Indian Software Industry : Structure, Trends and Constraints

By Chakraborty, Chandana; Jayachandran, C. | Journal of Services Research, October-March 2001 | Go to article overview

Indian Software Industry : Structure, Trends and Constraints


Chakraborty, Chandana, Jayachandran, C., Journal of Services Research


Based on a survey of software-related companies in the major cities of India, this paper critically examines the organization and size of the Indian software industry. Based on the analysis, the paper also outlines the future possibilities for the industry and identifies its major constraints towards growth in the desired direction. With regard to organization and size, the analysis suggests the following broad trends. First, it suggests that the industry is represented mainly by private domestic firms, majority of which are small both in terms of their assets and level of earnings. Second, it reveals that more than 80% of revenue for this industry is generated in the export market. Further, the export market is concentrated in the U.S., which accounts for 60% of the total export revenue. Third, a compositional breakdown of export indicates that the industry relies mainly on software services export, and lacks diversification in packaged software products. This is in sharp contrast with the export pattern of its competitors in Asia and Latin America. With regard to future trends, the analysis suggests that despite opportunities, growth potential of the Indian software industry would depend mainly on degree of reform in infrastructure planning and regulatory rules.

INTRODUCTION

Measured by the age of many industries, the computer software industry in India is still in its infancy. Yet, its growth and devel opment has caught the attention of the world market so much so that India is now being identified as the major powerhouse for incremental development of computer software. The reason for this attention is not the actual size of the industry but its rapid growth rate over the nineties and its projected growth rate in the decade of the new century. According to the Delhi-based National Association of Software and Services Companies (NASSCOM), India's quasi-governmental software industry promotion organization, the software industry in India was worth Rs. 243.5 billion or US$ 5.75 billion in 1999-2000, whereas ten years back its worth was not more than Rs. 3 billion or US$ 150 million1. Although India's domestic software market is burgeoning fast, the most important factor that has driven this growth is the growth of the export market. While still a relatively small share of total exports, India's software export business is growing at an increasing rate2. In terms of Indian rupees, the compound annual growth rate (CAGR) for India's software export revenues over the past five years has, according to NASSCOM statistics, been as high as 62.3%, compared to 46.8% of CAGR for its domestic market revenue during the same period. With a modest beginning in 1984-85, software exports moved up to Rs. 25.2 billion or US$ 734 million in 1995-96 to Rs. 171.5 billion or US$ 4 billion in 1999-2000. It is now being expected that export revenue will grow to US$6.3 billion by the year- end of 20013.

The combination of events that has inspired the remarkable growth of demand for Indian software services in the world market, however, is a complex one. Cost is an obvious, although diminishing factor. As the Indian market, both domestic and export, has boomed, the wage gap between Indian software professionals and their counterparts in the developed countries has started to narrow4. Nevertheless, cost advantage remains substantial even today. In addition, worldwide interest in business process reengineering, the economic imperatives in developed countries of outsourcing, cost-efficient maintenance of existing mainframe systems and continuous development of new software for PCs have played significant roles. Finally, India's comparative advantage in the software industry, generated from its relative abundance of skilled software personnel, coupled with its rapidly improving communications infrastructure has played a key role in creating confidence among buyers of Indian software products and related services. As is evidenced by the rapid growth in theirdemand, Indian software engineers have carved out an enviable reputation in the world market for providing an unbeatable combination of quality software at a low cost; Indian software developers offer a cost advantage of 40% to 60% over their American counterpart5. …

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