Information Technology In India

Study on Information Technology in India Subject: Contemporary Business Environment

Submitted By: Shubham Kaushik (2K92A44), Sachin Mahagan (2K92A31), Rakesh Kumar Goyal (2K92A26), Md. Ishtyaque Ajmeri (2K92A01), Shashank Saxena (2K92A37)

ASIA PACIFIC INSTITUTE OF MANAGEMENT NEW DELHI

Introduction Indian IT industry is one of the world’s successful information technology industries. Its growth and development has caught the attention of the world so much so that India is now being identified as the major powerhouse for incremental development of computer software. The reason for this attention is not the actual size of the industry but its rapid growth rate over the nineties and subsequent decade. The Indian IT industry can be mainly categorized into following sectors IT services, IT enabled services and BPO, Research & Development, Software Product and Hardware. It has grown from US $ 150 million in 1991-92 to US $ 64 billion in year 2008. The industry’s contribution to India’s GDP has grown significantly from 1.2% in 1999-2000 to cross 5.5% in FY08. The sector has been growing at an annual rate of 28% per annum. IT Exports will account for 35% of the total exports from India. As far as job creation out of this growth is concerned the sector generated 2 million direct jobs and around 7-8 million indirect jobs.

Market Structure The size of the Indian IT industry, according to NASSCOM (National association of software and service companies), is US$ 64 billion as of year 2008. It has been growing with an annual rate of 28%. The Indian IT industry can be broadly divided into two markets: domestic market and exports market. The exports market constitutes the largest segment accounting for 62-66% of the total revenue generated by the Indian IT industry. Within the export segment, geographical diversification and maturity in services and operating efficiencies helped the IT services exports to jump 28 per cent to $23.1 billion, while the BPO exports were up 30 per cent to $10.9 billion. Engineering services and product exports clocked revenue of $6.4 billion, an increase of almost 29 per cent over FY07. The domestic IT market accounted for 34- 38% of revenue. The Indian hardware industry is at present estimated to be in the proportion of 30% domestic, 1.25% exports and the remaining being imports. The domestic market itself offers tremendous potential for hardware companies, thus having very few companies venturing into hardware exports. Market share of IT majors are as follows –

Revenue earned by Software and hardware industry since 200304 to 2008-09

Policies for IT Industry IT Policy in India can be divided into two distinct periods. 



From the mid-1960s through the early 1990s, policies were aimed at achieving technological self-sufficiency through state production and regulation of private production. The second period, from 1990s, saw a shift in focus to extensive liberalization and promotion of IT industry in India.

Period from mid – 1960 to early 1990 further divided into – • 1960s and 1970s: Indigenization and self-sufficiency  India was motivated to develop self-sufficiency in computers and electronics largely by national security concerns related to border conflicts with China and Pakistan. The government created an Electronics Committee to devise a strategy for achieving self-sufficiency in electronics. The main vehicle chosen to gain access to advanced computer technology was

negotiation with multinationals, primarily IBM, which accounted for 70% of all computers installed in India from 1960 to 1972.  In an attempt to satisfy the government’s interest in developing domestic production, both IBM and the British owned ICL (International Computers Limited) began to refurbish used computers in Indian plants and sell them to Indian customers. IBM felt that India should evolve technologically from one level of sophistication to the next.  A 1966 report by the Electronics Committee objected to step-by-step technological evolution and recommended that India should leap ahead to the latest technologies. The government, however, failed to impose its will on IBM due to the company’s strong position with users and export earnings. The government’s early attempts to regulate the IT sector worsened the degree of technological backwardness.

 In 1966, the responsibility for implementing the Electronics Committee report strategies was given to the Department of Defense Supplies, with monitoring by a new agency, the Electric Committee of India. In 1971, the government announced the formation of the Department of Electronics (DoE) and a new Electronics Commission, responsible for policy formulation and overseeing the day to day implementation of policies. 

In 1975, the DoE was given power over the licensing of computer imports. The first step it took was the establishment of Santa Cruz Electronics Export Processing Zone (SEEPZ) near Bombay, followed by the creation of the state-owned ECIL (Electronics Corporation of India Ltd.) as a national champion in minicomputer production. 

In 1975, in a landmark development, the US computer maker, Burroughs, entered into a joint venture with Tata Consultancy Services to export software and printers from SEEPZ. In the same year, the government established the Computer Maintenance Corporation (CMC) with a legal monopoly on the maintenance of all foreign computer systems in the country, reducing the advantage that IBM had with computer users. 

 In 1978, due to increasing political pressure, IBM quit India. This was a seminal event, illustrating the extent of government’s ability to exert its power over multinational corporations and to direct the IT development in India. One effect of IBM’s departure was to open the market to a number of competitors, including ECIL, ICL and Tata Burroughs.

• 1980s: Partial liberalization and industry promotion India’s IT policies in the 1980s were aimed at modernizing an industry estimated to be about 15 years behind the current frontiers of research and production. In a departure from the import substitution approach of the past, exports software and peripherals were now promoted and the import of mainframes and supercomputers was encouraged under certain conditions. 

The new computer policy of 1984 – The new computer policy of 1984 announced by DoE (Government of India Department of Electronics, 1984) was aimed at promoting the manufacturing of computers, based on the latest technology, at prices comparable to international levels and with progressively increased indigenization. An important policy change was the liberalization of imports to foster domestic hardware. Duty levels were lowered on components needed by computer manufacturers, and companies producing CPUs, peripherals and subsystems were permitted liberal imports of ‘‘know-how’’ with a low excise duty. 

