 local employees, works with more than 70 regional technology companies across multiple sectors. Sector Opportunities Key sectors offering opportunities for Bay AreaIndia business development include fintech, edtech, pharmaceuticals and healthtech, renewable energy, electric vehicles, semiconductors, infrastructure, smart cities, and space.

Touching upon an issue of concern, data privacy and localization, the study says that Silicon Valley’s interests are particularly impacted by ongoing policy debates regarding privacy and data regulation. “India’s government was engaged in more than two years of deliberation on a 2019 Personal Data Protection Bill that it ultimately withdrew in August 2022. Beyond the data protection bill—and of particular concern for Bay Area and U.S. companies— are policies by the Reserve Bank of India to prevent the offshore transfer or storage of credit card and payment processing data without government approval, effectively requiring its storage locally.”

“Draft of the new Digital Personal Data Protection Bill 2022 was made public in November 2022. It contains many of the same provisions as its predecessor, including mandates patterned after the EU’s General Data Protection Regulation (GDPR) that require companies to obtain consent from individuals about whom they are processing data. Exceptions for the Indian government would allow data gathering in the “public interest,” a provision that could empower state surveillance and pose problems for Silicon Valley companies that would need to deal with complex legal issues of appropriate government access,” the study added.

However, a move that has been welcomed by Silicon Valley companies is that the draft backs off from the more aggressive data localization provisions of the earlier version. The new approach, based on the free flow of data to “trusted” geographies, would instead allow the Indian government to evaluate other countries’ data protection regimes and certify that their protections are sufficient for the data to be moved. “This approach addresses concerns raised by Silicon Valley and other companies regarding infrastructure and other data storage costs as well as cybersecurity concerns associated with mandatory local storage. It also addresses domestic concerns that mandatory local data storage would negatively impact India’s large cross-border IT services industry. Non-personal data is out of the bill, and penalties for non-compliance have been reduced. Throughout the undertaking, India’s government has been open to input in the drafting process, including from U.S. and Silicon Valley companies.”


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