information technology (it) industry in...
TRANSCRIPT
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Chapter – 4
INFORMATION TECHNOLOGY (IT) INDUSTRY IN INDIA
4.1 Introduction
India is one of the fastest growing economy of the world. India’s GDP at
current market prices is projected at Rs.46,93,602 Crore in 2007-08 by the
Central Statistical Organization (C.S.O.) in its advance estimates (AE) of
gross domestic product. Thus in the current fiscal year the size of the Indian
economy will cross US$1 trillion. At the nominal exchange rate (Average of
April – December 2007) GDP is projected to be US $1.16 trillion in 2007-08.
Per capita income at normal exchange rate is estimated at US$ 1021. India’s
GDP at Purchasing Power Parity (PPP) is estimated at US $5.16 trillion or US
$ 3.19 trillion depending upon whether the old or new conversion factor is
used. In the former case India is the third largest economy in the world after
the United State and China, while in the later it is the fifth largest (behind
Japan and Germany)
In 2006-07, the performance of the information technology enabled services
business process outsourcing (ITES – BPO) industry was marked by double
digit revenue growth, steady expansion into newer service lines an increased
geographic penetration and an unprecedented rise in investment by
multinational corporation (MNCS). Total export revenue of IT- ITES industry
have grown from US $ 23.6 billion in 2005-06 to US $ 31.3 billion in 2006-07,
a growth of 32.6 percent. A total of 90 Indian IT companies were certified at
SEI CMM level 5 by December 2006. Majority of the fortune 500 and Global
2000 corporations are sourcing IT – ITES from India. Over the last two – three
years, a number of reputed companies in electronic / IT / Telecom hardware
manufacturing like Nokia, Motorola, Foxconn, Flextronics, Aspocomp,
Samsung, LG, Ekoteq, Ericsson, Alcatel, Tessolve and Dell have either setup
their units or are in the process of investing in the country. India is rapidly
becoming an R & D hub. All the top 10 global fables design companies have
operations in India and 17 of the top 25 semiconductor Companies worldwide
have a strong presence in India. The total number of professionals employed
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in the IT – ITES sector grew from an estimated 12,87,000 in 2005-06 to
16,21,000 in 2006-07. In addition IT- ITES is estimated to helped create an
additional 60 lakhs job opportunities through direct and induced employment
in telecom, power, construction facility management, IT transportation,
catering and other services.
Table 4.1 Growth of production and exports in electronic industry
Items Electronic Production (Rs. Crores)
2002-03 2003-04 2004-05 2005-06 2006-07*
Consumer electronics 13,800 15,200 16,800 18,000 20,000
Industrial electronic 5,550 6,100 8,300 8,800 10,400
Computers 4,250 6,800 8,800 10,800 12,800
Communication &
broadcasting equipments 4,800 5,350 4,800 7,000 9,500
Strategic electronics 2,500 2,750 3,000 3,200 4,500
Components 6,600 7,600 8,800 8,800 8,800
Sub Total 37,500 43,800 50,500 56,600 66,000
Software for exports 46,100 58,240 80,180 1,04,100 1,41,800
Domestic software 13,400 16,250 21,740 29,600 37,800
Total 97,000 1,18,290 1,52,420 1,90,300 2,45,600
Electronic exports in crore
Electronic hardware 5,600 7,700 8,000 9,625 11,500
Computer Software 46,100 58,240 80,180 1,04,100 1,41,800
Total 51,700 65,940 88,180 1,13,725 1,53,300
Source: Ministry of Communications & Information Technology, Government
of India
* Estimated
Policy developments and new initiatives in information Technology
The Special Incentive Package Scheme (SIPS) to encourage investments for
setting up semiconductor fabrication and other micro and nano technology
manufacturing industries was announced in March 2007. The incentives
admissible would be 20 percent of the capital expenditure during the first 10
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years for units located in Special Economic Zones (SEZs) and 25 percent for
units located outside SEZs.
A Task Force has been constituted to promote the growth of electronics IT
hardware manufacturing industry.
The Department of Information Technology has unveiled various components
of the National e-Governance Plan (NeGP) covering 27 Mission Mode
Projects (MMP) and eight support components to be implemented at Central,
State and Local Government levels, at an estimated cost of Rs. 23,000 crore
over the next five years. The Government has approved the approach,
strategy, key components and implementation framework for NeGP with the
vision: "Make all Government services accessible to the common man in his
locality through common service delivery outlets and ensure efficiency,
transparency and reliability of such services at affordable costs to realize the
basic needs of the common man."
The Government has approved a scheme for facilitating establishment of 1
lakh broadband Internet enabled Common Service Centres in the rural areas
in the public-private partnership mode.
The Government has approved a scheme for establishing the State Wide
Area Networks (SWANs) across the country in 29 States / 6 UTs with a total
outlay of Rs. 3,334 crore with Central assistance component of Rs. 2,005
crore over a period of five years. The scheme envisage to provide Central
assistance to Sates / UTs for establishing SWANs for States / UTs
headquarters up to the block level with a minimum bandwidth capacity of 2
Mbps.
The Department of Information Technology is setting up Nano Electronic
Centres at the Indian Institute of Technology, Mumbai and the Indian Institute
of Science, Bangalore with an outlay of about Rs. 100 crore to carry out R&D
activities in nano-electronics devices and materials.
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The software tools and fonts for 10 Indian languages, namely Hindi, Tamil,
Telugu, Assamese, Kannada, Malayalam, Marathi, Oriya, Punjabi and Urdu,
have been released in the public domain.
The Information Technology Amendment Bill, introduced in the Parliament in
December 2006, was referred to the Parliament Standing Committee which
has presented its report to both Houses of Parliament.
Table 4.2 Sector attracting highest FDI flows
Sector Amount of FDI Inflows Cumulative infolws
(April 2000 to Nov 2007)
Share of infolws (%)
2004 -05 (Apr - Mar.)
2005 -06 (Apr - Mar.)
2006 -07 (Apr - Mar.)
2007 -08 (Apr - Mar.)
2004 -05 (Apr - Mar.)
2004 -05 (Apr - Mar.)
Service sector a 1,986 2,399 21,047 9,121 38,228 19.86 20.22
Computer Software
& hardware
2,441 6,172 11,786 4,217 30,760 15.98 9.35
Telecommunicationb 570 2,776 2,155 3,963 15,607 8.11 8.79
Construction c 696 667 4,424 3,593 9,989 5.19 7.97
Automobile Industry 559 630 1,254 1,191 8,350 4.34 2.64
Power 241 386 713 206 5,958 3.09 0.46
Chemical except
fertilizers
909 1,979 930 733 5,956 3.09 1.63
Housing & Real
estate
0 171 2,121 5,161 7,573 3.93 11.44
Drugs &
pharmaceuticals
1,343 760 970 353 4,633 2.41 0.78
Metallurgical
industries
836
654 787 1,909 4,572 2.37 4.23
Source: Department of Industrial Policy & Promotion, Government of India.
a - financial & non-financial services.
b - radio paging, cellular mobile, basic telephone services.
c - construction Including roads & highways.
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4.1.1 Information Technology (IT) Industry in India
Over the past decade, the Information Technology (IT) industry has become
one of the fastest growing industries in India, propelled by exports (the
industry accounted for more than a quarter of India's services exports in 2004-
05). The key segments that have contributed significantly (96 percent of total)
to the industry's exports include - Software and services (IT services) and IT-
enabled services (ITeS) i.e. business services. Over a period of time, India
has established itself as a preferred global sourcing base in these segments
and they are expected to continue to fuel growth in the future.
Exports contribute significantly to the Indian IT industry's revenues with key
segments being IT services and software and ITES- BPO
Even assuming a conservative growth rate of 20 percent, Indian IT-ITeS
exports could reach US$ 42bn by 2010.
These segments have been evolving over the years into a sophisticated
model of operations. Indian IT and ITES companies have created global
delivery models (onsite, near shore, offshore), entered into long term
engagements with customers, expanded their portfolio of services offerings,
built scale, extended service propositions beyond cost savings to quality and
innovation, evolved their pricing models and have tried to find sustainable
solutions to various issues such as risk management, human capital attraction
and retention and cost management.
Demand dynamics
A key demand driver for the Indian IT services and ITeS industry has been the
changing global business landscape which has exerted performance
pressures on multinational enterprises.
While companies initially sourced from the Indian IT and ITeS industry for
cost, quality and enhanced competitiveness have induced them to continue
and expand. Some companies have also viewed sourcing differently (beyond
cost and quality) and achieved non-traditional benefits of sourcing from India.
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Range of service offerings
The range of services offered by the Indian IT services and ITeS industry to
these global corporations range from simple tasks to increasingly complex
activities and span across the entire value chain of a typical organisation
Figure 4.1 :- Range of Service offering
What gets sourced
Information Technology
IT services
R & D and software products
Business process outsourcing
Customer interaction services
Data entry and transaction process
Content development
Knowledge Service & engineering design
Data mixing
Performance Analysis
Financial Modeling
Research
Design
Talent
Internal audit
Management
Traders
Internal consultants
People Projects Processes Products
Source : India brand equity foundation (2006), Information Technology, pp.3
Sourcing models
A wide range of sourcing models have evolved for sourcing IT and ITeS
services from India based on the required capabilities as well as risk profiles.
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Figure 4.2 : Sourcing Models
Hom
e co
untr
y
LO
CA
TIO
N
Onshore e.g. via work
permit
Onshore e.g. via work
permit
Co-source BOT
strategic stakes
Indi
a
Offshore e.g.
outsourcing
Offshore e.g.
outsourcing
OWNERSHIP
In – house Outsourced
Source : ibid, pp. 4
There is an increasing trend towards a global delivery model (higher
proportion of offshore in the onsite - near shore - offshore mix) as well as a
preference for captives and co-sourcing arrangements, though mature
captives are gradually tending towards becoming third party service providers.
4.1.2 The India advantage
Various country comparison studies have established the attractiveness of the
Indian IT services and ITeS industry.
The key attributes that have enabled India to establish itself as a preferred
sourcing base include:
Vast Access to skill base
Large pool of resources for IT and ITeS operations - 14 million
graduates, 1 million technical resources, one of the largest English
speaking manpower in the world.
Availability of quality delivery management talent from international
banks and consulting firms.
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In the future, while the increasing demand for resources may put pressure on
the resource base, initiatives are currently underway to enhance the supply of
quality human capital in the country.
Strong quality orientation
ISO9001, COPC. 6 sigma are some of the established quality
initiatives.
90 out of the world's 117 SEI CMM Level 5 companies are from India.
Availability of high quality infrastructure
Concerted efforts to provide dedicated, international quality, cost
effective real estate at software parks, Special Economic Zones (SEZ)
and knowledge sector industrial estates.
Availability of high quality international and national dedicated telecom
infrastructure with high level of redundancies insulating centres from
Public Switched Telephone Network (PSTN) quality.
Availability of multiple levels of backups providing insulation from public
system issues, if any.
Cost advantage
The cost impact of sourcing from the Indian IT and ITeS industry can be
significant due to the lower wages and lower cost of living.
While the increasing demand for resources is gradually adding pressure on
labour costs, companies within the industry are attempting to sustain cost,
competitiveness through appropriate location choices and revamped human
resource management practices.
Enabling policy environment
The Government of India is taking proactive measures to encourage
investments in this sector. Significant measures and incentives include a
liberalized FDI regime, single-window clearance facility, income tax holiday
and customs duty exemptions. State governments too are demonstrating a
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proactive approach towards attracting and facilitating investments and are
providing support for the development of specialized infrastructure, focusing
on development of a larger base of cities/towns to meet the needs of the
industry and undertaking measures to continually enhance the supply and
quality of manpower.
Mature industry eco-system
The support infrastructure for the Indian IT and ITeS industry which includes
specialized firms for functions such as recruitment, training, property
management, security, fleet management. book-keeping and payroll as well
as industry associations has evolved over the years.
Availability of private equity
Presence of a mature private equity industry to support local entrepreneurs
(organizations such as Warburg Pincus, General Atlantic, CDC).
Commitment to address security concerns
Indian companies as well as the government have been active in adhering to
international security standards such as ISO 17799, BS7799, COBIT and
ITSM. The required legal framework has been laid down by the government
and a revamp of the country's Information Technology Act, 2000 is expected
in the near future. The revised legal framework is likely to include provisions
against a new range of computer crimes to cover areas like privacy,
information protection and harming computer systems through viruses.
A majority of IT / ITeS activity in India is concentrated in seven cities / clusters
in India. With concerted development efforts of a wider base of cities / towns,
the geographical spread of IT / ITeS activity is gradually expanding to cover
cities such as Ahmadabad, Jaipur, Coimbatore, Kochi, Trivandrum,
Chandigarh, Mysore, Mangalore, Madurai and Bhubhaneswar.
Various companies have chosen to locate their operations in one or more of
these seven clusters based on parameters such as:
Leveraging local experience and assets
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Spreading to reach right skills at right costs
Business continuity requirements.
Information Technology Clusters
City / Cluster Key companies in the location (Illustrative and not exhaustive)
Mumbai / Navi
Mumbai / Thane
ABN Amro, Morgan Stanley, Citigroup, Accenture, Tata Consultancy
Services, World Network Services (WNS)
(Gurgaon / New Delhi
/ Noida)
Genpact (formerly GE Capital International Services), Sapient, HCL
Technologies, American Express, McKinsey research centre, E-Funds
Corporation
Bangalore JP Morgan, Goldman Sachs, Siemens, Infosys, Wipro, Tata
Consultancy Services, Cognizant Technology Services, Genpact
(formerly GE Capital International Services)
Chennai Citigroup, Standard Chartered (Scope International), World Bank,
Ford, Hewlett Packard, AIG, Infosys, Tata Consultancy Services,
Cognizant Technology Services
Hyderabad/
Secunderabad
HSBC, Microsoft, Franklin Templeton, Infosys, Wipro, Tata
consultancy services. Cognizant Technology Services, Genpact
(formerly GE Capital International Services)
Pune World Network Services, Cognizant Technology Services, HSBC,
Veritas, Sybase, AXA, Mellon Financial
Kolkata HSBC, Genpact (formerly GE Capital International Services), IBM,
Infosys, Tata consultancy services, Cognizant Technology Services
Source: ibid, pp.8
4.1.3 Key Opportunities
Opportunities in the Indian IT services and ITeS industry
The opportunities in the Indian IT services and ITeS industry can be classified
along the following broad categories:
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IT services
The range and depth of capabilities have enabled the Indian IT services
industry to gain a respectable position in the global IT services market (Indian
industry expected to achieve market share of almost 30 percent by 2008 in
key segments such as application development and application outsourcing
as per NASSCOM-McKinsey estimates). The key factors that have enabled
the industry's success are end-to-end solutions capability, focus on stringent
processes and quality of execution, global delivery model (combination of
onshore and offshore with an increasing offshore component), high-end,
mission critical service capabilities and strong project management
methodologies and expertise.
Table 4.3 Opportunity segments with IT services
Project oriented services IT outsourcing Support and training.
IT consulting
Systems integration
Custom application
development &
maintenance
Network consulting and
integration
IS outsourcing
Application outsourcing
Network Infrastructure
management
IT training and education
Hardware support and
installation
Packaged software
support and installation
Source : ibid, pp.9
Some multinational corporations who have leveraged the India advantage for
IT services (either through a captive unit or through outsourcing include
Siemens, Citigroup, Microsoft, Cisco, Hewlett Packard, Nortel, Boeing, Airbus.
R&D services and software
Indian R&D services and software product exports, though at a nascent stage,
is expected to grow rapidly (growth forecasts are US$ 8-11 bn by 2008-10:
Source - NASSCOM). The key opportunity areas within R&D services and
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software products include embedded software and systems and offshore
product development.
A number of large multinational corporations source a part of their embedded
system requirements from India either through captive design centres or
through vendors. Some of these companies include Samsung, Texas
Instruments, Delphi, STMicroelectronics, Motorola, Intel, Analog Devices and
National Semiconductor (Illustrative and not exhaustive; Source NASSCOM).
Apart from multinational corporations sourcing requirements from India. there
are over a 100 Indian companies operating in the embedded software
solutions domain. Also, in addition to the export of products developed by the
offshore units on behalf of MNCs a few Indian vendors (e.g. Infosys, I-Flex
Solutions) have successfully expanded their revenue streams to include their
own software products.
Customer interaction services
Customer interaction services is one of the largest segments within the Indian
ITeS industry contributing almost 30 percent to the total revenues in 2004.
The predominance of customer interaction services is gradually decreasing
due to pricing pressures as well as increasing depth of sourcing relationships
which have include a new range of service offerings. However, while the
share in the total pie may be decreasing, the outlook for this segment is still
favorable due to strong demand from customers who have not sourced
customer interaction services in the past as well as expansion of the customer
care service offering to include more complex activities such as higher-end
technical support.
Select multinational corporations who have leveraged the Indian advantage
for business process outsourcing services include Citigroup, American
Express, General Electric and Hewlett Packard. (Illustrative and not
exhaustive; Source-News reports).
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Transaction processing
Cost advantage, access to an abundant skill pool and commitment to quality
of delivery have enabled the rapid growth of this segment. The range of
capabilities sourced from India in business process outsourcing has been
illustrated below:
Range of capabilities sourced from India
Low end High end
Data entry /
conversion
Rule set processing
Problem solving Full process
outsourcing
Source documents
received via digital
imaging or voice
form. Data entry/
transcription at
offshore location into
application packages
Processing of transactions
as per predefined set of
rules. Rule definition
considers various
exception situations and
tasks to be executed for
every such situation.
