Futures 67 (2015) 1121

Contents lists available at ScienceDirect

Futures
journal homepage: www.elsevier.com/locate/futures

Indian IT outsourcing industry: Future threats and

challenges A reassessment
Sankalpa Bhattacharjee a,*, Debkumar Chakrabarti b,1
a
b

T. A. Pai Management Institute (TAPMI), Post Bag No. 9, Manipal, Karnataka 576104, India
Department of Economics, Ramakrishna Mission Vidyamandira, Belur Math, Howrah 711202, West Bengal, India

A R T I C L E I N F O

A B S T R A C T

Article history:
Available online 14 February 2015

A recent paper has argued that the future of the Indian IT outsourcing industry is uncertain.
This uncertainty emanates from paucity of quality manpower, inability of the industry to
move up the value-chain, underdeveloped state of the domestic market and unpreparedness of the industry for disruptive technologies. These factors may erode the competitive
advantage of the industry and inhibit the growth momentum. This paper is an attempt to
reassess the ndings considering a longer time horizon, encapsulating a broader set of
information and supporting evidences from literature. Our ndings suggest that the
exponential growth the industry has exhibited over the years has not shown any
signicant reversals in recent times. Further, reassessment of the concerns outlined earlier
makes it a bit difcult to believe that the industry is likely to face any serious threats and
challenges in the foreseeable future. Instead, our ndings suggest that the future of the
Indian IT outsourcing industry is not that uncertain, and in all probability the industry
would retain its competitive standing in the global market and make promising strides
ahead.
2015 Elsevier Ltd. All rights reserved.

Keywords:
India
IT industry
Outsourcing
Sustainability

1. Introduction
In a recent paper concerning the Indian IT outsourcing industry, Sharma (2014) highlighted certain threats and challenges
the industry is likely to face in the foreseeable future. Identifying such threats and challenges by industry experts have often
proved useful to the concerned industries, enabling them to undertake proper and timely actions. However, to our
understanding, the inferences drawn in the paper appears to be over reactive that warrants proper scrutiny before making
any meaningful conjectures about the future of the industry. This paper is an endeavour in that direction.
We have several reservations regarding the views expressed by Sharma (2014) that necessitated a reassessment of the
entire issue altogether with a view to provide a pragmatic outlook for the industry. It would be instructive to mention our
reservations at the outset before investigating the specic threats and challenges identied by Sharma (2014). First, it is not
prudent to use specic examples and generalise it for the entire industry. The case in point is the delayed hiring of HCL that

* Corresponding author. Tel.: +91 94825 49941.

E-mail addresses: sankalpa.bhattacharjee@gmail.com, sankalpa@tapmi.edu.in (S. Bhattacharjee), debkchak@yahoo.com (D. Chakrabarti).
URL: http://www.tapmi.edu.in/, http://vidyamandira.ac.in/
1
Tel.: +91 99037 00709.
http://dx.doi.org/10.1016/j.futures.2014.12.014
0016-3287/ 2015 Elsevier Ltd. All rights reserved.

12

S. Bhattacharjee, D. Chakrabarti / Futures 67 (2015) 1121

the author mentions at the outset. Like other industries, the IT industry also undergoes certain ebbs and ows. This, along
with the impact of the slowdown in the global economic activity following the subprime crisis and the exponential growth of
engineering graduates may have resulted into such temporary mismatches. However, there are ample evidences to believe
that the IT industry has the capacity to cope up with such challenges. Second, citing declining year-on-year growth rates for
two standalone years (FY2007 and FY2014P) does not necessarily imply that the growth rates overall has been declining. A
more meaningful reection of the growth rates would be obtained if we consider a longer time horizon and compute the
trend, instead of year-on-year growth rates. In our analysis, we nd that an exponential trend ts the data better and there is
no reason to believe that the growth rates are declining and thereby the competitive advantages are eroding. Third, we
observe that Sharma (2014) has made the entire issue a bit obscure by confusing overall development of the economy with
the development of the IT industry in particular. The case we are referring to is the utilisation of the demographic dividend,
an issue which is contingent on the development of the entire economy, not the IT sector alone. In a nutshell, selective
identication of certain issues in isolation and generalising it for the entire industry has resulted in a lot of subjectivity in
drawing inferences.
Given this backdrop, we address the specic concerns identied by Sharma (2014) that in his opinion renders an
uncertain future for the Indian IT industry. These include (i) paucity of quality manpower; (ii) inability of the industry to
move up the value-chain; (iii) underdeveloped state of the domestic market; and (iv) unpreparedness of the industry for
disruptive technologies.
Following Sharma (2014), we structure our paper on similar lines with a view to highlight our areas of difference and
thereby justify our claim. Section 2 outlines the journey that the industry has traversed till date. In Section 3, we address the
four concerns outlined by Sharma (2014) with a view to ascertain whether or not the growth momentum will sustain.
Section 4 summarises and concludes.
2. The journey till now
We are in agreement with Sharma (2014) that in order to predict the future, it becomes imperative to look at the past.
However, unlike Sharma (2014), we consider a longer time horizon and map the progression of the industry with greater
specicity in investigating how the industry responded to the challenges that surfaced and how it leveraged on the
opportunities that cropped up in order to predict the future more accurately. This is critical for an industry that is ever
evolving.
The journey of the Indian IT sector may be best described as a roller-coaster ride. From its humble beginnings in 1955 with
the installation of the rst computer at ISI Calcutta, the industry has steadily moved up the value-chain to emerge as the most
favoured outsourcing destination with a market share of 55% in the global outsourcing pie in FY2013. In a visibly uncertain
environment as evident from the modest growth of the global sourcing market at US$ 1112 billion in 2013, the sector alone
accounted for 90% of this incremental growth. The industrys contribution to GDP increased from 1.2% in FY1998 to an
estimated 8.1% in FY2014 (Fig. 1). The industry also happens to be the largest employer in the private sector providing direct
employment opportunities to 3.1 million people and indirect employment opportunities to an additional 10 million
(NASSCOM, 2014).
This unprecedented success of a technology-intensive industry like IT from a developing economy like India is indeed
intriguing, considering Indias mediocre record of success in most other industries. Till the mid-1960s, the industry

Fig. 1. Performance of the Indian IT sector.

