Consequences for Indian IT Sector Owing to Globalization - Term Paper Example

 Consequences for Indian IT sector owing to globalisation Introduction: Information and Technology sector has become the Indian brand image for International community. A sector that was little known in 1980s gradually grew with time and riding the vehicle of globalization touched the zenith of success in less than 20 years. This paper analyses the impact of globalization on Indian IT sector. The paper starts with a brief background of the IT sector in India and then proceeds to the problem statement. After discussing the methodology of research followed in this paper; it also reveals its limitations. The literature review part follows the introduction and after that a statistical overview of Indian IT sector has been given. Finally a PESTEL analysis has just preceded the conclusion. Background: A world without the geographical boundaries acting as an impediment to free interaction might be termed as globalisation. Unlike China or the roaring tigers of the South-East Asia, India embraced globalisation at the wake of 1990s, much later than the mentioned group of countries. The transformation from a protectionist nation to a worshiper of globalisation and liberalization gradually started in later years of 1980s under the auspicious presence of late Prime Minister Rajiv Gandhi. Finally in 1991 under the Prime Ministership of late Narasimha Rao and present Prime Minister Manmohan Singh as finance minister; with a severe level of devaluation of Rupee in a single day, India stepped into the rapid transformational phase of globalisation. In last twenty years India has moved quite a distance and reckoned itself as an emerging economic power in international scenario much owing to its huge market and a booming Information and Technology sector. Information and Technology sector might be considered as the most successful sector in India at the background of globalisation. In true terms its success over the years has been propelled by globalisation and helped it to emerge as an important sector in terms of contribution to Indian export as well as regarding employment creation. If outsourcing has been cursed by many learned scholars and protested in countries like USA and UK; for India it has unleashed a new potential and that particularly in the field of Information and Technology. Globalisation has been the main guiding factor behind such inflow of Information and Technology outsourcing in India. Statement of the Problem: This report undertakes a careful study of relevant literatures related to the influence of globalisation on Indian Information and Technology sector along with statistics from NASSCOM to reveal the impact of globalisation on Indian IT sector with a futuristic outlook. Choice of model and method of analysis: The study undertakes an exhaustive review of some selected literatures including some articles and websites in order to understand the growth of the IT sector for decades. The model of research is qualitative in nature and involves library research or secondary data sources (e.g. NASSCOM report 2010). The analysis employs some statistics and a PESTEL (Political, Economic, Social Technological, Economic and Legal) analysis in order to provide a macroeconomic overview of the Indian IT sector. This will help us gauge the impact of globalisation from all perspectives. Delimitation: However the report carefully avoids consideration of any trickle down effect of globalisation to any other sector even ancillary to IT or impact of IT on any other sector. The report also avoids giving too much weight to the domestic IT market. It takes a PESTEL analysis of Indian IT sector within the regime of globalisation and also uses statistics to draw the importance and future potential of Indian IT sector within and outside the Indian economy. Literature Review: According to Kauffman and Kumar (2008) national development of India has been significantly boosted by the production of the IT industry. They have also pointed to the fact that in India such development has occurred in clusters and that eventually led to the development of cities like Bangalore and Hyderabad. According to them one of the most significant features of globalisation in respect of IT industries in India is a gradual shift from vertically integrated industry structure to a horizontally integrated industrial structure or at least the coexistence of the same. Further similar to the great global peers, in India significant monopoly power exist in this sector. They keenly observed the fact that prior to globalisation Indian IT firms was highly regulated by the government and they got