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IT –– Growing fast but needs to move up the value chain
The Indian information technology (IT) industry recorded a turnover of about Rs 335 billion in FY 2000, indicating an increase of about 35 per cent over previous year. The hardware industry recorded a turnover of Rs 90 billion in FY 2000, which indicates a sharp increase in growth rates. This can mainly be attributed to increase in Internet usage and awareness, and increased spending on IT infrastructure in the corporate sector.The software industry accounted a turnover of about Rs 243.5 billion in this period, a growth of 53 per cent over FY 1999. The Indian software sector enjoys significant advantages like a large pool of low-cost, skilled and English-speaking technical manpower, a 12-hour time difference with the US (its main export destination) and continued fiscal and financial benefits from the government. In the post-Y2K scenario, web-enabled application, electronic commerce and IT-enabled services are likely to drive the prospects and earnings of the Indian IT industry. In order to remain competitive it would be incumbent on Indian companies to keep pace with global trends and developments. For this, Indian companies will have to work on many fronts simultaneously. First, they will have to invest in marketing and sales infrastructure and increase their local presence on a worldwide basis. Second, a prudent business strategy for Indian companies would include gaining expertise in various vertical industry segments and offering solutions in a wide range of areas like e-commerce, and embedded systems. Third, with the Internet becoming the basis for all new systems, Indian software companies will have to work on new business models and change their approach and technologies accordingly. Fourth, Indian software firms will have to invest in new quality methodologies and tools. Last, with the technological environment changing at a fast pace and the demand for software professionals outstripping supply, organisations will have to spend considerable amounts in time and money toretain and continuously retrain employees. The current industry position
One of the fastest growing industry segments in the Indian economy.
Hardware industry segment witnessed significant increase in growth rate in 2000 because of increased Internet awareness and increased corporate spending on IT infrastructure.
Significant share of unorganised market in the hardware segment. Market mainly driven by imported components and influenced by price movements in the international market. Software segment component has been increasing consistently in the overall IT industry turnover. The growth rate in software sector is primarily driven by exports component. The product, services and destination portfolio has witnessed significant increase in the recent past.
Highly fragmented software industry with over 5,000 players and just about 500 of them controlling more than 70 per cent of the industry turnover. At one end of the spectrum are companies with global operations and necessary infrastructure and at the other end are small companies operating in niche technology-driven segments.Key issues facing the industry
Losing cost-competitive edge: Exports facing stiff competition from other Asian countries, which have emerged as more cost-efficient in terms of skilled manpower.
Relatively lower component of high value products: Share of high value products and components is considerably lower in the Indian software segment turnover. Only some companies have moved up the value chain, viz., product-based, packaged software segment.
Infrastructure: IT sector requires high level of communication infrastructure, which is still not available to a significant proportion of companies. This has a negative impact on the international business of many small-sized players.
Financial strength and network: Considerable portion of companies in the Indian IT market do not have access to large marketing infrastructure and funds to invest in R&D and creation of network infrastructure.Factors that can be addressed in Budget 2001
Reduction in income tax on export income, which was imposed under Section 80HHE in Union Budget 2000-2001: This is likely to provide an incentive to the companies to increase their export earnings.
Allocation of funds to increase supply of skilled manpower: Cost- effective manpower has been one of the most important factors to have driven the growth for the Indian IT industry. However, relative shortfall in supply of skilled manpower can only be circumvented with effective investment in creating IT training infrastructure at the government level.
Tax applicability on stock options to be at the point of sale, raising investment limits by Indian resident staff from $10,000 in a five-year period to $100,000: This would make the salary structure more attractive for India based firms and thus increase the employee retention capacity of competitive IT companies in India.
Increased FII investment limit to 49 per cent in Indian companies, acceptance and execution of Sebi's VC panel recommendations: This would increase investment in the Indian IT companies.
No withholding of tax to be deductible towards payment of software licenses and no new tax on e-commerce transactions, expansion of Section 10A/10B to include IT-enabled services: This would increase the overall market size for IT-based products and services such as call centres.
Increase in government spending on IT infrastructure: This would have a significant impact on the Indian IT industry, in terms of increase in market size. Moreover, this would work as an impetus for growth in the other segments, which are related to government sector.
Reduction in excise duty, sales tax and rationalisation of sales tax across states on hardware components and products: This would reduce the cost for the computer hardware products, and thus help in increasing the market size. Moreover, this would also encourage investment in domestic hardware industry, which is mainly driven by imported components or products.
Full freedom to Indian IT companies to commit to an acquisition up to $1 billion or 30 per cent of their market capitalisation, whichever is low, without any prior approval: This would increase the network of the Indian companies, which is an important success factor for export-oriented companies.
Internet service providers to be given infrastructure status: This would increase the investment level in the Internet service provider (ISP) segment, which in turn would improve the communication capacity and service quality in the Internet segment.Copyright © 2001 Indian Express Newspapers (Bombay) Ltd.
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