India's Technology Revolution: A Primer

India is now a world leader in the development and manufacture of computer software, internet, and telecommunication products, bringing profits and substantial economic development to some states.

India's software exports grew by 68% in 1998/99, totaling $2.65 billion. Some $200 million of venture capital is currently available for Indian technology startups. Of particular interest are projects involving wireless and internet technologies and services. Call centers and medical record transcription services are also good bets, owing to India's low-cost, technically proficient, English-speaking pool of skilled workers.

All of India has not shared in this boom, however. Economic growth has been unevenly dispersed. Selected states in the south and west of the country have benefited enormously from the technological revolution. But others have not and they remain largely impoverished.

Over the past year, the Bombay stock exchange has been up more than 75%. The key drivers of this increase are software companies. In fact, India now possesses 3% of the global software manufacturing market, and this number is growing dramatically. Although software services account for just 1.3% of India's GDP, the industry is growing more rapidly than any other in the country and is now an agent of profound corporate and economic change.

No accident

India's success in the high tech sector was no accident. Throughout the 1990s, large numbers of educated, relatively low-waged, English-speaking engineers gravitated to IT centers in Bangalore, Bombay, Delhi, Madras, Hyderabad and Pune, where foreign and domestic investors had set up small software plants.

Today, the Indian software industry employs an estimated 280,000 software engineers in about 1,000 companies. These workers are the best and the brightest graduates of India's elite universities and technology institutes. Many are now multi-millionaires. As of September 1999, the market capitalization of India's Information Technology industry reached $24.3 billion, up from $13.6 billion just six months earlier. But none of this would have been possible if the Indian economy has not begun to emerge from a two year recession.

Over the past few months, industrial production growth has improved, housing starts are up, and the fiscally prudent BJP government appears to be stable. Analysts at Credit Suisse First Boston forecast an average growth rate of 7.5% over the next five years in India. The World Bank cautions, however, in its most recent report, that this goal will be achieved only if serious economic reforms continue to be implemented on both the national and state levels of government.

The BJP has pledged to triple foreign investment in India. In fact, the finance minister has stated that he hopes to attract $10 billion in foreign direct investment in each of the next five years. This is more than triple the annual average of the past decade.

Competition encouraged

In recent months, onerous foreign-exchange controls have been removed and new laws have opened the insurance sector to foreign investors. The government has also promised to encourage competition in the banking industry in the near term. In addition, in March 2000, the government passed legislation relaxing the tax burden for foreign venture capital firms setting up in India.

The National Association of Software and Service Companies (Nasscom) asserts that these measures could lead to extra inflows of $3 billion in the next 18 months, some 30%-40% of which will be invested by non-resident Indians.

Serious problems remain of course. The senior public service remains painfully slow in implementing new legislation. Infrastructure is often poor, there is a lack of agricultural deregulation, and the national fiscal deficit continues to drive up the cost of capital.

Regional economic inequality is pervasive. Six southern and western states have attracted most of the $18 billion in FDI that has come into India in the past decade. Many of the remaining states have made little progress.

Fewer constraints

As problematic as these issues are, the software industry has emerged largely unscathed. As a new economic sector, it is relatively free of state involvement. In the absence of a stifling national or state bureaucracy, software entrepreneurs are succeeding against global competition. Today, strong exports, professional management, and top technical talent characterize India's information technology industry.
Infosys, the first Indian software company to list on the US-based Nasdaq exchange, has seen its share price soar. It is now in the Nasdaq top 20.

In October 1999, Satyam Infoway, one of India's new internet service providers, became the second company to list on the Nasdaq. Others, including internet portal and Zee Telefilms are poised to follow and Nasdaq recently announced that it would open up a representative office in India to facilitate future listings.

Furthermore, prominent US and European firms such as Cisco, Microsoft, Texas Instruments, Oracle, Siemens, and SAP are recruiting Indian engineers for their research and development centers in India.
The rapid success of the Indian software industry has been remarkable. But the industry remains in its infancy. Fewer than three million Indian households own a personal computer, out of a population of over one billion. Furthermore, there are just 350,000 internet connections in India, but it is estimated that there are four internet users for every connection.

Undoubtedly, internet usage will increase when cable TV access is increased in India. Currently, twenty million Indian homes have cable service. In fact, several international companies including the UK-based WorldTel have negotiated or are negotiating with various Indian state governments to set up community internet cafes.

We expect this trend to continue. India's export-led software development industry has made it the model to emulate for the modernization of the rest of India's otherwise lackluster economy. Indian IT products are inexpensive by world standards. But they also stand out on the basis of quality, speed, reliability, and innovation.

The central government and almost all of India's forty state governments have created an IT development policy, including steps to encourage the use of computers in government. Ten years ago, few observers would have predicted that the Indian economy could have been transformed in this fashion.

India has very far to go of course, to eliminate its widespread poverty, and to promote widespread economic development. But it has taken a major step in the right direction by nurturing its IT industry. In this sphere at least, it is a world-class competitor.

Jonathan Lemco is director and senior consultant, KWR International.

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