CHAPTER I1

INFORMATION TECHNOLOGY INDUSTRY IN INDIA-

AN OVERVIEW

INFORMATION TECENOLOGY INDUSTRY IN INDIA- AN OVERVIEW

Courage is as ofen the outcome of despair ar of hope; in the one case we have nothing to lose, in the other, everything to gain - Diane de Poinliers

The Indian Information Technology industry accounts k r 5.19% of the country's GDP

and export eanhings as of 2009, while providing employment to a significant number of

its tertiary sector workforce. More than 2.3 million people are employed in the sector

either directly or indirectly, making it one of the biggest job creators in India and a

mainstay of the national economy. In 2010, annual revenues fiom outsourcing operations

in India amounted to US$54.33 billion compared to China with $35.76 billion and

Philippines with $8.85 billion.' India's outsourcing industry is expected to increase to

US$225 billion by 2020. The most prominent IT hub is IT capital Bangalore. The other

emerging destinations are Chennai, Hyderabad, Kolkata, Pune, Mumbai, NCR, and

Bhubaneshwar.

Technically proficient immigrants h m India sought jobs in the western world from the

1950s onwards as India's education system produced more engineers than its industry

could absorb. India's growing stature in the information age enabled it to form close ties

with both the United States of America and the European Union. However, the recent

global financial crises have deeply impacted the Indian IT companies as well as global

companies. As a result hiring dropped sharply and employees starzed looking at different

sectors like the financial service, telecommunications, and manufacturing industries,

which have been growing phenomenally over the last few years.2

India's IT Services industry was born in Mumbai in 1967 with the establishment of Tata

Group in partnership with ~ m u g h s . ~ The first s o h export zone SEEPZ (Santacruz

Electronics Export Processing Zone) was set up there way back in 1973, the old avatar of

the modern day IT Park. More than 80 percent of the country's software exports happened

out of SEEPZ, Mumbai in 80s.~

Each year India produces roughly 5,00,000 engineers in the country,5 out of them only

25% to 30% possess both technical c o w and English language skills6, although

12% of India's population can speak in knglish? India developed a number of

outsourcing companies specializing in customer support via Internet or telephone

connections. By 2009, India also had a total of 37,160,000 telephone lines in use: a total

of 506,040,000 mobile phone a total of 81,000,000 Internet users--

comprisiig 7.0% of the country's population,10 and 7,570,000 people in the country had

access to broadband Internet- making it the 12th largest country in the world in terms of

broadband Internet users." Total fixed-line and wireless subscribers reached 543.20

million as of November, 2009.'~

If there was one word which epitornised the world in 2009, it would be courage. Courage,

to pierce the darkness of challenging times and hope, amid despair. 2009 ushered

turbulence, with countries around the world plunging into the recession. The housing

bubble burst, followed by the financial crisis creating a domino effect that, but, brought

the world to a standstill. While robust fundamentals ensured that the recession impact on

India was relatively moderate, in an increasingly globalised environment, it could not

escape declining GDP growth, rising unemployment and weakened consumer demand.

However, prompt action by governments across the world and stimulus packages helped

to contain this downfall and make way for revival by the end of 2009.

Over the past decade, the Indian IT sector has become the country's premier growth

engine, crossing significant milestones in terms of revenue growth, employment

generation and value creation, in addition to becoming the global brand ambassador for

India. However, the industry performance was affected by the recessionary headwinds as

the clients cut their IT budgets, cancelled deals, delayed payments and deals, went

bankrupt while others renegotiated pricing, looking for severe pricing cuts and stretching

the dollar.

The changing demand outlook, customer conversations and requirements acted as a driver

to build in greater efficiencies and flexibility within the service delivery and the business

models - one which is here to stay. 2009 was also instrumental for more ways than one

for the industry. While the industry displayed tenacity and resilience, it also commenced

its journey to achieve its aspirations in view of the altered landscape.

It commenced working on its agenda to diversify beyond core offerings and markets

through new business and pricing models, specialise to provide end-toend service

offerings with deeper penetration across verticals, transform the w s delivery through

re-engineering and enablii technology, innovate through research and development and

drive inclusive growth in India by developing targeted solutions for the domestic market.

