Introduction

The Indian economy is at a critical stage in its process of structural transformation. The share of value-added as well as employment in agriculture continues to fall along expected lines, but the manufacturing sector has failed to expand correspondingly. The sector’s contribution to value-added remains low at around 15%, and its share of employment too has been more or less stagnant since the 1980s at less than 15% (State of Working India 2018). Further, there is evidence to suggest that the Indian experience is part of a global trend of ‘premature deindustrialization’ (Rodrik 2015), wherein peak share of manufacturing in value-added as well as in employment is being reached at a much lower level of per capita income than in the past.

Earlier phases of structural transformation in Western Europe, as well as the late industrialisers in East Asia, relied primarily on labor-intensive manufacturing to move a large agricultural workforce into more productive non-farm activities. Industrialization was thus seen to be the prime mover of structural change (Storm 2015). There were two important aspects to this: first, the property of manufacturing to display ‘unconditional convergence’ to global standards, and second its ability to create employment in relatively large numbers for workers without high levels of formal education. This neatly met two key needs: productivity growth and employment that matched the profile of the labor force (Rodrik 2011).

Today’s structural transformers face two major constraints: one is that they have to compete in a relatively more open economy with several more advanced industrialized countries, and two, manufacturing is no longer as employment intensive, particularly with respect to relatively unskilled labor and therefore further away from the comparative advantage of these countries. Both these may contribute to a failure of manufacturing to lead the process of structural change by drawing labor away from low-productivity sectors.

Several writers have advanced the proposition that countries like India may be experiencing an alternative process of structural change wherein the service sector leads economic growth as well as structural transformation (Economic Survey of India 2014–2015; Ghani and O’Connell 2014; Amirapu and Subramanian 2015; Dasgupta and Singh 2005). The question that arises here is, do service industries possess the attributes necessary to drive structural change, the way manufacturing industries have done in the past? In this respect, Amirapu and Subramanian (2015) have proposed that, rather than manufacturing or services, the relevant dimensions are ability to achieve high levels and growth rates of productivity, domestic as well as international convergence, expansion of a sector in its use of inputs, comparative advantage and exportability.

It is in this context we evaluate the potential of a key Indian service sector industry, Information Technology and Business Process Management (hereafter IT-BPM). Surprisingly, given the industry’s high profile and public visibility, it has not attracted much scholarship, particularly since the early 2000s (e.g., Kambhampati 2002; Kaushik and Singh 2004; Singh 2005). The present paper seeks to fill this gap.

Before proceeding further, we take a moment to define the industry. The IT-BPM industry is made up of the following segments: IT services, Business Process Management (BPM), Packaged software products, Engineering Research and Development (ER&D) and Hardware. Packaged software products and ER&D includes all activities that relate to generation of Intellectual Property (IP). The IT services segment includes Custom Application Development Management (CADM), Infrastructure Services Outsourcing (ISO), Testing, Support and Training, System Integration, IT Consulting and other related activities. Hardware includes all the business and personal user equipment including servers, network equipment, desktop and laptop computers, etc. The BPM market includes all activities in a company’s value chain that are standardized, usually not core and are subject to commercial benefit from remote delivery outside a firm’s physical or organizational boundaries. This includes low-skill/manual activities: voice and non-voice (transaction fulfilment), as well as high-skill/cognitive activities: knowledge intensive tasks such as researching on stocks and bonds.Footnote 1

Between FY09 and FY16, IT-BPM grew faster than overall GDP with the result that its contribution to GDP increased from 6 to 9%. Total IT-BPM exports grew 152% from USD 50bn to USD 126bn between FY10 and FY18. Notwithstanding the relatively low levels of employment in this industry (it employs around 4 million workers or less than one percent of the workforce) and India’s hitherto low-end position in the global value chain, a policy focus on the IT-BPM industry can have spill-over effects on other services subsectors such as Tourism, Retail, Real Estate, Financial Services as well as on driving competitiveness of local Industry and Agriculture.

Two questions are relevant here. First, what is the potential of the IT-BPM industry for expansion? And can this expansion also result in a wider transformation of the Indian economy, reducing the share of workers engaged in agriculture and other informal activities?

In this article our focus is largely on the first question. We analyze the past performance and future potential of India’s IT-BPM industry and show that, to an extent, it can make up for the absence of a strong manufacturing sector. Contribution to income, exports and employment by IT-BPM can increase further as general-purpose-technologies such as industrial automation and Internet-of-Things penetrate deeper and as governments, including that of India, spend more on IT-led delivery of public services. We also argue continued policy support is important for the industry to remain a driver of structural change and economic growth in India.

This article is organized as follows. Section “Manufacturing and services: an increasingly weak distinction?” briefly reviews the relevant literature on structural change and economic growth and makes a case for doing away with the traditional policy choice of manufacturing versus services. In “IT-BPM: role of policy and importance to the Indian economy” section, we discuss the importance of India’s IT-BPM industry and the role of policy. Section “India in the global IT-BPM industry and the way forward” evaluates the present position and future prospects of the industry including India’s position in the technology value chain as well as future opportunities for the industry in the context of relocation of global manufacturing value chains and growth of the domestic market. In “Potential for job creation” section, we discuss the likely impact of technology on jobs in the overall economy, direct and indirect job creation potential of the IT-BPM sector and the spill-over effects of technology as an enabler of new business models. Section “Key takeaways for policymakers” draws on lessons from relevant literature for effective industrial policy and “Conclusion” section concludes.

Manufacturing and services: an increasingly weak distinction?

India’s rapid growth in the last two decades has come from an expanding services sector rather than from manufacturing. Workers leaving agriculture have been absorbed in low-productivity services such as construction and retail and not in manufacturing, especially of the labor-intensive variety (State of Working India 2018). Manufacturing’s share in GDP as well as in employment has remained below 15% since independence.

