UNIT V

TRENDS IN SOFTWARE ECONOMICS

Case Study 1- Impact of Properly Licensed Software

Software is an essential tool of production in every sector of the modern economy. Enterprises of all
sorts rely on it to design products, provide services, communicate with customers, and manage
operations. But software contributes considerably more value to national economies if it is properly
licensed than it does if it is pirated.

Indeed, properly licensed software has a positive impact on national economic activity that is more
than three times the impact of pirated software, according to a new study from BSA | The Software
Alliance. And the additional economic value associated with lawful software use is especially
pronounced in developing markets: Every dollar invested in properly licensed software in low-
income countries yields an astounding $437 in additional national production, on average.

These are among the findings of an analysis conducted for BSA by INSEAD, one of the world’s most
prominent business schools and respected research institutions. Drawing on data from 95 countries,
the study confirms that increasing use of properly licensed software in a national market
corresponds to substantial positive gains in gross domestic product (GDP). It also reveals that
licensed software has a greater economic stimulus effect than pirated software.

A new study from BSA | The Software Alliance and INSEAD, one of the world’s leading business
schools, finds that increasing the amount of properly licensed software in use globally by 1 percent
would add an estimated $73 billion to the world economy, compared to $20 billion from pirated
software — meaning there is a $53 billion advantage associated with using licensed software. The
study also finds the greatest potential for economic gains are in emerging markets where piracy is
most common today.

Competitive Advantage: The Economic Impact of Properly Licensed Software is a groundbreaking

analysis that draws on data from 95 countries to demonstrate the benefits to national economies of
using fully licensed software. The study confirms that increasing use of licensed software
corresponds to substantial positive gains in gross domestic product (GDP), and that the economic
stimulus effect of properly licensed software is significantly greater than that of pirated software.

“Properly licensed software comes with value-added services that improve operational efficiency for
businesses and boost output for entire economies,” said Jodie Kelley, General Counsel and Senior
Vice President, Anti-Piracy for BSA. “For governments looking at ways to stimulate growth, this
analysis shows that properly licensed software offers a huge return on investment.”

The study finds that every country around the world can derive greater economic value from
properly licensed software than from pirated software. The gains from a 1 percent increase in
licensed software use exceed the impact of a similar increase in pirated software use by a wide
margin — ranging from $15.1 billion in additional economic value in the US to $5.9 billion in Japan to
$739 million in India.
On a dollar-for-dollar basis, the return on investment (ROI) for national economies from properly
licensed software is greatest in developing countries — $437 in extra GDP, on average, compared to
$35 for every dollar’s worth of pirated software put into the market. But countries across all income
levels benefit: each additional dollar invested in licensed software has an average ROI of $117 in
high-income countries compared to $42 from pirated software, and $140 in middle-income
countries compared to $28 from pirated software.

“Previous studies have shown that value-added services delivered with properly licensed software
help firms to reduce costs and increase investment. This report goes one step further to ascertain
the impact of software use on national production,” said Eduardo Rodriguez-Montemayor, senior
research fellow at INSEAD eLab. “The results make it clear that licensed software is beneficial for
business and national economies — and that licensed software has a greater economic impact than
pirated software across all countries included in the study.”

Governments and enterprises wanting to embrace the economic opportunity presented by licensed
software use should take action in the following areas:

 Establish strong and modern IP laws that protect software and other copyrighted materials
on PCs, mobile devices, and in the cloud.

 Step up IPR enforcement with dedicated resources.

 Raise public awareness about the risks of software piracy.

 Lead by example by using only fully licensed software and implementing software asset
management programs.

For software vendors and intelligence device manufacturers, proper software licensing is extremely
important. Effective monetization models and efficient compliance management solutions have
grown increasingly necessary in order to sufficiently protect intellectual property and assure proper
compensation for developers. This, of course, is paramount to the success of software producers.
But did you know that proper software licensing is also extremely beneficial to national economies?

