Changing Face Of Indian IT Industry

Positives

Economic impact
As per NASSCOM website it generated $146 billion in revenue in the year 2014-15 while Indian GDP in that period was around $2 trillion. It employs 3.5 m people making it the largest private sector employer. Most of these jobs are white collar jobs resulting in high value addition per job to the economy. Also each direct job results in at least 3 additional jobs. Some of these jobs are blue collar ones e.g. in catering, realty, transport etc exemplifying the trickle down impact on the economy.

One third of the workforce is females and a number which is most likely to increase in future. Though like rest of corporate India, IT industry equates diversity to gender diversity. Till recently it has grown faster than the GDP. A decade back in 2004-05 its estimated turnover was $16.5 billion. So it grew almost 9 times in a decade. As per NASSCOM its exports are estimated to be $ 98 billion in the year 2014-15. As per Exim bank, India's total exports covering both merchandize and services sector were $ 465 billion in the year 2014-15. Hence it accounted for about one fifth of India's total exports

Social impact
After India became independent, universal adult suffrage shifted the ballot power to the lower strata of the population. The upper echelons always have the means to subvert the system to their needs. IT industry triggered a middle class revolution as it significantly increased the buying power of vast sections of masses who came from metros as well as small cities, from middle to lower middle classes and from almost all the states of the country. Its social impact is also visible from the fact the apex body of IT companies i.e. NASSCOM is regularly consulted by the government on various policy matters and its figures are considered to be authoritative. Matrimonial and employment sections in the newspapers have a separate heading for IT professionals and any unfortunate event e.g. accident etc are referred to as " Software/IT professional meets an accident…".

Crimes against IT professional get significant media coverage. Since the Industry has a strong export bias, many IT professional travel to different parts of the world especially developed countries and that is contributing to slow westernization impact on the society especially the metro cities.

International reputation
It is forcing the developed world to notice Indian tech prowess and that is changing the image of India. Many global IT brands have significant number of Indians in their workforce and nowadays Indians are occupying senior most positions in Microsoft, Google, Adobe, Global Foundries, Sandisk etc.

Indian IT companies invest in different countries. For example as per government department UK Trade & Investment (UKTI), India is now the third-largest source of foreign direct investment into the UK and Indian IT industry is a contributor to that. They also hire foreign nationals and that contributes to employment in those nations

Negatives

However this runaway success story also has a few holes

Offshore delivery model
It pioneered the offshore delivery model where much of the work could be done at the centers remote from the parent companies. However this model has been replicated both by Indian companies as well as multinationals in India as well as other countries. That has increased competition and it putting pressure on margins and has blunted the first mover advantage. India faces competition on offshoring from Latin America, Eastern Europe, Eastern Asia and China

Software products
Despite many Indian IT companies now becoming global brands and some of them are also listed in global equity markets, at the core it still remains a low cost alternative for application development and maintenance work. In particular it has been slow to move in software product development space. Its turnover in this area in 2014-15 is estimated to be $6 billion only and less than half of it is exported. True the investments needed in product development are higher. Besides in the fast changing world of technology it is easy to lose market share but this area also brings steady revenue due to product support services. Also it is generally believed that profit margins are higher though that varies from company to company. Globally product oriented companies e.g. Microsoft, Apple, Oracle, SAP etc are bigger brands than pure software services oriented e.g. Cap Gemini, Accenture etc

Hardware
Same applies for hardware including semiconductors. It contributes to less than 10% to the $146 billion kitty and less than $ 1 billion of that is exported. It is worth mentioning the case of East Asian economies here e.g. Malaysia, Taiwan, South Korea and of course China and Japan. These countries make PCs, mobile telephones, printers, LCD/LED displays, memory chips, chip set fabrication etc. Many companies in these countries are global brands in these areas and often at the front edge of the technology curve. Government support in the initial stages was key factor for the growth of hardware sector in East Asian economies. In recent years, Indian government has started taking interest here and many chip manufacturing companies are planning to set up foundries in India

Artificial Intelligence
Slowly and steadily, artificial intelligence is moving from the labs to commercial market place. It has the potential of creating the biggest disruption of all comparable to Industrial Revolution which disrupted agrarian societies and economies and tilted the balance of power to urban centers. The limit of disruptive power of Artificial Intelligence is solely decided by limit of natural intelligence of humans.
The potential and positioning of Indian IT industry in relation to it is important

Potential impact

Robotics
An important application of AI I.e. robots are already used in industry for tasks that need precision e.g. putting chips on boards, hazardous e.g. shifting rods in nuclear reactors or otherwise difficult e.g. painting a car body. Robots are also available for domestic chores e.g. ironing the clothes or cleaning floors or cutting grasses in lawns. But these are expensive to buy and maintain and cannot handle unexpected situations say unbuttoning a shirt or moving out of a pit or negotiating a staircase.