The Indian economy can be viewed as having a traditional sector including much of agriculture, unregistered or unorganized manufacturing, construction, retail, and hotels and restaurants. These parts of the economy have low productivity, their output is usually non-tradable, and are characterized by surplus labor in the Lewisian sense (Lewis 1954). The modern sector includes registered or organized manufacturing (relatively more skill and capital-intensive compared to unregistered manufacturing) and highly productive services such as IT-BPM, business services, real estate and financial services and insurance. This modern sector has high levels of productivity, output is usually tradable, employs skilled labor and some key subsectors such as skill-intensive manufacturing and IT-BPM are constrained by inadequate supply of labor. Economic growth in such a dual economy can be thought of as two distinct but inter-related processes (McMillan et al. 2016): growth due to structural change (Lewis process) and growth due to accumulation of physical and human capital (Solow process).

Rapid industrialization or movement of resources to high productivity sectors alone without focus on fundamentals will fuel growth in the short term and then plateau as has been the case with India. On the other hand, investment in fundamentals will help in the long-run but investment only in fundamentals ignoring structural change will give only modest growth. South Korea, Taiwan and Hong Kong are examples of countries that have had sustained periods of prosperity owing to their focus on both (McMillan et al. 2016). In India’s case, Ahsan and Mitra (2016), using data from 1960 to 2004, show that contribution of structural change to overall productivity growth has been small and within-sector growth has been a volatile but major contributor especially in the 2000s.

Advanced economies in the West as well as in Asia have all taken the manufacturing route to structural change and economic growth. This is a less effective option now for developing countries primarily because of rapid diffusion of technology leading to lesser employment in manufacturing. As a result, there is a lack of consensus on whether reliance on manufacturing-led growth is still worth pursuing or whether services-led structural change can also drive economic growth. At one end of the spectrum are economists such as Rodrik (2011), who argue that manufacturing is the vehicle for economic growth. Rodrik shows that manufacturing, unlike economies as a whole, exhibits rapid growth leading to unconditional (i.e. notwithstanding geographic or country-level influences) convergence toward the frontier. This implies that manufacturing in poorer countries and less productive manufacturing activities grow more rapidly than manufacturing in richer countries and more productive manufacturing activities.

On the other end of the debate are Ghani and O’Connell (2014) who have analyzed data for various countries including India and show that services growth has shown much stronger convergence between countries compared with manufacturing which has shown only mild convergence.

Amirapu and Subramanian (2015) conclude that the question is not of manufacturing versus services-led structural transformation but that of comparative advantage defying or comparative advantage deifying activities-led growth. They identify five conditions a subsector needs to satisfy to be a driver of economic growth: high level of productivity, high growth rates of productivity and domestic as well as international convergence, expansion of a sector in its use of inputs, comparative advantage and exportability. We reproduce a summary scorecard on their assessment of various parts of the Indian economy on these conditions between 1984 and 2010 (Table 1). The last row on IT-BPM has been added by us.

Table 1 Evaluation of subsectors.
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The table shows, for example, that Registered Manufacturing in India has potential for structural transformation by virtue of having very high levels of productivity compared with unregistered manufacturing as well other parts of the economy. With respect to convergence, i.e., labor productivity growth being negatively correlated with initial level of labor productivity, registered manufacturing exhibited strong unconditional convergence within India. However, international convergence is elusive as the subsector exhibits labor productivity growth that is several percentage points below the international frontier. With respect to its ability to absorb labor, India is experiencing premature de-industrialization and the share of industrial employment has failed to increase. Registered manufacturing also employs a disproportionately high share of labor with relatively higher levels of education which is not in alignment with India’s comparative advantage. While the output is clearly exportable, the inability to converge to the international frontier and to absorb labor and misalignment with India’s comparative advantage have held the manufacturing sector back from being a driver of economic growth.

In the rest of the article, we examine the IT-BPM industry’s past and potential performance along these dimensions and demonstrate how it is well-placed to be a driver of India’s economic growth.

IT-BPM: role of policy and importance to the Indian economy

The role of industrial policy

Indian manufacturing has had a few success stories over the years, such as Pharmaceuticals and more recently Automobiles. But overall, there is agreement that, a combination of political economy, suspicion of private entrepreneurship, and lack of a well-coordinated industrial policy failed to develop India’s manufacturing sector and, had a negative effect on it through restrictive rules and myriad regulations (Bhagwati 1993; Chibber 2003; Nagaraj 2017). On the other hand, there is considerable disagreement regarding contribution of India’s policy regime in growth of the IT-BPM industry.

Some researchers (Lin 2012; Kapur 2002; Balakrishnan 2006; Heeks and Nicholson 2004) point to a more facilitating role played by government in IT-ITES (IT-enabled services) as compared with interference in manufacturing. This includes greater labor market flexibility, establishment of Software Technology Parks since 1989 with world-class infrastructure, heavily subsidized technical education, tax breaks, an overall export enabling infrastructure, efficient collective action by industry body NASSCOM (National Association for Software and Services Companies) working jointly with the government and existence of rules such as the MRTP Act (Monopolies and Restrictive Trade Practices) which restricted large industrial houses from getting bigger by setting up IT companies. Indefinite designation of English as India’s other official language after the 1950s ensured that by 1970s, the country had a large pool of English-speaking labor force (Kapur 2002).

