SECTOR

ANALYSIS

INFORMATION
TECHNOLOGY
Vaibhav More (45)
Divas Singhal (26)
Shahab Ahmed (21)
Abhishek Biswas (61)
Khubaib Alam (55)
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Structure of the Indian IT Industry

Infrastructure Scalability

Dedicated, cost effective, quality real estate in the form of India’s young demographic profile and academic
Software Technology Parks of India (STPI) and infrastructure strengthening its potential to cater to the
special Economic Zones (SEZs). growing demand for IT-ITeS.

STPI infrastructure available across the country, An estimated additional demand for 0.4 million IT and 1.4
demonstrating government’s support to the sector. million ITeS professionals in 2009–2010.
High quality telecom infrastructure with cost of
c connectivity declining rapidly and service levels Abundant talent pool producing close to 6,75,000 technical
i improving significantly. graduates a year, of which 4,00,000 are engineers.
Real estate, air and road connectivity, as well as
hospitality, registering impressive growth and providing Industry stakeholders, including individual firms and
supportive business environment to IT sector. associations, undertaking initiatives to address issues
Infrastructure availability set to complement industry relating to enhancement of talent.
growth, with the government working towards capacity
building. Some such initiatives include:

National rollout of skill certification through NASSCOM

Assessment of Competence (NAC).

Setting up of ‘finishing schools’ in association with the

Ministry of HRD to supplement graduate education.

Overview of IT sector

The Information Technology industry has emerged as one of the most important industries in the
Indian economy contributing significantly to the growth of the economy.
The IT industry of India got a major boost from the liberalization of the Indian economy. India's
software exports have grown at an annual average rate of more than 50% since 1991. The
structure of the IT industry is quite different from other industries in the Indian economy. The IT
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industry of India is hugely dependant on skilled manpower. Primarily a knowledge based

industry, the IT industry of India has reordered significant success due to the huge availability of
skilled personnel in India.

The industry structure in the IT sector has four major categories. These are:-

• IT services
• IT enabled services
• Software products
• Hardware

IT services

IT services constitute a major part of the IT industry of India. IT services include client, server
and web based services. Opportunities in the IT services sector exist in the areas of consulting
services, management services, internet services and application maintenance. The major users
of IT services are -

• Government Banking
• Financial services
• Retail and distribution
• Manufacturing

IT enabled services

The services which make extensive use of information and telecommunication technologies are
categorized as IT enabled services. The IT enabled services is the most important contributor to
the growth of the IT industry of India. Some of the important services covered by the ITES
sector in India are -

• Customer-interaction services including call-centres

• Back-office services
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• Revenue accounting
• Data entry and data conversion
• HR services
• Transcription and translation services
• Content development and animation
• Remote education,
• Data search
• GIS
• Market research
• Network consultancy

Software products

Software products are among the most highly exported products from India.
The software industry in India originated in the 1970s and grew at a significant pace in the last
ten years. Between 1996-1997 and 2002-2003, the Indian software industry grew more than five
times from 2630 crores to 13200 crores. During the same period software and service exports
from India grew by almost twelve times.

Hardware

The hardware sector of the It industry focuses on the manufacturing and assembling of computer
hardware. The consumption of computer hardware is high in the domestic market. Due to the rise
in the number of IT companies, sales of desktops, laptops, servers, routers, etc have been on the
rise in recent years. Many domestic and multi-national; companies have invested in the computer
hardware market in India.

Another categorization in the structure of India's IT industry is related to the market. There are
two major market classifications - the domestic market and the export market. The export
market, dominates the IT industry accounting for 75% of the revenue.

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Market size

The Indian information technology (IT) industry has played a key role in putting India on the
global map. According to the annual report 2009-10, prepared by the Department of Information
Technology (DIT), the IT-BPO industry is expected to garner a revenue aggregate of US$ 73.1
billion in 2009-10 as compared to US$ 69.4 billion in 2008-09, growing at a rate of over 5 per
cent. The report predicts that the Indian IT-BPO revenues may reach US$ 225 billion in 2020.

According to DIT, the Indian software and services exports is expected to reach US$ 49.7
billion in 2009-10 as compared to US$ 47.1 billion in 2008-09, registering an increase of 5.5 per
cent in dollar terms. Further, the IT services exports is estimated to grow from US$ 25.8 billion
in 2008-09 to US$ 27.3 billion in 2009-10, showing a growth of 5.8 per cent.

