Indian IT Software and Services Industry

India, the world’s largest democracy and home to nearly one billion people, is quietly but quickly emerging as a leader in the field of software engineering and web-based services. India’s own competitive advantage in the software business is well-known: cost-effectiveness, world-class quality, high reliability, and rapid delivery, all of it powered by state-of-the-art technologies. It is a nation where more and more multinational companies are outsourcing their software requirements to retain competitive advantage.     

The IT software and services industry in India grossed an annual revenue of Rs 24,350 crore (US$ 5.7 billion) during 1999-2000, according to the annual industry survey released on 3 July 2000, by the National Association of Software and Service Companies (NASSCOM), the apex body of software, dotcom and IT services industry in India.

NASSCOM’s survey indicates that the industry registered an overall growth of 53% during 1999-2000, up from Rs 15,890 crore (US$ 3.9 billion) in 1998-99. Out of the total revenue of Rs 24,350 crore (US$ 5.7 billion) during 1999-2000, software exports grossed a total of Rs 17,150 crore (US$ 4 billion) and the domestic software market fetched a total of Rs 7,200 crore (US$ 1.7 billion).

The interesting highlight of 1999-2000 was that more than 185 of Fortune 500 companies, i.e. almost two out of every five global giants, outsourced their software requirements to India. This clearly establishes that more and more global companies are outsourcing their software requirements to India and are gaining competitive advantage.

The Nasscom survey states that emergence of IT on the National Agenda and enthusiastic announcement of I.T. policies by many state governments has further strengthened India’s position in the software-driven IT sector in the world. 19 state governments have announced IT policies, while many more are in the offing.

Another interesting finding of the Nasscom survey was the phenomenal rise in market cap of Indian software industry during 1999-2000. As of 30 June 2000, the market cap of listed software companies in India was estimated at US$ 55 billion.

The survey revealed that as on January 1999, the market cap of Indian software industry on Indian Stock Exchange was a mere US$ 4 billion. It had peaked to US$ 95 billion in end February 2000. Later the meltdown on NASDAQ and Dow Jones affected the Indian stock exchanges. After a debacle, the software industry market cap has resumed a bullish path and has reached US$ 55 billion by end of June 2000. This is a clear indication of growing confidence of the investors in Indian software export industry.

As per the Nasscom survey, the Indian software industry has not only been growing exponentially but has been moving up the value chain as well. The industry has evolved from staffing to software development to integration and IT business consulting. The survey further stated that, however, the Indian software industry still requires to move faster on the value chain ladder and get more involved in strategic consulting, brand management for the customers, Research & Development and providing more web based and e-commerce kind of interactive services to the customers.

According to Nasscom survey, Research & Development (R&D) spending in the software industry in India increased from 2.5% of total spending in 1997-98 to about 3.4% during 1999-2000. Also, in software exports, R&D outsourcing orders from overseas companies fetched about Rs 950 crore.

During the year 1999-2000, software exports earned foreign exchange worth Rs. 17,150 crore or US $ 4 billion. This is a growth of over 57 percent in rupee terms and 51 percent in dollar terms over last year’s software exports of Rs 10,940 crore or US $ 2.65 billion.

One of the most interesting highlights of 1999-2000 was that Indian software exports accounted for 10.5% of India’s total exports during 1999-2000. Five years back, software exports from India accounted for only 2.5% of total exports.

NASSCOM’s survey indicated that in the year 1999-2000, about 37 software companies in India have exported more than Rs 100 crore (US$ 25 million) worth of software and services; 180 companies have exported more than Rs 10 crore (US$ 2.5 million) worth of software. In comparison in 1992-93, only eight companies had exported software more than Rs 10 crore. This indicates an upswing, high proliferation and all-round growth of software exports. The top twenty software exporters included TCS, Wipro, Infosys, Satyam, HCL, NIIT, Silverline, Cognizant, Pentamedia Graphics, Pentasoft Technoligies, Patni Computers, IBM, DSQ, Mastek, MBT, HCL Perot, I-Flex, Tata Infotech, Zensar Technologies and Birlasoft.

One of the highlights of 1999-2000 was the first ever listing of an Indian internet / ISP company at NASDAQ. It was a moment of great pride for the Indian software industry and its professionals that during 1999-2000, the second Indian infotech company - Satyam Infoway was listed on NASDAQ - which is the dream exchange of hi-tech companies. Later Rediff.com has also been listed on NASDAQ and recently Silverline Technologies got listed on NYSE. The first Indian software company to be listed on NASDAQ was Infosys Technologies on 11 March, 1999.