While the above-mentioned items helped the industry in its infancy, the reforms of 1991 provided a serious impetus. Software firms which lacked collateral had hitherto found it difficult to borrow. After 1991, they were granted freedom to raise equity capital domestically as well as from markets abroad. Even in its somewhat matured state now, IT-ITES industry continues to get favorable policy treatment from various state governments.Footnote 2

On the other hand, Dossani (2008) is of the view that the industry’s growth has been a result of private entrepreneurial skills and that the state in India played a restrictive role. He documents the government’s suspicion of IT using the case of Texas Instruments- one of the earliest MNCs in India in this space. The company was subjected to daily end-of-day inspection, of export of software code to its head office in the USA. Private enterprise had proven its capabilities since the 1970s and could establish more trust with clients in the western world during the Y2K boom in demand for IT services. In conjunction, drastic reduction in IT/Telecom infrastructure costs facilitated the offshore delivery model.

Nilekani (2009) has a more balanced view of the government’s intent in that Rajiv Gandhi government’s New Computer Policy of 1984 was seen as a move in the right direction and gave wings to fledgling companies such as Infosys in their efforts to tap export markets. He also acknowledged the resistance in overall government machinery regarding adoption of IT and lack of basic infrastructure such as electricity that never allowed IT to take off in the domestic set-up till the early 2000s. Lee et al. (2014) attribute Indian IT’s success to initial catch-up followed by leap-frogging to high value adding work via innovation, critical events in the technology landscape such as the Y2K problem and to support from government policies such as those related to foreign exchange and special economic zones.

Nevertheless, it seems fair to say that, at least in part as a result of industrial policy at the Central as well as the state level, India now has a strong and competitive IT services industry. Its contribution to India’s GDP at ~ 7%, share in exports at ~ 30% and share in service exports at 60% underscores what the sector has achieved in comparison with other segments of the economy. However, the industry is not a big direct contributor to job creation—direct employment at 4 million is less than 1% of India’s workforce. Considering indirect effects, total jobs created including those due to significant investments in the IT industry are estimated to not exceed 10–13 million. For comparison, construction employs around 50 million workers. Looked at this way, the industry perhaps does not offer much hope in alleviating India’s jobs crisis. However, as we discuss below and as also argued by Dossani (2018), a large part of the world IT spending has still not been outsourced or offshored and the growing digitalization of businesses the world over including new purely digital business models and technology-based platforms offers tremendous scope for direct and indirect job creation in the Indian IT industry. Finally, while we do not discuss this in this article, we do acknowledge contributions of the IT-BPM sector in developing an aspirational middle class in India as well as a tool for better governance and delivery of public services.

Contribution to exports

India’s service sector as a whole clearly stands out for its high share in exports relative to its share in GVA (Fig. 1). Services sector’s contribution to exports as a proportion of its contribution to GVA was 0.77 in FY07 which, although lower in FY17 at 0.7, is still much higher than the world average at 0.3 in FY07 and 0.34 in FY17. This is in large part attributable to the IT-BPM sector. Its share in exports is ~ 30%, its share in service exports is ~ 60%.

Fig. 1
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Source: India’s Economic Survey (2019)

Share of service in exports to share of services in GVA.

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Indian IT-BPM industry is primarily an export dominated story with total exports at USD 136 billion more than three times of domestic sales at USD 41 billion for FY19. In FY10, domestic revenues for the industry at USD 24 billion were nearly half of exports revenues at USD 50 billion and the gap has grown over time (Fig. 2).

Fig. 2
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Source: India’s Economic Survey (2019)

Trend in domestic versus export revenues for Indian IT-BPM.

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Total IT-BPM exports grew 152% from USD 50 billion to USD 126 billion between FY10 and FY18. During the same time, software products and engineering R&D services segment grew the fastest (+ 211%) from USD 9 billion to USD 28 billion followed by IT Services (+ 141%) from USD 29 billion to USD 70 billion and BPM (+ 133%) from USD 12 billion to USD 28 billion. As a result, the share of software products increased over the period from 18 to 22% (Fig. 3).

Fig. 3
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Source: India Brand Equity Foundation

Changing composition of IT-BPM exports (% share).

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Given the weakness in manufacturing exports, the IT-BPM sector has consistently been contributing toward foreign exchange earnings- a much needed cushion to compensate for India’s price inelastic oil, gold and electronics imports. In the 10 years between FY10 and FY19, IT- BPM exports have increased much faster than overall services exports, merchandise exports and total exports. While total exports almost doubled in value over this period, IT-BPM exports increased 2.7 times (Fig. 4).

Fig. 4
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Source: India’s Economic Survey (2019)

IT-BPM exports have risen faster than overall as well as other service exports.

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In terms of regional break-up of gross exports, the US as a market dominates with 62% share (Fig. 5) followed by Europe at 23.5% and East Asia at 7.2% (Gupta et al. 2017). However, when looked at as value-added in final demand, these three regions contribute equally. This is in sync with our understanding of business models of Indian IT companies i.e. mainly focussing on offshore outsourcing business for IT majors in the USA, a relatively lower value-added activity. Interestingly, India’s IT exports looked at as value-added in the gross exports of major regions of the world reveal East and South-East Asia on top with ~ 55% share. This means that a large proportion of IT-BPM exports to this region are of a higher value-added variety than those going to the USA and Europe.

Fig. 5
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Source: Gupta et al. (2017)

Buyers of India’s software exports (% share in gross & value-added terms).

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The foregoing demonstrates how the IT-BPM industry fulfils the ‘exportability’ condition listed in Table 1 and has been a strong pillar of India’s economic growth.

Employment, wages and firm size

Of India’s total workforce of ~ 480 million, total employment in the IT-BPM industry is ~ 4 million. Given its high contribution to GDP (around 7%), the sector thus has a low ‘job intensity’. Job intensity is defined as a sector or industry’s share in total employment divided by its share in value-added. As shown in Fig. 6 using data for 2019, Construction leads the way here with a job intensity of 2.1, followed by 1.9 for Hotels and Restaurants, 0.95 for Trade and 0.3 for Business Services (which includes IT-BPM). Note that job intensity is essentially the reverse of relative labor productivity. Thus, in terms of the desirable conditions from Table 1, the IT-BPM industry demonstrates very high levels of productivity though, thus far, its ability to absorb labor in large numbers has been poor.

