Information Technology in India in 2009 'Q1.
Companies and, February 23, 2009: Market Overview BMI expects the Indian IT market to grow at a compound annual growth rate (CAGR) of 12.6% over the 2008-2013 forecast period, as strong fundamental growth drivers enable the market to overcome difficulties associated with the global economic slowdown. IT market growth dipped in H208, with sales of both desktops and notebooks down (particularly in the consumer segment) and keyfinancial-sector outsourcing clients caught up in the financial crisis. We expect IT spending to ease further in 2009, before beginning to recover from 2010.

The Indian IT market is projected to expand to a value of nearly US$25bn in 2013, from an estimated US$13.77bn in 2008, driven not only by business process outsourcing (BPO) but also by a growing domestic market for hardware and solutions. Contributory factors include low computer penetration, rising incomes, falling computer prices and the government's ambitions to connect the vast rural areas to the outside world.

The potential of India's IT market is plain: less than 2% of people in India currently own a computer - about one-fifth of the level in China - meaning particular potential in the lower-end product range. The IT services sector remains critical to future market growth. According to government figures, India's BPO industry is likely to capture more than half of the US$110bn global offshoring market by 2010. However, a recent government report identified a strong challenge to India's BPO dominance from other countries, including China.

Industry Developments The government's IT agency, the National Association of Software and Service Companies (Nasscom), has downgraded its 2009 growth projections for the domestic IT sector as a result of the global economic crisis. The government now envisages Indian IT exports in FY09 growing at a rate in the high teens, down from its earlier projection of 21-24%.

Meanwhile, the IT ministry responded to the anticipated slowdown by moving to ask the government to extend the Software Technology Parks of India (STPI) scheme by a further three years. The STPI scheme, which offers a tax holiday to software firms located inside STPI parks, was due to expire in March 2010, having being extended by one year by the finance ministry in April 2008.

The government is also currently reviewing an IT amendment bill, which was first introduced to parliament in December 2006, and then referred to committee, where it languished for many months. The bill contains the so-called Special Incentive Package Scheme (SIPS), the aim of which would be to encourage investments in semiconductor fabrication plants (fabs) and other technologies. The Council of Ministers recently approved the bill, which, following the toughening up of clauses relating to information security, will now be presented to parliament.

Competitive Landscape A slowdown in consumer PC demand in the second half of 2008 presented a threat to the growth projections of global vendors such as Dell, HP, and Lenovo, as well as local companies such as HCL Infosystems. Most vendors appeared to feel that the slowdown would be temporary and that India will be a key growth market over the next few years. Dell achieved US$800mn sales in its FY08 - and set a US$1bn sales target for 2009.

The leading Indian IT companies have taken a hit from the US slowdown, with companies freezing wages and slowing hiring. This slowdown is likely to exacerbate an existing trend of the big vendors paying much more attention to the domestic market. Recently, Infosys set up a division aimed solely at Indian customers. For the moment, India constitutes only about 3% of revenues, but Infosys wants to increase this to 5% in the near future.

Meanwhile, leading software vendor Microsoft was promoting its Get Genuine Solution (GGS), which, in November 2008, it extended in the India market to include Windows Vista. The programme allows small- and medium-sized enterprises (SMEs) to easily legalise their unlicensed Windows Vista and Windows XP Professional PCs. The programme was launched in 2007, and the company believes that it has already sold over 90,000 licences through the initiative in India.

Computer Sales According to BMI forecasts, computer sales (including notebooks) in India's hardware market will be worth US$6.71bn in 2009, up from an estimated US$6.0bn in 2008, with revenues growth down to 11.8% as a result of India's exposure to the global slowdown. Sales of both desktops and notebooks dipped significantly in Q308. Demand was affected not only by weaker consumer confidence, but also by the rising price of components as a result of the strong US dollar.

However, BMI predicts that the CAGR for the hardware sector as a whole will be 11.1% between 2008 and 2013, with unit sales expected to achieve strong growth. Only nine out of 1,000 people in India own a computer, one-fifth of the China level. The government's ultimate goal is for 1bn internet-connected computers in India - equivalent to the total estimated number of PCs in the world today.

Software The software segment should continue to show robust growth, with combined software and services CAGR for 2008-2013 forecast at 14.4%. The tax-free status of software firms, which did much to fuel local sector performance, is due to end in 2010. However, the IT ministry intends to lobby the finance ministry for a further extension of the exemption. The local software industry is significant, with exports worth US$50bn annually.

In recent years, the SME market in India for hardware deployment has been growing, and this is now resulting in an increasing opportunity for applications. More demand for solutions and hardware is now coming from second- and third-tier cities. Industry reforms and privatisations, government regulations and new global competition have encouraged SMEs to use more technology. These firms are likely to become more sophisticated in their demand for customised software and applications to increase business flexibility. A second major driver is the emergence of India as a global centre for outsourcing, with large US and European companies focusing on offshore software development to lower costs.

Services Domestic company demand for IT services is increasing rapidly, and average project size - typically below the US$1mn mark - is now increasing, resulting in several projects above the US$100mn mark.

This trend, along with the US economic slowdown, is attracting vendors like Infosys and Tata Consultancy Services (TCS) to pay more attention to their domestic market. The high spending telecom industry has particular opportunities for IT services vendors, with huge increases in capital expenditure budgeted by most service providers. Meanwhile, a recent report by industry association Nasscom identified China as a major challenger to India's dominance in BPO segment of the IT market, but found that China was unlikely to close the gap on India in any significant manner over the next three to five years.

E-Readiness Broadband subscriber numbers are consistently falling behind target in India, with only 5.9mn subscribers by the end of 2008, according to BMI estimates. The main reason for the slow uptake is thought to be insufficient demand, although the government has taken some measures to reduce tariffs and encourage alternative forms of service provision. One brake on PC penetration is a poor dial-up internet home-user experience, even in cities. If this is to change, the government must take the initiative in improving bandwidth availability. Government plans to encourage WiMax network deployment may have some impact on penetration. Broadband subscribers are currently expected to reach 67.9mn by the end of 2013, while the number of internet subscribers is forecast to reach 553.1mn within the same period.

E-Government Some 26 e-government projects were due to be implemented over the 2006-2010 period, as part of a national e-government plan. The estimated budget for these is INR23,000. The plan will be implemented at central-, state- and local-government levels. Most of the 26 so-called Mission Mode Projects (MMPs) will use a public-private partnership (PPP) model. One central initiative will see the construction of one lakh (100,000) common service centres (CSCs), providing access to frequently sought information such as birth certificates. During 2007, land records, income tax and excise departments were computerised.

Key Issues For Investors Despite a cheap and well-educated workforce, India's business environment is impeded by excessive government regulation. Foreign-equity holdings remain restricted in many sectors. Hiring-and-firing procedures, meanwhile, are governed by rigid labour laws, under the terms of which companies employing more than 100 people need the permission of the local chief minister to lay off workers. Other concerns include the 670-odd industries reserved for small-scale producers; high import tariffs levied on foreign-made goods; failing infrastructure and, above all, poor power supplies; and a corrupt bureaucracy needed to approve 'permits' for even the most routine tasks. India is now fast-tracking the creation of South East Asian-style 'special economic zones' (SEZs) aimed at tackling some of these bottlenecks.