Source: Compiled from NASSCOM (2004, 20092014).

S. Bhattacharjee, D. Chakrabarti / Futures 67 (2015) 1121

13

witnessed complete domination of multinationals like IBM and ICL. In the formative years, the usage of IT was conned to
government and academic institutions, who relied partly on imported software that was bundled with computers and partly
on software developed in-house. Gradually, by the 1970s, with increasing number of commercial organisations embracing
IT, software development was delegated outside the user organisations that created the domestic market for software
development. On the hardware front, indigenous manufacturers started developing operating systems, compilers and
application packages (Heeks, 1996). The infant hardware industry was protected by high tariff barriers for achieving selfreliance in hardware capabilities through import substitution (Athreye, 2005; Khanna & Palepu, 2004). However, this import
substitution led industrialisation policy did not yield the desired results as it not only insulated the economy from the rest of
the world, but also inhibited entrepreneurship and innovation (Parthasarathy, 2004). To streamline the import process, the
government allowed hardware imports in exchange for software exports. Tata Consultancy Services (TCS) was the rst rm
that secured permission to import hardware in exchange for software exports. This happened in 1974 and the software
export industry was thus born. For fullling the export obligations, TCS formed an alliance with American hardware
company Burroughs Corporation. Being the largest IT player in the country, TCS continues to enjoy this rst mover advantage
even today. Following the footsteps of TCS, many other rms ventured into software development, albeit limited success
(Heeks, 1996; Parthasarathy, 2004).
The departure of IBM in June 1978 in protest against the FERA norms gave a major llip to the gradually evolving industry
in at least two ways. First, it allowed other hardware manufacturers (notably Boroughs and ICL) to penetrate the Indian
market and ll the void created by IBMs departure. As a result, Indian software professionals got exposure to a variety of
platforms, notably UNIX. Second, it rendered 1200 of its ex-employees jobless and they responded by setting up small
software companies to service the former IBM clients (Athreye, 2005; Khanna & Palepu, 2004; Parthasarathy, 2004, 2006).2
The period 19761978 witnessed the peak of government control over the industry (Heeks, 1996) which adversely
affected its growth. Restrictive measures such as import restrictions on hardware, high customs duties, MRTP regulations,
control of foreign currency availability etc. not only inhibited exports (which was roughly one-third of the industry earnings)
but also gave birth to the much derided body-shopping wherein Indian software professionals were taken abroad to the
clients site to execute the project (Athreye, 2005; Khanna & Palepu, 2004; Parthasarathy, 2006). Nevertheless, this bodyshopping has had a positive bearing on the evolution of the industry in at least three ways. First, it resulted in enormous
brain drain that gradually strengthened the diaspora in the Silicon Valley. Second, it gave the Indian software professionals
the much needed international exposure as they got an opportunity to work alongside their more advanced counterparts in
the West. Third, it helped the industry in building reputation and fortify the relationship with the clients.
The IT industry received a major boost in the mid-1980s with the advent of personal and networked computers as
computerisation spread in the US and Europe. This migration from mainframe to networked systems created huge demand
for customised software development (Athreye, 2005). This demand was primarily met through outsourcing and India was
the obvious destination, given its cost arbitrage and quality considerations. This outsourcing not only fortied the growth of
this nascent industry but also marked a gradual switchover from the much derided body-shopping to offshore software
development practices. It is important to note that this outsourcing of IT that started in the early 1990s has now become an
integral of contemporary globalisation (Aranya, 2008).
Alongside, there were some favourable developments. On the policy front, the New Computer Policy of 1986 was
formulated that envisaged development of indigenous hardware capabilities for promoting software development.
Hardware imports were de-licensed and was made duty free for exporters, which drastically reduced the price of imported
hardware. The lower price of imported hardware coincided with the worldwide crash in hardware prices. This reduced startup costs and boosted entrepreneurship (Athreye, 2005). Further, the industry body NASSCOM was formed in 1988 and
thereafter the Software Technology Parks (STPs) were set up in 1990. While NASSCOM has been instrumental in fostering the
development of the industry, the STPs by providing infrastructural facilities and high-speed data communication links
among others enabled offshore provisioning of services (Parthasarathy, 2006). The formation of STPs and consequent shift
towards offshore provisioning services manifested itself in changing the trajectory of exports from a linear to an exponential
trend in FY1993 (Parthasarathy, 2004).
The liberalisation of the economy following the Balance of Payments (BOP) crisis in mid-1991 led to a number of policy
initiatives that created an environment conducive to the development of the industry. This attracted multinationals for
setting up their Offshore Development Centres (ODCs) in India (Parthasarathy, 2010; Sarma & Krishna, 2010). The domestic
players were quick to realise the benets of ODCs and served the MNCs from their own centres in India at a xed price
(Athreye, 2005).
The new millennium witnessed the emergence the Y2K problem, dotcom crash and recession in the US economy. These
developments while on one hand lowered the demand for software and services, ensured large scale outsourcing (Athreye,
2005) which proved to be a boon for the Indian IT sector in at least two ways. First, it manifested in growing size of
outsourcing deals and growing offshore component of revenues (Athreye, 2005). Second, it resulted in reverse migration of
a number of jobs to India on account of new growth and employment opportunities. This reverse migration has had far

2
It is important to note that Computer Maintenance Company (CMC) was formed in 1975 primarily with ex-IBM employees for servicing the IBM
computers (Parthasarathy, 2004).