Includes Report
preparation, statementing.
This involves some
decision making.
Includes
troubleshooting and
determination of
solutions for
identified problems.
May require domain
expertise.
Service providers
becomes owner of
process from end
to end. Requires
domain and
industry expertise.
Source : ibid, pp.11
Select multinational corporations who have leveraged the Indian advantage
for business process outsourcing services include General Electric, Citigroup,
Standard Chartered Bank, ABN Amro, Bank of America, American Express,
British Airways and IBM.
Content development
The Indian ITeS industry offers a range of services to various multinational
organisations catering to their digital content development needs of website
management, production and delivery of multimedia over new media,
including CDs, DVDs and Internet TVs, movie production and gaming. Key
players offering / sourcing content development services from India include
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Walt Disney, Laserwords and Techbooks (Illustrative and not exhaustive;
Source-News reports).
Knowledge services (Non- IT)
Recent years have witnessed a spurt in sourcing of knowledge based
services as the industry has moved up the value-chain and built high-end
capabilities. While this trend is particularly evident in financial services
sourcing of knowledge services has also gained ground in industries such as
pharmaceuticals and biotechnology, entertainment and aerospace.
The key opportunity areas and their market potential have been
illustrated below:
Opportunity 2003
(US $ Bn)
2010
(US $ Bn)
CAGR
(%)
Basic data search, integration and management 0.3 5.0 50%
Market research, competitive intelligence 0.02 0.4 54%
Equity research, actuarial analytics and data modeling - 0.4 NA
Animation and simulation 0.1 1.4 46%
Remote education, publishing - 0.3 NA
Medical content and services - 2.0 NA
R&D (other non-IT areas 0.1 1.0 39%
Biotech and pharmaceuticals 0.28 3.0 40%
Source: ibid pp.12
Select multinational corporations who have leveraged the India advantage for
knowledge services include General Electric. J P Morgan, Citigroup.
American, Express, McKinsey, Pfizer, and A C Nielson.
Engineering design
A significant emerging opportunity for the Indian ITeS industry is in the realm
of engineering design which is expected to grow to US$ 4 bn by 2010
(Source: Evalueserve). While the scope of engineering design covers a broad
spectrum of complexity levels, different players have emerged across the
spectrum by building the requisite capabilities.
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Key players offering / sourcing engineering design services from India include
Bechtel, Ford Motor Company, General Electric,. General Motors and
Datamatics.
4.1.4 Key emerging trends impacting the Indian IT services and ITeS
industry
While the Indian IT services and ITeS industry is poised for rapid growth over
the next few years, there are emerging trends which are likely to impact their
operating models and the industry players would have to appropriately adjust
their operations to capitalize upon / manage these trends.
Some key emerging trends include:
Demand related
Offshoring is now mainstream and increasingly an integrated approach
is being adopted across service types. Also with more experience with
the concept, offshoring projects are moving beyond pilots and there is
better and coordinated planning, execution and monitoring of offshoring
projects.
Transaction processing is growing faster than customer interaction
services and is likely to dominate future growth. Key segments which
have contributed to this growth include finance and HR processing.
Demand for offshoring has extended beyond the banking and financial
services industry and other key verticals that are likely to be demand
drivers in the future include telecom, healthcare and entertainment
media.
While a range of sourcing models exist and continue to evolve, the
preferred models are captives and hybrid options.
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There is likely to be greater focus on risk, compliance and information
security issues and therefore risk management is likely to be the
dominant theme (both offshore and on-shore).
Supply related
Evolving market structure with consolidations, IPOs and other
transactions.
Emergence of other competing countries and need to appropriately
manage people, telecommunications and infrastructure costs to ward
off competition from the same as cost arbitrage is still a significant
driver for offshoring.
Possible demand-supply gap for trained manpower in the medium to
long term and therefore need to invest in enhancing supply of trained
manpower.
Development of a larger base of locations for IT and ITeS with
supporting ecosystems.
4.1.5 The Indian IT services and ITeS industry - The road ahead
The Indian IT services and ITeS industry is poised for rapid growth over the
next few years by offering a wider services portfolio, catering to a larger set of
industry verticals and evolving adapting to suit the service delivery
preferences of global customers. Key challenges that the industry faces
include the need to sustain competitiveness in the face of alternative
emerging locations and enhancing supply of quality human capital to cater to
increasing demand. Efforts in this direction are already underway and
continuous emphasis on the same is imperative to ensure that the industry's
future growth is undeterred.
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IT for development
The contribution of IT in the development of the rural areas is critical and
efforts are underway to enhance the awareness and penetration of IT in rural
areas. Attempts to increase the depth of IT services in rural areas range from
small initiatives like single computer information kiosks to the "Wired Village
Project", where dozens of villages are provided high speed internet
connectivity.
The government as well as the private sector has been actively involved in the
dispersion of IT and IT based services to rural India. Some models include:
ITC Limited has set up an initiative called "e-chaupal" which aims at facilitating
productivity enhancement by offering services and information on subjects like
weather, market prices, scientific farm practices etc. The venture has proved
to be successful and the number of e-chaupals have risen to 2,700 which
cover a population of 1.2 million in five states. ITC plans to expand to 20,000
e-chaupals in the next few years.
TARAhaat Information and Marketing Services Development Alternatives
(Technology Action for Rural Advancements), a well-known Indian NGO, is
focused on using technology for providing sustainable livelihood in villages.
The strategy deployed is to evolve a commercially viable IT-based enterprise
and to deliver public benefits by satisfying private needs. The services
provided are education, E-governance, insurance, mini-credit financing, rolling
out development packages made by NGOs and e-communications.
A private Indian IT company, Aksh Broadband, has executed the Gramdoot
programme in Jaipur district (in the state of Rajasthan) in western India. The
model is based on fibre optic technology laid through the district to carry
voice, data and graphics. The optic fibre cable runs for 3000 kms and benefits
a population of 6 million people. All government records are online - from land
records to revenue collected - and health and education services are provided
real time in Jaipur district. It is in fact the first time anywhere in the world that
land deeds are offered to the villager in real time. To help sustain this model
247
commercially, a small charge is administered for the services provided. The
model is cost effective, has rapid deployability, and has demonstrated ease of
operation and maintenance.
The "Param" project by Ogilvy and Mather aims to improve rural
connectivity in backward areas.
"Drishtee" has focussed on provision of e-governance facilities and
information services to the rural community.
Attempts to impart IT education to students from rural areas are
pursued by Microsoft and the Azim Premji foundation.
Some players in the Indian IT and ITeS industry have also included rural India
in their capability sourcing models. Select examples include:
Lason India an end to end outsourcing company is promoting village BPO's
where functions like data entry and data processing are carried out from rural
areas.
Datamation group is a Public Private Partnership where NGO's train
individuals from under-privileged sections of the society and employ them in
BPO's owned and run by them.
4.2 INDIAN IT INDUSTRY: NASSCOM ANALYSIS
FY 2006-07 witnessed a revalidation of the Indian Information Technology -
Business Process Outsourcing (IT-BPO) growth story, driven by a maturing
appreciation of India's role and growing importance in global services trade.
Industry performance was marked by sustained double-digit revenue
growth
248
The sector closed the year at record levels, with the revenue aggregate
growing by nearly ten times over the past ten years
Positive market indicators include large unaddressed white-spaces and
the unbundling of IT-BPO mega-deals with increasing shares of global
delivery
Strong optimism of the industry to achieve its aspired target of USD 60
billion in exports by 2010
Figure 4.3 : Industry Performance over the Last Ten Years
IT Industry-Sector-wise break-up
USD billion FY 2006 FY 2007 FY 2008 P
IT Services 17.8 23.6 30-31
Exports 13.3 18.0 -
Domestic 4.5 5.6 -
Eng Services and R&D, SIW Prods 5.3 6.5 8
Exports 4 4.9 -
Domestic 1.3 1.6 -
ITES-BPO 7.2 9.5 11-12
Exports 6.3 8.4 -
Domestic 0.9 1.1
249
USD billion FY 2006 FY 2007 FY 2008 P
Total Software and Services Revenues 30.3 39.6 49-50
Of which, exports are 23.6 31.4 39-40
Domestic 6.7 8.2 10
Hardware 7 8.2 -
Total IT Industry (including Hardware) 37.4 47.8 -
Source : Indian IT Industry NASSCOM, Analysis, 2007
(Total may not match due to rounding off
*NASSCOM estimates have been reclassified to provide greater granularity
Historical values for a few segments have changed due to availability of
updated information)
Growth in Revenues
Revenue from the Indian IT software and services sector (including the
domestic and exports segments and excluding hardware) touched
nearly USD 40 billion during FY 07 and is expected to grow by nearly
27 percent to clock USD 49-50 billion in FY08.
Contribution to GDP in FY 07 was 5.2% up from 4.8% last year.
Service and software exports remain the mainstay of the sector
contributing USD 31.3 billion during FY 07, beating forecast to register
a 33% growth. Increasing traction in offshore product development and
engineering services is supplementing India's efforts in IP creation.
This segment has grown by 22- 23 percent to report USD 4.9 billion in
exports.
MNC investments reach an unprecedented scale; over USD 10 billion
announced in FY 2006-07, to be invested over the next few years.
250
Global Markets
While US and UK remain the dominant markets for IT-ITES exports, revenues
from newer markets are growing rapidly
Market FY04 FYOS FY06
America 69.40% 68.30% 67.18%
Europe 22.60% 23.10% 25.13%
Rest of the World 8.00% 8.60% 7.69%
Growth Verticals
BFSI, Telecom and Hi-Tech continue to account for approximately 60% of the
market. Other verticals such manufacturing, retail, transportation, healthcare
and utilities are also growing rapidly.
Air
lines
an
d
tran
spo
rtat
ion
Hea
lth
care
Co
nst
ruct
ion
&
Uti
litie
s
Media,
Publishing &
Entertainment
Ret
ail
Man
ufa
ctu
rin
g
Hi-
te
ch
/
Tel
eco
m
BF
SI
Oth
er
FY 06 2.1% 3.0% 4.0% 4.2% 7.6% 12.9% 19.8% 38.1% 8.4%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
40.00%
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251
Table 4.4 Employment figures – Software and Services sector
Sector FY 2006 FY 2007
IT Services 398,000 550,000
Engineering Services and R & D and
Software Products 115,000 140,000
513,000 690,000
ITES-BPO 415,000 553,000
Domestic Market (including user
organizations) 365,000 378,000
Total 1,293,000 1,621,000
*Figures do not include employees in the hardware sector
Source : ibid
Domestic Market Matures
Complementing the continued growth in IT-ITES exports and for the first time
ever in FY 2007 showed signs of breaking out of the hardware led growth and
the trend of software and services gaining share is expected to continue
The total size of the domestic market (including hardware) was USD 16.4
billion in FY 07.
Traditionally, this segment has been led by MNCs. However, Indian firms are
gradually gaining ground. Overtime this segment could become a larger SME
play, as the mid-sized firms increase their levels of IT adoption
Going forward
For India to fully capitalize on the opportunity and sustain a disproportionate
lead in the global IT-ITES space, stakeholders need to continue working
towards timely and coherent execution of initiatives to address supply-side
concerns across the following areas
252
Augmenting Talent Supply
Creating world-class infrastructure
Strengthening information security
Enhancing operational excellence
Providing regulatory support
Catalyzing domestic market development
Fostering an ecosystem for innovation
INDUSTRY IS ON TRACK TO REACH THE TARGETED $60BN IN
EXPORTS BY 2010
CAGR PERIOD DOMESTIC
MARKET
EXPORTS * TOTAL
10 YR TARGET FY00-10 22.1% 31.2% 28.9%
ACHIEVED FY00-07 23.3% 34.4% 31.4%
REQUIRED FY07 -10 19.3% 24.1% 23.2%
Source : NASSCOM - McKinsey Study, 2007
4.3 NASSCOM STRATEGIC REVIEW 2007 & 2008
The year 2006 witnessed a revalidation of the Indian Information Technology -
Business Process Outsourcing (IT-BPO) growth story, driven by a maturing
appreciation of India's role and growing importance in global services trade.
Industry performance was marked by sustained double-digit revenue growth,
steady expansion into newer service-lines and increased geographic
penetration, and an unprecedented rise in investments by Multinational
Corporations (MNCs) - in spite of lingering concerns about gaps in talent and
infrastructure impacting India's cost competitiveness. The sector looks set to
close the year at record levels, with the revenue aggregate growing by nearly
ten times over the past 10 years.
The past few years have seen a gradual evolution of global perspectives
about offshore outsourcing, from a mix of heightened exuberance and
protectionist criticism - to a wider, more rational acknowledgement of the
253
economic imperatives, value drivers as well as possible risks of this
phenomenon. Maturing socio-political attitudes and an appreciation of the
proactive efforts by key stakeholders to further strengthen India's value-
proposition are helping reinforce its position as the destination of choice.
While alternate destinations are being explored to add multi-country delivery
capability, India remains an integral part of any major global sourcing strategy.
Positive market indicators including large unaddressed white-spaces and the
unbundling of IT-BPO mega-deals with increasing shares of global delivery,
strongly support the optimism of the industry in achieving its aspired target of
USD 60 billion in exports by 2010.
Yet, the size and scope of this opportunity, and the strategic advantages in
realising its potential - are significantly larger. While India is uniquely
advantaged to best address these opportunities, they are not lost to others.
Timely, coherent and continued action is needed to ensure that India makes
the most of these opportunities and maintains its lead.
4.3.1 Global Sourcing Trends in 2006
Worldwide technology and related services spending crossed USD 1.5 trillion
in 2006, growing at 7.7 percent over 2005. Healthy tech-sector performance
was sustained by above forecast GDP growth across the key economies of
Europe and the US, as well as in emerging markets. Outsourcing continued to
be the primary growth engine with global delivery forming an integral part of
most sourcing strategies1.
After the early enthusiasm about alternate sourcing locations, firms are
reaffirming their preference for India, reflecting a maturing appreciation of its
unique value-proposition. India based delivery continues to grow, driven by
local firms reporting steady growth in large contract wins and MNC investment
on organic growth as well M & A activity reaching an unprecedented scale in
2006.
1 Technology spending defined as per IDC classification of IT Services, software, hardware and BPO; worldwide R&D and
engineering spending estimates amounting to USD 783 billion in 2006 have been excluded to avoid double counting.
254
4.3.2 India's IT-BPO Performance in 2006
The Indian IT-BPO sector (including the domestic and exports segments) is
growing at an estimated 28 percent in FY20072. Total revenue aggregate for
the sector is expected to exceed USD 47.8 billion, nearly a ten-fold increase
over the aggregate revenue of USD 4.8 billion, reported in FY1998, and direct
employment is likely to cross 1.6 million.3 As a proportion of national GDP, the
revenue aggregate of the Indian technology sector has grown from 1.2
percent in FY1998 to an estimated 5.4 percent in FY2007. Net value-added
by this sector, to the economy, is estimated at 3-3.5 percent for FY2007.4
Service and software exports remain the mainstay of the sector; FY07 export
growth likely to beat forecasts and exceed 32 percent.5 While the US and the
UK remain the dominant markets, contributing to 67 percent and 15 percent of
total exports respectively, firms are also keenly exploring new geographies for
business development, and to strengthen their global delivery footprint.
Banking, Financial Services and Insurance, and Technology (Hi-tech/
telecom) are the main verticals, accounting for nearly 60 percent of the total;
Manufacturing, Retail, Media, Utilities, Healthcare and Transportation follow
also growing rapidly.
IT services exports, accounting for 55-57 percent of total exports, are growing
at an estimated 36 percent and are expected to reach USD 18.1 billion in
FY2007. Newer areas of application and infrastructure management, testing,
etc. are gaining traction, with their share in the business-mix growing steadily.
BPO continues to grow in scale and scope, with firms increasingly adopting a
vertical focused approach. Total exports for this segment are expected to
exceed USD 8.3 billion in FY 2006-07, growing by 32 percent over the
2 The fiscal year for the Indian economy follows a twelve month cycle spanning April - March. Hence all the figures reported for
the current Indian fiscal year (FY2007) pertain to the industry's performance during April - December 2006 that have been used to arrive at the year end estimates. 3 Revenue figure includes the revenues from IT services, software, BPO, engineering services and hardware, earned in the
domestic market as well as through exports either by Indian firms or by India-based centers of multinational firms. Employee-base figure does not include employment in the IT hardware sector. 4 Value added in the technology services sector is estimated at 60.70 percent.
5 The earlier forecast for the expected growth in FY2007 was 27.30 percent, released in June 2006.
255
previous year. Lastly, increasing traction in offshore product development and
engineering services is supplementing India's efforts in own IP creation. This
group is growing at 22-23 percent and is expected to report USD 4.9 billion in
exports, in FY 2006-07.
Service-line expansion is aiding service providers to take on larger and more
complex deals, and is driving up the average ticket size of contracts awarded
to Indian firms. High offshore component of delivery and superior execution in
multi-location delivery continue to be key differentiators. Broad-based industry
structure; IT led by large Indian firms, BPO by a mix of Indian and MNC third-
party providers and captives, reflects the depth of the supply-base. While the
larger players continue to lead growth, gradually increasing their share in the
industry aggregate; several high-performing SMEs also stand out.
The domestic market is also picking-up, showing definite signs of breaking-out
of the trend of hardware linked growth with the contribution of software and
services exceeding that of hardware for the first time in FY 2005-06. The total
size of the domestic market is expected to cross USD 15.9 billion in FY 2006-
07, a growth of 21 percent over FY 2005-06. Although this segment has been
led by MNCs in the past few years, Indian firms are gradually gaining ground.
