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IT sector grossed $10 billion this fiscal: Nasscom

Our Correspondent in Mumbai

The Indian software and services industry grew 22 per cent this year and grossed $10.1 billion during 2001-02, compared to the $8.26 billion last year. According to the National Association for Software and Service Sector Companies' annual industry survey, exports grossed $7.68 billion of the revenue while the domestic software market contributed $2.42 billion.

"Despite 2001-02 being a very challenging year for the industry, the industry proved its resilience and continued to record impressive growth. It has crossed the $10 billion figure on an increasing base and generated 92,000 new jobs and provided indirect employment to over 2,50,000 people," says Kiran Karnik, President, Nasscom.

Software exports sector registered a growth of 29 per cent in rupee terms and 23 per cent in dollar terms over revenues of $6.2 billion in 2000-01. The domestic software market has grown by 16 per cent in rupee terms and 12 per cent in dollar terms over revenues $2.17 billion in 2000-01.

"The industry is gaining significance in the Indian economy with sustainable growth rates, increased contribution to foreign direct investment, employment and exports. This industry has led to wealth creation of Rs 900 billion in the last six years and is expected to attract cumulative FDI worth $1.2 billion by 2005," says Karnik.

"This sector also contributed Rs 9.6 billon in direct taxes alone in the last year, which is significant when compared to any other sector," he adds.

To understand the significant trends that are emerging in the Indian software and services sector at a micro-level, Nasscom's annual survey covered 2,800 companies. This included Indian software companies, product and service companies, mid-sized and small software companies, third-party Indian IT-enabled service providers, multinational software companies and leading captive remote services companies.

Software exports grew by 30%

The growth in software services exports has been at a healthy 29 per cent during a difficult year for many industries. The growth engine of exports this year has been the IT-enabled services sector, which grew at a stupendous 67 per cent while IT Services grew at 22 per cent.

Nasscom's annual industry survey revealed that the top 20 Indian software companies accounted for 48 per cent of the total software and service exports. The multinational companies segment emerged as an important contributor to the total software and services export revenue with a share of 27 per cent. This included a share of 22 per cent in IT services and 45 per cent in IT-Enabled Services.

"The interesting trend seen during the year was the tremendous growth in offshore delivery. Billing through offshore increased by 64 per cent to Rs. 180 billion in the year 2001-2002 from Rs.109.5 billion last year. In comparison, onsite billings increased by 7 per cent from Rs 159 billion in 2000-2001 to Rs. 170 billion in 2001-2002", says Karnik.

As per the Nasscom survey, the onsite to offshore ratio of Indian software and service exports is now at 50:50. A few years back, onsite exports accounted for almost 80 per cent of India's total software and services exports.

Trends in service lines, verticals in IT service firms

The survey reveals consolidation and growth in existing service lines and encouraging growth in new service lines during 2001-02. Customer application development and maintenance increased from $2.5 billion to $2.65 billion and application outsourcing grew from $1.7 billion to $1.85 billion.

Amongst the verticals, BFIS (Banking, Finance and Insurance Services) continued to dominate the verticals with its share increasing to 22 per cent from the 20 per cent last year.

Similarly contribution from telecom also increased to 14 per cent from 12 per cent. Manufacturing was one of the highest growth verticals with its share increasing from 12 per cent to 16 per cent.

Software export destinations

Out of the total software exports of Rs 365 billion during 2001-02, almost 63 per cent was to the Americas (USA, Canada and Latin America); 26 per cent to Europe; 4 per cent to Japan; and 7 per cent to rest of the world. America continues to be India's largest export destination for more than a decade.

Currently, more than 270 Indian companies have set up offices, subsidiaries and marketing alliances in the US.

Despite the slowdown in the US economy, software exports to America continued to grow.

"While the IT services segment witnessed a slowdown in exports to USA, increase in ITES exports to USA, resulted in an increased share of USA in India's software and services exports," explains Karnik.

