Any visitor to cities like Bangalore and Hyderabad in Southern India or Gurgaon in the North would be stuck by Western-style glass towers dotting the skyline. These shimmering glass towers are home to an array of software, outsourcing and engineering services companies – both Indian and foreign. Some campuses in technology clusters of Bangalore, such as those of Infosys, are on par with the best in the Silicon Valley and elsewhere in the world. These companies have several thousand engineers and technical staff working in each campus. Almost all leading technology companies of America and Europe are present in the technology hubs of India and employ thousands of Indians.
All this has made the information technology and outsourcing industry one of the leading sectors of India's post-liberalization economic growth. The sector is a significant job creator providing direct employment to about 3 million people and a major contributor to the GDP – with a share of 1.2 percent in 1997-1998, rising to 6.4 percent in 2010-2011. As per industry estimates, revenues from software, outsourcing and related services would be close to 100 billion US Dollars (72 billion Euro) at the financial year ending on March 31, 2014. A bulk of these revenues – 86 billion US Dollars (62 billion Euro) – are from exports.
Modern Computer Technology in India: Early Beginnings
It is often wondered how come a country which till recently had a relatively small domestic market for IT products and has poor infrastructure for high tech industry could perform so well in exports. Many observers attribute India's success to the economic liberalization unveiled in 1991, while others feel that it was the business arising out of the Y2K or Millennium Bug problem and Euro conversion that changed the fortunes of Indian IT industry. Other factors like availability of a large pool of technical manpower, knowledge of English language among Indians and shortage of skills in Western markets are also credited for the success of Indian IT industry seen in the past one decade or so. While all these are important landmarks and factors which are responsible for development of a robust industry, they do not complete the picture.
India began early on with modern computer technology during the era of Jawaharlal Nehru when data processing was required for national planning as well as strategic research projects such as nuclear and space development. Multinational companies like IBM were permitted to operate in India, and at the same time modern engineering education was founded in the form of Indian Institutes of Technology. Electronics was recognized as a key sector of development and projects were funded at various national institutes for hardware design and software applications. All this helped in early development of software and programming skills among Indians in the 1970s.
However, encouragement to private industry began only with new computer policy in 1984 and software promotion policy in 1986. Software was recognized as an industry and exports were allowed via satellite-based data links operated in state-promoted Software Technology Parks. Export units located in these enclaves have also been given tax breaks and several other fiscal incentives, including land at concessional rates. The industry started to flourish with further liberalization in 1991 and changes in external environment such as the emergence of the internet and mobile telephony in 1990s.
Decades of Growth: From Coding Jobs to new Lines of Business
Over the past two decades the industry has matured a great deal. In the initial phase in the 1980s, small entrepreneurial software firms mainly catered to labor-intensive coding jobs in America and Europe. This was done through a model dubbed "body shopping," under which Indian companies sent their engineers to work with overseas clients. During the same phase, some American companies, such as Texas Instruments and Citibank, set up software development operations in India to take advantage of cheap labor.
In the second phase in early 1990s, Indian firms set up dedicated "software factories" or offshore development centers for large international companies. As telecom links improved and Indian firms adopted international quality benchmarks such as CMM (Capability Maturity Model for Software), more development jobs began to shift to India. Indian companies also developed a global delivery model, which allowed them to expand to America and Europe and serve their clients from a global center located in the same geography.
In addition, a new line of business opened up at the turn of the century when large companies began outsourcing their backroom operations to Indian companies mainly to take advantage of low costs and large manpower availability. Big consulting and outsourcing firms like EDS, Accenture, Convergys and IBM also set up huge operations in India for the same advantage.
Software Services as well as Business and Knowledge Process Outsourcing
At present, the IT and IT-enabled services (IT-ITES) industry has three major streams – software services and customized software development; business process outsourcing (BPO); and research and development (R&D) as well as engineering services. The fourth stream – software product development – is yet to be fully developed. IT services encompassing application development and maintenance, software testing, management of IT infrastructure, consulting and system integration account for more than half the export revenues. The BPO stream – which includes call centers, non-voice customer support, finance and accounting services and logistic support – is the next big segment. Over 200 multinational companies have their backroom operations in India, and Indian BPO companies provide services to customers spread in 66 countries.
A niche within the outsourcing segment is the Knowledge Process Outsourcing (KPO) in which Indian companies are providing to international clients specialized services such as market and business research, financial services, legal services, data management, patent related services and a host of other services. Some novel services like tuitions to students and reading radiological reports are also being provided. All such companies hire highly skilled personnel such as Ph. Ds in different branches of science, besides engineers, scientists, doctors, lawyers, patent attorneys, writers and teachers. In addition to Indian companies providing these services, all major global consulting firms have large workforce based in India to cater to their clients all over the world.
Increasing Business: Engineering and R&D Services
Yet another growing segment of the IT-ITES industry is engineering and R&D services. Semiconductor design firms like Texas Instruments and Cadence came to India early on and have large dedicated design centers. Today there is no major semiconductor design firm which does not have a development center in India. Leading Indian companies like Wipro, HCL and TCS have dedicated semiconductor design teams working for international clients. For instance, HCL is a US FDA-approved design house for medical devices. Indian companies also house dedicated R&D teams for international firms to develop their products. This kind of outsourcing helps companies develop new products ahead of their competitors.
