Country Profile: India

While government reform has embraced foreign investment, problems with infrastructure still prohibit many companies from moving to India. Kevin Rayburn takes a closer look.

Every two weeks TechRepublic will profile a country, looking at its emerging technology leaders and providing an overview of how business works there.

The democratic Republic of India is emerging from four decades of self-imposed socialist and isolationist economic policies with a bold new plan to encourage foreign investment and become a world leader in IT in the 21st century. Much of the brainpower behind the worldwide Y2K repair comes from India, and the city of Bangalore is often referred to as "Silicon Valley East" for the rapid growth and success of its software industry.

This subcontinent in South Asia, only a third of the size of the U.S. but harboring a population of nearly 1 billion, has a large talent pool and incentives that may be attractive to foreign IT investors. It continues to have problems, however, particularly in physical and telecommunications infrastructure. In some ways, India is still a land of mystery, so entrepreneurs are advised to carefully research the market before investing.

For most in the West, India is a land of rubies and temples known chiefly as an exporter of elaborately woven carpets. For four decades after its independence from Britain, India did little economically to change that perception.

India now is taking steps to dismiss its postcolonial legacy of hostility to foreign investment. Driven by its "New Industrial Policy" reforms, India seeks to become a global leader in the IT industry by 2005 and is aggressively seeking foreign investment. Under the reforms, India has stabilized its economy, reformed its financial sector, and favorably altered its tax and tariff policies. And it has opened to the private sector development areas such as manufacturing and telecommunications that were once exclusively government controlled.

Leading India's charge into its IT future has been a highly trained pool of technical professionals. The country, where the number zero was invented, has some of the best technical universities in the world. At those schools, engineering, business, and scientific graduates have undergone rigorous mathematical training. The nation is harnessing its talent and other advantages to become a software superpower, an outsourcing destination, and home to foreign and homegrown IT ventures in all sectors.

State of the Indian economy
Despite some fallout from the Indonesian economic crisis of 1997 and UN economic sanctions for its recent nuclear testing, India's GDP grew a respectable 5.1 percent from 1997 to 1998. According to the World Bank, India is the fifth largest economy in the world, has the third largest GDP in Asia, and has the second largest GDP among emerging nations. For fiscal year 1997-98, the GDP in purchasing power parity terms was estimated at $1.587 trillion U.S. dollars.

India's middle class, estimated at 300 million, continues to grow, but the definition of middle class there is substantially different than in the U.S. Big-ticket consumer items such as cars or computers are still beyond the reach of most Indians. Nearly 40 percent of India's population remains too poor to afford an adequate diet.

Massive government reforms of 1991 to liberalize policies toward foreign investment helped spur growth to an average of 7 percent from 1994 to 1997. Healthier export, investment, and domestic savings figures in recent years have lowered inflation. According to IndiaOneStop.Com , inflation has dropped from more than 10 percent in 1995 to less than 5 percent in the late 1990s.

In general, India's ongoing economic reforms and tax incentives have boosted industrial growth, attracted foreign investors, and encouraged exports. India is now one of the ten fastest growing economies in the world. According to the World Bank, India's $3.2 billion of foreign direct investment in 1997-98 was nearly 25 times higher than it was before the economy was liberalized. Still, export growth slipped markedly from highs of more than 20 percent in the mid 1990s to 4 to 5 percent in 1997, due to the Asian economic crisis and poor infrastructure. These and other factors also slowed India's industrial growth from 11 percent in 1996 to 6 percent in 1997.

Even as it struggles to diversify its economy, India remains strongly rooted in agricultural traditions. Almost 70 percent of its workers are in farming, which generates about 30 percent of the country's GDP. Unemployment and underemployment remain problems in India.

Support for U.S. firms in India
India's postcolonial suspicion of foreign investment hurt its growth prospects. By the early 1990s, India was on the verge of a financial crisis, a time marked by fiscal and trade imbalances, double-digit inflation, and near-default on its debt. That has changed with the "New Industrial Policy" reforms of 1991, which removed the dreaded "Licensing Raj" system that for years made every business decision subject to government bureaucratic micromanagement.

Now India welcomes foreign direct investment. India has reduced its high import tariffs, delicensed and liberalized imports, vigorously promoted exports, and ushered in many investor incentives including:
  • Automatic approval for majority foreign equity participation from 50 percent up to 100 percent, depending on industry sector.
  • Free repatriation of profits and capital investment.
  • Opening of the Indian capital markets to foreign institutional investors.
  • Bilateral investment protection agreements with investing countries, as well as agreements for avoidance of double taxation with more than 45 countries.
  • Reduction of corporate and personal taxes.
  • Special investment and tax incentives for exports and sectors including power, electronics, and software.
  • The establishment of seven Export Processing Zones to provide an internationally competitive, duty-free environment at low cost for export production.
  • The creation of Electronic Hardware and Software Technology Parks with incentives for electronics and software ventures including duty-free imports, various exports benefits, and tax holidays.

