IT Industry in India after Liberalization


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IT Industry in India after Liberalization

  1. 1. Information Technology Industry after Liberalization (1991) Submitted by Ali Sadhik Shaik
  2. 2. 1. Introduction and Objective India has come out as the best ever growing IT centre in the globe, its development conquered by Information Technology software and services resulted in global recognition. The objectives of this report are to (a) Review the IT industry after 1991 liberalization. (b) Highlight the statistics of growth in IT industry and factors responsible for development. (c) IT industry clusters and their formation. 2. Background and Industry Growth In this section, we will be looking at the IT industry from 1991 post- liberalization to till date and the factors contributing for the significant growth. India did not see a development in IT industry during mid 70’s and this period was not so effective due to restricting imports of computer peripherals, high import tax, strict Foreign Exchange and Regulation Act limiting its allocation. A notable turning point in the Indian software and IT industries policy environment was when Shri Rajiv Gandhi became PM in 1984. The major policy reforms were to recognize software as an industry to invest and make it eligible for incentives as other domestic industries, reducing import tariffs and announcement of CSDT policy which liberalizes exposure to the latest technologies to compete globally and to capture a share of global software exports. In 1986 when all state-owned banks were standardizing banking process, there came a need of using UNIX over MS-DOS and which created a puzzle for local vendors to shift towards UNIX based platforms and made India become “Unix country”. Another important event in mid 80’s was when GE’s chairman Jack Welch visited India in 1989 which led to GE’s technology partnership with India. Till this period policies were able to remove the barriers in IT industry but not completely. In 1990, Department of Electronics (DoE) introduced the concept of Software Technology Park (STP’s) in India. STP’s were allowed with basic infrastructure, dependable power supply, tax exemptions and also given 100% ownership for the foreign firms. 1990’s development was mainly because of STP’s. MRTP Act was replaced de-facto in 1991 which allowed unbiased trade practices there after. During this period India saw dramatic changes in heavy investments on higher education and booming privately funding engineering colleges which made India ready with technical manpower resources. South Indian states saw drastic changes in higher education after 1983, where liberalization made a major impact on privately funded colleges. This created IT clusters to form in and around Bangalore, Hyderabad, Chennai, New Delhi, Mumbai and Calcutta. A significant break through factor in IT industry development was by Y2K. Indians were already gained expertise in converting mainframes and DOS PC’s into UNIX platform. Y2K created a battle ground for Indian software professionals and which prepared them to compete and show their talent globally. High investments in higher education and formation of prestigious engineering colleges, policy reforms to allow foreign investments in 1991 enabled for significant growth in development. From just programming and documentation work India emerged to implementation, R&D, out sourcing and diversified itself to hidden depths of IT industry to become a global hub for software and IT enabled services.
  3. 3. 3. The India Advantage The attractiveness in India and factors favorable for growth can be discussed in different perspective, but below are the most important factors for India. • Vast Access to Skill: India is having the largest base of knowledge and skill accounting for 14 million graduates. One million skilled technical man-powers are available in India. It contains the largest pool of English speaking resources useful for IT and ITeS. • Quality Orientation: Indian companies are marching towards quality oriented ness and already 80 out of 117 SEI CMM (Capability Maturity Model) level 5 companies in the world are from India. Companies are towards ISO 9001, Six Sigma, and Just-in-Time and COPC certifications to maintain quality work so that they attract more foreign clients. • Cost Advantage: Low wage rates and much less cost of living compared to other developed countries, India became a destination of high technically skilled cheap manpower provider. By outsourcing to India, companies can reduce their expenditure and save 40-50% on overall they spend. • Government Policies: Liberalized FDI Policies, tax exemptions, providing basic infrastructure like STP’s and making eligible for subsidies in energy resources, single window system, support by local state governments in attracting MNC’s is creating a interest in IT companies towards India. • Developed Industry Eco-system: The support industries mainly like security services, HR payroll, recruitment and logistics are already in growth stage which creates a favorable environment for IT growth. • Venture capitalists and Private Equity: Good source of venture capitalists and private equity providers encourage local entrepreneurs to develop their ideas and create truly global companies. • Legal framework and Security commitments: The information Technology Act, 2000 by Indian government acts as a frame work to address legal issues and security concerns related to computer crimes and IT protection.
