Globalizing
Information Technology:
The Domestic Policy Context for Indias Software Production
and Exports
Balaji Parthasarathy
Indian Institute of Information Technology, Bangalore
Date
published: 3 May 2004
Abstract: This essay explains how the domestic policy
context enabled the Indian software industry to become the
largest non-OECD (Organisation for Economic Co-operation and
Development) exporter by 2000. The policy context is examined
in three phases. Prior to 1984, rigid policy restrictions
ensured that there was virtually no software industry. In
the second phase (1984 to 1990), the restrictions were eased
and Indian firms entered the global market by providing low-cost
programming services. In the third phase (1990 to 2000), pro-active
promotion of the industry, along with economy-wide policy
liberalization, led to rapid growth in exports. The nature
of exports also changed from providing programming services
at client sites, to providing offshore services from India
for turnkey projects demanding a wider range of capabilities.
The policy changes themselves are explained in terms of the
changing character of state institutions. The essay also discusses
the relevance of the Indian case for policy initiatives in
other countries.
Keywords: Globalization, India, Software
Services, Public Policy, Software Industry
I. Origins
of Policy-Making in the Computer Industry
II. Promoting
Software Exports before 1984
III. 1984
Policy Shift and the Transformation of DoE
IV. Software Technology
Parks and Other Policy Initiatives since 1990
V.
The Indian Software Industry that Emerged
VI. Conclusion
VII. Notes
The
Indian software industry has grown rapidly since the 1980s,
with revenues increasing from less than $100 million in 1985-86
to nearly $8.4 billion by 2000-01 (Figure 1). During this
period, exports grew even faster, with their share
increasing from less than a third to nearly three quarters
of revenues. This essay will analyze the domestic conditions
under which this export-led industry has grown. Although global
demand for software, sustained by the PC, networking and internet
revolutions of the 1970s, the 1980s and the 1990s respectively,
played an important role in facilitating the growth of the
Indian industry, it was also available to other countries.
[end of page 1] Similarly, while India offers a highly skilled,
English-speaking workforce whose wages are much lower than
that of the US (Figure 2), Indias main software market,[1]
India is hardly unique in possessing such labor force characteristics.
Indeed, global demand and the availability of a high-skill,
low wage workforce are necessary, but not sufficient, conditions.
If they were sufficient conditions, one must explain why India
failed to take similar advantage, unlike her East Asian counterparts
such as Taiwan, South Korea and increasingly China, of the
globalization of semiconductor design and manufacturing since
the 1960s.[2]
In other words, the growth of Indias software industry
must be explained in terms of how shifting domestic policy
conditions allowed her to take advantage of global demand
and her labor force characteristics to become, along with
Israel, the leading non-OECD software exporter by the end
of the millennium.
|
YEAR
|
REVENUES
(in millions of US$)
|
EXPORTS AS % OF REVENUES
|
EXPORTS AS % SHARE OF STPS
|
| 1985-86 |
81
|
29.63
|
-
|
| 1986-87 |
108
|
36.11
|
-
|
| 1987-88 |
130
|
40.00
|
-
|
| 1988-89 |
160
|
41.88
|
-
|
| 1989-90 |
197
|
50.76
|
-
|
| 1990-91 |
243
|
52.78
|
-
|
| 1991-92 |
304
|
53.95
|
-
|
| 1992-93 |
388
|
57.99
|
8.0
|
| 1993-94 |
560
|
58.93
|
12.0
|
| 1994-95 |
787
|
61.13
|
16.0
|
| 1995-96 |
1253
|
60.18
|
29.0
|
| 1996-97 |
1841
|
59.75
|
46.0
|
| 1997-98 |
3011
|
58.42
|
54.0
|
| 1998-99 |
4069
|
63.90
|
58.0
|
| 1999-00 |
5611
|
70.61
|
68.0
|
| 2000-01 |
8386
|
74.14
|
-
|
Figure 1. Indias Software Revenue
and Exports, 1985-86 to 2000-01. Sources: www.nasscom.org;
National Association of Software and Service Companies (NASSCOM),
Indian Software Directory, 1993-94, (New Delhi: NASSCOM,
1993); National Association of Software and Service Companies
(NASSCOM), Indian Software Directory, 1992, (New Delhi:
NASSCOM, 1992); STP data from www.stpi.soft.net.
Indias software exports, however, did not grow uniformly
between the mid-1980s and 2000. A statistical analysis showed
that, between 1987 and 1992-93, a linear equation provides
the best fit for the growth trend.[3]
From 1992-93 (and up to 1994, the last year for which there
was data), however, an exponential equation provided a better
fit, though there were insufficient data points to determine
whether that was a long-term trend. [end of page 2] But it
was projected that if exports maintained the exponential trend,
they would amount to $630 million by 1997. Since Indias
software exports in 1996-97 were $997 million, the trend was
clearly exponential. Using this data analysis as a starting
point, this essay will examine why exports behaved the way
they did from the mid-1980s on: in other words, why they followed
a linear trend in a world that tends to behave exponentially,
before there was a substantial change in the behavioral
attributes of the software export sector.[4]
| JOB TITLE |
USA
|
INDIA
|
| Project Leader |
$65,600
|
$33,700
|
| Systems Analyst |
58,300
|
20,500
|
| Systems Designer |
66,900
|
16,100
|
| Development Programmer |
49,800
|
11,700
|
| Support Programmer |
45,000
|
11,700
|
| Network Analyst/Designer |
59,600
|
20,500
|
| Quality Assurance Specialist |
60,800
|
20,500
|
| Database Data Analyst |
60,800
|
24,900
|
| Metrics/Process Analyst |
58,300
|
24,900
|
| Documentation/Training Staff |
43,800
|
11,700
|
| Test Engineer |
57,100
|
11,700
|
Figure 2. Average Annual Software
Labor Cost in US Dollars (1999). Source: International
Labor Organization (ILO), World Employment Report 2001:
Life in the Information Economy (Geneva: ILO, 2001), p.
135.
The changed growth characteristics of Indias software
exports have also been accompanied by certain qualitative
shifts. While Indias exports mostly involve the provision
of software services (Figure 3), during the 1990s, there was
a gradual shift away from onsite service provision, which
involves sending employees to work at client sites overseas,
to offshore service provision, which refers to developing
and exporting software from India. This essay will explain
how policy changes facilitated the quantitative expansion
of software exports and shifts in the spatial organization
of exports. But explaining why the export of software products
and packages has remained relatively insignificant is beyond
the scope of this essay.
The first section of this six-section essay will introduce
the key institutions, especially the Department of Electronics
(DoE), responsible for policy making for the computer industry.
Until 1978, a scientific establishment staunchly committed
to indigenous technology and self-reliance dominated the DoE.
