Dragoman Digest

India’s offices eclipse its factories‍ ‍

A boom built on IT cannot deliver the jobs a young workforce needs

India’s services exports are on the brink of overtaking goods for the first time. Over the past 12 years, average annual growth of 9.3 percent propelled services exports to US$421 billion in the year to March, just short of the US$442 billion figure for merchandise exports. Since 2014, Prime Minister Narendra Modi has courted manufacturers of everything from iPhones to solar panels, hoping to attract companies moving production out of China. Goods exports have nonetheless grown at barely a third of the pace of services – rising about one percent over the last year, as US tariffs and the Iran war disrupted trade. Competitive factories require roads, ports, cheap electricity, and land. Chronic underinvestment in infrastructure has kept manufacturing’s share of the economy flat for a decade. Services, by contrast, need only skilled and relatively low-cost English-speaking graduates, of whom India has a plenitude.

Software, IT, and business services generate three-quarters of India’s service export earnings. AI, however, is automating the coding and support work on which these businesses are built. Tata Consultancy Services, the sector’s largest firm, shed 3.9 percent of its workforce over the past fiscal year as revenue declined. IT is also a major white-collar employer, with nearly six million workers. Given that India holds just 1.9 percent of global trade in other services such as travel and insurance, earnings lost to automation will be difficult to replace.

For all their success abroad, services produce over 55 percent of India’s economic output but supply just 30 percent of its jobs. Growth of this kind absorbs too few of those entering the labour market. Graduate unemployment among 15- to 25-year-olds is nearly 40 percent. Diversifying beyond IT would also require the industrialisation that has so far eluded India. Services embedded in manufacturing account for over half the value of manufactured exports, the World Bank estimates. By that measure, services exports are best able to flourish alongside manufacturing, not in place of it. With the working-age share of the population set to begin declining after 2030, India is running out of time to build a globally competitive industrial base.

Carmakers retool for the war economy

A lifeline for ailing automakers depends on adapting assembly lines to fast-changing weapons

Germany’s Mercedes-Benz is the latest of Europe’s struggling auto-manufacturers to expand in the defence sector as Chinese competition squeezes profits. The company agreed last month to partner with Tytan Technologies, a Munich defence start-up, on a mobile system to intercept small first-person view drones (craft flown via live feed from an onboard camera). The impetus for this technology comes as officials blame Russia for a surge in drone activity around airports and sightings at military bases since its 2022 invasion of Ukraine. Compatible with two Mercedes vehicle types, the Drone Defender (carrying sensors and launchers) fires interceptors that ram targets or destroy them with a warhead. Output is targeted at thousands of units a year, each cheaper and faster to deliver than frontline systems such as Rheinmetall’s Skyranger, which costs upwards of €10 million per vehicle.

Facing even more ferocious competition from China, Volkswagen is planning up to 100,000 job cuts – about 15 percent of its global workforce – and a 500,000-vehicle reduction in European capacity. The group is concurrently in talks with Israeli missile maker Rafael to produce Iron Dome air-defence launchers at its Osnabrück plant in Germany. Berlin, which has committed more than €750 billion to military spending through 2030, is encouraging the auto industry to offer its spare capacity and mass-production know-how to weapons makers. Meanwhile, France’s Renault has signed with aeronautics group Turgis Gaillard and defence company Thales to make drones at its own plants.

Concerns have been raised that converting car plants to make military drones will fail – lines built to mass-produce identical products cannot follow constantly changing specifications. The head of Japan’s largest defence contractor, Mitsubishi Heavy Industries (MHI), warned this month that converted car plants would prove an “enormous waste” of taxpayers’ money. After Tokyo nearly trebled its drone budget to ¥277 billion (US$1.7 billion) this financial year, MHI is pitching its low-volume, varied production. Drone warfare, as Ukraine has demonstrated, rewards weapons that are cheap at scale yet always evolving. Whether carmakers can deliver both will determine if rearmament doubles as an industrial rescue or a white elephant.

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More proposals to bypass the Strait of Hormuz gather momentum

The development of new export corridors will gradually reduce Iranian leverage

Advanced discussions between US oil giant Chevron and Iraq exhibit how markets are continuing to adapt to the Iranian conflict. The proposed consortium between Chevron, US-based TI Capital, and a group owned by the Syrian-Qatari billionaire Al-Khayyat brothers is exploring reviving and building out pipeline infrastructure transiting through Iraq and Syria. One route under discussion would link oilfields in southern Iraq with Syria’s Mediterranean port of Baniyas via Kirkuk. Earlier this year, the strait’s closure forced Iraqi production to halve and triggered a domestic financial crisis. Syria, meanwhile, has sought to accelerate its diplomatic and economic reintegration by positioning itself as a regional export corridor. ConocoPhillips signed a gasfield contract with Syria’s state oil company in June. The proposed pipeline adds to Abu Dhabi’s Crude Oil Pipeline (connecting inland oilfields with the port of Fujairah), the Turkish-Iraqi Kirkuk-Ceyhan link, and Saudi Arabia’s East-West Pipeline.

A pipeline across Iraq and Syria will face myriad challenges, including the limited ability of Baghdad and Damascus to guarantee security. Swathes of both states are still plagued by armed groups, including Iranian proxies, which leaves any new corridor vulnerable to the very disruption it is intended to circumvent. Delivering on newly appointed Iraqi prime minister Ali al-Zaidi’s pledge to consolidate state control over armed pro-Iranian groups will be a formidable undertaking. The regional track record does not inspire confidence. Previous efforts, such as the proposed pipeline linking Jordan and Iraq, have stalled due to security concerns and political disputes.

This time, of course, there are powerful incentives to work through these challenges. The building of pipelines, however difficult, will gradually reduce Tehran’s leverage. More pragmatic Iranian politicians such as foreign minister Abbas Araghchi appear to recognise that their window to negotiate a favourable deal will narrow as energy markets reorientate. The most hardline elements of the IRGC, however, show no sign of moderating their maximalist demands. The interplay between the recalibration of oil markets and Iranian domestic politics will be a critical factor in determining the shape of any US-Iranian deal.