  4. 4. 4. IT Industry Statistics India has been exporting IT and ITES to about 95 countries around the globe. More than 61% of IT product and service are exported to North America, which is followed by Europe of 26% and by Japan and others of about 11%. In the year 2008, it is also estimated that about US $4 to 5 billion of foreign direct investment and 2.2 million jobs in this sector. By 2010, the IT export is projected to US $60-75 billion and revenue of more than US $100 billion. Normally export contributes 65% of IT revenue. Below table gives the statistical data of IT industry. 2007-‘08 (in USD billion) 2003-‘04 2004-‘05 2005-‘06 2006-‘07 (projected) Export 12.8 17.7 23.6 31.4 ~ 40 Domestic 3.9 4.8 6 8.2 ~ 10 market Revenue 16.7 22.5 29.6 39.6 50 % contribution 3.5 4.1 4.8 5.2 7 to national GDP % annual 28.2 33.7 31 30 ~ 27 growth in revenue *Source: NASSCOM. Share of on-shore & off-shore: This graph clearly states that India is marching towards off-shore. 29% % of revenue 36% 45% 57% 74% 64% 55% 43% 2000 2002 2004 2006 Off-shore On-shore • IT and ITES exports from the top-10 organizations achieved US$ 15 billion in 2006-07. The top 3 firms INFOSYS, TCS and WIPRO earned about US$ 8.7 billion. • IT segment in India sustains the position of employing large number of people, directly and indirectly providing jobs for more than 1.6 million and 6 millions in related industries respectively.
  5. 5. 5. Clustered Indian IT industry Technological revolutions have struck various developing nations creating an opportunity for them to develop further. India being one such opportunistic country, with a fast growing economy grabbed a major share in the IT revolution by showing a high degree of competition in software development and it enabled services. Evidences show that the IT industry had experienced a rapid growth in the early 90’s and became the major player in the Indian economy. What lead to this drastic revolution? The southern India’s part of contribution in software export has increased from 25% in 1991 to 45% 2004. Chennai was emerged in the early periods which were later over taken by Bangalore, Hyderabad and Pune; recently Kolkata became the key player. To promote the growth of IT industry both central and state government has provided with the best of infrastructures, which not only gives enough space but also communication links and various social amenities. The software parks present in these cities have also allowed the firms to develop clusters. Following are the few selected cities in the country which is serving as the Silicon Valley of India, and why clustering of IT industry occurs in these cities. 5. a. IT Cluster in Bangalore: Bangalore with more than 1,200 software companies, working in areas such as computer chip design, systems software’s and communications, is serving as the Silicon Valley of Asia. With high degree of MNC and more than 200 foreign firms operating it was ranked the fourth as a global hub for technological innovations. Bangalore has a rich supply of both economic and non economic factors that makes them preferable as business location. It is also noted for its highly skilled IT professionals relatively with lower cost. Infrastructure and climatic conditions have always been at its best even in its early days for conducting experiments in the field of defense and electronics. And there is also good network of educational institutes providing the best of human capitals for the software industries. Investments by both Government and various private institutions for the infrastructures, training centers, and testing laboratories have contributed to the development. Bangalore with more and high quality of IT companies made it possible for overseas companies to meet many potential demands. Local Government: The contribution of local government has also contributed largely for the development of the Industry in Bangalore. Various Policies attracted the foreign firms to invest in Bangalore. In 1997 Karnataka was the first government come up with policies that promoted the IT Industry like Tax concessions and other benefits for IT investors. 5. b. IT clusters in Hyderabad: Hyderabad started establishing its market by setting up the Software Technology Park of India (STPI), and with more than 1154 software firms. Among which the top ten firms contributed for about 58% of the export and the top seven firms exported for about one billion rupees. More than 500 firms have registered with STPI and once they start functioning it will be a major boost for the IT industry cluster in the city. Same as Karnataka, AP government is also targeting many MNC and Indian companies as well by providing good infrastructure, hidden subsidies, concessions and other
