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It's manpower that drives the software sector

Ashok V Desai

The software industry is labour-intensive. The essential work in it is done by human workers; without them it cannot grow.

They have to be trained to write software; and most who have been so trained have been engineers. Hence, behind any growth projection is implicit a daunting projection of manpower requirements.

The National Association of Software and Services Companies estimates employment in the industry at the end of last March to have been 416,000; within three years it expects the demand to grow to 929,000 at least and 1.4 million, at most.

Thus, it estimates the industry to require half a million workers at least, and a million if things go well - compared to less than half a million total employment this year.

In Nasscom's view, the present annual supply of new programmers is 158,000; with planned expansion of the educational facilities it might go up to 214,000 by 2004-05. With the existing and planned capacity the stock of programmers may go up to 875,000 in 2004-05 - well short even of the minimum requirements.

That figure itself is optimistic; it assumes, for instance, that the net emigration of programmers would fall from 64,000 in 2001-02 and would be reversed into a net immigration of 8,000 by 2004-05.

What drives Nasscom's stratospheric estimates is the demand from software exports, which it expects to go up from 180,000 workers last year to 641,000 at least and 1.06 million at most in three years.

These export demand estimates are driven by four factors. First, the proportion of big American corporations hiring foreign software suppliers is projected to go up from 44 to 55-72 per cent.

Second, their average IT budget would rise 5 per cent a year, from $196 million to $ 227 million.

Third, the share of software services in their IT budgets is projected to go up from 65 to 75 per cent.

Finally, the proportion of that share going to offshore suppliers is expected to rise from 12 to 25 per cent.

How realistic are the assumptions? At 44 per cent, the proportion of large US firms buying software services abroad is already high; but there is no reason to doubt that it can go higher. The question is whether the new clients are likely to be spending more than the old ones or less.

My own guess is that those who went out of the US first were the big spenders, for which their big budgets made outsourcing a part of their needs less risky. Those that follow will be spending less; the average expenditure per company is more likely to go down than up.

Suppose that it did not rise from the current $196 million; that alone would bring down the minimum demand below the projected supply of 875,000.

Will the proportion of IT expenditure on software go up? The assumption is that the big companies have the equipment they need and will spend more on getting more out of it. But as work requirements grow, there is also often an argument for junking old equipment and going for new. I suspect it will all depend on software.

A major function of software, especially that sold by Indian firms, has been to get more out of old equipment and to make it work together with new equipment.

If it gets better at this, it will encourage retention of old equipment, and vice versa. It is best to be agnostic on this point and to assume that the proportion spent on software will remain the same.

It is the assumed rise in the proportion of software expenditure abroad that is the most uncertain. For it is a fact that American firms are outsourcing more and more central IT-related functions.

As they do so, they will be increasingly concerned about security, continuity and accessibility.

In other words, local suppliers have an inherent advantage in outsourced services, and remote suppliers like the ones in India have a disadvantage.

This does not necessarily mean that Indian firms will lose out on outsourced services. But if they want a share of this market, they will have to supply it from locations in industrial countries - especially the US. And then the number of Indian programmers they can use will depend on those countries' visa policies.

Germany is supposed to have introduced a green card in 2000 specifically to attract Indian programmers. When I went to get a German visa in May, I found that every young person was being given a standard letter saying that he or she was being denied a visa and that German law protected the embassy from having to give a reason.

Even in the US, when Clinton increased the number of H1-B visas in 1999, Congress added a rider that any employer asking for an H1-B visa had to certify that he had tried to get the workers within the US and failed to get appropriate ones.

Thus, even if more work comes to Indian firms, it will not necessarily be done in India, and may not even be done by Indian workers.

Finally, Nasscom assumes that the productivity of workers will remain the same. In actual fact, however, there is a progressive rise in their productivity.

Firms copy already written programmes into the new work they do, and more and more shrink-wrapped tools are coming into the market that are designed to increase worker productivity. The software industry is still infant; at this stage, enormous increases in productivity are possible, and will take place.

Thus even if Nasscom's forecast of software expenditure were to materialise, it would generate far less employment.

The demand for additional workers will be well within the supply of newly trained programmers, and there is no reason to expect continuing shortages or to argue for ever larger training facilities.

In fact, there is a chance that the demand will fall short of supply; in which case programmers' wages, which have already fallen in the last two years, will fall further.

They could well fall until they are no higher than those of other graduates. I also see no rationale for the software firms' preference for engineers.

The CEOs I have talked to agree with me that many engineering colleges are second-rate. But still they prefer taking engineers because, they say, engineering colleges select their students more rigorously and because engineering teaches logic which is essential to programming.

But some of them have also told me that their best programmers had been non-engineers. I think software firms recruit engineers because they are headed by engineers.

If they are in a bind and look around, they can find equally good potential programmers amongst non-engineers. In which case the supply of programmers will be even larger.

So, contrary to Nasscom's projections of ever worse shortages, programmers may well become abundant and cheap; and therein lies the best hope of Indian industry.

Low wages have been its greatest strength in the past; they may come to so in the future as well.

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