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Software: Home is not where the heart is! - Views on News from Equitymaster
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  • May 8, 2003

    Software: Home is not where the heart is!

    While discussions and debates about the share of India’s software exports round the globe take prominence, the domestic software services industry continues to languish in comparison. During 2002-03, while the entire IT industry has grown by around 21% (Source: NASSCOM), the domestic software and services segment contributed Rs 124 billion as revenues to the IT sector, at a growth rate of 13%. We take a look at the reasons for low growth in the domestic software services segment as well as the potential for the same.

    The Indian IT Market: Composition
    Rs bn 2001-02 2002-03 Change
    Software Services Exports 365 475 30%
    Domestic Software & Services 110 124 13%
    Hardware & Networking 167 178 7%
    Training 16 16 0%
    Total 658 793 21%

    A listless economic environment has led to low levels of IT spending in the country. Also high levels of piracy are hurting the domestic software services industry. Pirated software sales are eating in to the market of software services companies. While there is no lacking on the supply front, what lacks in the domestic environment is the demand for IT products and services. Presently, the domestic IT segment is bearing the brunt of Indian companies that are reluctant of any new IT spending and are focused on realizing the benefits accruing from their existing IT investments.

    Source: Nasscom

    In the domestic segment, the IT/Telecom vertical contributes the biggest chunk to revenues. However, the banking and insurance vertical holds the biggest promise for the future. The need to manage risks in the financial system, asset-liability management, electronic banking, and management of customers will drive demand from the BFSI vertical. This will help the cause of companies like i-flex and Infosys, which are dominant in this vertical.

    On the manufacturing front, the need to become cost-efficient and productive will be the growth driver. With recent initiatives from certain state governments like those in Andhra Pradesh, Delhi, and Haryana to implement technology in their departments, the market for e-governance will get a fillip, and would help the companies that provide products and services in this area. Another area that holds promise for the software services industry in the domestic context is the field of biotechnology. India is slowly emerging as a major center for biotechnology related initiatives and this will create a market for software specific for this industry.

    The situation looks bleak at present, yet a long-term view provides some consolation that the domestic market has the potential to develop into a high growth one. A number of players are entering the ITES segment to provide solutions in areas of customer care and telemarketing to domestic companies, this is likely to drive demand for services from this segment. Also the Indian corporate sector, going forward is likely to make investments in areas of CRM, SCM, and ERP in order to become more efficient. While in the external segment, Indian companies continue to score over their competitors in China, Ireland, and Israel on cost, quality and scalability fronts, the domestic segment holds substantial promise for the future.



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