India bucks global outsourcing
trend By Siddharth Srivastava
NEW DELHI - While worldwide
information-technology (IT) firms witnessed an
overall fall in new outsourcing contracts in 2006,
Indian companies, such as Infosys, Tata
Consultancy Services (TCS) and Wipro, saw their
market share increase by more than 14 times in the
past four years, according to a new study.
Meanwhile, boosted by huge investments
across various sectors, India's domestic IT market
is expected to grow at 21.5% this year to Rs758.91
billion (US$17.5 billion), making it the
fastest-growing
segment in the Asia-Pacific
region.
"A major wave of IT investments
has started to take place across banks,
financial-services institutions, telecom,
manufacturing, government, resources, education
and other industries,'' market research and
analysis firm International Data Corp (IDC) said
in its report "India Domestic IT Market Top 10
Predictions for 2007".
"This is probably
why India is the fastest-growing country by IT
spending in 2006 at 22.4% and is forecast to
remain so in 2007 at 21.5% when it reaches Rs758.9
billion,'' it said.
Another study by
outsourcing advisory firm TPI says there are
difficult times ahead for the global IT majors, as
they face intense competition from new market
players. "Indian firms are emerging as an
attractive and credible alternative to the
traditional players and over the next few years
they are expected to compete directly with the
'Big Six' for larger-value contracts,'' said
Duncan Aitchison, TPI's managing director.
In contrast to the massive gains
registered by Indian service providers, the market
share of the "Big Six" global outsourcing majors -
Accenture, IBM, HP, ACS, CSC and EDS - declined to
46% last year, from 71% in 2002.
The
market share of India-based providers rose to 7%
last year, from less than 0.5% in 2002. Indian
service providers such as Wipro, Tata and Infosys
are reaping the benefits of the trend toward
single-process and specialist deals, the TPI study
says.
Looking at industrywide contracts
with a value of more $50 million, the Indian
players grew their share from 8% in 2005 to 11% in
2006, while the share of the Big Six, which are
known for their strong hold over IT contracts,
dropped from 44% to 37%.
Indian firms have
been particularly successful in the applications
development and maintenance segment, where they
expanded their market share to 36% in 2006 from 8%
in 2003. India-based IT service providers are
aiming for a $60 billion export target by 2010.
According to IDC, this year Indian
enterprises will graduate to the second level of
"dynamic IT infrastructure", where IT
infrastructure will be able to change in response
to changing business scenarios. The key technology
components that will come to the fore will be
virtualization, service-oriented architecture and
application integration.
This year will
mark the beginning of an aggressive effort by all
major vendors to broaden and deepen their coverage
of the small and medium-sized business sector.
Vendors will experiment with new models such as
on-premise hosted applications, hardware on lease,
and software as a service.
"We are looking
at five to 10 deals worth $50 million to $100
million each, across various verticals. We think
customers feel a lot more comfortable with such
deal sizes," TCS head S Ramadorai said recently.
"Large corporations do not want to sign the $1
billion to $2 billion or $10 billion outsourcing
deals for sure because they are also worried about
the aspect of value delivery on a sustained basis.
The key point emerging from the current trends in
the industry is that $50 million to $100 million
deals are the sweet spot."
Observers in
India, however, say the tax regime for software
companies could impact on profits in the near
future. The tax-free status of software firms in
India comes to an end in 2009. The National
Association of Software and Service Companies
(Nasscom), the industry's lobby body, has asked
the government to extend the exemptions for
another 10 years.
Software firms hope that
once the Software Technology Parks of India (STPI)
incentives come to an end, they may be able to
shift to special-economic-zone status and benefit
from similar tax breaks.
However, the left
wing, a key coalition partner of the government,
is opposed to this move. "What is the point in the
economy doing very well, but the government not
getting a share of the revenue [that] it can use
for the other [poorer] sections?" a senior
left-wing party leader recently asked.
Nasscom has said the STPI incentives are a
key factor in the growth of the industry, which is
likely to see export revenue rise nearly 30% to
$29 billion or more in the fiscal year, which ends
on March 31.
Until now software service
units set up in STPIs have not paid taxes on
exports, but have paid taxes on domestic business.
However, from the next fiscal year, income from
exports will come under a minimum alternative tax,
which was last month extended to the sector in the
federal budget for 2007-08. This rate is still
much lower than domestic corporate tax.
Manpower continues to be a major area of
concern. A severe manpower crunch combined with
high growth has resulted in unprecedented rises in
salaries in India. This is the fourth straight
year that salaries in India are projected to rise
faster than in any other major Asian country.
According to the annual study of
human-resources consulting firm Hewitt Associates,
India will continue to be the highest
salary-growth region in the Asia-Pacific region,
with an all-time high average pay hike of 14.5% in
2007 against 14.4% in 2006, 14.1% in 2005 and
13.7% in 2004.
Middle managers and
professional and technical employees will get the
biggest hikes at 15.1% and 15.8%, respectively.
Even manual workers will get an average hike of
12.2% against 11.9% in 2006.
The Hewitt
study follows an ECA International survey
indicating that India will this year witness its
highest-ever salary hikes.
ECA
International, the world's biggest organization
for human-resource professionals, said: "Indian
workers are set to receive the highest raise, with
firms forecasting annual salary hikes of 12%
resulting in a real wage increase of 7%, once
inflation has been taken into consideration."
Recently, N R Narayana Murthy, chief
adviser to software giant Infosys, said India
should quickly put in place a modern, world-class
human-resources policy to avoid serious
growth-related problems.
"There is a
serious manpower shortage," said Murthy. "So
unless we have put in place a dynamic,
forward-looking, modern and world-class
human-resources policy, I think we will regret
it."
However, Murthy said he is against a
tax holiday for IT companies. "I think we have to
pay taxes. After all, what's the difference
between a company that serves Indian consumers and
a company that serves outside? There is no
difference."
Siddharth
Srivastava is a New Delhi-based
journalist.
(Copyright 2007 Asia Times
Online Ltd. All rights reserved. Please contact us
about sales, syndication and republishing.)
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
