The Last NDA Government Set the Stage for India’s IT Revolution- Will There be an Act II?
August 26, 2014
During the last Bharatiya Janata Party (BJP) regime (1999-2004), two seemingly unrelated events— the New Telecom Policy 1999 and the Y2K crisis—triggered the explosive growth of India’s information technology-enabled services (ITeS) industry. The growth of this sector demonstrated that India was capable of competing in the modern economy and also led to stronger and more sustainable bilateral business ties with the United States than had existed in the past.
Several U.S.-based multinational firms have made huge investments in the ITeS sector. IBM, Accenture, HP, and Oracle are all widely acknowledged as having large chunks of their global employees based in India. More tangible examples include Oracle’s project to help the BJP execute its social media strategy during the elections, and AT&T’s partnership with Bharti Airtel to expand network access.
However, growth rates for India’s ITeS industry have slowed recently (see Figure 1). This industry hopes that the return of a BJP government will reverse its fortunes, but the steps necessary to restart significant growth are more difficult than in the late 1990s.
What led to the growth of the IT services sector under the previous BJP regime?
Early in its tenure, the BJP created the Jaswant Singh-led “National Task Force on Information Technology & Software Development.” The Task Force released two forward-looking reports in 1998. The BJP also anointed the country’s first-ever “Minister of Information Technology” in 1999, giving the new position to an important party leader, Pramod Mahajan, who became part-cheerleader and part-policy leader for the industry’s development.
More specifically, in 1999, the BJP introduced a new policy in the telecom sector—the New Telecom Policy (NTP), which provided a critical boost to the ITeS sector. Under this policy, the government changed the fixed license fee regime to a revenue-sharing model for cellular and basic telecommunications services, which allowed more telecom service operators into the market. Additionally, excise duties on important components such as optical fibers and semiconductors were cut, providing easier access to telecom parts for equipment makers. Both these moves served to increase teledensity in India from 3 per 100 inhabitants in 2001 to 70 per 100 inhabitants in 2012. Most importantly for the ITeS industry, NTP ‘99 broke the government’s monopoly on international long distance communications traffic, bringing down the price of international long distance data and voice traffic, unlocking one of the prohibitive cost barriers to the wider use of cross-border IT services. The NTP ‘99 originally proposed a five year phase-in period for opening international long-distance; however, the first license was issued in 2002, two years ahead of the initial timeline.
Another event—the Y2K crisis—increased the demand for software engineers and programmers to fix potential glitches as the new millennium began. This event proved to be a catalyst for growth in the IT sector as foreign companies handed out Y2K contracts, which Indian firms such as TCS and Wipro stepped in to fill. India’s dynamic technology entrepreneurs parlayed this “door opening” exercise to dramatically expand the types of services they offered their global customers, becoming one of the fastest-growing sectors of the Indian economy. India soon emerged as the largest exporter of software and computer services in the world.
However, the growth of India’s IT service exports has been losing momentum over the past few years, and was especially hit hard in the aftermath of the financial crisis in 2008.
What are the current problems facing this sector?
Rising operational costs in the IT sector have served as a major deterrent to foreign investment in the IT sector. Reports have suggested that India has been losing about 70 percent of all call center business to competitors like the Philippines. A chief reason has been mounting labor costs in the Business Process Outsourcing (BPO) sector, where wages have been climbing by as much as 30 percent a year. Moreover, most BPO units are still concentrated in Tier-1 cities such as Mumbai and Bangalore with elevated real estate and electricity costs. Added to that, the industry has a high labor turnover rate, around 30-40 percent according to most estimates. This is a problem for companies as training periods in call centers last about 14-16 weeks, thus increasing costs for companies with a high attrition rate.
Figure 1: Declining ITeS services exports and employment
The Philippines, on the other hand, is a relatively newer market and can operate on lower margins. Cultural proximity with the United States and a preference for American English have also played a role in attracting U.S. companies to set up BPO centers in Philippines. Moreover, about 30 per cent of the graduates in Philippines are employable as opposed to 10 per cent in India. As a result, by some estimates the Philippines has overtaken India as the hub of call centers and BPO business.
In addition to the cost differential in the BPO sector, there are several other problems plaguing the IT services sector. India does not have enough globally-competitive technical institutions. Indian technical institutions rarely make it to the top-200 global university rankings and most graduates need to be trained to make them job-ready. Additionally, the premier government-funded technical institutions—Indian Institutes of Technology (IITs)—that churn out some of the country’s highest-performing IT graduates have a faculty vacancy of 40 percent.
Lastly, the cross-border management of tax for foreign companies has been called into question by Indian authorities. Several U.S.-based IT firms such as IBM, Microsoft, HP, Google Accenture and Oracle have been battling lengthy tax disputes. Moreover, the United States and India have nearly 140 double taxation cases between them, a list that is growing. Several executives from these companies have identified a stable regulatory regime with a rational taxation structure as vital to the sustained growth of the IT services sector.
What can the current government do to revive these sectors and what role can the United States play?
Clearly getting more job-ready workers into the system is an imperative. Technical institutions have a role to play in supporting the growth of the IT sector. Some IITs have launched innovative programs to raise funds overseas, most notably in New York, to boost faculty wages and claim research grants. The new BJP government has taken a renewed interest in the IITs with proposals to set up five new institutions. Partnering with U.S. educational institutions to offer vocational training to students in India would be a good step forward in skills development and in increasing the available pool of English-speaking employees.
Delivering a stable tax regime and expeditiously resolving cases will help restore investor confidence. Pushing forward on an alternative dispute resolution mechanism such as the Mutual Agreement Procedure (MAP)—where competent authorities in the United States and India can negotiate a mutually acceptable tax settlement—will be of huge benefit to U.S. companies such as IBM and Microsoft that have been stuck in lengthy battles.
Some firms have had success in lowering employee attrition rates by offering cross-training in functional specializations such as project management, HR or finance to help lower employee attrition rates. Companies such as Google have launched initiatives such as mentoring and internal social networking platforms to encourage connectivity between employees, while other U.S. IT firms set up career planning committees. Offering such innovative perks can help lower labor turnover rates.
Richard Rossow is a senior fellow and Wadhwani Chair in U.S.-India Policy Studies at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Rasika Gynedi is a researcher with the CSIS Wadhwani Chair in U.S.-India Policy Studies.
This Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
© 2014 by the Center for Strategic and International Studies. All rights reserved.