According to Nasscom’s survey, till now it was the US customers who were gaining competitive advantage by aligning with Indian software companies. But now even US investors will have an opportunity to invest in software companies from India. The Nasscom Survey has projected that in the next eighteen months, at least 20 more Indian companies are expected  to be listed on overseas stock exchanges including NASDAQ, NYSE and LSE.

According to Nasscom Survey during 1999-2000, solutions for Y2K revenues accounted for about 12% of India’s software exports. Revenues from exports of Y2K software solutions were worth US $ 480 million out of total Indian software exports of US $ 4 billion during 1999-2000.

The Indian software industry earned a cumulative total of US$ 2.5 billion from 1996 to 1999 from Y2K solutions. The success of Indian Y2K expertise is now helping the Indian companies to get more and more orders in the area of interactive architecture, legacy to web and software engineering from satisfied clients.

Nasscom survey states that, Indian software industry has been able to perform a massive transformation by retraining its employees to the new areas of e-commerce, Euro solutions, CRM, ASP and IT Enabled Services.

Nasscom survey indicates that contrary to popular belief, India’s expertise in Y2K actually helped, to get new customers and elimination of Y2K orders have had no adverse effects on the Indian software industry. It helped India get more customers.

Opportunities in e-commerce software solutions would be the next major driver of growth of the Indian IT software and services industry. The NASSCOM-McKinsey study 1999 has clearly predicted that India can earn revenues of US$10 billion from e-business solutions by 2008. In 1999-2000, e-commerce software solutions worth US$500 million were exported. This is expected to increase to US$1.4 billion in 2000-01.

IT Enabled Services have often been referred to as the next major driver of technology led services industry. IT Enabled Services or "Remote Processing" covers a wide gamut of services including Call Centres, Medical Transcription, Data Digitisation, Legal Databases, Revenue Accounting, Data Processing, Back Office Operations, Web content development, Animation etc. As per reports by international consultants, the IT Enabled Services market is poised to grow from the present US$ 10 billion to US $ 200 billion worldwide.

During 1999-2000, I.T. Enabled services generated total revenue of Rs 2390 crore for the Indian industry. Out of this, almost Rs 1690 crore was earned through exports. The Nasscom-McKinsey study has indicated that by 2008 more than 1 million additional jobs can easily be created in this sector, generating an annual revenue of Rs 81,000 crore (US$ 17 billion).

According to Nasscom survey, the Indian software industry continued to get international recognition for its quality in software development. Out of top 300 companies, more than 170 have already acquired ISO 900 certification. However, as far as SEI CMM (Software Engineering Institute Capability Maturity Model) Level 5 is concerned, Indian software industry emerged as the real winner. Out of 23 worldwide companies having SEI CMM Level 5, fifteen are located in India. The Nasscom member companies located in India and have acquired SEI CMM Level 5 include Motorola, Wipro, Zensar, IBM, Infosys, CBSI, DCM ASIC, NIIT, CG Smith, Satyam, TCS, COSL, HCL Perot, I-Flex and NeST.

According to NASSCOM’s study, during 1999-2000, India exported software and services to 95 countries around the world. Out of the total software exports of Rs 17,150 crore during 1999-2000, almost 62% was to North America (USA and Canada); 23.5% to Europe; 3.5% to South East Asia; 3.5% to Japan; 1.5% to West Asia; 1.5% to Australia and New Zealand; and 4.5% to Rest of the World.

Onsite software exports to USA are quite dependent on availability of H-1B visas. Although the H-1B visa limit was increased from erstwhile 65,000 global cap in 1998 to 115,000 during 1999-2000, but this increased limit was also exhausted in March 2000. According to NASSCOM’s study, the exhaustion of limit of H-1B visas during March 2000 may adversely affect some of the onsite projects. However, NASSCOM is working in close association with various lobby groups in USA and US Congress to increase the H-1B visa cap. There are currently two bills pending in the US Congress and Senate respectively, that propose to increase the H-1B visa cap to 200,000 for the three year period of 2000 to 2002.

The study also indicated that due to NASSCOM’s and Government of India’s initiatives, especially the NIESA (Nasscom’s India Europe Software Alliance) Programme, software trade with Europe has been growing rapidly. The year 1999-2000 witnessed software exports of almost 23.5% to Europe. During 1999-2000, total Indian software exports to Europe was worth Rs 4030 crore or US $ 920 million. UK was the most favoured destination of Indian software exports to Europe. As per Nasscom’s study, Europe is fast recognising the competitive advantage that would accrue to its economy by aligning with Indian software companies. The shortage of skilled manpower in Germany, Austria, UK, France and Italy has resulted in process of liberalisation of work permit requirements and sourcing of skilled manpower from India.