Agencies and associations
Several government agencies and industry associations have been formed to attract and assist foreign investment in IT ventures. These include the government’s Indian Investment Centre and the National Informatics Centre's National Task Force on IT & Software Development, the Electronics and Computer Software Export Promotion Council of India , the Manufacturers' Association for Information Technology (which specializes in hardware issues), and the National Association of Software and Service Companies (NASSCOM).

Dewang Mehta, president of NASSCOM, says his organization's role is to act as a catalyst for the growth of India's software-driven IT industry. "I share a dream with my countrymen in India," Mehta says on his Web site. "We all wish to see India emerge as a software superpower. For this, we not only have to achieve higher revenues and value-addition in software developed in India but, we also have to ensure that we are effectively able to channelise the power of IT to provide basic necessities to all the citizens of India."

A major concern of foreign investors is rampant software piracy in India, but recently NASSCOM, the Business Software Alliance (BSA), and the Indian government have teamed up for an antipiracy campaign. According to Mehta, "We will not hesitate to take stringent action against sellers and users of illegal software in India. The menace of software piracy affects not only the potential of software development in India but also our country’s economy, besides sending negative signals to potential investors.

"Today we are crushing the counterfeit products seized in a round of Anton Piller [government-approved] raids… These civil cases have also resulted in monetary settlements to the satisfaction of the copyright holders."

Even with political volatility and a left-of-center coalition government, most international observers say India is committed across the political spectrum to continue its liberalized economic policies and aggressively court foreign investment.

Major firms in India
India can boast many successful foreign high-tech and IT ventures. Amreesh Modi, managing director of Motorola’s Global Software Division, was quoted in Forbes magazine as saying, "We are in India because that's where a lot of talent is. The cost advantage is a short-term bonus."

There are more than 600 IT firms in India. More than 200 major foreign corporations have opened operations in India in recent years, including technology giants IBM, Alcatel, AT&T, Ericsson, Texas Instruments, Philips, General Electric Corp., Taylor Instruments, Hewlett-Packard, Motorola, Lucent Technologies, Panasonic, Sony, Fujitsu, Apple, NEC, Xerox, Siemens, and Unisys.

According to Forbes, GE Medical Systems' unit in Bangalore was able to turn a profit in its first year partly by buying inexpensive software developed in India. An unexpected spin-off was the creation of the imaging software used in GE's top-line medical scanners.

Among the most prominent of homegrown software companies is Infosys Technologies in Bangalore, which in March became the first Indian company to be publicly traded on NASDAQ. The company, which designs custom software for companies such as Reebok, Visa, J.C. Penney, Nordstrom, GE, AT&T, and Equitable, is frequently referred to in the business press as the best managed software company in India and one of the best in Asia.

Software industry
India's software industry is respected and trusted by some of the world's largest multinational corporations. According to NASSCOM, the industry was worth $3.8 billion in 1997-98, an enormous growth from $15 million just ten years earlier.

According to the Electronics and Computer Software Export Promotion Council of India, the country has "the world's third-largest ’brain bank,’ with 2.5 million technical personnel available."

Although India's percentage share of the world software market is still low, exports are growing significantly. According to NASSCOM, the low software development costs, the high quality of the software, and the large pool of English-speaking scientific manpower are driving industry growth. NASSCOM estimates India's software industry has grown 53 percent annually in the last five years. The industry employs 200,000 in India and is one of the fastest growing sectors of the nation's economy. Mumbai (formerly Bombay) and Bangalore have the largest concentration of India's top 500 software companies.

The Indian government has targeted software as the nation's number one export. Incentives to drive this include technology parks with world-class computing and networking facilities and no import duties or corporate taxes.

India exported $1.75 billion worth of software in 1997-98, according to NASSCOM, but the industry has loftier goals. India seeks to export $4 billion in software by 2000 and $9.5 billion by 2002. "India expects to export about $40 billion worth of software in seven to eight years," said Indian IT observer, Professor SubhashBhatnagar . "I think this will happen."

The Indian work force
In terms of education and labor skills, India is a study in sharp contrasts. Although it has one of the world's largest pools of highly educated technical professionals, the majority of India's mostly rural population continues to have little or no formal schooling.

There are few statistics on women in the workplace. Culturally, female education is a low priority in India.