A new study released in May from BSA | The Software Alliance reveals that properly licensed
softwarecontributes three times more to national economies than pirated software. This effect is
even more pronounced in developing nations, where, on average, every dollar invested in properly
licensed software yields a whooping $437 in additional national production. As a combined effect,
increasing properly licensed software globally by just one percent would add an estimated $73
billion to world GDP. That is $53 billion more than what would be contributed by pirated software.
In the U.S., these gains equate to $15.1 billion in additional economic value. This works out to an
average ROI of $117 per additional dollar invested in licensed software (compared to $42 from
pirated software).

The study, conducted for BSA by INSEAD, evaluated eight years’ worth of data across 95 countries,
and contradicts the standard pro-piracy stance, which argues that pirating software benefits
companies more than licensed software by reducing overhead costs, while contributing to the
economy by facilitating the spread of powerful technological capabilities.

“Properly licensed software comes with value-added services that improve operational efficiency
for businesses and boost output for entire economies,” said Jodie Kelley, general counsel and senior
vice president, Anti-Piracy for BSA. “For governments looking at ways to stimulate growth, this
analysis shows that properly licensed software offers a huge return on investment.”

BSA suggests that governments and enterprises wanting to embrace this economic opportunity
should lead by example, using only properly licensed software and leveraging software asset
management programs. Such solutions, like those provided by Flexera Software, make it easy for
both vendors and consumers to contribute to this global cause, providing advanced software license
management and entitlement compliance solutions for businesses, governments, and other
organizations. Flexera’s license optimization tools can thus benefit both individual companies and
entire national economies, by helping software firms reduce costs and increase investments, and
consequently stimulating economic growth on a global scale.
Case study 2: Current Growth and Impact of Software on Indian Economy

In recent years, Indian software industry has boomed due to rapid increase in globalization. It has
accomplished this growth by becoming an important part of the global division of labour in software.
In particular, nearly two thirds of the revenues if the Indian software industry are from exports, with
a much smaller domestic market. The talent pool of computer engineers is rising in qualitatively as
well as qualitatively. According to NASSCOM figures, the top 25 companies accounted for 58.67
percent share of software exports revenue in 1997-98.Nearly one fourth of companies have sales
less than Rs. 10 million (about $250,000).Tata Consultancy Services (TCS)was the firm to agree to
export software in return for being able to import hardware in 1974. The growth rate of the Indian
Economy was at its fastest place in the last 18 years during the financial year ended march 31 that
was headed by a brave performance of its manufacturing and service sectors. The history of the
Indian Economy shows that before the last decade India was probably on the short list of the
countries which had the worst economic systems. At the time of independence the economy was
predominantly agrarian. Although after that the growth of the Indian Economy covering various
other sectors made good progress. The rate of growth of Indian economy improved in the 1980s.

STRUCTURE OF SOFTWARE INDUSTRY

The Indian software industry specializes in the export of Low-end software development services,
competing primarily on cost and availability of software talent.

The Indian comparative advantage is based on cost and availability of software talent: the ability to
offer the services of a large number of software professionals at costs substantially lower than those
in the U.S. U.S. do not outsource requirement analysis, specification, and high-level design, nor do
they outsource larger scale system integration type of activities to India. However, the leading Indian
software firms do not have the ability to provide these high end services.

The industry is diffusing geographically. Although, Bangalore is still home to many of the leading
firms, the industry is not confined to Bangalore and is diffusing to regions other than Bangalore and
Bombay, with a substantial presence in Hyderabad, Madras and Delhi and a growing presence in
Calcutta and Pune.

The domestic market is still small. Although PCs are diffusing more rapidly, communication
bandwidth is still limited. The bandwidth problem is compounded because of the rigid attitude of
the department of telecommunications as it tries to retain control over telecommunications in India.
The result is that the Internet access in India is still slow and expensive. In addition, various
infrastructure constraints have combined to slow the adoption of IT for business and government
operations. Insufficient electricity and transportation system, limited competition in the economy,
and uncreative and less informed top managers.

GROWTH IN IT SECTOR

The Indian IT industry has grown almost ten fold in previous decade. Domestic software has grown
at 46 per cent while software exports have grown at 62 per cent over the last 5 years. Information
Technology enabled services (ITes) with elements like call centres, back office processing, contents
development and medical transcription are key to rapid growth. The sector has an employment
potential of 2 million by 2010. All this shows the significant contribution of software industry to
Indian economy in terms of GDP and as an employment provider. India's specialisation in software
has been driven by two sorts of wage advantages that have reinforced each other: 1: The lower
wages for Indian software developers relative to that of their US and European counterparts make
Indian software cheaper in global markets, 2: while the higher wages earned by software
professionals in India relative to that in other industrial sectors has ensured a steady stream of
supply of software professionals.