On the other hand, to increase software business with Japan, Nasscom has also launched Project NINJAS (Nasscom’s India Japan Software Alliance). In financial year 1999-2000, software and services exports from India to Japan was about Rs. 600 crore or US$ 140 million. However, in years to come, this is expected to grow substantially. NASSCOM survey indicates the annual Indian software exports to Japan can be in excess of US $ 500 million in the year 2002-03. In 1999-2000, to target new and emerging markets, Nasscom also signed MoUs with Israel, Singapore, Ireland, Mexico and Morocco.

One of the interesting findings of Nasscom’s survey has been that during 1999-2000, off-shore services strengthened its dominance in the software exports sector. The offshore services increased to more than 42% of total exports, whereas on-site services contributed to about 58% of export revenues. In 1991-92, the percentage share of offshore services was a mere 5% and on-site services dominated with 95% of total software exports.

Welcoming this trend, Nasscom survey complemented VSNL and STPI for providing high speed (64 Kbps, 2 Mpbs) data communication links to the industry. As of 30 June 2000, there are more than 1200 leased lines from Indian software companies providing 64 Kbps and higher speed data communication links for offshore software development. In 1992, there were only 10 such links.

Till a couple of years back although the domestic software market was registering a healthy growth rate, but could not catch up with the revenues of the software export markets. However, the proliferation of internet and growth in the SOHO market has resulted in good growth rates in the domestic market. The domestic software market continued with better performance than many other industry sectors. The domestic software market aggregated revenues of Rs 7200 crore in 1999-2000, over its performance of Rs 4950 crore in 1998-99.

Nasscom’s survey attributes that inspite of sluggish market, the domestic software market achieving growth of over 45 percent is mainly due to increased government computerisation, increase in Y2K spending, elimination of import duty on software; increased enforcement of anti piracy laws as well as increased maturity in end-user organisations.

An important highlight of the year was the focus towards e-governance by state governments in India. 19 of the 26 state governments have already announced their IT policy and many others have formed high-level Task Forces. Nasscom is working in close association with various state governments to proliferate the software and IT Enabled services industry in their respective states.

According to Nasscom Survey, Y2K software solutions in the domestic market fetched Rs 680 crore. The ERP segment grew by 23%. At the same time, CAD/CAM market grew by about 41%. Software for banking segment recorded a 70% growth over previous year. The real growth in domestic market apart from government spending could be attributed to emergence of the SOHO market. Software purchases by the SOHO market witnessed a high growth rate of 70%.

According to Nasscom Survey, the turnkey projects segment in the domestic market grew by about 41% and spending for Y2K software solutions reported an all time high growth rate of 140% over the previous year.

Nasscom and BSA continued to assist the enforcement agencies in the country in curbing software piracy. In the last three years, more than 64 people have been arrested by policy for piracy activities. The software piracy has been brought down from 89% to 59%, but losses due to software piracy was about Rs 900 crore during 1999-2000.

This year, apart from evaluating the performance of the software industry during 1999-2000, the Nasscom survey also conducted across the board interviews to understand projections of revenue of various companies during 2000-01.

The survey revealed that the software industry’s handsome performance would continue unabated in 2000-01, and the industry shall witness no slowdown. On the contrary, even with a higher base of Rs 24,350 crore (US$ 5.7 billion) of the size of Indian software industry during 1999-2000, Indian software industry would be able to grow by more than 50% and should register revenues of Rs 39,500 crore (US$ 8.75 billion) during 2000-01.

Overall, according to Nasscom survey, the Indian software industry is expected to aggregate revenues of over Rs 39,500 crore (US$ 8.75 billion) during 2000-01. This will include software exports of Rs 28,500 crore (US$ 6.3 billion) and domestic market of Rs 11,000 crore (US$ 2.45 billion).

One of the main strategy for software industry in 2000-01 would be to move up the value chain and sow seeds of E-commerce, web based technologies and Interactive integration. The strategy would involve more acquisitions of overseas companies by Indian companies.

The Indian software industry has the requisite velocity and momentum to achieve the annual US $ 87 billion target by 2008, set up by the Nasscom-McKinsey Study 1999, provided the government continues with its present thrust towards this sector and continues to remove bottlenecks. At the same time, the government should assist industry lead Brand Equity promotion in the overseas countries.

