JUST 600,000 persons working in our information technology sector today create $ 16 billion worth of wealth every year. IT exports are liable to touch $ 13 billion this year – that is, in spite of recessionary conditions in their principal markets, our IT professionals and firms will earn about Rs 60,000 crore for the country in foreign exchange. Those earnings will account for over one-fifth of our total exports.
Such figures represent phenomenal, spectacular growth: 15 years ago the activity was hardly known; just five/six years ago the figure was not $ 16 billion, it was $ 5 billion. Similarly, but for the successes of this small number of firms and personnel, our export performance would have looked very different from what it does today. And with that the level of foreign exchange reserves too would have been substantially lower.
More significant for the future,
• India and Indians have contributed significantly to the growth of this field – one-third of the start-ups in Silicon Valley were by Indians.
• We are today one of the principal knowledge-generators in this field – over 100 of the Fortune 500 companies have set up R&D centres in India. Among these are some of the world’s cutting-edge IT firms – Intel, IBM, Microsoft, Motorola, Hewlett Packard, SAP, Sony, Samsung, Texas Instruments. Each of them relies on and seeks to avail of India’s strengths in IT.
• We export IT and IT-enabled services to over 133 countries. Our firms are training people in IT in 55 countries. A single Indian firm – NIIT – today runs 100 training centres in, of all places, China. The government itself is setting up training centres for people in other countries.
The other day, the prime minister inaugurated the Kofi Annan Centre for Excellence in Accra, Ghana, for the people of west Africa; in March he will be inaugurating a Cyber City in Mauritius for the people of east Africa – a project that accounts for about half of a $ 100 million credit line to the country, the rest to be used to provide other IT-related services, like education.
• Our IT firms have become standards of excellence: today three-fourths of the world’s CMM Quality level V companies are in India.
They are providing software services, of course; they are also contributing to the creation of software products. When I ask my colleagues in the Ministry of Information Technology for some recent examples, they list scores in no time. The Pramati studio/server has been rated among the top 10 in middleware; an i-Flex Banking product has been among the top three for three years in a row — from 2000 to 2002 — and is today the world’s number one.
We often regret that while we have made impressive strides in software, we have lost out to China, Taiwan etc, in hardware. There is much weight in the lament — and addressing it has to be a priority for the government. But we should not lose sight of the other side — that a number of high technology hardware products are being designed in India for the global market. The Philips DVD video codec; the Apple iPod audio codec; the Texas Instruments’ OMAP; Microsoft’s JSharp; the Adobe reader for Palm and iPaq; Intel’s ‘‘start up’’ utility; Cisco’s IOS core components; Hewlett Packard’s ux; the OpenView kernel; components of Oracle’s Pro-c; MBIL is the third global optical disk manufacturer; VXL Instruments is the third global terminal manufacturer; HiCal supplies magnetics for the world’s foremost mobile handset manufacturer, Implusesoft; the manmar imaging software for ultrasound scanners; Purple Vision’s signal processor — these and many more hi-tech products have all been substantially designed in India.
• Another factor that augurs well for the future is that we are rapidly expanding the infrastructure required for the future growth of this sector — we have already laid out 500,000 km of fibre optic network; the other day I had the privilege of inaugurating Param Padma — the fourth generation of Indian supercomputers, entirely conceived and put together in India; we have taken the first giant step in grid-computing: the link between Bangalore and Pune is already operational — soon, the grid will link major research institutions in nine cities.
But we cannot afford to rest for a moment — especially because this is a sector in which technologies change like lightning, and because the very success that our firms and professionals have secured has made them the target of many a protectionist manoeuvre.
What are the trends that our IT industry has to face? What steps should we be taking in the face of those trends?
Telling the trends
The first, of course, is the fact that our rivals are also adding strength to their operations just as we are. Ireland, Israel etc, were traditional centres for the kinds of services we are providing today. Countries such as China and Vietnam are acquiring the competence rapidly. Moreover, there are a slew of countries that will be joining the European Union from May 2004 — from Cyprus to several in eastern Europe.
Firms operating in these countries will naturally acquire preferred liaisons with European firms that seek reliable, cheap IT services — the firms will be part of the same economic bloc; there is in a sense the advantage of cultural affinity; there is that much lesser prospect of a backlash about loss of jobs in the countries that will outsource to them.
And we should not forget that several of these countries have special strengths — not many of us know, for instance, of the great competence countries like Hungary and tiny Bulgaria have in mathematics; few of us know countries such as these had been assigned specific areas during the Soviet period in which they then specialised, and that these specialisations — encryption and surveillance technologies, to take just two instances — today constitute excellent springboards for providing many IT-related services.
Second, as the past two/three years have reminded us, we have to be ever alert to the vicissitudes of our markets. And that for several reasons. Eighty to 85 per cent of China’s software industry is directed at meeting the demand for IT services within China. In our case, almost the same magnitude is directed at meeting demand outside India.
Also, our IT exports are heavily concentrated on a few countries — the US accounts for almost 60 per cent. Recessions, turbulence, backlash in these few countries can thus have disproportionate effects on our firms here.