Overtime this segment could become a larger SME play, as the mid-sized
firms increase their levels of IT adoption.
4.3.3 India's Value Proposition
India offers a unique combination of attributes that have established it as the
preferred offshore destination for IT-BPO. Over FY2001-2006, India's share in
global sourcing is estimated to have grown from 62 percent to 65 percent for
IT and 39 percent to 45 percent for BPO. The visibly higher preference for
India is driven by its unmatched superiority when measured across a range of
parameters that determine the attractiveness of a sourcing location.
Abundant Talent: With over half the population of India aged less than 25
years, India's young demographic profile is a unique and an inherent
advantage. This, complemented by a vast network of academic infrastructure
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and the legacy effects of British colonization has contributed to an unmatched
mix and scale of educated, English-speaking talent.
Notwithstanding the strong fundamentals (of a disproportionately large talent
pool), there has been growing concern about parts of the available pool being
unsuitable for employment. The Indian IT-BPO sector has taken the lead in
ensuring that requisite remedial actions are undertaken - well in time - to
avoid any form of a talent crisis. Training has become a regular and significant
component in the induction process of all IT-BPO firms. Several firms have
also established dedicated facilities and teams, for employee skill
enhancement initiatives.
In addition to firm level efforts that are more focused on the immediate
requirements, the industry is also driving a series of concerted efforts to
structurally address the talent concerns. NASSCOM has, on behalf of the
industry, led the development of a comprehensive skill assessment and
certification programme for entry-level talent and executives (low, middle level
management) and is organizing an image enhancement programme to build
greater awareness about the career opportunities in the BPO segment. The
industry is also working with the University Grants Commission and the All
India Council for Technical Education, to encourage and facilitate greater
industry interaction, thus helping them share relevant feedback, stay updated
on developments in the industry and giving them an opportunity to incorporate
positive changes to their curriculum and pedagogy. Further, it is proposed that
a chain of 'finishing schools' be set-up, to supplement the graduate education
attained by the next layer of candidates - considered unsuitable for direct
employment in the IT sector.
These initiatives are believed to be sufficient to address any potential supply
gaps in the medium-term. However, a sustainable solution of the talent
suitability issue requires a quantum increase in capacity and improvement in
quality of the education system, and it is encouraging to note that this issue is
being actively discussed at the highest levels of policy formulation in the
country.
257
Cost Advantage: India has a strong track record of delivering a significant
cost advantage, with clients' regularly reporting savings of 25-50 percent over
the original cost base. This cost advantage achievable from outsourcing to
India is unlikely to go away - for a considerable period. There are several
factors that support this. First, the absolute cost advantage, vis-a-vis other key
markets is actually increasing. The 10-15 percent wage inflation in India
amounts to a lower dollar value increase in the wage bill, compared to the 3-4
percent average wage inflation in the developed countries. Secondly, there is
still scope for further lowering infrastructure and overhead costs. In spite of
the rapid decline in telecom costs in India, they are still not at internationally
competitive levels. Finally, there is scope for further leveraging operational
levers to drive efficiencies in the organization. A detailed industry
benchmarking exercise, underway since 2005, has revealed that there is wide
variation in the internal practices adopted across the industry, and suggests
that the adoption of industry best-practices can further enhance operational
excellence in Indian IT-BPO firms.
This is also being evidenced in the performance of some of the best-in-class
players. Contrary to concerns of rising wage inflation eroding the sustainability
of India's cost-advantage, especially over the past two years, leading players
have managed to grow at an above average rate - while sustaining their high
levels of profitability.
Emphasis on Quality and Information Security: Demonstrated process
quality and expertise ill service delivery has been a key factor driving India's
sustained leadership in global service delivery. Since the inception of the
industry in India, players within the country have been focusing on quality
initiatives, to align themselves with international standards. Over the years,
the industry has built robust processes and procedures to offer world class IT
software and technology related services.
Today, India-based centres (both Indian firms as well as MNC-owned
captives) constitute the largest number of quality certifications achieved by
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any single country. As of December 2006, over 440 Indian companies had
acquired quality certifications with 90 companies certified at SEI CMM Level 5
- higher than any other country in the world.
The Indian IT-BPO sector is committed to extending its unmatched reputation
in quality, to information security and is working on a four-pronged programme
to achieve this objective. This comprises: a) engaging key stakeholders
(policy makers, industry players, enforcement agencies, etc.) to build a
common understanding of the key issues relating to information security in the
context of global service delivery; b) educating industry constituents about
developments in information security policies and practices; c) enactment of
policy reform required to ensure compliance; and d) assisting in the effective
enforcement of policy frameworks by encouraging the practice of periodic
security audits and certification, developing and maintaining an incident
response database and facilitating greater cooperation with enforcement
agencies.
These efforts have been endorsed by customer organizations and by
representatives of independent regulatory bodies who have visited the
operations of several IT-BPO firms and have found the information security
environment in India to be matching and often exceeding the levels in their
own home-countries. Notwithstanding the strong track record, Indian IT-BPO
firms and the authorities are aware that vulnerability of information is a global
problem and efforts towards minimizing these risks need to be continuous and
constantly enhanced. The National Skills Registry and the Cyber-Iabs
initiatives launched over the past 18-24 months are now running successfully
and the industry proposes to consolidate these efforts by establishing a Self-
Regulatory - Organization that will identify a basic set of security and privacy
standards, that member companies will be expected to adhere to.
Rapid Growth in Key Business Infrastructure: India's core proposition of
talent, quality, security and cost advantage would be inconsequential without
the rapid growth in availability of high quality telecommunication connectivity
across the country. Over a span of little over a decade, the Indian telecom
259
market has evolved from a public sector monopoly to thriving free-market
competition. Carefully crafted policy has helped drive a balanced agenda for
the sector by influencing a decline in pricing and increased affordability on
one hand and increasing access penetration and usage on the other, resulting
in strong growth. The IT- BPO sector has been a key beneficiary, with the cost
of international connectivity declining rapidly and service level quality
improving significantly.
However, the impact of the telecom revolution on India's development is not
restricted to providing international bandwidth / connectivity alone. In fact, the
Indian telecom sector has emerged as an example of policy reform driving
wide-reaching developmental gains in the country.
Telecom penetration in the country has increased from a modest 3.6 percent
in 2001 to over 12.6 percent in 2006, and is targeted to reach to 29.6 percent
by 2009. While the wire-line segment continues to witness steady growth,
rapid adoption of wireless telephony has made India the fastest growing
market in the segment. At the end of 2006, there were over 98 million wireless
subscribers in India, up from barely 4 million in 2001. Yet, this is only a start.
The low penetration levels and a growing consumer base are driving strong
growth forecasts across all segments of telecom demand are likely to keep
this sector in the spotlight for the foreseeable future.
In addition to strong telecom links, cities across the country have witnessed
steady growth in office facilities, hotels and other supporting business
infrastructure matching global standards. Importantly, this growth is taking
place, not only in existing urban centres - but increasingly in satellite towns
and smaller cities, with IT-BPO firms driving much of the demand.
Deregulation of the aviation sector has provided a significant fillip to the
availability and affordability of airline travel which in turn has also helped add
a larger number to the list of delivery locations for potential expansion. The
recent moves to privatize the development and maintenance of airports in key
metros and to develop Greenfield airports in 35 other non-metros are
expected to further improve access to domestic air travel.
260
Nonetheless, other elements of urban infrastructure are beginning to show
some signs of strain predominantly in the key metropolitan hubs of the
country. Recognizing that availability of adequate, quality business and social
infrastructure is an imperative for continued growth of industry and for overall
socio-economic development, the Government has made infrastructure
creation a key priority in its planning efforts. It is estimated that India will need
investments of over USD 300 billion in various elements of infrastructure
development.
Given the magnitude of investments required, and the strong health of the
private sector (vis-a-vis its position at the time of India's independence) - the
Government is actively seeking public-private-partnerships to play a greater
role in infrastructure development. So far, the response from the private
sector (domestic as well as foreign players) has been promising and the
Government is working towards ensuring an enabling policy environment to
sustain the m0mentum.
Enabling Business Policy and Regulatory Environment: The enabling
business policy and regulatory environment has played a critical role in the
rapid growth of the Indian IT-BPO sector. Policy makers in India have laid
special emphasis on encouraging foreign participation in the IT-BPO sector -
recognizing its importance not only as a source of financial capital but also as
a facilitator of knowledge and technology transfer. Consequently, IT-BPO
firms enjoy minimal regulatory and policy restrictions along with a broad range
of fiscal and procedural incentives offered by the central as well as individual
State Governments. These measures have earned wide appreciation, which
is best exemplified in the fact that several other nations are trying to emulate
the policy environment that has helped develop the IT-BPO sector in India.
The Software Technology Parks of India (STPI) scheme has played a pivotal
role in catalyzing the growth of this sector and supporting its rapid proliferation
across the country. The tax holiday has helped attract much needed
investments (MNC and Indian) in the sector and the virtual model has allowed
261
firms to avail benefits without constraints on their choice of location -
encouraging entrepreneurship and integrated growth. Although the existing
term of the STPI scheme is nearing its end (in 2009) the Government intends
to continue the benefits offered, by introducing similar provisions in the
Special Economic Zones (SEZ) policy - and further relaxing the minimum area
requirements (to qualify for an SEZ status), for the IT-BPO sector.6 While
welcoming the government's continued commitment to supporting the growth
of the IT-BPO sector, experts have cautioned that losing the universal nature
of the STPI is a regressive step that is likely to have a negative impact on the
growth of the small and medium enterprises (SMEs) in the sector. It is argued
that unlike the larger companies, SMEs will not have the capacity to build or
occupy independent SEZ units, and will have to settle for sub-optimal (and
likely more expensive) alternatives of renting parts of a large multi-product
SEZ. The industry has voiced these concerns and is encouraged by the
appreciative stance adopted by the government on this matter.
Other aspects of continuing policy reform that will aid the sectors growth
include the rationalization of international taxation policies, mutual trade
agreements with partner nations, and a proactive and positive stance on
international free trade.
4.3.4 Outlook
Worldwide technology related spends are forecast to reach USD 2.1 trillion by
2010, growing at a CAGR of more than 7 percent over 2006-2010. Growth in
global sourcing is expected to outpace growth in total spends, with up to USD
110-120 billion of the total amount spent on software and services in 2010,
likely to be sourced through the global delivery model.
Rapid evolution of technologies and Internet applications, and the rise of
pervasive computing are expected to drive a rapid and quantum increase in
technology adoption by businesses and individuals. The proliferation of client
devices and end-user or end-use devices at the network edge will result in the
6 For details. please refer to the SEZ Act. 2005, SEZ Rules 2006 at www.commerce.nic.in
262
addition of billions of devices to the network edge, which will drive the need
for more enterprise systems to deploy, manage, and make use of them. The
effects of the internet generation entering the working age population are
expected to further accelerate technology usage and adoption.
The resultant increase in scale and complexity of ICT infrastructure and
applications, will lead to an increased demand for skilled IT resources. The
ageing demographics in most developed countries will necessitate an
increasing reliance on globally dispersed talent pools to meet the demand for
professionals - contributing to accelerated growth of the global sourcing
phenomenon.
The sector will also face its share of challenges. Clearly, global sourcing is a
'win-win' proposition; and has been emphatically demonstrated in the
significant gains achieved by developed as well as developing countries that
have participated in the growth of ICT-related trade. However, equitable and
inclusive sharing of these gains remains a key challenge and the international
debate on 'offshore-outsourcing' needs to evolve from clashing unilateral
views (i.e., value creation vs. job-loss) to a deeper appreciation of its
imperatives and benefits. This will be a key factor determining the pace of
growth in global sourcing.
Nonetheless, the outlook for Indian IT-BPO remains bright, and the sector is
well on track to achieve its aspired target of USD 60 billion in export revenues
by FY2010. Key factors underlying this optimism include the growing impact
of technology-led innovation, leading the increasing demand for global
sourcing and the gradually evolving socio-political attitudes.
Achieving these targets will no doubt, reinforce the growing role of India's
technology sector in the new world IT order. However, the magnitude of
potential gains from ICT could be significantly amplified - especially in a
developing country such as India. Increasing adoption of IT in the domestic
industries is already beginning to reflect in their enhanced performance and
competitiveness- that must be further encouraged. ICT potential must also be
263
leveraged to address key issues of gender and economic disparities by
promoting greater participation of women in the workforce, and scaling up of
e-governance initiatives. Such continued emphasis on greater inclusiveness
will contribute to long-term payoffs, and will structurally strengthen India as an
ICT-enabled society.
NASSCOM Strategic Review 2008
2007 was a test of resilience for the Indian Information Technology –
Business Process Outsourcing (IT-BPO) sector. Nonetheless, the sector
successfully countered fresh headwinds of a slowing economy and a financial
sector crisis in the US, and sharp appreciation of the INR against the USD, in
addition to the already existing supply-side constraints – and maintained its
double-digit revenue growth. Driving the sector’s strong performance was
more diversified geographic market exposure and continued expansion of the
service portfolio, leading steady growth in scale by Indian-origin service
providers as well as Multinational Corporations (MNCs) having operations in
India.
While many of the challenges faced by the sector persist, and are likely to
remain over the foreseeable future, Indian IT-BPO’s demonstrated ability to
overcome them and continue on its strong growth trajectory reinforces the
conviction in its fundamentally strong and sustainable value proposition. India
continues to be the ‘nerve-centre’ for global sourcing with over 2/3rd of the
Fortune 500 and a majority of the Global 2000 firms leveraging global service
delivery – now sourcing from India.
Positive market indicators and a strong track record strongly support the
optimism of the industry in achieving its aspired target of USD 60 billion in
software and services exports and USD 73-75 billion in overall software and
services revenues, by FY2010.
Yet, the size and scope of the opportunity for Indian IT-BPO, and the strategic
advantages in realizing its full potential – are significantly larger. Though India
is uniquely advantaged to best address these opportunities, they are not lost
264
to others. Timely, coherent and continued action is needed to ensure that
India makes the most of these opportunities and maintains its lead.
Global Sourcing Trends in 2007
Not all problems have a technological answer, but when they do, that is the
more lasting solution.
- Andy Grove, Founder of Intel Corporation
Worldwide technology products and related services sector spends are
estimated to have grown at 7.3 per cent to nearly reach USD 1.7 trillion in
2007 – overcoming concerns of budgetary cutbacks due to an economic
slowdown in the US and its spill-over effects on other key markets.
IT-BPO services, growing at an above-sector-average rate of nearly 8
percent, remain the largest category, accounting for an increasing share of
the worldwide technology sector revenue aggregate.
Outsourcing continues to be the primary growth driver, albeit sustained by
gradual shifts in regional spending patterns – with increasing traction in
Europe and Asia Pacific offsetting a marginal decline in share of the
Americas.
Underlying this steady growth in services spends is the increasing adoption
and continued evolution of the global sourcing supply-chain. Global sourcing
of technology related services is estimated to have grown by about 30 percent
to reach USD 70-76 billion in 2007. Increasing emphasis on innovation-led
growth added to the secular trend in technology related spending, with IT-
enablement and global delivery now being recognized as complementary
means of effectively increasing productivity, reducing time-to-market and
thereby increasing the returns on innovation investment.
Consequently, players with demonstrated global delivery capabilities continue
to close-in on the market shares of the incumbents (US Big-Six and European
Big-Five), with India-heritage players reporting the sharpest gains in their
265
share of the total value of large outsourcing contracts awarded in the year
2007.
While the portfolio of sourcing destinations continues to evolve, India remains
the nerve-centre for any major global sourcing strategy. Sustained growth
amongst indigenous players is being complemented by a continued flow of
MNC investments – reinforcing India’s growing role in the new world
technology order.
Indian IT-BPO Performance in 2007
Twenty years and USD 40 billion. They seem like good round numbers
- Michael Dell, Founder of Dell Computers
Continuing on its established track-record, the overall Indian IT-BPO revenue
aggregate is expected to grow by over 33 per cent and reach USD 64 billion
by the end of the current fiscal year (FY2008).
Over the same period, direct employment in the sector is expected to reach
nearly 2 million, an increase of about 375,000 professionals over the previous
year. As a proportion of national GDP, the Indian technology sector revenues
have grown from 1.2 per cent in FY1998 to an estimated 5.5 percent in
FY2008. Net value-added by this sector, to the economy, is estimated at 3.3 -
3.9 per cent for FY2008.
Exports: Contributing 64 percent to the overall revenue aggregate, exports
remain the mainstay of the Indian IT-BPO growth story. Software and services
exports, accounting for over 98 per cent of the total exports, are expected to
cross USD 40 billion and directly employ nearly 1.6 million professionals, in
FY2008 – a commendable achievement over just about two decades.
Exports by geography: While the US and the UK remain the largest export
markets (accounting for about 61 per cent and 18 per cent respectively, in
FY2007), the industry footprint is steadily expanding to other geographies.
266
Exports to Continental Europe in particular have witnessed notable gains,
growing at a CAGR of more than 55 per cent over FY2004-2007.
Exports by vertical market: The industry’s vertical market exposure is well
diversified across several mature and emerging sectors. Banking, Financial
Services and Insurance (BFSI) remains the largest vertical market for Indian
IT-BPO exports, followed by High-technology and Telecom. These sectors
together accounted for nearly 60 per cent of the Indian IT-BPO exports in
FY2007. Manufacturing and Retail followed, contributing 23 per cent to the
aggregate. Other key segments include Media, Healthcare, Airlines and
Transportation, and Utilities.