1986 Software Policy - Following up on the 1984 hardware policy, the DoE announced the 1986 Policy on Computer Software Export, Software Development and Training (Government of India Department of Electronics, 1986). The main objectives of the policy were to promote the integrated development of software in the country for domestic as well as export markets, to promote the use of computers as tools for decision making, and to promote appropriate applications that would catalyze economic development software imports. 

 Though India’s IT Policies have focused heavily on regulation of foreign as well as domestic producers and on protection of the domestic market, the 1984 and 1986 policies consisted

mostly of loosening of the existing regulations. A number of programs, initiatives and institutions have been established to implement policy and promote various aspects of IT.

 In 1988, the National Informatics Center set up NICNET, a satellite-based computer communication network connecting 439 cities and towns to support computerization of governments at the central, state and district levels. A Computer Aided Design project was set up with links to five centers, and a Computer Aided Management Infrastructure has been established with feeder centers in four cities. A number of projects have been undertaken to promote IT use in public and private sectors and to mobilize a favorable bias towards its use.  The government’s attempts to spur the development of an indigenous IT industry have been quite successful. After the 1984 Computer Policy announcement, production shot up by 100% while prices declined by 50%. A boom in minicomputer sales began when HCL dropped its prices dramatically, starting a price war that greatly increased the affordability of PCs.

“Period from 1991 – After Liberalization in IT industry” During this period, the IT policy was greatly affected by changes in industrial policy. “In 1990, a 100% income tax exemption was extended to profits from software exports, and the double taxation of software imports was eliminated.” That’s why this period was known as –

“The Shift in Paradigm” Information Technology Business in India from a small sector to a large and growing industry. This change in status is leading to a major shift in paradigm. 

From To 1. IT as a sector Industry 2. Providing satisfactory services to existing sustain the growth increase in demand 3. Government controlling infrastructure facilitating and technology infrastructure and technology 4. IT for specialists masses 5. Fulfilling external demand internal demand

IT as an Adding value to Government IT for Creating

Several software-related promotional measures was taken during this period, including reductions in telecommunication charges for satellite links, duty-free imports of telecommunication equipment into EPS, and excise duty exemptions. 

 At the end of 1992, the DoE was reorganized to emphasize its promotional rather than regulatory role. It amended and updated interventions in areas such as training and research and development. The Copyright Act was also amended, confirming that raids, fines and prison sentences could be used against software pirates. Import rules were also changed, and liberalization gathered pace for software.  The duty for software imports was reduced to 110% in 1992, 85% in 1993, split in 1994 to 20% for applications software and 65% for system software, and then reduced to 10% for both categories in 1995 (Government of India Ministry of Commerce and Industry, 1995). In April 1993, duplication of software in India was permitted for the first time. “Software Technology Parks of India (STPI)”Emerged under the state initiative. STPI was created as an autonomous organization under the DoE to provide facilities, such as duty-free import of capital goods, income tax holidays for 10 years and high-speed data communication links. 

The year 1996 was a landmark year in the history of IT, as Internet service was started in India by – “Videsh Sanchar Nigam Limited” a public sector company with great promise. The policy makers recognized the potential of the Net for a quantum leap in the knowledge-based economy. The subsequent ISP policies of the Department of Telecommunications (DOT) were very pragmatic with free licensing to ISPs. Setting up gateways to the Internet and 

laying fibers and cables was freely permitted for the ISPs. Tax incentives were showered on the industry, infrastructure status was given, and mergers and acquisitions were facilitated.  India was one of the few countries to enact the IT Act in the year 2000 to enable digital signatures. This initiative aims to provide the legal infrastructure for e-commerce in India. The digital revolution:- IT has the potential to revolutionize the government and is vital for the way government serves the people. It offers endless opportunities to bring societal transformation centered on education, healthcare, agriculture and governance leading to higher employment rates, higher industrial growth, higher national efficiency and productivity, and the greater empowerment of women. By the use of IT, multiple technologies can be interwoven to realize a knowledge-propelled society. 

With the objective to help India emerge as an Information technology super power, a task force on IT was set up in May 1998. This task force submitted 3 reports: • Information Technology Action Plan I (Software) • Information Technology Action Plan II (Hardware) • Information Technology Action Plan III (Long Term National IT Policy) These reports are forming a solid base for the present policy development to build India‘s InfoTech industry and proliferate use of IT in the country. The industry and government are now working together to form suitable strategies to not only capture this market but also add value to it. 

With a resolution to make India a global IT super power, many revisions and additions have been made to the existing policy and procedures. One of the objectives for this revision is to, “Accelerate the drive for setting up a world class Info Infrastructure with an extensive spread of Fiber Optic Networks, 

Satcom Networks and Wireless Networks for seamlessly interconnecting the Local Informatics Infrastructure (LII), National Informatics Infrastructure (NII), and the Global Informatics Infrastructure (GII) to ensure a fast nationwide onset of the INTERNET, EXTRANETs and INTRANETs."(IT Action Plan Part I).  Legal framework for IT India is also realizing the need to redesign the laws of the industrial age to those of the information age. For this it is essential that the National advisory committee works out (a) Industry code of practice (b) E-commerce code for personal information protection (c) Parents advisory group for protecting children interests. 