CONTRIBUTION IN TERMS OF EXPORTS

Software exports make up 20 % of India's total export revenue in 2003-04, up from 4.9 % in 1997.
This figure is expected to go up to 44% of annual exports by 2010. Software service exports
increased from US $ 0.50 million in 1990 to $5.9 billion in 2000-01 to 23.6 billion dollars in 2005-06
recording a 34% growth.. Though India accounts for just about 3 % of the world market for
information technology services, this sector has been growing at a scorching pace, helped by a large
pool of English-speaking workers, nearly 4 million engineers and the increasing tribe of tech-savvy
entrepreneurs in the country. The Information Technology industry currently accounts for almost 4.8
% of India's GDP. It will account for 7 % of India's GDP by 2010.

CONTRIBUTION IN TERMS OF BALANCING CURRENT ACCOUNT DEFICIT

Software and IT enabled services have emerged as a niche sector for India. This was one of the
fastest growing sectors in the last decade with a compound annual growth rate exceeding 50 per
cent. A compound annual growth of over 25% per annum is expected over the next 5 years even on
the expanding base. The impact on the economy of projected software and IT enabled service
exports of $ 60 billion by 2010 is likely to be profound. One manifestation is that India notched up a
current account surplus in 2001-02, for the first time in 24 years. India further needs an open
environment under GATS to promote exports of services through outsourcing and off-shoring.

THE INITIAL GROWTH OF INDIAN IT INDUSTRY

The Indian economy saw a wave of liberalization for the first time in 1980.Besides formulating the
national vision to promote software industry in India in the early 1980s by the government, there
were deliberate attempt by the companies to promote software production like compilers, device
drivers and operating system to cater to the domestic hardware sector. The high tariffs for the
hardware sector had meant that the production of domestic hardware segment (including PCs which
were introduced in the same period) had to be sustained requiring necessary software‟s like
operating system and drivers. Subsequently by mid 1980s, software started coming up unbundled
with the hardware. This further gave fillip to the software industry and exports. The 1990s and early
2000 saw the rise of Software Technology Parks and formation of the Ministry of Information
Technology, respectively. Despite liberalization of the 1991, the software industry flourished
signifying the inherent strength that it developed due to benign and enabling environment provided
over a period of time and also the fact that the 1990s saw the dramatic decline in
telecommunication costs (government explicit intervention) and the commercialization of the
internet along with the Y2K “problem”. The Data Envelopment Analysis (DEA) model is used to work
out technical efficiency of Information and Communication Technology (ICT) Industry in host of
countries which are front runners as far as ICT is concerned. India lags behind the most as far as ICT
(not IT) is concerned.
RISE OF INDIAN SOFTWARE: A PERSPECTIVE

The Indian software and related service industry, which include ITES-BPO, has grown at an
unprecedented rate over the past decade or so. The output value of India‟s software service sector
increases more than 18 times from less than US$830 million in 1994-95 to US$15.5 million in 2003-
2004.The sector growth , services increased by more than 25 times during the same period.

With such rapid growth the software related service sector today accounts for over 2.6% of GDP in
2003-2004 compared with 0.5% in 1996-97, representing a more than fivefold increase. Its share of
India‟s exports of goods and services has increased even seven fold (from 3.2% to 21.3%) during the
same period. Furthermore, India‟s share of the global market for customized software that is
outsourced across borders is also more significant. The rapid growth of software exports in the
1990s has been moderated since 2001.

TREND IN PRODUCTION &EXPORT OF SOFTWARE AND SERVICES In 1999 total ITES exports were
only of the order of US $ 565 million and are estimated to have increased to US $ 3.6 billion in 2003-
04. ITES-BPO exports grew by 59 % during 2002-03 to 2003-04. Hence, but for the rise of BPO export,
the growth of software exports would be even slower than what is shown above. As a result, the
share of ITES-BPO in total software and service exports more than doubled, from about 14 percent
in 2000 to more than 29 % in 2003-04.