Fig. 6
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Source: KLEMS Database

Job Intensity (share of employment/share of VA).

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IT services require far more technical skills and technology-oriented degree education as compared to BPM services which normally employ English-speaking graduates from all streams. This is in line with availability of a skilled talent pool, but by itself, this segment is not labor-intensive globally.

Despite the low direct employment provided by the industry, however, IT-BPM also has substantial multiplier employment effects on other sectors of the Indian economy. Academic research and leading consulting organisations (Tholons 2011; NASSCOM; Dahlman 2009) estimate the multiplier effect to be 3 to 4 i.e. every new tech job creates 3 to 4 additional jobsFootnote 3 in the overall economy.

As compared to most of the service sector, however, the industry employs labor with a much higher level of formal education. Hence wages are higher than in other sectors and working conditions are in line with those prevailing internationally, thereby indicating that the sector offers better quality work opportunities. Based on a survey conducted by a leading human capital consulting firm (Monster India/Paycheck.in with IIM- Ahmedabad as research partner), wages in IT services are substantially better than other sectors within services and manufacturing.Footnote 4 Looking at data for the eight sectors covered in this report, highest median gross hourly wages were paid in the IT services sector standing at INR 317.6 (~ USD 4.5) in 2017. While well-paying in the Indian context, it must be noted that these wages are low and competitive in the global context as we discuss later in Sect. 4.2.

Wages in the IT-BPM sector are higher than the average wage in the economy for both entry-level and senior positions (Fig. 7). Khatiwada and Flaminiano (2019) note that entry-level salariesFootnote 5 were 2–3 times and senior-level salaries were 4–15 times more than median salaries in the economy.

Fig. 7
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Source: Khatiwada and Flaminiano (2019)

Wage premiums in IT-BPM (2018).

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Lastly, we note that, based on industry body NASSCOM accounts, a few large and medium sized firms (Table 2 based on data for 2019) contribute a bulk ~ 80% of the industry’s exports revenues (~ 65% employment) and small and emerging firms employ ~ 33% of the industry’s workforce (~ 20% revenues).

Table 2 Size distribution of IT-BPM firms.
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This indicates the tendency toward larger sized firms in an economy otherwise dominated by micro and small enterprises. A different source, the All-India Quarterly Employment Survey of the Indian Labour Bureau reported that, as of 2016, nearly 4% of firms in IT-BPM had more than 5000 employees, far greater than any other sector. Manufacturing was a distant second at 0.26%. Thus, despite being much smaller than manufacturing, IT-BPM accounts for 48% of establishments with more than 5000 workers (State of Working India 2018). Since quality of work is known to improve with firm size due to more regulated labor practices, taken together these data point to better quality and well-paid job opportunities in this sector.

It should be clear from the foregoing that the IT-BPM industry is worth focusing attention on as a leading service-sector industry to aid India’s structural transformation. However, the question is, what are its prospects for growth and employment generation? We turn to this question next.

India in the global IT-BPM industry and the way forward

World spending and India’s share

Indian IT caters to a small portion of world spending but has a high share of ‘global sourcing’. The global IT-BPM market of USD 4.5 trillion is made up of the following segments: IT services (USD 694 billion), BPM (USD 198 billion), Packaged software products (USD 515 billion), Engineering R&D (USD 1954 billion) and Hardware (USD 1113 billion). India’s IT-BPM industry has high shares in the global market for IT services at 13% and BPM services at 18%. The industry’s shares in Engineering R&D and Hardware sub-segments are minuscule at 1.8% and 1.3%, respectively, with negligible share in the packaged software products market.

The Indian IT-BPM industry is at the frontier in its chosen domain and over the years has converged to productivity standards in the more advanced markets thus satisfying the condition for ‘international convergence’ from Table 1. Looked at as a share of global outsourcing (as opposed to the entire market) India has an impressive 64% and 38% share in IT services and BPM, respectively. But these activities are relatively low value adding and low skilled within their respective domains and more amenable to automation. India’s share in the relatively higher value-adding software products and engineering space is low at 1.4%. China has a much larger share given its dominance in the manufacturing sector. India’s share in hardware pertaining to IT-BPM sector is 1.3%. Again, China is much stronger here. This segment of the market is employment intensive and China also benefits by embedding/bundling indigenously produced software with hardware.

While India is a leader in the world IT services market, China has been rapidly growing its share of world exports (Fig. 8). While India started from a higher base, between FY04 and FY17, China’s IT services exports have risen 10 times (from USD 2.2 billion to USD 27 billion) whereas India’s have risen ~ 5 times (from USD 17 billion to USD 79 billion) and growth in India’s revenues has plateaued over the last few years. Released in 2015, China’s “Made in China 2025” industrial policy is aimed at rapidly expanding ten high-tech sectors and developing its advanced manufacturing base. The main aim of this policy is to reduce dependence on foreign technology and achieve a dominant position in global markets.Footnote 6

Fig. 8
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Source: India’s Economic Survey (2019)

World IT services exports (USD bn).

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We now look at the different segments of the market more closely. Software product and Engineering R&D includes all activities that relate to generation of Intellectual Property (IP). Given the nonlinear payoffs from R&D, high investment requirements and an enabling ecosystem to encourage research, returns/margins are typically much higher. This also includes managing the product lifecycle.Footnote 7 Packaged software products, in particular, include off-the-shelf and standardized products that cater to a very large market and their development process must typically have foreseen requirements of all potential users. Accordingly, large software products companies are domiciled in markets such as the US with the maximum end-users.

