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THE INDIAN INFORMATION TECHNOLOGY IT is a Continuing Success Story
By Kiran Karnik
Defying
growth rates and projections for the global ICT market, the Indian IT
sector, boosted by its software and services engine has continued its
steady run, logging in healthy momentum, even in challenging times. The
year 2001-02, regarded as one of the most crucial for the worldwide economy
and characterised by a slowdown, saw the export-oriented Indian software
industry growing at a healthy 29 percent. This performance was not only
better than anything put up by other Indian industries, it also ranked
among the more impressive international statistics in a comparative scenario.
A worldwide trend towards outsourcing (as a means of reducing IT costs)
also enabled India to bag plum projects from global majors. The country,
which is gradually emerging as a key outsourcing destination, is catering
to the software and services needs of one in every four international
organisations. It is this strength that enabled India to tide over the
slump in business following the Y2K boom and bursting of the dot com bubble.
India's highly skilled, readily available IT manpower, its dominance over
the English language, its focus on quality and cost efficiency, have made
the software and services industry a favourite with customers worldwide,
including the Fortune 500 bunch. Over the years, Indian software companies
have held on to key customers, while bagging new ones. Repeat business
has in fact helped Indian companies to improve their bottom lines and
keep their cash registers ringing.
The emergence of IT-enabled services (ITES), or remote processing as a
major area of growth within the Indian software market, also bolstered
the performance of the industry during the year. The ITES market grew
at a rapid fire 67 percent in 2001-02, positioning itself as one of the
highest potential sectors within the Indian software industry in the future.
Apart from the immense revenue opportunities, the ITES/BPO market is also
becoming a large playground for career development. Today, maximum hiring
is taking place in this market with analyst projections show that revenues
worth US$ 21-24 billion and employment for one million Indians will be
generated by the ITES segment by 2008.
Apart from outsourcing projects to India, a large number of multinationals
are also setting up shop in the country-leveraging on India's vast IT
talent availability, gradually strengthening telecom infrastructure and
conducive Government policy environment. With both central and state Governments
placing IT at the forefront of their agendas and introducing special incentives
for investors in this industry, global majors are setting up software
development facilities, R&D and ITES/BPO centres across the subcontinent.
Indian
IT Market Performance (2001-02) Defies Global Trends
The global market downturn notwithstanding, the Indian IT market grew
to a US$13.5 billion status in 2001-02. In terms of share of GDP, the
IT industry's contribution rose from 0.59 percent in 1994-95 to 2.87 percent
in 2001-02.
The domestic market was dominated by hardware at US$ 2.9 billion, followed
by services at US$ 1.6 billion and packaged software with earnings of
US$ 409 million.
The
Indian Software and Services Market - Staying on Track
The IT software and services market continued to be the key driver of
India's overall ICT sector. The segment continued to hold its own during
2001-02, at a time when most other industries were floundering, on account
of intrinsic strengths and proactive turnaround strategies. The nimble-on-its-feet
software industry reacted quickly to the downturn, taking steps to stay
out of the woods and remain on a growth path. Recognising the fact that
India depended too heavily on the US market for its revenues, the software
industry made a concerted bid to capture other, equally high potential,
untapped markets. India's software vendors spent heavily in 2001-02, re-strategising
and refocusing to keep hopes alive in a highly competitive environment.
The industry not only consolidated its presence in existing markets, but
also began exploring others such as Europe, Africa, Latin America and
the Asia Pacific region.
Exports were the mainstay of the market, staying ahead of the domestic
segment, which witnessed lowered growth rates. Some of the highlights
of the year-that-was are as follows:
The IT Software
and Services sector contributed US$ 10.1 billion of revenue during
2001-02, up from US$ 8.3 billion in 2000-01
Of the total
revenue of US$ 10.1 billion, exports grossed (US$ 7.6 billion), while
the domestic software market contributed US$ 2.4 billion.
The growth in
software services exports was a healthy 29 percent during a difficult
year for many industries.
The software
market was fuelled by the ITES sector, which grew at a stupendous
67 percent. IT Services logged in a growth of 22 percent.
The industry
also crossed the US$10 billion mark on an increasing base and generated
92,000 new jobs. It also provided indirect employment to over 250,000
people in 2001-02.
The sector contributed
Rs. 960 crore (US$ 200 million) in direct taxes alone in the last
year, a significant performance when compared to any other sector.