In addition, some 700 global companies have opened captive engineering and R&D centers. The trend of R&D outsourcing from India gained momentum when General Electric established its major research center in Bangalore in 2000 – John F. Welch Technology Center. This was GE's largest R&D center outside America, employing nearly 3000 top-grade researchers and scientists, many of them doctorates. Since then, the number of foreign R&D units in India has simply multiplied.
According to one government-sponsored study, the total amount of FDI (foreign direct investment) for R&D received from some 700 firms was 29.22 billion US-dollar (21 billion Euro) between 2003 and 2009. Germany figured third in such investments, after the U.S. and the United Kingdom. These investments have been made for R&D across several sectors – aerospace, automotive, biotechnology, chemicals, computer Hardware, education, energy, healthcare, industrial automation, semiconductors, software and telecommunications. Several German companies including SAP, Mercedes-Benz and Volkswagen have their R&D units in Bangalore, Pune and other technology clusters of India.
The type of work foreign R&D units handle for their respective parent companies includes basic and advanced research, new product development, product improvement, new process development, product design, process improvement, software architecture development, software design tools, applied software, software testing, technology data collection and technology support. Innovation and intellectual property creation is taking place in the process. Over 1900 patents were generated by these units from India between 2006 and 2010, according to data filed with the US Patent Office. Top companies generating patents from India are IBM, Texas Instruments, GE, STMicroelectronics, Honeywell, Intel, Cisco, Microsoft, Oracle, SAP and Adobe.
Challenges 1: Loss of Competitive Advantages
Since the Indian IT-ITES industry is heavily export dependent, changes in global economy – particularly fluctuating expenditures on IT – directly affects its business prospects. While there is no denying that the trend of outsourcing is irreversible, it is also true that other countries are fast emerging as competitors and technology scene is also changing rapidly. That's the reason perhaps growth rates of Indian industry are falling despite the fact that overall size of the industry and exports are seen growing. After growing at scorching rates till the first few years of 2000s, there is a slow down. The growth rates have fallen from 32.6 percent in 2006–07 to 13 to 15 percent projected for 2014/15. If the trend continues, the growth rate of this industry could be in single digits in near future.
The reasons for this are many. First and foremost, India may be losing its competitive advantage of low-cost skilled manpower to other emerging competitors in both software and BPO segments. China, the Philippines, Vietnam, Poland, Hungary, Mexico, Brazil, Egypt are some of the countries with competitive locations where multinational firms are being offered incentives and a pool of manpower. A Government of India Task Force has warned that there is a "real danger" of some of these centers becoming primary sources of outsourcing services for international corporations. Already many of them are setting up centers in these countries. For instance, the Task Force pointed out, the Philippines is already half the size of the Indian ITES/BPO industry and is expected to grow at rapid pace.
The quality of manpower is another major challenge facing the industry. Though India produces nearly 4 million graduates including half a million engineers every year, they are not industry-ready. Overall, the quality of education is poor. Industry has to put fresh graduates through formal training course before these graduates can be employed. Once employed, productivity of Indian engineers and graduates in Indian companies is also low compared to foreign firms.
The knowledge of English language – which is touted as a major advantage for India – is also eroding. A national English language proficiency test conducted by a New Delhi firm, Aspiring Minds, revealed that as many as 43 percent of engineering graduates do not possess basic grammar capability necessary for simple communication such as writing e-mails. As much as 25 per cent of them did not have English comprehension skills necessary for them to understand engineering school curriculum. A similar test to assess engineering skills revealed that 30 percent of computer science/IT engineers did not know basic theoretical concepts used in computer programming. A bulk of them – 80 percent – was unable to apply their theoretical programming knowledge to real world problems.
Challenges 2: Lack of Innovation and Product Development in India
A major concern which has arisen in recent years is the lack of innovation and product development in Indian industry. Though Indian engineers working for foreign R&D units are able to generate intellectual property, they are doing so for foreign companies. Similarly, Indian companies engaged by international corporations are developing new products and services but the benefits in terms of royalty are not accruing to them because they don't own these products. Outsourcing services depend on headcount and are increasingly becoming location-independent. They can be moved to another location very swiftly. In the same vein, the software services business is also changing with emergence of new technologies like cloud computing and new delivery models like Software as a Service (SaaS).
All these trends mean that if India wants to remain competitive in the global IT industry, it will have to innovate, develop new products and intellectual property and not remain tied to low-cost, labor-intensive services. With the domestic market growing, the need for new products is also on the rise. Indian companies will have to gear up to cater to this market.
Policy makers and the government will have to take urgent measures to improve quality of engineering and general education, so that India is able to take advantage of its young workforce. On its part, the industry will have to get ready for competition as well as new technologies such as nanocomputing and quantum computing which are bound to change the face of information technology in decades to come.