India: The World Leader in IT Outsourcing

By Cindy Payne, Managing Director
Asia-Pacific Connections Pte Ltd

February 2003

India is currently the fourth-largest economy in the world, thanks to global demand for its information technology (IT) and software services. According to a well-known local industry association, the National Association of Software and Services Companies (NASSCOM), India's IT market was valued at US$13.5 billion at the end of 2002. NASSCOM and McKinsey & Company agree that India's IT industry will reach US$87 billion by 2008, driven by both local and foreign demand of IT services, software products and e-business initiatives. The Indian government expects that by 2008, the sale of software and IT services will contribute over 7.5% of India's overall GDP, with IT exports accounting for 35% of India's total exports. Between now and 2008, India's IT industry is expected to create more than 2.2 million jobs, attracting foreign-direct investment in the range of US$4-5 billion.

By the late 1990's, India realised the importance of leveraging its nascent information-communication-technology (ICT) industry and established The National Task Force on IT and Software Development, and the Ministry of Information Technology. IT tax and tariff liberalisation policies followed, paving the way for venture-capital investments, which totalled US$1.1 billion at the end of 2002.

There is no doubt that the main driver of India's software and IT services industry is its large pool of English-speaking technical talent. However, to continue to be a player in today's knowledge economy, India needs to further educate and train this massive workforce. With the second-largest population of English-speaking professionals in the world – trailing only the U.S. – India is focused on further developing its IT training. The government is continually expanding and upgrading training facilities across the country. Currently, there are over 1,832 educational institutions and polytechnics enrolling more than 67,785 computer software professionals annually. Today, India boasts the largest number of certified software companies in the world.

India's large English-speaking, highly educated and low-wage talent pool has also helped to establish India as one of the fastest-growing outsourced call-centre services markets in the world. According to research analysts, International Data Corporation (IDC), India's call-centre services industry is expected to grow from US$277 million in 2001 to reach US$1.59 billion by 2006. Growth in India's call-centre services market will be driven primarily by overseas demand as India does not yet have the spending power to support an in-country call-centre industry. Key multinationals that have already sited call-centres in India include GE Capital, HSBC and Standard Chartered Bank.

International research firm, Gartner Dataquest, recently conducted interviews with 917 U.S.-based companies – each with 1,000 employees or more – to gauge their interest in offshore IT services. Though only 5% of the interviewees indicated they currently use or plan to use offshore resources in the next year, demand for such services is expected to steadily grow over the next five years. Of those companies that are already outsourcing IT services, India is by far the country of choice. Across the board, the top offshore services include: enterprise-application integration (EAI); applications outsourcing; packaged-application implementation and integration; and maintenance services. Presently, Indian software and IT services companies export to 102 countries – 62% of this revenue comes from North America, 24% from Europe, 4% from Japan, and 10% from the rest of the world.

According to the latest NASSCOM-McKinsey Study, the IT Enabled Services (ITES) segment is expected to be valued at US$17 billion by 2008, representing 19.5% of India's IT sector. ITES covers manpower-based services delivered over telecommunications networks or the Internet. These are mainly back-office operations including:

Accounts
Financial services
Call centres
Data processing
Digital-content development and animation
Engineering and design
Geographical-information services
Human-resource processing
Insurance-claim processing
Legal-database processing
Payroll processing
Remote IT maintenance

Since much of India's IT industry is built on services delivered over telecommunications networks or the Internet, a well-developed telecommunications infrastructure is a prerequisite for the sector's further growth. According to IDC, India's 37 million fixed-line telephone network is one of the largest in the world. However, teledensity in the subcontinent remains low – at only 3.7%. According to NASSCOM, India's IT industry suffers from infrastructure bottlenecks – including lack of bandwidth, low-speed leased lines and slow servicing – which are threatening India's IT growth. To ensure that India reaches its full potential as an IT and related services outsourcing hub, it will have to invest an estimated US$106 billion in its telecommunications infrastructure. A wide range of communications services are needed including cellular, Internet, radio trunking, global-mobile-personal communication by satellite (GMPCS) and other value-added services. In the meantime, NASSCOM warns that if India does not make these massive planned infrastructure investments, it could lose as much as 30% of its target IT export market going forward.