  6. 6. benefits by project they started named e-governance project lead by the state government. Leaders of the State: Government by an entrepreneurial visionary, the Chief Minister of AP, Mr. Chandra Babu Naidu paved the way for many MNC’s to setup their firms in the city, which turned Hyderabad as the knowledge hub of India by upgrading economic and social infrastructure. This set a business opportunity for various companies even like Microsoft. Later on the government joined with the private industries and set up various educational institutes, and high quality industries in the field of IT, Biotechnology, Business management and life sciences. Apart from that seminars and exhibitions were conducted in various countries like US, Germany and UK to build a brand image of the city leading to cluster of IT industry in the city. He took up personal interest in negotiating with many multi national firms. AP was the first government to come up with a policy for the IT firms in 1999 and separate ITES policy on 2002. When ISB setup its institution in Hyderabad, within three years the adjacent areas around became the IT hub. The recent strategy shows that government is focusing on setting up high quality educational institution related to IT. It resulted in creating an atmosphere for a global business and investment in IT sector. A lot of effort has been put in shaping up the city and the state as a whole for the knowledge and service driven industries to grow. 5. c. IT clusters in Kolkata: The first IT firms were setup in the mid 1980’s which did not receive any support from the government. Though the government had set up the software technology of Kolkata in the year 1992-93 after liberalization, later on it failed to support its growth. But in the Last five years Kolkata had become the major cluster for the IT industry with 400 companies registered and 215 operating which lead to a development of 78% growth with 22 billion rupees in export. STPK has grown because unlike other cities Kolkata had been doing well in the field of power supply, talent pool, and cost of living which are the key enablers for the potential growth of IT firms. The government has started off with a project to make the city the largest IT hub by 2007 and also to build a similar electronic city for IT firms besides the Kolkata airport. Entrepreneurial leadership of the State: By the year 2002 it was contributing only 3-4 percent of the countries IT service export. But later the Government was taken up by the eminent leader Buddhadeb Bhattacharya, who concentrated on the development of IT. It has been envisioned by the year 2010 that Kolkata will be among the top three cities contributing for the maximum of the countries IT service exports. The government has been working hard to erase away the negative image and promote both Indian and multinational firms, to invest in the city even by putting up road shows abroad. They also gave importance to the E- governance project which would not only improve the administration but also create an opportunity for good business and investments in IT.
  7. 7. 6. How IT affects Indian economy NASSCOM says that the IT-ITES segment in India has registered US $39.6 billion in tax income in the year 2006-07, and shown 30.7 % increased growth than projected 27 per cent. The industry projected revenue for 2007-08 is of US $49-50 billion at a growth rate of 24-27 per cent. By the way, the IT industry is marching a way ahead compared to the global market grows about 10% a year. According to NASSOM report every rupee spent by IT sector will result in two rupees output in the economy and will create four jobs in economy. IT sector is recognized as one of the fastest growing sector in India when compared to other sectors. 5.2 % is the total amount IT industry has contributed to the national GDP. At 52 percent CAGR, India is already marching successfully to in this sector and also was able to get world recognition in this particular sector. 7. Conclusion The evidence is clear that IT industry is significantly growing in last 20 years i.e. after liberalization accounted by many factors. Highly skilled manpower, cheap wages, initiatives in educational sector growth to provide technical resources, government initiatives like formation of Ministry of Information technology, STP’s, DoE, allowing FDI (100% FDI in BPO’s), income tax exemption and duty free exports created a favorable environment in India to be a global IT hub.
  8. 8. 8. References • Sarala V.Nagala. (2006). India's Story of Success. Stanford Journal of International Relations. • K Ramachandran, (2004).ISB. Formation of Information Technology clusters: How late movers follow models different from early movers presented at NSF workshop Bangalore. • T.N. Srinivasan, Samuel C. Park, Jr. Professor of Economics, Yale University. (2005, September). Information Technology enabled services and India’s growth prospect. • Sankaran Krishna. (2005). India: Globalisation and IT Development. South Asian Journal. • Ashok Jhunjhunwala (2003). Can Information Technology Help Transform India? IIT Madras. • KPMG (2006, January) Report on Indian IT Sector. • –The India Brand Equity Foundation. • – National Association of Software and Service Companies. • Government of India Ministry of Communications & Information Technology Department of Information Technology (2003). quot;Task force on meeting the Human Resources Challenge for IT and IT enabled Servicesquot;.