The Rise of the Indian Software Industry

Seminar Paper, 2004
8 Pages, Grade: 67% (Upper second class)


Table of Contents

1 Introduction
1.1 General situation of India
1.2 Offshoring – The difference to Outsouring

2 Offshoring – The engine of the rising Indian service industry?
2.1 Need for offshoring
2.2 Advantages of India

3 The Indian service industry – A fallen angel or a rising star forever?
3.1 Downsides of offshoring
3.2 A rising star

4 Closing Words

5 References

1 Introduction

1.1 General situation of India

Today India is the second most populous country in the world, with about 1.04 billion people. Two-thirds of India’s population work in the agricultural sector and account for around 25% of GDP.[1] The Indian indicator of human development is one of the lowest in the world, and a large fraction of the population still lives below the poverty line. Nevertheless, due to India’s liberalising reform programme and the rising economic development, the number of poor people will decline to 220.1 million by 2007 according to the Planning Commission.[2]

The World Bank estimates that India will become the fourth largest economy in the world by 2020. While increasing pressures on domestic industry will have to cope with competition from imports, liberalisation of trade will open up new opportunities for export of goods.[3]

India’s service sector has already become the dominant contributor to GDP, accounting for 46 per cent of the total. NASSCOM, the Indian industry’s lobby, has stated that the country’s exports from software, other IT services and business-process-outsourcing industries grew by more than 25% to $12 billion last year, of which infrastructure services accounted for just over $300m.[4]

The global market for textiles, clothing and agricultural products will expand dramatically, but India’s ability to export will depend on its capacity to keep pace with rising international standards of price, quality productivity and service.

1.2 Offshoring – The difference to Outsouring

Before we delve into the offshoring trend, it is important to differentiate offshoring from general business process outsourcing (BPO), which also includes the outsourcing of manufacturing units to an external provider. Offshoring describes the process of outsourcing all kinds of services like “call centres”, IT and back-office work in low cost countries and therefore can be seen as a special type of outsourcing.

Outsourcing is an arrangement in which one company provides services for another company that usually have been provided in-house.

The Internet and high-speed Internet connections make it possible for outsourcing to be carried out anywhere in the world, a business trend economists call globalisation. In general, domestic companies are interested in offshore outsourcing on the one hand in order to decrease costs and on the other hand they might have not enough competencies to do it themselves. We will provide further reasons in the next paragraph why nowadays offshoring becomes more and more important.

2 Offshoring – The engine of the rising Indian service industry?

2.1 Need for offshoring

Offshoring is the newest strategy in order to be able to cope with several aspects such as a saturated world market, global competition and the companies own inefficiency. In addition to offshoring activities they need to acquire a better position in the market, stay competitive and increase market shares.

The financial times pointed out in their article that almost all of the American companies look on Asia as a partner for offshoring activities.[5] The companies’ main intention using offshoring is either to reduce costs or to concentrate on their core competences. The principle of ‘follow the leader’ has strengthened and accelerated a continuous growth in Indian economy. When industry leaders of western countries start to use offshoring as part of their business strategy other companies in the same industry will copy same approach in order to keep up with the industry leader.

2.2 Advantages of India

Why do companies often prefer India when the decision is made to offshore their own service activities? India has a range of advantages compared to other countries that are also known for marginal labour costs. Besides low labour costs, an Indian programmer earns 10% of the wage of a comparable American programmer.

India offers well trained programmers which are at least as qualified as other programmers around the world. Furthermore, the infrastructure provided in India is advantageous. The advanced telecommunication system allows a fast connection with other countries all over the world. Another huge advantage is the English language being widely spread. All higher education is taught in English. The last important point which should be mentioned is the government which provides ideal conditions for new IT and other service companies - tax releases and other additional benefits are granted.

According to Ricardo’s theory, countries benefit from specialising in industries where the productivity of labour force is higher than in other countries. The trend of offshoring confirms the theory of comparative advantage. In our case, industrialised countries tend to offshore their services to India where IT labour are the country’s strength. Furthermore, the well developed Indian infrastructure and telecommunication system are facts proving the theory of Heckscher-Ohlin, which is built on comparative advantage, based on factor endowments in general which expands the Ricardo theory.

3 The Indian service industry – A fallen angel or a rising star forever?

3.1 Downsides of offshoring

Is this hype around offshoring to India really sustainable or do companies realize that the attractive wages only were a trap with too many risks involved? There are certainly a lot of downsides that could lead to a severe slow down of the Indian service industry. The external political risk is not one of the greater problems that India faces since except their tense relation to Pakistan it can be evaluated as a quite stable country under the developing countries. More of a problem could be the internal political problems of the western companies that arise due to employee lay off programs. Employees who might lose their job because of outsourcing will try to work against this project and their motivation will fall immediately.


[1] The Economist Online (2002).

[2] India (2003).

[3] Gupta, S. P. (2002).

[4] The Economist Online (2004).

[5] Financial Times Europe (2004), p. 16.

Excerpt out of 8 pages


The Rise of the Indian Software Industry
University of Westminster  (University of Westminster (London))
International Trade & Finance
67% (Upper second class)
Catalog Number
ISBN (eBook)
File size
361 KB
Rise, Indian, Software, Industry, International, Trade, Finance
Quote paper
Markus Kutscha (Author), 2004, The Rise of the Indian Software Industry, Munich, GRIN Verlag,


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