The highlight of this period was the unsuccessful effort to
promote a public sector national champion in the
computer industry after ousting IBM. [end of page 3] Section
2 describes how the policy environment ensured that there
was really no software industry to speak of until 1984, despite
efforts to develop software for locally manufactured computers,
and a series of programs to encourage software export by providing
easy access to imported computers.
|
YEAR
|
ONSITE SERVICES
|
OFFSHORE SERVICES
|
PRODUCTS & PACKAGES
|
|
1990
|
90.00
|
5.00
|
5.00
|
|
1993-94
|
62.01
|
30.05
|
7.94
|
|
1994-95
|
60.90
|
29.59
|
9.51
|
|
1995-96
|
60.32
|
31.63
|
8.05
|
|
1996-97
|
58.69
|
30.21
|
11.10
|
|
1997-98
|
59.00
|
32.20
|
8.80
|
|
1998-99
|
58.18
|
33.91
|
7.91
|
|
1999-00
|
57.26
|
34.69
|
8.05
|
|
2000-01
|
56.09
|
38.62
|
5.29
|
Figure 3. Sources of Indias
Software Export Revenues, 1990-2001 (as a percentage of export
revenues). Source: www.nasscom.org; National Association
of Software and Service Companies (NASSCOM), Indian IT
and Software Services Directory, 2001, (New Delhi: NASSCOM,
2001).
Though the ineffectiveness of autarkic policies became apparent
by the late 1970s, Section 3 will describe why a policy departure
had to wait until Rajiv Gandhi took office as Prime Minister
(PM). A few reform-minded bureaucrats used the political backing
to redefine the role of the DoE and its policies to support
the growth of the computer industry in the private sector.
They were keen that the opportunities provided by the globalization
of the computer industry not bypass India, as was the case
with other sectors of the electronics industry. Thus, the
Computer Policy of 1984 eased the availability of microcomputers
and facilitated software exports by encouraging on-site service
provision. The 1986 Software Policy encouraged foreign investment
in the industry and access to technological developments overseas,
by allowing easy imports of the latest software and software
tools.
While the 1984 and 1986 policies mainly removed hurdles before
the industry, positive promotion came in 1990 when the DoE
initiated the Software Technology Park (STP) scheme after
doing battle with other government departments such as the
Department of Telecommunications (DoT), as Section 4 will
describe. The STPs provide data communication facilities using
which firms can provide offshore services from India instead
of being limited to on-site provision. Since the sweeping
economy-wide policy changes of 1991, various tariffs have
been reduced and procedures simplified to further help domestic
firms and to attract a large number of transnational corporations
(TNCs). [end of page 4]
Section 5 will describe some of the characteristics of the
Indian software industry that emerged from the policy changes
since 1984. Although Indian firms entered the global market
in the 1980s by offering sought-after expertise, the expertise
was deployed primarily toward low-value added programming
services at client sites. The rapid growth in exports in the
1990s followed the commissioning of the STPs that permitted
firms to shift to offshore service-provision and work profitably
with skilled labor at home. Further, Indian firms combined
state-of-the-art infrastructure and production processes at
their offshore development centers (ODCs), with well-developed
project management abilities to obtain turnkey jobs that went
beyond low-value-added programming services. A few also began
converting experience gained in specific application areas
into generic products. In the 1990s, a number of TNCs were
also attracted to India by the quality of skills. After an
early trickle of TNCs in the 1980s proved that India could
be more than a low-wage hunting ground, the ODCs established
by TNCs in the 1990s began to undertake work similar to their
parent bodies.
The essay will conclude by highlighting the key shifts in
policies and how they the facilitated the transformation of
India into a significant software exporter. The conclusion
will also examine the lessons that the Indian case offers
for other newly industrializing countries (NICs) seeking to
encourage the production and export of software.
The
Origins of Policy-Making in the Computer Industry
Though the first electronic computer arrived in India in
1955, the origins of a computer policy dates to August 1963
when the Committee on Electronics was established following
Indias defeat in the war with China the previous year.[5]
The chairman of the committee was Homi J. Bhaba, a nuclear
scientist who was also the chairman of the Atomic Energy Commission
(AEC). Since electronics was perceived to have a strategic
role in national development and security, the Bhaba committee,
as it was widely referred to, recommended ways to strengthen
the technological base in electronics in the country. In its
report submitted in February 1966, the committee argued that
computers were playing an increasingly important social and
scientific role. It also constituted a Working Group on computers
under Prof. R. Narasimhan of the Tata Institute of Fundamental
Research (TIFR), Bombay, an institution controlled by the
AEC. The Working Group, in its 1968 report, called for a national
effort to attain self-sufficiency within 10 years in small
and medium computers. In calling for the development of across-the-board
design and manufacturing capabilities, the report also argued
that, [end of page 5]
A computer system is only as versatile
as the software that is made available with it. . . . Software
is business. Software is strategic. Thus it would be very
foolhardy if a programme for the manufacture of the computer
systems . . . does not have built into it a scheme for the
development of appropriate software. . . . Software development
can be farmed out to other organizations . . . this is also
a labour intensive activity except that it requires intellectually
skilled manpower. . . . Software development would seem
to have very high employment potential in a country like
India . . . the export potential, as well as the value added
in the case of software, is very large.[6]
Initially, policy-making was in the hands of the Electronics
Committee of India. The Committee was set up in November 1965
after the US cut off the supply of electronics equipment during
the war with Pakistan that year. Given the circumstances,
the committee was dominated by the Defense Ministrys
Department of Defense Supplies. Since the Electronics Committee
lacked the finances and the staff to implement policy, the
DoE was established in June 1970, reporting directly to the
Prime Minister. In February 1971, the Electronics Commission
(EC) replaced the Electronics Committee as the primary policy
making body.[7]
M.G.K. Menon, a solid-state physicist and earlier director
of TIFR, was the first chairman of the EC and Secretary DoE.
Apart from Menon, the other members of the EC were the Cabinet
Secretary, the Secretaries of the Finance Ministry and the
Planning Commission, and the chairman of the public sector
enterprise Electronics Corporation of India (ECIL).
With Menon in charge of the new institutions, control of
electronics policy making in the country effectively shifted
from the Defense Ministry to the scientific community, most
of whom were drawn from the atomic energy program. For instance,
Ashok Parthasarathi, who became the Secretary, EC, was drawn
from the AEC, and N.Seshagiri, who headed the ECs Information,
Planning and Analysis group, came from TIFR. This shift in
control of the EC and DoE also resulted in a shift in policy
emphasis. The defense establishment had been keen on ensuring
access to electronics and computers. Thus, in the 1960s, it
allowed IBM and International Computers Limited (ICL) to operate
in India, though IBMs Indian operations were mostly
limited to reconditioning and leasing obsolete 1401s. IBM
went on to dominate the Indian computer market until the early
1970s, controlling nearly 75 percent of the market.[8]
In contrast, the scientific establishment was technologically
ambitious and committed to self-sufficiency and self-reliance.
This fit well within the larger economy-wide policy framework
in place between the 1950s and the early 1980s. To meet the
policy objective of building a broad-based indigenous industrial
capability, this period witnessed the implementation of a
heavy industry based, import substitution led industrialization
(ISI) strategy in which a vast network of public sector enterprises
(PSEs) was given the pride of place.[9]
[end of page 6] The private sector was often barred from operating
in the sectors where PSEs had a presence, although both PSEs
and private sector firms were hampered by a highly restrictive
and discretionary licensing regime in which state sanction
for virtually all aspects of their operation, be it production
capacity, plant location or credit and foreign exchange needs,
was mandatory.[10]
The policy regime not isolated the Indian economy from the
world, and stifled entrepreneurship and innovation. It also
hindered the growth of the electronic computer industry and
prevented India from taking advantage of the emerging international
division of labor in the semiconductor industry. Thus, until
the early 1980s, the overall policy framework and the commitment
of the DoEs leadership constrained the development of
computing in India.