Exports by service-segment: Broad-based growth, across all the segments
of IT services, BPO, product development and engineering services, is
reinforcing India’s leadership as the key sourcing location for a wide range of
technology related services. Further, being able to demonstrate credible scale
across a wider service portfolio is helping firms deepen relationships with
existing clients as well as drive access to previously untapped opportunities.
IT services (excluding BPO, product development and engineering services),
contributing 57 per cent of the total exports, remains the dominant segment
and is expected to cross USD 23 billion, a growth of 28 per cent in FY2008.
Over the past 5-6 years, the service-line mix of Indian IT providers has
evolved considerably – from being predominantly driven by custom
application development and maintenance to a wider portfolio of services
including software testing, applications management and system integration.
With providers and clients keen to adapt more services to remote delivery and
automation, and Indian providers actively building onshore and near-shore
capacities, the industry service portfolio continues to expand rapidly. In this
context, remote infrastructure management is emerging as a key growth
driver.
267
BPO services, accounting for over 1/4th of the export aggregate, is the fastest
growing segment across software and services exports driven by scale as
well as scope. Export revenues for this segment are expected to cross USD
10.9 billion, a growth of 30 per cent in FY2008.
The last few years have seen the Indian BPO services landscape expanding
to include increasingly complex processes involving rule-based decision
making and even research services requiring informed individual judgment.
The expansion in scope of BPO has been accompanied by an equally rapid
adoption across a range of vertical industries – with several providers offering
vertical specific services, adopting focused go-to-market strategies and
making significant investments in tools and technologies, new skills (functional
as well as multi-lingual) – in India as well as in other locations through a
combination of organic and acquisitive routes.
Complementing the strong growth in IT services and BPO exports is the
continued growth across product development and engineering services,
which also reflects India’s increasing role in global technology IP creation.
Export revenues from these relatively high-value-added services such as
engineering and R&D, offshore product development and made-in-India
software products is estimated to be growing at about 27 per cent, and are
forecast to reach USD 6.3 billion in FY2008.
Industry structure: Industry structure reflects a healthy balance between
ownership / origin and size. Today there are a large number of Indian and
foreign multinationals, successfully operating a range of sourcing models
including owned captives, outsourced to third-party vendors, and variety of
hybrid models – providing buyers with the flexibility to choose the engagement
models best suited to their requirements. In terms of size, while larger players
continue to drive industry growth, small / emerging companies also play a key
role in nurturing innovation – and continue to attract VC/PE7 interest.
Domestic market: Technology adoption in the domestic market also reported
steady gains in 2007.This segment is expected to cross USD 23 billion in
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FY2008, reporting healthy growth across all key segments. Hardware remains
the largest segment of the domestic market, and is expected to grow at 44 per
cent in FY2008. Domestic IT services spends are estimated to be growing at
about 43 per cent in FY2008, and are showing strong signs of increasing
sophistication as building enterprise IT infrastructures and applications,
networking and communication become key priorities for India Inc. Software
and BPO spending growth in the domestic market is being supported by
increasing adoption, and is expected to grow by over 37 per cent and 43 per
cent, respectively.
With several large Indian enterprises now counted in the league of
multinationals and often in head-on competition with the latter – in India as
well as overseas, their technology related demands (in terms of value and
scope) are evolving rapidly – in order to deliver world-class services. Equally
promising is the relatively less visible, and yet slow – albeit very important,
trend of growing technology adoption in the mid-market segments of the
domestic industry. Providers, Indian as well as multinational, are paying more
attention to specific needs of mid-sized customers – with reasonable success.
Growing levels of technology adoption are now accompanied by a steady
appreciation of the rupee, which is also making India more attractive as a
market – even for players that had earlier maintained a stricter focus on
exports. This self-feeding combination, of increasing demand met by a larger
mix of experienced and world-class providers is expected to drive further
growth in the domestic market.
In addition to enterprise demand, there is also a steady growth in usage of
computers and the internet amongst households / individuals. Further, e-
governance initiatives at the state and national levels are other key levers to
unlock a significant ‘network effect’, and are progressing steadily
India’s IT-BPO Value Proposition
The winner is the chef who takes the same ingredients as everyone else and
produces the best results.
- Edward de Bono, Motivational Author
269
Strong fundamentals of a large talent pool, sustained cost competitiveness
and an enabling business environment have helped establish India as the
preferred sourcing destination. Despite attempts by the Governments in
several other locations, to replicate the factors and policies that have
contributed to India’s success – superior execution has ensured that India
remains the distinct leader in the global sourcing arena. A mix of provider,
industry and Government initiatives are helping further strengthen India’s
lead.
Sustained cost competitiveness: India continues to deliver a significant cost
advantage, driven by a wide differential in wages and other lower factor costs,
and enhanced through productivity gains.
Large and growing talent pool: India’s young demographic profile
complemented by a vast and growing academic system continues to add to its
pool of educated talent. There is no other country that offers a similar mix and
scale of human resources. While some gaps in talent suitability exist, they are
being adequately addressed through strong provider-level initiatives, focussed
on skill development. Additionally, industry-led initiatives such as the National
Assessment of Competence (NAC), complemented by Government support,
are helping further enhance India’s long term talent advantage.
It is only the farmer who faithfully plants seeds in the spring, who reaps a
harvest in the autumn.
- Bertie Charles Forbes, Founder of the Forbes Business Magazine
Keen emphasis on quality and security: The Indian IT-BPO sector has built
a strong reputation for its high standards of service quality and information
security – which has been acknowledged globally and has helped enhance
buyer confidence. The industry continues its drive to set global benchmarks in
quality and information security through a combination of provider and
industry-level initiatives and at strengthening the overall frameworks, creating
270
greater awareness and facilitating wider adoption of standards and best
practices. The Data Security Council of India (DSCI) was launched in 2007 to
institutionalize efforts to further enhance the information security environment
in India.
Enabling business environment: Supportive policy and active private
enterprise have helped in creating an enabling business environment to
facilitate the rapid growth of Indian IT-BPO. Government policy played a key
role in catalysing growth in the early years and continues to aid growth with
progressive reform. Public and private enterprise has contributed by building
the required capacities of key business infrastructure, helping this sector
enjoy world-class facilities and services. The private sector is now, in
partnership with the Government, also beginning to play an increasing role in
the overall infrastructure development in the country. While the relative merits
of STPI / SEZ (for IT-BPO) continue to attract healthy debate, overall
Government policies have prioritized education and infrastructure and are
aligned with industry needs.
Enhanced value delivery: Indian IT-BPO is at the forefront of enhancing the
global sourcing value proposition. The maturing supplier landscape in India is
also helping buyers explore means of enhancing the global sourcing
proposition, by delivering additional business and strategic value beyond the
established primary benefits. Indian IT-BPO is delivering this additional value
through a combination of improvements in quality, speed and flexibility,
productivity and delivery innovation. India-based IT-BPO companies are
making focused investments in capability building across domain, process,
technology expertise coupled with enhanced flexibility to deliver on this
enhanced proposition.
While the context somewhat differs, the value proposition is just as applicable
in the Indian market, and its appreciation amongst domestic buyers is
increasing.
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Future Outlook
The future you see is the future you get.
- Robert G Allen, co-author of ‘The One Minute Millionaire’ and ‘Cracking the
Millionaire Code’’
From a fundamentals viewpoint, the drivers for global sourcing are likely to
remain strong in the near future. Most environmental factors affecting global
sourcing also look favourable despite concerns of a possible economic
slowdown. While the short-term US outlook is muted, global tech spending
forecasts remain strong, supported by momentum in EMEA and APAC, and
an expected resurgence in the US. Nature of short-term cutbacks in US
technology spends are unlikely to impact global sourcing negatively; in fact
could even boost its growth. Worldwide adoption of outsourcing, another key
influencing factor, is also expected to grow rapidly over the next five years.
Overall thus, global sourcing of services seems well-placed to continue
expanding its share of worldwide IT-BPO spending.
Sufficient demand, strong fundamentals and a favourable environment
support a positive outlook for Indian IT-BPO exports. Further, strong
imperatives for increasing technology adoption in India represent significant
potential for growth in the domestic market. Indian IT-BPO on track to reach
USD 60 billion in exports and USD 73-75 billion in overall software and
services revenues, by 2010.
Achieving these targets will also increase the IT-BPO sector’s contribution to
India’s socio-economic development. At the aspired levels of growth, IT-BPO
will employ about 2.5-3 million professionals directly in the sector, account for
direct investment of about USD 10-15 billion, and contribute 7-8 percent of the
national GDP.
Yet, the size and scope of this opportunity, and the strategic advantages in
realizing its full potential – are significantly larger. At USD 52 billion (excluding
hardware), India accounts for about 4 per cent of the worldwide spend on IT
software and services. Further, global sourcing penetration is estimated to be
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growing at nearly four times the rate of absolute technology spends. The
combination of these two facts alone signifies immense opportunities for rapid
growth. While India is uniquely advantaged to best address these
opportunities, they are not lost to others. Key stakeholders need to continue
working in a focussed and coordinated manner, for India to realize its
potential.
Firms: Indian IT-BPO companies need to maintain a keen emphasis on
ensuring that they continue to deliver the core benefits as well as enhance the
overall value proposition for their clients. This will entail increased investments
across the key axes of people, processes, and technology, in building deeper
domain / functional skills, and may also require firms to adopt a more global
footprint.
Indian IT-BPO firms have demonstrated continuing success in driving
efficiency and productivity gains from innovation in sourcing inputs and
running business processes. While sustaining innovations important, only a
significant shift towards more market-facing breakthrough and enhancing
innovations will provide the necessary revenue impetus in the medium to
long-term. These could include penetrating new customer segments in
intellectual asset-intensive service lines like engineering and R&D services,
creating IP in emerging technology areas, developing and codifying specific
domain expertise to target consulting and system integration services,
technical innovations to develop own standards for next generation of
technologies.
Leading providers have already started making these investments in
enhancing capabilities to deliver. This needs to be adopted in an industry-
wide manner to ensure that the required momentum is achieved.
Additionally, the providers should also enhance their role in addressing some
of the larger developmental challenges faced by the country. India IT-BPO,
with its exposure to global best-practices across a range of sectors, can well
273
take the lead in helping drive efficiency and productivity gains across the
spectrum of Indian industries.
Providers can also leverage their understanding of technology and superior
process orientation to enhance the process of government-business and
government-citizen interactions.
Finally, providers may also enhance the role they are already playing in
helping improve the quality of education – especially since that directly feeds
into the industry’s future growth potential. A large number of players are
already running world-class training programs to up-skill their employees –
and are engaging with universities and colleges to facilitate changes in the
curriculum and pedagogy, which directly influences the quality of graduate
output. These efforts could deliver a greater impact if they are
institutionalized.
Industry: The industry as a whole needs to continue working in a cohesive
manner, to rigorously ensure that high standards of quality and information
security are sustained, to effectively facilitate initiatives to address supply-side
constraints and to proactively prepare to address any developments in key /
potential markets that could potentially influence international trade. To do this
the industry needs to continue engaging closely with the relevant constituents
and key stakeholders, in India as well as overseas.
There is also a strong case for the Indian industry to take on a broader
leadership role in driving the next phase of global sourcing evolution and help
increase its penetration not just in more buyer geographies but also in other
emerging destination countries. This will require the industry to build stronger
ties with industry in other countries (including potential competition) and work
towards building a mutually beneficial agenda.
Government: Government actions continue to play a key role in shaping the
impact achieved by industry and firm-level efforts, by enabling the supporting
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business environment and influencing India’s attractiveness as an investment
destination.
The overall policy approach adopted by the Indian Government is oriented
towards sustaining rapid economic growth and broad-based development,
and further integrating India into the world economic order. Its specific
emphasis on enhancing the education system / output, increasing
infrastructure development and strengthening India’s role in international trade
is in line with the needs of the ITBPO sector.
However, in addition to the broad alignment in industry needs and policy
objectives, more targeted actions are needed for India to capitalize on its
long-term IT-BPO growth opportunity.
First, the Government’s efforts towards enhancing the education system need
to lay special emphasis on the talent needs of knowledge intensive industries,
technology and innovation. The need of the hour is to ‘raise the floor as well
as the ceiling’ by a) improving the graduate output in terms of basic language
/ communication skills and computer literacy; and b) increasing and
institutionalizing an emphasis on research and innovation by actions such as
creating a National Innovation Policy to guide all related efforts, launching
mission mode projects to lead innovation in select areas of strategic
importance, nurturing clusters of research institutes, academia and industry,
and establishing a nodal body to oversee these efforts and provide though
leadership.
Secondly, there is a strong case for continuing the current framework of fiscal
incentives for IT-BPO – especially for the emerging segments / companies in
the sector. The demonstrated success of the STPI model and its relative
advantages over the proposed alternative warrant special consideration,
especially in the light of the fiscal incentives now being offered in potentially
competing destinations.
275
Thirdly, development of basic and social infrastructure needs to keep pace
with the growth of industry. Private enterprises have shown high levels of
interest in participating in basic-infrastructure development projects and need
to be further encouraged.
There is also scope to deploy policy measures that allow more effective
utilization of invested assets. Examples include facilitating an option of
availing increased FSI limits for units dedicated to providing IT-BPO services
and easing restrictions on the use of VOIP and converged networks. Fourthly,
while IT-BPO companies in India operate under relative procedural ease (e.g.
single window clearance, no FDI restrictions, etc.), there is still scope for
review of key aspects of fiscal regulation (e.g. transfer of assets, tax filing and
refund mechanisms, etc.), labour laws (e.g. limits on working hours / days,
maintenance of registers, terms of contract employment, etc.).
Finally, increased technology usage by small / micro enterprises and end-
consumers can yield significant gains and must also be encouraged.
The most important single central fact about a free market is that no
exchange takes place unless both parties benefit.
- Milton Friedman, Nobel Laureate Economist
Achieving its full potential will no doubt, further strengthen India’s leadership
in the new world technology order. However, that is not all.
The growth of the IT-BPO sector has also had a perceptible multiplier effect
on the Indian economy as a whole. In addition to the direct positive impacts
on national income growth, foreign exchange reserve accumulation and
employment generation, the sector has also spawned several ancillary
industries, triggered a rise in direct-tax collections and propelled an increase
in consumer spending, attributed to the significantly higher disposable
incomes. It is estimated that every rupee earned in the Indian ITBPO sector
induces nearly another rupee of economic spending in the rest of the
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economy and every job created in the sector induces the creation of 4 more
jobs in the economy.
Further, the magnitude of potential gains from technology could be
significantly amplified – especially in a developing country such as India.
Increasing adoption of technology in the domestic industries is already
beginning to reflect in their enhanced performance and competitiveness. As
already demonstrated in some measure by the IT-BPO sector, technology can
play a key role in addressing important issues of gender and economic
disparities by promoting greater participation of women in the workforce and
creating widespread employment opportunities. A continued emphasis on
leveraging technology to induce greater inclusiveness will contribute to long-
term payoffs, and will structurally strengthen India as a more technology-
enabled society.
4.4 Key Highlights of the NASSCOM-IDC Study on the Domestic
Services (IT -ITES) Market Opportunity
The Indian Information Technology (IT) and IT Enabled Services (ITES)
success story and its paradigm changing impact on global service delivery is
now a well acknowledged fact. However, much of the success achieved by
the sector has been attributed to the meteoric growth in exports - that has
overshadowed the latent opportunities unlocked and growth observed in the
domestic market over the past few years.
Spotlight on the Domestic IT Services Market Opportunity
Domestic demand for IT in India is witnessing a gradual transformation from
being predominantly hardware driven towards a solutions oriented approach -
resulting in a growing emphasis on services. In fact, revenue growth in the
services segment alone has reported faster growth than that for the overall
domestic IT market (including hardware, software and services) over the past
few years. As depicted in the following chart, this trend is expected to
continue over the forecast period.
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Figure 4.4 Growth of IT Spending in India
Source: NASSCOM-IDC study on domestic services (IT-ITES) Market opportunity 2005
The liberalization of Indian economic policy, de-regulation of key sectors and
progressive moves towards further integrating India with the global economy
has been a key driver of increased IT adoption in the country. This is best
reflected in the fact that most indigenous players in telecom and banking, two
key sectors with significant multinational corporation (MNC) participation,
have significantly upgraded their levels of IT adoption to offer best-in-class
services comparable to those offered by the global competition and these two
sectors together account for approximately 35-40 percent of the domestic
spend on IT services.
Similar competitive pressures in other more recently deregulated service
sectors such as airlines and insurance, and the uptake in the manufacturing
and industrial sectors; and the several large e-governance initiatives launched
by the government under the National E-Governance Plan (NEGP) are
expected to provide sustained growth in domestic demand for IT services over
the next few years. Over the next five years, domestic spending on
outsourced IT services is projected to more than double, from INR 103 billion
in 2004 to over INR 238 billion in 2009.
278
Five Year Revenue Forecasts for Key Service Lines in the Domestic
Market (INR Million)
Breakups 2004 2005 2006 2007 2008 2009 CAGR
IT Consulting 4,784 5,669 6,775 7,774 9,109 10,674 1 7.4%
System
Integration 34,011 42,979 54,900 62,065 72,960 85,399 20.2%
Application
Development 13,997 17,115 19,852 22,586 25,113 27,924 14.8%
End - to - end
Outsourcing 6,328 8,221 10,247 12,343 14,344 16,850 21.6%
Discrete
Outsourcing 16,731 21,055 25,819 31 ,401 36,262 41,509 19.9%
Deploy &
Support 23,631 28,321 32,907 37,651 42,510 48,,186 15.3%
IT Education and
Training 4,126 4,879 5,609 6,534 7,260 8,067 14.3%
Grand Total 103,606 128,239 153,109 180,354 207,559 238,607 18.2%
Source : ibid
Systems integration and network integration make up a high growth-large size
category within the IT services engagements. These services will continue to
be prime drivers of the domestic IT services market in the enterprise segment
due to the increasing growth in the enterprise application implementation and
increased demand for network integration from telecom & banking verticals.
