With recession taking a toll on IT exports of the world?s two fastest growing economies, the key to the problem may lie in the development of domestic markets. ?New Industries from New Places? a book co-authored by Neil Gregory (advisor to the VP for financial & private sector development, World Bank group) throws light on the Indian software and the Chinese hardware market. In an interaction with Aseem Thapliyal, Gregory sees great growth potential in the Indian software market. At the same time, he warns of any complacency on the infrastructure front by the new government, if India wants to race ahead of others to become the world?s largest software destination. Excerpts:
As India and China form part of the BRIC nations, do you foresee any alliance between the two on hardware and software front?
We found that China?s software industry is larger than that of India as it is more focused on the domestic market. Indian software market constitutes around 10% of the global market, whereas the Chinese hardware market forms around half of the world market. I don?t actually see a big potential for Indian software in China. I don?t see whole lot of synergies there. Japan is the biggest English language speaking market in terms of software. Chinese software programmers find it comfortable to work in Japan. I think there is a potential for Indian software companies to hire Chinese programmers and access the Japanese market. China and India are going to be the two fastest growing economies in the coming five years .I think both countries will benefit from this with Chinese manufacturing comes to India and Indian manufacturing going to China as well.
What has led to China being a specialist in the hardware market?
I think China had cheap labour in the beginning. But with time, these costs have gone up probably higher than India. But advantage for China has been that it has been able to put together SEZs where companies have access to infrastructure, land, loan facilities, transportation and power. The result has been formation of clusters where a lot of suppliers of different components exist in the same zone. It has been efficient for companies in terms of costs as all linkages in different parts of supply chain have come very close. So China is a major force to reckon with in terms of hardware market.
How has the financial crisis affected the Chinese and Indian market?
Both countries are oriented towards the exports market. Export of IT has taken a hit, so exports are not going to recover quickly. The challenge is to direct these industries to serve the domestic market. There is a fairly low penetration of computerisation in the Indian domestic market. So there is a lot of potential for the Indian companies to serve the domestic market. The same goes for China, where the companies should focus more on the development of domestic market. There has to be some reorientation in terms of exports.
Do you also see other countries catching up with India and China on software and hardware front?
They have advantage in terms of lower costs of labour. But India and China have management advantage and world-class production processes that other countries will surely find difficult to catch up with.
The two countries can take advantage of this situation by sending offshore the low-value work to other countries and take advantage of the low cost of labour prevailing there.
How can the formation of new government help the Indian software industry?
I think what may make a difference is the new policies the government pursues to help the manufacturing sector. There are a couple of regulations, which are holding back the manufacturing like process of acquiring industrial land, labour problems and market regulations. I think the question is how much easier will it be under the new government to set up manufacturing activities in India.
How do you see the July Budget contributing to the growth of IT industry in India?
The challenge for India on the Budget side is that the fiscal deficit is now going back up again. So it means they will have less space for giving tax concessions to the Indian software industry for a long time.
It will lower the amount of relief to the Indian IT sector and will make it difficult for the software companies to carry out their R&D operations. Any policy which reduces the amount of taxation will be good for the software industry.
What do you think of the US proposal to restrict H1-B visas for Indian professionals? How will it affect the Indian industry along with the industry in the US?
I think this was a knee-jerk reaction to the global financial crisis by the US. I think in the long term, the Americans will realise the value of Indian skilled professionals, which make the US more competitive. So if the proposal goes through, there will be skill shortages in the country. I think if this kind of step is taken, it will not last long because skilled Indian experts form a major part of the US workforce.
There is also a proposal from the US regarding banning outsourcing to the Indian companies. How will this affect the Indian market?
The protectionist measures by the US are focused on the lower end of the market like BPO.
So jobs are being taken away to fulfill demand for employment in the US .So pressures will be there. I don?t think these restrictions?if imposed?will last longer. I don?t think the US and UK have the capacity to produce these kind of services domestically.
What advice will you give to the Indian government for further development of the domestic software market?
I think the government has done a good job until now and should continue to adopt hands off approach. The government should apply the lessons it has taken from the software industry to other knowledge-intensive businesses such as biotech, pharma and knowledge-intensive manufacturing, where you try and reduce the government?s involvement and give more space to the private sector to develop and operate and also provide necessary infrastructure.
When Indian telecom sector was not much developed, the government provided necessary infrastructure.
So like software and telecom, India should focus on other sectors to provide them more infrastructure on which they can build their strength. But I also think easy availability of land will be key to the development of infrastructure in India.
There are a lot of government regulations in China. Has this affected their hardware market?
One difference between China and India is that the former gives a lot of flexibility to the government at its provincial level to set up its industrial policies. In India, most regulations are made at the Union level.
There is a lot of experimentation in China. So it has left some provinces with good investment climate free from red tape, lower taxes but it?s not uniform across China as there are some provinces where it is more difficult to set up these industries.