Case 5:

The rise of the Indian Software Industry

Growth of sales and exports between 91-92 and 96-97

Types of projects done by Indian Software Industry

Rise of Industry despite poor facilities in 90s

Factors contributing to growth: ◦ Emphasis on Engineering◦ Highly educated middle class◦ Low wage rate◦ Satellite communication◦ Time zone advantage

Steps by Indian companies to compete against its foreign competitors

Case Synopsis

What is the current status of the software industry in India?

Top Indian IT Companies Sr. No Company Revenues USD billion (FY 14-15)

1 Tata Consultancy Services Ltd15.4

2 Infosys Ltd 8.713 Wipro Ltd 7.844 HCL Technologies Ltd 4.415 Tech Mahindra Ltd 3.756 iGate 1.277 Syntel Ltd 0.918 Mphasis Ltd 0.909 L&T Infotech 0.8010 Genpact India Pvt. Ltd. 0.49

Contribution of IT sector to GDP rose to 9.5 % in FY15 from 1.2% in FY98 The top six firms contribute 36% of total industry revenue Accounts 52% of US$ 124-130 billion market Employs about 10 million Indians, responsible for social transformation Pricing is 3-4 times cheaper than the US Cumulative FDI inflows worth US$ 13,788.56 million between April ’00 - Dec ’14

Indian Firms European Firms US Firms0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

23.60% 22.30%

16.70%

27.10%

16.40%18.10%

New IT Projects Offered in 2014 and 2015

Breakup of IT firms in India

US UK Europe (excluding UK) APAC ROW0

10

20

30

40

50

60

42

128

52

52.46

14.6210.32

6.881.72

Geographic Break-up of Export Revenue (USD billion)

FY12 FY14

The 1991 Crisis

What led to the 1991 Crisis? Import Substitution was the main strategy for growth Trade policy was characterized by high tariffs and pervasive import

restrictions Most items where domestic substitutes were being produced,

imports were only possible with import licenses- The License Raj No export related reforms Late to recognize the need for LPG Resistance towards foreign investment Too much control in the hands of the government

“ India was a latecomer to economic reforms, embarking on the process in earnest only in 1991, in the wake of an exceptionally severe balance of payments crisis. The need for a policy shift had become evident much earlier, as many countries in east Asia achieved high growth and poverty reduction through policies which emphasized greater export orientation and encouragement of the private sector.”

- Montek Singh Ahluwalia (Former Deputy Chairman , Planning Commission)

“Up to 80 agencies had to be satisfied before a firm could be granted a licence to produce and the state would decide what was produced, how much, at what price and what sources of capital were used. The belief (was) that India needed to rely on internal markets for development, not international trade—a belief generated by a mixture of socialism and the experience of colonial exploitation. Planning and the state, rather than markets, would determine how much investment was needed in which sectors.”

- BBC on the 1991 Economic Reforms

• Increasing Burden- With India’s foreign exchange reserves at $1.2 billion in January 1991 depleted to half by June, 1991

• Had only funds to cover a few weeks of India’s import needs• India Close to Default• Required to airlift gold reserves to IMF for a loan• Export Promotion became the main strategy• Reforms were made gradually- Gradualism• Industrial licensing by the central government was almost abolished

except for a few hazardous and environmentally sensitive industries

1991 Crisis and Beyond

What factors have lead to the evolution of the software industry in India?

◦ In 1972, Department of Telecom (DoT) introduced a policy to permit duty free imports of computer systems

◦ In 1980, DoT formed a Software Export promotion Council to initiate software export friendly policies & it liberalized import rules for materials required by the industry

◦ Investment in Technical Education – India’s investment in technical education beginning in 1960s provided the foundation

for the growth of the IT industry In the 1960s, government created many elite engineering & management institutes in

collaboration with leading universities in the US Subsequently, many state governments set up Regional Engineering Colleges

Facilitating policies of Government (before 1990)

Government’s Policy Initiatives (post 1991)