All these measures, along with India's game changing value proposition has helped India

widen its leadership position in the global sourcing market.

The advent of 2010 has signaled the revival of outsourcing within core markets, along

with the emerging markets increasingly adopting outsourcing for enhanced

competitiveness. Key demand indicators in the last two quarters such as increased deal

flow, volume growth, stable pricing, and faster decision making has made the industry

post good results. Though full recovery is expected in another two quarters, development

of new growth levers, improved efficiency and changing demand outlook signifies early

signs of recovery.

The Information Technology industry has become one of the most significant growth

catalysts for the Indian economy. In addition to fuelling India's economy, this industry is

also positively influencing the lives of its people through an active direct and indirect

contribution to the various socio-economic parameters such as employment, standard of

living, education and diversity among others. Growing at an extremely high pace, the

industry has demonstrated a decade of strong growth - growing 15 times to aggregate

revenues of USD 69.4 billion in FY2009. In addition, as one of the largest employers in

the organised private sector, it provides direct livelihood to 2.2 million people.

The IT-BPO industry has played a significant role in transforming India's image from a

slow moving bureaucratic economy to a land of innovative entrepreneurs and a global

player in providing world class technology solutions and business services. The industry

has helped India transform from a rural and agriculture based economy to a knowledge

based economy.

2.1 EVOLUTION OF THE IT-BPO INDUSTRY

The IT-BPO industry in India had humble beginnings with a few Indian entrepreneurs

setting up IT services companies and select MNC's such as GE, Texas Instruments and

American Express setting up theiu captive centres in India Cost arbitrage through

abundant talent pool available in India was the key driver for off shoring to India

The perceived success of the first few captives led other MNCs to ~omider cntering M a

to set up their back office and product development centres. India based tbird-perty

players started offering similar services to capitalize on the oppomnity. The Y2K

phenomenon and the "dot com bust" gave a strong push to outsourcing of technology

services to India, especially after Indian companies were able to prove their capability in

delivering the desired quality and functionality at a significantly lower cost.

Over a period of time, this industry has attracted the attention of Private Equity investors

leading to a large number of Indian entrepreneurs setting up IT-BPO centres. While wst

considerations used to be the primary driver earlier, performance, quality, productivity

and increasingly transformation have emerged as key reasons for outsourcing work to

India.

In recent years, this industry has witnessed the trend of India based companies actively

participating in Mergers & Acquisitions deals to gain access to diverse talent pool and to

expand their global footprint. While big names such as Infosys, TCS, and Wipro have

made their presence felt across the globe, industry has also witnessed emergence of niche

players and new service lines.

2.1.1 Formative years (till 1991)

The Indian Government acquired the EVS EM computers h m the Soviet Union, which

were used in large companies and research laboratories. In 1968 Tata Consultancy

Services-established in SEEPZ, Mumbai by the Tata Group-were the country's largest

software producers during the 1960s. As an outcome of the various policies of Jawaharlal

Nehru (office: 15 August 1947 - 27 May 1964) the economically beleaguered country

was able to build a large scientific workforce, third in numbers only to that of the United

States of America and the Soviet Union. On 18 August 195 1 the minister of education

Maulana Abul Kalam Azad,' inaugurated the Indian Institute of Technology at Kharagpur

in West Bengal. Possibly modeled after the Massachusetts Institute of Technology these

institutions were wnceived by a 22 member committee of scholars and entrepreneurs

under the chahanship of N. R Sarkar.

Relaxed immigration laws in the United States of America (1965) attracted a number of

skilled Indian professionals aiming for research. By 1960 as many as 10,000 Indians were

estimated to have settled in the US. By the 1980s a number of engineers from India were

53

seeking employment in other countries. In response, the Jndian companies realigned

wages to retain their experienced staff. In the Encyclo~dia of India, Kamdar (2006)

reports on the role of Indian immigrants (1980 - early 1990s) in promoting technology-

driven growth:

The United States' technological lead was driven in no small part by the brain power of

brilliant immigrants, many of whom came from India. The inestimable mntributions of

thousands of highly trained Indian migrants in every area of American scientific and

technological achievement culminated with the information technology revolution most

associated with California's Silicon Valley in the '1980s and 1990s.'~

The National Infomatics Centre was established in March 1975. The inception of The

