U.S. slowdown may not impact Indian software prospects - Mehta

The U.S. slowdown will not have any impact on the Indian software industry. A marginal slowdown in the U.S. economy will force U.S. industries in their cost cutting efforts to increase outsourcing their IT needs and this will in turn increase orders for Indian software exporting companies. Already, more U.S. companies are showing interest in the Indian software industry, says

Mr. Dewang Mehta, President of the National Association for Software and Services Companies, in an interview with N. N. Sachitanand on the eve of Nasscom's annual conference in Mumbai on February 7. Excerpts:

QUESTION: What revenue and growth rate in the domestic and export areas do you expect for the Indian software industry in the current year (2000-01). How do they compare with the performance last year?

ANSWER: In the current year we expect revenue from software exports to gross Rs. 28,500 crores ($6.24 billion). The domestic market in is expected to be Rs. 9,500 crores ($2.1 billion). In 1999-2000, software exports were Rs. 17,150 crores ($4 billion) and the domestic market Rs. 7,200 crores ($1.7 billion). In other words, software exports are expected to grow by 55 per cent in dollar terms and more than 60 per cent in rupee terms.

Impact of U.S. slowdown

What is the Nasscom view about the impact of the U.S. slowdown in IT spending on the Indian software industry? Mr. John Chambers, CEO of Cisco, was a bit pessimistic about this during his recent visit to India. Can we still expect to attain the target of $50 billion in software exports by 2008?

We feel that the U.S. slowdown will not have any impact on the Indian software industry. One of the magic mantras for cutting IT expenditure and improving cost effectiveness (as announced by the U.S. IT industry) is outsourcing. Indian software exports thrive on outsourcing, therefore a logical conclusion is that a marginal slowdown in the U.S. economy, which happens to be India's largest trading partner, can increase outsourcing and in turn increase orders for Indian software exporting companies. In the last few weeks, more U.S. companies are showing interest in the Indian software industry.

We believe that next year (2001-02) it can increase to $9.5 billion. The U.S. takes 60 per cent of our exports and we are confident that we will continue to do well.

The increased interest of European countries (like Germany, Norway, France, Italy and Hungary) in the Indian software industry is expected to improve India's cooperation in the IT sector with Europe. Besides, countries like Japan, China and Australia have expressed their desire to enhance IT trade with India. In addition, there is continued shortage of IT professionals in the U.S. and in survey by ITAA, it was pointed out that the U.S. now requires three lakh IT professionals. Shortage of IT professionals is being faced by other countries as well like Germany, Japan, the U.K., France and Hungary, which have expressed their desire for Indian knowledge workers. Therefore, India will continue to do well in onsite services also.

India has been smart to take on IT enabled services as another growth opportunity. Experts believe that outsourcing of IT enabled services again reduces expenditure in companies and therefore a major U.S. slowdown would only increase the outsourcing of IT enabled services.

Demand for IT professionals

A recent International Labour Organisation (ILO) report suggests that the growth in employment in our software industry may run out of steam in the next few years. But the Nasscom has been predicting a phenomenal growth in demand for software professionals throughout this decade. Why is there this difference in perception?

The Nasscom-McKinsey 1999 report clearly states that we may require 2.2 million IT professionals by 2008. The detailed break up is as follows: (workforce with years in brackets) 90,000 (2001); 115,000 (2002); 150,000 (2003); 195,000 (2004); 250,000 (2005); 300,000 (2006); 340,000 (2007); and 370,000 (2008). We don't expect any slowdown in demand for IT professionals.

Although the gross software exports are impressive, the net exports are almost 50 per cent less. Why is this so?

I don't agree that the net figures are 50 per cent less. On the contrary, the net foreign exchange earnings have also grown by almost 50 per cent during the year 2000.

During the last few years, the Nasscom has been maintaining that the Indian software industry is climbing up the value chain. But, the fact is that the rates fetched by the bulk of the industry from foreign clients are still mired in the region of $15 to $30 per man-hour. There has also been very little attempt to enter the global product market. When is this scenario likely to change and what can bring about this?

