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.”