How China’s DeepSeek could benefit India

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.

This week, on my CNBC-issued three-year-old laptop, I ran a powerful artificial intelligence model known as DeepSeek-R1.

The new model, developed by the Chinese AI lab DeepSeek and released last week, sparked a massive fall in U.S. technology stocks. The highly competitive and potentially shockingly cost-effective AI model led investors to question the billions of dollars currently being spent by large technology companies.

While my brief foray into DeepSeek-R1 served only to satisfy my curiosity, millions of other people around the world are likely to have done the same with more productive goals in mind.

Among those experimenting with DeepSeek are likely to be Indian technology companies, which for the first time will be able to offer clients a powerful reasoning AI model, trained and hosted in-house, without relying on Big Tech firms.

China’s DeepSeek released its model free for commercial use and also made public the technology know-how to build such a model from scratch. The company said it spent a mere $6 million in AI chip costs to develop the model.

Although some have raised questions about the exact figure, it compares to the hundreds of millions — and sometimes billions of dollars — spent by American technology firms.

The development could mark the start of AI model development within India, as previous methods for training large language models have required thousands of energy-intensive and expensive AI chips.

It could also mark a major turning point for Indian technology companies such as Infosys, which have previously had to rely on AI models created by U.S.-based tech firms, such as Meta‘s Llama.

Keshav Murugesh, chief executive of business process management firm WNS, said DeepSeek’s AI model is a “pivotal advancement” for Indian technology companies.

He suggested the low cost of development will enable new AI models to be trained in India’s regional languages and enable use cases previously deemed uneconomical. The vast majority of sophisticated large language models today, such as OpenAI’s o1 and Anthropic’s Claude Sonnet 3.5, can output text only in a handful of languages.

“By leveraging the innovations behind DeepSeek, these companies can significantly lower costs and accelerate their time to market,” Murugesh told CNBC. WNS, which is listed on the NYSE, revealed in its third-quarter call earlier this month, that it will soon be enabling generative AI use cases at a U.S. insurance firm, a top 10 client for the company.

Industry surveys have shown that data privacy and the high cost of implementing large language models are among the reasons why enterprises have resisted AI adoption. DeepSeek-R1’s benefits, if confirmed, would swiftly eliminate two of the top 10 concerns and could begin to address a multitude of others.

The Indian government has also embarked on subsidizing access to AI chips, known as graphics processing units, to enable academics and start-ups in the country to begin developing AI models.

Indian IT services companies could also benefit from DeekSeek in more indirect ways. Analysts expect large enterprise clients of IT companies to redirect budgets away from AI expenditure to other IT-related spending.

“DeepSeek is positive for Indian IT services, in our view,” said UBS equity analysts led by Shaleen Kumar in a note to clients. “While it is still too early to fully assess the impact, faster AI development that involves lower costs should help free up IT budgets, resulting in increased IT spend in other areas.”

It might not all be good news, however. Analysts at India-based broker Anand Rathi say domestic firms with “heavy exposure” to cloud computing giants like Microsoft, Amazon, Google and Oracle “may face short term headwinds” as nimbler companies outcompete them by pivoting to DeepSeek’s low-cost AI models.

Bank of America’s analysts also cautioned that a lower barrier to entry for service providers increases competition in the sector, although these risks are at “very preliminary stages” at the moment.

And so — in this globalized and connected world — a breakthrough in China has the potential to benefit rival India. However, DeepSeek’s R1 has the potential to turn into a double-edged sword much sooner than many expect.

AT&T, a large U.S. telecom operator with more than 150 million subscribers, slashed the number of customer support calls it receives by 30% in a single year, thanks to AI. The company has also made efficiency gains in software development.

“We’re spending less right now to develop new code internally and getting more,” said John Stankey, AT&T’s chief executive in a call with analysts. “And it’s through the application of AI and technology and what we’re able to do with generative AI.”

While expensive to implement using U.S.-developed AI models, it’s cheaper compared to high U.S. wages.

Given the growing concerns around unemployment, the Indian government will be hoping cheaper AI models don’t end up displacing low-cost jobs.

— CNBC’s Michael Bloom contributed reporting. In case you were wondering, DeepSeek-R1 did not.

Cutting deficit or raise spending? India’s finance minister faces a tough choice in crafting the annual budget, which is set to be unveiled on Feb. 1. CNBC’s Lim Hui Jie and Anniek Bao report on the challenges for Nirmala Sitharaman as the budget comes against the backdrop of a growth slowdown in the world’s fifth-largest economy, weak domestic demand, a depreciating rupee and rising global uncertainties.

Foreign investors are fleeing India’s stock market. Yet analysts say it’s a “healthy correction.” India’s benchmark stock indexes the Nifty 50 and Sensex are hovering at more than seven-month lows, firmly in correction territory since their September high. Some point to lofty valuations, others say profit booking as reasons behind the slide.

India is a “compounding machine.” Investor interest in India waned at the end of 2024 because of a pullback in Indian equities during that period. One portfolio manager, however, remains bullish on the country. The dip in the market is a buying opportunity, he says, and names three Indian stocks to buy for 2025. [For subscribers only]

Indian stocks are showing some signs of recovery after its prolong tumble. The Nifty 50 index has risen by 0.7% so far this year. Yet the benchmark is lower by 1.7% this year.

The benchmark 10-year Indian government bond yield has tumbled this week to 6.67% alongside global peers.

On CNBC TV this week, Neelkanth Mishra, chief economist of Axis Bank, said the Indian rupee had been “unduly” stable over the past few two years due to the Reserve Bank of India’s policy. Mishra suggested the rupee has lasted longer than necessary and has resulted in a weakening of the currency to all-time lows against U.S. dollar.

Meanwhile, emerging markets serving as ‘bridges’ to trade with China will be hit ‘pretty hard’ by U.S. President Donald Trump, according to portfolio manager Fergus Argyle of EFG New Capital. Argyle also explains why his emerging markets fund is not invested in either China and Vietnam. He says he prefers markets such as Mexico and India, as a form of his China plus one strategy.

Aside from India’s budget, inflation readings for the U.S., euro zone and Tokyo are in focus next week, while Big Tech reports earnings. Dr Agarwal’s Health Care, an eye hospital, lists on Wednesday.

January 31: U.S. personal consumption expenditures index for December, Tokyo consumer price index for January, Exxon Mobil earnings

February 1: India budget

February 3: Euro zone consumer price index flash for January, India HSBC Manufacturing PMI final for January, U.S. ISM Manufacturing PMI for January, China Caixin manufacturing PMI for January, Bank of Japan summary of opinions

February 4: Alphabet earnings

February 5: Dr Agarwal’s Health Care IPO, India HSBC Services PMI final for January, U.S. ISM Services PMI for January, China Caixin Services PMI for January

February 6: Bank of England interest rate decision, Amazon earnings