It isn't, any more. It's taken off.

The Indian IT industry grew 24%-to Rs 92,924 in 2003-04. And both the domestic market (Rs 33,374 crore) and exports (Rs 59,550 crore) shared the same growth: 24%. To achieve that, exports growth dropped 2 percentage points, while domestic growth jumped an impressive 15 percentage points.

On a healthy base, these figures are impressive. While 2002-03 was the year of recovery, 2003-04 was clearly the year of growth. Growth not just in terms of numbers, but in terms of confidence, and opportunity.

It was a feel-good year, fairly unblemished. This growth was driven by change and innovation by companies. The innovative thinking that came into place during the recent tough years actually started showing results. The re-structuring-in company structures, policies, strategies, products and services-is bearing fruit now.

Communications, which now plays a big role in IT, has also been able to rise up several notches, thereby giving a lot of support to IT growth. This paves the way for business opportunities like BPO and network management services, as well as new technologies and applications, such as mobile phones and the Internet, which have seen mass-market adoption.

Since then, government–industry partnerships have gone into top gear-whether it's anti-piracy, where Nasscom got much better support from the government, or industry–government readiness to accept WTO initiatives on free trade. Enterprise users were also quick to realize that unless they took to globally accepted policies on storage and security, they would soon be out of business.

No wonder, then, that infotech was one of the highest growth sectors in the country. While the overall capital goods business went up by about 13% last year, IT products and services went up by 22%. This clearly shows the increasing role of IT in businesses. Moreover, at a time when the unemployment rate was going up in most other sectors, IT was the only silver lining. While in most areas government talk about reducing expenses on infrastructure, real estate, energy and salaries, they're all looking at major investments to e-enable themselves.

Time for Volumes
Apart from the fact that the PC market is also a beneficiary of the market revival, the total number of PC units sold in the country isn't anything to write home about. Desktop prices fell, notebook prices came down drastically-revenues went up by only 8% against a shipment increase of 21%. Compared to the previous year, these growth figures have nearly douled. Yet total PC shipments are not zooming up in, say, the way cellphone usage shot up. A possible PC market driver could be notebooks which showed an 88% increase in terms of shipments last year, but the numbers are small.

One interesting thing that happened during the last fiscal, perhaps, for the first time, was that branded PCs snatched away some market share from assemblers. At the same time, Intel and its GID partners were getting more aggressive in C- and D-category towns. Now that the government is becoming a bit more liberal on its anti-dumping policies, PC donation laws, etc, the use of refurbished machines, could change. And if the government's new thrust on Internet services and broadband takes off, and if the telecom service providers really move on their wireless initiatives, PC and notebook sales in the country could really take off. PC penetration is considered a key parameter in judging the level and role of IT in any economy.

The server business was another trail-blazer last year. In terms of numbers, it went up from 38,984 units shipped, to 57,002, growing at 46 %; value growth was 21%, to Rs 2,082 crore. A closer look shows that the non-PC server segment is under pressure, and its growth was much less compared to PC servers. The server growth was driven by unprecedented demand from the BFSI and telecom sectors on one hand, and dropping prices on the other. Obviously, the comparatively low-priced Intel-based servers for some high-end applications also helped growth. The workstations market continues to be small, and declining. While it grew from Rs 172 crore to Rs 221 crore, there is surprisingly little activity in the scientific and media verticals-perhaps due to the availability of high-end, graphics-ready PCs.

The Impact of Connectivity
Networking is another major component that will help push the growing Indian IT market forward. While networking penetration is high among enterprises, the networking market actually grew slower than the overall domestic IT market as well as the hardware market.

While BFSI, telecom, and BPO were the big users, e-governance is a big area that remains untapped as yet. The overall networking market will actually take off when the hundreds and thousands of government offices and departments get networked. Networking is dominated heavily by one vendor, Cisco, across a whole range of product lines. Its competitors will also need to become more innovative not just for self-growth, but also to push the market's overall growth. As in the case of PCs, the networking is also related strongly to Internet penetration. As the very small base of 4.6 million Internet users increases, so will the need for networking.

As the industry began picking up steam steadily, in came wireless, creating a bit of a stir. CDMA operator Reliance talked about bringing the world into the mobile phone even as fixed-line player Touchtel tied up with Intel to push Wi-Fi in homes; wireless product vendors said they were slashing prices and enterprises said they were considering Wi-Fi.

