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India is currently the undisputed world leader in IT services. This occurred over the last 15 years (See Indian IT History) through a combination of global factors. In the year 2007-08, the Indian IT industry grew 29% to register a total revenue of Rs. 288,810 crores. Of this Rs.189,792 crores constituted of export services while the balance Rs.99,018 crores was domestic revenue. For the first time the growth of Domestic IT market (34%) was greater than the growth of Export Services (27%), though from a smaller base. However this indicates a shifting trend and highlights the potential of the Indian domestic market in the future.
In the last 15 years, the Indian IT services industry rapidly grew to take a leadership position in the world. See graph below:
There were many global as well as domestic factors that spurred this growth. We can understand and review the combined impact of these forces at the various phases of growth.
India had (and still has) the following basic underlying advantages that made it an ideal player for the IT service industry:
Lower cost compared to the western world
Large English speaking workforce
Solid technical skilled engineers (IIT, RECs etc)
Good work ethic
However, till the early 90’s India was hardly known as a software service provider. Having cut itself out from the world economy by self imposed economic policies, Indian companies or its engineers had hardly any exposure to the global market. This can be seen as the Pre-Liberalization period of the IT industry. The few companies in the Indian market were TCS, Wipro (more known for Light bulbs & soap!), CMC etc. Infosys, though established in 1982 was just a Rs.10 crore company in 1992!!!
The economic liberalization in 1990 by the then Finance Minister Manmohan Singh kick started the nascent growth of the IT industry. Policies for STPI units, free import of hardware, setting up of data transmission links, Income tax waiver for software export etc created a good industrial climate for software services. Indian companies took good advantage of this and we witnessed rapid growth in this phase of 1990-96. However this phase was characterized more by ‘body shopping’ than offshore development. Western companies were reluctant to move software development to India but were more than eager to hire Indian engineers to meet their growing needs.
The next 5 years (1997-2001) were historic in a number of ways. The two biggest factors during this time frame were:
Growth of the Internet
Y2K
As far as the IT industry is concerned, the Internet completely changed the competitive landscape for ever. This impact of this is so obvious that it does not need much further explanation. The Internet fuelled the Dot Com boom the late 1990s and huge amounts of venture capital and other funds flowed into the IT industry.
The Y2K problem on the other hand was more a short term phenomenon but provided the catalyst for the growth of Indian companies. Enterprises world over needed to convert their legacy programs and there was a major shortage of software engineers. Indian companies by them had established themselves as best providers of software engineers and Indian engineers began to viewed with respect across the world. Further many Y2K projects involved lot of mundane work and these were ideally suited to be moved offshore. The reduced cost of data transmission (through the Internet) enabled better communication and leveraging the low cost Indian manpower became easier.
After the Y2K and the Dot com bust it was widely believed that the Indian IT industry would shrink. The following 5 years (2001-2006) were rapid growth years for Indian IT. The industry grew over 5 fold and this mainly driven by the market leaders like TCS, Wipro and Infosys. For example Wipro which was a $400M company in 2000 had a revenue of $2.4 Billion by 2006 with a market cap of over $20 Billion! This showed how much investors and financial analysts started valuing Indian IT companies. Global players like EDS though much larger got much lower market cap.
The Dot com boom had led to significant over investment in Optic fiber network, which in turn led to a dramatic decrease in communication costs. Indian companies were able to take advantage of this and move more development work to India. U.S companies were also keen to cut costs and started believing more in the capabilities of Indian companies to deliver value. Most importantly, Indian companies started rewriting the rules of distributed development and became the world leaders of software development through Innovation, Process improvements and Value addition.