CREATING JOBS

The software and ITES-BPO sectors accounted for 813,000 jobs by 2003-04.Of these, nearly 500,000
(260,000 jobs in the software industry and 245,000 jobs in (ITES-BPO) have been primarily for export
oriented activities. In Particular, jobs in ITES-BPO have risen rapidly, from 42,000 in 1999-2000 to
245,000 in 2003-04. One may argue that the IT-BPO services that are booming currently are
relatively low value adding and low skill- intensive activities.

EXPANDING THE BASE OF ENTREPRENEURSHIP

Apart from creating jobs for highly qualified professionals as well as ordinary college pass outs, the
rise of the software industry has provided opportunities for expanding the local base of
entreneurship. The initial starts up costs in the sector are low than the economies of the scale are
not particularly significant especially for service enterprises. Hence, the entries barriers are low. This
has helped a number of technical professionals to start on their own. Many of the leading software
enterprises of today were started by first generation entrepreneurs. Infosys, Satyam, Mastek,
Silverline and Polaris, among numerous others, were started by software professionals and
engineers with small savings and loans at a modest scale to begin with.

REVERSING THE BRAIN DRAIN

The rapid rise of software industry in the country has also helped to reduce the extent of the brain
drain by creating rewarding oppurtunities within the country, a trend also supported by the
availability of venture capital to implement new. Indians to return to the country to start new
software ventures. According to some estimates , the rate of returning of professionals increased
from 2% in 1991 to 8 to 10 % in the late 1990s, with several senior software professionals returning
ti India to set up their own companies.
CREATING A BRAND VALUE FOR THE COUNTRY IN KNOWLEDGE-BASED INDUSTRIES

Despite a large pool of trained engineering manpower, India‟s image in the world has been that of a
poor and underdeveloped economy having a comparative advantage only in low skill and low
technology industries. As a result , the country has suffered from the disadvantage in exporting
knowledge –intensive goods. The emergence of the country as a centre for outsourcing such a highly
knowledge-intensive services as software is helping to change the public perception of India and is
focussing attention on the potential of the country in knowledge- based industries.

FACILITATING CAPITAL INFLOWS

The development of the software industry has led to an increased flow of capital to the country in
three forms : foreign directive investment (FDI) by outside MNEs in their subsidiaries and joint
venture in India, foreign institutional investments (FIIs) in software companies in India through stock
purchases, and capital raised abroad by Indian software companies. It has been estimated that MNE
affiliates account for 23 % of exports of software services and 26% of ITES-BPO exports.

SPATIAL AGGLOMERATION AND REGIONAL DISTRIBUTION

The development of the software industry in different parts of the world is characterized by a strong
tendency towards clustering because of agglomeration economies. In India, the software industry
developed initially in Mumbai. Bangalore subsequently emerged as a centre of software industry
development , especially after as a centre of software industry development , especially after the
entry of Texas Instruments in the mid-1980s.In addition to Bangalore and Mumbai , Delhi and the
suburban communities of Noida and Gurgaon have emerged as the third most popular location for
software units. As Bangalore has become saturated owing to the limits of its infrastructure and the
scarcity of space, Hyderabad and Chennai have started to provide alternative locations in the south.
The top five cities together account for 80.5% of the top 600 companies.

GROWTH OF THE SOFTWARE INDUSTRY

In software development and use, the life cycle includes analysis and specification of requirements,
design, coding, testing, installation, maintenance and support. Many of these activities, particularly
coding and testing, involve relatively routine IT skills that India‟s workforce has in large absolute
numbers (though small relative to the total population). Hence, attributing India‟s software export
boom at least partly to standard comparative advantage seems reasonable. One can further
elucidate the supply and demand factors by considering the existence of the Indian Institute of
Technology (IITs), the ubiquity of Unix in academic environments, and the relatively low
infrastructure demands of learning to use and create software all worked in India‟s favour on the
supply side. The use of English in India‟s higher education system, the increase in the use of Unix
and related operating systems due to explosion of the internet, and the large number ofY2K –related
projects in the late 1990s all contributed to demand for India‟s software industry services, in
addition to the general growth in IT in the 1990s the lack of explicit government restrictions on this
sector has also helped. Static gains from the use of IT come from more efficient use of scarce
resources, allowing higher consumption in the present. They are independent of any impact of
growth. Benefits that are measurable as increased market based economy activity, and hence show
up in GNP statistics, are not the only component of development. Development can include
improvement in the capabilities of the population, independently of any direct or indirect economic
impact. Minimum levels of education, health and nutrition are perhaps the most important
examples of such capabilities. The ability to participate in democratic decision making can also fall
into this category. The role of It in effecting improvements along non-economic dimensions must
also be considered, though this role may be harder to quantify.