Trends
in IT Services
The IT services segment, witnessed interesting developments, all of which
pointed to a maturing, consolidating segment. The IT services market has
over the years been moving towards the more profitable, offshore software
development and delivery model, a sign of the fact that global majors
are willing to place their trust on Indian capabilities. The growth in
offshore delivery - 64 percent between 2001-02 and 2000-2001 - pointed
to this trend. The slower growth in onsite billings, which increased by
seven percent, in 2001-02, indicated that the balance was clearly shifting
in favour of offshoring. The offshore market was driven by the following
trends:
Companies bagged
large man year contracts with IT outsourcing being bundled with BPO
or with system integration.
Vendors adopted
a strategic approach to IT procurement to maximise scales benefits
and improve quality and efficiency.
ROI or business
value improvement become a critical decision variable.
Going forward, the
Software Services industry will witness an increase in the addressable
market in terms of new geographies, new service lines as well as higher
penetration in new verticals. As mentioned, the new markets that will
provide growth opportunities for Indian software vendors will include
Europe (Germany, France, Italy and the UK); South East Asia (Singapore,
Korea and Malaysia) and Latin America (Chile, Mexico, Uruguay and Brazil).
On the service line front, the growth areas will be IS Outsourcing,
application outsourcing and systems integration. Indian software vendors
are achieving proficiency in verticals such as healthcare, retail, government,
utilities and telecom.
Remote
Services - The Enlarging Pie
A lot of hope and emphasis is being laid on the remote services segment,
which is now stepping forward to occupy a prominent place in the software
industry's hall of fame. The most excitement and action is being witnessed
in this market with leading global and Indian companies making investments
in the ITES/BPO domain. Today, more and more international organisations
are outsourcing their non core applications to either captive facilities
set up within the country, or Indian partners that have made significant
investments in creating state-of-the-art ITES centres. The Remote Services
sector in India has steadily increased its share in the total revenue
base of India's IT software and services industry - growing from a modest
6.5 percent in 1998-99 to almost 20 percent in 2001-02. The sector has
been expanding at a mind boggling 100 percent per annum over the last
five years and currently employs over 100,000 individuals.
Some of the reasons for the success of India's remote processing industry
are stated below:
India offers
a productivity-quality-cost model that has emerged as an unbeatable
value proposition for the software and service industry;
Apart from the
MNCs (who dominate the Remote Services space), the ITES/BPO market
also has a range of Indian players, which are well-capitalized third
party units. According to a comprehensive survey on the ITES sector
by NASSCOM, around 310 companies operate in India; and,
Indian companies
have built up tremendous expertise and experience in areas within
ITES such as contact centres, data processing, back office operations,
GIS/engineering services, among others. The top vertical markets for
Indian companies include Banking and Insurance, Technology Vendors
and Telecommunication services.
The
Domestic Market - Emerging Opportunities
Even though the domestic IT and software services market has not displayed
very high growth over the past few years, the segment is a hub of opportunity
for players, who can depend on this market for further sustaining and
fuelling momentum. These opportunities are in fact expected to catalyse
the growth of the market over the next 2-3 years. Some of the emerging
segments with the domestic market, where the IT software and services
industry can target its attention include the energy, insurance, financial
and banking services, e-governance and manufacturing sectors.
In the Energy
sector, de-regulation will drive spending on ERP and SCM. Further,
with the privatisation of the power sector, spending on IT to improve
productivity will get an impetus.
In the Banking
and Financial Service sector, the need for nationwide connectivity
and the imperative to improve customer access will provide opportunities
for IT. Also the emergence of new insurance companies will lead to
increase IT spending.
For e-Governance,
the major thrust this year will be in the area of local language applications
and application integration. This is in keeping with the second stage
of e-governance implementation in the states where the networks are
in place.
With the recovery
of the manufacturing sector and other traditional sectors on the anvil,
organisations will start using IT outsourcing in order to increase
productivity.
The
India Advantage: Refining the Edge
India continues to offer global customers a strong value proposition based
on factors such as a stable economy and infrastructure, large reservoir
of skilled workforce, vendor sophistication and government initiatives
and support to make India an IT hub. India's workforce in fact derives
its strength from 1,78,000 engineering graduates from countrywide campuses
that enter the market annually. More than 73,000 to 85,000 professionals
are ready to join the IT industry every year.