And how a particular development will eventually affect us is not always evident. The recent recession in western economies, for instance, created contrary pressures: on the one hand, it intensified the pressures on their firms to cut spending on IT solutions and to confine these to activities in which the applications of IT resulted in demonstrable gains in competitiveness; on the other, the recessionary conditions also intensified the pressure on such firms to improve their competitiveness by availing of the unique combination that India offers — that of high talent, low costs and ever-improving infrastructure.
For the same reasons, what effects will the recent revival of economic activity have? Will it entail higher outlays on IT by western firms, and thereby make them source more from India? Or will it loosen the pressure on them to avail of that unique combination?
Third, of course, is the problem that has arisen precisely because of success: backlash. It is real: protectionist legislation has already been introduced in eight states of the US; there is also a move to introduce a ‘‘Buy American Act’’ at the Federal level. Unions in the UK, in Australia have begun agitations against outsourcing functions to India. Moves of this kind are liable to be stoked even more in the coming months. In our principal market — the US — 2004 is an election year: the president and vice-president are up for re-election, so are one-third of the senators and the entire House of Representatives.
Of course, there has already been a major shift of jobs to China in manufacturing, but that does not make this new shift of services any easier. On the contrary, the sentiment is the opposite — ‘‘We lost millions of jobs to China, are we now going to lose more millions to India?’’ The media both reflects and feeds this sentiment: when a firm in the US expands its operations and decides to locate an R&D centre in India, the headline reads, ‘‘Oracle moving 2,000 jobs to India’’.
Moreover, the ones who are getting affected by outsourcing are the more vocal lot — the white collar workers. Many of them are college or high school drop outs: they have little prospect of finding jobs outside operations like call centres. And the location of functions in India this time has occurred during recessionary conditions — quite the opposite set of conditions during which American manufacturing firms set up their establishments in China.
For the past year there have been signs of a recovery — but till the past month the data that was coming out was being used by critics of outsourcing to point out that what was taking place was a ‘‘jobless recovery’’. The result is portrayed in a Forrester study: of every 100 IT workers who have been displaced only 65 have been able to get re-employed; that 50 per cent of those who got re-employed had to accept jobs at lower earnings. So there is a ready, disgruntled constituency for the politician to exploit, and this is an election year.
Economic trends apart, there is a structural feature of the IT industry that makes for possible difficulties. While IT registered the most conspicuous growth in the US, UK, etc, trade unions were not able to establish themselves in the industry. These organisations feel that outsourcing is the issue on which they can get IT/ITES professionals to sign up.
And the advantages
There are just as many trends on which we can build. First, as we noticed, India’s telecom infrastructure has improved dramatically over the past five years. It is set for even greater improvements in the coming years. With the laying of fibre optic networks all over the country, a firm in San Jose, California would find it as easy to access services from a firm in any one of 300 cities in India as from its neighbour across the street.
This expansion is being and will be assisted even more by the recent feature of our economic landscape — namely, intense competition among progressive states, each eager to prove itself to be the better investment destination. Bangalore and Hyderabad are not the only cities that are competing today. Gurgaon, Noida, Kolkata, Pune, Mumbai, Cochin are each trying to woo IT firms. Mangalore, Mysore, and half a dozen others have begun taking the first steps too, and have already begun registering successes.
Second, firms abroad have become accustomed to outsourcing — doing so has become part of the business model of more and more companies. Mckinsey interviewed 50 Fortune CIOs a few months ago. None of them reported outsourcing more than 15 per cent of the firm’s IT budget to India. But when asked what their plans were for the coming years, 70 per cent reported they would be outsourcing more than 15 per cent to India.
The figures at the other end of the scale were the direct opposite: 73 per cent reported they were outsourcing less than five per cent to India; that figure was down to two per cent when the CIOs were asked about what they planned to be doing in the near future.
Because of my current position, every week representatives of some IT giant or the other come to call on me. One of them after another reports how his firm is doubling and quadrupling staff in its Indian offices: Intel, Microsoft, SAP, Oracle … Indeed, we hear less than is in fact happening — these days firms that are expanding operations in India forgo the customary launch festivities lest these become occasions for unions back home to ignite scares.
Third, apart from the advantage that flows from Indian IT professionals having proven their capabilities already, the unique advantage that they have had vis a vis their competitors in China and east Europe is certain to weigh in their favour for quite some time. Firms in China, Vietnam, east Europe can write software, no doubt. Their professionals will soon learn to do so in English, no doubt.
But Indian firms are able to provide not just software for transforming an operation. They are able to provide complete business solutions — something firms in countries such as China, unfamiliar as they are with reigning financial systems and business practices, will take some years to master.
Fourth, a series of new disciplines is about to break out in India for which IT will be what arithmetic is to calculation. Biotechnology, nanotechnology, telemedicine, telesurgery, distance learning, products with embedded software, automated production processes, product design — and many more. Each of these will see a leap in the coming years in India, and in each of them IT will be a basic ingredient.
Finally, we are at the threshold of breaking out of a handicap that has hobbled us thus far: scale. Why is it that a firm like Nokia produces handsets in China but not in India? There are several reasons, of course, but among these is the question of scale: the demand for new handsets has been so much greater in China — at that scale, the firm reaps many economies.
Now that two million new telecom subscribers are being added every month, India too becomes a place that is attractive enough for a potential manufacturer to locate his facilities here. The same will soon be true for products that are used for IT and IT-enabled services.
What should we be doing to build on these advantages?
Tomorrow, Part II: The road ahead