Computer Maintenance Company (CMC) followed in October 1976. Between 1977-1 980

the country's Information Technology companies Tata Infotech, Patni Computer Systems

and Wipro had become visible. The 'microchip revolution' of the 1980s had convinced

both Indira Gandhi and her successor Rajiv Gandhi that electronics and

telecommunications were vital to India's growth and development. h4TNL underwent

technological improvements. Between 1986-1 987, the Indian government embarked upon

the creation of three wide-area computer networking schemes: INDONET (intended to

serve the lBM mainframes in India), NICNET (the network for India's National

Informatics Centre), and the academic research oriented Education and Research Network

(ERNET).

2.1.2 1991-2001

Regulated VSAT links became visible in 1985. Desai (2006) describes the steps taken to

relax regulations on linking in 1991:

In 1991 the Department of Electronics broke this impasse, creating a corporation called

Sohare Technology Parks of India (STPI) that, being owned by the government, could

provide VSAT communications without breaching its monopoly. STPI set up software

technology parks in different cities, each of which provided satellite links to be used by

firms, the local l i i was a wireless radio link. In 1993 the government began to allow

individual companies their own dedicated links, which allowed work done in India to be

tl'anSmiw a h a d directly. hhl firms soon convinced their American c-mm that a satellite link was as reliable as a team of programmers WO- in tht clients' office.

~ i d e s h Sanchar Nigam Limited (VSNL) introduced Gateway E l m n i c Mail Service in

1991, the 64 kbitls leased line service in 1992, and commemial Internet access on a

visible scale in 1992. Election results were displayed via National Informatics Centre's

NICNET.

The Indian economy underwent economic refonns in 1991, leading to a new era of

globalization and international economic integration. Economic growth of over 6%

annually was seen between 1993-2002. The economic refonns were driven in part by the

significant internet usage in the country. The new administration under A d Bihari

Vajpayee-which placed the development of Information Technology among its top five

priorities formed the Indian National Task Force on Information Technology and

Software Development.

Wolcott & Goodman (2003) report on the role of the lndian National Task Force on

Information Technology and Software Development:

Within 90 days of its establishment, the Task Force produced an extensive background

report on the state of technology in India and an IT Action Plan with 108

recommendations. The Task Force could act quickly because it built upon the experience

and fiwtrations of state governments, central government agencies, universities, and the

software industry. Much of what it proposed was also consistent with the thinking and

recommendations of international bodies like the World Trade Organization (WTO),

International Telecommtuications Union (ITU), and World Bank. In addition, the Task

Force incorporated the experiences of Singapore and other nations, which implemented

similar programs. It was less a task of invention than of sparking action on a consensus

that had already evolved within the networking community and government.

The New Telecommunications Policy, 1999 (NTP 1999) helped further liberalize India's

telecommunications sector. The Information Technology Act 2000 created legal

procedures for electronic transactions and eammerce.

Throughout the 1990~3 another wave of Indian professionals en- & UniM $-. The number of Indim Americans reaahed 1.7 million by 2 0 . This immigration

consisted largely of highly educated technologically proficient workers. Within the

United States, Indians fared well in science, engineerin& and management. Graduates

fiom the Indian Institutes of Technology ('Ill") became known for their technical skills.

The success of Information Technology in India not only had economic repe~~ussions but

also had far-reaching political consequences.

India's reputation both as a source and a destination for skilled workfo~e helped it

improve its relations with a number of world economies. The relationship between

economy and technology-valued in the western world-facilitated the growth of an

entrepreneurial class of immigrant Indians, which further helped aid in promoting

technology-driven growth.

2.13 2001 To at Present

India is now one of the biggest IT capitals in the modem world. The economic effect of

the technologically inclined services sector in India-accounting for 40% of the country's

GDP and 30% of export earnings as of 2006, while employing only 25% of its

workforce-is summarized by Sharma (2006):

The share of IT (mainly software) in total exports increased h m 1 percent in 1990 to 18

percent in 2001. IT-enabled services such as back office operations, remote maintenance,

accounting, public call centers, medical transcription, insurance claims, and other bulk

processing are rapidly expanding. Indian companies such as HCL, TCS, Wipro, and

Infosys had become household names around the world.