deregulated only after the advent of globalisation. This transformation that owes its roots to globalisation ultimately helped the Indian IT firms to enjoy economies of scale and scope like any other big IT firms of international origin. Considering the increased competition that is bound to flow in with an opened up economy; a more rational government resorted to software technology parks and they became the ultimate catalyst of growth of the IT sector. Furthermore these parks also encouraged many non-residential Indians to actively engage themselves into development of domestic IT industry and that eventually unleashed another form of economy of scope. Kauffman and Kumar (2008) stepped further to comment that economies of scale in development and growth of IT industry in India is present as well owing to the globalisation. The removal of protectionist regime and the advent of globalisation in India also witnessed price war among IT related firms and it helped to maintain the competitiveness. As mentioned by Kauffman and Kumar the protectionist regime severely restricted the access of the Indian firms to the ever changing IT technology that primarily the global firms were engaged with. This had compelled them to shift their primary interest from mainframe to development of personnel immensely trained in computer softwares; the computerization of Indian Banking system also helped to the same cause. Interestingly this situation was perfect for India considering the growing demand for software engineers from USA and other countries from late eighties and actually became more encouraging after the globalisation of the Indian economy in 1990s onwards. With time as connectivity between India and the other countries of the world improved, Indian software personnel were hired as distant employees and that in a large number. Owing to their skill and fluency in English they became very popular abroad. The increased level of out migration of Indian IT skilled professionals is well illustrated in Kamat, Mir & Mathew (2004) “the number of Indian workers arriving in the US went up to 31,686 in 1997, 40,247 in 1998 and 55,047 in 1999. In other words, over 47% of the visas issued in 1999 were awarded to Indian workers, most of them in the IT sector.” (Kamat, Mir & Mathew, 2004, p.16) This feature became particularly important when instead of mobile labour; job became mobile over the countries. Amidst the rapid emergence of outsourcing as the popular form of distribution of work all over the globe; India became the popular destination of outsourced IT related jobs and even the product development process. Globalisation had another important impact on Indian IT industries and that in particular on its nature of involvement in IT products. According to Kauffman and Kumar (2008) considering the growing demand of software services around the world and that of Information Technology Enabled Services many Indian IT firms that were previously engaged in mainframe computer manufacturing started to develop software for their own system. This is another mark of scale effect that might be considered as a direct impact of globalisation. Kauffman and Kumar have mentioned that India’s ability to cope up with increased competition in global market place and its ability “to shift from low-cost production of IT services to higher margin consulting and process redesign services.” (Kauffman and Kumar, 2008, p. 246) holds the key to the sustained development of Indian IT sector in long run. The promising fact is that; it has been observed that growth of outsourcing sometime bereft of any direct effect from global recession or economic downturn in a particular country of importance. As mentioned by Alok Aggarwal that economic downturn in USA the primary source of Indian IT outsourcing left no negative impression on Indian It sector and it kept on flourishing like before even at that period of economic turmoil. (Aggarwal, 2008) The growing importance of Indian IT sector in terms of export earning and as an important source of Job creation can be easily grasped through the statistical table furnished by Aggarwal (reproduced in the next page). The table lists revenue earned (in billion of dollars) and professionals employed (in thousands) by the Indian IT services industry excluding BPO and Hardware sector. The stared years depict estimated data. The table illustrates a sheer growth in both the variables considered over the years 2001-02 to 2015-16. Furthermore this table leaves one of the most expanding parts of IT industry that is the BPO sector out of its consideration. Considering this fact it is certain that if BPO sector had been included then the