Notebook vendors dropped prices below the Rs 40,000-mark, and kept an eye on Wi-Fi opportunities. From 5-star hotels in Mumbai and Delhi offering Wi-Fi to guests, to the Dal Lake in Srinagar, to the Shatabdi Express trains (CDMA), wireless began to happen-slowly. Hotspots came up at a few railway stations and airports. Sales of Wi-Fi equipment went up from Rs 12 crore to Rs 51 crore last year. According to a survey conducted by Dataquest on large-enterprise CIOs, 26% of them were experimenting with Wi-Fi, helped along by a delayed realization that 802.11b has been license-free for over a year, for indoor use.

But amidst all the good news, Internet subscriber growth seems to have got stuck somewhere. Now that the standalone ISPs, which had left many subscribers confused and dissatisfied, are winding up or getting out of the consumer dial-up game, it is expected that the Internet will see some action. Especially, after the integrated telecom operators like BSNL, MTNL, Tata Teleservices and Reliance have got aggressively into it, and are looking at new technologies like broadband and wireless. With other initiatives, like the setting up of the National Internet Exchange, along with the TRAI looking for a pro-active role, it is expected that prices will come down sharply. Broadband, which has about 200,000 installations, will be the big Internet usage driver, not just in homes but in enterprises too. Once again, the growth of the Internet will have a direct impact on desktop and notebook sales.

Distributors Getting Bigger
IT distribution kept on the growth path. Apart from the tradition big three, HCL also stepped up its distribution business, especially for mobile phones. Redington, Tech Pacific and Ingram Micro went on an expansion mode, extending their reach to B- and C-category towns, and getting more product lines and vendors in their portfolio. Even though their "own brands" did not work. Channel partners say that tax policies in this sector need to be loosened up and simplified a bit, for even faster growth; and a disturbing trend was an increase in fly-by-night frauds getting reported in the channel space.

The peripherals industry, primarily handled by distributors, was sailing in the same boat and showed excellent growth-from 9% to 47% during the last fiscal. The sub-segments in peripherals, which traditionally have had one or two leaders like HP in printers and Seagate in HDDs, will see stiff competition from Samsung, LG, Canon, Hitachi, Maxtor, just to name a few. But peripherals king HP continued to hold the overall leadership, shifting from inkjets to MFD/AIOs. That's a new market coming up.

The storage story is one of rising demand, especially in BFSI and telecom. Huge data accumulation drove demand: HDFC, for instance, has over 25 terabytes of data. This ensured more spending on storage capacities. In addition to this, the server and storage consolidation trend has created more demand for SAN and NAS products. And now with regulatory demands, especially in the banking, telecom, stockmarket and BPO areas, the demand for storage is only going to go up. Technology verticals have traditionally always been big buyers of storage, and remain so.

Software Moves, Finally
Perhaps for the first time, packaged software growth happened because of some significant factors. Vis-a-vis its 5% growth in FY 2002-03, the packaged software market in India grew by 15% this fiscal to reach Rs 2,300 crore. This is still small compared to overall domestic IT market growth. Falling hardware prices not only provided vendors with an opportunity to bundle some legal software, but it also gave buyers a reason to spend some money on software.

The role of Linux must also be mentioned in bringing hardware prices down. Also, the increasing pressure to reduce delivery times forced the CIO to go in for more standard off-the-shelf packages. Linux will actually play a big role in bringing down the prices of systems software over time. Many vendors like Microsoft, Oracle and SAP have already realized that prices are high, and that further market segmentation has to be done. In this direction, they have come up with special versions with stripped features for smaller-sized businesses. Clearly, packaged software, which had never really taken off in India, has a chance now. This will surely put a lot of pressure on smaller players who until now sold on the basis of personal relationships, prices, and high customization levels.

The story of Indian packaged software continues to be the story of the big names: i-flex, Infosys, TCS, Tally, and Polaris. At 40%, the growth of this segment this time was high. Yet most of these companies have really not been able to make any dent in the Indian marketplace: much of their money came from selling abroad. Except for the financial accounting software, Tally, that continues to be the king in India. While the number of Indian companies with packages of their own might be far and few in between, one noteworthy observation here is that now quite a few smaller software companies are positioning themselves as product companies. Subex of Bangalore, for instance, has productized its telecom solutions, and now has telecom software that is selling in India as well as internationally. The outlook for this segment, in the medium term, is also expected to be very sunny.

On the software exports front, there was nothing very significant to report. Software players weathered the storms of 2003 to cross the Rs 40,000 mark, notching a growth of 17%, thanks to the revival of telecom industry abroad. But reasons for worry are the appreciating rupee value and the increasing wage bill, which is increasingly putting margins under pressure. But the good news is that big players are once again on a hiring spree. Clearly the pipeline is heating up.