ITeS, which started with basic data entry tasks over a decade ago, is witnessing an expansion in
its scope of services. It now offers services such as knowledge process outsourcing (KPO), legal
process outsourcing (LPO), games process outsourcing (GPO) and design outsourcing, among
others.

India's IT/ITES-BPO industry those that account for the largest share of revenue are banking,
financial services and insurance (BFSI)-41 per cent, Hi-Tech/Telecom (20 per cent),
manufacturing (17 per cent), retail (8 per cent), with smaller contributions coming from media,
publishing and entertainment, construction and utilities, healthcare and airlines and
transportation. The Customer Interaction and Support (CIS), Finance and Accounting (F&A)
and Human Resource Management (HRM) are important areas in the BPO segment

Moreover, according to a study by Springboard Research published in February 2010, the Indian
information technology (IT) market is expected to grow at around 15.5 per cent in 2010, on the
back of growing investor confidence and favourable initiatives taken by the government.

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STRENTHS AND WEAKNESSES

Strengths

• Highly skilled human resource;

• Low wage structure;
• Quality of work;
• Initiatives taken by the Government (setting up Hi-Tech Parks and
implementation of e-governance projects);
• Many global players have set-up operations in India like Microsoft, Oracle, Adobe, etc.;
• Following Quality Standards such as ISO 9000, SEI CMM etc.;
• English-speaking professionals;
• Cost competitiveness;
• Quality telecommunications infrastructure

Weaknesses / Threats

• Absence of practical knowledge;

• Dearth of suitable candidates;
• Less Research and Development;
• Contribution of IT sector to India’s GDP is still rather small;
• IT development concentrated in a few cities only.

Opportunities

• It is estimated that the overall size of the domestic market grew by 20 per cent in 2008–
09 to reach US$ 24.3 billion by 2010.
• Domestic IT BPO spending grew by 40 per cent in 2008–09.
• The government is taking up e-governance initiatives and increasing its IT spend/outlay
with an allocation of more than US$ 400 million for the Unique Identification Authority
of India (UIDAI) in 2010–11.

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• The demand for domestic BPO services is increasing rapidly, with niche verticals such as
healthcare and retail fast gaining traction, apart from the traditional verticals of banking,
financial services and manufacturing.

Indian IT industry V/s world IT sector.

Key player-Indian

Wipro Technologies Ltd Infosys Technologies Ltd

Tata Consultancy Services

Revenues of US$ 5.94 Revenues of US$ 5.58 Revenues of US$ 4.40

billion in 2008–09, as compared to billion in 2008–09, recording a 12 billion in 2008–09, recording a 13
US$ 3.79 billion in 2007–08 per cent growth over revenues of per cent growth over revenues of
Profitability (operating US$ 4.96 billion in 2007–08 US$ 3.88 billion in 2007–08
margin) for 2008–09 recorded at Profitability (operating Profitability (operating
US$ 1.43 billion, a growth of 11.7 margins) for 2008–09 —18 per cent margin) for 2008–09 —34 per cent
per cent of revenues of revenues
Workforce of more than Workforce of more than Workforce of more than
126,150 professionals in 2008–09, 97,810 professionals in 2008–09, 104,900 professionals in 2008–09,
with 17 per cent growth in 2007–08; with more than 19 per cent growth in with 15 per cent growth in 2007–08;
employee base of 107,698 2007–08; employee base of 82,122 employee base of 91,187
Strong foothold in Indian Acquired six companies and Chosen the organic route to
market; global presence primarily formed joint ventures (JV) with two, develop its overseas operations.
established by acquisitions and increasing its offshore delivery
expansion of business verticals centresand expanding its service
offerings

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Key players –international

HP Oracle Cognizant Microsoft

One of the largest IT One of the largest A leading provider of The world’s leading
firms in the world; founded software business companies IT, consulting and IT developer of software
in 1939 and is ranked the in the world; has been infrastructure management products and services
9thin the 2009 Fortune 500 operating for more than 30 Founded in 1994 as a Operates in five
ratings. years in 145 countries captive arm of Dun & business segments —clients,
Total revenues worldwide. Bradstreet; revenues server and tools, online
amounted to US$ 118 billion Recorded revenues of estimated at more US$ 3.25 services business, Microsoft
in 2008–09. more than US$ 23 billion in billion for 2008–09 business division, and its
Workforce of more 2008–09 and was ranked the Has client-centric entertainment and devices
than 321,000 employees, third-largest software market approach, with major division
operating from more than company, based on its service offerings for various Recorded revenues of
170 countries revenues. sectors, especially healthcare more than US$ 58 billion in
Focusseson Workforce of more 2008–09
penetrating class-C and D than 68,000 employees in Workforce of more
cities by launching mobile more than 50 delivery centres than 93,000 employees
vans and linking them with Was ranked seventh worldwide
channel networks . on Forbes list of the 25
Has deep focus on fastest-growing tech
R&D, with more than US$ companies worldwide
3.5 billion dedicated to
development of new
technology.