Often these standardized products also need some level of customization and further development, integration with existing systems or software already in use in end-user environments. This and activities such as testing software before a software products company launches it to end users, managing a firm’s existing IT infrastructure, implementation of software products, training end-users, software related documentation and troubleshooting are collectively a part of IT services. This is the segment in which Indian IT firms have a very high share in the global market. The IT services revenue of Indian IT-BPM industry is broken-up as follows: CADM- 47%, ISO- 21%, Testing- 8%, Support and Training- 7%, System Integration- 3%, IT Consulting- 3% and others- 11%.

The hardware market includes all the business and personal user equipment including servers, network equipment, desktop and laptop computers, etc. India is virtually absent from this market at a global level. Very little of the USD 14.5bn Indian hardware market is produced in India and the rest is all imported.

Following Buxmann et al. (2013), we note that one way to classify softwareFootnote 8 is on the level of standardization i.e. custom or standard software. India mainly deals in custom software and as noted above, the lack of a domestic market means it must compete with players in the global market. Standard software is produced for the mass market- for example, Oracle and SAP. Even standardized software can be customized to some extent often through something called integration software. The licensing side of software business (“Inventor” in Fig. 9) is more profitable than the services side (“software re-seller” in Fig. 9). Software can be reproduced cheaply because variable costs are close to zero. While licensing is far more profitable business than providing services, over a period, pure-play product companies have also increased the share of services in their total revenues. Indian IT players are primarily involved on the IT services side which relates to the implementation and operating software sides of the ecosystem. In their role as consultants and integrators, they act as resellers of software. We note that high-end activities i.e. product research, product development, marketing and documentation are usually carried out by software creators themselves. Lower value-adding activities such as implementation, training, pre-sales support and maintenance are usually outsourced.

Fig. 9
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Source: Author’s own understanding of the industry

Software business-role of inventors and re-sellers.

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India’s position in the value chain

Indian technology industry has historically been on the lower side of value-added. The ‘Smile Curve’ (Fig. 10) represents India’s position in the global IT-BPM value chain (Jui 2010). On the y-axis is the value added in the IT software value chain and on the x-axis are the major steps starting with innovation, product definition, software development, deployment and integration and activities involved in reaching the end customer. A bulk of the work done by Indian IT companies falls in the middle, low-value-adding segments of the chain highlighted in red.

Fig. 10
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Source: Jui (2010)

Smile curve.

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Though undergoing a revamp now, the hitherto widely followed Global Delivery Model of India’s major technology companies involved high value activities delivered onshore and relatively low value adding and labor-intensive activities performed offshore in locations such as India. Table 3 shows a representative split of activities in software development for Infosys Technologies.

Table 3 Activities in software development—Infosys Technologies.
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India’s dominance in the relatively lower end of activities in the technology sector are also a reflection of the R&D and innovation ecosystem in India. Based on data up to 2014, global consulting firm PWC released the 100 Global Software Leaders Report. At that time, total revenues of all software companies globally were ~ USD 385 billion. Of this, the Global Top 100 had revenues of USD 272 billion (71% share). The Top 100 list is dominated by firms from the US with no representation from India. The Top 30 list from emerging markets is dominated by China (USD 2.2 billion) and Russia and other Eastern European countries (USD 2 billion). There were only 4 Indian companies in the emerging markets list.

Based on data from the US-based National Science Foundation’s Science and Engineering Indicators for 2018, worldwide expected expenditures in 2015 on R&DFootnote 9 were USD 1.9 trillion. Of this, spending by US, China and India was USD 497 billion, USD 409 billion and USD 50 billion, respectively, in PPP terms. The inadequacy of India’s USD 50 billion R&D expenditure can be judged from a comparison with that of some large firms such as Huawei (USD 14 billion), Amazon (USD 22.6 billion), Alphabet (USD 16.6 billion), Intel (USD 13.1 billion), Microsoft (USD 12.3 billion) and Apple (USD 11.6 billion).Footnote 10 India’s stock of current patents is at 60,000 in comparison with 2.9 million for the US and 2.1 million for China.

However, what makes India’s position competitive is the significantly lower wages (Buxmann et al. 2013). In 2010, the annual salary of an IT project manager in India was EUR 15,000 which is approximately 1/4th of that in USA (EUR 59,000) and Germany (EUR 55,000). Salary for this profile in China was EUR 20,000 in 2010 and has shot up rapidly in the years after that.

There are two key avenues for expansion of Indian IT-BPM under the present circumstances. First, with relocation of manufacturing value chains from China to other Asian countries, an opportunity opens to expanding IT exports that support these GVCs. And second, the Indian domestic market remains quite underdeveloped even in industries where IT has become part of core functioning, such as Banking.

Despite the historical positioning of Indian firms in the IT-BPM industry, an aspect that deserves discussion is the work done by early stage privately held firms. We quote one such example of a firm—Automation Anywhere (AA), that originated in India (Baroda in Gujarat) but moved base to San Jose in the USA. AA is among the top 3 players in the world in software for Robotics Process Automation (RPA). According to a leading IT Consulting firm GartnerFootnote 11 (2020), the RPA software market is one of the fastest-growing segments in the enterprise software market, with a rising competitive bar and many new entrants. It grew 63.1% in 2018 and 62.9% in 2019, compared with the 13.5% and 11.5% growth, respectively, of the overall enterprise software market. The RPA software market includes more than 45 vendors as of mid-2020 with the ten largest RPA software vendors accounting for over 70% of market share in the worldwide RPA market. AA is among the four ‘Leaders’ on the Gartner Magic Quadrant for Robotics Process Automation (out of sixteen vendors) well ahead of much bigger players in the IT industry such as Microsoft, SAP, NTT, Edgeverve Systems (part of Infosys). The other categories in the Magic quadrant are Challengers, Visionaries and Niche players.