Today, Bangalore is known as the Silicon Valley of India and contributes 33% of Indian

IT Exports. India's second and third largest software companies are headquartered in

Bangalore, as are many of the global SEI-CMM Level 5 Companies.

Next to ~ a n ~ d o r e Chennai plays an important role in IT. Lot of companies have

developed in Chennai, in the last few years.

And Mumbai too has its share of IT companies that are India's finrt and largest, like TCS

and well established like Reliance, Patni, L &T Infotech, WNS, Shine, Naukri, Jobspert,

etc are heiidqwrtered in Murnbai and these IT and dot corn companies are ruling the

roost of Mumbai's relatively high octane industry of Information Technology.

Such is the growth in investment and outsourcing, it was revealed that Cap Gemini will

soon have more staff in India than it does in its home market of France with 21,000

perso~lnel in 1ndia.14

On 25 June 2002 India and the European Union agreed to bilateral cooperation in the

field of scienck and technology. A joint EU-India group of scholars was formed on 23

November 2001 to further promote joint research and development. India holds observer

status at CERN (Central European R e m h Network) while a joint India-EU Software

Education and Development Center is due at Bangalore.

2.2 EVOLUTION OF IT IN CHENNAI

The Tamil Nadu Government focused the attention of IT industry for the economic

growth, formulated and adopted an exclusive IT policy way back in 1997.

The main objectives of the policy indicated were to encourage the growth of hardware

and software industries and associated services in the State and the removal of the

bottlenecks in starting and running of such units, to increase both domestic and export

earnings, upgrade and develop manpower skills required for the industry, to accelerate the

use of IT in educational institutions and upgrade the quality of life of the citizens by

facilitating access to CQnsUInt2I' applications of IT.

The Government also encouraged the use of IT in all its departments with a view to

improve productivity and efficiency. The fiscal and tax concessions available for mega

projects (investment above Rs 50 mre) and super mega projects (investments exceeding

Rs 1,500 crore) were made applicable to IT companies.

The State Government had set up IT parks in different cities, including Chennai through

ELCOT (Electronics Corporation of Tamilnadu) in association with private sector and

provided full fledged facilities with adequate modules for s o b developments as well

as sites for non-polluting hardware units, commercial and residential areas, educational

institutions convention and business centres as well as connectivity required for

communication and information exchange globally.

Information technology is a boon b M a n economy and also to the Chenaai people as it

provides lots of scope for development. In India IT industry had its growth only in the last

decade. The three major component of the IT are hardware which is the physical unit

which is designed using microchip. The second component is software unit which

includes programming languages and their applications. The third is Internet, it is

protocols that link individual computers into a vast network of computers.

The IT industry can be classified into two major categories such as IT Products and IT

Consulting. In Chemai, more than 90% of the IT industries are IT consulting companies.

Thus the IT product based company's focuses on designing the hardware and software

products and the IT consulting company's focuses on the ability to learn and apply the

software and hardware. The companies in Chennai have clients in technologies like

DBASE, FoxPro to the latest mobile technology.

2.3 HEALTH ISSUES AMONG YOUNG LABOR FORCE

Employees in IT 1 ITES services undergo high stress in their work environment which

raises serious concern of work in lhis industry 16. The corporate HR practices are another

concern where one survey found TCS employees average age is 28 years and the

recruitment practices which contribute to the inexperienced work force in the industry 17.

Corporate critics point out the shortage of human resources but the analyst says 20 year

old industry cannot have 6 year experienced labour force ". There have been raising concerns on violating employment laws by corporate and there are harassments reported

fiom various reputed companies ".

2.4 TOP EIGHT IT HUBS IN INDIA

Table 2.1: Table showing the top eight IT hubs in India

2.5 INDIA'S DOMESTIC IT MARKET

8

India's domestic IT Market over the years has become one of the major driving forces of

the industry. The domestic IT infixtructure is developing contexts of technology and

intensity of penetration.

