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Indian Software and Services Industry: Sustaining Growth

Author: Kiran Karnik, President - NASSCOM

The first year of the new millennium has been a year of turbulence, tragedy and terrorism. Early in the year, the earthquake in Gujarat caused devastation and wrought massive havoc; towards the end of the year we witnessed a dastardly attack on our Parliament; and in between these were the events of September 11, in the United States. These, in addition to many other events, contributed to making this a year of substantial human tragedy. On the economic front, the year began with news of the slow-down in the US economy. Being the major engine for the global economy, this slow down had world-wide repercussions. 

The events of September 11 and their aftermath only amplified the economic deceleration and many economies (including the US) are still formally in recession.
Amidst all this bad news, it is indeed creditable that the IT software and services industry in India has continued its robust growth and chalked up a 33% increase in exports in the first half of FY 2001-02. We expect the industry to register an overall year-on-year increase of about 30% for the full year (01-02)

A large part of the credit for this amazing success, amidst very difficult circumstances, must go to the fledgling IT enabled services (ITES) sector, which registered outstanding growth during the year. This bodes well for the future, since the ITES/BPO segment is poised to grow very rapidly, world-wide, over the next few years. India is potentially extremely well-positioned to exploit this market. The challenge is in turning the potential into reality. The economic slow-down in the US began over a year ago. The bursting of the "dot com" bubble was undoubtedly a contributor, that had a fall out world-wide. 

The "irrational exuberance" that accompanied the hype over dot coms (most of which had no business model worth the name) was followed by a melt-down in all technology stocks in the US and, by extension, in share markets around the world. As a result, the earlier excessive investments in IT were followed by drastic cuts in IT spends and even skepticism about any real benefits from IT applications in industry. Fortunately, we seem to have seen the end of these wild swings, and the outlook is for a more modest, but sustained, growth in this sector.

The Indian IT software and services industry has weathered this storm well. Faced with its first real test, the industry has shown resilience. It has, it seems, learned that there will be cycles in this industry too, and that de-risking strategies need to be put in place. The importance of geographical dispersal of markets has been recognized, and Nasscom's efforts to ensure deeper penetration of the Europe and Asia-Pacific markets have won wide support.

India has, doubtless, been very successful in the IT sector. As a result, India has often being referred to as a "software superpower" or a "knowledge power house". While a pat on the back is always welcome, and the worldwide appreciation is well deserved, this needs to be put in perspective. India's phenomenally growing exports even now account for but 2% of the world IT market. Also, a bulk of our exports are dependent on the fact that we are yet the lowest-price source, with our person-hour rates being far lower than those commanded by countries like Israel. 

Clearly, while we have begun well, we have a long way to go. "Superpower" is probably hyperbole; "rising star" is, arguably, a more apt description. The question, then, is: how can we best build on our success, develop our advantages, and sustain our long-term competitive edge over others.

To examine the long-term sustainability of the IT software industry, it is necessary to look at the factors that have helped us and see whether they will yet provide India with the differential advantage, vis-a-vis potential competitors, in the years to come. It is also necessary to look at competitors, understand their advantages, and see how we can continue to stay ahead of them.

Two major factors that have been our assets are lower costs and linguistic (English-language) skills. However, these are aspects in which our relative advantage is difficult to sustain. Already, competitors (like China, for example) are ensuring very extensive learning/use of English. Lower import duties and local taxes also make it cheaper to set up and run software facilities in countries like China. 

Therefore, in terms of sustainable advantages, we will need to look elsewhere and go beyond costs and language. With regard to the key role played by the Indian diaspora (another catalyst for our growth), it is worth noting that the Chinese diaspora is, in fact, larger and that their connections to their "home" country are probably stronger than is the case with Indians. This (the Indian diaspora) too, is clearly a temporary advantage.

The general infrastructure in China is, by all accounts, far superior to India's. Policies and decision-making are more industry-friendly in China, and systems and procedures are such that clearances, approvals, Customs etc. are far quicker than in India. As a result, on both cost and efficiency of operations, China scores over India.

China's phenomenal economic growth has been unmatched. Over the last two decades, its growth rates have been almost double that of India in most years. For a while, in the 1990s, it seemed that India was beginning to catch up as the GDP grew at around 7% for 3 years; but it has subsequently gone down to the 5% (or less) bench-mark once again. One cause (and result) has been China's success in attracting foreign investment--the magnitude has been many times that of India. China's manufacturing base has been growing rapidly, and this includes a large IT hardware sector. China produces about four times as many PCs as are sold in India each year, and the PC penetration too is about four times that in India. In communication, the growth rates have been truly astounding and China is estimated to have 200 million landlines and 110 million mobile phones, as compared to 32 million and 5.5 million in India.