Digital IT involves the electronic processing, storage and communication of information, where
anything can be represented in digital form is included in the term „information‟. Information goods
typically have the characteristic that one persons use does not reduce their availability for another
person. Thus, a message or weather news can be viewed by many people, simultaneously or
sequentially. Depending on the content of the news or message, different people may place
different valuations on the information. Only friends and relatives may be interested in a personal
message, all farmers in a district may be interested in local weather news, and so on. The ability to
share information among users can impact the feasibility of providing it on a commercial basis. IT
dramatically increases sharebility of information, and this affects the economics of private provision
of information goods and services. There are two broad classes of uses of IT for improved
government functioning. First, back-office procedures can be made more efficient, so that internal
record keeping, flows of information, and tracking of decisions and performance can be improved.
Second, when some basic information is stored in digital form, it provides the opportunity for easier
access to that information by citizens. The Emailing requests or complaints, checking regulations on
a web page, or printing out forms from the web so that a trip to pick up the forms from a physical
office can be avoided. The use of IT can increase transparency and accountability, simply by
requiring information, such as basic complaints, to be logged completely and systematically.

While successful examples of direct implementation of „e-goverence‟ initiatives exist, there is also
an alternative. This comes from recognizing the fact that citizens typically incur private costs (often
substantial) in availing of government provided services. If the use of IT can reduce such costs, even
low income individuals may be willing to pay at least some fraction of

the cost saving, and there is scope for private provision of intermediate services that reduce the cost
of access to government. There have been numerous examples of successful pilot e-governance
programs in India. These include:

Computer-aided registration of land deeds and stamp duties in Andhra Pradesh, reducing reliance on
brokers and possibilities for corruption.

Computerization of rural local government offices in Andhra Pradesh for delivery of statutory
certificates of identity and landholdings, substantially reducing delays.

Computerized checkpoints for local entry taxes in Gujrat , with data automatically sent to the central
database, reducing opportunities for local corruption.

Consolidated bill payment sites in Kerela, allowing citizens to pat bills under 17 different categories
in one place, from electricity to university fees.

E-mail requests for repair to basic rural infrastructure such as hand pumps, reducing reliance on
erratic visits of government functionaries.
As in the broader case of using the internet for communications and transactions, sustainability of e-
governance initiatives is a significant issue. Since government at all levels are financially strapped,
the initial investments and ongoing expenditure for IT based service delivery may act as a barrier to
adoption as well as to long-run sustainability. However, fieldwork suggests that a franchisee model
can be successful here. Low cost rural Internet Kiosks, a tiered franchising model, and a suite of basic
government access services for which users are willing to pay, are key components of what Drishtee,
a spin off of the Gyandoot project in Madhya Pradesh, is implementing in several parts of India.
Cooperation of local governments and subsidized financing have been important elements for
Drishtee , as in the case of TARAhaat,with the former being obviously critical in the case of Drishtee.
It is important to note that once Internet access is available; its benefits are not restricted to e-
governance. Individuals can obtain market information, training, job information, advice on farming
techniques and so on, as discussed earlier in this section. This is certainly part of Drishtee‟s long run
model. Here also, a commercial approach may find more flexibility. For example in Jaipur district in
Rajasthan, Drishtee has piggybacked on the expansion of a fiber optic company, and combined its
internet kiosks with cable TV franchises for greater and more immediate financial viability.