In the FY 2008-09, the domestic IT sector attained revenues worth US$ 24.3 billion as

compared to US$ 23.1 billion in FY 2007-08, registering a growth of 5.4%. Moreover,

the increasing demand for IT services and goods by India Inc has strengthened the

expansion of the domestic market with agreements worth rising up extraordinarily to US$

100 million. By the FY 2012, the domestic sector is estimated to expand to US$ 1.7

billion against the existing from US$1 billion.

Bhubaneswar

Government initiative in India's domestic IT Market

other companies are headquartered here. The capital City of Orissa, Bhubaneswar is one of the emerging IT Cities in India. Houses companies like Infosys , Satyarn, TCS and Wipro. There are many Large, Mid and Small IT companies present in this City since the last 2 decades.

The Indian governmknt has established a National Taskforce on IT with an aim of

formatting a durable National IT Policy for India

Endorsement of the IT Act, which offers an authorized structw: to assist

electronic trade and electronic operations.

Major investments in India's domestic IT Market

According to Andhra M e s h Government the state's SEZs and Software

Technology Parks of India (STPI) will witness an investment of USS3.27 billion

in the next few years.

VMware Inc, San Francisco-based IT firm invested U S 100 million by 2010 in

India

EMC Corporation's total Indian assets is expected to reach US$2 billion by 2014

Stung by global recession, growth of software exports from Tamil Nadu skidded to 4.99?/0

in the fiscal ended March 2010. According to government data, exports grew modestly

this year compared to the scorching 41.6% pace it witnessed in the year ended March

2009.

Within Tamil Nadu, Coirnbatore, is emerging as the next destination for IT exports after

Chennai, it registered, a growth of 90% with Rs 710.66 crore, compared to Rs 373.76

crore in 2008-09. Exports from Puducherry grew by 31.78%, while growth was'sluggish

in Madurai and Tiruchi, clocking 2.25% and 9.07% respectively.

Software exports fiom India grew by 5.5% for the fiscal ended March 2010. Of this, a

lion's share was from Karnataka, which had exports worth around Rs 76,000 crore.

However, Karnataka too felt the heat of the meltdown as exports grew only by 1.4%,

compared with 23% in 2008-09.

Software exports from Tier-I1 cities in the State have gone up fiom Rs.445 crore in 2008-

09 to Rs.908 crore in 2009-10, according to the Ministry for Information and Technology.

2.6 CONTRIBUTION TO THE NATION'S ECONOMY

Over the last 20 years, the IT-BPO industry has evolved from being a niche sector with a

limited number of companies to one of the largest contributors to the Indian economy in

general and the services sector in particular. The industry has been on a constant high

growth path and the revenues have grown over 15 times from FY 1998 to FY2009.

The immense contribution of the industry can be judged from the impact it has had on the

country's GDP, foreign exchange earnings, contribution to the exchequer arid

employment generation. This industry has also been ktmmmtal in fuelling the growth

of other sectors by employee spending and by attracting investments.

Increasing contribution to country's GDP: The ratio of an industry's output to the

GDP of a country is an important indicator of the impact of that industry on the country's

economy. The high growth rate of IT-BPO industry has helped the industry in steadily

increasing its contribution to India's GDP by five times over FY 1998-2009 to reach 6.0

per cent.

The industry has also played an important role in the growth of the Indian services sactor.

Between FY2002 and FY2009, the contribution of the IT-BPO industry to the Services

segment of GDP witnessed maximum incremental growth of 10 per cent, where

contribution by other segments either declined or remained almost fl at. As a result, while

share of other components of GDP (Agriculture and Industry) declined over FY2002-

2009, share of Services increased from 56.3 per cent to 62.6 per cent.

Looking at the growth trajectory of this industry, its contribution to India's GDP is

expected to increase further in the coming years. However, this would require collective

action fiom all stakeholders.

Growing exports boosts the foreign exchange earnings: Exports, which comprise two-

thirds of the Indian IT-BPO industry revenues, are one of the most important channels for

bringing foreign currency in the country. The IT-BPO exports have grown faster than

total Indian exports over FY 2005-2009 and account for 14 per cent of total exports. IT-

BPO exports have also been instnunental in modifying the export mix of India from

traditional commodities to services. The value of IT-BPO exports is more than the

combined value of exports from tdtional export secton, gems and jewellery, and

textiles.