Despite this, it is indisputable that India is substantially ahead of China in IT software and services. While China has a large and growing domestic market, its software exports are estimated to be just $600 million (2000-01), as compared to India's $ 6.2 billion (2000-01). Clearly, there are some things in this field that India is doing right and some circumstances that give it an edge over China.

There are many who are concerned about China as a competitor, and who feel that it is not in our interest to work with them as this will accelerate their progress and be detrimental to us. However, an insular approach is unlikely to work: the Chinese can always learn from others, and also they have the proven ability to "boot-strap" themselves so as to develop or get what they need. 

Instead, a policy of engagement may well be a far better strategy. It will provide us entry into the huge and rapidly growing domestic market in China; it could provide a stepping stone for entry into other East Asian countries (e.g., Japan and Korea); and we could co-operate with China to develop synergies (e.g., their hardware/manufacturing expertise, married to Indian software could be a global "killer"). A policy of "complementarity and collaboration" would, therefore, seem to be preferable. We are certainly way ahead of China in software, and they will take a few years to get to where we are. Meanwhile, we have to ensure that we not only stay ahead, but move on to altogether new paths.

Given the potential of India in the IT sector and the huge, growing world market, our long-term strategy must aim for a position of primacy for India. By 2010, the IT software and services industry should gross revenues of well over US$ 100 billion (about Rs. 500,000 crore), of which about two thirds will be exports. This calls for a ten-fold growth in 10 years: an ambitious but realizable goal, requiring a compounded annual growth rate of 25 to 30%. While it is fashionable to talk of the need for India to "move up the value chain" in IT, this is not necessarily desirable. First, there is no reason for India to vacate the large volume (though low profitability) low-end business, and give it up to some competitor. Second, given India's huge human power, and the wide spectrum of skill levels, there is no necessity to make an either/or choice between "low-end" and "higher value" work. 

Third, from the point of view of employment, the low-end not only provides large-scale employment, but it does so for a class of young people who would otherwise not fit into (or find) other jobs--the middle-class, general education (e.g., "B.A pass-course") types, looking for white-collar employment. With the drastic reduction in clerical-type jobs, these persons have difficulty finding employment. In many cases, these unemployed and frustrated youth are the ideal recruits into crime and terrorism. Therefore, apart from all else, the low-end IT jobs (e.g., in data processing or in call centers) are an important contribution to social stability, as also to economic well-being. 

The large and booming international market for business process outsourcing (BPO) is, therefore, a great opportunity for India--even if a lot of the work in this segment is at the low-end of the value chain. India has done well in this segment (the growth rate this year is in the 60 to 70% range).

However, India's success is now sought to be emulated, and many competitors are emerging. India is yet the favored destination for this business, but if we sell only on the basis of low cost, we could soon find business migrating to other countries where costs are as low or lower. Therefore, "low-cost" as a USP (unique selling proposition) is not sustainable. Instead, we need to re-position ourselves as a high-quality, high-productivity destination. This is a fully defensible proposition, because there is data that establishes India's credentials on these parameters. In this low-end business, we therefore need to:

Re-position ourselves as a quality and productivity leader, resulting in cost-effectiveness and benefits for the customer; and De-commodify these services by developing a brand, so as to generate brand loyalty and command a premium over "commodity" suppliers. 

Continuing growth and success in the IT-enabled services (ITES) space requires the above, plus appropriate infrastructure and policies. The infrastructure needs include:

 Connectivity with redundancy and reliability, 
 Quality standards (this will also minimize price under-cutting), 
 Supporting infrastructure, including suitable buildings with large floor-plates, roads    and transportation, 
 Trained human power and training facilities 

A supportive policy framework is also essential. This has to remove many of the "legacy" laws/regulations that originate from the industrial world (the Factories Act, the Shops and Establishments Act, etc.) and cannot be applied to ITES operations.

With these steps, ITES/BPO can really take off in India. It is entirely possible that this segment will not only provide huge employment opportunities, but will also exceed the US$ 17 billion target indicated for 2008 in the Nasscom-McKinsey study. More importantly, these steps will ensure that the growth is sustainable and that India continues to enjoy a competitive edge in this field.