MAJOR CONTRIBUTION AREAS

Together the IT and ITes are predicted to grow at 25% pa till 2010.The IT industry is highly export
oriented and the exporters are predominantly Indian. The Indian BPOs (ITES) are moving up the
value chain, handling high end data for many other industries like: Airline information, Insurance,
Banking sector Mortgage companies, Enterprise resource planning And many others. Some of the
companies have already moved into significantly higher value added segments such as: Mission-
critical applications Development and support Product design HR Management Knowledge Process
Outsourcing (KPO) for pharmaceutical companies and large complex projects.

FACTORS FAVOURING THE GROWTH OF SOFTWARE REVENUES IN INDIA

Software is not just another industry: Firms that produce software or employ software developers is
much larger than the set of firms commonly thought of as software firms, such as Microsoft or
Oracle. Indeed, large banks, insurance companies, finance companies ,and virtually every
organization above a certain size writes a great deal of software. Much of this software is either
developed for a particular user, or consists of standard “platforms” such as SAP ERP system or an
oracle accounting system and customized to the needs of the user organization Once in place, these
software systems have to be maintained and enhanced. Some observers claim that over two thirds
of all the software development effort is spent in maintaining and enhancing existing software code,
rather than producing new software. Despite the steady growth in software technology and tools,
software development is still labour intensive and requires relatively little capital. Estimates by
Lakha (1994) suggest that labour costs accounted for about 70% of all software costs in the early
1990‟s. As the information technology revolution has taken hold in the 1990‟s, the demand for such
workers has steadily outstripped supply in the developed world. However, a fairly substantial
fraction of these activities can be outsourced, and increasingly, are carried out away from the user
organization. This type of outsourcing demand has formed the basis of the initial growth of the
Indian software industry. The needs of such software production seem particularly suited to the
resource endowments of the Indian economy. Moreover, scale economies are not a significant
barrier to entry. Firms can, and id start as little more than one software development team, while
others have started as temporary employment agencies, requiring a few rooms in which to set up a
handful of PCs and a telephone. Further, the production of software does not depend quite so
heavily on physical infrastructure such as roads and ports, although a steady supply of electrical
power is critical, as is ready access to PCs, workstation and communication – airports, phones, faxes
and increasingly the Internet. The initial growth of the software service industry in India was
facilitated by the enlightened “hands off” policies of the government of India. By the late 1980‟s and
early 1990‟s, PC prices had fallen steadily, as had the prices of the other equipment. The
government allowed liberal imports of both hardware and software tools, and firms were able to
provide their own electrical power through a variety of sources, including self generation. Growth of
software revenues came disproportionately from export revenues. Thus it is worth exploring the
nature of India‟s advantage in software exports. Amongst developed countries only Greece shows
similar levels of salaries to software professionals as India. If one concentrates on the availability of
scientists and engineers, India has one of the largest numbers of engineers and scientists in the
world, almost all of speak English.

This story of the growth of exports of software from countries like India on account of lower labour
costs Is well known. It also underlies a somewhat pessimistic outlook for the future of such exports
and the growth of the software industry in India, because as the stock of surplus trained labour
depletes, the cost advantage erode, making India less attractive (compared to countries such as
China and Russia) as source for lower value added services. The absence of a sizable domestic
market is said to compound the problem by depriving software exporters in India of the depth of
experience that will ultimately enable them to produce higher value added services and products. In
this view, the only way out is for India to develop a sizable domestic market and reduce its export
dependence. This however begs the question. After all, perhaps the biggest reason for the absence
of a large and sophisticated domestic market is a relatively unsophisticated economy, which has,
until recently, grown at 3.5% per year. Thus, it would appear that the development of a sizable
domestic market for Indian software is likely to be a consequence as much as it is a cause of the
growth of the Indian software industry. They conclude that domestic market experience is not
particularly valuable for the export market.