The PSE charge in computing was lead by ECIL. Originally
established by the Department of Atomic Energy (DAE) in 1967
in Hyderabad to manufacture instrumentation for nuclear plants,
it was promoted as Indias national champion
in the computer industry. ECIL started its computer manufacturing
efforts by producing a 12 bit machine, the TDC-12. In 1974,
it released a more advanced version of the machine, the TDC-312,
and a 16 bit machine, the TDC-316. The development of these
computers also resulted in the first significant attempt to
write software on a commercial basis in the country. To develop
the software, ECIL assembled a team of 100 engineers and supplemented
their efforts by awarding contracts to TIFR, the Indian Institute
of Management, Ahmedabad, the Indian Institute of Science,
Bangalore, and the Administrative Staff College of India,
Hyderabad.
But writing all the software from scratch, including the
operating system, compilers and applications, proved to be
a formidable task. The lack of adequate software severely
limited the uses to which ECILs computers could be put.
Though custom packages were developed for several applications
including data acquisition systems for the DAE, and data loggers
for the steel industry, there were few applications for electronic
data processing (EDP). ECIL did develop E-COBOL, its own version
of COBOL. But, being a non-standard language, E-COBOL was
not widely used. Thus, of the 208 TDC-12, TDC-312 and TDC-316
computers that ECIL sold until 1986-87, only 18 were purchased
by the private sector.[11]
The rest went to government departments, PSEs and universities.
In contrast, of the 154 IBM machines installed until May 1978,
more than 50 were in use in the private sector.[12]
In light of the experience with the 12 and 16 bit machines,
it was clear that ECIL lacked the resources to develop its
32 bit machine, the System-332, on its own. It therefore imported
a French computer, the IRIS-55, and resorted to reverse engineering.
The idea was that if the machine served as a model for hardware
design, ECIL would not have to develop software for it. [end
of page 7] But the IRIS used unfamiliar technology and it
was compatible with neither ECIL nor IBM machines.
Despite the problems, ECIL had displaced IBM as the leading
player in the domestic market by 1972, after the EC had forced
the latter to abandon the sales of its reconditioned 1401
machines. The DoE also began pressurizing IBM and ICL to move
away from trading and to make a commitment to manufacturing
more up-to-date systems locally, for the domestic market as
well as for export. Further, since IBMs presence in
India was through a 100 percent subsidiary of the parent company,
it fell within the purview of the Foreign Exchange and Regulation
Act, 1974. The Act disallowed foreigners from holding more
than 40 percent equity in any firm in India. A higher stake
of 74 percent was allowed only when technologies unavailable
in India were involved. IBM proposed to the government that
it would set up a 100 percent export unit to manufacture peripherals
and another unit to export software worth about a million
dollars annually. In return, it wanted to import computer
systems up to 80 percent of the value of exports, besides
retaining 100 percent equity in its core manufacturing, marketing
and maintenance operations. But the equity issue proved non-negotiable.
In contrast to ICL, which stayed on the governments
terms, IBM shut its Indian operations in June 1978.
Promoting
Software Exports before 1984
Although IBMs proposal fell through, the government
made other efforts to promote software exports. The primary
means was to permit the import of computers in exchange for
a guarantee to export a certain amount of software. In any
case, with the decline in IBMs sales, and the DoE stalling
the licensing of manufacturers other than ECIL, despite recommendations
to the contrary in the Microcomputer Panel Report of September
1973, imports were the only option. Unless, of course, somebody
wanted to wait 18-24 months for a ECIL computer costing significantly
more than comparable international models.[13]
As early as in September 1970, the DoE issued newspaper advertisements
inviting proposals for developing software, especially for
export. But the response was poor. In 1973, the government
established the Santa Cruz Electronics Export Processing Zone
(SEEPZ) in Bombay. Guidelines issued in 1974 stated that computer
time for exports would be guaranteed on a non-profit basis
at the governments Regional Computer Centers.[14]
New computers could be imported provided there was no foreign
collaboration involved and the net foreign exchange earned
within a five-year period equaled the amount spent on the
import. The export requirements were later increased to 200
percent of the cost of the system. Tata Consultancy Services
(TCS), Bombay, was the first company to export software under
these guidelines. [end of page 8] In 1977, the Tatas went
into partnership with Burroughs to establish a unit in SEEPZ
to export software and peripherals. Money from the exports
would pay for the import of Burroughs mainframes into the
domestic market.
In July 1976 the government announced a programs to encourage
non-resident Indians (NRIs) to invest in India.[15]
Under the program, software firms could be established with
imported computers with an export commitment equal to 100
percent of the value of the computer. Customs duties on hardware
imports were also reduced in 1976 from over 100 percent to
40 percent. While duties were reduced, guidelines for the
import of computers costing more than Rs.500,000 (US$ 56,000)
were elaborate.[16]
Importers had to follow a five-step procedure. It began with
submitting an application listing the functional specifications
of the computer and the applications for which it would be
used. This was scrutinized by the DoE to determine whether
or not the requirement could be met domestically. If the request
was approved, tenders were placed. A commission of experts
appointed by the DoE then evaluated the tenders and a final
decision was made with input from the user. Before placing
the order, a letter from the concerned state government stating
that the interests of labor would not be hurt was required,
as was a final nod from an approval committee chaired by the
EC Chairman. These cumbersome guidelines led to delays and,
in a study of 82 cases, it was found that it took anywhere
between 6 to 64 months to procure the computer after the initial
application was made.[17]
Despite the tedium of the procedure, 441 computers of various
makes were imported between 1976-77 and 1980-81[18]
in contrast to the 35 computers that were approved
for imports between 1970 and 1975.[19]
But exports did not grow, partly because of the difficulties
in importing computers and software tools, and because of
problems with obtaining foreign exchange for overseas marketing
and business expenses. Efforts at tapping East European markets
by sending government delegations were not fruitful either.
It was also found that many who had imported systems either
evaded their export obligations or stopped exporting once
they had fulfilled their obligations. Instead, they established
service bureaus to lease out computer time in the domestic
market. The establishment of service bureaus (and the jump
in computer imports) not only reflected unmet demand in the
country, but it also marked the beginnings of a software industry
in the private sector. Following IBMs departure, many
of its former employees established the service bureaus before
shifting to software development.
Other developments also increased the local availability
of computers. In 1978, S.R.Vijayakar was made Managing Director
of ECIL and, in December, Prof. B.Nag took over from Menon
as Chairman EC and Secretary DoE. [end of page 9] Neither
Vijayakar nor Nag had any links to the atomic energy network
and were not as committed to the idea of self-reliance and
protecting ECIL. In any case, even before Menons exit,
there was growing disenchantment with ECIL. Pressure for policy
changes began to mount from users and from other firms wanting
to enter the market.