S. Bhattacharjee, D. Chakrabarti / Futures 67 (2015) 1121

14

reaching effects in fortifying social and physical infrastructure locally on one hand and strengthening transnational linkages
on the other (Chacko, 2007).
Thereafter, the industry continued to make steady progress, with diversication across various domains like insurance,
nance, transportation etc. (Athreye, 2005) and turnkey projects (Parthasarathy, 2006). This trend continues even today,
notwithstanding the outbreak of subprime crisis in 2008 that engulfed major industrialised nations (notably US, Indias
major trading partner). India continues to retain its leadership in offshore outsourcing (Table 1) driven by continuous
innovation, newer business models, adapting to disruptive technologies, enhanced utilisation and productivity of the
workforce; maintaining price levels; and geographical diversication (NASSCOM, 2011b, 2012, 2014).
The industry that evolved comprises over 16,000 rms, of which around 3000 are into product development (NASSCOM,
2014). The structure of the industry remains pyramidal, with only few rms at the top (Table 2). Alongside, there are a large
number of SMEs that not only enhance the plethora of offerings but also provide ample employment opportunities. While
the bigger players offer services that encompass the entire value-chain of IT, the SMEs specialise in niche services
(Bhattacharjee, 2012). In effect, the industry remains highly competitive, retaining its position as the most favoured
outsourcing destination.
The industry has been dominated by IT services which accounts for over 50% of the earnings. Software product offerings
have gradually picked up and its share in industry earnings have steadily picked up from 8.4% in FY2000 to an estimated
15.1% in FY2014. The ITeS-BPO offerings also witnessed a rise from 7.2% to 19.6% during the same period. The hardware
segment primarily caters to the domestic market and its share in the industry earnings have declined from 29.4% in FY2000
to an estimated 11.1% in FY2014 (Fig. 2).
A closer look at the offerings of the IT services exports reveals that while Custom Application Development and
Management (CADM) continues to be the frontrunner, higher-end offerings like IT consulting, software testing, offshore
product development are gradually gaining momentum (Table 3). This testies the transformation of the industry from
being a service provider to a solution provider. In effect, the role of the industry has witnessed a paradigm shift from being
a vendor to a partner, helping clients in enhancing their topline growth and operational efciencies (NASSCOM, 2014).

Table 1
Top outsourcing countries.
Overall rank

Country

Overall outsourcing
index

Cost competitiveness
index

Resources & skills

index

Business & economic

environment index

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35

India
Indonesia
Estonia
Singapore
Bulgaria
China
Philippines
Lithuania
Thailand
Malaysia
Chile
Egypt
Jordan
Czech Republic
Hungary
Poland
Argentina
Latvia
Sri Lanka
Vietnam
Costa Rica
Mexico
Jamaica
Romania
Russia
Ukraine
Ghana
Israel
South Africa
Kenya
Canada
Panama
Senegal
Pakistan
United States

7.1
6.7
6.6
6.5
6.4
6.4
6.3
5.9
5.9
5.8
5.7
5.7
5.7
5.6
5.6
5.6
5.4
5.4
5.4
5.4
5.3
5.3
5.2
5.2
5.2
5
4.9
4.7
4.6
4.5
4.4
4.4
4.3
4.2
4.2

8.3
8.6
7.5
6.4
8.8
7
9
7
8.2
7.9
7.2
9
7.6
6.9
6.9
6.8
7.5
7
8.3
7.4
7.3
6.9
6.2
6.8
6.4
6.3
7.5
3.8
6.9
6.7
2.5
5.8
7.1
6.6
1.7

6
4.3
5.2
5.7
2.9
5.6
2.8
3.9
2.3
2.2
3
0.9
2.7
3.2
3.4
3.6
2.5
2.7
1.2
2.5
2.3
2.8
3.7
2.7
3.4
3.2
0.9
5.5
0.6
1.3
6.3
1.9
0.2
0.8
6.9

4.2
4.4
6.9
9.4
5.2
5.6
3.9
6.5
5.9
6.9
6.9
4.3
5.7
6.5
6.3
5.5
4.4
5.6
4.3
4.5
4.8
5.3
4.7
5.2
4.7
3.8
4.3
7
6.3
3.6
8.3
5.6
3.3
3.1
8.3

Source: SourcingLine (2011).

Note. Extracted from https://clutch.co/top-outsourcing-countries. Accessed on October 20, 2014.

S. Bhattacharjee, D. Chakrabarti / Futures 67 (2015) 1121

15

Table 2
Structure of the Indian IT industry (FY2013).
Category
Large sized

Mid-sized

Emerging

Small/start ups

Number of
players

Share of exports revenue

Share of employment Remarks

11 >40%
3538%
Annual revenues: >US$ 1 billion
120150 3540%
Annual revenues:
US$ 100 million1 billion
10001200 910%
Annual revenues:
US$ 10100 million

15,000 910%
Annual revenues:
 US$ 10 million

Fully integrated Indian and MNC third party players with

presence in over 60 countries.

2830%

Mid-tier Indian IT and MNC rms offering multiple services

across multiple verticals with presence in over 30 countries.

1520%

Primarily Indian third party vendors (TPVs) offering full

spectrum of services with specialisation in ER&D and
niche IT services. In addition, they have dedicated GICs
offering IT/BPO/ER&D services.

1518%

Smaller rms focusing on niche in services and verticals.

Source: Adapted and compiled from NASSCOM (2013, 2014).

Note. GIC: Global In-house Centre; ER&D: Engineering Services and Research and Development.

The journey that the industry has traversed since its formative years as presented above testies how the industry
overcame the challenges that surfaced and leveraged on the opportunities that cropped up so as to transform itself from
being a vendor to a partner. Considering such a radical transformation, it may not be prudent to consider any short-term
slowdown as a precursor to any large threat to the industry as argued by Sharma (2014) for at least two reasons. First, it is
always advisable to consider a longer time horizon for making any growth forecasts rather than stray incidences of lower
growth witnessed in one or two years and deducing inferences. Our analysis shows that an exponential equation provided a
better t to the performance of the industry (Fig. 1). It is interesting to note that this exponential growth the industry has
been witnessing since FY1993 with the commissioning of the rst earth stations at STPs in Bangalore and Hyderabad
(Parthasarathy, 2004). Second, even if we ignore this exponential growth for the time being and focus on the slowdown
witnessed in FY2007 and FY2014P as mentioned by Sharma (2014), it is evident from our analysis (Figs. 1 and 2) that this
slowdown may, to a large extent, be owed to the base effect (a view also expressed by Sharma (2014)) and hence may not be
as alarming as Sharma (2014) postulates.
Sharma (2014) also expressed serious concerns about the reduction in the share of the BPO outsourcing market from (45%
in 200534% in 2010) to countries like China, Vietnam and Philippines. However, he ignored that during the same period,
Indias share in the global IT services outsourcing market increased from 52% to 70% mentioned in the same page of the report
(DIT, 2012, p. 5). Further, he also overlooked the fact that India continues to retain its leadership (notwithstanding the advent
of various low-cost destinations that he has mentioned) in the global sourcing pie with a market share of 55% in 2013, which
stood at 49% in 2005 (DIT, 2012; NASSCOM, 2014). As a result, Indias declining share in the BPO outsourcing market is not at
all a matter of concern, but something worth cherishing as it is more than compensated by (a) Indias increasing market share
in the overall outsourcing pie; and (b) Indias increasing market share in the IT services outsourcing space which is much
more skill intensive as compared to the BPO services (Coward, 2002). In fact, these developments wherein services that are
higher up on the value-chain (IT services) are increasing at the cost of the ones that are lower (BPO services) are welcome
changes signifying that the industry is steadily moving up the value-chain.