Strong tax contributions: IT-BPO companies in India and employees on the payroll of

these companies make a significant contribution to the tax collection of the Government

of India The industry contributes almost INR 15,000 crore in direct taxes with INR 8,000

crore contributed from IT-BPO companies and the rest INR 7,000 crore fiom & i t

employees of the industry. Though the industry receives bemiits in terms of lower

effective tax rates and tax holidays for select units, the overall direct tax contribution by

the i n d m to the exchequer outweighs the tax benefit^ received by the STPI units,

which are estimated at INR 10,000 cmre.

Generation of employment: The rapid growth in IT-BPO industry has created large

number of jobs for the expanding employable population. The employment provided by

the industry increased more than 8 times over FY2000-2009 and reached 2.2 million in

FY2009.

Apart from influencing the life of people directly employed within the industry, the IT-

BPO industry impacts the lives of around 8 million indirect employees. The establishment

of an IT-BPO unit provides employment to numerous people involved in ancillary

activities such as catering, security, transportation and house-keeping. A notable point is

that a large segment of the i n d i i t employees belong to the rural areaslsmall towns of

India The wealth earned by these employees is supporting the households and improving

standard of living in under developed regions of the nation.

Fuelling the growth of other sectors: While the industry strongly contributes through

direct channels, it has also played a key role in driving the growth of other sectors such as

real estate, telecom and retail by creating demand for the output generated by these

sectors. IT-BPO employees spent almost INR 76,000 mre in different areas such as

telecom, healthcare, textiles, media and entertainment, and consumer durables.

Attracting PE (Private Equity) 1 VC (Venture Capital) investments: The IT-BPO

industry was at the forefront of investment activity at the start of the decade 2000-09 and

over the years, this industry has played a key role in bringing the attention of P W C

investors to India as an investment destination. The return on investment attained by the

investors in the IT-BPO industry has made a positive impact on the perception of the

international investor community and other sectors are now also opening up to PENC

funding.

In FY2009, the share of IT-BPO industry in terms of number of PENC deals (24 per

cent) and the value of P W C deals (15.7 per cent) has been the highest in FY2009. This

clearly indicates that IT-BPO remains one of the most preferred industries for investors as

its share of investments. The growth in P W C activity has been reflected in the spurt in

entrepreneurship and rise of many start-up units in the technology and IT services

domain.

According to the STPI, about 3,000 new STPI units were registered over 2001-06 (almost

50 units per month), most of which are likely to be set-up by first-generation

entrepreneurs. During the year 2008-09, 572 new units were registered under STP

Scheme and as on March 3 1,2009,8455 units were operative.

2.7 INDIAN IT-BPO PERF'ORMANCE

The industry is estimated to aggregate revenues of USD 73.1 billion in FY2010, with the

IT software and services industry accounting for USD 63.7 billion of revenues. During

this period, direct employment is expected to reach nearly 2.3 million, an addition of

90,000 employees, while indirect job creation is estimated at 8.2 million. As a proportion

of national GDP, the sector revenues have grown from 1.2 percent in FYI998 to an

estimated 6.1 per cent in FY2010. Its share of total Indian exports (merchandise plus

services) increased from less than 4 per cent in FY 1998 to almost 26 per cent in FY2010.

Exports market: Export revenues are estimated to gross USD 50.1 billion in FY2010,

growing by 5.4 per cent over FY2009, and contributing 69 per cent of the total IT-BPO

revenues. Soha re and services exports (including BPO) are expected to account for over

99 per cent of total exports, employing around 1.8 million employees.

Geographic focus: The year was characterised by a strong revival in the US, which

increased its share to 61 per cent. Emerging markets of Asia Pacific also contributed

significantly to overall growth.

Vertical markets: The industry's vertical market mix is well balanced across several

mature and emerging sectors. 2009 saw increased adoption of outsourcing fiom not only

our biggest segment i.e., the Banking, Financial Services and Insurance (BFSI), but also

new emerging verticals of retail, healthcare and utilities.