The Nasscom survey revealed that major factors which continue to hinder growth of the Indian software industry are: continuance of physical bonding at STP; EOU and EPZ units; lack of global parity in telecom tariff and inadequate telecom infrastructure. Lack of bandwidth and age-old policies of DoT are the real obstacles. Nasscom survey demanded a simplified call centre policy, VOIP and allowing Internet leased circuits to be connected to PSTN networks.

The Nasscom survey stated that although the government has announced continuation of Income Tax holiday to EOU / EPZ / STP units under Section 10A/10B till 2009-10, but substitution of a new section has led to many anomalies in the section. The government needs to announce clarifications and remove anomalies at the earliest.

Nasscom has also launched `Operation Bandwidth’ which has projected a demand of 300 gbps of international internet bandwidth by 2005. Nasscom has demanded a phased increase in bandwidth starting with 10 GBPS of bandwidth at end of 2000 (from the current level of 325 mbps).

The Nasscom survey also indicated that total annual software exports could be to the tune of US $ 10 billion by the end of the ninth five year plan, i.e. in the year 2002.

Indian IT Software and Services Industry Highlights of Nasscom's Survey

The highlights and trends of the software industry in India during the year 1999-2000 can be summarised as follows :

Exports

• Indian Software exports in 1999-2000, grossed revenues of Rs. 17,150 crore and registered a growth rate of 56.8% in rupee terms and 51% in dollar terms over 1998-99 performance.

• During the year, more than 185 companies out of the Fortune 500 companies outsourced their software requirements to India.

• India exported software to 95 countries around the world, with almost 62% of exports to North America.

• n 1999-2000, 37 software companies have exported more than Rs. 100 crore of software. During the same period, more than 60 companies exported more than Rs. 50 crore of software; about 180 companies have exported more than Rs. 10 crore worth of software; and more than 500 companies exported software more than Rs. 1 crore. This testified profound proliferation of the industry.

• In 1999-2000, the number of software exporters increased to a record number of 1250 companies.

• During 2000-01, the number of software exporting companies are expected to exceed 1600.

• VSNL and STP continued to play a very vital role for offshore software development. The number of dedicated high speed (64 kbps, 2Mbps and above) datacom links currently being used by software exporting companies are more than 1200 circuits. In 1992, only 10 such links were being used.

• Offshore software development exceeded 42% of total software exports. (In 1991-92, off-shore software development contributed only 5% of the software exports)

• Satyam Infoway Limited was the first Indian internet company to be listed on the NASDAQ Stock Market.

• TCS was the number one exporting company in terms of revenues, with export revenues of Rs 1,820 crore.

• The top 25 exporters accounted for almost 61% share of the I.T. software and services exports revenues in 1999-2000.

• During the year, number of quality certified software companies from India increased to over 170; Fifteen Indian companies now have the unique distinction of an SEI-CMM Level 5 certification. (Only 23 companies worldwide have achieved level 5 certification)

DOMESTIC MARKET

• Software Revenue from the Indian Domestic Market accounted for Rs. 7200 crore in 1999-2000; domestic market grew at 45% over 1998-99 revenues.

• Over 149 new software products and upgrades were launched by the indigenous software companies in the domestic market.

• Over 131 new software products and upgrades were launched by the overseas companies in the Indian domestic market.

• Y2K Software solutions in the domestic market fetched Rs 410 crore.

• Sales of products and packages packages for the year amounted to revenue of Rs. 2962 crore, which is approximately 41% of the total domestic software market.

• ERP segment grew by 23%; E-commerce software solutions grew by 200%; CAD/CAM market grew by 41%; Banking software grew by 70%.

• Software purchases by the SOHO market witnessed an all time high growth rate of 70%".

• Total volume of E-Commerce transactions in India were estimated at Rs. 450 crore in 1999-2000. Out of this volume, about Rs. 50 crore were contributed by retail internet or Business-to-Consumer transactions, and about Rs. 400 crore were contributed by Business-to-Business transactions.

• There were more than 7,70,000 internet subscribers in the country as on 31st March 2000. The actual number of users who have ready access to internet in India are more than 3.2 million. The internet subscribers are expected to increase to 1.6 million by March 2001.

• Piracy levels brought down to 59% during the year. However, losses due to software piracy amounted to more than Rs. 900 crore.

• Government eliminated import duty on IT software.

• NASSCOM / Business Software Alliance facilitated many anti-piracy raids; with the result 100 people were arrested in police raids in New Delhi, Mumbai, Bangalore, Pune, Chennai, Hyderabad, Calcutta and Jaipur.