Domestic IT Services Revenues by Key Vertical Markets (2004)
Retail and
Wholesale
Government
& Education
Communications
and Media
Manufacturing
Financial
Services
Others
1% 14% 17% 29% 31% 8%
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Retail and Wholesale
1%Government &
Education 14%
Communications and
Media 17%
Manufacturing 29%
Others 8%
Financial Services 31%
Source: ibid
The financial services, communications and media, and manufacturing
verticals accounted for over 3/4th of the revenues earned by service providers
in the domestic IT services market in 2004.
The growth projections for IT service revenues in the domestic market may be
further accentuated by addressing some basic issues highlighted by the
findings of the surveys conducted as a part of this study.
A significant portion of the domestic corporate IT spends still lies in-house,
predominantly driven by a perceived lack of focus by service providers on the
domestic market and a perceived absence of value generated by outsourcing.
It is estimated that in-house spending on IT services (including training costs,
salaries of in-house IT staff and associated overheads) still accounts for more
than half of the corporate IT spend in India, while the outsourced / vendor
addressed spends account for just 45 percent of the total.
280
Comparison of the Vendor Addressed Market and the In-house Spend by Key
Services (INR Million)
Breakup 2004- Vendor addressed
market
2004 – In house team addressed
market
Total Market
Vendor addressed
market as % of total market
IT Consulting 4,784 11,163 15,947 30%
System
Integration
34,011 34,011 68,022 50%
Application
Development
13,997 20,995 34,992 40%
End-to-rod
Outsourcing
6,328 NA 6,328 100%
Discrete
Outsourcing
16,731 25,096 41,827 40%
Deploy & Support 23,631 23,631 47,262 50%
IT Education &
Training
4,126 9,628 13,754 30%
Grand Total 103,608 124,524 228,132 45%
Source: ibid
During the research study, IDC undertook in-depth interviews with CIOs.
There was a strong perception among a majority of the CIOs that domestic
customers were not a focus area for IT service providers and that the IT
service providers rarely offer Indian customers the kind of commitment and
expertise that they provide their large (and necessarily more lucrative) global
customers. The CIOs also strongly believe that the potential of the domestic
market is still not appreciated by many of the IT services players.
Further, there continues to be a relative poor awareness of the potential of
using IT as an enabler of competitive advantage. As cost arbitrage is not a
strong enough justification for outsourcing in India, the IT service providers
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need to clearly articulate their value proposition and relate it to business
benefits.
IT services vendors should be able to assist the CIOs to focus on generating
business value from IT investments, by offering total solutions and end-to-end
services.
As the level of IT investment increases, there is a change in the perceived
role of IT from a support function to an enabler of competitive advantage.
There is increasing pressure on the CIO(s) to justify the IT investment by
demonstrating the value delivered from IT investments. The increased
expectations from IT, requires them to move from routine IT operations to
strategic IT management. The challenges they face in making this
transformation has to do with the existing complexities in their IT
environments, which make the IT departments and the CIOs spend most of
their time and effort in day-to-day operations.
The IT services vendors have a key role to play in helping the CIOs make this
transformation. New offerings and service delivery models need to be
developed that can assist the CIOs in streamlining their IT operations to such
a level that they can then devote their IT investments and efforts to
transformational initiatives.
Verticalised solutions are becoming increasingly important, and IT service
vendors need to develop domain skills and offerings.
Verticalisation of IT services is a definitive emerging trend and users are
demanding services tailored to their needs. Mature IT customers are today
looking for total solutions that can solve their business challenges rather than
at IT hardware, software, and services as discrete elements.
IT vendors today, need to develop new or customize existing offerings to
address the specific needs of each vertical/market segment. Such an
282
approach, based on solution orientation, is enabling IT service providers to
offer sustainable value to customers.
While the larger services vendors have specific vertical practices and teams,
the medium- and small-sized IT services vendors need to focus on select
verticals and develop their skills in these.
Service providers need to extend strong end-to-end service capabilities to
domestic customers, as the IT services market moves to high-value, annuity
engagements.
The evolution of the IT services landscape is defined by the market
graduating from low value long-term services (such as basic maintenance and
support) to high-value onetime services (such as system integration) and then
on to high-value long-term services (such as discrete and end-to-end IT
outsourcing).
The vendors who will gain from this shift are those who will have the capability
to offer end-to-end services.
Larger and mature IT users are increasingly looking for end-to-end IT services
and this will be a major growth engine for the market. This market segment
will be dominated by a few large IT services vendors who have the size and
the capabilities to address this demand.
The development of the domestic IT services market will need to become
more broad-based. To achieve sustained development, new verticals will
need to be penetrated as it is not sufficient to increase business from only the
currently addressed verticals.
A large proportion of the current IT services market is predicated on the
banking, financial services and telecom verticals. While IT services for these
verticals will continue to show strong growth, new verticals will need to be
developed to increase the rate of growth of the IT services market in India.
283
As the Indian economy opens further opens up, other verticals including
manufacturing, travel and tourism, healthcare, entertainment will increasingly
look towards IT to increase competitiveness. For both new and existing
verticals, the small and medium business (SMB) segment will represent an
important source of growth for the domestic IT services market.
Spotlight on the Domestic ITES-SPO Market Opportunity
ITES-BPO is a very nascent segment of the domestic market, driven by voice
based services with customer care and sales and marketing activity
accounting for approximately 70 percent of the total.
Domestic ITES-SPO Revenues (INR Million)
2004 2005 2006
HR 2428.9 4412.5 801 9.5
F&A 2563.9 2975.4 3454.1
Customer Care 7696.1 16161.8 33939.7
Sa les & marketing 8465.2 12019.6 17756.4
Other 2059.2 2449.4 2914.6
Total 23213.3 38018.6 66084.4
Source: ibid
Currently, the BFSI and Telecom verticals account for over 70 percent of the
demand for ITES-BPO services in the domestic market.
Domestic ITES-SPO Revenues by Vertical Market (2004)
Verticals Share (2004) Typical Processes Outsourced
Banking & Financial
Services
47.4
Customer support, marketing and sales,
collections, billing. transaction processing,
market analytics, H R
Telecom 24.1 Customer support, cross-selling. loan
processing, claim processing, market analytic,
data validation, HR
284
Verticals Share (2004) Typical Processes Outsourced
Manufacturing (Consumer
Durables / Automobile)
12.2 Customer support, sales and marketing,
transportation, supply chain management,
accounts payable/receivable
Others (IT-ITES, Aviation,
Hospitality, Retail)
16.4 HR, Customer support, marketing and sales,
billing, transaction processing, analytics, etc.
Source: ibid
While cost savings have been the primary driver of offshore outsourcing,
vendors do not have comparable differences in labour costs to leverage while
serving the domestic market. As a result, the primary motivation for the
domestic market, in its early years of evolution are not cost savings but
access to specialist skills and freeing client resources to focus on the core
business. Scalability and process efficiency is expected to return some
degree of cost savings in the domestic market as well. However this may not
compare with the levels achieved by overseas (e.g. US/UK) clients.
Notwithstanding its relatively smaller contribution to the industry revenues,
this segment has over the past twelve-eighteen months witnessed a
noticeable increase in interest and activity on the part of customer
organizations as well as service providers. While the market activity (contracts
announced and deals known to be in the negotiation stages) signal growth in
the segment, like in IT services, future growth may be accentuated if a few
lingering issues are addressed.
Some of the key findings from the ITES-BPO leg of the user-organization
survey conducted by IDC as a part of this study include:
While BPO / ITES penetration (to external/independent entities) is still very
low, a sizeable proportion of end user organizations have an internal division
to focus on these specific business processes indicating growing adoption of
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process based work-flow. This is a critical stage in the maturity of user
organizations for them to consider / be able to outsource.
Willingness to move from an in-house captive sourcing model to outsourcing
is very low. Satisfaction with existing systems, lack of trust in outsourced
service providers, high cost of services, unavailability of suitable vendors and
lack of skilled personnel (with vendors) being the most commonly cited
reasons for not looking at outsourcing.
Demonstrated focus on serving the domestic market and showcased
examples of successful engagements with domestic customers are key
factors that would make outsourcing a more attractive alternative for end
users.
4.5 INDUSTRIAL PROMOTION
India has enormous opportunities emerging from globalization and
consequent lowering of tariff barriers. Information Technology has given India
formidable brand equity in the global markets. The Indian Software Industry
has been moving up the value chain as well. Indian software companies have
a unique distinction of providing efficient software solutions with cost and
quality as an advantage by using state-of-the-art technology. Through joint
efforts of Government and the Industry, Software Development and IT
Enabled Services have emerged as niche opportunities for India in the global
context. The Government has been making continuous efforts to make India a
front-runner in the age of Information revolution. India today has the
advantages of skilled manpower base, active and healthy competition
amongst states in attracting investment in infrastructure as well as framing IT
applications in areas such as e-governance, e-learning, e-commerce,
entrepreneurship, software exports growth and a large potential in the
domestic market. Information Technology Act dealing with Cyber Security,
Cyber Crime and other information security related legal aspects is in place.
Through a policy of sustained R&D in cutting edge technology the
Government hope to further increase and broad base our exports while also
expanding the domestic market.
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India has the potential to develop and manufacture Electronics / lT Hardware
for the global markets and gain higher global share besides meeting the
country's future requirement in the converging areas of information,
communication and entertainment. The Government has set up a National
Manufacturing Competitiveness Council (NMCC) to provide a continuing
forum for policy dialogue to energize and sustain the growth of manufacturing
industry including IT hardware.
As a result of technological convergence, at the infrastructure, services and
industry level there has been a tremendous up-surge in new products and
also consolidation in the underlying industries through acquisitions and
mergers. Consequent shift has been from monopoly of Government as
service provider to private entry in telecom to promote competition and
establishing a neutral regulatory agency. The essence of the convergence
spirit and the vitality of changes have led to lowering of tariffs, plentiful
availability of bandwidth at increasingly lower cost, competition and growth in
technology, especially fiber optics and wireless technology. Internet is clearly
surging ahead laying another milestone that promises to rewrite global and
national economies. India has been successfully promoting reforms in all the
constituents of the Internet, Communication and Entertainment sector. At the
same time, the Government vision is to use Information Technology as a tool
for raising the living standards of the common man and enriching their lives.
Towards this end the Department of Information Technology has taken up an
ambitious programme of PC and Internet penetration to the rural and
underserved urban areas.
The Government of India's liberalization and economic reforms programme
aims at rapid and substantial economic growth and integration with the global
economy in a harmonized manner. The new policies have made
governmental procedures transparent, eliminated licensing in almost all
sectors and provide encouragement to entrepreneurship through market
friendly systems. The Industrial Policy reforms have drastically reduced the
industrial licensing requirements, removed restrictions on investment and
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expansion and facilitated easy access to foreign technology and foreign direct
investment. An outward looking and liberal trade policy is one of the main
features of India's economic reforms. In line with its mission of formulating a
transparent investor friendly environment, the Government has done away
with the complex pre-entry approvals. Foreign Direct Investment today can
enter India in most sectors through the automatic route. India is a signatory to
the Information Technology Agreement of the World Trade Organization and
w.e.f. 1st March, 2005 the customs duty on all the specified 217 items has
been eliminated.
Over the years, Foreign Trade Policy for Electronics and IT products has been
liberalized, Customs and Excise procedures simplified, EDI implemented by
customs & under implementation by central excise and customs duty on
specified capital goods and raw materials for electronics / lT hardware has
been brought down to zero %. Electronics Hardware Technology Park (EHTP)
and Special Economic Zones (SEZ) schemes have been tailored to boost
manufacturing in the country.
4.5.1 INDUSTRIAL APPROVAL POLICY
Industrial Licensing has been virtually abolished in the Electronics and
Information Technology sector except for manufacturing electronic aerospace
and defence equipment.
There is no reservation for public sector enterprises in the Electronics and
Information Technology industry and private sector investment is welcome in
every area.
Electronics and Information Technology industry can be set up anywhere in
the country, subject to clearance from the authorities responsible for control of
environmental pollution and local zoning and land use regulations.
Large and Medium Industries exempted from licensing are only required to file
information in the prescribed Industrial Entrepreneurs' Memorandum (IEM)
with the Secretariat for Industrial Assistance (SIA), Department of Industrial
288
Policy and Promotion, Ministry of Commerce & Industry, Government of India
and obtain an acknowledgement. Immediately after the commencement of
commercial production, Part B of the IEM has to be filed. No further approval
is required. Small Scale Industries are required to register with the District
Industries Centre (DIC). Forms can be downloaded from the website of the
Department of Industrial Policy and Promotion, Ministry of Commerce &
Industry http://www.dipp.nic.in
4.5.2 FOREIGN INVESTMENT POLICY
India welcomes investors in Electronics and IT sector. Government of India is
striving to bring greater transparency in policies and procedures to provide an
investor friendly platform.
A foreign company can start operations in India by registration of its company
under the Indian Companies Act 1956. Foreign equity in such Indian
companies can be upto 100%. At the time of registration it is necessary to
have project details, local partner (if any), structure of the company, its
management structure and shareholding pattern. Registration is a kind of
formality and it takes about two weeks. It can forge strategic tie up with an
Indian partner.
A joint venture entails the advantages of established contracts, financial
support and distribution-marketing network of the Indian partner. Approval of
foreign investments is through either automatic route or Government
approval.
Government of India facilitates Foreign Direct Investment (FDI) and
investment from Non Resident Indians (NRls) including Overseas Corporate
Bodies (OCBs), predominantly owned by them to complement and
supplement domestic investment. Foreign technology induction is encouraged
both through FDI and through foreign technology collaboration agreement.
Foreign Direct Investment and Foreign technology collaboration agreements
can be approved either through the automatic route under powers delegated
to the Reserve Bank of India (RBI) or otherwise by the Government.
289
Automatic Approval
FDI upto 100% is allowed under the automatic route from foreign / NRI
investor without prior approval in most of the sectors including the services
sector. FDI in sectors / activities under automatic route does not require any
prior approval either by the Government or RBI (For details please refer to
RBI website at www.rbi.org.in). In pursuance of Government's commitment to
further liberalize the FDI regime, all items / activities have been placed under
the automatic route for FDI / NRI and OCB investment, except the following:
I. All proposals that require an Industrial Licence, which includes
i. the item requiring an Industrial Licence under the Industries
(Development & Regulation) Act, 1951;
ii. Foreign investment being more than 24% in the equity capital of units
manufacturing items reserved for small scale industries; and
iii. All items which require an industrial licence in terms of the locational
policy notified by Government under the New Industrial Policy of 1991.
II. All proposals in which the foreign collaborator has a previous
venture/tie up in India.
III. All proposals relating to acquisition of shares in an existing Indian
company in favour of a foreign/NRI/OCB investor.
IV. All proposals falling outside notified sectoral policy/caps or under
sector in which FDI is not permitted and/or whenever any investor
chooses to make an application to the FIPB and not to avail of the
automatic route.
All proposals for investment in public sector unit, as also for EOU / EPZ /
EHTP / STP units would qualify for automatic route subject to the above
parameters. The modalities and procedures for automatic route would remain
the same and RBI would continue to be the concerned agency for monitoring /
reporting as per exiting procedure. FDI / NRI / OCB investment under the
automatic route shall continue to be governed by the notified sectoral policy
and equity caps.
290
Procedure for Obtaining Government Approval - FIPB
All proposals for foreign investment requiring Government approval are
considered by the Foreign Investment Promotion Board (FIPB). The FIPB also
grants composite approvals involving foreign investment/foreign technical
collaboration. For seeking the approval for FDI other than NRI investments
and 100% Export Oriented Units (EOUs), applications in form FCIL should be
submitted to the Department of Economic Affairs (DEA), Ministry of Finance.
Foreign investment proposals received in the DEA are generally placed
before the Foreign Investment Prom6tion Board (FIPB) within 15 days of
receipt. The decision of the Government in all cases is usually conveyed
within 30 days. For details on the Foreign Direct Investment Policy guidelines,
please refer to website - http://www.dipp.nic.in
4.5.3 FISCAL POLICY
The salient features of the Fiscal Policy as applicable to the Electronics/IT
Sector are as follows:
Peak rate of customs duty is 15%. Customs duty on ITA-1 items (217 items)
has been abolished from 1.3.2005. 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 / inputs used for
manufacture of electronic components or optical fibers / cables is zero%.
Customs duty on specified capital goods used for manufacture of electronic
goods is zero%.
Excise duty on computers is zero%. Microprocessors, Hard Disc Drives,
Floppy Disc Drives and CD ROM Drives are exempted from excise duty.
Parts, components and accessories of mobile handsets including cellular
phones are exempted from excise duty.
Information Technology Software is exempted from Customs and Excise
Duty.
Export Oriented Units (EOU) / Electronics Hardware Technology Park (EHTP)
Units / Software Technology Park (STP) Units are eligible for Income Tax
291
exemption on export profits, upto 2010, in terms of Sections 10A and 10B of
the Income Tax Act. 100% Income Tax exemption on export profits is
available to Special Economic Zone (SEZ) Units for 5 years, 50% for next 5
years and 50% of ploughed back profits for 5 years thereafter.
Depreciation on Computers is @ 60%.