Service lines: The IT Services segment aggregated export revenues of USD 27.3 billion,

accounting for 55 per cent of total exports. Indian IT service offerings have evolved from

application development and maintenance, to emerge as full service players providing

testing services, hhstmcture services, consulting and system integration. Within that, IT

outsowing exhibited a strong growth, in l i e with the global trend, driveq by increased

spend in the remote infwtmcture management, application management, testing and

SOA (Service Oriented Application) segments. Further, cloud computing took centre

stage this year, as it offered clients access to best-in-class process management at reduced

capital expenditure levels.

Even though growth in BPO was single digit for the fin* time, it stiIl is the fastest

growing segment of the industry and is estimated to reach USD 12.4 billion in FY2010,

growing at 6 per cent. Increased acceptance of platform BPO solutions was the key

highlight, as lndian BPO providers increasingly focused on transforming client businesses

through a mix of re-engineering skills, technology enablement, and new service delivery

methods. Additionally, the engineering design and products development segments that

involve IP driven service capabilities command an exports revenue share of 20 per cent,

generating total revenues of USD 10 billion in FY2010, growing by 4.2 per cent.

Domestic market: Domestic IT-BPO revenues are expected to grow at almost 8.5 per

cent to reach INR 1,088 billion in FY2010. Rise of Indian corporations facing

competitive market conditions through an increasingly globalised Indian market,

increased spend by the government in several e-Governance initiatives, enhanced

connectivity and increased levels of IT spending are key factors, which make the

domestic market lucrative today. Coupled with the fact that companies are looking to

improve competitiveness by adopting global best practices, leverage customised service

offerings and new delivery models such as SaaS (Software as a Service) , which ensures greater cost savings. Domestic IT services is expected to grow by 12 per cent in FY2010.

While hardware spend is largely expected to remain fl at in FY2010, an imminent

hardware rehsh cycle will positively impact revenues next year. The domestic BPO

segment has continued its strong performances over the past few years, growing by 22 per

cent over FY2009, to reach INR 108 billion, driven by large deals in the telecom and

BFSI space.

2.8 INDIAN IT VALUE PROPOSITION

Availability of quality talent at cost effective rates, rapidly developing infrastrudure, an

enabling innovation environment, supportive regulatory policies, and a positive overall

business environment - are all central p i b of India's value proposition

Low cost of delivery- India offas the lowest cost of delivery as compared to other off

shore locations, with Tier-I locations o&ring savings of 70 per cent over source

locations, Tier-IVIII cities in India offer a still larger benefit.

High caliber talent pool- Availability of skilled talent has been India's foremost

attraction as a global sourcing country. India's graduate outtum has more than doubled in

the past decade, with addition of 3.7 million graduates in FY2010, a scale unmatched by

any other couitry. While some gaps in talent suitability exist, they are being addressed

though strong provider-level initiatives and industry-led programmes.

Robust process delivery- The industry has been extremely quality focused, with India

based centres accounting for the largest number of quality certifications achieved by any

country. The industry has also set standards in the establishment and maintenance of be t

practices in corporate governance, and leads in customer satisfaction.

Business environment and infrastructure- Timely government policies and increased

public private participation have played a key role in developing an enabling business

environment for the Indian IT-BPO sector. India's strong education framework ensured

ample supply of technical and non technical talent, while the establishment of Softwa..e

Technology Parks of India (STPI), and later SEZs provided an enabling ecosystem for the

industry to flourish. Infrastructure development has been addressed by both public and

private sector, leading to the development of world class facilities in select cities.

Growing Indian market- India has become, in purchasing power parity terms, the fourth

largest economy in the world. India's economic growth since 1980 has been rapid. Real

average household income has roughly doubled since 1985. With rising incomes,

household consumption has soared and a new middle class has emerged. It is expected

that India will go through a'major transformation over the next decade and emerge as the

fifth largest consumer market provided it continues its high growth path.

Transformational capabilities- The industry has been enhancing its abilities to

trans60rm client businesses though increased R$D spend, focus on IP creation,

development of new technologies in- p m s and business model innovation

and increased domain expertise.

Global footprint- Increased focus on global delivery has required the industry to enhance

its global footprint, which has in tum helped the ind* reach out to new customer

segments and offer new services. Over .the last two years, then has been a 32 per cent

increase in the number of global delivery centres with outreach expanding to 12 new

countries.

