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.
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