Software services is the, much admired and much spoken about, jewel of the Indian IT crown. The Indian software industry is estimated to have revenues of over USD 3 billion and employs nearly 200,000. Characteristics that have aided the rapid expansion and growth of this industry include an abundant skilled English speaking and relatively less expensive labor force, non-invasive government policies and ready capital. The picture of the industry is a mixed one; on one hand there is a great deal of excitement, owing to its growth and export success and on the other hand, the work performed is mundane, with limited potential for sustained growth. But the last couple of years have been promising, they have produced evidence that Indian firms are maturing and developing capabilities to execute larger projects.14
History of Software Services in India
The early days of computing in India were dominated
by Public research organizations. Imported hardware from companies such
as IBM, Honeywell, etc came with their systems software. Therefore early
software developements efforts were concentrated on writing applications
for these imported systems.
Custom software services were originally performed
near the end-user of the software. But advances in semi-conductor production,
application of industrial engineering concepts and improvements in voice
and data communications overcame all location constraints. It become possible
to locate software development virtually anywhere in the world. End-users
werel reluctant to export software services from distant locations as they
feared a loss of control due to the physical dustance from developement
staff. Inspite of such reservations, prospect of low cost developement
at off-shore sites became increasingly attractive, especially as MIS budgets
tightened. Hiring low cost programmers provided a significant advantage
as labor cost constituted mnore than 80% of total developement cost. India
had a compettive advantge in this field, as a typical Indian programmer
earned approximately $3000, in comparison to their US counterpart, who
drew a salary in the range of $80,000 to $100,000. Even after taking into
account additonal expenses such as communication, infrastructure, hardware,
etc, it was still atleast 40% to 50% cheaper to develop software in India
rather than in the US. Thus exports from India, which had begun with contract
progamming in the early 1970's grew to include offshore services in the
1980's.
| Year | Exports | Domestic Revenue | Total Revenue |
| 1993-94 | 330 | 228 | 558 |
| 1994-95 | 485 | 341 | 826 |
| 1995-96 | 734 | 515 | 1249 |
| 1996-97 | 1085 | 681 | 1766 |
| 1997-98 | 1800 | 900 | 2700 |
| 1998-99 | 2600 | 1223 | 3823 |
| 1999-2000(est.) | .. | .. | 6000 |
The Indian software industry began to recieve a lot of attention, inspite of the fact that it had a very small piece (approximately $3 billion)of a very large pie(world software market was close to $300 -$500 billion in 1997). Inspite of ots impressive growth, the Indian software industry faced some stiff challenges. The domestic market was very small and much less advanced than those in the bigger markets,Indian software projects were less advanced than those in more progressive economies(projects mainly focussed on modifications to imported packages and computerizing back office functions), protective government policies had hampered hardware developement which adversely affected software developement and limited functionality of domestic software resulted in extensive piracy.
However, the industry continued to flourish and
earned a place in the world software industry, especially for customized
software and software services. It is estimated that India has 16% of the
global market in customized software and that more than 100 of the Fortune
500 firms had outsources to India(Dataquest, 31 July 1996, pp 43-44). The
industry, growing at an average rate of 50% over the last five years, is
one of the fastest grwoing industries in India. As per the Ninth Plan target,
the software industry in India is poised to touch
revenues of $12 billion by year 2002 of which exports
may be as high as $7.9 billion.With the sustained and continued growth
of software industry, availability of finance has become an important issue
facing the industry. As per NASSCOM estimates, the Indian software industry
requires atleast $400 million in venture capital over the next 3 years
to sustain its high growth rate.
India's success can be attributed to a combination of factors, such as
| .. | Employment | Revenue per Employee
(USD) |
| 1993-94 | 90,000 | 6199 |
| 1994-95 | 118,000 | 6998 |
| 1995-96 | 140,000 | 8924 |
| 1996-97 | 160,000 | 11,036 |
| 1998-99 | 180,000 | 15,000 |
Michael Porter ascribed five factors to a country’s’ strength in an industry. These factors are internal industry structure, customer’s profile, factor endowments, suppliers profile, and government support. This section highlights only the role of the government and emphasizes how the government influences the other factors.