Focus on sustainable growth- Going green has become the motto of the industry as it

seeks to develop a business model that is not only competitive but sustainable with

minimum ecological impact.

2.9 IMPACT OF IT SECTOR IN INDIA

The impact of the IT-BPO sector is multi-pronged as elucidated below:

Contribution to India's economy- In addition to a high contribution to the country's

GDP and share of exports, the industry and employees contribute about USD 4.2 billion

to the exchequer. Additionally, the downstream effect of the industry's operating and

capital expenditure was estimated to be around USD 30 billion, while consumer spending

effect from its employees amounted to USD 21 billion in FY2009.

Enabling regional development- Also, the industry has played a key role in regional

development with IT-BPO intensive states accounting for over 14 per cent of respective

state GDPs, with 58 per cent of engineering graduates, and 62 per cent of engineering

colleges. IT-BPO intensive states have 100 per cent higher broadband penetration and 50

per cent higher tele-density than the India average, and also account for 75 per cent of

SEZs.

Empowering diverse human assets- The industry has played its part in empowering a

diverse set of human assets - 30 per cent of employment in the age group 18-25 yrs, 4 per

cent of employment for economically backward people, over 30 per cent of total

employee base are women, 60 per cent of companies offer employment to 'differently-

abled people, while 58 per cent of total employment are originally from Tier-IVIII cities.

Enabling environment for innovation- The industry has been at the forefront of creating

an enabling environment for innovation, with a 29 fold increase in patents over FY2005-

FY2008, and average R&D spend of -1 per cent of revenues.

~nhaneing the brand image of India- The industry has p h y d a key role in h c i n g

the brand image of India, by accounting for over 10 per cent of total FDI in the last

decade, over 200 cross border acquisitions between FY2005-FY2009, and establishment

of over 900 MNC captives in the last decade.

Facilitating social development- The industry has imbibed a strong sense of social

responsibility with over USD 50 million spent in FY2009 towards CSR activities mainly

focused on education, health awareness and ecological development.

2.10 FUTURE OUTLOOK

The beginning of the new decade heralds the slow, but steady end of the worst recession

in the past 60 years. Global GDP, after declining by 1.1 per cent in 2009, is expected to

increase by 3.1 per cent in 201 0, and 4.2 per cent in 201 1, with developing economies

growing thrice as fast as the developed economies. Improving economic conditions

signifying return of consumer confidence and renewal of business growth, is expected to

drive IT spending go&g forward.

IT services is expected to grow by 2.4 per cent in 2010, and 4.2 per cent in 201 1 as

companies coming out of recession harness the need for information technology to create

competitive advantage. Organisations now recognise IT'S contribution to economic

performance extending beyond managing expenditures.

They expect IT to play a role in reducing enterprise costs, not merely with cost cutting but

by changing business processes, workforce practices and information use. Movement

toward SaaS and cloud computing, shared services, and more selective outsourcing will

take firmer shape as near-term priorities to address constrained IT budgets.

Government IT spending continues to rise across the world, focusing on inkstructure,

and security. Other areas of spending include BPM (Business Process Management), data

management, on demand ERP, virtualisation, and efforts to increase and deliver

enterprise managed services on IP networks.

Business process outsourcing spending in 2010 is expected to be increasingly driven by

FCA ( F i and Accounting) segment and procurement, followed by HR outsourcing.

providers will increase their focus on developing platform BPO solutions across verticals

and service.

2010 is also expected to be an IT hardware refiesh year with Windows 7 driving the

replacement cycle, albeit in a highly cost constrained environment. Lower configured

systems, lower ASPS (Application Service Provider), virtualisation and consolidation will

mean that the increase in replacement demand will not necessarily be reflected in

increased levels of spend.

Even though India has a 51 per cent market share of the off shoring market, there is

tremendous headroom for growth as current off shoring market is still a small part of the

outsourcing industry. Significant opportunities exist in core vertical and geographic

segments of BFSI and US, and emerging geographies and vertical markets such as Asia

Pacific, retail, healthcare and government respectively. Development of these new

opportunities can triple the current addressable market, and can lead to Indian IT-BPO

revenues of USD 225 billion by 2020. The industry also has the potential to transform

India by hamessing technology for inclusive growth.

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