growth would have been more prominent and extraordinary. The globalisation effect on IT industry gets well illustrated from the fact that the export of IT services is expected to grow by a staggering 25 times in 14 years considered in the table. The same for the engineering services, research & development and software products are expected to grow 17 times (estimated). (Aggarwal, 2008, p.18; see table 1) The employment is expected to rise by 9 times over the same time frame. D. Arun Kumar in another study has shown that employment potential in Software and IT services are much more than that in core engineering and non-technical services. He has also mentioned that at present students are much more interested to become a software engineer rather than a conventional engineer. In tune of the same from 1990 (initiation of globalisation process) to 2003 the engineering degree colleges has experienced a 4 fold increase in numbers and from 1997 to 2003 number of institutions providing MCA degree has increased by around 7 fold; this is a direct effect of globalisation (estimated). (Kumar, 2008, p.57) Table 1 Annual revenue and number of IT professionals employed by Indian IT services Industry Year IT Services Exports Domestic Engineering Services, R&D, Software Products Exports Domestic Total IT Industry (excluding Hardware and BPO sectors) 2001-02 Annual Revenue 4.5 2.1 1.6 0.5 8.7 Number of IT professionals employed 150 160 55 40 405 2003-04 Annual Revenue 7.3 2.7 2.5 0.8 13.3 Number of IT professionals employed 220 190 75 60 545 2005-06 Annual Revenue 13.2 3.9 3.9 1.3 22.3 Number of IT professionals employed 345 250 105 85 785 2007-08* Annual Revenue 23.1 7.9 6.3 2.2 39.5 Number of IT professionals employed 510 400 145 115 1170 2009-10* Annual Revenue 36.7 14.3 10 3.2 64.2 Number of IT professionals employed 720 615 205 135 1675 2011-12* Annual Revenue 54.5 24 15.1 5.1 98.7 Number of IT professionals employed 975 870 280 165 2290 2013-14* Annual Revenue 76.9 37.5 21 6.7 142.1 Number of IT professionals employed 1225 1155 365 200 2945 2015-16* Annual Revenue 101.7 54 27.8 9.6 193.1 Number of IT professionals employed 1490 1485 430 240 3645 Source: Aggarwal, 2008, p.18 (* stands for the forecast figures) Indian IT Sector - A statistical retrospective: It has been previously mentioned that the year of commencement of globalisation in India is determined as 1991 by most scholars. Over the years India became more and more liberated or globalised. This movement from lower lever of globalisation to a higher level of the same and its associated positive impact on IT sector gets well illustrated through the statistical data provided by NASSCOM. The estimated total revenue of the sector is USD 73.1 billion in 2010 and IT software and services segment sum up to USD 63.7 billion in that (Nasscom Strategic Review, 2010, p. 6). The IT software and service sector is mainly outward oriented regarding its final product and that orientation would have been impossible unless India would have gradually embraced globalisation. The IT sector revenue as a percentage of GDP has increased from 1.2% in 1998 to 6.1% in 2010. Its share in Indian export has risen from 4% in 1998 to 26% in 2010. The gross export revenue has been estimated as USD 50.1 billion in 2010 and it has registered a growth of 5.4% over the previous year. Export figure for an industry reflects its level of globalisation. For Indian IT sector 69% of its total revenue comes from export and this figure depicts the globalised nature of this Industry. Globalisation has introduced BPO to the industrial world and for India it’s the fastest growing segment of the IT industry. The BPO segment is expected to grow at a rate of 6% and reach USD12.4 billion in 2010. Such a massive presence of BPO segment portrays the fact that globalisation indeed has influenced the IT sector more than anything else. The BPO earning draws more importance considering the fact that most of its revenue if not total comes from abroad and that contributes to the foreign exchange reserve of the country. Some more encouraging facts revealed through statistics deserve to be discussed and they will further strengthen the growing importance of IT sector at the foreground of globalisation. The sector and its associated employees account for USD 4.2 billion paid to the exchequer. The operating and capital expenditure of the industry is a staggering USD 30 billion this accounts for further investment. The consumer spending effect generating from this sector is measured around USD 30 billion in 2009 and that definitely contributes to the aggregate demand, which is a precondition for increasing output in any economy. IT sector