However, educational opportunities are available, often at government subsidy, to high-achieving students. Many of these students enroll in India's six Indian Institutes of Technology (IITs).

Unemployment and underemployment remain problems in India. Because many jobs in India are temporary, it is difficult to gauge the actual rate of unemployment. Most of India's work force (60 percent) is self-employed. Nearly 30 percent are casual workers who are frequently unemployed. Only about 10 percent are regular employees, and more than a third of those are government workers.

According to the World Bank, nearly half the population over 15 years old and about 60 percent of all women over 15 years old are illiterate. Despite a government goal that all children who attained the age of 19 years by 1990 would have five years of formal schooling or its equivalent, political dissension has prevented progress.

The IT work force
According to Forbes, there are more than 1,200 engineering and technology colleges in India. NASSCOM statistics add that computer science courses are taught at more than 300 universities, 32 engineering colleges, and 700 private training institutes. These institutions graduated more than 60,000 as of 1996, up from just 1,000 in 1983. The number of software professionals increased from 140,000 in 1995 to 160,000 in 1996.

Even so, NASSCOM projects that the high foreign and domestic demand for IT professionals will create a tight job market. "As in most other countries India has a large number of universities with varying degree of quality orientation," Bhatnagar said. "However, there is always a choice available. For example, my business school selects 200 MBA aspirants from 40,000 applicants. Most good software companies can hope to generate five to ten applicants for one position. That is a great choice."

"Also about a million people undergo IT training in private institutions every year," Bhatnagar said. "This training may be of short duration of four to 40 weeks. Such training companies can also provide low-end manpower (programmers) to the software industry."

A survey by NASSCOM of IT employers in India rated Indian employees highly, with an average of close to 9 on a 10-point scale.

Turnover and brain drain remain problems, however. The average turnover at IT firms is about 16 percent. "Body-shopping" has been popular in India, with employees jumping ship for the high salaries and benefits of multinational companies in India or for the perks of working in the U.S. Still, turnover is far less than the 25 percent rate of 1992.

"In some ways the brain drain of IT people has already come down from the high levels of early ‘90s," Bhatnagar said. "With well-paid jobs available in India and easy access to consumer goods, a lot of Indians, after a few years experience, when they have families now prefer to work in India. Many Indians are also coming back to set up shop in India. Also with a significant proportion of work being done in offshore mode, a lesser proportion of Indian software engineers need to travel abroad. However, we still lose many bright engineers in non-IT sectors who go to the U.S. for higher education."

Bhatnagar added that, even though management of multinational corporations in India may typically be non-Indian, foreign companies prefer to limit their non-Indian work force in favor of Indians because of the cost savings. Also, education and training, even at the most prestigious technical institutions, is cheaper than comparable training in the U.S.

Salaries and benefits
The salary of an entry-level software engineer in India is between $2,000 and $5,000 per year, compared to about $60,000 yearly in the U.S. The cost advantage has led many U.S. firms to set up subsidiaries or offshore development centers staffed by Indians.

Small companies often outsource in India while large companies, including Microsoft and Oracle, set up their own development centers there. Salaries have risen in India due to demand for IT labor. NASSCOM reports that basic salaries in IT rose by 21 percent from 1995 to 1996.

Compared to the nation as a whole, however, IT workers earn far more than the average Indian. By contrast, World Bank figures show the national average annual wage is $333. In India's poorest state, Bihar, annual per capita income is only $82.

Widespread joblessness makes labor a sensitive issue in India. By law, employers with more than ten workers cannot fire an employee without the permission of a government labor commissioner—something rarely granted. However, both domestic and foreign companies have found ways to bypass some of India's archaic regulations by subcontracting labor or using early retirement schemes.

Corporate taxes
Despite overhauls to reduce taxes and ease its tax codes and enforcement, India still has a long way to go to simplify its arcane tax policies. Frequent changes of governments mean frequent—not always favorable—changes to the code. The 1998 budget, for instance, added some corporate tax incentives but took away others.

Still, India's reforms have reduced many corporate taxes, though corporate taxes, as in much of Asia, remain high. The corporate tax rate for foreign companies has been reduced from 65 percent to 48 percent. The tax rate for domestic companies was lowered to 35 percent. Companies able to maximize tax incentives can lower their rates even more.

The long-term capital gains rate for foreign companies was lowered to 10 percent. The Indian Income Tax Act exempts export earnings from corporate income tax for both Indian and foreign firms. The U.S. and India have an agreement for the avoidance of double taxation.

