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IT: The next big revenue source is ... - Views on News from Equitymaster
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  • Mar 5, 2010

    IT: The next big revenue source is ...

    Indian IT companies appear to be a lot more euphoric these days. And why not! The IT demand environment is showing strong signs of revival globally. Large multi-million dollar, long term projects are making a comeback. Clients in the developed West are loosening their purse-string a little. A good sign after a year-long lull in IT demand. However, what enthuses us more is the vibrancy back home in the Indian IT market. This article particularly discusses about the sea of opportunity for Indian IT majors coming from government boardrooms.

    The Indian government has long been considered as visionary in planning but poor at execution. However, it is now attempting to improve its image in this regard. It eyes IT as a significant enabler in bringing efficiency and transparency in its social and economic initiatives. The following table encapsulates major reform projects being undertaken by government of India along with estimated spending on the same.

    Marquee government projects Estimated spending (In Rs bn)
    APDRP 200
    N-eGP 230
    Unique Identity (UIDAI) 270
    Crime and Criminal Tracking 20

    While the Accelerated Power Development Reform Project (APDRP) aims at reforming Indian power sector, National e-Governance Project (N-eGP) aims at improving delivery mechanisms of government projects. Then comes the ambitious UID project which promises to give a unique identity to every Indian citizen. Even Indian Police, India Post, Indian Railways all are out in the market searching for technology partners to modernize their archaic systems. To sum up, the opportunity is huge for Indian IT companies in the government corridors.

    Indian government's IT spending is estimated to be have been Rs 150 bn in 2009. It is pegged to reach US$ 4 bn in FY11. It means that the technology spending will be around 3% of the government budget. Nasscom has projected IT spend to touch US$ 9 bn in couple of years. And that's not all. Governments round the globe are waking up to the fact that IT can help them become more efficient and lean in processes. Indian IT companies are seeing a robust surge in demand for outsourcing from government bodies in different parts of the world. All major Indian IT players have joined the race with global counterparts like IBM, Accenture and HP in getting a share of global e-governance pie. Indian IT mega-vendors are vying with 37 global players for UK government's IT project worth over Rs 220 bn. Indian companies are expected to mop up at least 5% to 10% of this project. The UK government has an annual IT budget of 8 bn, 65% of which is expected to be outsourced. Similar multi-million dollar deals are emanating from the Nordic countries as well as Middle East and Asia Pacific.

    But as usual, when opportunities come, challenges often tail along. First of all, let us accept that it's the 'government' that we are dealing with here. Project delays, frequent change in leadership coupled with immense public scrutiny is the way of life in government deals. Something that our software giants are coming to terms with. When the government hires you, it ensures that you are worth your salt. However, it might not be equally professional when it comes to signing the cheque. Government asked TCS to pay a penalty of Rs 2 lakh for every week of delay in its e-Passport project. Nevertheless, such penalties are common with private clients as well but public attention that such events get is a deterrent.

    More worrying is the time taken to complete the long-drawn government processes to finalise a project. Indian IT is surely not well-versed with such ambiguity. Lately the bidding norms have been tightened. As per new norms, only those Indian players which have consistently earned more that Rs 2 bn from IT services for the past 3 consecutive years will be eligible to bid for government projects. Now that is a tall order. Add to it, the player should have some large government IT projects already to its credentials. It clearly eliminates a number of mid and small sized IT players in participating in the buzzing e-governance market.

    The table shows different e-governance projects bagged by the IT majors. The new norms suggest that these will gain more of the Indian e-governance pie going forward. But then there are opportunities for small and large hardware, smartcard and storage vendors to supply for the IT infrastructure underneath the IT services. The UID project alone is estimated to offer such opportunities worth more than Rs 150 bn.

    IT major Projects
    TCS e-Passport (Rs 1000 m),
    APDRP - MP, Gujarat, West Bengal (Rs 7690 m)
    Infosys Tax CPC (Rs 2500 m), e-Biz (Rs 145 m), APDRP - Karnataka(Rs 3860 m)
    Wipro ESIP (Rs 11820 m), Excise and Customs project (Rs 11300 m)

    No doubt that the Indian IT companies are betting big time on Indian e-governance market. They have set up dedicated India units to tap into buzzing Indian IT marketplace. We believe that there efforts have started bearing fruits. The government is no doubt a difficult but very critical client now. Still, a long way to go!



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