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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 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

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indian software industry prospects and policy

Indian Software Industry: Prospects and Policy

Shyam Sunder

Yale School of Management

ASHA, Mid-Hudson Valley and ISA, Pace University, February 21, 2002

phenomenal growth of past decade
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 India’s exports
  • $1.6 billion investment
  • 500,000 jobs
  • 1,200 software firms, 260 of Fortune 500 firms are clients
  • Unprecedented, unanticipated and unplanned

Shyam Sunder

indian software exports
Indian Software Exports

Source: Nasscom

Shyam Sunder

indian software exports4
Indian Software Exports

Source: Nasscom

Shyam Sunder

consequences
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

Shyam Sunder

hope versus satisfaction
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

Shyam Sunder

not raining on the party
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

Shyam Sunder

bottlenecks for growth
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

Shyam Sunder

education
Education
  • Industry staffed by graduates of India’s institutions of advanced technological education
  • Not enough new educational capacity created to meet the requirements of other parts of the economy—starved 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

Shyam Sunder

it for domestic productivity
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)

Shyam Sunder

labor laws
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

Shyam Sunder

dependence of indian software industry on wage differential
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

Shyam Sunder

advanced research and tools
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
  • R&D 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

Shyam Sunder

no shrink wrapped software
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?

Shyam Sunder

incentives to innovate
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

Shyam Sunder

protection of intellectual property
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

Shyam Sunder

policy issues
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

Shyam Sunder

education starts with grade 1
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 nation’s 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 India’s wealth
  • World Computer Exchange having a tough time getting its containers loads of computers for poor school children into India

Shyam Sunder

but there is hope
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 …

Shyam Sunder

thank you
Thank You
  • This presentation is available from
  • www.som.yale.edu/faculty/sunder/research
  • Please send any comments to: shyam.sunder@yale.edu

Shyam Sunder