Patenting Blues
Amazing it may sound, a country that is one of the largest software producers in the world is light years away from thinking about future opportunities in the area of IP (Intellectual Property). It is said that in the days to come, IP revenues would contribute the major chunk of a software company's revenue. While MNC development centers in India are filing for patents in big numbers (1,108 last year), Indian companies, including some of the big names, have not really started planning for it.

This is another area where the government could do well to consider stepping in, as there are some legal, financial and governmental factors involved. It could take a leaf from the Chinese government, which, for instance, is giving financial and procedural support to software companies that file patents in the US. India will have to get on top of the IP situation if it wants to translate its knowledge leadership in software into money.

BPO Party On
Despite the outsourcing "backlash", the BPO industry, with over 45 % growth, continued its dream run. This segment was so hot that several high profile mergers and acquisitions happened here. Clearly, all the hue and cry about the backlash is insignificant, and unlikely to last very long.

Without a doubt, BPOs and call centers have given India another arena to prove its global advantage in IT and knowledge-based services. And at the same time it is opening up new areas such as remote network management services. And it's encouraging nations across the world to open their markets too.

On the domestic front, the booming BPO sector was one of the reasons for the industry doing so well. As the total number of people working in IT and ITeS went up by 17%, it was also the biggest employment generator in the country. Further, BPO is encouraging the IT industry to geographically spread beyond the established metros and big cities. Therefore, places like Kolkata, Chandigarh, Jaipur and Bhubaneshwar, among others, are also laying claim to their piece of the action.

There are obviously challenges too. There has been a negative impact on companies, with attrition rates touching abnormally highs at 50%. Globally, other countries are also gearing up and investing heavily on education and communications infrastructure, the two things that bring major competitive edge in the long run. Fortunately, BPO and call center services are getting recognition in India too, and more Indian service providers and banks are now going in for outsourcing.

India's success story as a major knowledge and hi-tech services destination is gathering momentum. And the country is making its mark in areas beyond software and BPO. The new areas where Indian players have very quietly made significant progress are in network management services, IT infrastructure management, and managed services. India today boasts of providing these services to several of the Fortune 500 companies, ranging from very high-tech enterprises like AMD, to mass-market companies like Reebok, whose lifeline is its IT and networking infrastructure. In fact, some of these deals, bagged by Indian companies, like the $750-mn IBM-Bharti deal, or the $150-mn HP-Bank of India deal, where the vendor will look after the complete IT infrastructure and requirements, are global trend-setters. Surely in the days to come India is poised to make major inroads on this front too as it did in the BPO market.

Training Down, Opportunities Up
Even though this segment continued to show negative growth, the fiscal 2003-04 seems to be bringing new winds of opportunity and change. There seems to be some recovery, with the big names like NIIT and Aptech tapping the international market.

Then came BPO. This boom industry, which is employing people by the thousands every month, needed trainers. One good development was that enterprise users are getting more involved in training activities. They are asking training houses to train people in specific applications. The Indian government's talking about e-governance is an encouraging sign, as it will create huge training and education opportunities.

While it is good to observe that training seems to getting back on its feet again, there is also growing demand from some sections that perhaps it is time for some government involvement. The much talked about Chinese thrust on education is getting a lot of support from the government. If knowledge workers and knowledge economies are going to drive and lead the world in the future, India not only has opportunities for a bigger global role, but will also be under threat from those countries which are taking this up on a priority basis – countries like China, Russia, Mexico, Brazil, and Malaysia – and pumping huge amounts of money into education.

Wake-Up Call
The domestic market has woken up. And exports business could become more challenging. That's the news and the reality.

Everything seems to be moving in the direction of growth. The mood is upbeat. Obviously, all the positive environmental factors will have to be around for Indian IT to keep up this kind of growth in days to come. But some areas will need special attention now. One is that the government will have to translate its self-proclaimed focus on IT into action. The new UPA government will have to reassure the country that "IT shining" does not mean that "India not shining", and will have to work towards a "masses-based-and-humane-face-of-IT" strategy. The UPA government will also have to re-assure the world that the Left parties, its main coalition partner, are not the driving forces behind business policy in the country. And for that to happen convincingly, the Left parties will have to shed their image of being anti-business and anti-entrepreneurship. One should not forget that IT growth primarily depends on enterprise and investments; and India needs major investments in the space, to grow.

Ibrahim Ahmad