Many state governments are also taking initiative in developing suitable fiscal incentives, infrastructure facilities, coupled with adequate pool of skilled manpower. The state of Andhra Pradesh was one of the first to announce a special policy for IT Enabled Services industries. The states of Karnataka, Tamil Nadu, Maharashtra, Himachal Pradesh, Delhi, Goa, Gujarat and Orissa have also announced special and attractive initiatives. Karnataka is developing “Grameen Data Processing Centers”around the Silicon Valley of Bangalore in places such as Mysore. Some state governments are also developing strategies for wooing large companies to set up IT Enabled Services units in their states.

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Major steps that have been taken towards a stronger infrastructure and reduced cost base, are 1. PSTN connectivity

2. Income Tax Exemption 3. Global Parity in Telecom Infrastructure 4. Inter-connectivity of International Call Centers/IT Enabled Services 5. Reduction in tariffs for International connectivity 6. Interconnectivity across multiple networks 7. 7x24 support of DoT links 8. Reduce Delays in Provisioning of International Bandwidth 9. Scarcity of International bandwidth on Fiber 10. Build Supply Base of best knowledge worker. 11. Grameen Data Processing Centers 12. Creating the Ideal regulatory environment 13. IT Policy to encourage women entrepreneurs and employment.

Policy applicable to Electronics Hardware Industry are brought out below: Customs• Peak rate of basic customs duty is 10%. •

India is a signatory Agreement (ITA-1) of

to the Information Technology the World Trade Organization.

Therefore, the basic customs duty on all the specified 217 tariff lines is 0%. •

All goods required in the manufacture of ITA-1 items have been exempted from customs duty subject to actual user condition.

• Customs duty on specified raw materials and inputs used for manufacture of electronic components and optical fibres / cables is 0%. • Customs duty on specified capital manufacture of electronic goods is 0%.

goods

used

for

• Customs duty on MP3/ MP4 / MPEG4 players is 5%. • Set top boxes (STBs) and their major parts are exempted from basic customs duty. Central Excise• The mean rate of excise duty (CENVAT) is 8%. • Microprocessors, Hard Disc Drives, Floppy Disc Drives, CD ROM Drives, DVD Drives/DVD Writers, Flash Memory and Combo-Drives are exempted from excise duty. • Parts, components and accessories of mobile handsets including cellular phones are exempted from excise duty. Central Sales Tax•

Central Sales Tax (CST) has been reduced from 3% to 2%.

Porter 5 forces Rivalry As the industry is still in its growth stage, there is enough room for expansion for existing players and new entrants. With the entry of many multinational companies (MNC) are opening their

operations in India to leverage the low cost advantage provided by India, has increased the completion ratio (CR) of the industry. Also as there is no huge capital investment required to start a new company, the industry see a very large numbers of small and medium-size companies operating in a niche market. Presence of such large number of players has made the industry as one of the most competitive industry in the market. Threat of Substitutes The Indian IT industry currently enjoys a very high growth rate due to following advantages: High availability of skilled labour, Availability of large English speaking population, Low cost of labour, Good government policies (like tax holidays till 2009 for IT companies & setting up of special economic promotion zones) But there are many countries such as China, Philippines, and many east European countries that has started to provide similar opportunities and Indian IT industries always need to innovate and move into new sectors to keep out the competition. Buyer Power Buyers in IT industry can be briefly classified into following categories: institutional buyers and individual or small consumers. Institutional buyers comprises of big and small enterprises which outsource part of their work or implement an IT solution for improving their processes. As the IT industry has large number of suppliers and few entry barriers for new entrants, the buyer has a many option to choose from thus have a large bargaining leverage. Similarly the individual consumer enjoys options of plenty and has large bargaining power. Supplier Power As there exist many competitive suppliers in the market the supplier has very little or no power in this industry. Barriers to entry An IT company can be started with very low initial cost, further the government policies also promotes the entrepreneurs by

providing benefits in terms of tax holidays and building Software Technology Parks. Apart from this there is large amount of venture capitalist who are ready to fund new start-ups enabling them to scale up.

Indian IT Industry - Long term profitability sector The Indian IT sector has been growing at an annual rate of more than 28% since 2001 and it is projected that the growth story will continue overcoming the hurdles of economic slowdown and rising cost of resources in India. Few points which will keep driving this growth: • India has the raw talent capacity to comfortably service the IT-BPO industry in the future. While talent suitability is a concern, industry initiatives such as NAC will help improve overall employability . • Despite cost increases, the Indian IT-BPO industry continues to leverage its lower cost structure to deliver a compelling cost advantage. • Overall risk exposure is low with mature quality and data security mechanisms and negligible geopolitical risk. • Proactive government policy is helping address existing infrastructure gaps. Further, SEZs will take over from STPI in propelling industry growth. • Providers are maturing their service delivery capabilities to actively deliver value-adds through global delivery models, process expertise, and innovation. Apart from the traditional markets where Indian IT software and services players have a strong presence, it is also important to focus on emerging areas, where the future opportunities lie. The Indian software industry needs to develop a strong strategy for some of these segments and based on current trends, build skill sets that will be relevant for these “on-the-anvil” markets. According to NASSCOM, one of the emerging sectors where Indian IT software and services companies can make a tremendous

impact is the software products segment, which encompasses the embedded software, Research and Development and shrink wrapped and enterprise products domains. Apart from these there is great growth potential in hardware industry. Currently India imports more than 50% of its hardware requirements, so companies will try to expand and tap this segment of market.

