Indian Software Industry: Prospects and Policy

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Indian Software Industry Prospects and Policy

• Shyam Sunder
• Yale School of Management
• ASHA, Mid-Hudson Valley and ISA, Pace University,
  February 21, 2002

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Phenomenal Growth of Past Decade

• Industry grew at 78 percent per year in rupees
  and 44 percent per year in dollars between 1997-8
  to 2001-2
• 16 percent of Indias exports
• 1.6 billion investment
• 500,000 jobs
• 1,200 software firms, 260 of Fortune 500 firms
  are clients
• Unprecedented, unanticipated and unplanned

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Indian Software Exports
                                              
                                             
Source Nasscom
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Indian Software Exports
                                             
                                                

Source Nasscom
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Consequences

• A place for India in world trade
• Pride from recognition of the skills of Indian
  software professionals and organizations
• Welcome mat at visa/immigration counters
• Inflow of cash to pay for imports and build
  reserves
• A self-congratulatory environment

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Hope versus Satisfaction

• This state of affairs justifies hope that India
  can become a major player in the world software
  industry
• But there are miles to go, and tough policy
  choices before India can achieve such a goal
• Climate of self-congratulation can induce
  complacency
• It also makes it more difficult to force reform
  and hard policy decisions

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Not Raining on the Party

• India still constitutes less than one percent of
  the world software and related service markets
• The total revenues of the entire software
  industry in India amount to less than a third of
  Microsoft revenues (25,296 million in 2001) and
  less than 4 percent of the revenues of 25 top
  U.S. suppliers of software and computer services
• Revenue of the largest software firm in India
  (TCS) is one half the revenue of the 25th
  software firm in U.S. (Adobe)
• With foresighted policies it could become a major
  force, capturing 5-8 percent of the world market
• Or, it could celebrate too early, and stop at one
  percent of the market as better equipped
  competitors overtake India

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Bottlenecks for Growth

• Education
• IT for domestic productivity
• Labor laws
• Dependence on wage differential
• Advanced research and tools
• Service versus software
• Incentives to Innovate
• Protection of intellectual property

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Education

• Industry staffed by graduates of Indias
  institutions of advanced technological education
• Not enough new educational capacity created to
  meet the requirements of other parts of the
  economystarved of talent
• Ignoring production of PhDs to teach
• Best minds not being drawn into education and
  scholarship
• Without the seed farm to educate PhDs and do
  research, there can be no bumper crop tomorrow

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IT for Domestic Productivity

• U.S. and other advanced economies have generated
  great wealth using information technology to
  increase productivity
• Application of IT in Indian economy lags (1.7
  percent of GDP vs. 6 percent in U.S.)
• Less than 30 percent sale in domestic market
• While each hour of software work may earn
  substantial foreign exchange for India, it could
  generate even more wealth internally
• India has denied itself this benefit (only 12,000
  of 45,000 bank branches have computers)

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Labor Laws

• Rigid labor laws freeze mobility and preclude
  reorganization of firms and the economy through
  adoption of IT
• Domestic markets being taken over by new,
  unconstrained entrants (e.g., banking)
• No motivation for retraining of work force
• Poor incentives and poor work culture
• Wage as a right versus compensation for services
  rendered

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Dependence of Indian Software Industry on Wage
Differential

• Comparative advantage of Indian software industry
  lies largely in wage differentials between India
  and customer countries
• This wage gap is closing gradually, and may
  disappear within ten years
• A sustainable advantage in software industry
  would require a productivity differential
• Investment of advanced research and software
  technology development necessary

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Advanced Research and Tools

• Comparative advantage in this fast moving field
  lies in developing newer technology, moving up
  the value chain (e.g., code to write code)
• Need advanced research institutes IN INDIA that
  can attract top talent
• Neither the government nor even the industry has
  paid much attention to it
• RD spending of mere 3.4 percent of revenues of
  software houses in this high tech industry (cf.
  18-82 in U.S.)
• Satisfied with bottom fishing service jobs
• Ambitions of major players cannot be sustained by
  piggy-backing on creation of technology

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No Shrink-Wrapped Software

• Indian industry dominated by corporations making
  money from wage differential between India and
  customer countries
• High variable cost service sector instead of zero
  variable cost software sector
• In India, like elsewhere, there are plenty of
  brilliant young minds
• Few of young Indians can dream to become rich
  writing killer applications in their garages
  (Bill Gates)
• Why not?

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Incentives to Innovate

• If you write such an application, it will be
  selling in the bootleg market for Rs. 25 a few
  days after you sell the first copy
• No chance to profit from intellectual property
• IP laws exist, but are not enforced, saving about
  160 million per year in cost of software imports
  (IIPA, 2000)
• But they also destroy the dreams of the young
  geniuses who could put India on the software map
  of the world
• So they accept 45,000 in body-shopping market
  instead of risking killer applications worth
  billions

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Protection of Intellectual Property

• In India IP policy is discussed most in the
  context of pharmaceuticals and the cost of
  protecting foreign IP
• In software industry, we fail to produce local IP
  because we do not protect it
• Also, rigid labor laws block domestic demand for
  IT
• Absence of effective IP protection discourages
  entrepreneurs who cannot reap the rewards of
  their labor and risk bearing

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Policy Issues

• Education Train enough engineers and technicians
• Research to develop frontier technologies
• Seed Farm Attract top talent to teaching and
  research
• Protect intellectual property to encourage
  innovation
• Relax labor laws to release domestic demand for
  IT
• Education of the young

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Education Starts with Grade 1

• Change the mind-set of policy makers in India
• Indian government views a used computer brought
  to Sahar airport as an opportunity to make a few
  thousand rupees in import duty
• Not as a tool for creating nations wealth
• With mere 5 PCs and 2 internet subscribers/1000,
  a single computer could help a hundred children
  reach their dreams and add at least one crore
  rupees to Indias wealth
• World Computer Exchange having a tough time
  getting its containers loads of computers for
  poor school children into India

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But There is Hope!

• Government policies have been changing (no import
  duty on software now)
• But a great deal more needs to be done
• India has to start thinking of its people, and
  their skills, as its wealth (not just the gold
  and foreign exchange reserves)
• And invest in people, to build a future.
• Perhaps one day

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Thank You

• This presentation is available from
• www.som.yale.edu/faculty/sunder/research
• Please send any comments to shyam.sunder_at_yale.edu