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. 

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 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.
  

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.

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.
  

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.
  

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. 

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.

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. 

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.

About the Author: Dr. Karan Karnik is the President of NASSCOM (National Association of Software Service Companies)