Industry analysis - it and ites

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Over the past decade, the Information Technology industry has become one of the best rising industries in India. Thrust by exports (the industry accounted for more than a quarter of India's services exports in 2004-05. The key segments that have contributed significantly, 96% to the industry's exports include - Software and IT services & It enabled services i.e. business services. Over a period of time, India has established itself as a preferred global resource base in these segments and they will expected to continue to fuel growth in the future.


Over the past decade, IT industry has become one of the best growing industries in India. Strong demand over the past few years has placed India amongst the fastest growing Information Technology markets in the Asia- Pacific region.

The Indian software and information technology enabled services industry has grown at a compounded annual growth rate of 28 per cent during the last five years. It was expected that the contribution of Information Technology & Information Technology Enable Service to India's GDP it was rise to 7 per cent by 2007-08.The key segments that have contributed significantly (96 percent of total) to the industry's exports include - Software and IT services and ITES,

Over a period of time, India has recognized itself as a preferred global sourcing base in these segments and they are expected to continue to fuel growth in the future. The total number of IT and ITES- BPO professionals employed in India is estimated to have grown from 284,000 in 1999-2000 to 1,287,000 in 2005-06, growing by 230,000 in the last year alone.

In addition to Indian IT - ITES is estimated to have helped create an additional 3 million job prospect through indirect and induced employment. Recognizing the advantages of multi-country service delivery capabilities to better manage evolving customer requirements and execute end-to-end delivery of some new services, Indian companies are enhancing their global service delivery capabilities through a combination of Greenfield initiative, cross-border M&A, partnerships and alliances with local players.

Global software product giants such as Microsoft, Oracle, SAP, etc have established their captive development centres in India. India's record on information security ranks better than most locations.

The authorities in India are maintaining a keen emphasis on further increase the information security environment in the country. Specific initiatives underway include enhancing the legal framework through proposed adjustment to the Information Technology Act 2000, increasing interaction between industry players and enforcement agencies to help create greater awareness about information security issues and facilitate mutual support.

A majority of companies in India have already aligned their internal processes and practices to international standards such as ISO, CMM, six sigma, etc. which has helped to establish India as a credible sourcing destination.

Evolution Of the industry

Evolution in IT:

1968: The Tata industrial corporation forms software services entity Tata Consultancy Services.

Mid-1970s: IBM exits India Import duties of 150 percent or more .VCRs cost $3,000 and TVs cost $6,000. Wipro starts to create India's first homegrown PC.

1991: National financial crisis causes government to introduce major reforms.

1993: A group of IT leaders determines plan for Information Technology industry.

1994: Telecom liberalized.

1995: TCS determines that its Case Pac tool developed for IBM can be used to scan software for Y2K problems

1999: Y2K contracts pile into India

2002: Indian companies expand hiring. Massive layoff in US

2003: Led by Service Corporation such as Wipro and Infosys. India becomes a primary destination for offshore outsourcing as foreign companies look for to lower cost.

IT: Primary factors
  • Cost ( Labor cost Infrastructure costs Exchange rates)
  • Labor competitiveness (Size Level of education compatibility)
  • Other Factors (Business and political risks Geographical location Regulatory considerations)
Evolution in ITES:
  • First Phase: MNCs establishing units in India (Pre 1997)
  • Second Phase: Entry of established software co. (1997 - 2002)
  • Third Phase: Geographical dispersion of Activities (2002-2004)
  • Fourth Phase: Move towards acquisitions (2004 - So on )
Current Status

The Indian IT sector (including the domestic and exports segments) grew at an estimated 28 per cent in the financial year 2006-07. Total revenue aggregate for the sector is estimated at US$ 47.8 billion, nearly a ten-fold increase over the aggregate revenue of US$ 4.8 billion, reported in 1997-98, and direct employment is likely to cross 1.6 million.

As a proportion of national GDP, the revenue aggregate of the Indian technology sector has grown from 1.2 per cent in 1998 to an estimated 5.4 per cent in 2006-07. Net value-added by this sector, to the economy, is estimated at 3-3.5 per cent for 2007.

IT Services

Service and software exports remained the mainstay of the sector; 2006-07 export growth likely to beat forecasts and exceed 32 percent. While the US and the UK remained the dominant markets, contributing to 67 percent and 15 percent of total exports respectively, firms are also explored the new geographies for business development, and to strengthen their global delivery footprint Banking, Financial Services and Insurance, and Technology (Hi-tech/ telecom) are the main verticals, accounting for nearly 60 percent of the total; Manufacturing, Retail, Media, Utilities, Healthcare and Transportation follow - also growing rapidly.

IT services exports, accounting for 55-57 per cent of total exports, grew at an estimated 36% and reached an estimated US$ 18.1 billion in the financial year 2006-07. Newer areas of application and infrastructure management, testing, etc. are gaining traction, with their share in the business-mix growing steadily.


Outsourcing work in India began in 1993 when American Express started using its India operations to provide book-keeping support to is other Asian operations. India's ITES industry can trace its origins to the Y2K problem, which first started in 1995-96 and culminated in December 1999. It required fixing the codes of hundreds of thousands of mission critical computer programmers before the arrival of the year 2000. A vast portion of the work fixing these programmers was outsourced to India.

Another factor contributing to the initial growth of the India ITES industry was the buoyant US (and global) software market during the late 1990s. Many companies outsourced their software requirements to India. While some companies outsourced such work to their captive units in India, other contracted out to external, third-party providers.

Following the stock market down run of 2000 and the economic recession in the US during 2001-02, US companies began looking for ways to cut cost. One solution was to outsource back-office functions to the other countries with cheaper but qualified labor. The cost of significantly qualified and competent labour in India is among the lowest in world. Another reason for companies to outsource is the competitive advantage gained by working around the clock.

BPO continues to grow in scale and scope, with firms increasingly adopting a vertical focused approach. The India ITES industry has evolved significantly over the past few years.

Total market size of the Indian ITES industry is US$ 12 billion in 2005-06

  1. Process outsourcing contributes -USD 7.2
  2. Engineering Services, R&D etc - USD 4.8

Total exports for this segment estimated to exceed US$ 8.3 billion in the financial year 2006-07, grew by 32 percent over the previous year. Lastly, increasing traction in offshore product development and engineering services is supplementing India's efforts in own IP creation.

This group is growing at 22-23 percent and is expected to report USD 4.9 billion in exports, in FY 2006-07.Service-line expansion is aiding service providers to take on larger and more complex deals, and is driving up the average ticket size of contracts awarded to Indian firms. High offshore component of delivery and superior execution in multi-location delivery continue to be key differentiators.

Broad-based industry structure; IT led by large Indian firms, BPO by a mix of Indian and MNC third-party providers and captives, reflects the depth of the supply-base. While the larger players continue to lead growth, gradually increasing their share in the industry aggregate; several high-performing SMEs also stand out.


Information Technology has given India formidable brand equity in the global markets. Keeping this in view, the Government has set up a National Manufacturing Competitiveness Council (NMCC) to provide a continuing forum for policy dialogue to energize and sustain the growth of manufacturing industry including IT hardware.

India has been successfully promoting reforms in all the constituents of the Internet, Communication and Entertainment sector. Being a signatory to the Information Technology Agreement of the World Trade Organization, the customs duty on all thespecified 217 items has been eliminated, from March 1, 2005.