India's IT industry has failed to move up the value chain

It is a comprehensive failure, and not a noble one.

The Deep Seek moment has shattered India’s image of itself as an IT super‑power. Before January 2025, when Deep Seek was released, most in India did not believe that we should develop our own foundational models; instead most people agreed with Nandan Nilekani that India should focus more on applications of AI rather than on foundational models. Now, many people are wringing their hands wondering why a Deep Seek came out of China rather than India.

Before we discuss developing foundational AI models though, we must recognize the harsh reality that India has more or less failed to move up the value chain in IT.

Japan and Korea

Some parallels with other countries will make the extent of the failure clear. Japan started out as a manufacturer of low‑cost and low‑quality cars, and eventually captured much of the US market. South Korea too started out the same way and now South Korean companies dominate in electronics products.

India started out as a low‑cost supplier of IT services, and three decades later, it is still primarily a low‑cost supplier of IT services. With rare exceptions like Zoho, one is hard put to think of an Indian IT product that is a player in the global market, let alone one that dominates its category.

The buses we missed

Before missing the AI bus, there were many other buses that India’s IT industry could board, but did not. We missed the desktop consumer applications bus. Then the dot‑com bus arrived and we still weren’t at the bus stop.

When websites turned into mobile apps, Indian consumers adopted them enthusiastically. Some of the apps they adopted were Indian, but none of those went global. India did achieve some success when it came to applications for business—people do talk of Finacle, for example—but nothing that compares to Japan’s triumphs in cars.

Given that we have so many Indian programmers, one might expect Indian companies to succeed in developing and selling the products they use, but one would be disappointed. There is no Indian company like JetBrains, which develops the moderately successful IntelliJ product.

The penultimate bus we missed— before we were left forlornly watching the departing AI bus—was social media. China produced TikTok and was able to challenge American social‑media giants; India banned TikTok, fumed about Twitter and Facebook bias, wished fervently for an Indian social‑media platform, and never built one.

India has failed. What makes it worse is that, for the most part, it is not a noble failure. The story of the Indian IT industry is not filled with tales of product companies valiantly fighting to take over the global market and being crushed or acquired by global players. We weren’t in the running at all. We don’t have an Indian WhatsApp that was acquired by Facebook, or an Indian Telegram that failed to take on WhatsApp. Amazon developed AWS to solve an engineering problem it faced and then packaged it as a product for the world. It is impossible to imagine Flipkart doing the same. It is ludicrous to even imagine India building a cloud platform such as AWS, Azure or GCP. The fact that it is unthinkable tells us how comprehensive the failure has been.

Why we missed so many buses

I will examine some explanations that we can think of for this failure. Many will have some validity, but none of them is satisfying on its own.

Building consumer products is hard

One could theorise, for example, that consumer IT products have to be close to the customer to succeed, and as the most lucrative consumer market is the United States, companies have to be based in the US. This explanation is unsatisfying. Japanese car companies were able to crack American consumer behaviour by having marketing teams in the US while being headquartered in Japan. India, with an Anglophone elite that is tuned to American culture, should have been the country that cracked the American market remotely. Instead, it is China that created the most successful social‑media app that penetrated the American market. Surely a social‑media app requires significant understanding of the consumer psyche? In contrast, not even a utilitarian app such as Skype has come out of India.

Another supposed explanation is that Indian start‑ups are too focused on the Indian consumer market. This is more an observation than an explanation. Why do we have no example of an Indian product company that, having made a success of the Indian market, decides to expand to the American one? Why couldn’t an Indian travel‑booking site have gone global? Surely there was a pathway: it could first have targeted the Indian immigrant community and then expanded to the core American consumers.

Monopolies and agglomerations

Other explanations involve monopolies. It is difficult to compete in spaces where Microsoft or Google—or whichever companies—want to be, as they will either crush you or buy you out. There are two objections to this explanation: first, where are the Indian companies in the markets that Microsoft and Google don’t want to be in; and second, where are the Indian companies that valiantly fought Microsoft or Google but were either vanquished or bought over? The battle was not fought and lost—it was never joined.

A similar answer can be given to the other explanation involving agglomeration effects. The idea is that it is difficult to compete with Silicon Valley, as it attracts the smartest people from all over the world and great things happen when they work together and exchange ideas. This is a valid explanation, but unsatisfying. Sweden will struggle to replicate Silicon Valley’s success, but nonetheless it has Spotify. Where is India’s Spotify? Where are those few companies from India that prove we have made an attempt and failed?

The education of India

The other set of explanations involve India’s education system. We are told that it encourages rote learning, which explains the lack of innovation. How do we then account for the success of China, a nation whose educational system focuses even more on cramming than India’s?

Another complaint about the education system is that it is not equipping our students with the skills for the job. It is true that we have too many engineering colleges that take in students with no aptitude for engineering. They churn out computer science graduates who are unable to code, leave aside possess computer‑science knowledge.

While this complaint about the poor skills of computer‑science graduates is true, it doesn’t suffice as an explanation of the lack of product innovation from India. When the IT industry in India faced a shortage of programmers, it took to training them. Many of the higher‑order IT skills that are required for product development—such as product management, UI design, architecture—have to be learnt on the job and it is unrealistic to expect them to be taught well in colleges. Of course, the hardcore engineering skills cannot be taught in training courses or learnt on the job. You do need good four‑year engineering degrees for those. But we do have the IITs and the NITs that do a decent job. I am sympathetic to the argument that we need many more, but the ones we have should have given us many more successful products than they have.

