can India look beyond outsourcing?

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Over the past couple of decades India has had a massive impact on the world economy, with companies as varied as Tata, Bharti Airtel, Wipro, Reliance and Infosys becoming important global players. Indian companies have had success in a wide range of industries including oil, steel and manufacturing, but also in high-tech industries such as telecommunications, software and IT services.

Business process outsourcing (BPO), which started off with call centers and now encompasses a wide range of services from software development to back office support, was a huge source of growth. In the five years from 2008 to 2012, the Indian BPO industry grew from $63 billion to $101 billion, representing 7.9% of the country’s GDP.

Many other countries are looking to wrest the BPO crown away from India. In fact, according to the Indian government’s own economic survey, the country has lost about 10% of the BPO market to countries as varied as Brazil, China and the Philippines. However, according to the Indian outsourcing association Nasscom, most of this is in call center outsourcing.

In recognition of this changing market, Nasscom is trying to rebrand the industry IT-BPM (business process management) instead of BPO. It said that the industry “had gone up the value chain, managing entire businesses processes of clients and not just outsourcing them.” Analyst Ovum, however, warns that this exercise “is a futile attempt to mitigate the challenges that the sector is facing”. Ovum expects market consolidation and says that Indian IT services companies need “new strategies – not new names”.

moving up value chain

In order to get themselves out of the cut-throat world of wage arbitrage, the IT services industry is already hard at work pushing itself up the innovation value chain. India’ proven education system is known for producing engineers that can excel in research and development for both domestic and multinational corporations (MNC).

In fact, 25 more MNCs have set up R&D centers in India in the last 18 months, bringing the total to well over 1,000. They are from a wide range of industries including Internet, engineering and technology. This represents nearly a quarter of the overall global engineering R&D outsourcing market, making India the clear market leader, says research firm Zinnov.

Consultancy Booz & Company has done an interesting analysis of the world’s 1,000 biggest corporate R&D spenders. It grouped India and China together and found that spending on R&D in those two countries increased by 27% in 2011 to a total of $16.3 billion, which was the largest increase globally (although it points out that this was from a lower base). However, Booz & Company also notes that China accounted for 90% of the combined countries’ spending.

challenges remain

There are some words of warning to temper the optimism around this undoubted growth. In fact India’s own economic survey says that despite having better scientific research institutions, its innovation capabilities are lower than the other BRICs and it is not managing to turn innovation into commercial opportunity.

On a worldwide scale, the Global Innovation Index pegs India at 66th place out of a total of 142 countries (the top five are: Switzerland, Sweden, the UK, the Netherlands and the US). The index uses 84 indicators including the quality of universities, access to ICT, availability of microfinance and venture capital. India scored poorly on access to IT at 96th, and ease of doing business 128th.

But India is taking the right steps in improving its innovation capability. “Underperforming countries can boost their innovation capabilities by developing hubs in which large companies, whose business goals are aligned with the objectives of the innovation hub, can play a key catalyst role,” said Barry Jaruzelski, Senior Partner and leader of the Global Engineered Products & Services Practice at Booz & Company.

supporting micro-enterprises

Driving innovation isn’t just the responsibility of large enterprises; small organizations are playing an important role. Small business are central to offering gainful employment to the millions of young Indians looking for work. Unlike many developed countries and even fellow BRICs like China, India is not aging. In fact by 2020 India will be the world’s youngest country and 64% of the population will be of working age.

Micro, small and medium enterprises (MSME) “play a pivotal role in India’s economic and social development as the sector accounts for about 45% of India's total manufacturing output, about 40% of India's total exports,” said D.S. Rawat, secretary general of industry body ASSOCHAM.

One of the biggest problems micro-enterprises have to overcome is access to capital. Only around 34% of MSMEs have access to banks or other financial institutions, says ASSOCHAM. The remainder has to access finance through informal channels such as family or friends.

Microfinance was an important source of lending for smaller organizations, but the industry suffered a major slowdown in India after its high point in 2010.  However, it looks like it is on the up again, as witnessed by $144 million of equity invested in microfinance organizations in the past year. India’s central bank is backing microfinance and regulation is capping interest rates to prevent the loan-shark excesses of the boom years.

building the infrastructure

To play a role in developing the innovators of the future, these businesses also need connectivity, but the country’s infrastructure is lagging. In its Global Competitiveness Report, the World Economic Forum highlighted India’s ICT, transport and energy infrastructure as ill-adapted to the economy’s needs. “The Indian business community repeatedly cites infrastructure as the single biggest hindrance to doing business,” says the report.

Fixed broadband penetration, for example, stands at only 1.1 subscribers in 100 people, with Internet bandwidth averaging only 5.2 kbps. Even mobile broadband, which is often a savior in areas with poor fixed infrastructure, is fairly low at 4.9 subscriptions per 100 population – putting India in 99th place out of 148.

The government is taking action to try and plug the infrastructure gap. One of the most ambitious projects is the Delhi-Mumbai Industrial Corridor (DMIC), which links the seats of political and business power. This $90 billion plans envisages smart cities linked along a 1,500km corridor, which includes smart networks and devices to monitor environmental conditions. The project was chosen by KPMG as the second-most innovative project in a recent report on global infrastructure projects.  Other government projects include a cloud computing strategy and a national ID project. Together these are seeing government IT spending reach $6.4 billion this year.

There is no doubt that projects such as these are essential if India is to improve its access to IT and bring connectivity and technology to the unconnected. This will help drive innovation and allow India to master the knowledge economy.

Do you think India will be able to cement its place as an innovator of the future? Will it be able to benefit from its massive demographic advantage to take global leadership?

Anthony

image © Hellen - Fotolia.com

Anthony Plewes

After a Masters in Computer Science, I decided that I preferred writing about IT rather than programming. My 20-year writing career has taken me to Hong Kong and London where I've edited and written for IT, business and electronics publications. In 2002 I co-founded Futurity Media with Stewart Baines where I continue to write about a range of topics such as unified communications, cloud computing and enterprise applications.