Potential growth segment  Considering the current growth rate of Indian IT industry coupled with favourable government policies, would thrive investor confidence. Therefore, India requires huge investment in developing the required infrastructure and on education.  According to the Planning Commission of India, the Indian IT-ITeS sector would create another 2.5 mn direct employment opportunities. The sector requires direct investment of US$ 28– 30 bn by the end of FY12. There are various potential-rich segments in Indian IT-ITeS sector as given below. • Infrastructure management services (IMS) is expected to emerge as a key growth driver for the Indian IT industry. According to NASSCOM, the global IMS market is estimated to be worth US$ 86–150 bn, and currently, around 60% of the total IMS projects are delivered via ‘global delivery’ offshore-model. Therefore, there is an immense potential for remote information management (RIM), which is estimated to be worth US$ 51–90 bn, globally. Notably, in 2006, more than 2,000 clients have collectively awarded US$ 927 mn in IMS work to the top six Indian IT players. • E-commerce in India is gradually picking up; over the next 2 years, the segment is expected to contribute significantly to the country’s IT-ITeS sector. As Indians increasingly become more tech–savvy, the growth in online shopping, online ticket-booking etc would tap the potential of the segment.

• Another important booming segment in Indian IT industry — the gaming sector — is expected to reach US$ 300 mn by 2009 from US$ 30 mn in 2005. Mobile gaming dominates the segment, currently accounting for more than 50% of the market; the segment’s share is expected to go up to 68% by 2009. • Similarly, e-governance is another upcoming segment with several state government’s are increasingly focusing on egovernance services to be made available for its citizens. EGovernment denotes a paradigm shift in the functioning style of the government and the interactions it has with its citizens, business and even within government itself. Over the last few years, it has been observed that a rise in the technical collaboration of the Governments with the MNCs and major domestic players for implementing e- governance activities. • Engineering services are expected to become a key market for the Indian IT-ITeS sector. In 2004, India’s share of global off-shore engineering services was around 12%, which was relatively low as compared with the shares of the IT and BPO segments. As per a NASSCOM study in 2004, it was estimated that the engineering off-shore market would reach US$ 40 bn by 2020, enhancing India’s strategic positioning in the global market in key sectors like defence and aerospace.  According to the Eleventh 5-year Plan recommendation, the domestic IT market should attempt to improve PC penetration from 11 per 1,000 PCs (in 2004) to 65 per 1,000 PCs by FY12. Importantly, the Plan expects domestic IT implementation to contribute 1.8% to country’s GDP growth. Emerging technology areas would be ubiquitous computing, RFID, high-performance computing, grid computing, high-performance networking, bioinformatics, software engineering, web technologies, etc

 The Indian IT companies are entering into newer geographies to strengthen their business model, reduce dependency on single location and offer end-to-end solution to their clients. This expansion is likely to be fuelled through mergers and acquisitions. The industry is poised for a big leap over the next couple of years, focusing on to improve productivity and utilisation and move up the value chain.

Government Initiatives:  The Foreign Trade Policy 2004 - 2009 permits import of all kinds of computers (except second hand computers) in India without any licenses. In order to promote domestic investment, foreign direct investment, transfer of technology / process knowhow, technical collaboration, joint venture etc in India and export IT software products and services from India to the global market, both Government of India and State Governments in India have been offering a series of policy packages including tax breaks, import duty concessions etc under various schemes which include: •

Export Oriented Units (EOUs) Scheme: The purpose of the scheme was basically to boost exports by creating additional production capacity.

•

Electronics Hardware Technology Parks (EHTPs): Electronics Hardware Technology Park (EHTP) complexes can be set up by the Central Government, State Government, Public or Private Sector Undertakings or any combination thereof, duly approved by the Inter- Ministerial Standing Committee (IMSC) in the Ministry of Communication and Information Technology (Department of Information Technology).

•

Software Technology Parks (STPs): The Software Technology Parks of India (STPI) have been set up by the Ministry of Information Technology, Government of India and the International Technology Park in a joint project by the State Government.

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Special Economic Zone (SEZ) Scheme: SEZs are being set up to enable hassle free manufacturing and trading for export purposes. Sales from Domestic Tariff Area (DTA) to SEZs are being treated as physical export. This entitles domestic suppliers to Drawback/ DEPB benefits, CST exemption and Service Tax exemption. Certain exemptions like Income Tax exemption on export profits is available to SEZ Units for 5 years, 50% for next 2 years and 50% of ploughed back profits for 3 years thereafter are available for units in these designated areas/zones.

•

Export Promotion Capital Goods (EPCG) Scheme: The EPCG Scheme allows import of capital goods for preproduction, production and postproduction (including CKD/SKD thereof) at 5% customs duty subject to export obligations.

Units undertaking to export their entire production of goods and services may be set up under the Export Oriented Unit (EOU) Scheme, Electronic Hardware Technology Park (EHTP) Scheme or Software Technology Park (STP) Scheme. The Export Promotion Industrial Park, built near International Technology Park, gives an exclusive 288 acres of area for export oriented business. An industrial park, known as Electronic City was set up in 1991 taking more than a hundred electronic industries including Motorola, Infosys, Siemens, ITI, and Wipro, in an area of around 330 acres. The IT Corridor project, conceptualized by Singapore’s Jurong Town Corporation Private Ltd, was initiated by the Department of

IT and the Bangalore Development Authority in order to develop state of the art facilities for the development of knowledge based industries. Government initiatives for the ITes Sector: The government of India has already set up a single-window facility for attracting foreign direct investments in this sector. “ Recognizing the potential of this sector, the government has provided many incentives including a tax holiday up to 2010 and competitive duty structures.” In order to support IT-related services, the government is providing some special incentives and is also providing infrastructure support through organizations such as the Software Technology Parks (STP). Financial institutions and venture capitalists in the country are willing to provide funds at competitive rates for expansion in ITes businesses. All these factors collectively create a number of opportunities in the IT sector.

