India's IT services market: Growing fast, but dwarfed by offshoring

India's domestic market for IT services is growing rapidly, but it is still small compared with the offshore IT work done in the country for organisations overseas.

The domestic IT services market in India represents a mere 1.4 percent of the world's total IT services spend, far short of the 39 percent seen by the US. In a report released on Monday, Pierre Audoin Consultants (PAC) estimates India's IT services market at $7.3bn (£4.7bn) last year. The analyst house expects it to grow by 14 percent this year, compared with the three to four percent predicted for the US and Europe.

Three-quarters of the demand for IT services in India comes from four vertical sectors: government, manufacturing, telecoms, and banking and financial services. Outsourcing within India is also a growth area, with PAC calculating that outsourcing in India hit $2.3bn last year.

But demand for IT services from Indian companies is dwarfed by the provision of offshored service by Indian companies to organisations abroad. According to the analysts, offshore IT services created €33bn in revenue in 2011 — three-quarters of the worldwide total.

PAC senior analyst Rajeev Suman said more growth in IT project spending will come from larger Indian government initiatives such as the Tax Information Network and the National Pension Scheme.

Demand for IT services from smaller Indian cities such as Mohali, Ahmedabad, Surat, Indore, Bhopal, Lucknow and Mangalore will increase and account for as much as 25 percent of total Indian IT services business, he noted.

"This trend is seen mainly due to rise of SMBs in these cities and their propensity to ask for cost optimisation," Suman told ZDNet.