In any case, the fact that we end up exporting our talent—and that it ends up being successful in the US—should put paid to any explanation involving a skills shortage.

IT service company culture

There is another niche explanation that I would like to dispose of. IT service companies find it difficult to move to the product space because of cultural reasons. When your business model is based on charging clients for programmers’ time, you will find it expedient to hire many low‑skilled developers. A good programmer is a liability, as he may finish the job faster and expect a higher pay, thereby increasing costs and reducing revenue. Career advancement consists of being sent onsite if you are technically inclined, or moving to the account‑management or people‑management side if you are in India, thereby losing your technical skills. For such companies, moving into product development and developing higher‑order IT skills requires a significant cultural shift which many have failed to achieve. But while this explanation may apply to service companies, it does not explain why a start‑up without this cultural baggage couldn’t succeed.

The regulation of India

Next, we move to explanations involving policy—in particular, to the ease of doing business. It is true that doing business in India is an arduous task made more challenging by the continuous harassment by the government. But it is also true that the IT industry has been spared the worst of it and that there is a vibrant start‑up scene in India. So why would the regulatory climate impair world‑class IT product development in particular, especially given that IT is an area where the government’s policies are comparatively supportive?

There is another regulatory area that impairs our ability to develop social‑media products: we have effectively no free‑speech protection. There is no regulatory clarity over which speech is protected and which is not. Back when my fellow Indians were fuming over the unfairness of Twitter or Facebook and were calling for a home‑grown social‑media company, I felt an irresistible urge to mock them. Did we really believe that Koo or TakaTak or whatever would be able to survive in an environment where FIRs could be filed for some random reason in Jorhat, Assam? I even wrote a humorous post suggesting that we should export free speech to other countries while not bothering about it in India.

Export of Free Speech can be India's soft power

Only to realise later that this was the exact strategy China adopted with TikTok. Why couldn’t India have done the same? It wouldn’t have been something to be proud of, but not even having a social‑media product at all is an even greater failure.

Combining explanations

At this point, I have covered all but one of the reasons for India’s failure in IT‑product development. Some of the explanations I find incoherent, while the others are inadequate. We must consider the possibility that the inadequate reasons, while they may not work in isolation, form a potent explanation in combination. For example, take the regulatory‑burden explanation: while it hasn’t stopped the start‑up ecosystem from developing, it is enough of a burden that the truly ambitious ones go abroad and set up companies there. It is enough of a burden that you have to be at a particular size to deal with it, which means the established IT service companies, with all their cultural challenges are the ones who make a success of products to the extent that they do.

Regulation could also be enough of a burden that it is worth dealing with all of that only when you are serving the Indian market.

Our regulatory burden also cripples the IT industry in indirect ways: we do not have a manufacturing economy—an Indian Shein, an ecommerce company that succeeds in the West on top of exports is unthinkable. Another explanation is that much of our start‑ups’ energies are expended in working around the unique inefficiencies of our brick‑and‑mortar economy in a way that is not scalable. Or take the quick‑e‑commerce industry—it is a great IT‑enabled success, but made possible only due to cheap labour in India and is hardly replicable in the United States unless Trump gets a third term.

The talent‑shortage theory also explains quite a bit when combined with the regulatory‑burden explanation. By itself, the talent shortage should not have stopped us from developing a couple of great product companies. But when paired with the regulatory‑burden explanation, it explains why the talented people we do have prefer to start up outside India; this is a compelling explanation.

Brains drained

That brings me to the explanation that I have saved for the last. This is the brain‑drain explanation—or, to be precise, the explanation that, due to cultural reasons, we are much more susceptible to it. As we are comfortable with English, we have immigrant communities already present in the destination countries, and culturally it is acceptable and almost expected that our educated youth will go abroad. Our government policy considers export of our youth to be a strength; we tend to be welcomed abroad for the most part.

Now, to be honest, when I started writing this essay, I had saved it for the last because I thought that this was the best explanation for the failure of the Indian IT industry, especially when the question is posed as “Why has China succeeded where India failed?” The Chinese IT industry has some advantages as compared to India - better state capacity, possibly better STEM education and the undeniable fact of being ahead of India on the development curve. But India too has some advantages - availability of IT talent, a vibrant start-up ecosystem and an Anglophone population. While both countries subject their industry to capricious regulation, India’s IT industry is somewhat freer to develop products than China’s. When all things are compared, my view was that India and China should have been equally likely to move up the value chain in IT. The reason China did and India did not is that China’s talent is more likely to stay in, or come back to, China than India’s.

The process of writing this essay did not quite make me change my mind, but it did force me to introduce some nuance to this explanation. I still think that the preceding paragraph is true. It is true even when we set aside China and pose the question more generally. India has some strengths in IT. It does face challenges as well. I am sure that the Japanese car industry or South Korea’s electronics industry faced challenges when they were growing. That is the nature of emerging economies. But it is because India’s IT has an easy exit in the form of Brain Drain that these challenges have defeated it in the way that similar challenges did not defeat China, Japan or South Korea.

Another bus to miss

This is not a call to do something stupid like stopping people from going abroad or haranguing them for the lack or patriotism. It is important to remember that the Brain Drain explanation only works on top of all the others. We need to work on those others, especially the regulatory climate, the quality of India’s cities and India’s education system. In parallel though, it’s probably a good idea to tackle the culture of Brain Drain. Perhaps, we should focus less on getting the US to increase H1B quotas and more on opportunities for talented Indians to build high value stuff in India. The destruction Trump is causing to the US is causing some talent to flee from there. Other countries are taking steps to attract them. India could do the same, but will probably miss this bus as well.