Incentives and abatements are available for foreign companies, especially those locating in Electronic Hardware and Software Technology Parks. Because India's various states are competing to attract investment, corporate tax rates and other factors vary widely. Companies that develop and maintain physical infrastructure (roads, ports, sewage projects, etc.) have a five-year tax holiday.

According to CFO Asia magazine, India's 1999-2000 budget reduces the country's seven rates of customs duty to five, and it consolidates the 11 major excise duty categories to six. It also creates an authority on customs and excise so finance managers can determine applicable rates of duty in advance.

Because of India's complex tax structure, companies looking to invest there are encouraged to employ a savvy tax specialist.

India is frequently lauded as an outsourcing haven because of its low labor costs, highly skilled programming and design expertise, and quality products. Typically companies design their products in the U.S. and outsource the development to Indian firms. A large number of U.S. firms have outsourced their Y2K repairs to Indian programmers, renowned for their expertise in UNIX.

Twelve hours behind the U.S. on the clock, Indians are working when Americans are sleeping. This gives many U.S. firms the ability to have a virtual 24-hour office. With India's access to high-speed datacom links, many large U.S. companies can provide 24-hour support.

According to NASSCOM's Mehta, many global firms, including GE Capital, British Airways, and American Express, are using India as a base of operations for these "information technology-enabled services," also known as "teleworking." In a Times of India article, Mehta said, "This is going to change the economy, employment, and style of entrepreneurship in the next five years." NASSCOM estimates India currently employs about 25,000 people in infotech-enabled services, but predicts 1 million in that sector by 2008. NASSCOM has set up a site for potential investors at .

The movement of goods and services
Transportation infrastructure remains poor in India, in spite of recent government and World Bank initiatives. In its 1999 World Competitiveness Year Book, Switzerland's International Institute for Management Development (IMD) ranks India 46th out of 47 nations surveyed for infrastructure quality, with only Russia ranking worse.

India's cities are clogged by too many vehicles on narrow roads. Flight delays are common. Shipping ports experience delays due to high demand. A 1998 report by the U.S. Embassy in Delhi notes that handling capacities of all the major ports have increased by around 10 percent in the past three years, but exports have grown by more than 20 percent in the same period. Sea shipping accounts for 95 percent of Indian trade. Road vehicle numbers are increasing 13 percent a year, but the road network is growing just 4.6 percent.

Although India has one of the largest and most well-developed rail networks in the world, passengers and freight saturate the rails. While the government recently undertook major renovations to the nation's international airports and key shipping ports, its efforts will not be enough. That is why the government is offering tax holidays and other incentives to foreign companies that invest in Indian infrastructure.

Telecom infrastructure
Although highly developed in pockets such as universities and high-tech firms, much of India's telecommunications network looks like something from the age of the telegraph. In rural India, paper mail and telegraphs rule. This nation of almost 1 billion people has only 12 million telephones, making it one of the least adequate telephone systems among industrializing countries. Three of every four villages have no telephone service, and only five percent of India's villages have long distance service. The government-run telephone system is frequently criticized as antiquated, linked by manual switchboards.

A sophisticated series of satellites, earth stations, and recently added fiber-optic cable lines have helped somewhat, but experts say India has been slow to enter the telecommunications age. "I do not think India is addressing its infrastructure problem with the urgency that is needed," Bhatnagar said. "I am somewhat hopeful on telecom sector growth but other infrastructure like roads and other transport, electricity, [and] urban facilities will be slow to grow. Much re-engineering requires to be done before new IT is inducted."

Under its 1999 "New Telecom Policy," India's government has recently loosened some of its tight control of the data communications infrastructure to invite foreign and domestic investors. The reforms, according to the Wall Street Journal, "ease the financial burden on investors, introduce greater competition, and strengthen an independent regulator in a bid to unlock billions of dollars of stalled foreign investment." As a result, startups in cellular and basic telco services as well as Internet service providers (ISPs) are rapidly proliferating. U.S. telecom giant Lucent Technologies is entering the India market with its InterNetworking Services division by introducing a faster, cost-effective DSL connectivity technology.

Until recently, lack of competition and inefficient state control of the only ISP has meant expensive Internet service costs of about $250 to almost $400 or more for 500 hours, or $25,000 or more for a dedicated 64 KB leased line. The proliferation of private ISPs is expected to increase capacity and reliability and reduce costs. NASSCOM recently estimated that there are about 250,000 Internet subscribers in India, but the number of actual users may be three to four times higher. An article in the National Post (Canada) quotes analysts estimating that the number of Internet users in India will jump to 1.5 million by the turn of the century.

Office space costs
The price tag on office space varies widely, but in many cases prime footage is among the most expensive in Asia. A December 1998 survey in Asia Pulse magazine found that Mumbai and New Delhi were the second and third most expensive cities in Asia respectively in terms of top office space.

