Outlook for 2013: Dun & Bradstreet

BANGALORE, INDIA: The Indian IT-ITeS industry has made significant progress during the last decades. According to The National Association of Software and Services Companies (NASSCOM) India has captured a sizeable share of 58 per cent in 2011 which was up from 51 per cent in 2009 in global technology sourcing and business services market.

The year 2012 was marked by slowdown in global economy resulting in weak growth prospects of several world economies including India. The recovery process of Indian economy which began after the financial crisis of 2008 as reflected in the performance of FY11 again took a pause in FY12. Yet, the IT-ITeS sector not only showed resilience amidst the slowdown but also marked a new milestone of crossing $100 bn revenues in FY12.

1. Cloud computing and other pay for use models to gain popularity in the coming years:

The end users today who are constantly connected to internet and local networks wirelessly via cell phones are finding applications like cloud computing convenient to remotely access data.

Moreover, in order to combat pricing pressure and slowdown in demand, these lower cost services are increasingly becoming popular among sectors like healthcare, hospitality etc. Many corporate houses are expected to explore the new opportunities which require lesser capital especially in a cost conscious environment. This new trend in technology which is expected to grow manifold will drive more deals in the cloud segment in coming year.

2. Higher technology adoption by the Indian government and corporate sector to drive the domestic market:

According to NASSCOM, currently revenue from the domestic market for the IT-ITeS sector (including hardware) is estimated to account for a share of around 32 per cent at about $31.7 bn, growing at CAGR of over nine per cent during FY08-FY12. Improved IT infrastructure, increase competition among corporates and enhanced government focus has aided in greater technology adoption in India and making IT services as fastest growing segment in the domestic market.

The quality of IT infrastructure in the country has improved with enhanced Internet connectivity and introduction of 3G services which in turn has driven the growth of BPO segment. Growing usage of mobility devices, netbook, notebook and connectivity devices is expected to contribute to the hardware market growth. Further domestic software segment is also set to rise with advanced applications such as cloud, mobility etc. The focus of the government, especially on projects involving e-governance across states, provides an opportunity for vendors to expand their foothold in the domestic market.

Emerging technology initiatives through the Unique Identification Authority of India (UIDAI) opens avenues for companies in the rural market in the coming years.

3. IT outsourcing market expected to grow though at moderate rate:

The IT-ITeS exports depicted a remarkable revenue growth rate of 18 per cent in FY11 and 16.95 per cent in FY12 amidst slowdown in global business environment where around 80 per cent of export revenue comes from western developed economies. Yet, persistent uncertainties in global economic environment coupled with fluctuations in value of rupee against US dollar is expected to reduce corporate IT spending and thereby result in moderate growth rate of revenue in coming years.

According to NASSCOM, the growth in IT -IteS services export is expected to be 11-14 per cent in rupee terms.

4. Indian service providers set sights on unconventional markets:

Slow recovery in the traditional developed export markets has forced Indian service providers to look beyond them to reduce geographical dependencies. According to the Department of Electronics and Information Technology, though the US remained the major market for Indian IT-ITeS (including hardware) sector, the share of the UK and the Continental Europe - the second largest market has declined in last three years.

The sector has already started expanding in emerging markets such as Russia, Asia Pacific, Philippines and Africa. The Asia Pacific market which is growing at 18 per cent currently is expected to increase its share to eight per cent to total IT - ITeS exports.

5. Strong competition from other countries likely to be expected in the near future:

While India still remains as the preferred destination for outsourcing activities, many other countries have started providing similar type of services and are fast emerging as competitive locations. The competition from countries such as China, Philippines, Vietnam, Poland, Hungary, Mexico, Brazil, and Egypt poses a great challenge for India. Currently, India accounts for 20-25 per cent of R&D offshoring, whereas China is behind with 15-20 per cent market share.

Thus, the Indian ITeS-BPO sector needs to make extra endeavour to remain competitive in terms of cost efficiency measures and scalability of various high-end services to handle competition.

6. IT-ITeS sector needs enabling policy framework to sustain growth:

The contribution of IT-ITeS sector to India's growth story has been noteworthy which reached a milestone of $100 bn in terms of revenue in FY12. The government of India has also played a crucial role of facilitator aiding the sector to grow at its present size. However, the sector has new set of challenges in local, international and regulatory front. In addition with the expiry of tax holidays and the recent economic slowdown, it is testing time for the sector to overcome the issues and burgeon to sustain the growth momentum.

Rise in transfer pricing adjustments, imposition of MAT on SEZ, General Anti Avoidance Rules (GAAR) which is part of proposed Direct Tax Code (DTC) are expected to affect the tax cost and allied decisions of corporates. Sector specific policies and guidelines coupled with pro-active measures from the sector in terms of innovative strategies is the need of an hour for sustainable growth of the sector in the coming years.

The author is leader, Economy Analysis Group, Dun & Bradstreet India.