An Introduction to the Indian Software Services Industry
The Role of Technology in the Rise of the Indian Economy
Technological revolutions sometimes bring unexpected opportunities for countries. India, a relative laggard among developing countries in terms of economic growth, seems to have found such an opportunity in the information technology revolution as an increasingly favored location for customized software development. Early success has led to speculation about how long the Indian software industry can sustain its growth. It has also led to the hope that software and information technology can be the engine of growth for poor, labour abundant countries.
In this essay, we focus on the Indian software export sector. After briefly describing the main features of the industry, we analyze the major challenges it faces and its prospects for the future. Our analysis is based on field visits to over 40 Indian firms in Bangalore, Bombay, Hyderabad and Delhi, where we interviewed nearly 75 senior managers and software professionals. These interviews were loosely structured around a questionnaire that we developed in consultation with industry experts and were followed by interviews with fifteen U.S. based firms that had outsourced software development to these firms in India. We complemented the field research with publicly available data on firms (NASSCOM, 1994-98), as well as information from a questionnaire survey administered to over a hundred Indian software exporters. Finally, we had brief structured interviews with 60 software development professionals in Indian firms to understand better where and how they are trained and the nature of the work they do.
In 1995, the global market for computer services was estimated by IDC as being over $220 billion. Of this, a substantial fraction involved outsourcing of some part of the software development and maintenance process: Custom software development was estimated to be nearly $16 billion, systems integration at $32 billion, IT consulting at $11 billion and business service outsourcing at $9 billion.
A growing fraction of the outsourcing is taking place across national boundaries against a backdrop of shortages of skilled professionals in the developed countries. A study based on responses to a telephone survey of 532 companies with more than 100 employees concluded that there were an estimated 346,000 IT positions currently vacant in the U.S., in three core IT occupational clusters (programmers, systems analysts, computer scientists and engineers). In addition, there were another 240,000 vacancies in areas such as technical writing, training, and sales (ITAA, 1998).
The Indian software industry has attracted a disproportionate amount of interest as a source of software, given that its $4 billion software revenues in revenues in 1998-99 was a tiny fraction of the estimated world software market of over $300- 500 billion. There are some compelling reasons, nonetheless, for the attention on India. The Indian software industry has captured a significant portion of the world trade in software services. One estimate suggests that India has 16% of the global market in customised software, and that more than 100 of the Fortune 500 had outsourced to India (Dataquest, 31 July, 96; pp 43-44). Perhaps most of impressive of all, the industry has grown at over 50% per year over the last five or six years, and if current trends persist, software exports may account for a full quarter of Indian exports within the next five years.
Currently, software exports contribute to around 5 per cent of India's total exports. The industry association also indicated a target of garnering 23 per cent of customized software market and 5 per cent of products and packages market in the global IT economy by 2003. Nasscom also projects that software exports will constitute about 25 per cent of India's total exports by 2003.
These projections are likely to be excessively rosy. The Indian software industry faces a number of challenges as the labor cost advantages diminish and competition from other countries with supplies of educated and underutilized workers increases. However, even if the projected goals are only partially achieved, the Indian software industry will still have achieved a substantial role in the world software industry, especially in customized software and software services. If the projected trends in demand for skilled workers hold, demographics alone should continue to ensure the survival and growth, albeit perhaps at a reduced rate, of the Indian software services industry.
The Indian success story has, for the most part, been a combination of resource endowments (created in part by a policy of substantial investments in higher education), a mixture of benign neglect and active encouragement from a normally intrusive government, and good timing. By the late 1980s, India was graduating approximately 150,000 English-speaking engineers and science graduates, with only a limited demand for their services from the rest of the economy. By the late 1980s as well, India’s economic liberalization was also well under way. Around this time, the information technology revolution in the developed world had begun to take root and shortages of skilled programmers and IT professionals were beginning to develop. By this time a number of Indians were working in very substantial numbers in US firms. Some of them played an important, although as yet undocumented role, in bridging the gap and matching the buyers in the US with the suppliers in India. Responding quickly to the growing demand, a number of Indian firms arose in quick time. Contrary to its normal practice, the State encouraged this growth by considerably simplifying the process for obtaining the numerous clearances and permits that any firm in the organized sector in India typically needs. Finally, given the many weaknesses in the Indian financial system, Indian entrepreneurs greatly benefited from the low levels of initial investment required to start a software services firm.