From an employment perspective, AA creates jobs in India for engineers from Tier 2/Tier 3 institutions who find RPA a more attractive career option than it is for engineers from the Tier 1 institutions. Primary reason attributed to this is the relatively ‘easier’ technology behind proprietary RPA solutions i.e. it requires simple coding skills akin to those required for Visual Basic for Applications (VBA) coding in MS-Office. Given the technology, AA’s implementation partners (large Indian IT Services firms) are able to hire from several rural locations and have observed them grow on to previously inaccessible job roles such as that of a Solution Developer.Footnote 12

Relocation of manufacturing GVCs and opportunity for IT exports

Growth of China’s software industry has been driven by captive demand from its hardware industry (Jui 2010). The manufacturing sector in general has also provided a captive market for the Chinese software industry. With the trade wars between China and the US, several companies are relocating from China, and this presents an opportunity for Indian IT. A study by analysts at investment bank Nomura recently identified 56 companies that exited China over a seventeen months period.Footnote 13 Only 3 relocated to India and a majority moved to Vietnam and Thailand. Relocation of GVCs to India and their continued success will definitely need development and expansion of a robust services setup supporting manufacturing such as logistics, and warehousing.

As a starting point for potential for success of this relocation strategy, we next look at the current level of penetration in ‘factory Asia’ by Indian IT firms. This section draws on work by Gupta, Oak and Mukherjee (2017). A limitation of the study is that it is based on input–output data till 2011. We consider the value of India’s exports to South-East Asian countries, the total world imports of IT services by these countries and supply of IT services by their domestic industry. We note that, at least as of 2011, Indian IT’s share of overall demand in these countries is low (< 10%) except in Indonesia. Most countries have a domestic industry equal to or slightly larger than the purchases from Indian IT industry. From this, it does not appear that these countries individually are a threat to the Indian IT industry and its prospects in the East and South-East Asia market.

Indian IT and the domestic market

Using data from the database ceic.com, we next look at how the IT-BPM sector’s exports and local sales as well as workforce catering to exports and local markets have grown over the 10-year period from FY10 to FY19. In INR terms, both the exports and domestic markets have more than doubled in the 10 years i.e. from a base of 100 to 272 and 252, respectively (Fig. 11). However, since export revenues start from a much higher base and grow faster, the gap between them has grown. In FY 19, revenues from domestic sources for Indian IT-BPM industry were ~ 23% of total revenue.

Fig. 11
figure 11

Source: www.ceic.com

Revenues & Jobs Growth (exports & local sales): Index, FY 2010 = 100.

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We have analyzed a sample of FY19 revenues of top Indian technology firms (Table 4). India business contributes to ~ 4% of their revenues. Focus is mainly the exports markets and the domestic market is considered low margin and the government market marred with elongated payment terms/heavy up-front investments.

Table 4 FY19 total and domestic revenue of Indian IT-BPM firms.
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The domestic market is split as follows: IT services (41%), BPM (10%), Software, products and engineering (13%) and Hardware (35%). A key point here is that very little of this hardware expenditure is on domestically produced hardware. As a result, domestic capacity is grossly underutilised. Production units of major personal computer manufacturers are utilized to the extent of ~ 20%.Footnote 14

Future growth in the domestic market is expected to come from two sources, outsourcing of in-house IT and upgrade in well-penetrated verticals. Four sectors account for more than 60% IT spendingFootnote 15—Banking, Government, Manufacturing and Telecom. Emerging sectors for future growth are Education and Life Sciences and Healthcare. For Telecom, IT is a core activity yet is outsourced actively, Manufacturing has low penetration of IT, Media is characterized by multi-vendor small contracts and in Retail, IT spending is by the organized segment only and hence, not as high as it should be.

Taking a closer look at Banking,Footnote 16 we see that only 17% of PSBs have required system capabilities (single-view of customer transactions, Return on Equity calculation on deals, data warehousing for credit modelling and CRM, workflow automation in HR processes and in retail credit processes)- versus 67% foreign banks and 27% private banks (BCG-CII 2013).

Indian banks typically rely on multiple vendors for their software requirements. Revenue-stream specific Application Software is used by banks for collections and liquidity management, risk management, capital calculation, trade finance, etc. SBI uses both Infosys’ Finacle as well as TCS’ Bancs for core banking in India and International business, respectively. While most foreign banks also use a mix and match of systems, their core banking systems are the same worldwide and often developed in-house. The top Indian banks use Infosys’ Finacle, TCS’ Bancs and Oracle’s Flexcube. A large number of firms listed in Table 4 and other mid-tier firms cater to common clients demonstrating ‘domestic convergence’ in productivity, again satisfying one of the key conditions from Table 1.

Potential for job creation

In this section, we have quoted estimates of job creation from different studies. However, none provide explicit details of how those numbers have been arrived at.

As we saw in Fig. 11, there appears to have been a healthy growth of jobs in both export and domestic sectors over the past 10 years (an increase of 1.9 times for export jobs and 1.6 times for domestic jobs). But as mentioned earlier, the industry as such is not labor-intensive and only employs around 4 million people in India.

Further, around 20–35% of these jobs are estimated to be at risk of redundancy with the deployment of technologies such as robotics process automation i.e. automation of rules-based tasks for execution without human intervention, and intelligent automation i.e. automation of tasks requiring judgement where machines can be trained with large volumes of historical data. Industry estimates project an increase in employment in IT-BPM to 4.5 million by 2022 (NASSCOM Strategic Review 2019; Team Lease Jobs and Salaries Primer 2019). Of this projected figure, 10–20% jobs are estimated to be new and 60–65% are estimated to need new skills.