Fig. 2. Segmental break-up of earnings.

Source: Compiled from NASSCOM (2004, 20092014).

16

S. Bhattacharjee, D. Chakrabarti / Futures 67 (2015) 1121

Table 3
IT services exports.
Offerings
Project based
IT consulting
Systems integration
Custom application development
Network consulting and integration
Software testing
Outsourcing
Application management
IS outsourcing
Offshore product development (OSPD)
Others (SOA & web services +
E-business/E-commerce)
Support and training
Software deployment and support
Hardware deployment and support
IT education and training
IT services exports

FY2006

FY2007

FY2008

FY2009

FY2010

FY2011

FY2012

FY2013

FY2014E

7708
348
374
5923
167
896
4364
1589
840

9440
500
500
7000
200
1240
5950
2100
1620

11,610
650
680
8500
280
1500
8793
3100
3293

1935

2230

2400

13,326
737
778
9728
320
1763
11,329
3677
3930
900
2822

13,973
764
808
10,214
332
1855
12,141
3879
4346
936
2980

17,086
950
1006
12,441
398
2291
14,899
4725
5476
1063
3635

20,353
1104
1182
14,848
464
2755
17,824
5645
6580
1249
4350

22,299
1180
1264
16,208
493
3154
19,894
6142
7600
1367
4785

25,430
1351
1429
18,380
548
3722
22,903
6965
9006
1506
5426

1233
986
80
167
13,305

1660
1330
100
230
17,050

1800
1440
110
250
22,203

2045
1633
126
286
26,700

2113
1687
130
296
28,227

2556
2041
157
358
34,541

2962
2365
182
415
41,139

3223
2573
198
452
45,416

3583
2861
220
502
51,916

Source: Compiled from NASSCOM (2004, 20092014).

Note. All gures in US$ million.

3. Will the growth momentum sustain?

Sharma (2014) opines that the future of the IT industry rests on three key factors, namely (i) availability of quality
manpower; (ii) capability of the industry to move up the value-chain; (iii) growth of the domestic market. He argues that on all
these three fronts, the future seems to be uncertain and is concerned about the sustainability of the industry. In addition, he
also argues that the industry is also not well prepared for disruptive technologies that may inhibit the growth momentum. In
contrast to Sharma (2014), we opine that the growth momentum is likely to sustain in future. We outline our areas of
difference along the same factors identied by Sharma (2014) with a view to justify our claim.
3.1. Availability of quality manpower
Notwithstanding the abundance of software technology and tools, software development continues to be labourintensive, with relatively less usage of capital. As a result, it automatically qualies itself to suit the resource endowments in
India that has abundance of quality manpower and relative scarcity of physical infrastructure and nancial capital (Arora &
Athreye, 2002). Not surprisingly, the abundance of quality manpower at an affordable cost was instrumental in attracting
outsourcing work to India. This outsourcing of activities not only laid the foundation of the initial growth of the industry
(Arora & Athreye, 2002), but also catapulted India to the most favoured outsourcing destination in present times.
Indias excellence in quality education is an outcome of her long-standing investment in technical education since the
initiation of planning with the setting up of IITs NITs, IIMs etc. This has been ably complemented by a host of private
education and training institutes since the early 1990s, when the IT revolution started to gather momentum. The number of
educational institutes offering higher education increased from 6000 in FY1991 to 21,000 in FY2008 (NASSCOM, 2010).
Presently, the Indian education sector comprises around 389 universities, 14,169 colleges and 1500 research institutions
(NASSCOM, 2013, 2014). As a consequence, Indias graduate outturn more than doubled in the past decade reaching an
estimated 5.34 million in FY2014 (NASSCOM, 2014). Presently, India has the worlds second largest English speaking
population at 72 million, largest employable graduates and second highest number of engineering graduates, after China
(NASSCOM, 2010, 2014).
Sharma (2014) asserts that this growing outturn of graduates is a matter of great concern as it has dented quality on two
fronts: (a) soft skills, like prociency in English; and (b) engineering skills. This would inevitably lead to diminishing
employability and create a wedge between demand and supply, causing talent bottleneck. It seems to us that drawing
inferences from a sample of 55,000 engineering students in 2011 that comprised less 8% of the total engineering graduate
outturn that year (NASSCOM, 2012, 2013) and generalising it for the entire population is not apt. These issues have to be
addressed from a broader perspective in order to assess the extent of concern it deserves.
First, with regards to the issue of soft skills like prociency in English, given the earlier mode of education wherein most
part of the academic life of the students were spent in studying in their local languages, it seems quite unlikely that the entry
level students of the earlier era would, on an average, have performed better than the current generation of students at their
corresponding entry levels. In other words, prociency in English seems not to have deteriorated over time as argued by
Sharma (2014). On the contrary, language prociency in English seems to have increased with English gradually being
embraced as the predominant language used in Indias medium and large enterprises, government institutions and almost
all education at the university level. An obvious indication of this is that 99% of all computer users in India use the English
edition of Windows. The remaining 1% use Indian languages (Javalgi, Joseph, Granot, & Gross, 2013).

