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Home > Computers and Information Technology > IT Administration & Services > General Services
India Information Technology Report Q3 2008
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Market Overview
The Indian IT market is projected by BMI to reach a value of around US$11.8bn by 2012, growing at aCAGR of at least 13% over the 2007-2012 forecast period. Despite the likelihood that India’s economicgrowth will continue to moderate, falling PC prices, continued investment in the IT-BPO industry, andthe large number of first time PC buyers will make India a key market for vendors.
Notebook sales will power PC growth, as domestic and global vendors seek to penetrate lower-incomesegments, smaller and medium businesses and new geographic regions. Many first time buyers are nowpurchasing notebooks. The potential of India’s IT market is plain: less than 2% of people in India own acomputer, about one-fifth of the level in China, meaning particular potential in the lower-end productrange. Significantly, 45% of India’s population is under 25, which should boost PC and IT usage.
Despite potential difficulties, including regional imbalances, low incomes and a possible demandslowdown, India should therefore confirm its potential as a key emerging market over the forecast period.However, there are a number of other risks to our fast growth scenario. India’s legal regime for patentprotection remains flawed, measures to encourage the domestic hardware sector have had mixed results,and the important BPO sector faces a strong challenge from other markets, including China. The federalgovernment has taken recent action in some of these areas.
Industry Developments
The Finance Ministry has extended the tax holiday scheme for software companies by one year. The taxexemption had been due to expire in March 2009, and an extension was heavily lobbied for by theindustry. The effective tax rate on export-oriented software companies of 8-10% would otherwise haverisen about 10%. The extension particularly benefits these smaller software companies which can’t affordto relocate to Special Economic Zones.
Meanwhile, the government plans to nurture the development of the IT-BPO industry by establishing aseries of new IT institutes. Industry body Nasscom has submitted a ‘detailed project report’ to theMinistry of Human Resource Development concerning the establishing of twenty new Indian Institutes ofInformation Technology (IIT). According to Nasscom’s suggestion, each will be set up as a fullyautonomous institution through a public-private partnership model.
Debate still continues over measures to stimulate the development of the hardware sector. According tothe IT Manufacturers Association, India currently produces only 22mn PCs a year, as compared with over100mn TVs. However, the government has claimed results for its range of incentives launched last year topromote chip manufacturing in India.
Competitive Landscape
HP is the leader in the PC market including PCs and notebooks. Local giant HCL takes second placethanks largely to its strong performance in desktops. HP’s desktop strength is mainly in the consumerretail segment, while HCL does better in the business segment. Chinese vendor Lenovo is third overall,with around 10% of the market. Much of the growth is now fuelled by notebooks.
Vendor attention is particularly on the lower end of the market. Vendors are also entering the low-priceultra portable PC market, which is seen has having great potential with certain demographics. HP andDell are both scheduled to launch ultra portables in 2008, both priced at below US$500. HCL has beenpromoting its MiLeap laptops, which are priced at INR13,990 upwards.
Moving to services, and one trend is that the Indian IT Service giants are now paying much moreattention to the domestic market. Recently Infosys set up a division aimed solely at Indian customers. Forthe moment India constitutes only 3% of revenues, but Infosys wants to increase that to 5% in the nearfuture. For its part, Tata plans to add 30,000-50,000 employees this year.