In response, the Minicomputer Policy of 1978 permitted the
setting up of systems engineering companies to design and
assemble computers. The permission was not without restrictions:
no foreign financial or technical collaboration was allowed;
annual production was limited to Rs.20 million (US$ 254,000),
no more than five different types of systems could be produced
and none of them could cost more than Rs.300,000 ($38,000).
Despite the restrictions, four firms quickly established themselves
to produce microcomputers, incorporating advances in microprocessor
technology. By listing their products as accounting and invoice
machines, these firms captured about 75 percent of the total
computer market between 1978 and 1980. ECILs share in
the same period fell to 10.7 percent from approximately 50
percent between 1973 and 1977.[20]
The availability of computers was further eased when the
Import Policy of 1983-84 permitted the duty-free import of
computers costing less than Rs.500,000 (US$ 50,000). It also
became easier to import completely knocked down (CKD) and
semi knocked down (SKD) kits. As the cautious liberalization
of the early 1980s increased supply and the exposure to computers,
the demand for hardware and software grew. Despite more liberal
tendencies in the domestic market, the DoE was concerned about
the misuse of the computer import for software export program.
Though it was the DoE that authorized computer imports, the
Chief Controller of Imports and Exports (CCI&E) was responsible
for monitoring export performance. There was an information
gap between the two agencies that, from the DoEs viewpoint,
encouraged misuse.
The recommendations of the Rajaraman committee became the
basis for a tighter policy in 1981. The committee argued that
since a relatively large number of computers had been imported
in previous years, exporters should utilize spare computer
capacity in the country wherever possible. If the DoE determined
that no domestic capacity existed, import proposals would
then fall under one of 3 categories: (A) Indian nationals
who required foreign exchange from the government could import
if they had a firm order for at least 20 percent of the value
of the computer. They also had to export 200 percent of the
value of the computer over a five-year period. (B) Similar
conditions applied to NRIs who did not need foreign exchange.
The only difference was that their export obligation over
a five-year period was limited to 100 percent of the computers
value. (C) Indian nationals could import against a specific
export order without any conditions provided the computer
was not used for any domestic work and it would be re-exported
within a two year period. [end of page 10] The DoE tried to
push as many importers as possible to the last category. In
any case, all importers had to sign a legal bond with the
CCI&E and those failing to meet their obligations could
have their machines confiscated and be subject to legal action.
The
1984 Policy Shift and the Transformation of the DoE
Although the DoE had given 86 approvals for computer manufacture
by 1 December 1981 under the Microcomputer Policy of 1978,
only six licensees went into production.[21]
The local content in manufacturing was low among the licensees,
reflecting the limited financial resources and design skills
at their disposal. Concerned with the state of affairs, he
EC took upon itself the task of revising computer policy in
the latter half of 1982. After much input and debate, a draft
policy was approved on 14 September 1983. But the draft never
became policy. Instead, a different version of the new computer
policy was announced on 19 November 1984, within twenty days
of Rajiv Gandhi taking office as PM. In contrast to the EC
approved draft which, despite giving a significant role for
the private sector, asserted that the guiding principles
were to be national control over the production base and major
application areas of computers,[22]
the new policy effectively abandoned that premise. In a significant
departure, it aimed at developing manufacturing capabilities
in the country incorporating advanced technologies, simplifying
procedures and promoting applications for development.
The manufacture of mini and microcomputers was now open to
any Indian manufacturer, except those with more than 40 percent
foreign equity, and all restrictions on production capacity
were removed. Import procedures were also simplified. Although
the policy did not look too critically at manufacturing operations
that were little more than the assembly of imported CKD/SKD
kits, it established minimum viable capacities and required
manufacturers to follow a phased manufacturing program to
indigenize the industry.[23]
Despite the simplification of import procedures, domestic
manufacturers were to be protected initially with high tariffs,
although there was to be a progressive reduction in tariffs
to force them to compete at international levels. As a start,
the policy allowed educational, research and defense institutions
to import without any duties. Other users could import computers
not available indigenously for a low duty provided the computers
were among those approved by DoE. Though it never happened,
the idea of approving 12 to 18 models was an attempt to standardize
machines in the country so that the DoE could negotiate bulk
purchases and ensure the availability of software. As for
the manufacture of mainframes, they continued to be reserved
for the public sector, i.e. ECIL, though the reservation was
to cease after two years. [end of page 11]
The policy also made changes that affected software directly.
The DoE was to establish a Software Development Promotion
Agency to promote development efforts both for the local and
export markets, and also set up a research, design and development
facility. Software was recognized as an industry,
making it eligible for investment allowance and other incentives,
and it was freed from the demands of locational policy. Duties
for the import of software were loweredsource code and
object code could be imported at 60 percent ad valorem,
instead of 100 percent, while source code as printed matter
attracted no duty at all. The import of application software
was more cumbersome and continued to attract a high rate of
duty.
Though the 1981 policy continued to provide the basic framework
for exports, software export over satellite data links was
now permitted. The National Computer Network INDONET was also
to be made available for software exports. The import of computers
for software export was permitted at a special low duty and
exporters were permitted to retain 50 percent of their foreign
earnings beyond their obligation in any year for any purpose.
Income from the provision of services at customers sites
overseas, including bodyshopping, was also to count as exports.
Bodyshopping refers to the practice of software firms offering
programming services, typically for low-value added services,
where billing is directly proportional to the number of programmer-hours
contracted.
The prime mover behind the new policy was N.Seshagiri, Additional
Secretary at the DoE and Director General, National Informatics
Center (NIC). Although Seshagiri was part of the atomic energy
network that had entered the DoE when it was first formed,
by the early 1980s, he no longer subscribed to autarkic views.
Seshagiri had argued in various fora that existing policies
and procedures were too restrictive and cumbersome. He wanted
to quickly build a strong domestic industry without being
wedded to self-reliance. He also argued that if India were
to realize its software ambitions, of becoming to software
in the nineties what Taiwan and South Korea were to hardware,[24]
it would have to begin with high volume, low-value-added exports
and then move up the value chain.[25]
To him, it was the failure to follow such a strategy that
had left India far behind East Asia in hardware exports. Thus,
the policy explicitly recognized all on site services as valid
exports.
Seshagiris ideas had to wait until they had the right
backing. In May 1984, ECIL chairman Vijayakar moved to the
DoE take over as Secretary. His first hand experience with
the problems that ECIL faced with the TDC 332 made him take
a pragmatic approach to the question of foreign technology
and self-reliance. Unlike Menon or Nag, who were academics,
Vijayakar was an engineer with a commercial outlook. [end
of page 12] A few other senior bureaucrats, including the
then Cabinet Secretary and the Industries Secretary, were
also supportive of Seshagiri.
Politically, crucial support came from Shivraj Patil, Minister
of State for Science and Technology, and from Dr.M.S.Sanjeevi
Rao, the Deputy Minister of Electronics and the Chairman,
EC, since November 1982.[26]
Most importantly, Seshagiri had impressed Rajiv Gandhi when
the two had interacted during the design and operation of
the information systems for the 1982 Asian Games held in New
Delhi. As his views fit well with Rajiv Gandhis own
interest in encouraging the widespread application of computers,
Seshagiri came to be one of Gandhis computer boys,
as the PMs team of advisers was popularly referred to.
