A new report by Datamonitor, ‘The Indian IT Services Market: The Evolutionary Path and US$50 billion Domestic Opportunity’, affirms that the government policy environment will remain favorable. It states that the domestic IT services market is expected to grow and present numerous opportunities to IT solutions providers.
“The interesting thing about the evolution of the Indian IT sector is that it could have easily gone the other way,” says Somak Roy, lead analyst with Datamonitor’s technology team and the report’s co-author. The IT industry established its roots in India around the 1980s, against a backdrop of heavy government intervention and regulation. Over the next two decades, government policy switched from a focus on self sufficiency to benign neglect and a favorable industry-specific tax regime. The mid 80s saw the slow shift in policy direction to pro-liberalization. The formation of a new government headed by a Prime Minister with a personal conviction in the transformation potential of technology played a key role in the policy shift. “However this is not to suggest that the policy change was inevitable. The industry also benefited from external events such as the Y2K problem. This was when the industry came of age. In other words, the IT services industry could have easily been much less of a success story than it turned out to be,” adds Roy.
The key policy element, Software Technology Parks of India (STPI) has been extended to March 2011. While no clear transition path from STPI has been announced yet, a number of alternatives, such as IT SEZs, exist for the Indian IT sector.
The large and some of the mid-sized Indian IT services companies have enough scale to benefit from the SEZ regulations. However, smaller companies would find the transition a lot more challenging. The SEZs offer a favorable tax regime spanning 15 years, and the key element of the SEZ scheme is that only new units can benefit from an SEZ. IT services is already a scale business, and the STPI-SEZ transition can skew the equation even more in favour of the majors.
However, the industry as a whole, is facing bigger challenges dealing with the talent pipeline and urban infrastructure. Both the private and the public sector are taking steps to meet these challenges, but the scale of the problem is too huge for benefits to show in the short term. The talent pipeline problem has two dimensions, namely capacity expansion and improving industry readiness.
The requirement for favorable policy and budget allocation to university-level education goes beyond the IT/BPO sector. Aviation, retail, and financial services sectors are pressing for capacity expansion and quality improvement. The government is increasing its education budget and implementation efforts have seen moderate success, but naturally, the benefits will be perceptible only in the long term. Somak Roy comments, “The industry together with private sector training services providers, in partnership with state run colleges, is the most likely way forward for the IT/BPO industry.”
On the urban infrastructure front, the IT majors have been mostly successful in expanding to tier-II and tier-III cities and some formal help from the government is also forthcoming. Somak Roy says, “The government is working on IT Investment Regions (ITIR), which are designated areas aimed at the development of IT software and services, ITES, and electronic hardware manufacturing. The major focus of the ITIR program is to increase the ‘catchment’ area of major cities, where streamlined IT/ITES operations are possible.”
Datamonitor agrees with NASSCOM’s estimate that the domestic opportunity could be US$50 billion by 2020.
According to Datamonitor the domestic market will grow to US$24 billion by 2013, growing at a CAGR of 27% between 2009 and 2013. Datamonitor supports the industry’s self assessment (NASSCOM’s projections) that the domestic opportunity will be US$50 billion by 2020.
Lead analyst with Datamonitor and the report’s co-author, Surya Mukherjee, states that at least three major factors will drive growth: The B2C companies are scaling up and with scale comes the need for formal, tightly defined processes and the technology to support these processes; the e-governance projects in the private sector; and egovernance projects and the broader economic growth story will rope in parts of the population that are yet to receive service from the private sector will come within the organized sector’s horizon, driving the need for IT systems and applications.
However Datamonitor analysts believer that the domestic IT services growth will happen if the following hold true: the current global economic climate does not slide into a prolonged recession; the liberalization drive and the public-private-partnerships proceed at the current pace; the near monopoly of the National Informatics Center (NIC) on government projects is progressively relaxed; and the most ambitious of government sponsored IT projects such as the Unique ID project, which is expected to have a multiplier effect on other e-governance projects, goes mostly according to plan
The public sector has played an important role in absorbing some of the uncertainties and fluctuations induced by the global economic climate. There are 27 ‘mission mode’ government projects in the pipeline, and four in operation. The scale is enormous, and the projects have an estimated outlay of US$5.1 billion over 5 years (announced in 2006). NASSCOM estimates t the IT opportunity from 2010 to 2013 could be US$9 billion.
Roy says, “. Per capita public sector spending on IT is a little more than a dollar, compared to over US$150 for New Zealand and Australia; India was ranked 113th in an e-governance index in 2008. While this could indicate either potential or an insurmountable lack of political will and management ability, we believe that current e-governance projects could have a better success rate.”
The focus has shifted to Public-Private-Partnerships, and the government is leveraging a model that involves specialists who handle the entire suite of procurement and implementation services, with the government playing a monitoring role. The government is also leveraging the Build-Operate-Transfer (BOT) and the Build-Own-Operate-Transfer (BOOT) models. Thus, making the projects more effective.
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The UID project, unprecedented in scale, could have a long term impact on public sector IT projects, and the impact could extend beyond public sector projects.
Datamonitor believes that the Universal ID project (involves assigning an unique ID to all citizens with biometric authentication), could have far reaching consequences, such as extending banking to a broader base of citizens, streamlining of essential government processes such as benefits distribution, leading to major additional IT projects downstream.
Roy says, “We believe that the Universal ID Project marks a major step towards achieving what some major contemporary economists (notably the Peruvian economist Hernando De Soto) believe are necessary conditions for sustainable growth - an enforceable legal system that allows citizens access to credit, monetize their assets, and conduct business with individuals not tied by social bonds of family and community.”
A number of other e-governance projects such as Business-to-Government applications and land record digitization and the overall growth of B2C sectors such as telecommunications and banking could work in conjunction with the UID project to bring more people into the folds of the organized sector and create incentives for joining the organized sector.
Overall, the UID project over the long term can have a major impact, directly and indirectly, on the domestic IT sector. We believe that the benefits could start showing as early as 2016-2017.
The Indian domestic IT services market, particularly the public sector, opens up tremendous opportunities for software product vendors. However, as would be expected of a market of this nature, realizing the opportunities will be far from easy.
The e-governance projects are managed by the IT services majors. The diversity of projects open up plenty of opportunities to IT solution providers to address public sector requirements through partnerships with these systems integrators. However because of some fairly unique challenges, realizing these opportunities will be far from easy.
Procurement in the public sector is often less transparent than what the vendors are familiar with, and decision and implementation cycles in the public sector are too long for many vendors. Government project stipulations are often unrealistic. For example,. The state-owned NIC accounts for over 50% all government IT contracts. We have been told that there is
considerable cultural bias in the government in favor of NIC. This might not be easy to change. Ovum recommends a ‘wait and watch’ approach, given that its still early stages for Public-Private-Partnerships for the Indian public sector.
Exploring opportunities, Somak adds, “Most of the ‘still on the table’ opportunities are in the niche areas across solution categories. Some of the possible niche categories are Enterprise Architecture, Transactional Content Management Business Rules Management Systems, Data Quality Management, Master Data Management and low cost end-user computing solutions.”
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