The software industry in India has the promise to become the growth engine of the economy. The competitive advantage the industry has enjoyed over the years is cost leadership. Due to availability of cheap labour the software industry has managed to provide services at rates lower by 50% compared to their foreign counterparts. Also, as the economic slow down in the US continues, corporates in the US are increasingly looking at offshore development to avail even cheaper rates.
How have these companies been able to offer significantly lower prices? It is due to the fact that manpower – the most exhaustive resource is available to these companies at very low costs. It is these advantages that the companies have been able to pass on to their customers.
But the question is whether the model is sustainable? For an answer let us look at how the scenario has emerged. Firstly, the employee costs in the past year have moved up significantly with companies raising wages at an average rate of 20% per annum.
Large Indian corporate houses that have substantial information technology requirements have set up their own IT outfits to meet internal demands and of course, make some money providing the similar set of services to other corporates. The list includes, ICICI that has created ICICI Infotech, ITC with ITC Infotech and IDBI with IDBI Intech.
But if Indian companies can do it why cannot the MNCs? Well they have been doing so. A large number of MNCs have been setting up software development centres in India and they are not only software companies. GE has set up The John F. Welch Technology Center in Bangalore. It is a part of GE's Corporate Research and Development (CRD). Increasingly, as MNCs set up their outfits they will compete for talent and in some time for business.
Therefore, in the long run talent is going to become expensive. This year companies have taken a breather as the slowdown in the US has caused the demand for talent to take a hit.
So where does the cost advantage shift to? The other resources that the software industry consumes are bandwidth and power. Bandwidth has increasingly become critical as the offshore model gains popularity. Clients overseas would definitely be far more comfortable if they could closely monitor the progress of their projects being executed offshore. Infact, it is the lack of this comfort that has caused clients to strike off projects that were being done in India as in tough economic environment the corporates would not like taking any risks.
Also, IT enabled services industry in India that is in its nascent stage is all about transfer of data. The industry is expected to grow at a CAGR of 42% till 2008 and create 1.1m jobs. Thus, band with availability will play a pivotal role in the development and future growth prospects of both the software and IT enabled services industries.
Currently, 390 Mbps of international Internet bandwidth is available in the country, whereas the demand is for a total capacity of 5 Gbps. On the domestic front, 34 Mbps of Internet bandwidth is available, whereas the demand is for at least 2 Gbps of domestic bandwidth. Supply far short of demand. This has created a scenario where bandwidth has become very expensive.
In India, bandwidth is estimated to be almost 10 times more expensive than in countries like the US. In the USA, coast-to-coast connectivity of 56 kbps costs between US$ 600 and US$ 1,000 per month. The charge for a 64 kbps link to India from USA is around US$ 5,000 per month, while the cost of a 64 kbps link from the USA to UK is US$ 2,000.
However, things are moving on this front. According to Nasscom in the next 18-24 months, the bandwidth availability could go up to 10 Gbps of international bandwidth. VSNL that till sometime was the sole provider has proposed to increase its capacity to 13 gigabits by 2004.
Though VSNL’s monopoly ends in 2002 and private ISPs have been allowed to set up there own international gateways since last year the bandwidth availability has not improved drastically. In fact, recently certain ISPs increased their dial up access rates.
If the shortage prevails and once the cost advantages in terms of human resources diminishes other countries like China that have an excellent Internet infrastructure shall be able to provide the same advantage that was once Indian forte. If the scenario does not improve US$ 22.5 bn worth of business and 650,000 jobs could be lost in the next five years due to lack of adequate bandwidth.
But far more importantly the loss will be India’s positioning as a cost effective quality services and solutions provider. And this should not be the future of a sector that is promising to be an important contributor to the growth in the Indian economy.