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 • 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 Source: Nasscom Shyam Sunder

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 • 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 • 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 • 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 • 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 • 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 • 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 • 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 • 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 • 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 • 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 • 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 • 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 • 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! • 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 • This presentation is available from • www.som.yale.edu/faculty/sunder/research • Please send any comments to: shyam.sunder@yale.edu Shyam Sunder

Indian Software Industry: Prospects and Policy