Other segments of the IT software and services industry also require a number of initiatives so as to ensure rapid and sustainable growth. Some are similar to those mentioned earlier for ITES--de-commodification, brand-building, emphasis on quality and productivity. Other needs, especially for higher value-added work (which, too, we should seek to dominate), include:


More emphasis on product development and intellectual-property related work 


Bigger investments of effort and money in R&D 


Working more closely with R&D and academic institutions 


Greater focus on marketing, to build brands, brand loyalty and customer relationships, and market research 

Apart from the above, sustainability also requires certain long-term and fundamental measures. These include:


Steps to widen computer-literacy: ultimately this should be a part of basic literacy. Minimum learning levels for computers/IT could be defined for different grades/classes. This would help to create a "computer culture." 


Upgradation of the physical and human (academic) infrastructure in the engineering colleges. A target like "100 IIT-class institutions in five years" and "50 truly world-class institutions by 2010" could be set. 


Continuous updating of the syllabus (and of the faculty members) in science/technology/engineering, and a close interaction between industry professionals and academic institutions/teachers/students, so as to ensure relevance, topicality, and employability. 


Developing a strong domestic market. Paradoxically, this will help exports, especially by facilitating testing, de-bugging and user feedback in India before products/services are offered to foreign customers. 


Focus on emerging growth areas like bio-informatics, embedded software, information security, disaster recovery systems; develop/tap expertise, enter early and seek to dominate the market. 


Marry domain expertise and software skills: India has a tremendous reservoir of very talented domain experts in a whole range of disciplines. Combining this with software skills can be a "killer combination." Examples include animation, engineering services, HR, fashion design, legal services, etc. Combining India's two most successful industries-viz., entertainment and software-may present extraordinary opportunities. 


Adopting a strategy of "complementarily and collaboration" with countries that have appropriate facilities and skills-e.g., linking Korean/Taiwanese/Chinese manufacturing with Indian software (embedded software could be one area), or German engineering with Indian software. 


Increase the output of micro-electronic engineers, so as to enter the chip design market in a big way. Design and testing of customized chips is a potentially big market, and India is well positioned to make a major foray. 


Work towards a massive increase in computer/Internet penetration: This is essential to grow the domestic market, both for hardware and software. This may mean stimulating the creation of a world-class, world-scale hardware manufacturing or assembling industry. 


Collaborate with other industry segments to introduce IT so as to make Indian industry more efficient, productive and competitive. At present, India's software industry is exporting productivity and making industry in other countries more competitive. 


Push e-governance. This will benefit the IT industry through greater sale of IT hardware, software and services; but, more importantly, it will increase the efficiency of the economy, with all-round benefits, including to the IT sector itself. 


Increase the use of IT in improving basic infrastructure services, like power, health, education, transportation. The increased transparency, accountability and efficiency will again help not only the IT sector, but also the economy as a whole. 

Some of the above build on India's strengths, while in other cases, IT is sought to be used as a tool to improve the lacunae in our infrastructure/systems. In years to come, as the computer/IT industry evolves, we will have the opportunity to capitalize on our biggest competitive asset: India's diversity.

With globalization, working in multi-cultural, multi-ethnic teams has become a necessity. Understanding other cultures is essential not only for marketing, but also for design of systems and applications. As computer systems (including embedded systems in consumer durables, speech recognition, etc.) become more sophisticated, the need for fuzzy logic, for non-linear and intuitive approaches will increase. Creativity, innovation and an ability to deal with uncertainty and ambiguity will be the hallmarks of many systems and the need of the hour. A mind-set that is attuned to ambiguity, to appreciating diversity and thinking laterally, to an internalized ability to deal with multi-cultural contexts: these will be great assets in the emerging technological world of tomorrow. 

We in India are uniquely gifted in this area. Our diversity and "multi-everything" context makes it natural for us to be able to handle the new needs. Most of our potential competitors are homogeneous, non-diverse societies, good at logical thinking and routine operations, but unable to handle ambiguity or to be innovative as naturally as Indians. It is, therefore, a strategic necessity to nurture and develop our diversity, plurality and multi-culturalism. We need to celebrate and appreciate our "mosaic" society and not seek to either homogenize it by a melting-pot/common identity approach or a forced centralized unitary approach. Ultimately, what some see as our weakness is our ultimate strength. It is this that will help us win the marathon, i.e., ensure long-term sustainable growth.

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