is expected to allocate a total of2.3 million jobs in 2010 and that is an addition of around 90 thousand employees over the previous year. At this time when unemployment is an international burning issue, such prolific figure regarding employment generation deserves attention. That success owes much of its origin to globalisation since much of the job creation in IT comes from external demand boost for IT personnel. (Nasscom Strategic Review, 2010, pp.8-9) PESTEL analysis of Indian IT sector: By far the importance of IT sector in Indian economy and the role of globalisation behind its immense success are quite clear. A PESTEL analysis now would help to perceive the macro environment for this sector. Political: Industrial development is always subject to stable political environment. In India the present government is serving its second term and has always been looked outward. In this process the government has abolished almost all discriminatory protectionist policies and has invested in building up necessary infrastructure to promote IT sector. As an example setting up of a number of software parks all over India has immensely boosted the sector. Furthermore many state governments in India rightly gauged the employment potential of this sector as well as the importance of IT sector as a source of drawing investment both foreign and domestic. That understanding has led them to devote special focus for the development of this sector. As an example Bengaluru or Bangalore in Karnataka has always been an IT hub and the Karnataka government has always provided friendly atmosphere and assistance towards the sector. The same is true for Andhra Pradesh and Salt Lake Sector V in Kolkata, West Bengal. Health Information System Project (HISP) was implemented. (Sahay & Walsham, 2006) Sector V has received better roadway than the rest of the city and many bus routes both public and private much owing to the help of the state government (West Bengal makes rapid strides in industrial development, 2010). Opening up of large number of government backed computer centres has helped people to become computer literate even professional at a much lower cost and that has added to the growing pool of IT professionals resulting in better supply of skilled labours. Economic: As illustrated in the diagram above; Indian GDP (at factor cost) and Industrial Production (at factor cost) have experienced a continuous rise over the past two decades. Share of Industry in GDP has maintained a steady 18% to 21% level (estimated) (Reserve Bank of India, 2009; see Table 2 (appendix)). These figures depict a steady growing stable economy. The following chart will illustrate this: (Reserve Bank of India, 2010) Again with respect to purchasing power parity India is the fourth largest economy of the world. Real average household income has almost increased by twice the amount since 1985 and so as consumption. (Nasscom Strategic Review, 2010) The graduates’ turnover in India has more than doubled in the past decades and in financial year 2010 3.7 million graduates (Nasscom Strategic Review, 2010, p. 7) have been added to the Indian talent pool. Addition of such a huge number of professionals each year creates a continuous supply of skilled labour. Rupee is not that a strong currency and that is a big help for exporters. Rate of inflation is little high in recent times but considering the fact that growth cannot be sustained without inflation; that level can be allowed. All these economic factors make India a dream destination for IT related investments. Social: India is getting younger and by 2050 it will be the youngest nation of the world. Such demographic feature is in favour of India in terms of successive generations of young batch of employees. Indian IT professionals work more than any other nationals in terms of working hours. The professionals are well educated and skilled. They are more productive, efficient and accurate than their UK and USA counterpart. Again jobs have higher status in Indian society. (Nadeem, 2010) Due to its colonial background Indians are better in spoken and written English and it is practised from childhood. This has important bearing while dealing with clients from UK and USA. Computer education is a part of life in India from the very beginning of school and it has made them familiar with the computer from a very early age. Technology: Indian professionals are quite adaptable to new form of technologies and with great assimilative capabilities. Technological development in Indian IT sector started late but as it drove into globalisation; the country picked its pace. Indian consumers are inquisitive about new IT technologies