Tax Incentives / Budget 2008-09: • Excise duty being increased on packaged software from 8 per cent to 12 per cent, bringing it at par with customized software attracting a service tax of 12 per cent. • Customized software has been brought under the service tax net to bring it on par with the packaged software and other IT services • Specified parts of set top boxes and specified raw materials for use in the IT/electronic hardware industry to be exempted from customs duty.

• Allocation to the Department of Information Technology enhanced to Rs.1, 680 crore in 2008-09 from Rs.1, 500 crore in 2007-08; Two Schemes for establishing 100,000 broadband internet-enabled Common Service Centres in rural areas and State Wide Area Networks (SWAN) with Central assistance under implementation; new scheme for State Data Centres also approved; Rs.75 crore provided for the common service centres; Rs.450 crore provided for SWAN and Rs.275 crore for the State Data Centres. • Foreign Direct Investment (FDI) Policy: 100% FDI is permitted in the Electronic hardware sector and the Software development sector under the automatic approval route. Industrial Licensing has been virtually abolished in the Electronics and Information Technology sector except for manufacturing electronic aerospace and defence equipment.

Budget 2009-2010 Announcements in Current Budget Expectation: •

Extension of tax holiday under Software Technology Parks of India (STPI) Scheme

• Abolition of Fringe Benefit Tax

• Withdrawal of multiple taxation on packaged software Actual: • Tax holiday under STPI scheme extended by one year • Fringe Benefit Tax abolished • 8 per cent excise duty on packaged software removed Impact: • Bottomline of IT companies to stay healthy with lesser tax outgo • Will help companies do away with administrative costs and offer stock option as tool to retain employees •

Packaged software to become cheaper with removal of duty.

Information Technology and India’s Economic Development The success of India’s software industry on the global stage has captured the imagination of Indians in a way that only cricket and hockey successes could in the past. Indians (or people of Indian origin) have become leaders of, as well as contributors to, the information technology (IT) revolution in the United States,

reinforcing the impression that India is world class in IT. At the same time, India remains a developing country, with levels of human development for the masses that put it in the same league as sub-Saharan Africa. From this perspective, India’s IT success represents the emergence of another elite enclave, with increased inequality the result. IT and Development • The IT sector can be an important source of growth for India if the country has a comparative advantage in providing certain kinds of IT-related products and services, if the global demand for these products and services is likely to grow rapidly and • If the growth of the sector has positive spillover benefits to the rest of the domestic economy. • The first two of these conditions seem to be well established, though they merit some discussion of future possibilities, particularly with respect to the reasons for and the dynamics of India’s comparative advantage in this sector. • One of the most interesting issues, which we wish to emphasize here, is the third condition, of spillover benefits. This is the area where the IT sector may be special, and not just another export enclave.

The Domestic Market • The domestic market for IT products and services is not independent of the export market.

• The nature of information goods in general is that they involve high fixed costs of production and low marginal costs. While customization and service provision mitigate this property, they do not negate it. • Reputation and experience effects, on the other hand, enhance the importance of economies of scale and scope. Hence it is important for Indian software firms to compete simultaneously in domestic and export markets, in order to take advantage of these economies. This is true even though the product-service mix that is being sold in different markets is going to be somewhat different. • Since Indian software firms can compete successfully abroad, they should also be able to succeed in their own backyard. In fact, they have advantages in the domestic market, knowing their customers better, and being closer to them. • On the other hand, a poor domestic infrastructure, dependence on imported hardware, late mover disadvantages, and lack of economies of scale and learning by doing, can all reduce or eliminate any advantage that Indian software firms might have over foreign competitors.

Two mitigating factors operate on potential disadvantages of Indian firms. • First, some of the problems are faced by all firms, irrespective of location: for example, entering the market for desktop operating systems in the face of Microsoft’s dominance is difficult, if not impossible, for any firm anywhere in the world. • Second, the boundary lines between domestic and foreign can be blurred when multinationals have Indian subsidiaries, particularly for IT or IT-enabled services. In such cases, the effects on the local economy are not that different from when these services are provided by Indian firms. Two differences in the case of multinationals, however, are in profit repatriation and the creation of another brain drain channel, if Indian employees of multinationals can be assigned to other countries. At the level of business software and software services, therefore, • It seems that issues for the domestic market boil down to the same concerns as for export markets. These are availability of the key inputs, namely various types of skilled IT personnel and managerial and marketing skills. • Location and ownership are not of direct importance, but are only proxies for whether the IT software and services provider has the right combination of people, knowledge, experience and reputation to compete successfully.

Hardware may offer additional opportunities to Indian IT firms in the domestic market. • In developed countries, the establishment of the PC market took place before the Internet took off. In a good example of complementarities, however, the growth of the Internet has increased the demand for PCs and other access devices.

• Internet access is probably the most attractive use for many potential consumers of IT in India but Internet penetration may not go far enough with hardware designed for developed countries. • While Internet use is beginning to grow rapidly, the number of subscribers remains minuscule, estimated at 1.8 million in December 2000. • The main reasons for this backwardness have been the government long-standing monopoly, through VSNL, of the country’s Internet gateways, as well as the general poor state and high cost of the telecoms infrastructure. • The removal of the VSNL monopoly in 2002 marks a process that began a few years earlier, with NASSCOM lobbying resulting in private ISPs being allowed to set up their own international gateways starting in 2000. • The possibility of designing and building lower-cost access hardware in India may represent an opportunity for the domestic IT industry. • While India has tried to develop a domestic hardware industry since the 1980s, it has not succeeded in establishing an industry that is efficient and globally competitive. • We note once more that Dell is a profitable company because it serves targeted markets efficiently, not because it manufactures sophisticated components. Instead, management and infrastructure are the key inputs that are required.

