Context: The Confederation of Indian Industry (CII) organised the Inaugural Edition of the Global Capability Centers (GCCs) Summit in New Delhi recently.
Relevance of the Topic: Mains: Global Capability Centers: Status, Issues and Way Forward.
What are Global Capability Centers?
- Global Capability Centres (GCCs) or Captive Centres are offshore offices or subsidiaries set up by multinational corporations (MNCs) to handle various business processes and services.
- These centres are responsible for tasks including IT support, data analytics, finance, human resources, BPO etc.
- Over time, GCCs have evolved from being simple support centres to becoming strategic hubs that drive innovation. GCCs now provide a scale and range of services including- product development, operations, R&D, engineering, software, data scientists etc.
Status of Global Capability Centers in India:
India has emerged as one of the world’s largest GCC destinations. Key GCC hubs are located in Bengaluru, Hyderabad, Pune, Chennai, Mumbai, and the National Capital Region (NCR).
- The GCC sector contributes $68 billion as direct gross value addition (GVA) which is 1.6% of India’s GDP. Estimates suggest GVA from GCCs could rise to $200 billion by 2030.
- GCCs in India currently employ nearly 2.16 million people. Estimates suggest it is expected to grow to 2.8 million by 2030.
- Over 1800 GCCs are currently operational in India at present which are projected to increase to 5000 by 2030.
- Setup rate of engineering R&D GCCs has grown 1.3 times faster than the overall GCC setup over the last 5 years, indicating a clear shift towards high-value-added work in India.
The Indian government is working on a comprehensive National Framework for GCCs to further accelerate their growth.
Factors conducive to the growth of GCCs:
- Govt. initiatives: Strong physical and digital infrastructure supported by strategic initiatives like Digital India and Ease of Doing Business Reforms have created a conducive environment.
- Specific policies by states like Karnataka, Tamil Nadu, and Telangana in physical and digital infrastructure development have enabled GCC clustering in these regions.
- India’s talent pool remains a critical competitive advantage with approximately 2.1 million STEM graduates entering the workforce annually. There is approximately 35% female participation in the GCC workforce.
- Cost-effectiveness: Engaging Indian talent is more cost-effective as compared to other countries. It is estimated that GCC operations cost 30-50% in India less than the US, the UK and Australia.
Challenges Associated with GCCs
- Clustered development in few states: About 95% of GCCs in India are concentrated at six major locations, and the challenge is to expand this base to Tier-2 cities. Lack of digital infrastructure, power outages, unreliable internet connectivity, and traffic congestion can impact their expansion in Tier-2 cities.
- Regulatory Issues: Due to a lack of National level GCC policy, different states of India have varied GCC policies. There are also concerns related to dispute resolution mechanisms, and the lengthy appellate process.
- Transfer Pricing: Safe Harbour Regime was introduced to provide certainty in transfer pricing for MNCs. Industry experts have recommended safe harbour margin rates of 14-15% aligning with global trends, as the current transfer pricing margin rates of 17-24% is detrimental for MNCs’ revenues and operations, and discourages GCC expansion.
- Operational Challenges: Conflicts between cross-border data transfers laws and regional laws create significant operational challenges for GCCs. E.g., Balancing EU-US Data Privacy Framework and India’s data mandates under the DPDP Act 2023.
- IP issue: Despite hiring Indian engineers, GCCs retain innovation and intellectual property (IP) abroad. There is also a risk of IP theft or disputes. The multi-jurisdictional nature of GCC operations further complicates IP ownership and enforcement, with differing legal frameworks and limited cross-border IP protection.
Way Forward
- Enhanced outreach strategies to attract global players and facilitate GCC expansion beyond the US companies to other countries.
- Comprehensive framework involving dialogue between the Centre and state governments and Industry bodies to promote the geographic spread of GCCs to Tier-2 cities.
- Identifying best practices from existing GCC hubs in India to provide direction for emerging locations to attract GCCs.
- For regulatory simplification, GCCs need a national-level single-window clearance and rationalisation of the safe harbour margins in transfer pricing.
- Concessional tax rates to GCCs for engaging in R&D and IP creation.
- Creation of digital economic zones housing GPU-based data centres, academia, startups and co-located workspaces. This will facilitate the shift beyond traditional business functions to engineering R&D, AI, and emerging technologies with specialised skills development.
India has evolved from a cost-arbitrage destination to an innovation-driven economy powered by emerging technologies. GCCs have played a vital role in India’s economic landscape by creating high-value jobs, fostering skill development & employment, and facilitating knowledge transfer.
Also Read: IT Sector in India