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 2003-
04 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 IT as an
Industry
2. Providing satisfactory services to existing Adding value to
sustain the growth increase in demand
3. Government controlling infrastructure Government
facilitating and technology
infrastructure and technology
4. IT for specialists IT for
masses
5. Fulfilling external demand Creating
internal demand
 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.

 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 to the Information Technology
Agreement (ITA-1) of 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 goods used for
manufacture of electronic goods is 0%.
• 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 e-
governance services to be made available for its citizens. E-
Government 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, bio-
informatics, 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 know-
how, 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.

• 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 pre-
production, 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 40-
45,000 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.
• 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 multi-
vendor 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.”