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eXchange In-Depth: What You Need to Know About India and IT

Posted by Frank Gens on October 24th, 2005

Headlines are full of stories about India as a growing provider of services to the rest of the world. And rightly so. But India’s story is not just about its role as an IT and BPO services exporter; it is also a fast-growing consumer of IT products and services. In this extended posting, Piyush Singh, managing director of the Centre for Consultancy & Research (IDC’s own, Bangalore-based, global offshore research subsidiary), offers his view of the present and future of India’s IT and business environment with the IDC eXchange community…

Piyush SinghThe opportunity within India – home to over one billion people – drives from its very hot economy: GDP growth will be around 7% this year and next, corporate profits are on the rise, the stock market is booming, and inflation is under control despite the rise in oil prices. There is a sense of excitement in the business community, and strong economic growth is anticipated over the next decade or more. The country has been gradually opening up to foreign investment, and integrating with the global economy – a process that started in real earnest only since 1991. The fruits of this liberalization process are becoming visible now.

Driven by the growth of the Indian economy, as well as the global economic recovery, the IT industry in India (including domestic sales and exports) grew by 33% in 2004 to record revenues of US$24 billion. We expect this growth momentum to continue over the next 5 years, with IT industry revenues reaching US$65 billion by 2009, growing at a CAGR of 21%. While most growth will come from IT and BPO exports, the domestic IT market in India, which accounts for around one-third of the total IT industry revenues, will also grow at a CAGR of 19% over 2004-2009.

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As is common in most developing economies, the domestic IT market in India is very hardware-centric. About 59% of external IT spending in India in 2004 was on hardware, and 60% of this hardware spending was on PCs. Geographically, IT spending in India is fairly well dispersed throughout the country and the north, west and south regions account for 90% of the total market. The eastern region, which is relatively small is also growing rapidly. From an industry perspective, the finance industry spends the most on IT in India (around 23% share), and has been investing heavily in core banking infrastructure as well as branch automation. This investment will continue over the next two years. Another key IT spending segment in India is the IT Services and BPO industry, which accounts for 12% of IT spending and is increasing its investments in IT at over 30% per year.

Ever since the New Telecom Policy was introduced in 1994, which triggered in an era of deregulation, privatization and competition, telecom services in India have improved considerably. The telecom services market in India was worth US$15 billion in 2004 and is expected to grow at a CAGR of 18% over the next 5 years – with most growth expected from mobile services. The total number of telecom subscribers crossed 100 million in April 2005, and more than half of these subscribers were for mobile services. At present, around 2.5 million mobile subscribers are being added every month.

In 2004, 90% of the total telecom services spending was on voice related services, 7.5% on internet access and the balance 2.5% on SMS. The proportion of data related services will increase over the next five years as broadband services become available at higher speeds and more affordable prices. The new broadband policy that was introduced in 2004 is expected to increase the penetration of broadband amongst households. At present there are around 400,000 broadband subscribers in India and this figure will increase to around 600,000 by the end of 2005. More than 670,000 route kilometers of optical fiber has been laid across the country, which will facilitate provision of broadband services in the coming years.

Of course, doing business in India – as in any developing market – carries with it some very big challenges. Three key ones, in our view, are:

  • Nascent channel network. India is a large country, comprised of 602 districts, and the IT market is fairly well dispersed. Hence, to cover this market, presence is required beyond the A level cities into the B and C level cities and towns. This can be done efficiently only by tapping into the existing distribution and value-added reseller networks. Thankfully, the channel network in India is consolidating, and at the top-tier there are only three big distributors: Ingram Micro, Redington and HCL Infosystems, who can provide a country-wide market coverage. The key issue in managing volume channels remains credit management.
  • High turnover and rising salaries. Another critical issue in India at present is rising salaries and high manpower turnover in the IT industry. Manpower attrition in the industry averages around 20-25% and can go much higher in the BPO segment, especially in call centers. Annual salary increases average around 17-20%, which create pressure on the bottom line. This implies that companies need to migrate quickly to higher value-added services to maintain their margins. Also, they need a finely tuned HR function to hire, train and deploy resources rapidly.
  • Red tape and weak infrastructure. Finally, tremendous patience is required to do business in India. Patience, not from the perspective of generating profits from the business, but to cope with delays that could arise from red tape, bureaucracy and corruption that is rife in India. Also, the infrastructure including airports, roads, electricity, water supply, etc. is very weak, which can be very frustrating for businesses.

Despite all these challenges, the economic and business outlook in India is very buoyant and strong growth is expected over the next 5-10 years, at least. Hence, it becomes imperative for all multi-national companies to have a proactive strategy to capture the opportunity that India offers both as a market and as a large low-cost talent base.

[NOTE: Piyush and I would like to thank IDC's Indian research organization, IDC India, for contributing much of the market information in this post.]

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3 Responses to “eXchange In-Depth: What You Need to Know About India and IT”

real a compact & perfect data which i am sarching

This was a very pertinent post. A fabulous article with an amazing level of detail. India undoubtedly stands as the undisputed giant when it comes to IT resource. India has gained worldwide recognition in the past few years as a hub of oIT activity, with hundreds of English-speaking students graduating from colleges and universities every year. Neighbouring China, on the other hand, is more known for its manufacturing prowess and has only recently sped up efforts to tap the services sector. -Jamie

Ofcourse, India is not only a very big exporter of IT products & services but also a big consumer of these.
see more on Kaizen

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