India boasts of one of the largest IT services manpower in the world. But this strength is not reflected in the state of ICT usage by its domestic corporations. In this document, we put forth the view that the consumption of ICT solutions in Indian domestic business is mainly due to businesses themsleves taking initiative without any support either from government of IT service providers who are too busy serving foregin customers, leaving the vast market to MNCs - who have seen a vast opportunity in serving these markets. We theorize that is because of the lop-sided incentives provided by a plethora of tax exemptions (on capital goods as well as operating expenses and profits) to Export Oriented Units. These export incentives make it extremely difficult for organisations wishing to service domestic clients because seek to amplify the inherently large margins available in servicing foreign clients. This leads local IT producers without any leverage to attract and retain talent in a highly manpower oriented business. It also deprives local companies of the skills and expertise that the highly trained and experienced work force of the large service providers can bring to the table. We argue that it is about time the government looked at provided some incentives to domestic IT consumers so as to enable them leapfrog the competition.

1. Indian IT Sector – Why is the Domestic Sector
Under Served? – The Policy Impact
Industry Presentation
at
Design and Evaluation of Innovation Policy in
Developing Countries (DEIP), New Delhi
2nd - 7th February, 2009

2. Who are We?
Presented by:
Sachin Garg
With Inputs and Assistance
From
Arpita Subhash
Lokesh V.
Manisha Gupta
Mukundan Raghavan
Rashmi Sarita

3. Indian IT Sector
Industry's growth can be charted as:

Filling the vacuum created by the exit of large

computing multinationals
Possible due to a reasonable supply of skilled engineers

and bold entrepreneurs
Initially serving the domestic sector

Export oriented IT Services sector

Outsourcing of work – body shopping

Offshoring – 24 hour workday

Cost-Arbitrage

Government Policies and Incentives


4. Software Model Replication
Across Industry
IP Focused
Development
Consulting
Value ->
Projects
Offshore
Onsite
Body shopping
Time ->

5. Policy Instruments for the IT
Sector
STPI Scheme

Single Window Clearance

Tax Exemptions, duty drawback schemes,

increased depreciation rates etc. for Export
Oriented Units (EOUs)
Dedicated and priority telecom access

Land at discounted rates


6. Spillovers
Direct

Infosys Technologies' “FINACLE” product being

used as CORE Banking solution
ITC e-choupal project for agricultural production

Increased e-Governance projects

MCA21 project executed by TCS

Bhoomi project of the Govt. of AP


7. Spillovers
Indirect

Setup and creation of a large number of education

and training institutions to build capacity & feed into
the industry.
Increased societal awareness of ICT leading to

Increasing usage of the Internet and pervasiveness of

e‑commerce
Increased computer literacy

Creation of a latent domestic market for IT Services

Use of ITeS for the domestic sector – domestic call

centres, telemarketing etc.

8. Spillovers
Adverse

Diversion of a large tract of highly trained

Science/Engineering/Technology graduates away
from core areas to IT
Creation of a large quantity of “un‑employable”

scientists and engineers by emphasising quantity
over quality
Lack of students pursuing higher education in

Indian institutes
Rising social inequality in the IT hubs

The “Digital Divide”


9. SWOT Analysis
STRENGTHS WEAKNESSES
Productivity is not keeping
Mature Industry – 

the desired pace
substantially high on the
Value Chain Skewed structure – small

number of large firms
Strong & Vibrant domestic

IT market Manpower supply constraints

OPPORTUNITIES
THREATS
Rising factor costs Global vendors playing in the
 
domestic market
resulting in lowering
advantages on the cost- Leapfrog opportunities –

arbitrage alone requires strategic direction
and long-term thinking
Emerging Competition

from Latin America, Bottom of Pyramid

Eastern Europe and China Innovation

10. ICT Systems in Domestic
Industries
Under-developed and weak ICT systems in

Indian Firms, especially the MSME sector
A well-developed ICT system is inherent to the

firm's success in the marketplace
Indian Firms need to invest in IT Systems

These gaps are HUGE

Retrofitting is not required – companies can

leapfrog multiple generations
No-need to repeat past mistakes – pick and choose

the best technologies

11. The Missing Link
The large IT Services companies are reluctant

to service the domestic IT sector
Why are they needed?

Immense domain knowledge across verticals –

BFSI, retail etc.
Well-developed processes and high-quality delivery

systems
Well-trained, highly qualified and experienced

manpower
Wherewithal to invest in and gestate projects that

may not have immediate pay-offs

12. The Missing Link (2)
Why Companies?

Domain knowledge is largely tacit knowledge

acquired through customer linkages
Knowledge sharing across the industry is virtually

non-existent owing to very high customer linkages
as opposed to industry linkages

13. Why the Reluctance?
Boomerang effect of Tax Breaks and other

EOU subsidy policies
Effective tax rate as low as 6% owing to

Duty drawbacks

Concessional or Zero Corporate Income Tax on STPI

and SEZ units
Which Leads to

Huge Margins on servicing Exports

Which in turn, leads to

Huge Pressure to serve the International Market and

show good quarterly results
Billing based, short-term thinking mentality rather than an

effort to think long-term

14. Some Improper Practices
Many “new” SEZ projects are in fact re-

packaged instances of continuing projects
Domestic companies that wish to use the IT

Services Companies do it through foreign
based shell companies

15. Summary Innovation Model
Innovation Based Service Providers
Research & Development
Encourage Research Build Domain
Expertise
Innovation
IP Generation Co-Development &
To
& Management Cross Licensing
Happen
Incubation & Technology
“Intrapreneur” Portfolio
Manufacturing

16. Recommendations
Insufficient mentoring and networking support for start-ups and

entrepreneurs
Lack of entrepreneurs focussed on IP development in emerging

technologies
Lack of knowledge sharing between IT-ITES firms and key user

industries
Severe lack of funding at the seed / start-up stage

No platforms for all stakeholders to interact

No market-place for innovation trading in India

Tenuous partnership between industry and academia

Lack of meaningful collaborations between industry and

research institutes
Source: Nasscom-BCG Innovation Report, 2007


17. Re-Thinking Policy
Re-think the impact and effect of Tax Subsidies

They cannot be forever

Withdraw or curtail tax breaks for Export Oriented

Software Units – the industry is now mature
Implement certain measures and incentivise

industry to service the latent domestic demand
Encourage National Standards and make

standards conformance mandatory and a pre-
requisite for public and other procurement
Standardise E-Governance Systems and

implement them on a large scale