Quality Aspects Software companies in India improved their quality tremendously in the last few years. Today they are known for the quality of their software services. India has one of the largest numbers of quality Certified software companies in the world. The increasing quality perception will help India transcend the cost barrier and increase margins in offshore business. There are several quality standards, which a software company can obtain. There are about 170 software companies in India with quality certification. 15 Indian companies now have the SEI CMM Level 5 certification (out of 23 worldwide). Apart from global recognition and quality assurance, government policy also tends to be favorable to companies holding quality certificate. According to EXIM policy software companies with ISO 9000 series or equivalent certification are eligible for grant of Special Import Licenses (SILs).

Core competencies of IT Industry of India 1. Availability of Large Human Resources Every year, approximately 19 million students are enrolled in high schools and 10 million students in pre-graduate degree courses across India. Moreover, 2.1 million graduates and 0.3 million postgraduates pass out of India's non-engineering colleges. While 2.5-3 percent of them find jobs in other fields or pursue further studies abroad, the rest opt for employment in the IT industry. 2. Indian Education System The Indian education system places strong emphasis on mathematics and science, resulting in a large number of science and engineering graduates. Mastery over quantitative concepts coupled with English proficiency has resulted in a skill set that has enabled the country to take advantage of the current international demand for IT. 3. Quality Manpower Indian programmers are known for their strong technical skills and their eagerness to accommodate clients. In some cases, clients outsource work to get access to more specialized engineering talent, particularly in the area of telecommunications. 4. Government Policies

IT is a part of government's national agenda and all policies are driven to achieve maximum benefit to their industry. The reforms have reduced licensing requirements and made foreign technology accessible. The reforms have also removed restrictions on investment and made the process of investment easier The government is actively promoting FDI, investments from NRIs (Non-Resident Indians) including Overseas Corporate Bodies (OCB's) owned by the NRIs. FDI can be brought in through the automatic route, based on powers accorded to the Reserve Bank of India. Till 1994, DOT was the sole provider of basic telecom services in India. The new National Telecom Policy has opened the field for private participants. The IT Bill passed in 2000 provides a legal framework for the recognition of electronic contracts, prevention of computer crimes, electronic filing of documents, etc Amendments have also been proposed in the Indian Evidence Act, Indian Penal Code and the RBI Act. The IPR law in India. 5. Cost of Labour and resources The comparative cost advantage that India provides in terms of availability of cheap labour and resources as compared to the European or US market makes companies to outsource portion of their business to these destination. 6. Technological advances & Dot-Com bust Before the dot com boom, many multinational companies invested a large sum of money in laying the underline cables for inter-continental communication. But after the dot-com bust many of these companies went bankrupt leaving handing down the large network of communication lines at dirt cheap prices. This brought down the prices of inter-continental communication by a large factor. With availability of new communication technologies companies find it easier to manage their business spread across the globe. This also provided the companies to

move a part of their non-core business to low cost locations like India and gain the cost advantage.

Risk Factors 1. Manpower availability and cost India has more than 1,900 institutions from which about 70,000 software professionals graduate each year. This is further supplemented by private training centers which coach about 4045,000 students each year. With many students opting for further studies/ other employment streams and several overlap between students at institutions and training centers, it is estimated that India can supply about 75,000 software professionals each year. Despite this huge addition to the manpower base each year, the demand-supply situation is expected to remain tight during the next 3years. The excess of demand over supply will further push salary levels upward. Salary levels for experienced and qualified professionals are broadly at par with developed countries. The rising cost of manpower has already eroded India's position as a cheap source of labor to a large extent. This increases the risk of losing business to competing countries like China and Russia who

have cheaper labor, if they would be able to match the quality Indian professional’s offer. Moreover, to maintain profitability on the increased cost, software companies will have to increase productivity i.e. maximizes revenue/profits per employee. Till the time Indian software companies are able to move up the value chain to products and transcend the cost barrier, they carry a risk of Low profitability. 2. Manpower turnover It is essential that an organization keeps employee turnover to a minimum, so as to maximize on productivity. This is even more important if an employee has to undergo initial training to develop specific skills. Employee turnover occurs as employees show little respect for continuity with a single organization and even employers actively 'poach' from competing companies by offering more lucrative salaries. Most software companies have been providing various incentives and stock option schemes to retain talent, especially at senior levels. Organizations also have to provide better working facilities to motivate employees to put in their best. 3. Skill and experience levels Indian programmers have a wide range of skills, with experience on legacy systems and on latest platforms as well. They have also displayed an ability to learn and adapt quickly to the changing environment. However, about 77% of the software professionals in India have a work experience of less of 7years. Corporate therefore need to continuously invest in training to improve skill levels further, especially in the area of functional domains. 4. Availability of infrastructure The current boom in the software sector can be sustained through an increase in offshore programming activity. This places special emphasis on availability of quality infrastructure facilities in the

form of hardware/software, power and telecom links. India's power and telecom infrastructure is poor compared to many developing countries. On top of that power and telecom costs are among the highest in the world. One of the prime reasons for this has been the state monopoly over these sectors. The attempts at privatizing these institutions have not improved the situation in a significant manner. For software companies, investing in telecom infrastructure is an additional overhead, which few companies will be able to afford. 5. Poor government demand In most developed countries government/public sector enterprises constitute the largest consumers of IT. In India public sector companies are generally reluctant to introduce IT in a major way, as this would antagonize the trade unions. Public sector companies' policies also tend to be pro-labor. The software sector therefore receives negligible encouragement from the public sector unlike most of the leading IT countries in the world. 6. Government policies Government policies so far have been favorable to software companies. If tax exemption on exports is withdrawn it could affect software companies adversely.