S. Bhattacharjee, D. Chakrabarti / Futures 67 (2015) 1121

17

Second, with regards to the specic tests regarding engineering skills as mentioned by Sharma (2014), it needs to be
mentioned that while evaluating the results, it should also be taken into account that these students have also passed their
engineering exams that demand a level of skill much higher than simple multiplication and division of fractions. Evidence
suggests that on the contrary, quality of mathematics and science education in India is better even when compared to the
developed nations like US, while overall quality of education exceeds BRIC average, notwithstanding the lower levels of
enrolment in tertiary education and lower levels of internet access in schools (NASSCOM, 2010).
Thus, Sharma (2014)s concerns with regards to the growing outturn of graduates are unfounded. On the contrary, this
growing outturn of graduates is an indication of the widening educational opportunities presently available in India that
ensures that India is unlikely to face any talent crunch in the foreseeable future (Joshi & Mudigonda, 2008) as Sharma (2014)
asserts.
In addition to the growing reservoir of professionals, what is even more important is the attributes of the workforce (other
than English language prociency and computing skills) that Sharma (2014) has completely overlooked. These include
readily adaptable nature, experience in western business practices, exposure to frontier technologies that few of its
competitors can imitate (Joshi & Mudigonda, 2008). The diversity of the workforce comprising domain experts like lawyers,
doctors and chartered accountants is also worth noting (NASSCOM, 2014). The number, quality and diversity of the
workforce is adequately complemented by the demographic prole of the working population. Almost 3/4th of the
workforce are below the age of 30, with an average age of 27 (NASSCOM, 2014). This demographic dividend has given
the industry an uncontested edge over its rivals.
Sharma (2014) however argues that this demographic dividend is more a matter of concern than hope since he opines
that this demographic dividend does not imply that India would automatically qualify as the potential supplier of
employable manpower to the world. It seems to us that this issue of grabbing the demographic dividend is a subject of
discussion concerning overall development of the economy, not necessarily IT. This is because even if we assume the growth
of the IT sector is being fully realised, it would only be able to accommodate a small part of the total labour pool. As a result,
the issue of demographic dividend is much broader in scope and warrants a separate platform of discussion. Nevertheless,
what is important for the IT sector is to consider whether it is able reap the benets of this demographic dividend by
imparting necessary skills required for this sector if industry ready professionals are not readily forthcoming. In this
direction, the government has set up the National Skills Development Council (NSDC) in association with NASSCOM with a
view to minimise the gap between demand and supply in 21 high growth sectors (NASSCOM, 2013). This initiative continues
to ensure best practice standards of the industry.
3.2. Capability of the industry to innovate and move up the value-chain
Over the years, the industry has steadily moved up the value-chain to emerge as the top outsourcing destination in
present times. This sustained leadership in outsourcing cannot alone be explained by the availability of quality manpower. It
is contingent on the industrys ability to enhance its productivity through continuous innovation (Porter, 1990). This is
exactly what the Indian IT sector has achieved over the years with the industry revenues crossing the US$ 200 billion barrier
in 2012. NASSCOM (2013) attributes the rst US$ 100 billion to wage arbitrage while the next US$ 100 billion to a
combination of high-value services and increasingly non-linear play resulting in shift from enterprise services to enterprise
solutions. Not surprisingly, India happens to be second most favoured nation (behind US) for offshoring of R&D (UNCTAD,
2012, p. 50). During the 1960s, R&D facilities in India focussed on adaptation and technology transfer driven by the obvious
cost advantages (Reddy, 1997). Nowadays, the orientation has shifted towards technological innovation catering to the
global markets (Ilavarasan & Parthasarathy, 2012), with an estimated 870 R&D facilities in India established by MNEs
(Aoyama & Parthasarathy, 2012).
We agree with Sharma (2014) that an obvious indication of the extent of innovative activity is the nature of product
development that is being carried out in India. Of over 16,000 rms that comprise the industry, 3000 are into product
development (NASSCOM, 2014). This was not the case however in FY2000, when imported products (primarily from the US)
tended to dominate the domestic market. Several factors contributed to this trend. First, software product market being
highly concentrated, Indian rms failed to penetrate that market as the users prefer to use successive up-gradations of
the same package provided by the same supplier, primarily due to familiarity with the package (Desai, 2000). Second, the
intellectual property rights which is associated with a product is built in the rst two stages of a product development
life cycle (namely design and specication) that was mainly executed by foreign rms made it increasingly difcult for the
Indian rms to borrow product development ideas and develop substitute products (Bajpai & Shastri, 1998). Third,
development of a product involves huge investment, and Indian rms with a mediocre record of product development could
not risk such an investment (Bajpai & Shastri, 1998). However, this trend has witnessed a sea change in recent times with
Indian rms venturing into product development. Some of the notable products developed by Indian players include Sonata,
a word processing package in Indian languages; accounting packages like Finnacle and EX; few industry-specic products
like MakESS, an ERP package and Spectrum, a stock broking product (Krishnan & Prabhu, 2004). In addition, rms are
providing innovative products like eToilet for sustainable sanitation; underwater operations robot for cleaning water storage
tanks; Saral Money, handheld micro ATMs; Nano Ganesh for remote operations of irrigation pumps using mobile (NASSCOM,
2014). The need for vertical-specic solutions, security solutions and business intelligence are the prime drivers for product
development in India.

