IT was the best of times, it was the worst of times…. said Dickens in A Tale of Two Cities. Had he spoken this of Circa 2000-01, software exporters in India would have readily agreed. It was a year of unprecedented growth followed by a sudden and unexpected downturn that had exporters rethinking strategies, numbers and growth projections. It was a year in which it looked like nothing could go wrong. Yet, suddenly everything did.

First, the best of times—software exports became the dominant segment of the Indian IT industry. For the past few years, software exporters have dominated mindshare with big branding, huge market caps and extensive media coverage. In 2000-01, they dominated where it ultimately matters—share of revenue.

Except for the first big jump in 1996-97, it turned out to be the best year ever for software exports. Revenues, comprising those from services and packaged software, grew by a handsome 61% as against 47% in the previous year. At Rs 24,813 crore, they now account for half of Indian IT industry revenues. In 2000-01, more than 30 software companies in India have exported more than Rs 200 crore worth of software and services; altogether 75 companies have exported more than Rs 50 crore worth of software. In 2000-01, the number of software exporters increased to a record number of 3,000 companies.

Even more important, India has emerged as the preferred software-outsourcing destination of the world despite a growing IT workforce in China and strong competition from other outsourcing countries like Ireland and the Philippines. A combination of factors—direct as well as indirect—has contributed to this. While the Philippines competes well with India on both price and language, a chronic political instability makes it, at best, a second choice. Ireland has a reasonably mature, English speaking software industry, but has lost its cost advantage due to a steep rise in salaries. Billing rates in China are on an average 15% lower than India but this quasi-communist republic is a relatively new entrant—it suffers from industry immaturity and despite concentrated effort, an obvious language barrier. East European nations need to get their act together politically before they can pose a major threat.

Other factors played a role, but the single largest determinant in India’s outsourcing status was the industry’s investment in process certifications. Wipro was the first software services country in the world to attain Carnegie Mellon University’s SEI-CMM Level 5 certification. Today, India has the largest number of Level 5 certified companies. During the past year, the number of quality certified software companies from India increased to over 250. Twenty-seven Indian companies now have the unique distinction of being certified at the SEI-CMM Level 5 level. The reason is simple. As outsourcing clients hunt for vendors, they have limited means of ensuring a risk-free process. An analysis of the country’s language and cultural barriers and political situation, examination of the vendor’s previous projects, client referrals and on-site visits could be some factors vendors can check on. But there is no way of knowing if a software vendor will deliver what he promises to, when he promises to. Quality process certifications objectify the process. Clients know that a Level 5 certified company delivers over 90% of its projects on time without escalations in cost. For first-time clients, an assurance of this kind is critical. The Indian software industry realized this at an early stage, and last year this investment in process quality certifications began to pay-off. The motto of the year was: "If you think Indian software, don’t just think price. Think quality."

Last year, the domestic software market achieved a growth of over 47% mainly due to increased government computerization, increased Y2K spending, elimination of import duty on software; increased enforcement of anti-piracy laws as well as increased maturity in end-user organizations.

The Budget of 2000 had a positive impact with the removal of duty on a host of equipment for the telecom, IT, and the entertainment industries. In the Budget of 2000, the software industry had expected the finance minister to raise the limit for acquiring companies abroad to $100 million. Removal of tax incentives and non-enhancement of overseas acquisition limit for IT companies were longstanding demands as they would bring down software prices. This wasn’t done. The finance ministry’s silence on taxation of ESOPs at the time of sale of shares did not help. Furthermore, streamlining of Customs procedures by removing the bonding mechanism was not done. However, the easing of VC norms and hike in FII investment limit to 40 per cent were positive factors.

Budget 2001-02 has given a boost to the software industry by including onsite services in software exports for tax exemption and allowing change of ownership in public listed software companies located in EPZ, EOU and STP without depriving them of tax benefit.

In the Budget proposals, the income from on-site services by the software industry has been granted the benefit of tax exemption like other export earnings for all software development companies. Currently, on-site services contribute around 60% of the total software exports from India.

On the downside, the finance minister has taxed the domestic sale of software EOUs and units located in EPZs and STPs. These units currently enjoy tax exemption on 25% of their domestic sales. The Budget recommendations came as a major boost to the software sector. The industry had feared that software services and e-commerce might be borught into the tax net, but these sectors were left untouched.