A 1998 report issued by the international real estate firm of CB Richard Ellis found rental costs per square foot in Delhi and Mumbai to be $74.25 and $103.57, respectively. Only London and Hong Kong were higher than Mumbai. By contrast the survey found midtown New York City real estate to lease for $48.25 per square foot.

Still the January 1999 issue of SiliconIndia notes that some cities competing for foreign IT investment are offering relatively cheap space. In Chennai, for instance, space can be bought outright for $75 per square foot or leased for $1.13 a square foot per month.

Major cities
India's population is growing faster than any country’s on Earth, and its cities are buckling under the strain. As a article put it, India is "a country where high technology industries are burgeoning alongside slums and open sewers." In addition to the transportation infrastructure and telephone reliability problems mentioned before, utilities have problems delivering reliable service. Even in the capital city of New Delhi and in "Silicon Valley East," Bangalore, brownouts and blackouts occur regularly. Domestic software giant Infosys keeps backup batteries and diesel-fueled generators ready at all times for emergency power, according to Forbes magazine. Despite the government efforts to increase electricity generation, output remains about 10 percent below demand. Sewage and water supply services are also overburdened and often inadequate.

Still, India is full of beauty, and Bangalore is known as the "Garden City" for its parks, boulevards, gardens, temperate climate, and shopping malls. A 1998 Business Today/Gallup MBA survey of CEOs ranked Bangalore as India's best city for business for the sixth straight year. Rounding out the top five were Mumbai, Hyderabad, Chandigarh, and Pune. According to a June article in BusinessWorld, Pune is now India's fastest growing IT city, with more than 100 software companies in place and another 50 likely by the end of this year.

Population of major cities
India's cities are growing so rapidly that even recently widely available population statistics are grossly inaccurate. As of 1991 there were 23 cities with a population of more than 1 million. By contrast, the capital of New Delhi is relatively small, with a combined metro population of 301,297.

Universities in India
The country’s six renowned Indian Institutes of Technology (IITs), located in Kharagpur, Bombay, Chennai, Madras, Kanpur, and Delhi, are consistently ranked among the best technical universities in Asia and in the world.

Five of India's IITs made the 1998 Asiaweek survey of "The 30 Best Specialized Science and Technology Schools" in Asia. The Indian Institute of Technology, Delhi, and the Indian Institute of Technology, Madras, ranked second and third, respectively. Coming in at 6th and 12th were the Indian Institute of Technology, Bombay, and the University of Roorkee.

India has the world's third largest university system, with more than 100 other leading universities throughout the country and more than 1,200 engineering and technology colleges in India.

India is a federal republic modeled on the British and American constitutions, but it incorporates features from several other Western democracies as well.

Like the U.S., India is a union of states (25 states and seven centrally administered territories), but its government is more centralized and states' rights are limited.
  • Executive branch: India's chief of state is President Kicheril Raman Narayanan, elected for a five-year term by an electoral college. The president's role is nominal; real executive power resides in a council of ministers responsible to the parliament. The council of ministers, or cabinet, is headed by the "head of government," Prime Minister Atal Bihari Vajpayee. The Indian cabinet system is similar to that of Great Britain.
  • Legislative branch: The bicameral parliament consists of two houses: The House of the People, or Lok Sabha, which is directly elected, and The Council of States, or Rajya Sabha, most of whose members are elected members of the state legislative assemblies.
  • Judicial branch: Supreme Court judges are appointed by the president and remain in office until age 65.

India has a thriving press, including 2,500 dailies among a total of 4,000 newspapers. Many dailies, including the influential The Times of India and the Indian Express, are published in English.

Government-owned All India Radio broadcasts to 70 million radios. There are 100 radio stations, mostly AM. There are 274 government-controlled television stations broadcasting to more than 30 million televisions. Programs are broadcast in many languages and many dialects.

On the plus side, India has one of the world's biggest pools of highly trained IT labor, an excellent technical higher education system, a reputation for quality work, and many new incentives for foreign corporations. On the downside, its telecommunications and transportation infrastructure is underdeveloped, its tax structure is confusing, and its employee turnover can be high.

Many U.S. companies that have studied the market and partnered with Indian ventures have seen success. A recent U.S. Embassy survey of 135 American companies in India indicated they believe the country is a good investment despite its problems. "India has a natural advantage in low-cost, high-caliber, high-motivation, good work ethic talent," Bhatnagar said. "If India can continue to focus on telecom growth and manpower development, MNCs (multinational companies) will find it attractive to come."

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