However robotics is now evolving to replace the normal assembly line worker. Japan and China are already factoring this as a solution to the problem of ageing of their population. As per International federation of Robotics, between 2010 and 2014, the average robot sales increase was at 17% per year (CAGR). Robot Density - Number of multipurpose industrial robots per 10,000 persons employed in manufacturing is above 100 in many countries. Asia is the biggest market for industrial robots.

In India the domestic market is negligible and there is no Indian company with ambition of manufacturing robots for exports. India's vast and cheap labour force, powerful trade unions do not allow Government to actively promote robotics. While countries e.g. China are trying to automate as much manufacturing as possible using robots, in India this is a distance thinking. Robotics is not purely IT but a mix of mechanical, chemical, software and hardware engineering. Indian IT industry does not seems to be in position to take advantage of potentially massive market.

Automation
Artificial Intelligence can automate vast sections of IT industry itself. The biggest leap is happening in the areas where software learns by itself. So a testing software can not only point defects but start correcting them after understanding the pattern. Similarly Indian IT industry employs army of people who monitor software, hardware and networks for defects and then rectify them. In the next few years this defect detection as well as correction can be automated.

Various tasks in services sector at managerial level e.g. competence development, appraisals, chase ups can be automated significantly reducing the need of middle level managers. While Indian IT industry has understood the impact of Automation and is gearing towards it, it is still using it to be cost competitive rather taking the leadership position in development of Artificial Intelligence related products and services.

India can be a big gainer here if it starts producing AI related products and services. TCS has created a neuroscience based self-learning platform called Ignio for optimizing and automating IT operations and processes. Infosys has purchased a company called Panaya, a leading provider of automation technology for large scale enterprise software management etc. But much will depend upon the thought leadership of Indian IT captains. It could ride this disruptive wave gaining immensely economically or again go back to low cost model just for the sake of survival

Future

Economic growth
Its future growth is unlikely to exceed 15% which almost equal to nominal GDP growth rate. Hence it will cease to be sunrise industry. This will impact growth of related sectors e.g. reality, catering, transport, domestic help etc. It will still contribute significantly to government tax kitty especially the direct taxes but its share in GDP will grow slowly. As margins and growth rates fall, so will be the market capitalization. Today just 5 companies i.e. TCS, Infosys, Wipro, HCL and Mahindra Satyam account for more than 10% of market capitalization of of whole of BSE listed companies. This ratio will fall

Employment
The pace of employment growth will reduce significantly due to competitive pressures and automation. It was customary to assume that IT companies need 25000 people to generate $1 billion revenue. This number will fall below 15000. Biggest impact will be on middle level managers and freshers. The impact on latter is already resulting in many engineering colleges being closed down.

Middle level managers have to chose between the difficult options of stagnant careers or retraining. For example Wipro wants to reduce work force by one third in 3 years. Share of females will continue to rise and will cross 40% mark and more females will start occupying the senior level positions. They are already occupying pole positions in companies e.g. Cap Gemini, HCL, HP, Intel etc.

Startups
One of remarkable trend in the recent years is the growth of startups. These are small nimble players who can disrupt the established bigger companies and will continue to remain an important part of the ecosystem. They heavily rely on web and mobile based technologies and look like IT companies. The launch of mobile apps and general penetration of net has taken online methods to sections of populations which was technology averse or ignorant say elders or in small towns.

The launch of 4G services and continued broadband penetration will further increase the user base, also helped by increasing participation of females in the workforce. Many of them are enablers for services like day to day shopping, ticketing, car renting, housing, bill payments etc and their employment generation will be more in non IT areas. Others offer technology related services in Artificial Intelligence, Analytics, cloud and other emerging areas. They will provide the technological edge to the IT industry. As of now they are flush with funds.

According to data from YourStory, a media body that covers startups, capital worth $9 billion was invested in Indian startups in 2015, which is equal to the cumulative funding in the 2010-2014 period. Startups have caught the attention of state and central governments who are taking interest in promoting them, one such measure being central government setting a fund of $ 1.5 billion. An important point which is missing is that the low barriers to entry imply that new start-ups are being born almost every day with little product differentiation. After a while the market will consolidate and some startups may die, merge, brought over or convert into bigger companies. Bigger established players will buy technology oriented startups especially dealing with automation. Within IT companies the technical workforce will gain prominence while the managers who were the backbone of the companies tell recently will fade?