7. Financing Software companies require finance for setting up development centers, establishing communication links and other infrastructure and for working capital. Traditionally, lenders have been averse to project finance due to lack of tangible assets as security. The recent spurt in share prices of all the listed software companies reflects the confidence amongst investors. This should enable software companies to raise adequate finance in the form of equity. But government has to set machinery in place to provide

software companies with venture capital, project and lease finance etc. 8. Quality India has gradually moved into high quality but competitive cost bracket. Currently, many of the large companies hold quality certificates. However, there are various quality levels and standards. Moreover Indian companies need to pay more attention to Total Quality Management and not just Production process quality. 9. IPR Indian companies have to move up the value chain to become truly global companies. This requires a strong policy on IPR and strict enforcement procedures. Uniformity of IPR policies with the 'target countries' will also help Indian companies to improve export prospects.

Direct impact of IT industry – On Indian economy. The current and evolving role of IT/ITES industry in India’s economy is well established. The sector is proving to be the major

growth pole within the services sector, which in turn drives several economic indicators of growth in the country. A few key indicators of direct contribution are: • Growing share of the country’s GDP: The sector’s contribution to the country’s GDP has been steadily increasing from a share of 1.2% in FY98 to 5.5% in FY08. • Boosting the foreign exchange reserve of the country: Export earnings in FY08 stood at approximately USD 40.0 billion with a growth of 36%. • Employment generation: Direct employment in the sector is expected to be 2.0 million by end of FY08, growing at a CAGR of 26% in the last decade, making it the largest employer in the organized private sector of the country.

Indirect impact of IT industry – to Indian economy.

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Additional employment generation: The indirect employment generated, at the rate of 4 additional jobs created in the economy for every 1 job created in the sector, is even more socially relevant as nearly 75% of the workforce employed in those additional jobs are SSC/HSC or less educated.

• Driving growth of other sectors of the economy: Apart from contributing to the growing income of its direct stakeholders (promoters, shareholders and employees), the IT/ITES industry has had a multiplier effect on other sectors of the economy with an output multiplier of almost 2 through its non-wage operating expenses, capital expenditure and consumption spending by professionals. Study show that USD 15.85 billion spent by the IT/ITES industry in the domestic economy in FY06 generate an additional output of USD 15.5 billion. • Encouraging balanced regional development: By gradually spreading their business operations to smaller Tier II/III cities, the IT sector (besides generating revenue and employment) is also assisting in improving the supply of talent pool and development of physical and social infrastructure, either directly by themselves or by spurring the Government to action. Fuelling the growth of PE/VC funding: The worldwide dot com boom and growth in the IT sector kick-started VC activity in India which led to the creation of first generation of India centric VC funds. Other sectors, such as healthcare, manufacturing and financial services have also benefitted from this phenomenon as these sectors are now also being able to access this source of funding. While IT/ITES continues to be the •

favourite sector with the largest share (28%) of PE/VC funding, other sectors now account for 72% share as compared to 34% in 2000. Spurring first generation entrepreneurship: Corporate India consisted of either large family owned businesses or multinational companies till the advent of the IT/ITES industry, and it was rare to see a first generation entrepreneur. The shift of focus from physical capital to intellectual capital and the advent of the PE/VC funding enabled a large number of first generation entrepreneurs with no wealth to try their hand at starting new enterprises. The demonstrated success of these entrepreneurs created an aspiration among the middle class and spurred them to exploit their potential with confidence. •

Improving the product/service quality level: The fact that IT/ITES companies cater to and compete with global players has led to their adopting the highest quality standards. This high quality of services and products has been the driver and sustainer of growth which has helped move India out of the “mediocrity”, low quality image and has in fact raised the bar for other industries as well. Indian exports had traditionally been restricted to low end, low-technology oriented products like gems and jewelleries and garments/apparels. It is with the advent of IT/ITES industry that the world began to recognize that Indian products and services could also compete and win against global competitors on quality parameters. India is now also emerging as a research and development centre for some of the large IT/ITES companies in the world, once again demonstrating that India now stands for quality. •

• 30% of companies worldwide who have reached Level 5 of Capability Maturity Model Integration (CMMI) are Indian IT/ITES

firms and nearly 75% of Fortune 500 and 50% of Global 2000 corporations source their technology related services from India with an increasing number of MNCs outlining their investment plans for setting up R&D operations in India.

Front runner in practicing good corporate governance: The industry has been a front runner in practicing good corporate governance and their commitment to infuse it in their business activities have led to a creating a positive pressure within the industry, as well as in other industries, with more and more companies adopting global standards in corporate governance practices. The major IT/ITES companies in India have in recent times received national and international recognition for their corporate governance initiatives. •

• Boosting the image of India in the global market: The India IT/ITES industry has contributed to what brand ‘India’ stands for in today’s global market. While India Inc. has been witnessing an acquisition spree of overseas companies in recent years,the IT/ITES sector has led this phenomenon with the highest share (23%) of outbound M&A deals in 2006. Listing of Indian IT/ITES companies in global stock exchanges, which requires adherence to stringent global accounting norms, has helped build a strong brand of the companies and the sector outside India.