Indian companies are also now actively expanding into emerging markets such as Europe and Asia. Exports to Europe saw an increase by 2 per cent from the earlier 24 per cent.

ITES as a growth driver

IT-enabled services have become the growth engine for the exports sector. ITES grew at 67 per cent this year contributing to about 20 per cent of the total software and service exports.

In ITES, customer care has emerged as the most important service line for the 103 companies working in this area. The other important lines are Web sales and Web marketing, billing services and accounting transaction.

"ITES has shown tremendous growth during the last year and is turning out to be the second pillar of the Indian IT export revolution. However, there are some unique issues facing the industry in terms of infrastructure, labour regulations, quality and manpower which need to be addressed to maintain the growth trajectory," says Karnik.

Nasscom also conducted India's first ever city wise survey on the ITES sector covering 310 companies. The survey revealed that: The average number of employees in the ITES sector is 190 but the range is huge and varies from as low as 4 people to as many as 16,000 people. MNC captive units account for 45 per cent of the industry and are a vital determinant of the long term competitiveness of India in this sector. The National Capital Region has emerged as the largest with 53 companies based in this region. Mumbai comes second with 45 companies, and Bangalore and Chennai are at fourth place with 35 companies each.

Domestic software market

The domestic software industry clocked a revenue of Rs 115 billion in 2001-2002 as compared to Rs 98.9 billion in 2000-2001. However, growth rates have declined to 16 per cent from 30 per cent.

According to the Nasscom survey, there are still a number of opportunities emerging in the domestic sector, which will help catalyse growth in the next 2-3 years. These include the energy sector, insurance, financial and banking services, e-governance and manufacturing.

In the energy sector, de-regulation will drive spend on ERP and SCM. Further, with the privatization of the power sector, spending on IT to improve productivity is expected to get an impetus. In the banking and financial service sector, the need for nation-wide connectivity and the imperative to improve customer access is likely to provide opportunities for IT. Also the emergence of new insurance companies could lead to increased IT spending.

For e-governance, the major thrust this year is seen to be in the area of local language applications and application integration. This is in keeping with the second stage of e-governance implementation in the states where the networks are in place.

With the recovery of the manufacturing sector and other traditional sectors on the anvil, organisations are expected to start using IT outsourcing in order to increase productivity.

Outlook for fiscal year 2002-03

The total size of the Indian software services industry for 2002-2003 is expected to be Rs 607 billion or $12.3 billion. Additionally, IT services exports is expected to grow by 22 per cent to Rs 358 billion and ITES exports is expected to grow by 65 per cent to Rs 117 billion.

The domestic market is expected to grow to Rs 132 billion.

"While globally, IT budgets are expected to be flat or marginally up, the share of software services in IT budgets is expected to increase. Moreover, within IT services we are going to see a further up-take in outsourcing due to continued cost pressure faced by global companies. This will ensure continued volume growth for Indian software and service companies," says Karnik.

Nasscom also predicts that the Indian software services industry will witness an increase in addressable market in terms of new geographies, new service lines as well as higher penetration in new verticals.

Amongst the new geographies that will provide growth opportunities for India include Germany, France and Italy in Europe; Singapore, Korea and Malaysia in South East Asia; and Chile, Mexico, Uruguay and Brazil in Latin America.

On the service lines front, IT outsourcing, application outsourcing and systems integration will be the growth areas. Among verticals, healthcare, retail, government, utilities and telecom service providers are likely to increase their share in the total exports.

Nasscom also claims that Indian IT companies will work towards beefing up their capabilities. They are likely to look towards building expertise through thought leadership, gaining better customer access and key account management.

Indian companies will also examine the possibility of building global delivery models to overcome geo-political risks. Further, the industry will see a strengthening of domain expertise due to lateral recruitment.

"Companies will try to contain costs by recruiting in line with utilization rates, hiking the proportion of variable pay, and better management of fixed price contracts. The industry is also expected to witness a rise in M&A (mergers and acquisitions) activity as players try to broaden product offerings and build scale," says Nasscom.

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