With the backing at the highest political level, he was able
to push through the new policy without even formally informing
the EC until February 1985. Seshagiri also became the chairman
of the Inter-Ministerial Standing Committee (IMSC) in the
DoE which, as per the new policy, was to be the last word
on all matters pertaining to the regulation of the computer
industry.
The 1984 policy succeeded in achieving one of its major objectives,
which was to ease availability of computers, especially microcomputers.
The production of micros grew almost ten-fold from 3400 in
1984-85 to 33,000 in two years.[27]
Though international prices were two to three times lower
than domestic prices, end-user prices fell by almost 30 percent
in less than a year.[28]
While there were a few who were concerned with the official
sanction given to screwdriver technology, especially
companies that had invested in developing local engineering
skills, by and large, the hardware industry had much to cheer
about.
In contrast, policy confusion and bureaucratic hurdles continued
to afflict the software industry. On one hand, policy confusion
arose in part because of a limited understanding of the industry.
The confusion, however, had its advantages. Seshagiri would
have been unable to push through his policy had it not been
for misconceptions that prevailed about software among various
policy makers:
If the administrators and some of the bureaucrats
had too deep a knowledge, they might have prevented bodyshopping
or on site services. Software was seen as a glamorous hi-tech
industry, so they said, all right, do it.[29]
At the same time, the basic framework remained unchanged.
The issue of copyrights continued to plague the industry and,
despite the industry being permitted to export with satellite
data links, establishing an earth station was a long-winded
procedure requiring permission from various government departments.
Indeed, it required ingeniously removing or breaking 25 government
rules before Texas Instruments (TI) could set up the first
earth station in Bangalore.[30]
For instance, no one other than the DoT was legally allowed
to own, install and operate the earth station and related
equipment. [end of page 13] To get around this, an arrangement
was worked out whereby it was made to seem that TI, which
had paid for the equipment, was merely renting the equipment
from the DoT. TIs capital costs were adjusted against
the DoTs rental charges.[31]
In response to industry concerns and demands, the government
announced the Computer Software Export, Development and Training
Policy on 18 December 1986. The aim of the policy was to increase
Indias share of world software production by facilitating
a quantum jump in Indias software exports
besides promoting the domestic industry. The key feature of
the policy was flood in, flood out: Indian firms
would be provided liberal access to the latest software and
software tools so that they could enhance their international
competitiveness, and exports could have a higher value-added
content. To that end the policy placed software imports in
the open general license (OGL) category i.e. software could
be imported in any form in any quantity by anybody by paying
60 percent ad valorem duty.[32]
Various other procedures were also simplified. Those wanting
to import hardware for software export now had to apply to
the IMSC that would convey its decision in six weeks. The
IMSC clearance would also automatically ensure an import license
from the Joint Chief Controller of Imports and Exports and
foreign exchange from the Reserve Bank of India. The importer
would merely have to deal with the Computer, Communications
and Instrumentation (CCI) wing of the DoE, which would employ
the necessary chasers to obtain all post-IMSC
clearances. Applying through the IMSC was no longer the only
alternative either. Applicants could also go through the Export-Import
(EXIM) Bank. Not only was this approach faster but imports
through this route were also given a 50 percent duty rebate.
Importers who went through the IMSC and needed foreign exchange
from the government had to generate net exports equivalent
to 250 percent of the amount. For those using their own foreign
exchange the obligation was 150 percent, while using the EXIM
Bank route came with a 350 percent obligation. Whatever the
obligation, it had to be earned within four years with specific
annual targets.[33]
Those failing to meet these obligations had to pay a penalty
equal to the export shortfall. Exporters could, however, retain
up to 30 percent of excess export earnings and use it to make
new investments to generate further exports. Firms were also
given a foreign exchange allocation of up to 30 percent of
their previous years earning for overseas travel and
other marketing expenses. To ease the availability of funds
at home, the policy promised to make venture capital available.
Ultimately, Seshagiri hoped that providing easy access to
technological developments overseas and encouraging foreign
investment would have a domino effect, encouraging thousands
of small software companies in the country and thereby increasing
export as well as local development.[34]
[end of page 14] He also wanted industry to be independent,
with the government only stepping in to provide promotional
and general infrastructure support. Overall, this policy was
radical, as it explicitly rejected Indian ISI and the ideology
of self-reliance, even as broader economic policy in the 1980s
was characterized by tentative liberalization with efforts
to simplify the regulatory and administrative regime without
making major policy departures.[35]
While the new policy was welcomed by the large, export oriented
firms, smaller firms had their grouses. First, a net export
obligation of 250 percent meant that gross exports would have
to be at least 500 percent of the value of imported hardware
and software. This, along with the annual targets, was felt
to be too stiff for new firms entering the export market.
Other biases against small firms followed. In 1987, the Software
Development Authority, which was established by the DoE in
1986 to formulate and coordinate software policy, announced
that software firms had to register with the DoE to receive
export promotion assistance. Initially, only firms with exports
of Rs.5 million in the previous year were eligible, though
that figure was reduced to Rs.1 million (US$ 72,000) in 1988
and to Rs.0.2 million (US$ 12,500) in 1989. Similarly, in
1988, firms exporting more than Rs.100 million ($7.2 million)
were permitted to pay off their export obligations in any
manner whereas smaller firms were restricted to exports using
the imported computer. But an earlier decision to disallow
the import of either used computers, or computers on loan,
was reversed. Such computers could now be brought in at 20
percent duty for up to a year with a 50 percent export obligation
and up to 6 months with a 25 percent obligation.
Second, firms focusing on the domestic market felt that placing
software under OGL would kill local efforts. In response to
this concern, new norms were announced in February 1987 for
the import of software under OGL. It was now to be restricted
to actual users, including government departments and computer
manufacturers, the DoE, and firms registered with the DoE
as distributors of foreign software, or stock and sale
as it was referred to. In April, the government tightened
the norms further: stock and sale was only permitted
either with the 30 percent excess export earnings or up to
50 percent of income tax paid on the software activities of
the firm in the previous year. The duty on imported software
was raised from 60 to 65 percent in 1988 and to 107 percent
in June 1989. But these steps ensured that only the largest
firms could continue to import, without necessarily addressing
the question of how imports were affecting local efforts.
[end of page 15]
As duties went up the government also levied a 15 percent
travel tax that hit software firms hard as most of them relied
on supplying on site services to their clients. The raising
and imposition of duties did not affect the software industry
alone; they also affected the hardware industry. In the 1987-88
budget, a 10 percent excise tax was re-imposed on computers.
The following years budget laid a uniform duty of 98
percent on all imported systems and peripherals to replace
duties that varied between 0 percent and 147.5 percent. The
1988-91 export-import policy shifted many peripherals and
computer sub-assemblies from OGL to the limited permissible
list, which required prior clearance. An export obligation
of 30 percent of ex-factory value in the case of computers,
and 15 percent in the case of peripherals, was imposed on
all computer firms approved after April 1986 that needed to
import components.
