Indian IT Sector - Why is the Domestic Market Underserved?

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India boasts of one of the largest IT services manpower in the world. But this strength is not reflected in the state of ICT usage by its domestic corporations. In this document, we put forth the view that the consumption of ICT solutions in Indian domestic business is mainly due to businesses themsleves taking initiative without any support either from government of IT service providers who are too busy serving foregin customers, leaving the vast market to MNCs - who have seen a vast opportunity in serving these markets.

We theorize that is because of the lop-sided incentives provided by a plethora of tax exemptions (on capital goods as well as operating expenses and profits) to Export Oriented Units. These export incentives make it extremely difficult for organisations wishing to service domestic clients because seek to amplify the inherently large margins available in servicing foreign clients. This leads local IT producers without any leverage to attract and retain talent in a highly manpower oriented business. It also deprives local companies of the skills and expertise that the highly trained and experienced work force of the large service providers can bring to the table.

We argue that it is about time the government looked at provided some incentives to domestic IT consumers so as to enable them leapfrog the competition.

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Indian IT Sector - Why is the Domestic Market Underserved?

  1. 1. Indian IT Sector – Why is the Domestic Sector Under Served? – The Policy Impact Industry Presentation at Design and Evaluation of Innovation Policy in Developing Countries (DEIP), New Delhi 2nd - 7th February, 2009
  2. 2. Who are We? Presented by: Sachin Garg With Inputs and Assistance From Arpita Subhash Lokesh V. Manisha Gupta Mukundan Raghavan Rashmi Sarita
  3. 3. Indian IT Sector Industry's growth can be charted as:  Filling the vacuum created by the exit of large  computing multinationals Possible due to a reasonable supply of skilled engineers  and bold entrepreneurs Initially serving the domestic sector  Export oriented IT Services sector  Outsourcing of work – body shopping  Offshoring – 24 hour workday  Cost-Arbitrage  Government Policies and Incentives 
  4. 4. Software Model Replication Across Industry IP Focused Development Consulting Value -> Projects Offshore Onsite Body shopping Time ->
  5. 5. Policy Instruments for the IT Sector STPI Scheme  Single Window Clearance  Tax Exemptions, duty drawback schemes,  increased depreciation rates etc. for Export Oriented Units (EOUs) Dedicated and priority telecom access  Land at discounted rates 
  6. 6. Spillovers Direct  Infosys Technologies' “FINACLE” product being  used as CORE Banking solution ITC e-choupal project for agricultural production  Increased e-Governance projects  MCA21 project executed by TCS  Bhoomi project of the Govt. of AP 
  7. 7. Spillovers Indirect  Setup and creation of a large number of education  and training institutions to build capacity & feed into the industry. Increased societal awareness of ICT leading to  Increasing usage of the Internet and pervasiveness of  e‑commerce Increased computer literacy  Creation of a latent domestic market for IT Services  Use of ITeS for the domestic sector – domestic call  centres, telemarketing etc.
  8. 8. Spillovers Adverse  Diversion of a large tract of highly trained  Science/Engineering/Technology graduates away from core areas to IT Creation of a large quantity of “un‑employable”  scientists and engineers by emphasising quantity over quality Lack of students pursuing higher education in  Indian institutes Rising social inequality in the IT hubs  The “Digital Divide” 
  9. 9. SWOT Analysis STRENGTHS WEAKNESSES Productivity is not keeping Mature Industry –   the desired pace substantially high on the Value Chain Skewed structure – small  number of large firms Strong & Vibrant domestic  IT market Manpower supply constraints  OPPORTUNITIES THREATS Rising factor costs Global vendors playing in the   domestic market resulting in lowering advantages on the cost- Leapfrog opportunities –  arbitrage alone requires strategic direction and long-term thinking Emerging Competition  from Latin America, Bottom of Pyramid  Eastern Europe and China Innovation
  10. 10. ICT Systems in Domestic Industries Under-developed and weak ICT systems in  Indian Firms, especially the MSME sector A well-developed ICT system is inherent to the  firm's success in the marketplace Indian Firms need to invest in IT Systems  These gaps are HUGE  Retrofitting is not required – companies can  leapfrog multiple generations No-need to repeat past mistakes – pick and choose  the best technologies
  11. 11. The Missing Link The large IT Services companies are reluctant  to service the domestic IT sector Why are they needed?  Immense domain knowledge across verticals –  BFSI, retail etc. Well-developed processes and high-quality delivery  systems Well-trained, highly qualified and experienced  manpower Wherewithal to invest in and gestate projects that  may not have immediate pay-offs
  12. 12. The Missing Link (2) Why Companies?  Domain knowledge is largely tacit knowledge  acquired through customer linkages Knowledge sharing across the industry is virtually  non-existent owing to very high customer linkages as opposed to industry linkages
  13. 13. Why the Reluctance? Boomerang effect of Tax Breaks and other  EOU subsidy policies Effective tax rate as low as 6% owing to  Duty drawbacks  Concessional or Zero Corporate Income Tax on STPI  and SEZ units Which Leads to  Huge Margins on servicing Exports  Which in turn, leads to  Huge Pressure to serve the International Market and  show good quarterly results Billing based, short-term thinking mentality rather than an  effort to think long-term
  14. 14. Some Improper Practices Many “new” SEZ projects are in fact re-  packaged instances of continuing projects Domestic companies that wish to use the IT  Services Companies do it through foreign based shell companies
  15. 15. Summary Innovation Model Innovation Based Service Providers Research & Development Encourage Research Build Domain Expertise Innovation IP Generation Co-Development & To & Management Cross Licensing Happen Incubation & Technology “Intrapreneur” Portfolio Manufacturing
  16. 16. Recommendations Insufficient mentoring and networking support for start-ups and  entrepreneurs Lack of entrepreneurs focussed on IP development in emerging  technologies Lack of knowledge sharing between IT-ITES firms and key user  industries Severe lack of funding at the seed / start-up stage  No platforms for all stakeholders to interact  No market-place for innovation trading in India  Tenuous partnership between industry and academia  Lack of meaningful collaborations between industry and  research institutes Source: Nasscom-BCG Innovation Report, 2007 
  17. 17. Re-Thinking Policy Re-think the impact and effect of Tax Subsidies  They cannot be forever  Withdraw or curtail tax breaks for Export Oriented  Software Units – the industry is now mature Implement certain measures and incentivise  industry to service the latent domestic demand Encourage National Standards and make  standards conformance mandatory and a pre- requisite for public and other procurement Standardise E-Governance Systems and  implement them on a large scale

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