◦ Economic liberalization of the 1991◦ De-licensing and de-regulating the import of software productivity tools ◦ Establishment of software technology parks◦ Elimination of duties on imports of information technology products◦ Relaxation of industrial controls on both inward and outward

investments◦ The list of industries reserved solely for the public sector- Reduced

from 18 (includes telecom) to 3 (Defence, Atomic Energy and Railway Transport)

The creation of NASSCOM in 1988 and the subsequent establishment of software technology parks (STPs) in 1990 represented a fundamental approach to policy making for the software industry

Providing infrastructure for private companies to export software Established in 39 locations, including most major towns Provide ready-to-plug IT and telecom infrastructure Allowed single-window clearance for all regulatory matters Benefits & approvals for STPs similar to those of export-oriented units Provide high-speed data communication services to the industry STP exports INR 2,51,498 Cr in FY12-13 Direct tax benefits under STPI ended in September 2011; indirect tax benefits still

continue

Establishment of Software Technology Parks

Delicensing: Only six industries were kept under Licensing scheme.

Disinvestment and the Privatisation policies the state owned monopolies in many service areas came to an end Multinationals were permitted to enter the Indian market

Liberal lending policies and lower interest rates motivated many people to become self-employed.

Different sectors like Banking, Insurance, Power projects, Telecommunication, Hospitality sector, Health Services, Entertainment, Air transport, and Courier services witnessed intense competition, due to the entry of multinationals.

Liberalisation of Foreign Policy. The limit of foreign equity was raised to 100% in many activities, i.e., NRI and foreign investors were permitted to invest in Indian companies.

Economic liberalization of 1991

In 2005, the Government of India came up with the Special Economic Zone Act

• Objective - Provide internationally competitive & hassle free environments for exports

• Provides - • Drastic simplification of procedures & • A single window clearance policy on matters relating to central & state governments

• Some of the incentives include – • Duty free imports & Exemption from CST & service tax• 100% income tax exemption on export income

Special Economic Zones (SEZs)

Was set up in 1998 whose mandate was to draft National Informatics Policy in order to remove bottlenecks and give boost to India’s IT industry in general and software industry in particular

• Major recommendations of the task force included: Opening of Internet Gateway access Encouragement for private sector Software Technology Parks (STPs) Zero customs and excise duty on It software Income tax exemption to software and services exports Encouragement to set up venture capital funds 1-3 % of Budget of every Ministry/Department for IT applications Allowing US Dollar linked stock options to employees of Indian software companies

• The Government accepted almost all the recommendations and directed all concerned departments to implement recommendations

National Task Force

The acquisition of overseas parent-company shares by employees of the Indian company

Companies whose software sales were over 80 percent could grant stock options to non-resident and permanent-resident employees

Foreign exchange could be freely remitted for buying services

Companies that executed contracts in “computer software” abroad could use income up to 70 % of contract value to meet contract-related expenses abroad.

Tax holidays were given on company profits; tax breaks from corporate income and tax on profits were available to units in any free-trade zone, any software-technology park, or any special economic zone to the extent of 100 percent of the profits derived from the business.

Measures taken by RBI

• Tax breaks on corporate income & tax on profits was available to units in any free trade zones, any STP or any SEZ to the extent of 100% of the profits derived from the business

• Indian Direct Investment in joint ventures & wholly owned subsidies abroad was simplified & a fast track window is available for large investments

• IT companies in India can acquire companies overseas through American Depository Receipt/ Global Depository Receipt stock swaps without prior approval for up to $ 100 Mn or ten times the export earnings of the previous year

• The IT Act of 2000 – covering privacy, digital signatures & cyber crimes – took care of the concerns of clients in the developed countries related to the issue of data protection

Other Government reforms & policies (Post 1991)

◦ Recognizing the growing need of manpower of the software industry, the ministry of HRD took various steps to meet the demand

◦ It helped create & expand computer science departments in existing colleges

◦ It also eased policies to enable private sector to open educational institutes without public funding

◦ It introduced quality control systems for engineering colleges & other IT training Institutes like AICTE & accreditation systems run by professional bodies as the Computer Society of India to monitor private training institutions

Role of Human Resources Development Ministry

Which are some of the leading IT companies in India?

How did they become successful?