A major strength of India's export oriented software companies has been
the high quality of their products, solutions and services. The quality
maturity of the Indian software industry can be measured from the fact
that already 316 Indian software companies have acquired quality certifications
and more companies are in pipeline to do so. More than 216 have already
acquired ISO 9000 certifications and as of 31 May 2002, India had 42 companies
assessed at SEI CMM Level 5. Indian software talent today is considered
synonymous with high quality, cost-competitive, cutting edge and cross-platform
solutions.
The confidence that international customers repose on Indian software
companies proves the above claims. Apart from blue chip companies in the
US, organisations from Europe, South East Asia, Australia, Japan, Hong
Kong, and New Zealand are reaching out for Indian software expertise.
Strong
Government Support
Apart from innovations introduced by Indian vendors to gain an edge, the
Indian IT industry has also benefited greatly from the steps taken by
the central and state Governments to boost the sector. Most Indian states
today have an IT framework that is committed to creating a policy and
infrastructural environment conducive to the growth of the IT industry.
Here are some of the steps the Indian Government has taken to ensure that
the Indian IT industry remains globally competitive.
Over the years,
the Indian Government has reduced duties on imports of hardware and
software. While software imports attract zero duty, hardware imports
(under the WTO regime) will also be made duty free by 2003.
India has amongst
the strongest Copyright Acts in the world. Protection of IPR is therefore
a key commitment and area of focus for the Government.
The Government
introduced the IT Act in 2000, which launched cyber laws in the country.
The new, regulated cyber environment is enabling the expansion and
conduct of e-commerce across the country and is helping India to integrate
with the global Internet-based economy.
Indian State
Governments have undertaken major initiatives to improve the viability
of their regions as destinations for ITES/BPO and software development.
Software Technology Parks, EHTPs, etc., equipped with relevant telecom
infrastructure have been set up across India with special incentives
(tax, etc.) to companies participating in these sectors.
Privatisation
in the ISP domain has helped proliferate the Internet across India.
The Indian Government
has been working towards improving the telecom infrastructure in the
country. Bandwidth availability, a key consideration for successful
software exports, has been given a major focus. More however, needs
to be done.
Looking
Ahead - 2002-03
With the overall global economy on the path to recovery, the prospects
for the Indian software industry are expected to brighten further during
2002-03. The industry is in fact expected to gross revenues of US$ 12.2
billion in the financial year 2002-03. While IT Software and Services
exports will grow by 22 percent to US$ 9.5 billion, ITES exports are expected
to jump by 65 percent to US$ 2.4 billion. The domestic market too is expected
to expand to US$ 2.7 billion during this period.
Long
term Targets (2008)
The Indian IT software and services sector is on track to achieve its
long-term target aspiration of US$ 77 billion by 2008. The CAGR required
between 2002 and 2008 would be around 34 percent. It is further expected
that:
IT software and
services export revenues will account for more than 30 percent of
all foreign exchange inflows in 2008 from the current figure of eight
percent.
The industry
will also create over two million jobs by 2008 with software services
sector contributing to approximately 1.1 million and the ITES sector
to an additional one million jobs.
In addition,
the parallel support services industry will create employment for
another two million people
In the area of
marketing, Indian companies will look towards building expertise through
thought leadership, gaining better customer access and key account
management.
Indian companies
will also examine the possibility of building Global Delivery Models
to overcome geo-political risks.
Companies will
also try to contain costs by recruiting in line with utilisation rates,
hiking the proportion of variable pay and better management of fixed
price contracts and strengthening of domain expertise due to lateral
recruitment.
The industry
is expected to witness a rise in M&A activity as players try to
broaden product offerings and build scale
The Indian ICT industry
then is poised to improve its standing in the global markets. Having
established its credentials and enhanced its stakes in a tough, globally
competitive environment, the Indian software and services segment is
set to further strengthen its hold on its domains of focus. The future
of India's numero uno industry can only get brighter.
Potential
for Indian Software
and Service Industry by 2008
Category
US$ Billion
IT Services Exports
28 - 30
ITES Exports
21-24
Product & Technology Services
8 - 11
Domestic Market
13 - 15
Total
70 - 80
About the Author: Dr.
Karan Karnik is the President of NASSCOM (National Association of Software
Service Companies)