S. Bhattacharjee, D. Chakrabarti / Futures 67 (2015) 1121

18

Another indicator of the innovative activities carried out in the Indian IT sector is the growing number of patents led
with the Indian IP ofce. The number of patents led by top 3 integrated IT rms increased from 150 in 2009 to 1000 in 2013.
The patents are being developed around Social Media, Mobile, Analytics and Cloud (SMAC) technologies, cyber security,
workow management, software testing systems, circuit characterisation and authentication and interception of data
(NASSCOM, 2014).
Thus contrary to Sharma (2014), we observe that the Indian IT sector is steadily moving towards the innovation phase. It
is the long-standing attachment with the clients as high skilled service providers that have enabled Indian IT companies
secure the product development contracts. Moreover, innovations may not necessarily require formal research and
developments. Over the years, Indian IT rms have shown their impressive ability in delivering unique, cheap and easy-toroll methods of operation. These informal innovations commonly termed as Indian Juggad has not only been accepted in
the US lexicon, but is steadily gaining prominence as a separate area of study in leading management schools (Radjou,
Prabhu, & Ahuja, 2012).
3.3. The promise of the domestic market
The Indian IT industry has been predominantly export-oriented, with exports accounting for bulk of the revenues.
However, over the years the domestic market has gradually evolved to match the export segment in terms of product
complexity, delivery exibility and service offerings (NASSCOM, 2010). The domestic IT market which stood at US$ 9.2
billion in FY2005 rose to an estimated US$ 31.6 billion in FY2014, thereby registering a CAGR of almost 15% during the said
period (Table 4). It is also apparent from the table that domestic endeavours have made noticeable inroads into higher-end
services like IT consulting reecting the transformation of the industry even on the domestic front.
This transformation of the domestic market is worth noting since unlike Export Oriented Unit (EOU) schemes, domestic
operations have never received any tax incentives from the government. The major drivers for this transformation include
(a) sustained pervasiveness of IT in the domestic sphere; (b) e-governance initiatives; (c) Players increasingly resorting to the
domestic market to withstand vulnerabilities of the export market and thereby retain their competitiveness. This
transformation of the domestic market has aided rms in delivering solutions both for global and emerging markets
(NASSCOM, 2010; Sarma & Krishna, 2010).
It is also worth noting that the structure of the domestic segment which is pyramidal is similar to its superior export
counterpart (Table 5). In addition, with most user industries gradually embracing IT for enhancing competitiveness on the
domestic front, the service offerings of the domestic segment now encompass the entire value-chain of IT.
We observe that as regards both the industry structure and service offerings, there is not much difference between the
export segment (that has historically been the frontrunner) and its domestic counterpart. Thus, contrary to Sharma (2014),
we assert that the domestic segment is not at all at an undeveloped state, but rather has reached an inexion point
(NASSCOM, 2010).
3.4. Disruptive technologies
In addressing the issue of disruptive technologies, it would be instructive to distinguish between disruptive technologies
and sustaining technologies. While disruptive technologies redene the market place by bringing the market to a different
value proposition, sustaining technologies maintain or increase the market value of an existing product or service by
providing better service manifested in higher margins. However, the same product/service may be disruptive or sustaining

Table 4
Domestic IT scenario.
Offerings

FY2005

FY2006

FY2007

FY2008

FY2009

FY2010

FY2011

FY2012

FY2013E

FY2014E

Project based
IT consulting
Systems integration
Custom application development
Outsourcing
Application management
IS outsourcing
Support & training
In-house/captive IT
Total IT services
Domestic BPO
Software products
Hardware
Total

1166
106
751
309
509
369
140
333
920
2928
914
1329
4029
9200

2483
874
1235
374
865
627
238
230
898
4476
914
1329
6500
13,219

3076
688
2031
357
1033
749
284
222
1200
5531
1097
1600
7978
16,206

4413
987
2917
509
1426
1034
392
279
1764
7882
1576
2234
10,293
21,985

4695
1036
3122
537
1501
1075
426
475
1555
8226
1932
2690
9006
21,854

6320
1099
3805
1416
2051
1586
465
698

7466
1385
4426
1655
2725
2154
571
813

8008
1585
4672
1751
3303
2663
640
859

7906
1602
4574
1730
3496
2863
633
780

7774
1552
4509
1713
3565
2953
612
700

9069
2304
2960
9746
24,079

11,004
2791
3495
11,732
29,022

12,170
3068
3721
12,710
31,669

12,182
3220
3774
12,835
32,011

12,039
3244
3721
12,623
31,627

Source: Compiled from NASSCOM (2004, 20092014).

Note. All gures in US$ million.

S. Bhattacharjee, D. Chakrabarti / Futures 67 (2015) 1121

19

Table 5
Industry structure: domestic segment.
Category

Number of players

Share of total domestic IT-BPO

(FY2011)

Remarks

Large companies

20

60%
Annual revenues: >INR 10 billion

Comprises Indian and MNC third-party players

offering services encompassing the entire value-chain of IT.

Mid-sized

5560

25%
Annual revenues: INR 110 billion

Primarily IT service providers and software product

companies specialising in business application solutions.

Domestic BPO

200

56%
Annual revenues: INR 17 billion

Includes pure-play BPO players, with gradual progression

to non-voice based services.

Software products

1100

5%
Annual revenues: INR 2.5 billion

Around 150 MNCs, 400 Indian product companies and

around 500550 start-ups operating primarily in the
business applications space.

Smaller rms providing

IT services or support

11,000

510%
Annual revenues: <INR 1 billion

Comprising players providing IT services that includes small

web-development organizations, freelancers and resellers
restricted to a particular geography.

Source: Adapted and compiled from NASSCOM (2010, 2011a).