To induce more investment for Research and Development activities, a
weighted deduction of 150% on the sums paid to any university, college or an
institution or a scientific research association for the purposes of scientific,
social or statistical research is available.
Income by way of dividends or long-term capital gains of!a Venture Capital
Fund (VCF) or Venture Capital company from investment made by way of
equity shares in a Venture Capital Undertaking, which has been expanded to
include the Software and IT sectors, will henceforth not be included in
computing the total income. To give thrust to Venture Capital finance, SESI
has been made the single point nodal agency for registration and regulation of
both domestic and overseas venture capital funds.
4.5.4 FOREIGN TRADE POLICY
In general, all Electronics and IT products are freely importable, with the
exception of some defence related items. All Electronics and IT products, in
general, are freely exportable, with the exception of a small negative list which
includes items such as high power microwave tubes, high end super
computer and data processing security equipment.
Second hand capital goods are freely importable.
Export Promotion Capital Goods scheme (EPCG) allows import of capital
goods on payment of 5% customs duty. The export obligation under EPCG
Scheme can also be fulfilled by the supply of Information Technology
Agreement (ITA-1) items to the DTA provided the realization is in free foreign
exchange.
292
Special Economic Zones (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 / DEPS benefits, CST exemption and Service
Tax exemption.
Supplies of Information Technology Agreement (ITA-1) items and notified zero
duty telecom/electronic items in the Domestic Tariff Area (DTA) by EOU /
EHTP / STP / SEZ units are counted for the purpose of fulfillment of positive
Net Foreign Exchange Earnings (NFE).
The import of second hand computers including personal computers and
laptops are restricted for imports. However, second hand computers, laptops
and computer peripherals including printer, plotter, scanner, monitor,
keyboard and storage units can be imported freely as donations by the
following category of donees subject to the condition that the goods shall not
be used for any commercial purposes and are nontransferable:
i. School run by Central or State Government or a local body
ii. Educational Institution runs on non-commercial basis by any
organization
iii. Registered Charitable Hospital
iv. Public Library
v. Public funded Research and Development Establishment
vi. Community Information Centre run by the Central or State Government
or local bodies
vii. Adult Education Centre run by the Central or State Government or a
local body
viii. Organization of the Central or State Government or a Union Territory
India's Foreign Trade Policy and Procedures are available on the
website of the Department of Commerce, Ministry of Commerce &
Industry http://www.commerce.nic.in ).
293
4.5.5. EXPORT PROMOTION SCHEMES
SPECIAL SCHEMES FOR ELECTRONICS HARDWARE AND SOFTWARE
Special schemes are available for setting up Export Oriented Units for the
Electronics / IT Sector. Various incentives and concessions are available
under these schemes. The schemes are:
Export Oriented Unit (EOU) Scheme
Electronics Hardware Technology Park (EHTP) Scheme.
Software Technology Park (STP) Scheme
Special Economic Zones (SEZ) Scheme
EOU / EHTP / STP Schemes
Units undertaking to export their entire production of goods and services,
except permissible sales in the Domestic Tariff Area (DTA), may be set up
under the EOU, EHTP or STP Scheme for manufacture of goods, including
repair, re-making, re-conditioning, re-engineering and rendering of services.
Trading units, however, are not covered under these schemes. 100% Foreign
Direct Investment is permitted through automatic route for the units set up
under these schemes. EOU / EHTP / STP units may import and / or procure
from the DT A or bonded warehouses in DTA, without payment of duty, all
types of goods, including capital goods, required for its activities, provided
they are not prohibited items of import in the ITC(HS). The units shall also be
permitted to import goods including capital goods required for the approved
activity, free of cost or on loan/lease from clients. An EOU / EHTP / STP unit
may, on the basis of a firm contract between the parties, source the capital
goods from a domestic / foreign leasing company without payment of
customs/excise duty. EOU / EHTP / STP unit shall be a positive net foreign
exchange earner. Net Foreign Exchange Earnings (NFE) shall be calculated
cumulatively in blocks of five years, starting from the commencement of
production. The donation of computers, imported/indigenously procured duty
free by EOU / STP / EHTP units to recognized non-commercial educational
institutions, registered charitable hospitals, public libraries, public funded
294
research and development establishments, etc., two years after their
import/procurement and use by the said units is permitted.
Supplies of Information Technology Agreement (ITA-1) items and notified zero
duty telecom / electronic items effected from EOU / EHTP / STP units to DTA
will be counted for the purpose of fulfillment of positive NFE, EOU / EHTP /
STP units are permitted DTA access upto 50% of the FOB value of exports
subject to fulfillment of positive NFE on payment of concessional duties.
Depreciation upto 100% is permissible to computers and computer
peripherals over a period of 5 years.
SEZ Scheme
Special Economic Zone (SEZ) is a specifically delineated duty free enclave
and shall be deemed to be foreign territory for the purposes of trade
operations and duties and tariffs. Goods and services going into the SEZ area
from DT A shall be treated as exports and goods and services coming from
the SEZ area into DTA shall be treated as if these are being imported. SEZ
units may be set up for manufacture of goods and rendering of services.
SEZ unit may import/procure from the DTA without payment of duty all types
of goods and services, including capital goods, whether new or second hand,
required by it for its activities or in connection therewith, provided they are not
prohibited items of imports in the ITC(HS). The units shall also be permitted to
import goods required for the approved activity, including capital goods, free
of cost or on loan from clients. SEZ unit may, on the basis of a firm contract
between the parties, source the capital goods from a domestic/foreign leasing
company. SEZ unit shall be a positive Net Foreign Exchange earner. Net
Foreign Exchange Earning (NFE) shall be calculated cumulatively for a period
of five years from the commencement of production. Complete details of the
SEZ scheme are available at the website http://www.sezindia.nic.in
Infrastructure service providers for STP units, duly approved by the Inter
Ministerial Standing Committee (IMSC) for EHTP and STP Schemes are
eligible to import, duty free, telemetric infrastructural equipments and other
295
items as listed in Customs Notification No. 153/93 dated 13.8.93, as amended
from time to time. Software Technology Parks are also covered under the
Industrial Park Scheme 2002 implemented by the Department of Industrial
Policy and Promotion, Ministry of Commerce and Industry for providing
Income Tax benefits under Section 80lA of the Income Tax Act for setting up
of the Industrial Park/Industrial Model Town/Growth Centre.
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 an export obligation equivalent to 8 times of duty saved on
capital goods imported, to be fulfilled over a period of 8 years. The capital
goods shall include spares (including refurbished / reconditioned spares),
tools, jigs, fixtures, dies and moulds. Second hand capital goods without any
restrictions on age may also be imported under the EPCG Scheme. The
export obligation can also be fulfilled by the supply of ITA-1 items to the DTA
provided the realization is in free foreign exchange.
DUTY EXEMPTION AND REMISSION SCHEMES
The Duty exemption schemes enable duty free import of inputs required for
export production. An Advance Licence is issued under Duty Exemption
Scheme. A Duty Remission Scheme enables post export replenishment /
remission of duty on inputs used in the export product. Duty remission
schemes consist of (a) Duty Free Replenishment Certificate (DFRC) and (b)
Duty Entitlement Passbook Scheme (DEPB). DFRC permits duty free
replenishment of inputs used in the export product. DEPB allows drawback of
import charges on inputs used in the export product. The details of these
schemes are available on the website of the Directorate General of Foreign
Trade, Ministry of Commerce & Industry (http://www.dgft.delhi.nic.in).
Advance Licence
An Advance Licence is issued to allow duty free import of inputs, which are
physically incorporated in the export product (making normal allowance for
wastage). In addition, fuel, oil, energy, catalysts etc., which are consumed /
296
utilized in the course of their use to obtain the export product, may also be
allowed under the scheme. Duty free import of mandatory spares up to 10%
of the CIF value of the licence, which are required to be exported / supplied
with the resultant product, may also be allowed under Advance Licence.
Advance Licences are issued on the basis of the inputs and export items
given under Standard Input Output Norms (SION). However, they can also be
issued on the basis of Adhoc norms of self declared norms.
Duty Entitlement Pass Book Scheme (DEPB)
The objective of the DEPB is to neutralize the incidence of Customs duty on
the import content of the export product. The neutralization shall be provided
by way of grant of duty credit against the export product. Under the DEPB
scheme, an exporter may apply for credit, as a specified percentage of FOB
value of exports, made in freely convertible currency. The DEPB scheme will
continue to be operative until it is replaced by a new scheme, which will be
drawn up in consultation with exporters.
Duty Free Replenishment Certificate (DFRC)
DFRC is issued to a merchant exporter or manufacturer exporter for the
import of inputs used in the manufacture of goods without payment of basic
customs duty. However, such inputs shall be subject to the payment of
additional customs duty equal to the excise duty at the time of import. DFRC
shall be issued on a minimum value addition of 25% only in respect of
products covered under the SION as notified by Directorate General of
Foreign Trade (DGFT).
DEEMED EXPORTS
"Deemed Exports" refers to those transactions in which the goods supplied do
not leave the country and the payment for such supplies is received either in
Indian rupees or in free foreign exchange.
The following categories of supply of goods by the main/ sub-contractors are
regarded as "Deemed Exports" under the Foreign Trade Policy, provided the
goods are manufactured in India:
297
a. Supply of goods against Advance Licence / Advance Licence for
annual requirement / DFRC under the Duty Exemption / Remission
Scheme;
b. Supply of goods to Export Oriented Units (EOUs) or Software
Technology Parks (STPs) or Electronic Hardware Technology Parks
(EHTPs) or Bio Technology Parks (BTP);
c. Supply of capital goods to holders of licences under the Export
Promotion Capital Goods (EPCG) scheme;
d. Supply of goods to projects financed by multilateral or bilateral
agencies/funds as notified by the Department of Economic Affairs,
Ministry of Finance under International Competitive Bidding in
accordance with the procedures of those agencies / funds, where the
legal agreements provide for tender evaluation without including the
customs duty;
e. Supply of capital goods, including in unassembled / disassembled
condition as well as plants, machinery, accessories, tools, dies and
such goods which are used for installation purposes till the stage of
commercial production and spares to the extent of 10% of the FOR
value to fertilizer plants;
f. Supply of goods to any project or purpose in respect of which the
Ministry of Finance, by a notification, permits the import of such goods
at zero customs duty;
g. Supply of goods to the power projects and refineries not covered in (f)
above;
h. Supply of marine freight containers by 100% EOU (Domestic freight
containers manufacturers) provided the said containers are exported
out of India within 6 months or such further period as permitted by the
customs;
i. Supply to projects funded by UN agencies; and
j. Supply of goods to nuclear power projects through competitive bidding
as opposed to International Competitive Bidding.
298
The benefits of deemed exports shall be available under paragraph (d), (e), (f)
and (g) only if the supply is made under the procedure of International
Competitive Bidding (ICB).
Benefits for Deemed Exports
Deemed exports shall be eligible for any/all of the following benefits in respect
of manufacture and supply of goods qualifying as deemed exports subject to
the terms and conditions as given in the Handbook of Procedures (VoLl),
2004-2009 of the Department of Commerce, Ministry of Commerce &
Industry:
a. Advance Licence for intermediate supply/deemed export / DFRC /
DFRC for intermediate supplies.
b. Deemed Export Drawback.
c. Exemption from terminal excise duty where supplies are made against
International Competitive Bidding. In other cases, refund of terminal
excise duty will be given.
4.6. Information Technology (IT) Industry in Maharashtra
MAHARASHTRA known as the land of saints, intellectual's social reformers
and freedom fighters, will perhaps one day also be known as the land of
industrialists. It has made tremendous strides in the industrial sector in recent
years, becoming the fastest developing state in the country.
In times of globalization, privatization and liberalization, when the world is
being converted into a global village, Maharashtra has been successful in
creating its own identity. On the one hand where the economic growth of the
country stands at 8.7 percent, Maharashtra has shown a growth of 9 percent.
It has also attracted maximum FDI for the country as well. Maharashtra as
attracted an investment of Rs 74 crore by getting 79 small and large-scale
projects. About 60 percent of the country's GDP is contributed by Maharashtra
alone. Industrialists like Tata, Bajaj, Kirloskar, Garware, Dandekar, Kalyani,
Firodiya and Ambanis have created a strong industrial foundation in Maha-
rashtra. On this foundation, the state is making rapid industrial progress. Rural
299
entrepreneurs have also hit the road to progress by adopting modern
practices in agriculture, food processing and horticulture. IT and BT parks,
textile parks, Food Park, wine park, auto cluster and SEZs and small and
medium scale industries are springing up in if every corner of the state,
creating greater employment opportunities.
Automobile giants like Mercedes, General Motors, Volkswagen and Skoda
have set up their manufacturing units in the state. As a spin-off, industries
producing spare parts are now being set up in the state.
The State Government is developing Information Technology (IT) parks in
different areas of the state through City and Industrial Development
Corporation (CIDCO) and Maharashtra Industrial Development Corporation
(MIDC). Accordingly 33 Government / Public IT parks are being developed.
These IT parks are expected to generate 11.54 lakh employment
opportunities with private investment of Rs.15,005 crore.
As per the advance estimates the Gross State Domestic Product (GSDP) of
Maharashtra at constant (1999-00) prices is expected to grow at the rate of
9.0% during 2007-08. The sectorial growth rate of GSDP are expected to be
at 5.7% for primary, 10.4% for Secondary and 9.1% for territory sector.
Being an urbanized state, Maharashtra has attracted various Indian as well as
foreign banking and insurance companies too. The number of malls,
multiplexes, big bazaars, food bazaars, five star, business and budget hotels
too has shot up across the state. Maharashtra is in the midst of a strong wave
of globalization, privatization and liberalization. The state has always changed
with the changing times but it has also managed to preserve its identity as
well.
4.6.1 Gross State Domestic product (GSDP)
The advance estimates of Gross State Domestic Product (GSDP) of
Maharashtra State for the year 2007-08 are worked out considering the
anticipated level of agricultural and industrial productions and performance of
300
key sub-sectors like transport, communications, trade, hotels & restaurants,
real estate & business services etc. The GSDP for the State at constant
(1999-2000) prices is expected to grow at 9.0 percent during 2007-08 as
against 9.7 percent during 2006-07.
This significant growth in GSDP is due to satisfactory monsoon, sustained
growth in industrial production and improvement in growth rate of services
sector. Due to good monsoon during the current year, which in turn augured
well for kharif and rabbi productions, the GSDP originating from agriculture
and allied activities is poised to grow at 5.8 percent. The industry sector is
expected to grow by 10.3 percent during 2007 -08, mainly due to buoyant
growth in manufacturing (9.8 percent) and construction
Expected Growth Rates: 2007-08 (Percent)
Sector India (GDP) Maharashtra (GSDP)
Agriculture & allied activities 2.6 5.8
Industry 8.9 10.3
Services 10.7 9.1
Total 8.7 9.0
Source : Economic survey of Maharashtra 2007-08
Per Capita GSDP for Maharashtra (In Rs.)
Year At current
prices At constant
(1999-2000) prices Index
1999-00 26.257 26.257 100.0
2000-01 26.234 25.228 96.1
2001-02 27.992 25.843 98.4
2002-03 30.238 27.188 103.5
2003-04 33.816 28.769 109.6
2004-05 37.770 30.645 116.7
2005-06 42.056 32.978 125.6
2006-07 48.171 35.633 135.7
Source : ibid
301
Growth Trends
The compound annual growth rate of GSDP, at constant (1999-2000) prices,
during the last seven years i.e. from 1999-2000 to 2006-07 was 6.6 percent.
During this period, the Per Capita Gross State Domestic Product grew by 4.9
percent. The sectoral growth rates during this period for primary, secondary
and tertiary sectors were 3.9 percent, 6.3 percent and 7.6 percent
respectively.
The trend in the growth of GSDP at constant (1999-2000) prices, for the last
seven years is not uniform for the three sectors of the economy. The income
from the primary sector increased from Rs. 40,871 crore in 1999-2000 to
Rs.52,950 crore (29.6 percent) in 2006-07. In the years 2000-01 and 2004-05,
agriculture sector recorded negative growth due to drought situation, which
had a dampening effect on primary sector. After this set back, agriculture
sector attained a sizeable average growth of 9.1 percent in 2005-06 and
2006-07. During 1999-2000 to 2006-07, the income from secondary sector
grew from Rs.71.280 crore to Rs. 1,02,693 crore (44.1 percent). Further,
income from the tertiary sector during this period showed increase from Rs.
1,35,680 crore to Rs. 2,21.140 crore (63.0 percent), showing variations in
growth rates between 2.2 to 12.1 percent. The sector wise annual growth
rates of GSDP are given in Table No. 4.5.
Table No.4.5 Sectorwise Annual Growth Rates of GSDP
( In percent)
Year Primary Secondary Tertiary GSDP
2000-01 (-) 4.1 (-) 9.1 2.2 (-) 2.1
2001-02 7.1 (-) 0.6 5.8 4.3
2002-03 2.6 7.9 7.5 6.8
2003-04 10.5 9.8 5.7 7.5
2004-05 (-) 5.6 8.4 12.1 8.2
2005-06 8.7 9.9 9.2 9.3
2006-07 8.5 12.9 8.5 9.7
2007 -08 * 5.7 10.4 9.1 9.0
*Advance estimates. Source: ibid
302
The data in Table No. 4.5 reveals that the State economy has attained more
than 9.0 percent growth in the last three successive years. During the last two
years in succession, the secondary sector attained double digit growth rate.
This high rate of economic growth has been attributed to acceleration in
secondary and tertiary sectors. It can, therefore, be surmised that
Maharashtra's economy is growing robustly and is on higher growth path.