The tightening of trade and import policies reflected Indias
growing inability to pay for imports following the policy
liberalization, and Rajiv Gandhis efforts to shore up
his political fortunes after his liberal policies began to
be perceived as elitist.[36]
There were changes at the DoE too. Seshagiri was transferred
from the DoE as full time head of NIC in January 1988 following
a power struggle between the IMSC and K.P.P.Nambiar who had
taken over as Secretary, DoE, in January 1987. But despite
the backtracking with trade and import policies, some promotional
policies did continue. In 1987, an insurance scheme was introduced
protecting clients from Indian software companies and, in
1988, one-year visas were offered for overseas trainers.
In 1988, the Commerce Ministry sponsored the Electronics
and Software Export Promotion Council (ESC) to promote electronics
and software exports. Although the Engineering Export Promotion
Council (EEPC) had constituted a software panel in 1981 and
included industry representatives on trade visits abroad,
ESC was formed because it was felt that the EEPC was responsible
for too many sectors to be able to pay any special attention
to software exports.[37]
The ESC grew from 40 members to 1800 members in the
mid-1990s, 600 of whom were software firms. It has a working
committee to which 25 members are elected once every 2 years.
The committee includes four members from the government at
the Joint Secretary level, two of whom are from the Commerce
Ministry and one each from the DoE and the Finance Ministry.
ESCs focus is to discover markets, to provide contacts,
and to remove domestic hindrances to exports. To that end
it regularly takes up space at trade exhibitions overseas
and lets it out at subsidized rates to firms. Although such
marketing measures are not directed at helping individual
firms as such, they are praised by both companies and
independent commentators as helping larger companies to diversify
their collaborations and helping small companies to find clients.[38]
[end of page 16]
In 1988, the industry also formed its own trade body, the
National Association of Software and Service Companies (NASSCOM),
to promote its interests. When it was formed, NASSCOM had
38 members who accounted for 65 percent of the industrys
revenues. A decade later, it had 464 members, accounting for
95 percent of industry revenues.[39]
Software
Technology Parks and Other Policy Initiatives since 1990
While the policies of 1984 and 1986 signaled a liberal shift
in Indias computer policies, the shift in the political
fortunes of Rajiv Gandhi slowed promotional policies after
1987. According to Pronab Sen, former economic advisor at
the DoE, amidst the euphoria following the growth in software
exports in the 1980s, arrogance and ignorance also encouraged
the opinion that the software sector did not need much by
way of policy support.[40]
Thus, he scathingly writes,
until 1991-92, there was virtually no policy support
at all for the software sector. Even the term benign
neglect would be too positive a phrase to use in this
connection.[41]
There was ambivalence within the government about actively
promoting bodyshopping as some of the more technologically
conversant policy makers were critical of intellectual
coolieism.[42]
More crucial to Sen was the failure to provide reliable telecommunication
facilities, in the absence of which Indian firms had no option
but to resort to on-site services.[43]
He points out that the lack of data communication
facilities also meant that India was unable to take advantage
of the global demand for data-entry services, something that
it could have well done given its work-force.
It was not until N.Vittal took over as Secretary DoE on 20
June 1990 that many of the specific concerns of the software
industry were addressed. When Vittal took charge, the then
Cabinet Secretary asked him to do something about
software.[44]
Vittal was a vociferous advocate of liberal policies and,
though he had no prior awareness of the issues affecting the
software industry, he was familiar with running an industry,
in contrast to most other bureaucrats. His career as an officer
of the Indian Administrative Services (IAS) included a five-year
stint as Managing Director of the Gujarat Narmada Fertiliser
Corporation (GNFC). While at GNFC he had set up a printed
circuit board plant and a plant to manufacture TV glass shells.
Vittal therefore set about rapidly to address the concerns
of the software industry. The industry wanted high-speed data
communications facilities for exports and lower import duties
on software. It wanted service exports to be treated on par
with merchandise exports. Specifically, it wanted profits
on exports to be exempt from taxes and a concession on the
import of computers under the Export Promotion Capital Goods
scheme. [end of page 17]
Based on his dialog with the industry, Vittal drew up a policy
package and presented it before a meeting of the Committee
of Secretaries on 30 August 1990. At this meeting, the Finance
Ministry agreed to clear the whole package provided he could
guarantee a five-fold increase in exports, to $500 million,
in a year. Though they finally settled on a still unrealistic
target of $400 million, Vittal decided to accept it arguing
that somebody had to take a bold leap forward. Not only did
industry fail to meet the target, many concessions also did
not take immediate effect due to the prevailing political
uncertainty. The concessions had to wait until the Narasimha
Rao government took office in June 1991.
Although many aspects of his package could not take effect
immediately, Vittal pushed to initiate the Software Technology
Parks (STP) scheme to promote software exports from India
using data communication facilities. The idea had been talked
about since 1986, after TI unambiguously demonstrated the
potential of offshore development: it was possible to encourage
the growth of an industry that utilized high-skilled labor
at home, instead of sending it overseas to work at client
sites.[45]
But, as mentioned earlier, TI had to cross many bureaucratic
hurdles before establishing its satellite connection. Even
after operations commenced, security concerns prompted the
Intelligence Bureau to post a person at TIs offices
to check samples of the data being sent.[46]
It was in an effort to overcome such hurdles that the STP
scheme was established.
Under the STP scheme, firms are allowed to import equipment
without an import license or having to pay an import duty.
Similarly, equipment purchased from the domestic market is
exempt from excise duty. Foreign equity up to 100 percent
is permitted and firms are allowed to freely repatriate capital
investment, royalties and dividends after paying the necessary
taxes. In return, there is an export obligation. Firms have
to earn a net amount equal to 150 percent of the hardware
imported within four years. They also have to earn a net amount
equal to 150 percent of their wage bill on an annual basis.
Although the STP scheme was meant for 100 percent export units,
in January 1995 STP firms were allowed to sell up to 25 percent
of the value of their exports to the domestic tariff area.
The figure was revised to 50 percent in 1999.
Administratively, the STP scheme provides a decentralized,
single window clearance mechanism for applications from investors.
The Directors of the individual STPs handle the export valuation,
letters waiving import licenses and customs duty, and other
formalities. In 1993, the Directors were also granted the
power to clear projects without foreign equity up to Rs.30
million, a figure that was later raised to Rs.100 million.
The local Directors were given wide-ranging powers in the
hope that each one would become a friend, philosopher
and guide to the industry while also functioning as
the eyes and ears of the DoE.[47]
[end of page 18] Inclusion of industry representatives
on the boards and councils of the STPs was also meant to emphasize
the industry-friendly approach of the scheme.
In establishing the STP scheme, the DoE had to intrude on
the turf of other ministries. Though the scheme is in principle
no different from the 100 percent export oriented unit (EOU)
scheme or the export processing zones (EPZs) established by
the Commerce Ministry, the DoE had its own reasons for establishing
separate facilities. First, it argued that the export potential
of the software industry merited special attention. Since
the EOU scheme and the EPZs cater to various industries, the
people who administer them often have little knowledge of
the software industry.[48]
Many regulations governing the EOU and EPZ schemes were also
not meaningful when applied to the software industry as the
issue of disposal of obsolete hardware showed.[49]
Under the EOU/EPZ schemes, inputs that are imported duty-free
are bonded i.e. they cannot be removed from the premises.
