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India: The Rapid Growth of the Service Sector

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small globe iconThe outsourcing of software and ICT services

The software and ICT service sector has been at the forefront of the country’s economic growth over the past decade, with employment increasing rapidly. Figure 6 shows that the fastest growth area has been call centres. Outsourcing to India began with software development, but quickly moved on to other aspects of ICT (Figure 7). NASSCOM, which represents the ICT sector in India, estimates that exports from software services, other IT services and business process outsourcing companies reached $12 billion in 2003. Figure 8, an extract from The Economist, illustrates the latest phase of outsourcing to benefit the Indian economy – infrastructure management services. Deutsche Bank recently estimated that this sector is worth $86 billion globally. India aims to gain an increasing share of this valuable market (Figure 9).

Figure 7 – ICT: The three stages of development of outsourcing to India.

Figure 8 – After the call-centre, now the IT department is off to India.

Figure 9 – India's share of the global IT services sector, 2003.

A milestone in India’s economic progress was reached in 1999 when Infosys Technologies became the first Indian company to list on a US stock market. In 1995 there were no IT companies in the list of India’s top ten companies. By 1999 there were four in the top ten. These were Wipro (2nd), Infosys Technologies (3rd), Niit (9th), and Satyam Computer Services (10th). Indian ICT expertise operates both at home and abroad. It is well represented in America’s Silicon Valley and many other high-technology centres in MEDCs. Founded in 1968, Tata Consultancy Services (TCS) has long been a leader in India’s booming IT industry. The company claims to be Asia’s largest IT company, with 2003/04 sales of $1.5 billion and 28,000 employees working in 32 countries. In India, it pioneered offshore operations when it began working in the USA in 1973.

The centres of India’s ICT industry are:

  • Bangalore
  • The Delhi suburbs of Noida and Gurgaon
  • Mumbai
  • Pune
  • Hyderabad
  • Chennai.

The country’s biggest ICT companies, such as Infosys, Wipro and Satyam, have all developed from these dynamic clusters of industry. In each of these high-technology locations, the process of cumulative causation can be recognised. Figure 10 is a simplified diagram of this important process.

India’s ICT sector has benefited from the filter down (global shift) of business from MEDCs. Many European and North American companies which previously outsourced their IT requirements to local companies are now using Indian companies. Outsourcing to India occurs because:

  • Labour costs are considerably lower than in MEDCs.
  • A number of MEDCs have significant IT skills shortages.
  • India has a large and able English-speaking workforce (there are about 50 million English-speakers in India).

The filter down of employment to India has been dominated by business links with North America and Europe, with a relatively low level of involvement from Japan and the other dynamic Asian economies.

In 1999 India established a Ministry of Information Technology. The Ministry’s main task is to increase software and IT services revenue for the country. From low-technology beginnings, Indian companies are migrating to high-value software services, e-commerce, and business consultancy and technology research. This is all to maximise India’s real cost advantage, which is in brainpower and not manpower.

The early growth of the sector was driven by foreign companies, mainly American. It has only been relatively recently that the number of home-grown companies has significantly increased. Most of these companies have been formed by Indian IT professionals who have gained valuable experience working for American or European companies. For example, Texas Instruments, which has had facilities in Bangalore since 1985, saw half a dozen of its top Indian engineers leave the company in 2000 to strike out on their own.

Over the past decade India has exported its IT expertise to many other countries. However, it is possible that India itself may suffer IT manpower shortages in the future. According to a recent survey by India’s National Association of Software and Services companies, demand for IT professionals is expected to rise from 340,000 in 2000 to 800,000 by 2005. Major companies are very much aware of this possibility. For example, Cisco has pledged the Indian government $10 million to set up 30 ‘networking academies’ across the country.

The Indian government hopes that Indian firms and individuals who have either made big money abroad, or through doing contract work for foreign companies in India, will invest in fledgling Indian enterprises in the form of venture capital. This process has already begun and could become very significant indeed in the coming years.

Figure 6 – Breakdown of employment in the IT sector (000s).
Figure 6 –
Breakdown of employment in the IT sector (000s).
Click here to enlarge.

Figure 10 – Simplified model of cumulative causation.
Figure 10 –
Simplified model of cumulative causation.
Click here to enlarge.

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