Tata Consultancy Services Established in 1968 by a division of Tata Sons Limited

• Started off as a Data Processing Unit for the Tata Group of Companies in 1968• Central Bank of India and Unit trust of India some of its earliest clients

Problems they Faced:• In 1973, FERA(Foreign Exchange Regulation Act) was passed• Duty on Hardware and Software Imports- 135 %• Foreign Ownership- restricted to 40%• Hardware Problems: Malfunctioning of equipment was a regular occurrence• Telecommunications a challenge• Till 1977, not allowed to have even an offshore sales office

Opportunity Grabbed:• Tata Consultancy Services created the factory model for Y2K conversion and developed software tools which

automated the conversion process and enabled third-party developer and client implementationOperations spread across the Americas, Europe, Asia-Pacific, and Middle East and Africa (MEA)

Accounts for nearly 50% of the Indian IT industry’s combined market capitalisation

“It would take us two years in India and almost a year in the US to get all the clearances we needed to import computers. By the time we got the approvals, the model of the computer would have changed. Then we had to explain to Indian customs officers that model numbers don't mean much, etc. But they would say, go back and get the license amended. Very few companies would have persisted through all of that.”

- SR Ramadorai, Former CEO OF TCS

• Set up first office in Pune, 1981

• Moved to Bangalore when got the first Client- Data Basics Corporation in US

• Infosys decided to import a Data General 32-bit MV8000, the founders realized they would not be in a position to use the computer for 24 hours a day. Given the high expense involved – it cost Rs. 52 lakh*

• Infosys struck a time-sharing deal with MICO (Motor Industries Company Ltd.) for partial use of the computer

Global Delivery Model: • Working while the client in the US sleeps (Between 1985-1990)• Many a times, software was sent abroad by courier and source code was faxed

ESOPs:• Infosys one of the first companies to offer ESOPs (1994)• This was to create respect for the company in the minds of the employee and have a sense of accountability

Y2K Challenge:• Capitalized on the opportunity with a separate team looking into just Y2K

Foreign IT Companies Operating in India IBM, Cognizant, Microsoft, Capgemini, Accenture, SAP, Oracle & many more

IBM India Founded in the year 1992, re-entered after an exit in the 1970s IBM's Indian employees generate $35 billion of IBM's global revenues  IBM revenues from Indian clients are approximately $3.2 billion Facilities in Bangalore, Delhi, Kolkata, Mumbai, Chennai, Pune,

Gurgaon, Noida, Chandigarh, Indore, Bhubaneshwar, Coimbatore, Visakhapatnam & Hyderabad

Employees increased from 9,000 in 2003 to 1,50,000 in 2015, that is over 1000%

IBM is planning to open new data centres in India India to receive a major portion of the $1.2 billion investment planned by IBM

in the coming years to expand its cloud services

IBM India Clients In Feb 2015, IBM signed a 9 year deal with Birla Sun Life Insurance for IBM’s

Mobile, Analytics, Cloud, Research and Software Expertise to transform its business processes and reduce cost

In April 2014, Bharti Airtel renewed IBM outsourcing contract for five years, to maintain infrastructure and application services for Airtel. The deal is valued at $500 mn.

Ceat joined hands with IBM in 2007, to implement SAP across all locations of Ceat India

Indian Railways, the world's largest railway has an automated crew management system that provides information about the crew at all times & allocates them to different types of trains

The Central Ministry uses IBM Software to combat fraud in the financial systemAcquisition Date Company Value

Apr 7, 2004 Daksh e-Services, to enhance its ability to deliver CRM and back-office services $170 million

Nov 10, 2005 Network Solutions Pvt Ltd, to expand its reach in the domestic market, especially in the infrastructure services 

Investment Promotion Agencies UKTI (UK Trade and Investment), NZTE (New Zealand Trade and Enterprise),

IDA, SDI (Scottish Development International), Austrade (Australian Trade Commission)

Help understand business opportunities, markets, financial skills, training support, partnering and collaboration opportunities, government, industry and academic contacts

Organization is able to globalize, export to neighbouring countries, access to skilled and educated population, good infrastructure, tax incentives

IDA Ireland - Aditi Technologies, Synowledge, HCL Technologies, Wipro, TCS, ArisGlobal and Firstsource Aditi Technologies created 40 jobs in Dublin with 50% growth YOY since 2007 Synowledge helped create 35 new jobs in Dublin IDA is aiming to have more than 50 Indian companies and have about 6,000

jobs in Ireland in the next five yearsSDI Scotland – Wipro and TCS, Axsys Technology, Corus and Hero ITES

Where is IT used in India?

