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IT-Industry-in-Transformation--Opportunities-and-Challenges-for-India
Raja Mitra
Monday, February 1, 2010
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The rapid expansion of the IT industry has been a key feature of economic development worldwide. The IT industry has become a main source for export earnings and also a key driver in the transformation of the domestic economy and its international interface in several Asian economies. In the past decades, East Asian countries have been successful in capturing a large share of the global sourcing of IT hardware, and India has emerged as a major center for offshoring of IT services.

These sectors, however, continue to face multiple challenges such as the need to respond quickly to changes in technology and demand. This is illustrated by the fact that the IT industry in India went through a radical transformation in the 1990s and the 2000s and is poised to be reshaped again in the 2010s. The deceleration in global demand for IT following the global financial crisis in September 2008 and the subsequent economic recovery phase underscored the opportunities and challenges which the global IT industry will have to deal with in the 2010s.

This global context and its implications for India are examined in an in-depth study entitled “IT Industry in Transformation: Opportunities and Challenges for India” authored by Raja M. Mitra.

The study compares developments in the 2000s and to what is likely to happen in the 2010-2020 period. It contains analysis of the global economic slowdown in 2008 and 2009 as well as long term IT-BPO industry transformation issues as manifested in the revenue earnings, industry linkages, human resource, finance, and industrial organization and innovation developments. It highlights opportunities as well as factors constraining growth and provides growth scenarios for exports and the domestic market for the 2010s. Furthermore, it points to key corporate strategy and public policy imperatives and lessons in enabling continued growth of the IT-BPO industry and the offshoring business in India and internationally.

This study identifies three major growth scenarios for the IT products and services industry and the BPO sector in India for the 2010-2020 period.

* The low growth scenario: IT-BPO industry revenue reaches $185 billion level by 2020 out of which exports accounts for 140 billion while the domestic market accounts for 45 billion. This implies an especially substantive deceleration of IT-BPO industry growth compared to the 2000s.

* The medium growth scenario: IT-BPO industry revenue reaches the $255 billion level by 2020 out of which exports accounts for 200 billion while the domestic market accounts for 55 billion. This implies that IT-BPO industry growth is substantial but significantly lower than in the past.

* The high growth scenario: IT-BPO industry revenue reaches the $350 billion level by 2020 out of which exports accounts for 270 billion while the domestic market accounts for 80 billion. This implies that overall IT-BPO industry growth will grow at comparatively higher rates but the CAGR will still not reach the 2000s level.

The study asserts that medium growth scenario appears to be most likely and hence it is viewed as the base line. This scenario assumes a gradual but robust recovery in the global economy. All three scenarios project that much of the dynamism in IT-BPO industry development in India will continue to be driven by the offshoring business. However, unlike the 1990s the rate of growth in the domestic market may be at par with or higher than in exports. The size of the domestic market will be substantially larger than in the 2000s. Nevertheless, the actual size of the export business would continue to be several times larger than that of the domestic market.

The targets of IT-BPO industry growth presented may at first sight appear ambitious but are, in fact, rather modest if compared to the performance in the past. According to the medium growth scenario, total revenue would need to grow at a CAGR of around 14.3 percent to achieve the $ 255 billion target in 2020. In the high growth scenario the CAGR would be around 17.6 percent. These growth rates are significantly lower than what has been typical in the 1990s and 2000s.

Saturation in addressable demand is unlikely to be the principal factor leading to deceleration of growth in the IT-BPO sector in India in the 2010s and beyond. Rather, the prime reasons for a gradual slowdown in the industry’s growth rates are poised to be insufficiencies in the supply and inadequate use of skilled human resources as well as the overall business climate developments.

Several factors indicate that the IT-BPO industry in India will grow at double-digit levels during the 2010s. The key strength driving the Indian IT-BPO industry is entrepreneurial dynamism and the access to a large pool of skilled manpower at comparatively low costs. This is reflected in the fact that India ranks number one among developing countries in terms of offering a favorable setting for offshoring of IT-BPO services. Its comparative advantage in the offshoring oriented IT-BPO services industry development is mainly described in terms of the labor-arbitrage ‘model’ in which low cost for human resources is a central component. These developments reflect India’s ‘first mover’ advantage in many aspects of the business of offshoring of IT software and services and BPO to developing countries.

The magnitude at which India based companies developed the scale and scope of their operations in India and internationally is hard for smaller emerging market economies to match. India continues to have the largest pool of skilled human resources besides China. Indians along with other Asian people play a central role as employees in IT and other knowledge-based industries worldwide. Also, the IT-BPO industry in India has swiftly moved into newer business niches.

The Indian economy, and the IT and BPO industry in particular, has undergone several phases of transformation. Principal factors driving this transformation have been changes in demand and supply, coupled with change in technology, business processes, human resource and institutional capabilities, public policies, and more broadly the overall investment climate. The decade of 2010s is poised to imply new phases of radical transformation in the scale and scope of the IT-BPO industry operations and the role of IT based technology in India and globally.

Much of the burden to respond effectively to the opportunities for further development of the IT industry primarily falls on the IT-industry itself and the corporate end users. The immediate response typically comprises of cost cutting and renewed marketing measures. Such efforts are, however, typically not enough. In addition, it is essential to consider special measures to improve productivity and foster long term growth prospects, the latter including development of ‘new’ business segments and markets and also investing in new technology solutions as well as business processes.

Moreover, government policies and corporate strategies need to fully acknowledge the heterogeneous nature of the IT-BPO industry. The priorities and requirements within the industry differ depending on business segments, the size of a firm and whether a company primarily focuses on exports or the domestic market.

Furthermore, it is essential that the government, the corporate sector, or others are active in formulating ideas and specific plans and projects regarding what should be done. However, such ideas and projects must be well grounded in terms of what is doable. Also, there has to be a clear sense of, and commitment to, prioritization.

India constitutes an example of a country which has begun to emerge as a significant power, in high technology industry with the IT-BPO offshoring industry being a prime illustration. If handled well ,the IT-BPO industry offers the possibility of India becoming one of the world’s leading powers in IT and other areas of knowledge-based industries both in terms of production and innovation.

The author is Senior Consultant at World Bank
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Reader's comments(1)
1:Great article! I advise you to read the full study entitled “IT Industry in Transformation: Opportunities and Challenges for India” authored by Raja M. Mitra published by London School of Economics. It can be downloaded for free at the website of LSE Asia Research Centre, look under working paper. U. Steven
Posted by: Usri Choudhury - 04th Feb 2010
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