Which stocks could spearhead India’s AI acceleration?

The US, China, Japan and Korea may dominate the AI discussion, but India could be primed for an AI acceleration, with the country’s PM Narendra Modi championing the potential of the technology. Several Indian firms are well-placed to leverage its growth.

• India and US are to collaborate on AI, including to prevent misinformation.
• A young workforce will drive growth and demand for AI products and services.
• How to invest in India tech: the VanEck Digital India ETF is up 10.5% in the past six months.

When it comes to artificial intelligence (AI), it’s companies based in the US, China, Japan and Korea that have garnered most of the headlines over the past few months. But India is poised to catch up with them.

Last week, PM Narendra Modi made his first-ever state visit to the US, during which he and President Biden shared an ‘innovation handshake’ and discussed, among other things, how the two countries could cooperate on AI and quantum computing to ensure they’re not used as “tools of misinformation and oppression”, according to a White House press briefing.

The pair’s Critical and Emerging Technology initiative was announced in May last year and officially launched in January.

“There have been many advances in AI... At the same time, there have been even more momentous developments in another AI: America and India,” declared Modi in a speech to Congress.

A state dinner held for Modi last Thursday was attended by a number of tech and AI leaders, including Apple [AAPL] CEO Tim Cook, Alphabet [GOOGL] CEO Sundar Pichai, Microsoft [MSFT] CEO Satya Nadella and OpenAI founder Sam Altman. The guestlist is suggestive of who India is hoping to do business with, and whose expertise it feels it could leverage to advance its own AI industry.

A phenomenal opportunity

AI is “a phenomenal opportunity for India”, Freshworks [FRSH] CEO Girish Mathrubootham told Bloomberg last week.

“Think of this new world where your employees can become even more productive [because] they don’t have to do the mundane, boring, routine tasks and they can go on to doing higher productivity tasks, and that is going to make life a lot easier for all of us,” said Mathrubootham.

Freshworks is currently building an AI assistant for its sales and marketing people that will “augment” its workforce, rather than replace it.

Mathrubootham’s comments echo those made by Paytm [PAYTM.NS] CEO Vijay Shekhar Sharma on the fintech’s fourth quarter 2023 earnings call in May.

Generative AI will be able to handle a “lot of work that humans do for us from onboarding to the customer care to the fraud detection to every decision that we make”. The technology will make the company more efficient and enable the business to scale, Sharma added.

The technology should also help to democratise access to government services. Microsoft-backed Jugalbandi, launched in May, harnesses generative pre-trained transformer (GPT) models and translation tools to break down language barriers for villagers and farmers so that they can access government services and support.

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Young workforce will drive AI growth

Asked by the Bloomberg hosts why the Freshworks share price hasn’t enjoyed the kind of rally other big name AI stocks have — it’s up 10.2% year-to-date — Mathrubootham was quick to point out that the company is “more in the business [of] productivity software, we’re not in the business of hyping up AI”.

Nonetheless, Mathrubootham was keen to stress that India has a young and motivated workforce, which will play a key role in helping its tech industry to capitalise on the AI opportunity in the long-term.

It also helps that people in India seem more willing to embrace AI products and services than their US counterparts. According to a 2022 IPSOS survey referenced in Stanford University's ‘Artificial Intelligence Index Report’, 71% of Indians feel positive about AI — that AI products and services “have more benefits than drawbacks” — compared with just 35% of Americans questioned.

Regulation could cast a dark cloud

Another reason the AI trend should take off in India is because millions of young people are getting their first smartphone and coming online for the first time, Kevin T. Carter, founder and chief investment officer of EMQQ Global, told an episode of Opto Sessions earlier this year. AI products and services will undoubtedly be targeting this demographic.

Of some concern could be the fact that India has no plans to regulate the use of AI in the country. But it does want to oversee its development in order to reduce ethical risks, such as bias and discrimination in decision-making, and data and privacy violations.

“AI will have [a] kinetic effect for the growth of entrepreneurship and business,” wrote the Ministry of Electronics and Information Technology in April. The government “is taking all necessary steps in policies and infrastructure to develop a robust AI sector in the country”, it added.

Success depends on investment

If India’s AI industry is to be a success story, then it will ultimately need more financial support.

During a conversation chaired by the Economic Times, OpenAI founder Sam Altman suggested that it was unlikely an Indian company could build a chatbot to rival ChatGPT without the level of investment seen in the US.

“The way this works is… it's totally hopeless to compete with us on training foundation models — you shouldn't try. And it's your job to try anyway,” said Altman, in response to a question asked by venture capitalist and former Google India vice-president Rajan Anandan.

How to invest in India tech

ETFs, or exchange-traded funds, offer an economical and diversified way to invest in a variety of stocks within a particular theme.

Funds in focus: VanEck Digital India ETF

A number of ETFs offer exposure to the broader India tech theme, which has recently been added to the Opto app. There are no funds specifically targeting the country’s AI industry.

The VanEck Digital India ETF [DGIN] is weighted in favour of the information technology sector (IT; 60.51%) as of 31 May. The rest of the portfolio comprises communication services (17.94%), energy (7.79%), consumer discretionary (5.67%), financials (4.07%) and industrials (3.94%). The fund is up 10.5% in the past six months.

The India Internet & Ecommerce ETF [INQQ] doesn’t provide up-to-date portfolio allocation breakdown. As of 31 March, the fund was weighted in favour of fintech (31.78%), while ecommerce had the second-biggest exposure (17.82%). The fund is up 14.1% in the past six months.

As of 23 June, the Invesco India ETF [PIN] has allocated 19.46% of its portfolio to financials and 14.29% to IT, while consumer discretionary, which would include ecommerce, has an allocation of 10.31%. The fund is up 4.6% in the past six months.