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July 14, 2013

The forgotten software boom

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Indias software and information technology-enabled services (ITeS) exports have lost momentum. Since 2007-08 the Reserve Bank of India has been conducting an annual survey of exports of computer software and information technology services. The recently released results of the survey relating to 2011-12 indicates that over the five-year period since 2007-08, though exports of both computer-related services and overall software services have increased, the pace has been lethargic (Chart 1). After recording relatively low rates of growth of 4.6 and 6.3 per cent in 2008-09 and 2009-10, the industry appeared to be recovering its past momentum, with the rate touching 23 per cent in 2011-12. But the growth rate has slumped again to 9 per cent in 2011-12. Even this performance may be an exaggeration. As part of their evolution, Indian software firms have established overseas subsidiaries to deliver their services and execute contracts. To take account of this, the National Association of Software and Service Companies (NASSCOM) reportedly includes the software exports of the overseas subsidiaries of Indian companies in its figures on Indias software export earnings. The resulting NASSCOM figure is used by the RBI as the controlling total when reporting software services exports in its overall balance of payments (BoP) statistics.

To make the BoP and annual export survey figures comparable, the RBI adds on the exports of the overseas subsidiaries of Indian companies to its estimate of the exports of domestic firms. This total is close to, though not exactly equal to, the NASSCOM figure that is used in the balance of payments statistics. This is an advantage since the NASSCOM figures are available for a longer time period. If Indias export performance in software and ITeS is measured using the NASSCOM-BoP figures, the slow down in export growth is even sharper. As Chart 2 shows, the annual rate of growth of software services exports rose from 19 to 38 per cent between 2001-02 and 2004-05, only to decline thereafter to a low of 7.4 per cent in 2009-10. It has since fluctuated in the 6-12 per cent range. The evidence is clearly one of a drastic slowdown. In fact, in the industrys heyday performance was even better. During the period 1990-91 to 2005-06, exports had been growing at 46 per cent per annum or doubling every 19 months. As a result, the ratio of IT services exports to merchandise exports had risen to an estimated 20 per cent in 2004-05. Even allowing for the amplifying effect on growth rates that the low base of the 1990s would have had, this record makes the recent performance extremely poor. Interestingly, there has been little fuss or alarm about the recent tend. Indias software boom seems almost a forgotten story. This loss of software and ITeS export momentum at a time when Indias current account deficit is wide, leading to a weakening of the rupee and uncertainty about the stability of capital flows, is of much significance. If we take the year 2012-13, for example, provisional figures suggest that net invisible receipts (from services, remittances and income from abroad), helped cover as much as 54 per cent of Indias merchandise trade deficit or excess of goods imports over goods exports. Of these invisibles, net software export earnings amounted to as much as 60 per cent. Hence, if the merchandise trade deficit remains high and rises, while software exports stagnate, the impact on the current account deficit, Indias overall balance of payments and the rupee can be damaging. Needless to say, principal among the factors limiting the exports of software and IT-enabled services is Indias dependence on a few developed English-speaking markets. The US, Canada and UK together account for more than three-fourths of those exports. With developed-country GDP growth still sluggish, especially in the US, the Indian IT industry is still experiencing the effects of the crisis. Given the state of countries in Europe, the prognosis is not good. Global growth is likely to take long to fully recover, especially in those countries that supported Indias IT-exports boom. That does mean that the return to the software boom of the late 1990s and the early 200os is unlikely. That is bad for the IT industry. It could be even worse for Indias vulnerable balance of payments situation. Keywords: IT industry, ITeS, NASSCOM, economic slowdown More In: Chandrasekhar | Columns | Business | Economy | Opinion | Economy Watch 7 Ads by Google 34% Off Books at Indigo Summer Book Savings at Chapters Indigo. Free Shipping over $25! Chapters.Indigo.ca/Summer-Reading

Comments(5) Recommended Post a comment In the context of BOP we have to agree that IT has lost its boom due to its lack of quality. Some 1 or 2 company's provide the best services whereas majority dont practice the core programming area. This is the main reason for the decrease in forex from IT sector. When it comes to ITeS, India provides only teleprocess & not decision making. Countries who require to keep their customers satisfied (somewhat) transfer their basic work to India & decision making is held by their company in their place. This means India is just to pacify the customers by talking to them which is very easy & cost is very cheap. Now countries such as US, UK & others have found Philippines as cheaper than India so they have gone there. Now India has to grow in production & not processing. India is a self reliant country which can produce & reproduce the same within our nation. Deficit is due to the decline of production. from: Shankar Posted on: Jul 15, 2013 at 12:25 IST Improving India's manufacturing capability is the long term solution to India's troubling BOP and CAD situation. Learn from China on how to set up mass manufacturing capability and use to to export to other countries. Manufacturing would also produce the factory jobs that are so urgently needed for the burgeoning youth population of the country. from: Suvojit Dutta Posted on: Jul 14, 2013 at 21:41 IST The software industry has no doubt created large number of jobs directly and positive spin-offs indirectly for other industries such as real estate, service sector and transport. But ultimately it has been around for more than two decades and should have grown out of the dependency on Government tax doles. It seems to be over-dependent on the lower labour cost factor. Until and unless it moves out of its comfort zone and moves up the value chain, we will continue to see lower growth rates and stiff competition from other low cost countries. Unfortunately, We do not seem to be creating enough new things, instead we seem to be satisfied to be parasites on what others have created. The other sad aspect is that the bigger companies seem to be eating into each other's pie rather than try to expand the market. from: Shivram Posted on: Jul 14, 2013 at 20:31 IST In fact, there never was a boom in Software. We speak exports performance in terms of rupees and sometimes in dollars. Due to change in the government in May 2004 and its policy paralysis, software

industry was compelled to pay MAT starting from 15% in 2007-08 and ended with 18.50% during 2010-11. Thats how government of the day diluted STPI/100% EOU schemes and eliminated tax breaks on exports with a sunset clause date 31st March 2011 without scrapping the STP scheme. The government did not understand that ideas and innovations trickle from SMEs. Moreover 90% of the software units have been providing services and not developed product(s) of their own there by earning a label cyber coolies. SEZ 2005 Act was passed.It's a big flop, except in few places. SMEs can not move into SEZs due to reasons more than one. One would have loved to see an integrated scheme on software and hardware instead of SEZs. We lost edge in hardware also. Employment generation in software is bleak. from: L.A.Pramod Posted on: Jul 14, 2013 at 20:25 IST The software industry desperately needs the Government's support but it got nothing. Scrapping of the STPI scheme was an example of the Government's indifference which significantly hurt SME software businesses. from: Eshwar Posted on: Jul 14, 2013 at 14:38 IST

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