and is contingent on the type of business model. In many cases, the business model in itself may be disruptive (Yovanof &
Hazapis, 2008). Given this clarication, it would be unwise to refer to disruptive technologies without any consideration of
the business model. Sharma (2014) has completely ignored this aspect while addressing the issue of disruptive technologies.
In the Indian context, we observe that the IT sector has always embraced disruptive technologies, be it in terms of new
business models or new product/service offerings. We begin by underlining the disruptive innovations that happened in
the business models itself. The rst disruptive innovation in this direction happened in the early 1990s with the setting up of
the STPs and subsequent shift from onsite to offshore provisioning of services. Thereafter, in 2000 the dotcom bubble lured
the industry to venture into other destinations like Japan, Asia Pacic region etc. In 2008, with the outbreak of the subprime
crisis engulng major industrialised nations, the industry looked inwards and focussed on the domestic market so as to
circumvent the vulnerabilities of the export market. In recent times, increasing M&A activity enabling inorganic growth
(through acquisition of new products, clients, workforce and penetrating newer geographies etc.); leveraging the Global
Delivery Model (GDM) and providing nearshore services to clients; service delivery from Tier 2 and Tier 3 cities for retaining
cost competitiveness; six delivery models to choose from, namely onsite, offshore, hybrid, nearshore, hub and spoke and
build operate transfer; cloud-based delivery, virtualisation and automation (NASSCOM, 2014) are the disruptions in business
models worth mentioning.
As regards the disruptive innovations in offerings, in the IT services segment, applications are being developed around
third party platforms (social, mobile, big data analytics and cloud). In the IT products arena, there has been a transformation
in the way the product is being delivered from Service Oriented Architecture (SOA) to Software as a Services (SaaS). In the
BPO segment, services are being delivered by bundling it with analytics for enabling real-time decision making. On the
whole, a combination of solutions around disruptive technologies like SMAC, articial intelligence, platforms, embedded
systems are fuelling the growth of the sector in recent times (NASSCOM, 2014). As regards nanocomputing, India embraced
this disruptive technology in 2000 when it launched its national nanotechnology initiative. Over the years, the patents in this
eld have grown exponentially which reects Indias growing competence in the eld of nanotechnology (Gupta, 2009).
Given these developments, we assert the preparedness of the industry for disruptive technologies ever since inception.
Otherwise, the industry would not have retained its competitive standing for such long span of time, that too in a technologyintensive sector like IT.
4. Concluding observations
This paper attempts to infer about the future of the Indian IT outsourcing industry based on the progression of the
industry from its humble beginnings in the mid-1950s to emerge as the foremost outsourcing destination in present times.
Our starting point was Sharma (2014). Building on his work, we differ with him in our assessment of the industry dynamics
along the areas of concern identied by Sharma (2014). In this context, it is important to mention that Abel and Bernanke
(2008) pointed to certain limitations embodied in such inferences that harbour the possibility of inducting certain subjective
elements in prediction, thereby reducing its viability. To ensure that our differences with Sharma (2014) is not a by-product
of such subjectivity, we have considered a longer time horizon, encapsulating a broader set of information. Our conjectures
are also ably supported by evidences from literature. Our ndings suggest that at least in the foreseeable future, there is no
reason for being sceptical about the future of the industry. We assert that in all probability, the industry is capable enough to
tide over the uncertainties outlined by Sharma (2014) and retain its undisputed leadership in outsourcing of IT.
Following Sharma (2014), we started off analysing the journey of the industry. However, unlike Sharma (2014), our
analysis not only captured a longer time horizon, but also laid greater emphasis on detailing how the industry responded to
the challenges and leveraged the opportunities. This was important for predicting the future more accurately. We observed

20

S. Bhattacharjee, D. Chakrabarti / Futures 67 (2015) 1121

that the industry faced more challenges than opportunities, but importantly, it was vigilant enough to identify those
challenges and convert them into opportunities. That explains the exponential growth the industry has witnessed since the
formation of the STPs in the early 1990s. Given such a growth momentum, it becomes too difcult for us to come to terms
with the pessimistic forecasts of Sharma (2014). Further, notwithstanding this exponential growth, it is important to note
that India still accounts for only 10% of global IT spend (NASSCOM, 2013) that signies the presence of a large untapped
market offering enormous growth potential. Hence, there is no reason whatsoever for being sceptical about the future of the
industry.
We went on to reassess the four areas of concern identied by Sharma (2014) so as further investigate whether or not the
growth momentum will sustain. First, as regards the availability of quality manpower, we observed that there is no dearth of
quality manpower (in terms of both soft skills and engineering skills) so as to retard the growth momentum. Further, the
enviable outturn of graduates reiterates that India is unlikely to face any dearth of quality manpower in the foreseeable
future. Second, as regards the capability of the industry to move up the value-chain, we observed that the industry is steadily
moving up the value-chain manifested in terms of products or services that now encompass the entire value-chain. Though
the industry continues to be dominated by services, Indian rms are gradually making noticeable inroads into product
development. Presently, as many as 3000 rms are into product development driven by the need for vertical-specic
solutions, security solutions and business intelligence. Further, the growing number of patents led by the players more than
testies that innovation is here to stay and augment the growth momentum.
Third, the domestic market shows tremendous promise and complements the export market as rms are looking inwards
to circumvent the vulnerabilities of the export market. We observed that the domestic market matches the export market in
terms of product complexity, delivery exibility and service offerings.
Fourth, contrary to the usual notion, the industry has had a long-standing association with disruptive technologies. We
observed that the industry has continued to embrace disruptive technologies, in terms of either new business models or new
product/service offerings. As a result, we rmly believe that by the time quantum computing and nano technology develops
proper architecture for IT businesses, Indian rms will be capable enough to adopt such changes.
In a highly expanding market like that of IT, it is not prudent to expect that an early incumbent will always maintain its
pre-existing market share. What needs to be seen is that whether the industry is capable in sustaining its desired growth.
Given the existing indicators, we nd it too early to be sceptic in this regard.
References
Abel, A. B., & Bernanke, B. (2008). Macroeconomics. Boston, MA: Adison Wesley.
Aoyama, Y., & Parthasarathy, B. (2012). Research and development facilities of multinational enterprises in India. Eurasian Geography and Economics, 53(6),
713730. http://dx.doi.org/10.2747/1539-7216.53.6.713
Aranya, R. (2008). Location theory in reverse? Location for global production in the IT industry of Bangalore. Environment and Planning A, 40(2), 446463.
Arora, A., & Athreye, S. S. (2002). The software industry and Indias economic development. Information Economics and Policy, 14(2), 253273. http://dx.doi.org/
10.1016/S0167-6245(01)00069-5
Athreye, S. S. (2005). The Indian software industry and its evolving service capability. Industrial and Corporate Change, 14(3), 393418. http://dx.doi.org/10.1093/
icc/dth056
Bajpai, N., & Shastri, V. (1998). Software industry in India: A case study. Harvard Institute for International Development, Harvard University Development
Discussion Paper No. 667.
Bhattacharjee, S. (2012). Efciency dynamics and sustainability of the Indian IT-ITeS industry: An empirical investigation using DEA. IIMB Management Review,
24(4), 203214. http://dx.doi.org/10.1016/j.iimb.2012.08.001
Chacko, E. (2007). From brain drain to brain gain: Reverse migration to Bangalore and Hyderabad, Indias globalizing high tech cities. GeoJournal, 68(2/3), 131140.
http://dx.doi.org/10.2307/41148150
Coward, C. (2002). Obstacles to developing an offshore IT-enabled services industry in Asia: The view from the US. Center for Internet Studies, University of
Washington.
Desai, A. V. (2000). The peril and the promise: Broader implications of the Indian presence in information technologies. Working Paper No 70 Center for Research on
Economic Development and Policy Reform.
DIT (2012). Report of the working group on information technology sector for the twelfth ve year plan (201217): Ministry of Communications & Information
Technology.
Gupta, V. K. (2009). Indian publications output in nanotechnology during 19902008. Advanced Science Letters, 2(3), 402404. http://dx.doi.org/10.1016/
j.futures.2013.10.011
Heeks, R. (1996). Indias software industry: State policy, liberalisation and industrial development. New Delhi: Sage Publications.
Ilavarasan, V., & Parthasarathy, B. (2012). Limited growth opportunities amidst opportunities for growth: An empirical study of the inter-rm linkages of small
software rms in India. Journal of Innovation and Entrepreneurship, 1(1), 112. http://dx.doi.org/10.1186/2192-5372-1-4
Javalgi, R. G., Joseph, W. B., Granot, E., & Gross, A. C. (2013). Strategies for sustaining the edge in offshore outsourcing of services: The case of India. Journal of
Business & Industrial Marketing, 28(6), 475486. http://dx.doi.org/10.1108/JBIM-04-2013-0103
Joshi, K., & Mudigonda, S. (2008). An analysis of Indias future attractiveness as an offshore destination for IT and IT-enabled services. Journal of Information
Technology, 23(4), 215227.
Khanna, T., & Palepu, K. (2004). The evolution of concentrated ownership in India: Broad patterns and a history of the Indian software industry. Cambridge, MA: National
Bureau of Economic Research Working Paper No 10613.
Krishnan, R. T., & Prabhu, G. N. (2004). Software product development in India: Lessons from six cases. In A. P. DCosta & E. Sridharan (Eds.), India in the global
software industry: Innovation, rm strategies and development (pp. 139163). New York: Palgrave Macmillan.
NASSCOM (2004). The IT-BPO sector in India: Strategic review. New Delhi.
NASSCOM (2009). The IT-BPO sector in India: Strategic review. New Delhi.
NASSCOM (2010). The IT-BPO sector in India: Strategic review. New Delhi.
NASSCOM (2011a). Indias domestic IT-BPO market: Winds of change. New Delhi.
NASSCOM (2011b). The IT-BPO sector in India: Strategic review. New Delhi.
NASSCOM (2012). The IT-BPO sector in India: Strategic review. New Delhi.
NASSCOM (2013). The IT-BPM sector in India: Strategic review. New Delhi.

