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(Asia Times) India's domestic IT market wakes up By Indrajit Basu KOLKATA - For India's money-spinning information-technology (IT) industry, the fact that in 2003-04 the performance of its software and IT-services sector surpassed expectations yet again and emerged unscathed against a globally challenging economic backdrop, static IT budgets, and a "backlash" against offshoring, is certainly reason to feel optimistic. But an even more notable feature in the IT sector is that for the first time in 10 years, ever since Indian IT started creating a sensation globally for its software-services exports, the country's domestic IT market made gains in catching up. Revenues from the domestic IT sector leapfrogged by 24% to reach US$7.25 billion from a relatively modest growth rate of 9% in the previous year (ending March 2003), which almost equaled the 25% growth figure of its software-services exports. Indeed, India's IT industry had always been apologetic about the fact that despite being considered an IT superpower in terms of software-services exports, its domestic market - or internal use of IT - had never been worth talking about. For that matter, barring the few smaller and less economically developed countries (Pakistan, Nepal, Bangladesh, Myanmar, etc), India's domestic IT use has been among the lowest in Asia. "But now," says Sunil Mehta, vice president and head of research of industry lobby the National Association of Software Services Companies, or NASSCOM, "demand for IT is also growing within the domestic IT industry, which until recently was dominated by software-services exports. Consumption of IT has moved on to the higher growth trajectory." For the record, though, even as global IT just managed to inch ahead (growing at an estimated 4%) in 2003-04, India's IT industry as a whole recorded a growth of 24% to cross $20 billion. India's software, services and business process outsourcing exports, the mainstay of the industry, grossed $12.5 billion, up from $9.6 billion in 2002-03, indicating a growth of 30.5% for the year, higher than the 26-28% projections and significantly more than the 25% in 2002-03. "Incidentally, this was the highest growth in the software and services sector since 2001," says Mehta. And according to Partha Iyengar, vice president of research for Gartner India, "Indian IT emerged as the world's fastest-growing IT sector." Meanwhile, there were several contributors to the turnaround of the domestic IT industry, and according to NASSCOM, the increasing trend of Indian states toward e-governance is an important one. Already 14 Indian states have launched an aggressive e-governance plan. "If earlier the software-services sector wanted the government to hard-sell software exports, now it is counting on it to spend more on e-governance projects and develop the domestic IT market," says Kiran Karnik, president of NASSCOM. Another interesting trend in the Indian IT landscape is that "Indian companies have definitely started adoption of using IT as a competitive differentiator for business", says Radha Basu, chief executive officer of US-based SupportSoft. This is evident from the growing trend of IT outsourcing by Indian companies. In a somersault of sorts, Indian companies have also started outsourcing to US multinationals and, as reports suggest, while US companies outsource non-core activities to India, India Inc's outsourcing includes core area functions such as finance, supply-chain management and even procurement. Over the past few months, a slew of Indian companies including Bharti Telecom, Bank of India, Tata Steel, ITC, HDFC Bank, Colgate Palmolive, HLL Ltd and the like have awarded outsourcing contracts to IT multinationals such as IBM, Accenture and HP. The value of these contracts range between $2 million and $750 million over periods extending up to 10 years. But the biggest reason for the increased adoption of IT domestically has been the steep fall of hardware prices, along with an improving IT infrastructure. "The decline in hardware prices, which have fallen by 20% to 45% over the past 18 months, has enabled IT to penetrate into small and middle level enterprises," says Sunil Mehta. "Also the growth in non-PC [personal computer] devices like handheld phones, cable Internet etc has helped, along with improving infrastructure like broadband connections." A burgeoning domestic market overall, say experts, is also yielding some direct benefits for the IT industry. "Because the consumption in the domestic market has started to assume global scales, we are finding significant interest from major multinational manufacturing companies such as Elcotek, Flextronics, Solectron, etc to set up manufacturing bases here," says Vinnie Mehta of the Manufacturers Association of Information Technology. "India has become important not only because the country consumes close to 2 million mobile phones every month, or that the country is buying 3 million personal computers every year, [a market] that is growing at 30%, but also because there is the realization that its excellent geographical location has never been harnessed. We are plum halfway between Taiwan/China and the European markets; with cost of insurance and freight having gone up post [September 11, 2001], there is a significant interest from Taiwan manufacturers to consider India as an alternate base." Basu notes another interesting phenomenon. "The general matrix in India was always about scaling its huge pool of human resources people and directing them towards services, because the service sector is people-oriented," she says. "However, India is getting into the next phase of IT by directing its focus on repeatable, scalable product software." Other IT experts such as Iyengar of Gartner too feel that India has entered this arena, which could be yet another direct benefit of a growing domestic market. "One needs to test products locally first and a growing domestic market spurs development of products in the IT arena," Iyengar says. Nevertheless, according to Karnik, even as domestic use of IT has started growing after years, "Indian IT companies are not really global and the Indian industry is still in the early stages of adoption of IT." So, feels NASSCOM, the country has a pending agenda of deregulating a few key sectors to encourage adoption of IT in the domestic market. But meanwhile, the country's IT industry can derive satisfaction from the fact that a country considered a major knowledge and IT success story is taking rapid strides in developing its own market; even if it is a decade behind the rest of Asia. Indrajit Basu is a Kolkata-based equity analyst turned journalist with more than 12 years of experience in business/finance and technology journalism. Besides contributing to Asia Times Online, he also writes for other US-based publications and IT companies. @atimes.com Aug 19, 2004 -------------------------------------------------------------------------------- India, the world's R&D hot spot (Aug 18, '04) The rise of India's IT paradise (Jul 31, '04) Rifts open in India's Silicon Valley (Jul 31, '04) No material from Asia Times Online may be republished in any form without written permission. 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