Another way of looking at the growth of software exports from India is to ask if there is an
underlying comparative advantage that India enjoys in software production vis-à-vis the rest of the
world? If such a comparative advantage does exist then, both the absolute cost advantage enjoyed
by India, and favourable events like the excess demand caused by the millennium bug, could give
Indian software exporters the experience and scale of output that is required for dynamic learning
processes to kick in and start making their effect felt on the further growth of the productivity in the
sector. In this story the future of Indian software exports is less bleak; the erosion of the labour cost
advantage could be compensated for by increasing productivity. Productivity levels measured as
revenues per employee are lower in India compared to other parts of the world (notable Ireland and
especially Israel). More importantly however, software is far more productive relative to other
sectors in India compared to other countries – the essence of a comparative advantage argument.
For instance, productivity in software is more than twice that in manufacturing in India, whereas it is
1.3 times in the US. A similar picture obtains for Israel, another country with a fast growing software
industry. In an open economy, both India and its trading partners will benefit from India‟s
specialization in software, and implicitly her imports in the sectors that the economy is less
productive in (e.g. manufacturing). The distribution of these gains is a moot point, of course. Given
the high reliance on US exports of the Indian software sector and the undifferentiated nature of
software exports from India, it seems likely that the productivity improvements in the Indian
software contribute more to productivity in US rather than in India. Though the share of the
software production in India‟s industrial output, exports and employment is growing, its share in the
world market for software remains low. The Indian software industry accounts for a small proportion
of her domestic employment outside agriculture, and Indian software account for a very small
fraction of the world software market. The picture changes somewhat when we look at customized
software alone. India‟s share of the customized software market is estimated to have grown from
11.9% in 1991 to 18.5% 1999.

CHALLENGES

Infrastructure constraint: It continues to hamper the growth of IT industry. Most important of these
is the availability of power and the quality of telecommunications infrastructure – bandwidth and
the increasingly telephone penetration. Thus, it is estimated that in 1996, India had 15 main
telephone lines per 1000 people compared with 395 lines per 1000 for Ireland and 446 lines per
1000 for Israel. The picture is much worse when we consider the penetration of PCs in the total
population: India boasted 1.5 computers per 1000 people compared to 145 for Ireland and 117.6 for
Israel. It is difficult to estimate exactly how much infrastructure constraints have affected
productivity, but some indirect evidence is available. Expenditure on power was second largest
category of expenditure among software firms and many firms generate their own power.

Low Bandwidth: While current bandwidths are adequate for the simple tasks required of Indian
software exporters, they could potentially be keeping more complex, higher value added tasks from
coming to the same firms. For the newly emerging area of e-commerce in India, the lack of
telephone penetration (which does not require land lines) saw the most rapid growth in smaller
towns. In this context, the development of mobile telephony and internet products present a
window of opportunity and growth is as much as demand for these is not constrained by telephone
lines and for mobile phones, by literacy.

Economic output, exports and employment: India’s software sector has been argued to have
represented an embodiment of a market model within a social-welfare focussed economic structure.
This market model may have led to combined economic development at the aggregate level, but
when analyzed at the micro-level taking regional, sectoral or knowledge- content indicators into
account, this development appears uneven and disconcerted at best. However, scholarly literature
suggests that the even economic development that has resulted from the rapid evolution of one
particular sector in the world’s fifth largest economy is rooted in the differential innovative
capability and infrastructure, the uneven diffusion of technical education and the varying policy
entrepreneurship underlying India’s overall socio-economic and political structure.

The export oriented software sector has been criticized to contain a very little forward and backward
linkages to the regional economies, leading to less likelihood of providing as many growth points as
the manufacturing sector. Although the software industry has grown out of the software processing
zones of the 1980s, it has till date remained concentrated in the handful of cities. Whereas many
researchers attribute this development to the concentration of science and engineering institutes
and telecom infrastructure in a limited number of cities, the impact of the regional policy
entrepreneurs cannot be overstated. The states of Andhra Pradesh, Karnataka and Maharashtra are
cases in example where the state governments have proactively engaged in structural reforms. As
per the study reported by Kambhampatti , by 1997 a major proportion of firms were headquartered
in Mumbai (96 of 302) , followed by Delhi ()61/302 and Bangalore (51 of 302). Most recently, the
industry has spread to other smaller cities, albeit the concentration of firms in the southern and
western region has not altered significantly. Software development is seen to be gender neutral
from an employment standpoint, providing a more conducive and less discriminatory work
employment from women. Approximately 10% of the software employees were women by mid
1990s, the proportion is believed to have grown to 18-20% in the last five years.