Government Support: India’s success in software services can be ascribed largely to the government policies over the years, which actively encouraged and supported development. Some examples are the various tax breaks offered, subsidies to software export firms, incentives to entrepreneurs through provision of capital at low interest rates, establishment of educational institutions in order to provide a steady supply of skilled workers, etc. On the other hand, the government’s strict imposition of taxes and limitation on hardware export did curtail growth. The popular argument for this policy was the “infant industry argument”, but as developments today emphasize, these policies did more harm than good. India has not churned any innovative hardware developers, as a result of these “supportive policies”.
Future Role: The government will play a crucial
role in the development of the Indian software industry. The industry is
hovering on the brink of phenomenal change and development. The vision
shared by various industrialists of molding India into the software giant
of the 21st century may remain just that- a vision, without ever becoming
reality if the government does not take the right measures. It is a big
challenge to convert India from simply being a “low cost code source” to
a “high quality complete solutions provider”. Making this transition successfully
will enable the country to enjoy improved standards of living, improved
economic growth, and increased capital/aid to fund infrastructure development.
In order to make this transition; the government will have to concentrate
in the following areas:
- Education: India, like other countries, is facing a shortage of skilled IT workers. Premier institutions such as IIT, IIM and REC can only provide a limited number of graduates every year. For every student who makes it into any of these institutes, there must be atleast five others who do not. Faced with very few quality options, these students either register for low quality courses or choose a different field. For every Sabeer Bhatia who made it to the US, there is one back in India who has the potential but not the means. Indians working abroad, have successfully displayed above average technical skills but have not scored high on managerial skills. There is a very real need to combine technical courses with management courses so as to produce well-rounded managers. Such courses will provide the skills and the boost for entrepreneurship, which historically has been lower in India than in the western countries.- Infrastructure: Indian companies suffer from a disadvantage in comparison to their American, European and Japanese peers because of the lack of infrastructure in the country. Infrastructure in this context includes modern telecommunications, broad band access, high-speed data lines, etc. Indian companies may be unable to accept projects because of this handicap or may have to concentrate a large percentage of the work on client sites, which results in lower net profits.
It is worthwhile to note here that the end objective of any policy is to foster internal development rather than facilitate acquisition of foreign projects. Development of infrastructure, as mentioned above, will help achieve both objectives. The Indian consumer (business and household) is relatively unsophisticated in technology when compared to his US counterpart. The customer forms a factor in Porter’s model, wherein Porter theorizes that a demanding customer is a key driver for innovation and success. The Indian consumer definitely does not provide any challenge to the IT industry. Private IT companies can only do so much to encourage automation of internal business processes in other companies. The government plays a critical role in educating the Indian consumer through provision of telephone lines in remote areas, provision of Internet connections, etc.
- Incentives for hardware development: Indian companies have not forayed into the area of hardware development and if they have, the venture has not been a success. This can be ascribed to very high R&D and development costs, paucity of skilled labor, lack of access to cutting edge technology, etc. Many industrialists have lobbied that developing skills in hardware production will give a boost to other areas in IT namely software development. This argument can be translated into Porter’s third factor, which is supplier’s profile. The model states that a strong supplier base is necessary for industrial success. A counter argument may be that scarce resources should not be deployed to do something that someone else does better, namely established overseas hardware manufacturers. In either case, the government role is crucial- in the former to promote such activities and in the latter to enable cheaper access to hardware.- Promote a pro IT attitude: The government needs to promote “IT ness”. The recent plan to open a “Cyber City” in the Indian capital of New Delhi is a step in the right direction. This 1000 acres facility will house R&D, training and other IT related activities. ChandraBabu Naidu, the Chief Minister of Andhra Pradesh, one of the Indian States, is very technology savvy, something that cannot be said of other Indian politicians. He has set an example for forward thinking and embraces new technology with fervor. The common man who looks upto him has lost a large part of the “fear” of IT and has begun to see IT as something “good” rather than something “bad”.
Present Statistics
(Source: NASSCOM)
Return to:The
Information Technology Landscape in Nations around the world
Report created for: INITEB
in the program of MoGIT
at the Kogod School of Business,
American
University,Washington D.C.