Investments

• Between April 2000 and March 2010, the computer software and hardware sector
received cumulative foreign direct investment (FDI) of US$ 9,872.49 million, according
to the Department of Industrial Policy and Promotion.

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Indian IT Sector as on 2010

The National Association of Software and Service Companies (NASSCOM) is the apex body for
software services in India. According to its recently released publication-Strategic Review 2010,
the IT-BPO sector's revenue as a proportion of the country's gross domestic product (GDP) has
grown from 1.2 per cent in FY 1998 to an estimated 6.1 per cent in FY 2010.

Further, as per DIT, the ITeS-BPO is being seen as the fastest growing segment within the Indian
IT-BPO sector and is predicted to reach export revenues of about US$ 12.4 billion in 2009-10 as
compared to US$ 11.7 billion in 2008-09, growing at 6 per cent.

The domestic BPO revenue is expected to touch US$ 2.29 billion in 2009-10 from US$ 1.93
billion in 2008-09, registering a growth of 18.6 per cent, according to the DIT.

• Total revenues in India’s IT industry touched US$ 70.5 billion in 2008–09 as compared
to US$ 64 billion in 2007–08, growing at more than 12 per cent. The Indian IT industry
has been growing at a compound annual growth rate (CAGR) of 27 per cent from 2003 to
2008. India’s software and services exports, including its ITeS-BPO exports, touched
US$ 47.3 billion in 2008–09, as compared to US$ 40.4 billion in 2007–08, an increase of
14.3 per cent.
• The Indian IT & ITeS industry is primarily concentrated in seven clusters—
Bengaluru, NCR-Delhi, Hyderabad, Chennai, Pune, Mumbai and Kolkata. Every
year, 675,000 technical graduates qualify in the country, of which 400,000 are engineers.
It is estimated that the overall size of the domestic market grew by 20 per cent in
2008–09 to reach US$ 24.3 billion by 2010. India is poised to become the hub for
Engineering Process Outsourcing (EPO), with its market size estimated to touch US$ 30
billion annually by 2015, attracting 25 per cent of the US$ 70 billion global EPO
industry.

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Government Initiatives

• The government has constituted the Technical Advisory Group for Unique Projects
(TAGUP) under the chairmanship of Nandan Nilekani. The Group would develop IT
infrastructure in five key areas, which includes the New Pension System (NPS) and the
Goods and Services Tax (GST)
• The government set up the National Taskforce on Information Technology and Software
Development with the objective of framing a long term National IT Policy for the country
• Enactment of the Information Technology Act, which provides a legal framework to
facilitate electronic commerce and electronic transactions
• Setting up of Software Technology Parks of India (STPIs) in 1991 for the promotion of
software exports from the country, there are currently 51 STPI centers where apart from
exemption from customs duty available for capital goods there are also exemptions from
service tax, excise duty, and rebate for payment of Central Sales Tax. But the most
important incentive available is 100 per cent exemption from Income Tax of export
profits, which has been extended till 31st March 2011
• Government is also setting up Information Technology Investment Regions (ITIRs).
These regions would be endowed with excellent infrastructure and would reap the
benefits of co-siting, networking and greater efficiency through use of common
infrastructure and support services.
• Moreover, according to NASSCOM government, IT spend was US$ 3.2 billion in 2009
and is expected to reach US$ 5.4 billion by 2011. Further, according to NASSCOM, there
is US$ 9 billion business opportunity in e-governance in India.
• The government has recently relaxed employment visa norms for the IT and ITeS
sectors, allowing companies in these sectors to employ foreign nationals as per their
requirements, effectively removing the ceiling of 20 such employees per company.

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Export Promotion Schemes

The Foreign Trade Policy 2004 - 2009 permits import of all kinds of computers (except second
hand computers) in India without any licenses.

