Times
are hard for the word economy in general and the US
economy in particular. This should make the period
difficult for any industry that depends on global
markets in general and the US market in particular
for much of its demand. This, unfortunately, is true
of India’s IT industry, dominated by exports of software
and IT-enabled services. Yet there are signs of cautious
optimism among some industry insiders and observers
based on the premise that the cost-cutting encouraged
by slow global and US growth would increase outsourcing
to low-cost locations like India, which would be good
for growth even if not necessarily for margins.
It is too early to empirically confirm this speculation,
but the evidence permits some initial judgments. Come
July each year and industry journal Dataquest releases
its data on the performance of the top 200 firms in
India’s IT industry during the previous financial.
Dataquest’s information, unlike that of NASSCOM, covers
the whole of the IT sector, including hardware, software,
software services and IT-enabled services. It also
provides detailed information on the top 20 firms
in the composite industry. There is much to be desired
of this data set, especially more information on the
ways in which data is collated in the case of firms
whose performance indicators and financial accounts
are not easily available in the public domain. But
with almost all of the data on the Indian IT industry
being collated by private organizations like NASSCOM,
MAIT, Dataquest and IDC India, this information, which
covers both the hardware and software segments, has
been an important basis for analysing IT industry
trends in the country.
As yet we have access only to the first round of data
released by Dataquest (July 15, 2008) focusing on
the top 20 firms in the industry, in the export sector
and in the domestic market. The information on the
top 20 is an adequate basis for analysing industry
trends, not only because they account for an overwhelming
share of the revenues of the top 200 (64 per cent
in 2007-08), but these are the most dynamic firms
that have remained industry leaders for long. The
top 20 list includes industry veterans such as TCS,
WIPRO and Infosys that epitomize India’s IT success.
On the surface there is a sameness about the trends
the data on the top 20 reveal. The top firms in the
industry continue to grow at a scorching pace with
the trend rate of growth till 2007-08 amounting to
34 per cent per annum whether we take 1991-92 or 2001-02
as the base year to make our calculations. Services
firms dominate the industry in terms of number and
revenues with 95 of the top 200 companies engaged
in services delivery and another 20 in the production
and sale of software products. And export revenues
still constitute the mainstay of the industry with
the revenues of the top 20 exporters (at Rs. 102,451
crore) far exceeding those of the top 20 revenue earners
in the domestic market (Rs. 74,843 crore).
These perennial positives notwithstanding, there is
some cause to for an element of caution. With the
US remaining India’s principal market, the growth
slowdown in that country together with the long run
depreciation of the dollar (despite fluctuations)
has begun to tell on export performance. The top 20
exporters from the industry recorded a growth in export
revenues of 30 per cent in 2007-08 as compared with
45 per cent in the previous year. Since growth of
revenues of the top 20 firms catering to the domestic
market was also slightly lower at 27 per cent in 2007-08
as compared with 31 per cent in the previous year,
the performance of the top 20 firms in the industry
was disappointing. Top 20 revenues rose by just 23
per cent in 2007-08 as compared with 42 per cent in
2006-07, pointing to the beginnings of a slowdown
that could last for long. This could be the first
sign that the software and IT-enabled services boom
is losing momentum.
This slow down have been concealed by two factors.
First there have been individual companies that have
recorded remarkably high rates of growth of revenues,
albeit from small bases in the case of some. Thus
13 of the top 200 companies covered by Dataquest registered
triple-digit growth rates in 2007-08. Second, there
have been a few companies that managed to expand their
net revenues significantly during the financial year
gone by. These trends have conveyed the impression
that despite being dependent on the US market, the
Indian industry is decoupled from a growth slowdown
in the US market because the deceleration in growth
is more than neutralized by enhanced outsourcing by
firms in a recessionary environment.
The slowdown in growth is not the only new, even if
disconcerting, aspect of the figures for last financial
year. The numbers thus far released by Dataquest point
to a consolidation of certain trends in the industry
that have some troubling long term implications. The
first of these trends is a tendency toward increased
concentration of revenues generated by firms in the
industry. The top 200 firms account for an overwhelming
share of the industry. In 2005-06, for example, the
revenues of the top 200 firms were placed at about
85 per cent of total industry revenues. What is noticeable
is the growing concentration within the top 200 segment.
If we take the group of firms constituting the top
200, the top 20 firms (or 10 per cent of the number)
accounted for 63 per cent of the revenues of the top
200. The next 30 (15 per cent) accounted for a near
proportional 17 per cent of revenues. And the remaining
150 (or 75 per cent in numerical terms) contributed
just 20 per cent of the revenues. Consolidation and
concentration are part of the industry’s maturity.
Underlying this concentration is a change in the nature
of the firms that constitute the top 20 in the industry
as a whole. Increasingly, firms with foreign parents
populated the top 20 league tables. While 67 of the
top 200 firms are foreign companies, 13 of the top
20 are known international companies. This is indeed
a relatively new tendency. The number was as low as
3 out of the top 20 ten years back and 7 at the beginning
of this decade.
What is interesting to note is the differential distribution
of foreign companies among the top exporters and top
suppliers to the domestic market. While12 of the top
20 exporters of IT products and services from India
are Indian firms, only four of the top 20 revenue
earners in the domestic market are Indian. It has
been known that foreign companies have been displacing
Indian firms as major exporters, especially with the
growth of captive outsourcing facilities of foreign
firms in the country. But this process has not yet
displaced Indian companies such as TCS, Infosys, Wipro
and Satyam, which are service providers who remain
the top exporters.
The situation is different in the domestic market.
Over the last two decades, an increasingly liberal
hardware and software import regime and a liberal
policy with regard to foreign presence in the domestic
hardware and software market has substantially increased
the foreign share in these markets. This did not matter
when the size of the domestic market was small in
both absolute terms and relative to export revenues.
However, as the diffusion in use of information technology
increases this unusual distribution of target markets
between foreign and Indian firms can become significant.
What is noteworthy is that as the use of IT in business
and in government increases rapidly, with a limited
effort to shift away from proprietary to open source
software, the presence of international software product
suppliers in the Indian market is increasing rapidly.
At a time when the diffusion in use of information
technology in the country is increasing rapidly, foreign
firms have displaced domestic firms in the domestic
market at a much faster rate. At first this was predominantly
in the hardware segments where a liberalized import
regime and substantially lowered tariffs helped international
firms outcompete not just Indian brands but the huge
assembled PC industry in the country. But more recently
software presence is becoming important. For example,
two global software majors—Microsoft and SAP—registered
revenue growth of 29 and 104 per cent respectively
in the domestic market in 2007-08.
The emerging picture is clear. Even while India’s
scorching pace of IT services export growth slows,
there are signs that foreign firms are increasing
their presence in an increasingly concentrated information
technology sector. This has two implications. First,
that IT export revenues are increasingly being garnered
by foreign firms. But more importantly that as the
domestic market for IT hardware and software grows,
fuelled by increased government expenditure aimed
at increasing IT use, foreign firms are coming to
dominate the rapidly growing domestic market for both
hardware and software. This would mean that slowing
revenue and employment growth would be accompanied
by a shift in the net foreign exchange eared by the
IT sector, leading perhaps even to a net outflow sometime
in the foreseeable future.
India’s software and IT-enabled services industry
was seen as different from much else of modern business
in India because it was a high growth sector driven
by huge net foreign exchange earnings. It was pampered
with tax concessions for this reason and the concessions
that were to end in 2009 have now been extended to
2010. But more recent evidence shows that as the industry
grows to maturity, the features that made it unique
are losing their significance.