and never averse to try something new. This has also made product launching in India much easy. The sector has realised a 29 times rise in number of patents in three years spanning 2005 to 2008. In an average 1% of the revenue is spent on R&D. (Nasscom Strategic Review, 2010, p. 8) Environment: Industrialization in India is cantered around cities; this is very true for IT sector as well. Cities like Bengaluru, Hyderabad and Kolkata have very high environmental pollution level owing to the increased level of urbanization. Since IT sector is considered as a green sector so it will increase employment, output and infrastructure in those cities without adding to the pollution level. Legal: India is about to relax the foreign direct investment law of the country (Thompson, February 2009) and IT sector that accounts for around 10% of the total FDI India receives is sure to benefit from an increased inflow of foreign fund. (Nasscom Strategic Review, 2010, p. 8) Conclusion: The forecasted growth of world GDP in 2010 and 2011 are 3.1% and 4.2% respectively; that is very much promising after a dampened economic environment in 2009 when it declined by 1.1%. India is a developing country and at the background of globalisation developing nations are growing three times faster than the developed nations. Considering the above fact the scenario looks promising for Indian IT sector. As forecasted by NASSCOM, IT services is expected to grow by 2.4% in 2010 and 4.2% in 2011 and in coming times growth in offshoring will supersede all the other IT sectors. India already enjoys 51% of the total offshoring market and there is till untapped potential. At this current pace Indian IT and BPO revenue will grow to a staggering USD225 billion by 2020 (Nasscom Strategic Review, 2010, pp. 8-9). However certain facts should always be taken into account. Many outsourcing destinations have already developed and might pose challenge to Indian domination in this field in near future. Again too much dependence on outsourcing would expose India to many new kind of vulnerability: flow of work from abroad might stop or change destination; the source country might get into recession. However, the kind of individuality the Indian IT sector is famous for; it is expected it will sustain its growth in that changing environment. References Aggarwal, A. (2008), Emerging Markets: India’s Role in the Globalization of IT, Communications of the ACM, Vol. 51, No. 7, pp. 17-19 Arun-Kumar, D. (2008), Impact of Globalization on Core Engineering Education in India, PGDT, Vol. 7, pp. 55-68 Kamat, S., Mir, A. & Mathew, B. (2004), Producing hi-tech: globalization, the state and migrant subjects, Globalisation, Societies and Education, Vol. 2, No. 1, pp. 6-23 Kauffman, R.J. & A. Kumar (2008), Mapping the Multi-Tiered Impacts on the Growth of IT Industries in India, Information Technology for Development, Vol. 14, No. 3, pp. 225–252 Thompson, J. (2009), India poised to relax laws on foreign direct investment, The Independent, available at: http://www.independent.co.uk/news/business/news/india-poised-to-relax-laws-on-foreign-direct-investment-1624012.html (accessed on August 28, 2010) Nadeem, S. (2006), The uses and abuses of time, Global Networks, Vol. 9, No. 1, pp.20-40 Nasscom Strategic Review, (2010), Executive Summary, available at: http://www.nasscom.in/upload/SR10/ExecutiveSummary.pdf (accessed on August 28, 2010) Reserve Bank of India (2009), Publications: Handbook of Statistics on Indian Economy, available at: http://www.rbi.org.in/scripts/AnnualPublications.aspx?head=Handbook%20of%20Statistics%20on%20Indian%20Economy (accessed on August 28, 2010) Sahay, S. & G. Walsham (2006), Scaling of Health Information Systems in India, Information Technology for Development, Vol. 12, No.3, pp. 185–200 West Bengal makes rapid strides in industrial development (August 25, 2010), Hindu, available at: http://www.hindu.com/2010/08/25/stories/2010082561860800.htm (Accessed on August 28, 2010) Appendix TABLE 2:   Industrial Production (At Factor Cost) GDP at Factor Cost % Share of Industry in GDP 1990-91 214552 1083572 19.80 1991-92 213925 1099072 19.46 1992-93 220880 1158025 19.07 1993-94 237376 1223816 19.40 1994-95 262164 1302076 20.13 1995-96 296664 1396974 21.24 1996-97 320266 1508378 21.23 1997-98 326720 1573263 20.77 1998-99 338369 1678410 20.16 1999-00 350233 1786525 19.60 2000-01 372599 1864301 19.99 2001-02 381366 1972606 19.33 2002-03 407276 2048286 19.88 2003-04 431724 2222758 19.42 2004-05 468451 2388768 19.61 2005-06 506519 2616101 19.36 2006-07 560775 2871120 19.53 2007-08 602032 3129717 19.24 2008-09 617882 3339375 18.50 (Reserve Bank of India, 2010; Table 2&3) Read More