Made in India software products have found widespread use across the world while several Indian IT/ITES firms have been partnering with high profile global brands and events. •

Role of NASSCOM Foundation NASSCOM Foundation has taken significant strides in fulfilling its stated role. • Providing hand holding support and advisory services: In order to enable member companies of small size (in terms of turnover) to be a part of the growing number of IT/ITES organizations participating in community initiatives, NASSCOM Foundation (NF) is ideally placed to provide handholding support and connect them to partnering organizations. It can also help create awareness of the fact that it is possible to contribute to society without necessarily setting aside a large amount of funds. Companies can demonstratesocial consciousness and sensitivity in the regular course of business or by ‘doing business responsibly’. Dissemination of information on best practices, international benchmarks and monitoring mechanisms: NF could help create awareness among companies for the need •

of having in place guidelines for undertaking community initiatives and dedicated personnel/ department to undertake these activities to ensure greater effectiveness and impact. An effort by NF to prepare a comprehensive database of various successful practices of companies and create awareness of international standards of socially relevant community initiatives would also go a long way in helping the industry move up the learning curve. Educating companies on possible monitoring mechanisms and ways to measure outcomes of their activities would also help in assessing the impact and allowing course correction where necessary. • Identify sector specific investment opportunities: As the survey has shown, the sectors in which companies undertake their community initiatives are diverse and are often chosen in an isolated manner based on personal perspectives. A conscious decision to link the activities with MDG goals or Government initiatives in promoting socio-economic development could help the IT/ITES industry achieve more in public-private partnerships (PPP) than what is possible through the individual efforts of specific companies. Initiate award/recognition system for socially relevant community activities: To recognize and encourage companies which undertake community initiatives and motivate others to participate as well, there is a need to inform the direct and indirect stakeholders about the activities being undertaken by the companies in the IT/ITES industry. Taking a cue from other NASSCOM initiatives like ‘100 IT Innovators’, NF can initiate a recognition system to showcase some of the commendable activities being undertaken by the member companies. •

• Capacity building of NGOs:

The activities of NGOs, many of whom partner with IT/ITES companies in their community initiatives, are often hindered by their lack of technical and project management skills and limited access to technology solutions. Capacity building efforts, both technical and functional, supported by NF would help the NGOs to extend the reach and scalability of various innovative community initiatives of the IT/ITES companies.

Future overview • Indian IT industry is riding high with rise global spending on technology products and related services. According to the International Data Corporation (IDC) estimates, the global spending on technology related services reached US$ 1.58 trillion (excluding R&D and engineering) in 2006 and is expected to grow at CAGR of 7.12% to reach US$ 2.1 trillion by 2010. Notably, IT services segment (excluding BPO) contributed around 29.8% of the total global spending on technology products and related services in 2006. • The success of the Global Delivery Model adopted by the global IT companies and the increase in offshore spending by the US and European countries would help countries like India

to reap rich benefits. Noticeably, the global offshore IT services spending is expected to reach US$29.4 bn by 2010, would grow at a CAGR of 17.5% during 2006-2010. The trend underscores opportunities the for Indian IT companies to take significant strides towards global offshore IT services market. • Technology adoption by companies across sectors and rapid evolution of technology and applications will significantly drive growth in the IT sector. Spending on IT is expected to increase across businesses with new sectors driving the new wave of IT growth. The increase in spending on IT sector will be backed by the growth in offshore spending, preference towards multivendor contracts and success of the Global Delivery Model. • According to NASSCOM, Indian IT-ITeS exports would reach US$ 60 bn by 2010. Some key factors supporting this optimism include the growing effect of technology-led innovation, leading the growing demand for global sourcing; favourable policy initiatives; and gradually evolving socio-political attitudes towards the acceptance of IT in professional and social activities. The global IT spending is likely to be sourced through the global delivery model, which has already opened up various avenues of outsourced services for India. • Rapid evolution of technology and Internet applications and invasive computing are expected to drive a rapid, quantum growth in technology adoption by businesses and individuals. The proliferation of client devices and end-user or end-use devices at the network end will result in the addition of billions of devices to the network age, which in turn will drive the need for more enterprise systems, to manage and correctly use them. The ‘Internet generation’ entering the working age population is expected to further accelerate technology usage and adoption.

According to the IDC, the Indian IT-ITeS industry is expected to grow at a CAGR of 15.6% to reach Rs 4,582.28 bn during 2008-2011. The sector is expected to witness robust growth, thanks to demand from the domestic market, which is growing steadily over the last couple of years — especially sectors like telecom, retail, logistics and transportation, BFSI, and manufacturing. The domestic ITeS market is expected to reach Rs 362.38 bn by 2011, at a CAGR of 264% during 2008–2011. •

Nobel Laureate Dr. Amartya Sen, About the Indian IT/ITES industry – “My point is not that the IT industry should do something for the country at large, for that it does anyway. It makes enormous contributions: it generates significant incomes for many Indians; it has encouraged attention to technical

excellence as a general requirement across the board; it has established exacting standards of economic success in the country; it has encouraged many bright students to go technical rather than merely contemplative; and it has inspired Indian industrialists to face the world economy as a potentially big participant, not a tiny little bit-player. My point, rather, is that it can do even more, indeed in some ways, much more. This is partly because the reach of information is so wide and all-inclusive, but also because the prosperity and commanding stature of the IT leaders and activists give them voice, power and ability to help the direction of Indian economic and social development.”