The likely impact of technology on jobs in key job providing sectors of India’s economy is summarized in Table 5. Key factors/trends that will shape the future of employment in the IT-BPM industry and other sectors include globalization and trade, FDI flows, adoption of exponential technologies and their impact on offshoring, demographics and increasing local demand, and connected products and services.

Table 5 Impact of technology on jobs-select sectors.
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With respect to manufacturing, the current stock of robots globally is concentrated in capital-intensive (and assembly using hard materials vs soft materials like textiles) and high-wage industries (e.g., transport equipment, electrical equipment vs textiles). In addition, not everything is economically feasible to automate. Employment share of sectors such as textiles, which are less amenable to automation is much higher.

As far as India and other Asian economies are concerned, new jobs from rising demand will compensate for displacement of jobs by technology (ADB 2018). Reshoring is also not perceived to be a big threat to jobs in India. Several new job titles show creation of new jobs that did not exist a few years ago (Karnik 2019).

We take a brief look at the estimate of direct/indirect job creation including enablement of new business models via IT-BPM.

FDI and job creation

Over the period FY01 to FY19, services sector overall and the sub-segment ‘computers (including software and hardware)’ attracted 50% and 9% of the total Foreign Direct Investment into India of USD 421 billion, respectively. FDI can be directed toward two purposes: setting up a new business or buying an existing business. The former leads to net new job creation whereas the latter could lead to net reduction in jobs. We observe no direct relationship between FDI inflows and job creation in India’s case.

FDI flows considered here pertain only to the computer software and hardware industry and do not include what has gone into business services or other components of the IT-BPM industry. The average inflows prior to 2015 have been ~ USD 1 billion after which it increased to USD 2.3 billion in 2015, USD 6 billion in 2016, USD 3.7 billion in 2017 and USD 6.2 billion in 2018. During this period of higher FDI inflows, incremental new job creation has been going down. From ~ 315,000 jobs created in 2014, incremental annual job creation in IT-BPM sector fell to less than 100,000 in 2018 (source: ceic.com).

GVA and job creation

With progress in technology and consequent improvements in labor productivity, there has been a decoupling of economic growth and employment growth. Employment elasticity has declined sharply from 0.41 in 1980s to 0.2 between 1993 and 2012 (Exim Bank 2016).

A recent study by McKinsey on behalf of Ministry of Electronics and Information Technology (Meity), Government of India (2019) estimates that the digital economy is likely to experience a fivefold jump in GVA from ~ USD 200 million to ~ USD 1 trillion by 2025.

Industry revenues are expected to grow fast but with the feasibility of automation technologies, job creation will not follow the path it has been following till now. Digital technologiesFootnote 18 and businesses focussing on them are expected to dominate in future. Revenues from digital technologies already contribute to 20–25% of IT-BPM industry’s overall revenues. In addition, these digital technologies will generate huge volumes of data most of which will need to be housed within India (for locally generated data) and India is also emerging as a “co-location” for global companies to store their data in India. This requires huge Data Centres to be set up and will lead to opportunities for real estate and other non-traded services as well.

Based on surveys of Indian IT-BPM firms, Indian Staffing Federation estimates addition of 3 million tech jobs in the 5 years to 2023- this will be led by jobs in digital technology areas mentioned above.

Exports and job creation

The employment intensity of services exports is lower than that of manufacturing exports, and it has been falling for both over the last decade or so. As per a 2016 EXIM Bank study, total exports-led employment in India was 63 million in FY13 and services contributed to ~ 20% of this at 12 million. Given the nature of technology-enabled work, highly skilled workforce and the high productivity levels the IT-BPM sector’s employment elasticity is low compared to the rest of the services sector.

The EXIM Bank study estimates that for one crore worth of exports, the Computer and related services sector contributed to 6.7 jobs in FY08. This number dropped to 5.3 in FY12.

Indirect job creation in other sectors and job creation potential through new business models made possible by technology

As noted earlier, IT jobs have an estimated multiplier effect of 3 to 4. Estimates of indirect job creation will be a function of the numbers of direct jobs created influenced by a mix of FDI, contribution to GVA and to exports.

While this is necessarily speculative, technology also has the potential to transform the future of work. Meity estimates creation of additional 60–65 million jobs across sectors in the digital economy (new employment opportunities enabled by internet and exponential technologies) by 2025. E-commerce and last mile logistics are another potential area of large-scale job creation, as evidenced by the Alibaba ecosystem in China which created 40 million + direct and indirect jobs in 2018 itself (Renmin University 2019). Lastly, there are examples of O2O (online to offline) platforms, firms that started off purely online are now rapidly establishing physical presence and hiring staff for delivery and other functions (e.g., Lenskart).

A large volume of literature and discussions in the popular press revolve around how platform businesses in India such as those of Swiggy and OLA have impacted lives in a major way, both from employment and demand sides, by leveraging the power of technology. However, what we would like to highlight and briefly discuss below are two uncommon but powerful examples of how Indian firms working on solving problems in agriculture, industry and services have embraced Advanced Technologies (such as Internet-of-Things and Artificial Intelligence) and Advanced Analytics in developing business models that have the potential to be game changers within and outside India. The two examples we discuss below are those of Glocal Healthcare and Stellapps.

  1. (a)

    Glocal HealthcareFootnote 19: digital dispensary using the power of IoT and AI

Glocal Healthcare- a chain of brick-and-mortar low-cost hospitals in rural India, uses advanced technology for medical decision support. Over the past 10 years, the company has built ten fully functional 100-bed multi-speciality hospitals in states like Bihar, Uttar Pradesh, Odisha and West Bengal. It has set up 250 digital dispensaries (HellolyfCX), which provide video consultations, examination, investigations and automated medicine dispensing. These doctor-less clinics need only nurses to run them but provide comprehensive primary care at prices below $5 per episode. Glocal Healthcare Systems models have also been implemented in Canada, Ghana, Mali, Mongolia, Nigeria.