In order to promote domestic investment, foreign direct investment, transfer of technology /

process know-how, technical collaboration, joint venture etc in India and export IT software
products and services from India to the global market, both Government of India and State
Governments in India have been offering a series of policy packages including tax breaks, import
duty concessions etc under various schemes which include:

• Export Oriented Units (EOUs) Scheme: The purpose of the scheme was basically to
boost exports by creating additional production capacity.
• Special Economic Zone (SEZ) Scheme: SEZs are being set up to enable hassle free
manufacturing and trading for export purposes. Sales from Domestic Tariff Area (DTA)
to SEZs are being treated as physical export. This entitles domestic suppliers to
Drawback/ DEPB benefits, CST exemption and Service Tax exemption. Certain
exemptions like Income Tax exemption on export profits is available to SEZ Units for 5
years, 50% for next 2 years and 50% of ploughed back profits for 3 years thereafter are
available for units in these designated areas/zones.
• Export Promotion Capital Goods (EPCG) Scheme: The EPCG Scheme allows import
of capital goods for pre-production, production and postproduction (including
CKD/SKD thereof) at 5% customs duty subject to export obligations.
•

Policies and Regulations of Indian IT Industry

The policies and regulations of Indian information technology industry are the basic
guidelines that have been set up by the Department of Information Technology of the Ministry of
Communications and Information Technology of the Government of India.

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There are a number of guidelines on various aspects of the Indian IT industry that are supposed
to be followed by the information technology industry of India. They may be enumerated as
below:

• Preparation for project proposals

• State Data Centre

• National Electronics or Information Technology Hardware Manufacturing Policies

• Electronics and Information Technology Industry

• Implementation of Common Services Centres Scheme in States

• Establishment of State Wide Area Network

• Capacity Building and Institutional Framework for e-governance under NeGP

• .IN Internet Domain Registration

• Submitting Proposals for DIT support needed to host Symposiums, Conferences,

Workshops and Seminars in the fields of electronics, and Information and
Communication Technology

• .IN Internet Domain Name-Policy Framework and Implementation

Tax Incentives in Budget 2008-09:

• Excise duty being increased on packaged software from 8 per cent to 12 per cent,
bringing it at par with customized software attracting a service tax of 12 per cent.

• Customized software has been brought under the service tax net to bring it on par with
the packaged software and other IT services..

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• Allocation to the Department of Information Technology enhanced to Rs.1,680 crore in

2008-09 from Rs.1, 500 crore in 2007-08; Two Schemes for establishing 100,000
broadband internet-enabled Common Service Centres in rural areas and State Wide Area
Networks (SWAN) with Central assistance under implementation; new scheme for State
Data Centres also approved; Rs.75 crore provided for the common service centres;
Rs.450 crore provided for SWAN and Rs.275 crore for the State Data Centres.

Industrial Approval Policy

• Industrial Licensing has been virtually abolished in the Electronics and Information
Technology sector except for manufacturing electronic aerospace and defence equipment.

• There is no reservation for public sector enterprises in the Electronics and Information
Technology industry and private sector investment is welcome in every area.

• Information Technology industry can be set up anywhere in the country, subject to

clearance from the authorities responsible for control of environmental pollution and
local zoning and land use regulations.

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The threat of the entry of new competitors

Profitable markets that yield high returns will attract new firms. This results in many new
entrants, which eventually will decrease profitability for all firms in the industry.

The existence of barriers to entry (patents, rights, etc.) The most attractive segment is
one in which entry barriers are high and exit barriers are low. Few new firms can enter and
non-performing firms can exit easily.

Economies of product differences

Brand equity

Switching costs or sunk costs

Capital requirements

Access to distribution

Customer loyalty to established brands

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Industry profitability; the more profitable the industry the more attractive it will be to
new competitors
The intensity of competitive rivalry
For most industries, the intensity of competitive rivalry is the major determinant of the
competitiveness of the industry.

Sustainable competitive advantage through innovation

Competition between online and offline companies;

Level of advertising expense

Powerful competitive strategy

How will competition react to a certain behavior by another firm? Competitive rivalry is
likely to be based on dimensions such as price, quality, and innovation. Technological advances
protect companies from competition. This applies to products and services. Companies that are
successful with introducing new technology are able to charge higher prices and achieve higher
profits, until competitors imitate them. Examples of recent technology advantage in have
been mp3 players and mobile telephones.