Banking Telecom Manufacturing Media, Publishing & Entertainment Retail Insurance Healthcare

Domains in IT

Current and future IT spend patterns

INR 18,500 crores IT spend National private banks &

foreign banks leading IT adoption followed by nationalized and old private banks

Key opportunities o Customer relationship

managemento Back–end managemento Data warehousingo E–payments and mobile

bankingo Payment systemso Outsourcing of ATMso Solutions to cater to RBI

regulations

Banking INR 15,000 crores IT spend High level of IT adoption—

multiple applications, infrastructure and business process outsourcing

Large strategic outsourcing deals are the norm in telecom

Key Opportunitieso Need for analytical tools to

capture usage trends as well as those tracking service levels

o Enterprise solutions catering to the needs of the large, mid– sized companies as well as the SMBs

Telecom Focused on increasing

penetration—web–based portals and mobile applications

Various enterprise applications like CRM and business intelligence tools

Key Opportunitieso Cloud–based services to

reduce costso Web 2.0 to improve

customer services and increase customer reach

o Integration of various platforms to provide seamless services through service oriented architecture

Insurance

What are the employability aspects in the IT industry?

Work Culture in IT Companies As per ‘2015 India's Best Companies to Work For’, 8 of the Top 25 companies are IT firms (

Source) Indian IT companies trying to adopt work culture of foreign IT companies

Relatively younger workforce compared to other industries

Work culture in established IT companies v/s startups

Training Programs for cross-skilling

However, attrition rate is high in companies like Infosys (20.4% in Q2 FY14-15), TCS(15.9% in Q1 FY15-16) and others

What are the emerging trends in the IT industry and what is the road ahead?

Emerging Trends in IT

Philippines The IT & BPM space is

growing rapidly & the industry generated $ 18.4 Bn in revenue in 2014

Factors behind the growth of IT industry in Philippines –

Low Cost Skilled workforce Growing population &

young labor force

India’s Competitors in the IT Outsourcing Industry

China China is the emerging IT

services destination

In FY14-15, China’s Software Industry generated revenue of $ 593 Bn

The key factors for this growth have been initiatives like ‘Internet Plus’, ‘Made in China’

The Government is also in process of coming out with favorable policies to encourage young talents to start their own businesses

India faces tough competition from countries such as Philippines, China & Vietnam in Asia, Mexico in Latin America & Belarus, Russia & Ukraine in Europe

Mexico Mexico’s IT industry is

growing at a rapid clip

There are more than 2000 IT companies in Mexico & around 6 Lakh people are employed in this sector

Mexico spends heavily in its education system thus enabling the IT companies to find the right talent

India and USA have agreed to jointly explore opportunities for collaboration on implementing India's ambitious Rs 1.13 trillion (USD 18.22 billion) ‘Digital India Initiative’. Also agreed to hold the US-India Information and Communication Technology (ICT) Working Group in India.

Bengaluru has received USD 2.6 billion in venture capital (VC) investments in 2014, making it the 5th largest recipient globally during the year, an indication of the growing vibrancy of its startup ecosystem. Among countries, India received the third highest VC funding worth US$ 4.6 billion.

India continues to be the topmost offshoring destination for IT companies followed by China and Malaysia in second and third position

Social, mobility, analytics and cloud (SMAC) collectively provide a US$ 1 trillion opportunity. ◦ Cloud represents the largest opportunity under SMAC, increasing at a CAGR of approximately 30 per cent to

around USD 650-700 billion by 2020. ◦ Social media is the second most lucrative segment for IT firms, offering a US$ 250 billion market opportunity by

2020.

Road ahead

Thank You