That IT industry has made impressive growth in recent years is well-knownand its contribution to keep up a moribund capital market alive is alsoequally recognised. The gigantic strides made by some of the key players inthe field have been well brought out in a recent study of 500 largecorporates by a financial newspaper.

Growing at a compounded annual rate of 40 per cent for the past five years,the information technology industry has become one of the largest foreignexchange earners in India. During this period, the growth registered by theIT Industry seems unattainable for many others in the current economicscenario. Total revenue earned by the Indian IT industry in FY98 was at Rs180 billion, a growth of 34.1 per cent over FY97.

The Indian IT industry has witnessed a distinct change during the last fiveyears. The IT industry was equated with hardware, which played a dominantposition. But now, software accounts for more than half of the industry'stotal revenue. The transition hasn't happened overnight. The relative fallin the contribution of the hardware sector has been the lack of governmentspending, adverse policies, and the Y2K problem.

The hardware sector, faced with high tariffs, was forced into a corner inthe early nineties when manufacturing became unviable. This goaded theIndian hardware companies into joint ventures with international majors formarketing their products in India.

But the Indian software industry, which found attractive internationalmarkets, took advantage of the low-cost pool of technical manpower andgenerated huge revenues, largely in dollars. As reflected in the growth rateof 50 per cent every year since FY95. Comparatively for the hardware sector,the recent slowdown in the Indian economy coupled with intense competitionhave all but flattened margins. Moreover, capital needed to start a softwarecompany is less than that for hardware business, which requires huge capitalexpenditures on plant and equipment. All these factors together have forceda gradual shift in priorities of IT companies to software. The key growthareas in the global IT industry now are multimedia , enterprise resourceplanning, Euro conversion, e-commerce and the Internet. Also, in thedomestic software market, integrating local language and local content willbe crucial. In all this, there is tremendous scope for Indian IT companiesto grow.

The Union government has lent a thrust by granting various incentives toboost demand for IT products in the domestic market. Government spending inIT itself will gallop in the coming years, in turn boosting demand forhardware too. India also has the world to play for as at present it accountsfor only 0.2 per cent of the global IT industry, which is expected to growat 12 per cent per annum in the medium term. Apart from services andsoftware development, Indian companies have so far not been able to grab afair of the global market for products, and should step up efforts in thatdirection too.

Indian software companies are seeking out new markets like Japan, SouthAfrica and Latin America, to reduce dependence on the US market. With manysoftware companies now acting as prime contractors having successfullyexecuted many big projects, Indian companies will have more exposure andcredibility in new markets.

Most software companies are expected to do well in the near future, butcompanies with high exposure to the services segment will emerge as clearleaders. Exposure in different international markets is another importantcriterion.

The modalities of the proposed capital venture fund are being worked out.Indications are that it is expected to be a subsidiary of the SmallIndustries Development Bank of India (SIDBI) chipping in Rs 40 crore. Theother sponsors are the department of electronics Rs 30 crore, IndustrialDevelopment Bank of India, Industrial Finance Corporation of India andNasscom (Rs 10 crore each). Some of the state governments, for instance,Karnataka, Kerala, Andhra Pradesh , Gujarat, Punjab etc, under therespective State Industrial Development Corporation have already set upand/or in the process of setting up venture capital for IT industry. VCFssponsored by financial institutions is not a new phenomenon in this country.

Risk Capital Foundation (later christened Risk Capital and TechnologyFinance Corporation, (RCTC) sponsored by IFCI, venture capital schemes ofIDBI, SIDBI, TDICI of ICICI (now known as ICICI Venture) has been in thisfield for some time. Similarly, Gujarat Leasing and Finance Corporation Ltdand APIDC were also providing similar funding.

Neither the industry nor the funding agencies are happy with the existingstate of affairs. As for as institutions are concerned they are starved offunds in as much as one of the institutions had no funds to support even asingle case in 1998-99. Most of the projects funded by them are failuresand/ or in the category of non-performing assets (NPA).

There is a general feeling in the industry that institutional funds areavailable to a select few who have the right contact, or right places. Andthey have become places of distribution of favours to friends and relativesof members of the screening committee/ board/ chairman. This was the talk ofthe town at least as far as a north-based institution was concerned, thanksto the partisan attitude of previous chairman of the said institution.

Ironically, if not deliberately, there was not a single IT expert either atthe screening committee nor at the board levels for evaluating for proposalsobjectively and professionally.

Though there is an imperative need for adequate funding arrangement for asustained and faster growth of IT industry, institutions per se, asenvisaged, with limited resources at their disposal are unlikely to bring inthe desired results. When we are talking of market-driven rate of return inthe framework of economic liberalisation and globalisation one does notfully appreciate the idea of state funding and props. Let the industryitself find ways and means for developing required infrastructure supports.

Some of the giants in IT industry are quite capable of doing so. Besides,they are in a better position to keep pace with the fast-changing technologyand consequent limited product life cycle, which, the state-sponsoredfunding institutions cannot be expected to take care of.

All over the world it is the private sector which sponsors venture capitalfunds. For instance, Intel Corp is expected to announce a new $300-millionventure capital fund to promote companies that design key building blocksfor the next generation of Intel micro processors. Intel, the world's No 1chipmakers, would contribute $100 million and the remaining $200 millionwould come from a mix of 500 corporates and technology suppliers likeHewlett-Packard.

This is not to suggest that the government- sponsored VCF has no role toplay in the IT sector. But as mentioned earlier, resourceful corporates inthe private sector, both in terms of capital and technical skill, can andshould play a better role in their own interest.

The author is Horizon Consultancy president