The threat of substitute products or services

The existence of products outside of the realm of the common product boundaries increases
the propensity of customers to switch to alternatives:

Buyer propensity to substitute

Relative price performance of substitute

Perceived level of product differentiation

Number of substitute products available in the mark

Substandard product

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The bargaining power of customers (buyers)

The bargaining power of customers is also described as the market of outputs: the ability of
customers to put the firm under pressure, which also affects the customer's sensitivity to price
changes.

Degree of dependency upon existing channels of distribution

Buyer volume

Buyer information availability

Availability of existing substitute products

Differential advantage (uniqueness) of industry products

The bargaining power of suppliers

The bargaining power of suppliers is also described as the market of inputs. Suppliers of raw
materials, components, labor, and services (such as expertise) to the firm can be a source of
power over the firm, when there are few substitutes. Suppliers may refuse to work with the firm,
or, e.g., charge excessively high prices for unique resources.

Degree of differentiation of inputs

Impact of inputs on cost or differentiation

Presence of substitute inputs

Strength of distribution channel

Employee solidarity (e.g. labor unions)

Supplier competition - ability to forward vertically integrate and cut out the buyer

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S- CURVE (INDUSTRY LIFE CYCLE) APPROACH FOR IT INDUSTRY

PIONEER GROWTH MATURE DECLINE

Fig: S- Curve Approach (Industry Life Cycle)

 Industry lifecycle is commonly correlated with the cycle of product and process
innovation. Other factors that may launch industry lifecycle include government
intervention (e.g. Deregulation), liberalization of external trade.

 Indian IT Sector is on the growth phase because the industry is getting all the essential
ingredients required for dynamic growth

 The government is backing the industry through favourable industrial reforms, while the
private sector is supporting it with investments worth billions of dollars.

 In the tough times of economic slowdown, the industry is unable to sustain its positive
growth momentum.

 The global economic slowdown hampered the growth curve of various IT industries.

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 However, the government proactive incentive plans to boost economic growth by

injecting funds in various industries.

 Although each Industry is unique, the life cycle stages of an industry are relatively
consistent and therefore useful for forcasting industry-wide earnings per share

Future of Indian Information Technology Industry

The current scenario in the IT industry of India and the tremendous growth registered in recent
years has generated much optimism about the future of the Indian Information technology
industry. Analysts are optimistic about the huge potential of growth in the Information
Technology industry in India.

According to a report prepared by McKinsey for NASSCOM called 'Perspective 2020:

Transform Business, Transform India' released in May 2009, the exports component of the
Indian industry is expected to reach US$ 175 billion in revenue by 2020. The domestic
component will contribute US$ 50 billion in revenue by 2020. Together, the export and domestic
markets are likely to bring in US$ 225 billion in revenue, as new opportunities emerge in areas
such as public sector and healthcare and as geographies including Brazil, Russia, China and
Japan opt for greater outsourcing.

The major areas of benefit that the future growth in the IT industry can generate for the Indian
economy are -
• Exports - The IT industry accounts for a major share in the exports from India. This is
expected to grow further in coming years. The information technology industry is one of
the major sources of foreign currency for India.
• Employment - The biggest benefit of the IT industry is the huge employment it
generates. For a developing country like India, with a huge population, the high rate of
employment in the IT sector is a big advantage. The IT industry generated employment
of approximately 2.2 million by the end of 2008 which is subsequently expected to
increase significantly in coming years.

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• FDI (Foreign Direct Investment) - High inflow of FDI in the IT sector is expected to
continue in coming years. The inflow of huge volumes of FDI in the IT industry of India
has not only boosted the industry but the entire Indian economy in recent years.
Software exports from India are expected to grow in coming years. New markets for
software exports from India have opened up in the Middle East, South and Southeast
Asia, Africa, and Eastern Europe. The reputation that India has earned as a major
destination for IT outsourcing has opened further possibilities. Many developing
countries are now using the Indian model for growth in the IT sector.
Another important area of future growth for the IT industry of India is the domestic
market. While exports dominate the IT industry at present, there is huge scope of growth
in the domestic market which can be tapped in the future.
The US recession has had its share of negative impacts on the Indian IT industry.
However, the industry has faced the challenges posed by the global market and is
sustaining its rate of growth. The focus for the future is to ensure that the benefits of the
IT industry percolate to the grassroots levels.

References:

http://www.ibef.org/industry/informationtechnology.aspx
http://business.mapsofindia.com/india-gdp/sectorwise/
http://business.mapsofindia.com/india-industry/it.html
http://www.ibef.org/download/IT_ITeS_060710.pdf
http://www.google.com

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