• JUNE 4, 2007

Software: Indian IT-ITES 2012

India will be uniquely positioned to sustain its global leadership position, grow its offshore <>IT-ITES industries at an annual rate of 24% to 25%, sustain nearly 10 m jobs, and generate export revenues of more than US$ 86 bn by FY12 (as per NASSCOM estimates). Additionally, industry participants can further accelerate this export growth through deep and stable innovation. Such extensive innovation could generate an additional US$ 15 to US$ 20 bn in export revenue over the next five to ten years. Further, establishing India's leadership in the global IT-ITES sector will mean more than achieving a targeted growth in exports. Achieving these growth targets will entail a significant demand for incremental human and financial capital in the country. US$ 86 bn in IT-ITES exports by FY12 translates to incremental direct employment of about 2.5 m people and capital investment of approximately US$ 20 bn. This is based on industry average capital to revenue ratio of 1:5 and lead-time of 3 years in the investment cycle.

IT-ITES exports (US$ bn)
FY0623.6 FY14E124.9
FY0729.8 FY15E150.0
FY08E37.6 FY16E175.5
FY09E47.5 FY17E205.3
FY10E60.0 FY18E240.2
FY11E72.1 FY19E281.1
FY12E86.6 FY20E328.9
FY13E104.0 CAGR20.7%
Source: NASSCOM McKinsey Research

India holds a dominant share of the global offshore IT-ITES sector (65% of the global market in offshore IT and 46% of the ITES market). Yet, at US$ 31.3 bn in FY07, Indian IT-ITES exports accounted for less than 3% of the global spend on IT-ITES. This clearly indicates significant headroom for growth. If India maintains its current share of the global offshore IT-ITES market, IT-ITES exports from India will exceed US$ 60 bn by FY10 and US$ 86 bn by FY12. Further, growing at current trends, Indian IT-ITES exports are projected to reach nearly US$ 330 bn by FY20 (nearly 14% of the projected worldwide spend). But the Indian IT companies will have to move up in the value chain and concentrate more on high value added services.

IT Exports in US$ bn% of market
FY05 FY06 FY07 FY05 FY06 FY07
IT Consulting0.3 0.3 0.5 1.1 1.41.8
System Integration0.2 0.4 0.5 0.3 0.50.6
Network consulting and integration0.2 0.2 0.2 0.6 0.60.7
Custom Application development5.0 6.5 8.9 22.5 27.836.4
Application management2.7 1.6 2.2 14.8 7.89.6
IS outsourcing0.6 0.8 1.1 0.7 1.01.2
Support and training1.1 1.2 1.7 0.9 0.91.2
Others- 2.3 3.0 - - -
  10.1 13.3 18.1 40.9 40.0 51.5

Infrastructure management services (included in IT outsourcing) and system integration services are forecasted to be high growth areas in offshore IT services sourced from India. In case of offshore BPO, relatively lower penetration levels and significant untapped potential is expected to lead significant growth (CAGR 33% to 45%), across vertical markets, over the next five years. But to achieve these targets, there lies some big roadblocks in between them. They are:

Shortage in supply of suitable talent: While India's young profile has the country favourably placed in terms of its quantitative manpower requirements, gaps in suitability and access to the entire available pool are beginning to reflect in talent supply shortages which are indicated by continued above average wage inflation and high attrition levels in the sector. To achieve US$ 86 bn in export revenues and to continue to grow the domestic IT industry, the IT and ITES industries will need to employ nearly 2.5 m professionals. Further, the number of Indian students going abroad annually is currently over 100,000 and is projected to cross 200,000 by the end of FY10. In comparison, the number of foreign national students coming to pursue studies in India is estimated at less than 10,000 each year. As a result, the net annual outflow on account of education, currently estimated to be in excess of Rs 150 bn (US$ 3.5 b), is likely to continue to rise rapidly.

Lack of adequate infrastructure: The demand for infrastructure and indirect resources poses a key challenge for the IT-ITES sector. The incremental infrastructure required to support the projected growth is unlikely to be absorbed into the existing city centres in Tier I and Tier II cities, which are already witnessing signs of strain. With Tier III and Tier IV cities lacking important elements of business and social infrastructure, decentralized growth of the IT-ITES sector will require a coordinated, large-scale urban planning exercise. The IT-ITES sectors will likely employ an additional 2.5 m professionals (export sectors alone) by FY12. In addition to basic utilities and physical infrastructure, growth in the sector will also generate significant demand for world-class business and social infrastructure. Existing Tier I and Tier II cities are already overcrowded, choked, and struggling to provide basic urban services. Upgrading these existing centres is necessary, but can only reduce rather than solve the problem. Further, decentralizing the industry beyond existing hubs is essential to allow wider distribution of the development benefits driven by the growth of the sector. Therefore, this demand will need to be met by developing new townships to house the young population.

Sustaining cost competitiveness: Cost savings remain the primary driver for offshore sourcing of IT-ITES. In addition to the potential loss of absolute cost arbitrage due to wage inflation, firms are becoming increasingly concerned about increasing cost of doing business in India due to infrastructure constraints. The recently introduced SEZ policy is a positive measure, however, it does not adequately accommodate the requirements of this sector and is likely to have unfavourable implications for SMEs and smaller cities. Further, India still ranks poorly on other aspects of 'ease of doing business' when compared to other emerging competitor locations which also impacts the cost of doing business in India. India currently ranks 116th out of 155 countries. (Source: www.doingbusiness.org)

The IT and ITES have been the largest industry segments responsible for contributing to the growth of the Indian economy in the past few years. A gradual shift has been seen, in terms of the choice of one's profession, with an increasing number of people from diverse backgrounds opting for a career in IT and ITES. In the past few years, a large number of graduates, from a diverse range of backgrounds, have been leaving their chosen disciplines and joining the IT sector. Shortage of graduates in basic science and engineering streams may result in the near future. This is likely to have an impact on research and innovation and also on other primary and secondary sector of economy. Further, as the ITES-BPO industry shifts to Tier II cities, there will be an increase in the infrastructure requirements in those semi-urban areas also. In addition to this, there are challenges arising out of social and cultural changes that are being brought out by the IT-ITES Industry growth, since the professionals are employed in the virtual environment of the target industry. There is a need to continuously study the changes that are taking place in economic as well as cultural domain of various sectors also as a result of IT-ITES growth.

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