India@61: From low-cost to high-value

As the nation commemorates its independence from British rule Aug. 15, we look back at India's journey toward becoming an IT super power and offshore hub.

Today marks India's 61st year of independence from British rule, and despite the odds, the nation is set to emerge as an important innovation hub to the world, say market observers.

In 1992, a study conducted by the Department of Electronics, Government of India and funded by World Bank, predicted that the market for global software exports would increase to Rs 20,000 crore by 1996, or approximately US$7 billion--based on the average conversion rate of 28 rupee to a US dollar in 1992.

Titled Indian Software & Services: Export Potential & Strategies, the study projected that India would emerge as one of the top three preferred destinations.

The projections were seemingly optimistic, considering that in 1990, the country's software exports registered at only US$131.2 million.

"We didn't know what those numbers meant, but we knew it was achievable," Sanjiv Kataria, a former NIIT executive and curremtly a strategic communications and PR counsel, told ZDNet Asia in a phone interview.

India's ICT milestones

1958: Indian Statistical Institute Kolkata gets India's first computer Ural, from Russia
1968: TCS established. Back then, it was known as Tata Computer Centre and provided computer services to the Tata group companies.
1976-1981: Establishment of companies such as HCL, Wipro, Infosys and NIIT
1978: IBM asked to leave India, under Foreign Exchange Regulation Act
1984: Indian government announced the New Computer Policy
1988: Nasscom is set up
1991: India announces New Economic Policy
1994: New Telecom Policy announced; allows Foreign Direct Investment in telecom
1997: Creation of Telecom Regulatory Authority of India
1998: Government ends monopoly of VSNL. India opens up Internet sector to private nternet service providers.
1999: Infosys becomes first Indian company to be listed on NASDAQ
2002: VSNL sold to Tatas; voice over IP is legalized; international long distance market is deregulated
2008: India's software exports cross US$40 billion mark

"In the early 1990s, NIIT had bagged a contract for offshore software development for a Canadian firm," Kataria recalled. To service the deal, he noted that NIIT had to set up an offshore development office in central Delhi, a location close to the office of the state-run Videsh Sanchar Nigam Ltd (VSNL) in order to establish last-mile connectivity to Canada.

"The follow-the-sun offshore development model was just about taking birth [then]," Kataria said.

Pradeep Gupta, founder, chairman and managing director of India-based media house CyberMedia, said in a phone interview: "[The 1992] report was a watershed event for the IT industry."

The Indian IT industry has never looked back since, achieving growth rates faster than any study forecasted.

By 1998, India's software exports had reached some US$2.3 billion (or Rs 9500 crore). Over the last decade, the industry has grown 20-fold.

In the last financial year, the nation's software and services exports clocked US$40.4 billion, while the size of the overall Indian IT industry, including hardware, was worth US$52 billion.

Overcoming multiple challenges
Over the last 18 months, the Indian IT and IT-enabled services (IT-ITES) industry has faced many challenges brought about by the U.S. economic slowdown, a volatile currency, high attrition rates, rising skill scarcities, inflation and a diminishing cost arbitrage.

Despite the odds, Nasscom--India's trade body and chamber of commerce for the IT-BPO industry--is confident the local industry will achieve the target of generating US$60 billion exports by the next financial year.

"While low costs are always a reason to outsource to India, the bigger reason is our vast repertoire of skill sets," Rajdeep Sahrawat, vice president of Nasscom, told ZDNet Asia in a phone interview.

"In no other country will you find such a large number of engineers, chemists, lawyers, technicians and post-graduates, in subjects like physics, biotechnology, biology and mathematics. Our education system is really strong," Sahrawat said.

Concurred Gupta: "The key contributors to India's emergence as an IT super power was the country's education system and institutes like the Indian Institutes of Technology (IITs) and Indian Institutes of Management (IIMs)."

Sanjit Chatterjee, director global sales of Flytxt, said in a phone interview: "India's strong telecommunications network and its English-speaking skilled workforce played an important role in the emergence of India as an IT super power." Flytxt is a telecom marketing software developer.

"While companies came to India for low cost [benefits], they stayed on for quality," Chatterjee said, noting that this triggered the growth of segments such as knowledge-process outsourcing (KPO), remote infrastructure management (RIM) and captive R&D (research and development) centers.

While the nation is still way behind countries such as the United States, Japan and China, India's Patent Office has been receiving an increased number of patent applications, growing at over 20 percent per annum.

According to research firm Evalueserve, India filed 35,000 patent applications during fiscal year 2007-2008.

In a recent press statement, Nasscom Chairman Ganesh Natarajan, said: "The product industry in India is coming of age with world-class intellectual property now being created from India in key domains and end-to-end design and development services, provided to global independent software vendors (ISVs) by captive and third-party units in India."

Gupta added that Indian IT companies should convert cost and skill challenges into opportunities, for example, by opening up centers in countries that offer lower cost arbitrage, compared to India.

Vamsee Tirukkala, managing principal at consulting firm Zinnov, said in a phone interview: "There are skillset shortages, especially in product management and software architecture." In addition, he noted that 30,000 expatriate professionals recently returned to India.

"These expatriates now account for 10 to 15 percent of the staff in offshore R&D centers. They have brought high-end talent to India. With time, I am sure India will have a richer talent pool," he added.

Chatterjee said: "India's growth story has reached a huge momentum. Today, no threat can be big enough for the country."

According to a Nasscom report, the next decade will "play a crucial role in bringing about disruptive growth for the Indian software product segment". The industry body said the annual revenue aggregate of India's software market is expected to grow from US$1.4 billion in 2007-2008, to some US$9.5 billion to US$12 billion by 2014-2015.

Thanks to increased offshoring, Tirukkala said Indian talent has "evolved a great deal".

He added that people working at technical support centers of large multinationals in India have considerable customer insights. Tirukkala said: "They are increasingly using this insight for product development."

"India can't become an innovation hub today or tomorrow. But in time to come, that too will happen," he said.

A recent study by Zinnov noted that offshore R&D market is worth US$9.35 billion a year, and growing at 23 percent annually. By 2012, this industry segment will reach US$21.4 billion, the report said.

While it may be difficult for India to replace Silicon Valley in terms of innovations, Tirukkala said India is already playing a significant role in product development. "India is an important part of the global innovation ecosystem," he said.

Swati Prasad is a freelance IT writer based in India.