HellolyfCX Digital Dispensary (Healthcare-in-a-box) offers end to end primary healthcare solution based on the use of Internet-of-Things and Artificial Intelligence. This solution recently won the prestigious Public Appreciation Award 2020 at the UN Innovation’s Health Innovation Exchange (HIEx).

It is a portable digital clinic which is safe even in a pandemic like COVID19, protected by UV-C light disinfection, positive pressure and acrylic barrier between the nurse and the patient. It does not require a doctor. Doctors can see the patient remotely on video, conduct examination remotely through Internet of Things, all tests are done inside within 15 min using Point of Care diagnostics, and medicines are dispensed automatically from a machine.

  1. (b)

    StellappsFootnote 20: Data-led, internet of things based, farm-to-consumer dairy supply chain digitization

Stellapps is an India-based farm-to-consumer dairy digitization service provider, improving farm productivity and milk quality and bringing supply chain traceability to the industry. It is one of the two companies from India recognized by the World Economic Forum as part of Technology Pioneers 2020.

It leverages advanced analytics and artificial intelligence through its full-stack internet of things platform to enable dairy system partnerships (financial and insurance institutions, veterinary services, etc.) to drive significant value for each stakeholder, including smallholder farmers. Stellapps digitizes 8 million litres of milk daily and impacts 2 million dairy farmers in 28,000 Indian villages.

Key takeaways for policymakers

India’s industrial policy needs to ensure that right support is provided to industries that have proven their capabilities at a global level, are best positioned to take advantage of the technology-led business environment and also have substantial spill-over effects on the rest of the economy. Building on Rodrik (2007), we note that the Central and State governments would do well by continuing their active support for the IT-BPM industry which satisfies the following Ten Design Principles of Industrial Policy.

  1. 1.

    Incentives should be provided only to “new activities”: the IT industry is undergoing another revolution with game changing/general purpose technologies such as IoT and AI having a near universal impact on every aspect of our lives.

  2. 2.

    There should be clear benchmarks or criteria for success and failure: IT-BPM industry has a demonstrated track record of direct and indirect contribution to the economy.

  3. 3.

    There must be a built-in sunset clause: as has been the case with governments of industrially successful countries across the world, given the changing technology landscape, the Indian IT-BPM industry continues to need policy support in the initial stages as it positions itself toward moving up the value chain.

  4. 4.

    Public support must target activities, not sectors: technology is pervasive and touches every aspect of our lives- not just new business models but also better delivery of public services.

  5. 5.

    Activities that are subsidized must have clear potential of providing spill-overs and demonstration effects: as discussed in the initial section of this article, IT-BPM sector has clear spill-over benefits for other sectors of the economy. Success here has also given Indian companies the confidence to scale businesses globally, as has been happening in the case of new business models such as those of OYO, Paytm, OLA.

  6. 6.

    The authority for carrying out industrial policies must be vested in agencies with demonstrated competence: Meity in close co-operation with industry body NASSCOM have demonstrated success in the past.

  7. 7.

    The implementing agencies must be monitored closely by a principal with a clear stake in the outcomes who has political authority at the highest level.

  8. 8.

    The agencies carrying out promotion must maintain channels of communication with the private sector: NASSCOM plays a very constructive role in the development of the entire industry and is seen as a voice representing all types of players- big and small.

  9. 9.

    Mistakes that result in “picking the losers” will occur.

  10. 10.

    Activities need to have the capacity to renew themselves, so that the cycle of discovery becomes an ongoing one: technology by nature is an evolving area where India has managed, albeit to a limited extent, move up the value chain starting from body-shopping to project management within the software space.

Indian Government’s Digital India Programme (2015) and National Policy on Software Products (NPSP 2019) are steps in the right direction. While Digital India will help increase domestic penetration of IT, the NPSP envisages innovation-led tenfold increase in the current low (< 0.5%) share in the world software products market and creation of 3.5 million direct/indirect jobs by 2025. However, there is little to show by way of budgetary support or any material change in the industry’s performance, especially with respect to NPSP. Private initiative continues to bear fruit. However, this time might prove to be different and mere non-interference on the part of the government may not be enough.

Conclusion

The world economy and the technology industry are at the cusp of another internet-like disruption some of which has already started to take shape. Industrial policies of countries at the frontierFootnote 21 are focussed on the interplay of new technologies, economic growth and the future of employment. For example, as Alcácer and Cruz-Machado (2019) articulate, Germany’s Industrie 4.0 aims to work with a higher level of automation achieving a higher level of operational productivity and efficiency, connecting the physical to the virtual world. It will bring computerization and inter-connection into the traditional industry. The future of manufacturing will involve more use of Big Data and advanced technologies such as the IoT, Industrial Automation, Cybersecurity, Cloud Computing and Intelligent Robotics.

These kinds of digital technologies already make up 20–25% of revenues of India’s IT industry and Indian companies are well positioned to capitalize on their established position in the IT-BPM value chain, albeit at the lower end. While the exports market will continue to dominate, with the government’s focus on better governance and delivery of public services and transfers sans intermediaries, the domestic market will also provide sufficient impetus for India’s IT-BPM industry. New business models made possible mainly because of digital technologies will be the new job creators and technology can have a positive impact on quality of work. What is required from the government is a big push for developing the local IT industry as has been done in China. India has always struggled to retain talent within the country. To build an even more robust IT-BPM industry, India would do well to retain talent and create incentives for reversal of brain drain.

In conclusion, notwithstanding the large changes afoot due to fourth industrial revolution technologies, a continued and coordinated policy support for IT-BPM has the potential to expand the industry and, in the process create a large number of jobs in other sectors as well.