They can be de-bonded and sold in the domestic tariff area
(DTA) only if all the duties that apply to imports to the
DTA are paid. This presents a problem with hardware that becomes
obsolete very rapidly and has little resale value after a
couple of years. In the absence of clear regulations, the
unwanted material would just lie around occupying space.[50]
Similarly, the DoE also felt that the export obligations
for firms, based on value-added criteria, were unrealistically
high in the EOU and EPZ schemes.[51]
It wanted to place realistic shadow prices on the
two scarce resources, foreign exchange and skilled labor,
so that artificial constraints were not placed on exporters.
The 150 percent export obligation on foreign exchange used
over a four-year period, and the annual 150 percent obligation
based on the wage bill, was set with an eye on competition
from other low-wage countries such as China and the Philippines.
While STPs can be established by anybody, anywhere in the
country, when the scheme was first formulated, reliable and
affordable high-speed data communications facilities were
not available. The 9.6 Kbps lines provided by the DoT and
VSNL did not have enough bandwidth, while the three 64 Kbps
lines were each priced at an equivalent of $180,000 per annum
in comparison to the internationally prevailing rate of $84,000.[52]
When asked to provide more 64 Kbps lines, the DoT wanted users
to deposit money up front so that it could be certain that
the demand existed for a service it would then provide 18
months later. [end of page 19]
Figure 4. Geographical Distribution
of the DoEs Software Technology Parks. Source: STPI.
To get the STP scheme going, the DoE intruded on the turf
of the DoT and took the initiative to provide data communication
facilities and other infrastructure by establishing its own
STPs. The first STPs were established in Pune, Bangalore and
Bhubaneshwar in September, October and December 1990 respectively
(Figure 4). In June 1991, the Software Technology Parks of
India (STPI) was registered as an autonomous society under
the DoE and the three STPs established the previous year were
brought under its umbrella. Later, in 1991, in addition to
the STP at Noida, three more were established in Gandhinagar,
Hyderabad, and Thiruvananthapuram at the initiative of their
respective state governments. The first earth station was
commissioned in Bangalore in April 1993, followed by Hyderabad
in October 1993 and Thiruvananthapuram in April 1994. [end
of page 20] The DoE provided 90 of the 200 64Kbps links in
the country in 1994.[53]
The DoEs STPs provide infrastructure such as core computer
facilities, reliable power, ready to use office space and
high-speed data communication facilities including 64 Kbps
lines, internet access, remote log-in and video-conferencing.
Office space and shared computer facilities in the STP are
meant to encourage small firms, while larger firms that can
afford their own space and hardware can locate anywhere within
a 30 kilometer radius and connect to the earth stations with
a microwave link. The STPs also have a mandate to undertake
technology assessments and market analysis besides organizing
training programs for software professionals and encouraging
the acceptance of new ideas in software engineering.
Soon after the establishments of the first STPs, a balance
of payments crisis in mid-1991 forced the Narasimha Rao government
to turn to the IMF for a fiscal stablization plan.[54]
This plan was accompanied by a structural adjustment program
whose aim was to increase the efficiency and competitiveness
of the economy by relying on foreign technology and FDI to
a greater extent than was hitherto the case. To that end,
a New Industrial Policy (NIP) was announced on 24 July 1991.[55]
The NIP permitted FDI in virtually all sectors of the economy
and substantially loosened licensing to ease entry barriers
for new firms. India also demonstrated its seriousness in
this pursuit by joining the Multilateral Investment Guarantee
Agency in April 1992.[56]
This was not just a one-way flow and soon international investments
were also permitted. In 1997, software firms were allowed
to invest in joint ventures and wholly owned subsidiaries
abroad to the extent of 50 percent of their foreign exchange
earnings in the previous three years, subject to a maximum
of $25 million. In 1998, they were also allowed to offer ADR/GDR
linked stock options to their employees.[57]
In July 1991, the Rupee was devalued by 24 percent and made
convertible on the current account, which made Indian software
cheaper globally.[58]
Further encouraging software exports was the income tax exemption
granted to profits on service exports under Sections 10A and
B, and Section 80HHE of the Income Tax Act. Initially, this
exemption was granted on an annual basis before being made
permanent in 1995. On the trade front, the duty structure
was rationalized and, in the case of software, they were reduced
from 114 percent in 1991 to 0 percent by 1997.[59]
Royalty payments were liberalized[60]
and foreign trademarks and brands could be used freely in
the domestic market. Thus, in April 1993, Indian companies
were allowed to import software packages at the regular duty
and then pay a taxable royalty on each copy duplicated and
sold in the country. DoE permission was required only if the
royalty was more than 30 percent of the local price. [end
of page 21] The Indian Copyright Act, 1957, was amended in
1994 to levy stiffer penalties on copyright infringement.[61]
While the many economy-wide policy changes of the 1990s undoubtedly
helped the rapid growth of the software industry, many sector-specific
policy changes and initiatives also emerged from NASSCOMs
constant interaction with the government.[62]
NASSCOM is represented on various committees of the
GoI in the DoE, the DoT, the Ministries of Commerce, Finance,
External Affairs, Human Resources Development and Labour.
Apart from its interaction with the state, NASSCOM has tried
to cultivate a public constituency for the industry. For instance,
regular club meetings are held in major cities
over cocktails where we invite the member
companies, government officials, the press, leading IT users,
politicians, bureaucrats, diplomats. It is a meeting ground
where a lot of information is exchanged, people are able
to talk frankly. It creates a good understanding between
people across segments, not only among members. We hold
meetings very often, about six club meetings per year per
city.[63]
The result of such efforts was the creation of an awareness
of the policies needed to promote the information technology
(IT) industry, and their potential benefits, among the political
leadership, the upper echelons of the bureaucracy and the
urban intelligentsia. A leading business weekly describes
NASSCOM as an organisation that has lobbied for policy
changes openly, transparently, and in a well-planned manner
in India and abroad on a wide variety of subjects and achieved
considerable success.[64]
NASSCOM also acts as a consulting body for various state
governments. By the late 1990s, virtually every state had
an IT policy, at least on paper, and promoted itself as the
next Silicon Valley.[65]
In addition to an IT policy, state governments typically
try to attract the industry by providing infrastructure either
on their own or by encouraging the private sector. In 1998,
there were at least 25 STPs under various stages of planning
and development in different parts of the country.[66]
This was in addition to the STPs under the DoE. For instance,
the Information Technology Park (ITPL) in Bangalore, is a
partnership between the Government of Karnataka, Tata Industries
and a consortium of Singapore firms. While the data communication
links at these new parks are provided by the Videsh Sanchar
Nigam, Indias monopoly international telecommunications
carrier until recently, private STPs, unlike the DoE STPs,
are allowed to provide connections only to firms within their
premises. To overcome such limitations, private parks began
to provide other infrastructure such as residential units
and recreational facilities. [end of page 22]
The
Indian Software Industry That Emerged
Having described the policy changes that played a crucial
role in the emergence of an Indian software industry, the
paper will briefly describe the characteristics of the industry
that emerged. One key feature of the Indian industry was the
ability to offer the specific expertise in demand by the global
market for software services. The departure of IBM in 1978,
and the failure of ECIL to develop a commercially viable computer,
had forced most Indian users to rely on imports. But since
high duties proved a disincentive to import, mainframes never
had a significant presence in India. Even the few mainframes
that were imported came from various sources. As a result,
in 1990, Computer Maintenance Corporation (CMC), the PSE established
in 1975 with ex-IBM staff to maintain and service all computers
not manufactured locally, was supporting 923 computers of
approximately 60 models of various vintages made by 34 manufacturers.[67]
Thus, in the 1970s, Indian programmers worked on a
variety of platforms. This proved helpful in the 1980s in
acquiring contracts for the maintenance of various legacy
systems.[68]
With the growth in computer manufacture and usage in India
in the 1980s, Unix became the operating system of choice.