S. Bhattacharjee, D. Chakrabarti / Futures 67 (2015) 1121

21

NASSCOM (2014). The IT-BPM sector in India: Strategic review. New Delhi.
Parthasarathy, B. (2004). Globalizing information technology: The domestic policy context for Indias software production and exports. Iterations: An
Interdisciplinary Journal of Software History, 3, 138.
Parthasarathy, B. (2006). The political economy of the computer software industry in India. In G. Parayil (Ed.), Political economy and information capitalism in India:
Digital divide, development and equity (pp. 199230). London: Palgrave Macmillan.
Parthasarathy, B. (2010). The computer software industry as a vehicle of late industrialization: Lessons from the Indian case. Journal of the Asia Pacic Economy,
15(3), 247270. http://dx.doi.org/10.1080/13547860.2010.494902
Porter, M. E. (1990). The competitive advantage of nations. London: Macmillan Press.
Radjou, N., Prabhu, J., & Ahuja, S. (2012). Jugaad innovation: Think frugal, be exible, generate breakthrough growth. San Francisco, CA: Jossey-Bass.
Reddy, P. (1997). New trends in globalization of corporate R&D and implications for innovation capability in host countries: A survey from India. World
Development, 25(11), 18211837. http://dx.doi.org/10.1016/S0305-750X(97)00079-X
Sarma, M., & Krishna, V. V. (2010). State and the software: Public policies in the shaping of the Indian software sector. Service Industries Journal, 30(1), 2542.
http://dx.doi.org/10.1080/02642060802389498
Sharma, D. C. (2014). Indian IT outsourcing industry: Future threats and challenges. Futures, 56, 7380. http://dx.doi.org/10.1016/j.futures.2013.10.011
SourcingLine (2011). Top outsourcing countries. From https://clutch.co/top-outsourcing-countries. Accessed on October 20, 2014.
UNCTAD (2012). Technology and innovation report 2012: Innovation, technology and south-south collaboration. New York/Geneva: United Nations.
Yovanof, G. S., & Hazapis, G. N. (2008). Disruptive technologies, services, or business models? Wireless Personal Communications, 45(4), 569583. http://dx.doi.org/
10.1007/s11277-008-9486-1
Sankalpa Bhattacharjee is Associate Professor at T.A. Pai Management Institute (TAPMI), Manipal, Karnataka, India. He did his doctoral work under the aegis of
Institute of Development Studies Kolkata (IDSK) and was subsequently awarded Ph.D. in Economics from University of Calcutta for his work entitled Software and
Services Industry: A Case Study of STP Kolkata. He has an experience of over ten years in industry and academia. He research interests include Industry Economics
(notably IT-ITeS) and Macroeconomics. His research has been published in journals like IIMB Management Review and Economic & Political Weekly.
Debkumar Chakrabarti is an Assistant Professor and Head of the Department of Economics, Ramakrishna Mission Vidyamandira, West Bengal, India. He did his
Ph.D. from Calcutta University. Apart from his teaching, he has written a number of articles in some reputed journals and edited volumes. He has also authored a
book titled Investment Decision by Firms: Real and Financial Factors His areas of interest are macroeconomics, industry and nance.