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Software: Growing in importance - Views on News from Equitymaster
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  • Mar 14, 2005

    Software: Growing in importance

    India is among the fastest-growing economies in the world today. GDP growth for fiscal year 2006 has been estimated at 6.9% in the latest Economic Survey. Going forward, steps need to be taken in order to ensure that the economy grows at 8% to 10% annually over the next few years in order to generate employment, improve the fiscal situation by focusing on agriculture, manufacturing and infrastructure, all of which are key segments of the economy.

    In this regard, the Indian software industry has, over the years, been at the forefront of the 'India growth story', and has showcased to the world, Indian managerial and technical prowess. It has consistently grown at a rate well above the GDP growth rate and helped in no small measure, the 'Made in India' label to get global recognition and appreciation. We attempt to analyse the growing importance of the Indian software industry in the Indian economy, with reference to factors such as wealth creation, job creation and share in the economic output of the country.

    Wealth creation: The industry has probably created more millionaires than any other industry. With the scorching pace of growth maintained by the industry over the years, the share prices of companies in the industry like Infosys and Wipro have seen a quantum jump. The industry offers stock options to its employees, which is a key measure of employee retention. Since the share prices have done well, it automatically follows that the employees and shareholders of these companies have benefited greatly. With companies like Infosys, Wipro and TCS expected to continue growing at a fast clip, given their strong growth prospects, the industry is expected to continue to create long-term wealth.

    Apart from monetary wealth, intellectual wealth creation has also been a feature of the industry. R&D budgets have increased over the years, as companies realise the value of building a long-term sustainable competitive advantage through financing innovation. The result has been a greater focus on R&D, which is not just restricted to the software industry.

    Job creation: The number of jobs created by the IT and BPO industries has crossed 1.0 m this year, and the total is set to end at around 1.1 m at the end of this financial year. The industry has set itself a target of providing employment to 2.0 m people by 2008. Thus, the scorching pace of growth of the industry in the past few years has resulted in a huge benefit of creating jobs and increasing economic output.

    The honourable Finance Minister Mr. P. Chidambaram has mentioned the information technology (IT) industry in this year's Union Budget as a key industry that can help in the creation of an additional 7 million jobs by 2009! Over the years, the industry has played a key role in increasing employment opportunities and with the BPO industry gaining momentum in recent times, the job growth has increased.

    Contribution to economic output: Over the years, the software industry's contribution to economic output (GDP) has increased considerably. From a mere 0.3% of GDP in 1998-99, the industry's contribution to GDP is currently over 3%, and is expected to rise to as much as 7% by the year 2008. This is a result of the fact that the growth in the industry is well ahead of the expected GDP growth rate.

    Conclusion: We have seen and understood that the outlook for the software industry is bright, barring unforeseen events. Companies will continue to outsource to cut costs and remain competitive. Indian companies will continue to move up the value chain. BPO companies will gain more high-end work from clients. All in all, companies with scale and size, and which have a strong track record of seamless execution, will benefit the maximum from this growth.

    This is a good sign for investors - current and potential - who would like to get a better idea of the industry's future. With the increasing importance of this industry in the Indian economy, no investor worth his salt will be willing to miss the bus. But in our view, it is better to stick to the top rung companies in this sector from a long-term perspective. Investors, please take note!



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