However, concerted efforts are necessary to maintain this accelerated growth
of the State economy in future also.
Planned economic development is the responsibility of the Government. The
GSDP is the composite indicator to measure its level of development. It is,
therefore, inevitable to continuously measure and monitor the growth of
GSDP in different plan periods. The compound annual growth rates of GSDP
in the VIIIth, IXth and Xth Five Year Plans (FYP) were 7.8 percent, 3.8
percent and 8.3 percent respectively.
District Domestic Product
Estimates of domestic product at district level are compiled by the 'Income
originating approach', the method used for calculating the State Domestic
Product. Therefore district domestic products estimates have all the inherent
limitations of the State Domestic Product estimates. Though, the income
accruing is a better method to work out estimates of district income, it cannot
be adopted because economic activities at the district level are more open
ended and inter-district flows cannot be captured fully. The availability of
district wise basic data required for estimation of income at the district level is
not still up to the mark. The data in respect of commodity producing sector are
mostly available, but the data for other sectors are very scanty. As such,
wherever the basic data are available, the methodology used at the State
level has been followed for preparation of estimates at district level. Proxy
indicators are used to allocate State level estimates to districts as and when
the actual data are not available. Because of the paucity of data, use of proxy
indicators and various limitations in estimation procedure the district domestic'
303
products may be used with a margin of error and can be used to have a broad
judgment of income at district level.
Net District Domestic Product (NDDP).
Which is also commonly known as District Income, is a measure, in monetary
terms, of all goods and services produced [without duplication] within the
geographical boundaries of the district during a given period of time
(generally, one year).
Gross District Domestic Product (GDDP):
When the consumption of Fixed Capital is added to NDDP, it is termed as
Gross District Domestic product.
Per Capita Net District Domestic Product
Among the districts, Greater Mumbai with Per Capita Net District Domestic
Product (at current prices) at Rs. 65,361 in 2006-07 was at the top in the
State, followed by Pune (Rs. 60,375), Thane (Rs. 58,224), Raigad (Rs.
47,648), Nashik (Rs. 46.064) and Nagpur (Rs. 44,598). Washim district was
the lowest in Per Capita Income (Rs. 20.774).
4.6.2 Industrial Scenario
In accordance with the central policy, Maharashtra State has also taken steps
to attract more and more investments in industrial sector and has succeeded
in maintaining the leading position in the country. As a part of this,
Government of Maharashtra has taken number of initiatives in designing and
implementing policies with respect to SEZs, ITs and MSMEs.
New Industrial Investment
The industrial policy reforms have reduced the industrial licensing
requirements, removed restrictions on investment & expansion and facilitated
easy access to foreign technology as well as foreign direct investment. Under
the de-licensing policy, the Government of India is receiving large number of
applications of Industrial Entrepreneur Memorandum (IEM) / Letter of Intents
(LoI) / 100% Export Units (EOU) and Memorandum of Understanding (MoU)
304
for setting up new industries/ mega projects in the State. Upto the end of July,
2007 the State's share in proposed industrial investment and employment to
be generated therein in the country is 12 percent and 16 percent respectively.
The sectors such as Chemicals & Fertilisers and Metallurgical (14 percent
each) and Food Processing (11 percent) are dominating in the total proposed
investment, followed by the sectors like Textiles (6 percent), Engineering (5
percent), IT and Rubber & Petroleum (4 percent each). The status of projects
(IEM/LoI/100% EGU, MoU) implemented during August, 199l upto July, 2007
is given in Table No. 4.6
Table No. 4.6 Status of project implementation in Maharashtra
(Cumulative since August 1991 to July. 2007)
Projects IEM / LoI / 100% EOU MoU
Approved
Number 14,069 55
Investment (Crore Rs.) 3,89,190 47,500
Employment (No.) 25,06,798 43,919
Completed (Production started)
Number 6,475 *
Investment (Crore Rs.) 1,01,416 *
Employment (No,) 6,38,559 *
* Not yet started. Source : ibid
The statewise information on industrial investment (through IEM, LoI and
100% EGU) for major states in India, given in the Table No. 4.6 reveals that
Maharashtra has remained a favoured destination for industrial investment in
the country. Maintaining its status of the most industrialized state,
Maharashtra has successfully attracted bulk of industrial investment in the
post liberalization era, from both the domestic as well as foreign entities.
305
Table No. 4.7 Industrial Investment Proposals
(since August 1991 to July 2007)
State Proposals (IEM, LoI and 100% EOU)
No Investment (Rs.in crore)
Employment (In lakh no.)
Gujarat 9440 452983 15.84
Maharashtra 14069 389190 25.07
Chhatisgarh 1883 323956 4.13
A. Pradesh 5976 273540 10.36
Orissa 1212 250549 3.56
Karnataka 3628 237823 6.60
Tamilnadu 7628 229529 21.00
U. Pradesh 6790 186314 16.21
M.Pradesh 2860 98370 5.98
All India 79468 3165645 155.87
0
10000
20000
30000
40000
50000
60000
70000
80000
Rs
in C
rore
UP AP
Gujrat
Tamil
Nadu
Mahara
shtr
a
States
FDI in Maharashtra & major States
Source : ibid
Salient features of FDI in Maharashtra
Projects approved
Number 3982
Investment 70856
306
(Rs.in crore)
Projects commissioned
Number 1623
Investment 39121
(Rs.in crore)
Most favoured Sectors*
Services 24%
IT Industry 21%
Infrastructure 12%
Automobiles 10%
* Figures in bracket indicates share in FDI
As regards foreign direct investment (FDI) total 3,982 projects with Rs. 70,856
crore of investment in the state have been approved by Government of India
during the post-liberalization period August, 1991 to July, 2007, which
accounts for about 24 percent share in the total FDI in the country. Of these
approved proposals, 1,623 projects with investment of Rs. 39,121 crore (55.2
percent) have been commissioned by July, 2007.
4.6.3 Special Economic Zones (SEZ)
The SEZ Act, 2005, with SEZ Rules, came into effect on 10th February, 2006,
with provision of drastic simplification of procedures and for single window
clearance on matters relating to Central as well as State Governments. The
main objectives of the SEZ Act are:
Promotion of exports of goods and services
Promotion of investment from domestic and foreign sources
Creation of employment opportunities
Development of infrastructure facilities
Generation of additional economic activities
307
It is expected that this will trigger inflow of large foreign and domestic
investment in SEZs, infrastructure and productive capacities which will lead to
generation of additional economic activities and employment opportunities. Up
to the end of October, 2007, in all 175 SEZ proposals were received in the
State of which 122 were approved (84 formal and 38 in-principle approvals)
and 21 proposals were already notified. The region wise proposals approved,
land requirement, investment therein and likely employment generation
through these SEZs are given in the Table No.4.8.
Table No. 4.8 Details of Approved SEZs in the State
(As on 31.10. 2007)
Region Approved SEZ Proposals
No. Area in hectares Investment* Employment#
Konkan 58 29,668 95,296 35.36
Western Maharashtra 42 10,228 22,607 10.73
Marathwada 13 3,980 4,265 1.56
Vidarbha 9 6,004 10,409 5.84
Total 122 49,880 1,32,578 53.48
* RS. in crore # Figures in lakh Source : ibid
Out of the 122 approved SEZs, 98 are private/joint ventures. Maximum
numbers (45) of approved SEZs are from IT sector, where as 21 are
multiproduct SEZs and 56 are single product SEZs. Of these single product
SEZs, 2 are captive power projects.
4.6.4 Package Scheme of Incentives 2007
In order to promote balanced industrial development in the state, the Package
Scheme of Incentives was introduced in 1964 and the scheme has been
amended from time to time to incorporate structural changes in the economy.
Recently, Government of Maharashtra has declared Package Scheme of
Incentives (PSI), 2007 which is to be implemented in the next four financial
years starting from 1st April, 2007. Eligible Micro and Small Enterprises,
308
Medium Enterprises and Large Scale Industries from all sectors except
Central Public Sector are considered for incentives under PSI 2007. In order
to implement the scheme effectively tehasils in the state are classified into A,
B, C. D. D+ and 'No Industry District' according to their level of industrial
development.
The highlights of this scheme are
Promote new SMEs/ expansion of existing units through 'Industrial
Promotion
Subsidy' for Fixed Capital Investment
Provide cushion to new SMEs in textile hosiery, knitwear and
readymade garment sector through Interest Subsidy for acquisition of
fixed capital assets.
To reduce the burdens of various taxes/ duties on the SMEs for
sustained growth by means of exemptions from electricity duty waiver
of stamp duty royalty refund (specifically for units in Vidarbha Region),
refund of octroi/ entry tax (in lieu of octroi.)
To attract large scale investment by facilitating conducive environment
for industries, some of these benefits are extended to IT/ BT units and
mega projects.
To increase the quality of the production and efficiency of MSEMs,
subsidy for (i) capital equipment for technology upgradation, (ii) quality
certification, (iii) cleaner production measures (iv) patent registration.
Customized and special/extra incentives to prestigious mega projects.
4.6.5 Information Technology (IT)
The Government has taken a number of initiatives to promote development of
IT / ITES sector in the state. The steps include formulation of a progressive
sector-specific policy, development of IT parks and the knowledge corridor. As
envisaged in 'Information Technology (IT) and Information Technology
Enabled Services (ITES) Policy. 2003' the state has offered various fiscal
incentives to IT / ITES industries. Besides, non-fiscal incentives like additional
FSI permitting software industry in residential areas, extended working hours
for women employees under Shop and Establishment Act, suitable
309
permissions to develop communication systems, self certifications under
labour laws are offered.
Public and Private IT Parks
Emergence of IT parks has triggered development of integrated infrastructure
needed for this industry. These parks are supposed to be centers of
excellence with reference to various infrastructure facilities and overall
ambiance required for industry. In view of this, 33 public IT Parks are
established by MIDC and CIDCO. For getting private participation in creating
world class infrastructure for IT industry, 245 private IT Parks have been
approved, out of which 46 IT parks have started functioning. These 46 IT
parks are covering approximately 93.62 lakh sq. ft of built-up area (BUA) with
investment of Rs. 1.952 crore and are creating 1.50 lakh jobs. The remaining
199 IT parks covering 653 lakh Sq.ft. BUA with investment of Rs. 13,053
crore have given Letters of Intent and are expected to generate 10.04 lakh job
opportunities. However, the private IT parks are mainly concentrated in
Greater Mumbai (107), Thane (28) and Pune (106) districts.
The software export from IT parks in the State has registered impressive
growth of 44 percent (CAGR) during 2000-01 to 2004-05 as against the All-
India 37 percent (CAGR). The comparison of software exports from IT parks
of the state against the states of Karnataka, Tamil Nadu and other states is
given in Table No. 4.9.
Table No. 4.9 Statewise Software exports from IT Parks
(Rs. In crore)
State 2000-01 2001-02 2002-03 2003-04 2004-05
Karanataka 7475 9904 12350 18100 27600
Tamilnadu 2956 5014 6305 7621 10790
Maharashtra. 2570 4603 5508 8518 11642
Other states 7050 10002 13013 17229 23987
India 20051 29523 37176 51468 74019
Source : ibid
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Mumbai - Pune Knowledge Corridor
A unique and first of its kind initiative of the Government of Maharashtra, the
Mumbai - Pune Knowledge Corridor is fast emerging as the IT hub of the
country. Main features of this corridor are:
A six lane, dual carriage expressway between the two cities
Optical-fiber cable link provided between the two cities
Six major IT parks set-up in the two cities, three each in Mumbai and
Pune, providing world-class IT infrastructure
Mumbai and Pune provide the best infrastructure in terms of housing,
education, transport and electricity
4.6.6 Maharashtra Industrial Development Corporation (MIDC)
In order to achieve planned and systematic growth throughout the state,
MIDC is developing industrial areas with essential infrastructure like internal
roads, water, electricity and other internal services to entrepreneurs. To
achieve decentralized as well as faster industrial development, the State
Government is implementing the following important programmes through
MIDC:
Establishment of growth centres
Establishment of mini-industrial areas to cover all tehasils
Setting-up of 'Five Starred' industrial areas
Table No. 4.10 Operational data regarding MIDC Industrial areas in the
State
(As on 31st March, 2007)
Region MIDC Industrial areas Industrial units No. of plots
Major Mini Growth Centre
Total No. Investment
(Rs. in crore) Employm
ent Devp. Allotted
Greater
Mumbai 1 0 0 1 305 346 28,670 354 332
Konkan 22 3 3 * 28 9,570 6,000 1,66,201 16,323 14,552
Nashik 10 9 11* 30 5374 3,363 98,411 8,672 7,682
Pune 28 18 17 63 7,901 10,779 1,51,552 14,929 12,972
Aurangabad 14 19 12 * 45 3,895 1,200 49,272 9,148 8,253
Amravati 7 32 8 * 47 1,269 394 16,564 4,451 3,046
311
Region MIDC Industrial areas Industrial units No. of plots
Major Mini Growth Centre
Total No. Investment
(Rs. in crore) Employm
ent Devp. Allotted
Nagpur 11 25 10 * 46 2,019 6,965 73,881 5,436 4,321
Total 93 106 61 260 30,333 29,047 5,84,551 59,313 51,158
* Of which one center each is being developed by Government of India
Source : ibid
Operational data regarding MIDC industrial areas in the State is given in
Table No. 4.10 and the performance status of MIDC as on 31st March, 2007
is given in Table No. 4.11.
Table No. 4.11 Performance status of MIDC as on 31st March, 2007
Item Status
No. of MIDC areas 260
Area notified (Hect.) 68,093
Area under possession (Hect.) 53,121
Plots demarcated
a) No. 59,313
b) Area (Hect.) 24,246
Plots allotted
a) No. 51,158
b) Area (Hect.) 21 ,832
Galas/shades (No.)
a) Constructed 6,536
b) Allotted 5,296
Industrial Units (No.)
a) Production started 30,333
b) Under construction 3.018
Per day Water supply capacity (Million lit.) 2,241
Source : ibid
312
4.6.7 Exports from Maharashtra
Exports from Maharashtra have maintained the growth momentum in tune
with the buoyant economy, registering growth of 16.5 percent (CAGR) during
the period 2001-02 to 2005-06. The comparative details of exports from
Maharashtra vis-a-vis India are given in Table No. 6.15. The main products
exported from the State are software, gems & jewelleries, textiles, readymade
garments, cotton yarns, made-up fabrics, metal & metal products, agro-based
products, engineering items, drugs and pharmaceuticals, plastic & plastic
items. For recognition of efforts put by the exporters and to boost the exports
from the State Government is taking initiatives like giving 'The Best Export
Awards' and organization of exhibition of products.
Table No. 4.12 Exports from Maharashtra and India
(Rs. in crore)
Year Maharashtra India
2001-02 73.865
2,44.245 (30.24 )
2002-03 99.778
3.00.290 (33.23 )
2003-04 85.916
3.49.617 (24.57)
2004-05 1.93.832
4.34.979 (44.56 )
2005-06 1,13.700
4,54,800 (25.00)
2006-07* 1,04,002
4,16,011 (25.00 )
* (upto Dec.06)
Note :- Figures in brackets indicate percentage to India.
Source : ibid
313
4.7 Information Technology Industry in Pune
Pune is a major industrial centre, growing rapidly every year. It is home to one
of the world's largest two-wheeler manufacturers, Baiai Auto. Other
automobile majors are Tata Motors, India's largest passenger car and
commercial vehicle manufacturer, DaimlerChrysler, which has an assembly
line for its Mercedes-Benz brand, Kinetic Engineering and Force Motors Ltd
(previously known as Bajaj Tempo). It is soon going to house General Motors,
Volkswagen, FIAT who have announced their plans to set shops around
Pune. Auto component major TATA Autocomp Systems Limited (TACO) is
based primarily in Pune. TACO has manufacturing units in various industrial
zones of Pune and outskirts. Engineering goods industries situated in Pune
are Bharat Forge Ltd, the world's second largest forging company, Cummins
Engines Co Ltd, has its Research & Technology India center, Thermax
Limited a global player providing sustainable solutions in energy and
environment, Alfa Laval, Sandvik Asia, Thyssen Krupp (formerly Buckau
Wolff), KSB Pumps, Finolex, Greaves India and Forbes Marshall, among
others. Electronic goods giants like Whirlpool and LG have appliance
manufacturing plants. Food majors like Frito Lay and Coca Cola also have
their food processing plants. Black & Veatch, a large global engineering and
construction company-also has a large presence in Pune. Apart from this
Pune houses many mid and small industries. The international air connectivity
had helped many volume produce growers in the surrounding districts to
export their goods conveniently. Pune has a burgeoning software industry,
thanks to the presence of IT parks like Rajiv Gandhi IT Park at Hiniewadi,
Magarpatta Cybercity, MIDC Software Technology Park at Talawade, Marisoft
IT Park at Kalyani Nagar, International Convention Center (ICC), Weikfield IT
Park etc. Many of India's major software players such as Symphony services,
Reflexis Systems, Starent Networks, Fiserv, TietoEnator, Amdocs, Infosys,
Ambuiex TCS, Tech Mahindra, Wipro, Cognos, Atos Origin, Oracle
Corporation, Sasken, Calsoft, Krawler Networks, Cybage, Cognizant, Tata
Elxsi, Fluent, Xansa, John Deere Technology Center, Patni, Satyam, Cybage,
KPIT Cummins, Aztecsoft (Disha), Persistent Systems, Pyxis Systems Pvt.