Moving up the value chain does not only mean getting into the product market. It also means providing more sophisticated services. According to the U.S. Ambassador to India, Mr. H. E. Richard Celeste, last year 266 of the Fortune 1000 companies outsourced their mission critical operations to India. This clearly indicates a moving up in the value chain. However, we do believe that in the next five years at least 20 worldclass software products would come out of India.

Potential in IT-enabled services

The Nasscom has been claiming that there is great potential for India to grab a big share of the global IT-enabled services market such as call centres and medical transcription due to availability of a large number of educated youth familiar with English at fairly low wage rates. Can China, where English education is being taken up on a war footing, snatch away much of this business from India? What about the obsolescence of such services due to rapid advances in voice recognition systems and computer telephony?

In the IT-enabled services, one has to constantly evolve. If voice recognition becomes more helpful then medical transcription work would also have to evolve. Your comparison of China is interesting but let me tell you that it is not only important to speak English but one has to think also in English. Even in IT- enabled services, we will have to move up the value chain. We expect to earn $18 billion of annual revenue in IT-enabled services by 2008.

So far, the Indian software industry was concentrating on the export market as domestic demand was constrained by lack of connectivity. Now that telecom service providers are rapidly laying down the connectivity infrastructure and computerisation is becoming widespread within the country, do you expect the industry to shift its focus to the domestic arena ? How will this impact the growth of exports in the coming years?

There is no need to shift the focus. More and more software companies are joining the bandwagon. Some will concentrate on the domestic market, some will concentrate on exports and some will do both. In the coming years, due to better connectivity, the domestic market is expected to grow faster including more opportunities in e-governance and the SOHO market.

Dotcom bubble and its impact

What is the extent of damage caused to the Indian software industry by the bursting of the dotcom bubble in the U.S.?

The damage to the Indian software exports industry is marginal as far as the dotcom bubble burst in the U.S. is concerned. No doubt, some companies have been hit, but over all the industry average has not been hit. Majority of Indian companies provide solutions to brick and mortar companies of the U.S.. Undoubtdely, the dotcom burst did affect the valuations.

There was a lot of hype built up in the last couple of years about Net commerce. But B2C has had a cold start and even B2B in this country is marginal to overall commerce. How will this impact our software industry?

I think there has been a slower start in e-commerce in India than earlier expectations. We expect e-commerce transactions in India in 2000-01 to reach about Rs. 2,300 crores. Next year it can jump to Rs. 7,500 crores provided the IT penetration increases. We need quick implementation of the IT Act; more telecom penetration for e-commerce transactions to increase. Moreover all our expectations were perhaps wrong in this sector.

There is now a lot of talk about the tremendous opportunities for India in the area of bio-informatics? Is our software industry really prepared for a major foray in this sector? What needs to be done to capitalise on this opportunity?

I think that there is a great opportunity in bio-informatics. The Nasscom is seriously considering formation of a taskforce, which can look at this opportunity. Already many companies have sprung up in this sector. I think we need to have a clear-cut strategy in this direction.

Looking ahead, where do you see the growth areas for the software industry and what are the constraints that are still to be removed?

The growth in exports would be in communications software, ASP embedded software, wireless Internet, e-banking, e-CRM and e- commerce solutions. The two main constraints are lack of physical and telecom infrastructure and non-availability of adequate quality knowledge workers. Also, lack of adequate IT penetration is a constraint.

The Union Government has in the last one year come out with several pieces of legislation to boost the IT industry. From the software industry angle, which other measures do you want the Government to take?

We just want status quo as far as legislations are concerned. We do not want any more incentives; nor do we want withdrawal of any: A few things such as PSTN connectivity to leased lines; removal of physical bonding at STPs/EOUs/EPZs and clarifications in Sec. 10A/10B of Income-tax Act are still required.

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