As it undertook limited computerization of some of its activities
the government also played an important role in encouraging
the use of Unix. For instance, the Rangarajan committees
report on bank automation took the advice of CMC and recommended
the adoption of Unix-based systems. This potentially large
market encouraged investment in research and led to many innovations
in the design of Unix-based hardware in the late 1980s and
early 1990s.[69]
Firms obtained the Unix source code and modified it to run
on the machines they designed. The DoE helped fund and coordinate
import substitution work in Unix.
The importance of familiarity with Unix cannot be overemphasized.
Unix itself was first developed by Ken Thompson and Dennis
Ritchie in 1969 at Bell Laboratories as a multi-user OS to
provide a comfortable programming environment.[70]
Even as the usage of Unix spread, AT&T refused to support
it, forcing users to come together to share information and
ideas. AT&Ts liberal licensing of Unix to many universities
across the world was particularly conducive to fostering a
collaborative spirit and Unix developed as a truly open system.[71]
It is widely used as the worlds leading computer
vendors adopted different various versions. According to a
review on its 25th anniversary,
Putative standards and consortia have done
nothing to calm the splintered 25 year old. Solaris, HP-UX,
AIX, Ultrix, and myriad derivatives sit at the . . . table
today. Since the late 1970s, Unix has influenced every operating
system that is sold today. Unix has had a profound impact
on DOS, Mac OS, and Windows NT. Windowing, multitasking,
and networking would not be what they are today without
Unix.[72]
[end of page 23]
As circumstances forced Indian programmers and engineers
to adopt Unix,
India entered the 1990s in a position of
special advantage. Indian programmers are not only well
educated and English-speaking, but out of necessity theyre
keenly focused on client/server or multi-user solutions
for PCs running DOS (with Netware) or Unixjust the
kinds of solutions that U.S. and European companies are
rushing to embrace.[73]
Despite the expertise, exports grew slowly in the 1980s,
because Indian software firms were stuck in the relatively
low-value added production segments such as coding and testing,
or in maintenance and reengineering[74]
tasks, as opposed to the more conceptually demanding
and lucrative segments such as requirements analysis or design.[75]
Further, a substantial proportion of the low value-added
software exports took the organizational form of on-site services
which, in the case of Indian firms, meant bodyshopping. Bodyshopping
had its advantages and limitations. On one hand it provided
easy access to the global market as it represented
almost inputless exports which
require only a contact overseas, a little finance, and the
names of local programmers who can be hired if a contract
is forthcoming. Such a path can also be followed relatively
independent of government policy measures, particularly
those on imports, because no imports are needed.[76]
The drawback, however, was that once sent overseas, many
employees tended to quit and seek better paying and professionally
more challenging jobs. The high employee turnover only reinforced
the tendency of Indian firms to compete on the basis of low
costs rather than being able to fall back on a repository
of technical and managerial expertise acquired from previous
projects. It also led to an under-utilization of Indian engineering
talent.
Despite the drawbacks of bodyshopping, and the kind of work
that it entailed, firms had few other options. In the absence
of easily available and affordable data communication facilities,
firms could not shift to offshore services. Further, with
the exception of a few firms such as Tata Consultancy Services
(TCS), which has been an exporter since the 1970s, it was
not until the 1980s that Indian firms began to make their
presence felt as suppliers of software in the global market.
Firms from a country that had hitherto merited no consideration
as a source of IT products had to establish their credibility
with global customers before the latter could be convinced
that their software, that was strategically crucial to business
operations, could be written several thousand miles away.
A study of 230 projects across 125 firms in India shows that
reputation matters in software contracting, even after controlling
for project, firm and client characteristics.[77]
[end of page 24] A reputation could not be established
overnight and had to wait until at least a few projects were
completed satisfactorily. Interviews with industry representatives
indicated a widespread agreement that, in order to gain the
confidence of western customers, there was no alternative
to on-site services in the 1980s. Besides, while Indian engineers
had the necessary technical skills, they had been trained
in a closed economy. On-site services provided exposure to
not just new technologies but also management processes, market
trends and socially specific communication protocols with
customers.
During the 1990s, however, the Indian software industry underwent
significant changes. There was a shift away from onsite to
offshore facilities following the commissioning of the STPs
(Figure 2). It is more than mere coincidence that the shift
from a linear to an exponential trend in software exports
began in 1993, the year that the first earth stations were
commissioned at the Bangalore and Hyderabad STPs. STPs have
also proven popular with industry as the rising share of STPs
in software exports illustrates (Figure 1).
STPs became popular because, as one interviewee mentioned,
they provided a step-function jump in terms of
the work done and value-added at home. For instance, firms
could exploit the 12.5-hour difference between Indian Standard
Time and Pacific Standard Time to undertake maintenance and
reengineering after regular users in the US left for the day.
This, in turn, meant lower costs and greater profitability,
as overall resource costs in India are only about a third
of what they are in the U.S. One reason for the lower costs
is that engineers in India can be paid just an Indian wage
whereas, once abroad, they also have to paid an overseas allowance
to cover their expenses.[78]
Offshore development also offered the advantage of having
most employees under one roof instead of them being scattered
across many customer sites. This allows them to interact with
one another and learn from other projects in a way that communication
by email alone does not permit. It also helped firms build
a repository of knowledge that helps in competing for subsequent
projects. Though this did not overcome the problem of employee
mobility and labor turnover, in the event of a crunch, employees
could be moved from one project to another or new hands could
be hired at local wages.
With the availability of data communications facilities,
offshore software factories emerged complete with the infrastructure,
technology, training programs, quality processes, productivity
tools and methodologies of the customer workplace. For instance,
by October 1999, 140 Indian firms had obtained the ISO 9000
certification offered by the International Standards Organization,
and 134 firms were awaiting certification.[79]
27 firms had obtained SEI-CMM certification of the
Software Engineering Institutes (SEI) five-stage Capability
Maturity Model (CMM).[80]
[end of page 25] Not only were six of the worlds
12 CMM Level 5 firms Indian, but NASSCOM also claimed that
in the software industry, India would soon have more
ISO 9000-certified companies in the world than any other country.[81]
There are at least two reasons why quality certification is
widely sought by the Indian software industry.[82]
First, it is a marketing device, to signal to potential customers
that the certified firm follows a well-defined and docume