Ltd., Geometric Limited, Neilsoft, Nihilent Technologies, Encodex
Technologies, Blade Logic, Ouagnito and Capgemini previously Kanbay, have
314
a major presence in Pune. Global majors like Accenture, BMC Software,
NVIDIA, HSBC Global Technology, TIBCO, IBM, Dell, Red Hat, Siemens,
EDS, Amdocs, UGS, I-Flex, Cognizant, Symantec, SunGard Data Systems,
Global Graphics Software, Versant Inc., Zensar Technologies, eGain Corp.,
Syntel Limited, GamCom Solutions which also has office in London UK, T-
Systems and SAS Research and Development India Pvt Ltd have a major
presence in Pune. Pune is also emerging as a prominent city for BPO due to
the availability of skilled English speaking manpower. BPO companies like
WNS, Convergys, Infosys BPO, EXL, Wipro BPO, Next, Customer and
Mphasis have started operations in Pune. Several hardware and VLSI
companies like Ingot Systems are also located in Pune. Several HR
consultants have their operations in Pune to meet the ever growing demand
for a highly specialised workforce. To meet the demands of this explosive
economic growth in Pune, the state is planning a 1,000 MW power plant
which will exclusively serve Pune. MIDC is the lead agency for the project.
4.7.1 NASSCOM - Netscribe study on city competitiveness
Over 270 - odd companies today comprise an industry that did not exist in
India two years back - IT-enabled services (ITES). And the size of the industry
is expected to grow at a scorching pace over the coming years.
This sprouting has thrown up an interesting trend - a select few cities have
attracted the attention of the majority of ITES companies that operate out of
the country. About 90% of all the ITES companies in India operate out of just
nine cities - the National capital region of Delhi, which includes Gurgaon and
Noida, Mumbai (including Navi Mumbai), Chennai, Kolkata, Bangalore,
Hyderabad, Kochi, Ahmedabad and Pune. Though there are almost a dozen
other cities that house ITES companies, none have been able to attract as
many companies.
But why huddle in a select few cities? What sets these cities apart, so that
they are able to attract more ITES companies than the others? What can be
done to help the other cities catch up?
315
To answer these questions, Nasscom and Netscribes undertook a month long
study of ITES companies in these cities.
Concentration of ITES companies
City No. of companies
NCR 53
Mumbai* 45
Bangalore 35
Chennai 35
Kolkata 29
Hyderabad 24
Kochi 10
Ahmadabad 9
Pune 6
Others 32
Total 278
* Includes Navi Mumbai
Source : NASSCOM - Netscribe study on city competitiveness, pp.2
Netscribes' survey of nine cities - NCR, Bangalore, Chennai, Hyderabad,
Kolkata, Kochi, Mumbai, Pune and Ahmadabad - threw up a number of
factors that dearly contribute to the high concentration of ITES companies in
these cities.
They ranged from the availability of telecom infrastructure and physical
infrastructure like power, real estate, and local transportation, to the
availability of manpower, perception of the city in terms of its IT-orientation,
and the policy initiatives of the respective state governments.
316
In order to find out the relative importance of each of these factors in
establishing an ITES unit, the survey asked the respondents to rank these
factors on a scale of 1 to 10, in the order of increasing importance
IT-enabled services, by definition, rely heavily on efficient telecom
connectivity. Across all the ITES - be it calls centers, medical transcription, or
business process outsourcing telecom connectivity is a must.
Similarly, reliable power is an important requirement for running any business,
and ITES is no exception. Real estate plays a crucial role too, as ITES
companies typically have to seat a large number of people who need access
to comfortable and affordable housing.
Relative importance of various factors
Factors Weight
Manpower 8
Real Estate 7
Telecom Infrastructure 6.5
Policy Initiatives 6.5
Power supply 6.5
City perception 5
Entrepreneurial history 5
Total 44.5
Source: ibid pp.5
Moreover, being a service industry, ITES depends heavily on trained
manpower for success. In fact, the key competitiveness of the Indian ITES
industry comes from its ability to employ inexpensive and skilled manpower.
The last two - perception and entrepreneurial spirit of the city - are generally
taken into consideration by businesses before choosing the location.
317
Perception plays an important role as it is developed over time, and the city's
record of treating the same or similar industries informs that perception.
Similarly, the entrepreneurial history of a city has great influence on the
location of a business - a favorable history tends to denote that the city can
nurture and sustain entrepreneurship.
Having established the relative importance of the six factors, they set out to
rank each city according to the factors. The following table summarizes the
findings:
Telecom infrastructure
Telecom infrastructure, deemed one of the most important ingredients for
ITES, is one area where these cities score high. For instance, barring Pune,
Ahmadabad and Bangalore, all the cities have direct international bandwidth.
And even these three cities are connected directly to Mumbai, the hub for
international bandwidth, through high-speed links. Besides, all the cities are
connected through high-speed links to Mumbai.
In addition, except Kolkata, all the cities have tele-densities in excess of 1.4%,
compared to about 3% for India as a whole. Even Kolkata's tele-density is
thrice the national average
Factorwise rating of cities
Telecom Power Real Estate
Manpower City Perception
Entrepreneurship Policy Initiatives
Ahmadabad 9 4 2 4 8 6 3
Bangalore 8 7 6 6 1 1 6
Chennai 4 2 5 5 3 4 4
Hyderabad 5 3 3 2 2 5 1
Kolkata 6 1 4 3 7 7 5
Kochi 2 6 1 1 9 9 2
Mumbai 1 5 9 3 4 2 8
NCR 3 9 8 8 5 3 7
Pune 7 8 7 7 6 8 9
Source : ibid, pp.6
318
Physical infrastructure
CITY RANKINGS FOR TELECOM INFRASTRUCTURE
City International Bandwidth
(MBPS
Connectivity to Mumbai
(MBPS)
Tele - Deisity
% of Total STPI
Service Providers
Rank
Mumbai
780 - 14 13.5 MTNL,
HUGHES
TELECOM
1
Kochi 310* 155 15.7 3.36 BSNL 2
NCR 102 310 14.5 20 MTNL 3
Chennai 68 155 15 10 BSNL 4
Hyderabad
34 155 15 18 BSNL,
TATA
Teleservices
5
Kolkata 34 79** 9.5 2 BSNL 6
Pune
0 622 13.9 8 BSNL,
HUGHES
Telecom
7
Bangalore 0 155 15.5 13 BSNL 8
Ahmadabad 0 8 14 5 BSNL 9
* Under installation, to be commissioned in two months
** Connected via Delhi and Chennai
Source: ibid, pp.6
Physical infrastructure includes power, manpower, and real estate - all very
important for running a successful ITES business.
Power
The availability of power - rated one of the most important factors, like
telecom is better in these nine cities compared to the rest of the nation. The
variance comes in the tariffs - from Rs 4.97 a unit in Mumbai to Rs 3.00 in
Kochi.
However, most of these cities pay a tariff of more than Rs 4.00 a unit
319
Pune, Bangalore, NCR and Kochi experience pre-scheduled power cuts
ranging from 30 minutes to four to six hours a day. The other cities, however,
are virtually free of blackouts.
CITY RANKING BASED ON POWER SCENARIO
City Load shedding* Cost ** Rank
Kolkata - 3.41 1
Chennai 4.15 2
Hyderabad 4.30 3
Ahmedabad 4.83 4
Mumbai 4.97 5
Kochi 0.30 3.00 6
Bangalore 2-4 4.15 7
Pune 4 4.10 8
NCR 4-6 4.25 9
* Hours per day
** Rs per unit Source : ibid, pp.7
Real estate
Although the real estate rates in Mumbai and NCR have been some of the
highest in the country, they were able to attract many ITES companies even
2-3 years ago. This was mainly because the respective state governments
were aggressively Promoting Noida, Gurgaon and Navi Mumbai.
However, since then, increasing rates have pushed NCR and Mumbai down
the 'affordability' list as other cities started getting their act together.
320
CITY RANKINGS BASED ON REAL ESTATE PRICES
City Rent per sq.ft / Month Rank
Kochi 15.50 1
Ahmadabad 16 2
Hyderabad 24 3
Kolkata 25 4
Chennai 25.20 5
Bangalore 30.30 6
Pune 35 7
NCR 57 8
Mumbai 87 9
Source : ibid, pp.7
The rates vary hugely both between cities and within the cities - especially in
Mumbai, NCR, Bangalore and Chennai. In fact, larger the city, higher is the
variance in rates. For instance, the rent in NCR ranges from a high of Rs 157
to a low of Rs 57 per square feet per month. Similarly, the cost of real estate
in Mumbai ranges from Rs 287 to Rs 50 per square feet per month. But in
cities like Ahmadabad and Pune the variance is lower.
Manpower
The availability and cost of trained manpower is another major issue while
selecting the location. Since manpower is one of the key advantages that
India enjoys in the global ITES market, the cities with trained manpower are
able to attract more ITES firms. Again, the cost of manpower varies between
these cities depending on the respective city's cost of living.
321
Perception
A majority of the respondents in their survey indicated that perception played
a major role in deciding the location of a new unit. While most cities score well
in this category, Bangalore was ranked the highest because of the state's IT
policy.
Similarly, Hyderabad, with its IT- friendly government, was also a preferred
city. However, Kolkata, Ahmadabad and Kochi lag, and the recent riots in
Ahmadabad have harmed its perception as a business center.
CITY RANKING BASED ON PERCEPTION
City Rank
Bangalore 1
Hyderabad 2
Chennai 3
Mumbai 4
NCR 5
Pune 6
Kolkata 7
Ahmadabad 8
Kochi 9
Source : ibid, pp.8
Entrepreneurship
This intangible also influences companies in setting up shop. Again, a majority
of the respondents felt that a city's entrepreneurial history helps attract
investments. Also, entrepreneurs hailing from a city are more likely to base
their companies in that city. While all the cities have histories of successful
entrepreneurs, some within these rank higher. Bangalore, Mumbai and Delhi
with a number of startups in both IT and ITES, score highly. But places like
Kolkata, Pune and Kochi don't score that high, as they haven't seen as many
startups, especially in the concerned sectors.
322
CITY RANKING BASED ON ENTREPRENEURIAL ACTIVITIES
City Rank
Bangalore 1
Mumbai 2
NCR 3
Chennai 4
Hyderabad 5
Ahmadabad 6
Kolkata 7
Pune 8
Kochi 9
Source : ibid, pp.8
Policy initiatives
Policy initiatives set the pace for any industry. Industry-friendly policies not
only instill confidence in the entrepreneurs, they ease the process of setting
up businesses.
While all the nine cities have attractive policies for ITES, the details vary.
Though an attractive policy may not ensure that businesses flock to that city, it
plays a major role. There are a few contrasting examples for this.
NCR, which does not score very highly on policy initiatives, still has been able
to attract a number of ITES companies. On the other hand, Hyderabad, which
has the best policy for ITES companies, hasn't been able to attract as many.
Another example is Bangalore, which has been able to attract a number of
ITES companies mainly because of the perception about its IT-orientation.
323
CITY RANKINGS BASED ON POLICY INCENTIVES
City No. of Policies Rank
Hyderabad 8 1
Kochi 7 2
Ahmadabad 5 3
Chennai 4 4
Kolkata 4 5
Bangalore 4 6
NCR* 7 7
Mumbai * 4 8
Pune * 4 9
* All policies yet to be notified Source : ibid, pp.9
4.7.2 City competitiveness
A city's competitiveness draws mainly from the infrastructure it provides and
the policy incentives it offers. If a city ranks high on both counts, it is
considered highly competitive.
The cities, if pitted against each other on these counts, show that what
matters is the combination of initiatives on both counts, not one.
At the end, this is how the cities stand vis-a-vis each other.
City Scores. Rank
Hyderabad 2.93 1
Kochi 3.82 2
Chennai 3.91 3
Kolkata 4.49 4
Ahmadabad 4.94 5
Bangalore 5.31 6
Mumbai 5.75 7
NCR 6.37 8
Pune 7.44 9
324
*The score for each city-is derived by first multiplying the rank for each factor
with its particular weight and then dividing the sum total of all the factors for
each city by the total weight.
Source : ibid, pp.16
The point is illustrated in greater detail in the following diagram. In this, the
fourth quadrant represents both high infrastructure availability and policy
support and cost effective manpower availability, and thus, the most
competitive cities fall in this category. The third quadrant represents high
manpower availability but inadequate infrastructure availability and policy
support. The second quadrant represents high policy support and
infrastructure availability but low manpower availability. As a result, those
classified into quadrants 2 and 3 can be termed as moderately competitive.
The first quadrant represents both low infrastructure availability, low policy
support and high cost manpower - thus framing the least competitive cities.
Policy & Infrastructure
Hyderabad emerges as the most competitive city. Chennai, Kochi and Kolkata
too rank highly in their infrastructure offerings, policy incentives, and low cost
manpower availability though not at the level of Hyderabad.
Ma
np
ow
er
Kochi
Hyderabad
Kilkata
Ahmedabad Chennai
Bangalore
Pune
NCR
Mumbai
Policy & Infrastructure
On the other hand, Ahmadabad, which ranks highly on availability of low cost
manpower, lose out on competitiveness as a result of weaker policy
incentives and infrastructure availability. Bangalore, Mumbai, NCR, and Pune,
325
which rank quite low in both infrastructure availability and policy support, and
availability of low-cost manpower, bring up the rear.
4.7.3 Pune City
Proximity to India's financial capital Mumbai and the presence of a cohort of
automotive companies has for long been Pune's claim to fame in the industrial
world. However, with the Maharashtra government's increased focus on IT
and ITES, things are changing.
The state government is aggressively promoting the Mumbai-Pune region as
a 'knowledge corridor’ and the effects are already visible, with a large number
of software and ITES companies locating themselves in Pune, the eighth most
populous city in the country.
Area 430 Sq.Km
Population Density 8,734 Persons Per Sq Km
Net State Domestic Product (2000-2001 At Current Prices) Rs 2,582.72 Billion
Per Capita State Income (2000-2001 At Current Prices) Rs 23,726
Popular Languages Marathi, Gujarati, Hindi
Urbanization Rate (State) 42.39%
Source: Census of India 2001, Pune Municipal Corporation, Maharashtra
State Government, Economic Survey of India 2001-2002
Males Females Total
Population 1,980,941 1,774,584 3,755,525
Literacy Rate 81.43% 72.24 % 77.04%
Source: Census of India 2001
All India Population 107,881,836 100%
Pune 3,755,525 3.48%
Source: Census of India 2001
326
Being in Maharashtra, the city's policy support schemes are the same as
Mumbai.
Infrastructure
Over the past decade, Pune has transformed from a paradise for retired folk
to a snazzy business center. This has put the city's infrastructure under a lot
of strain. Many infrastructural facilities haven't grown fast enough to meet the
increasing demand.
STPI: With 470 units, the Pune STPI accounts for 8% of all the approved units
under the STPI scheme.
Telecom: The telecom infrastructure has vastly improved over the past
decade. The city has close to 600,000 land lines and the Maharashtra
telecom circle (excluding Mumbai) has more than 450,000 cellular users, a
majority of which comes from Pune. The city's tele-density, at 13.9%, is close
to that of the other major cities.
Service Subscribers
Basic (Jan '02) 579,000*
Cellular (Apr '02) 486,627 (Maharashtra)**
Tele-Density 13.9%
Approved STP Units 474
* Figure includes the whole Pune Revenue District including areas under the
Pune & Pimpri - Chinchwad Corporations
** Maharashtra excludes Mumbai
Source: Pune Telecom. COAl, and STPI
Its proximity to Mumbai means that the nearest international gateway is not
very far off.
Education: With a student population of more than 200,000 (college and
higher education), Pune claim to have one of the best education
327
infrastructures in the country. The city has a number of management institutes
and technical education facilities, including the Symbiosis Institute of
Management. Its proximity to Mumbai helps it draw from the educational
resources of the metropolis too.
Physical infrastructure: Though business in the city has grown rapidly over
the past decade, infrastructure expansion hasn't kept apace. The public
transport system is inadequate - much in contrast to Mumbai's, the city Pune
is regularly compared with. A steep increase in private vehicles has choked
the city's traffic.
The city's road network that stretches for only 850 km, supports more than a
million vehicles, mostly two-wheelers.
Power: This is another of Pune's headaches. Power cuts are common -
industrial and residential blackouts average 4 hours a day.
Type Of Consumer Tariff
Industrial Rs.2.85/Unit
Residential Rs.2.60/Unit
Source: MSEB
Real estate: Despite its proximity to Mumbai, the real estate rates in Pune
haven't traveled on a northward spiral. In fact, the economic slump has
dampened prices here too. Currently, the rates are comparable with those in
Hyderabad.
Location Rent (Rs./Sq Ft, PM)
Bund Garden Road / Dhole Patil Road 42-48
Shankarsheth Road 40
Shivaji Nagar 35
Source: Indian Real Estate Survey. 2001-02
328
FSI For Commercial
Districts
FSI For IT Proposals FSI For It Proposals In
Designated Areas For ITES
1.00 1.00 MIDC IT Parks
Hinjewadi 2.00
Talawadi 2.00
Kharadi 2.00
Source: Colliers Jardine
Transportation: The completion of the Mumbai-Pune Expressway has almost
halved the travel time between the two cities to about two hours. Though its
airport is small and not well connected to the rest of the country, the excellent
road link with Mumbai makes up for it. The city is also well connected by rail
with the southern and western cities.
VEHICLES UNITS
Two-Wheelers 919,052
Cars 127,722
Autos 59,824
Taxi 4,590
Trucks & Lorries 33,537
Public Buses 6,079
Other Buses 3,612
Source: Motor vehicles department, Maharashtra