Why are Google and Facebook investing in India despite its crisis-hit economy?

REUTERS/Sankalp Phartiyal
REUTERS/Sankalp Phartiyal
Image: REUTERS/Sankalp Phartiyal
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India’s economy is in a terrible place, yet the world’s largest technology firms can’t stop placing bets on the country.

On July 13, internet search major Google said it would invest $10 billion (Rs75,000 crore) in India over the next five to seven years. The investments, according to CEO Sundar Pichai, will be made in forging new partnerships, and in building stronger infrastructure and ecosystems. The move “is a reflection of our confidence in the future of India and its digital economy,” the company said in a blog post.

Google’s commitment comes just months after US-based social networking giant Facebook invested $5.7 billion in Jio Platforms, the digital and internet subsidiary of Reliance Industries, to further its hold in “India’s vibrant digital economy.” And in January, American e-commerce major Amazon had committed a $1 billion investment in India over the next five years. The Jeff Bezos-led company has already invested over $5.5 billion in India.

These investments have come amid worries that the Indian economy will contract anywhere between 5% and 10% this year, its first degrowth in four decades.

But economists are not surprised.

“The underlying strength and the significant untapped potential that the country offers from a long term perspective makes the country an attractive investment option,” said Kavita Chacko, senior economist at credit agency CARE Ratings.

Dream of digital India

Even as India has the world’s second-largest internet user base today, there is a huge untapped consumer base in the country still. In 2019, India had 560 million internet users, which is still under 50% of its total population.

So, some say, Google, Facebook, and Amazon are possibly making “early investments” in a booming digital economy.

“India has great human resources. The brain drain too will reverse on account the permanent job loss globally due to the pandemic, adding to this quality manpower,” said Naushad Panjwani, regional president at the Indo American Chamber of Commerce (IACC), which promotes trade ties between the two countries.

These investments will further accelerate the digital opportunities in India, according to Ami Shah, co-founder of a Mumbai-based social media marketing firm, IntelliAssist. “We have favourable demographics, rising consumption, increasing technology adoption, and impressive mobile and internet penetration. While it can be argued that the internet economy’s share in the overall economy is small currently, we cannot deny the fact that FDIs (foreign direct investments) play a critical role in removing inefficiencies at multiple levels.”

Besides, the internal strengths, there are external factors that favour India.

Because China

India is frequently pitched as the “next China,” and that might be a reason why investors are so upbeat about the country’s long-term prospects. “Around 20 years ago China was at the same GDP as India is today. In these 20 years, China’s GDP has grown five times and India has the potential for similar growth,” Panjwani said.

While the sentiment had been around for some time, India is particularly gaining from the world’s rising dislike for China following the Covid-19 outbreak. For instance, around 200 US-based manufacturing firms are reportedly looking to shift their base to India from China.

In addition, given China’s walled gardens, it is not an option for many multinational firms. “The companies investing in India today are in any case not permitted to operate in China (Google, Facebook, and Amazon). So it is more to do with India’s potential than with diverting from China,” Panjawani said.

Besides, some say that these investments may fill the gaps in India’s economy, which takes away the degrowth-related fears in the long-term.

A promising future

FDI provides resources to upgrade technology, infrastructure, and supply chains, which will, directly and indirectly, help the overall growth of the economy, said Shah of IntelliAssist.

Stronger digital infrastructure will also provide support to the country’s small and medium enterprises, which are the backbone of the country’s economy. “Sectors such as unorganised retail, telecom, technology hardware, along with education and finance in the form of ed-tech/fin-tech look likely to gain the most from such investments,” said Aviral Gupta, chief strategy officer of an experiential travel company Zostel.

However, there is a need for the Indian government to ensure that these investments don’t give foreign firms a free hand at exploiting the country’s resources. Among other things, Gupta said, the Indian government needs to put in place strong data protection laws to ensure the safety and security of its people. Such laws, he said, are essential also to ensure “keep tabs on the ever-growing influence of such firms on user data, which will be essential for healthy competition and provide opportunities for other Indian companies to grow and innovate.”