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Will AI make or break India?

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This report is from this week’s CNBC’s “Inside India” newsletter which brings you timely, insightful news and market commentary on the emerging powerhouse and the big businesses behind its meteoric rise. Like what you see? You can subscribe here.

The big story

It was a tale of two European companies. But one that could foreshadow India’s growth story. 

When fintech firm Klarna said it was using artificial intelligence to provide customer service earlier this year, shares of the French outsourcing giant Teleperformance tumbled by nearly 20%. 

The Swedish buy-now-pay-later firm had revealed that its AI chatbot was now doing the work of 700 full-time customer service jobs, netting the firm $40 million in savings. That was enough to frighten investors into dumping shares of Teleperformance over concerns that AI would disrupt its own profitable call center business in the future. 

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The Paris-listed company, worth nearly 6 billion euros ($6.4 billion), employs 500,000 people globally who do telemarketing, customer relationship management, and content moderation, among other roles — all at risk of being disrupted by AI. The firm’s stock has tanked by 55% since ChatGPT launched, while the French stock market has risen by 24%. 

Can Teleperformance’s stock plunge be the canary in the coal mine for what is likely to happen to India because of AI? The chief executive of India’s Tata Consultancy Services thinks so. 

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K Krithivasan told the Financial Times recently that AI is likely to resolve customer complaints even before people pick up the phone to call a company’s helpline — eliminating most call center jobs in the process.

The head of TCS, which predominantly employs software developers in its global workforce of some 600,000 people, expects this is likely to happen in “a year or so down the line.” 

While Krithivasan said that job losses have yet to materialize due to AI, others are already counting the impact it’s likely to have on the labor market.  

Researchers from the World Bank, International Monetary Fund and the University of Oxford found that the demand for AI skills hurts labor demand for non-AI roles in India. This means that for every job created that requires a specialism in AI, there are fewer jobs in other sectors. 

“We find that AI adoption initially coincides with a small increase in general hiring but then reduces demand for non-AI workers over the next few years, such that the overall effect is substantially negative,” the researchers said. 

However, automation in the business process outsourcing (BPO) sector could quickly turn political due to its outsized position in India’s economy. 

While it employs only 0.4% of all jobs, the sector is responsible for 6.5% of India’s GDP and 25% of its exports, according to Capital Economics. It also employs many of India’s youth — a demographic currently responsible for more than 80% of all unemployed people in India. 

Prime Minister Narendra Modi, currently contesting for a third term in the ongoing general elections, has already been pressured by opposition parties for not doing enough to create jobs. AI, it appears, is set to make his job harder if he’s re-elected. 

It’s not all doom and gloom, however. 

Even under the absolute worst-case scenario — and highly unlikely — where the BPO sector is wholly decimated, Shilan Shah, deputy chief emerging markets economist at Capital Economics, estimates the damage will amount to a mere 0.8 percentage points off annual GDP growth. 

Yes, every job lost is a period of turmoil and misery for the individual and often their dependents. But it’s likely to be a blip for India’s growth trajectory, given the macro forces at play.  

Investment bank Nomura, for instance, has forecast that India’s economy will grow 7% on average over the next five years on the back of growth in manufacturing — a sector that is yet to see real AI disruption.

India also appears to be focused on creating jobs in high-tech sectors and has had some successes recently. 

Qualcomm, the American chip giant, is already designing semiconductors in Chennai by tapping into the country’s pool of talented engineers. India has also been wooing foreign chip makers like Taiwan’s Powerchip Semiconductor Manufacturing Co. to set up operations in the country. 

Besides creating jobs that are less likely to be immediately disrupted by AI, India could also be a net beneficiary of artificial intelligence. 

Due to its geographical characteristics, India is one of the most vulnerable countries in the world when it comes to climate change.  

India’s meteorological department revealed earlier this year that it is set to use AI to improve weather forecasts and predict severe events. It is expected to positively impact the agricultural sector, which employs about 45% of India’s workforce.

The rapid improvement in India’s financial infrastructure — the UPI payments network — has given birth to several new tech companies currently using AI to lower the cost of finance.

India is also unlikely to be alone in confronting the challenges AI poses. Goldman Sachs last year estimated that one in four jobs in the U.S. and Europe are also at risk of disruption.

While it will be a challenge for India, it’s unlikely to be a problem for only India. 

The latest on the elections

Our News Editor Vinay Dwivedi has been on the ground in India speaking to farmers who have been spearheading protests against the government in recent months. About 250 million people work in agriculture in India.

Their main demand is a guaranteed minimum support price across agriculture commodities, to combat rising production costs. But the government has shown no signs of capitulation, even as it risks losing support from this huge farmer population at the ballot box.

Meanwhile, economists have said the farmers’ demands are not economically viable.

“These demands are not just detrimental to the agricultural sector, but they will throw a major spanner in the economy. The entire economy will go into a tizzy,” economist and a former chairman of the Commission for Agricultural Costs and Prices, Ashok Gulati, said.

Need to know

Nomura projects India’s economy could grow by an average of 7% in the next five years. The new prediction by the Japanese bank is reliant on policy continuity after the election result — whoever wins. The projection is much higher than Nomura’s growth outlook for China (3.9%), Singapore (2.5%) and South Korea (1.8%) in the same period. 

America’s fastest-growing sport is looking to India for its next leg of growth. The United Pickleball Association and Global Sports announced a deal last week to bring the PPA Tour and Major League Pickleball to India. Pickleball, for those that don’t know, is a racket sport that combines elements of tennis, table-tennis and badminton.

White House comments on India’s alleged role in assassination plots. A Washington Post report alleged that the Indian intelligence services were involved in assassination plots in Canada and the United States. India’s foreign ministry said the report made “unwarranted and unsubstantiated imputations on a serious matter,” while White House spokesperson Karine Jean-Pierre told reporters. “We’re going to continue to raise our concerns.”

What happened in the markets?

The Indian stock market indexes, Sensex and Nifty 50, are heading for a positive week again — up by 1% and 1.2%, respectively. The benchmarks are up by 3.28% and 4.22% so far this year.

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The 10-year Indian government bond yield has been trading range bound — with a rate between 7.15 and 7.20 in the last last week.

The Indian rupee has slackened against the U.S. dollar, even as global oil prices edged lower as markets repriced for fewer U.S. rate cuts this year. However, markets also interpreted U.S. Federal Reserve Chair Jerome Powell as being less hawkish than expected as he downplayed the possibility of an interest rate hike during his press conference Wednesday.

On CNBC TV this week, we had Raghuram Rajan, the former Reserve Bank of India governor and professor of finance at the University of Chicago Booth School of Business. He said India’s 8.5% growth rate has some “fluff” in it, but added that “even 6-6.5%” is a pretty good number for the country.

Meanwhile, Ashish Jain, the chief financial officer of the Indian food processing company KRBL, discussed the country’s agricultural slump in the wake of poor weather conditions.

CNBC’s Ayushi Jindal also sent a report from inside Qualcomm’s newly built design center in Chennai, where they are already designing chips.

What’s happening next week?

Aside from the elections, we’ll have Indegene, which provides digital services to the life science industry, hitting the Indian primary market. The subscription will be from May 6-8, and shares will likely be listed on the BSE and NSE on May 13.

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