Computer Sales
According to BMI figures, sales in India’s hardware market will be worth around US$7.3bn in 2007, upfrom an estimated US$6.5bn in 2007, with expected tax breaks and subsidies for hardware manufacturersexpected to support growth. In the first half of fiscal 2007-2008, notebooks were the main driver ofgrowth according to industry association MAIT (Manufacturer’s Association of InformationTechnology). Key segments such as government, telecoms, financial services and education played animportant role. Big company sales were less than expected, but this was compensated for by strongdemand from smaller and medium businesses. BMI predicts the CAGR for the hardware sector as awhole will be around 11% between 2007 and 2012, with unit sales showing strong growth. The averageprice of a PC has nearly halved over the past few years to less than US$250. Desktops will still accountfor more than 80% of unit sales, a higher ratio than for many countries in the region. Combined shipmentsof desktops and notebooks have now comfortably exceeded the 5mn mark. Investments of more thanUS$18bn in hardware manufacturing in India (including telecoms hardware) have stoked expectations ofa hardware boom. However, a high tax regime means that around 25% of the retail price of an averagecomputer goes to the government, and there are fears that this may delay growth. Moreover, it will bedifficult for India to catch up with Taiwan and mainland China, given the strong lead these two territorieshave.
Software
Combined software and service CAGR for 2007-2012 is expected to be in the region of 15%. In recentyears the SMB market in India for hardware deployment has been growing, and this is now resulting in anincreasing opportunity for applications. More demand for solutions and hardware is now coming fromsecond and third tier cities. Industry reforms and privatisations, government regulations, and new globalcompetition have encouraged SMBs to use more technology. These firms are likely to become moresophisticated in their demand for customised software and applications to increase business flexibility. Asecond major driver is the emergence of India as a global centre for outsourcing, with large US andEuropean companies focusing on offshore software development to lower costs. Several sectors areleading the way in this respect, including auto ancillaries and pharmaceuticals. The tax free status ofsoftware firms, which has done much to fuel local sector performance, has recently received a one yearextension. In August 2007 the first IPR (intellectual property rights) court opened in Karnataka. The newcourt has been taken as a sign that the issue of illegal software is becoming a more central policy issue forthe government.
Services
Domestic company demand for IT services is increasing rapidly and project sizes are increasing. This wasdemonstrated in 2007 by contracts such as HP’s seven year outsourcing tender in India with United IndiaInsurance, and by the deal by which Idea Cellular agreed to outsource IT infrastructure and otherservices to IBM. The Idea deal, which is for ten years and also covers billing and customer management,has a reported value of up to US$80mn. This indicates that average project size, typically below theUS$1mn mark, is now increasing and this has resulted in several projects exceeding the US$100mn mark.This trend is attracting domestic vendors like Infosys and TCS to pay more attention to their domesticmarket. The high spending Telecoms industry has particular opportunities for IT services vendors, withhuge increases in capital expenditure budgeted by most service providers. Meanwhile, a recent report byindustry association NASSCOM identified China as a major challenger to India’s dominance in the ITBPOmarket, but found that China was unlikely to catch up with India’s lead in any significant mannerover the next three-to-five years.
E-Readiness
Broadband subscriber numbers are consistently falling behind target in India, with only 3.5mn subscribersby the end of 2007, according to BMI figures. The main reason for the slow uptake is thought to beinsufficient demand, although the government has taken some measures to reduce tariffs and encouragealternative forms of service provision. One brake on PC penetration is a poor dial-up internet home userexperience, even in cities. If this is to change, the government must take the initiative in improvingbandwidth availability. Government plans to encourage WiMax network deployment may have someimpact on penetration. Broadband subscribers are currently expected to exceed 48mn by 2012, while thenumber of internet subscribers will rise above 460mn within the same period.
E-Government
Some 26 e-government projects are planned to be implemented over the 2006-2010 period, as part of anational e-government plan. The estimated budget for these is INR23,000. The plan will be implementedat central-, state- and local-government levels. Most of the twenty-six so-called Mission Mode Projects (MMPs) will use a public-private partnership (PPP) model. One central initiative will see the constructionof one lakh common service centres, providing access to frequently sought information such as birthcertificates. 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 excessivegovernment regulation. Foreign-equity holdings remain restricted in many sectors. Hiring-and-firingprocedures, meanwhile, are governed by rigid labour laws under which companies employing more than100 people need the permission of the local chief minister to lay off workers. Other concerns include the670-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’ (or SEZs) aimed at tackling some of these bottlenecks.
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