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IT drives India's growth curve

By CNN's Asia Business Editor Geoff Hiscock

Group chairman Ratan Tata, left, with TCS managing director S. Ramadorai at the listing of TCS on August 25.
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Recent GDP rates

1998-99: 6.5 percent
1999-00: 6.1 percent
2000-01: 4.4 percent
2001-02: 5.8 percent
2002-03: 4.0 percent
2003-04: 8.2 percent
2004-05: 6.4 percent (F)
India's financial year ends March 31

Source: Morgan Stanley

MUMBAI, India (CNN) -- Some time between 2008 and 2010, annual export revenues from India's information technology (IT) sector are predicted to hit $50 billion, up from $16.3 billion this year.

That is the spectacular growth curve projected by the IT industry's peak body, the National Association of Software and Service Companies (Nasscom), which sees at least 25 percent annual growth for the next five years.

Given that India's total exports this year will be around $70 billion, Nasscom's view amounts to a phenomenal performance for an industry that barely existed until the 1990s.

Now, the world knows names like Infosys, Wipro, TCS, Satyam, HCL and NIIT, and global clients beat a path to their door for work that meets the three magic criteria of speed, quality and price.

The champions of this industry are men such as NR Naryana Murthy of Infosys and Azim Premji of Wipro, whose headline-grabbing financial success has flowed through to thousands of staff shareholders and investors.

That pool of lucky shareholders widened even further late last month with the listing of Tata Consultancy Services (TCS), which immediately confirmed its status as India's most valuable IT company with a market worth of $10.2 billion.

TCS became India's first billion-dollar software company in revenues last year. TCS managing director S. Ramadorai told CNN last week that "substantial growth" since then had pushed revenue for the year to March 2004 to a record $1.6 billion.

Ramadorai sees growth continuing at a healthy rate and "in multiple ways" for TCS because of what he says is its competency in delivering a globally competitive service.

But Ramadorai is alert to the competition. "China wants to play in the IT space too," he observes.

Still, he believes that the "value addition" that Indian professionals bring is the key to the industry's success. "It is a creative exercise".

That theme is echoed by Ramadorai's industry peers. In a recent interview with CNN television, Wipro chairman Azim Premji said the Indian IT industry initially won customers because of its low costs. But he said customers had stayed because "we deliver better than the best quality in the world, consistently".

After its listing on Wednesday August 25, TCS stands as the world's third-largest IT services company. Its market capitalization of $10.2 billion makes it substantially larger than rivals Infosys ($8.84 billion) and Wipro ($8.52 billion).

The TCS also listing means that the Tata Group -- which holds 85 percent of TCS through its Tata Sons -- has clearly overtaken the Ambani family's Reliance Group as India's biggest private business conglomerate.

"The veil has been lifted," Tata Sons executive director R. Gopalakrishnan told CNN. "This group (Tata) has been perceived as No. 1 in India. Now the market shows we really are No. 1".

Come of age

Wipro's Azim Premji is one of the IT industry's leaders.

In the view of Morgan Stanley's India chief economist Chetan Ahya in Mumbai, the Indian IT industry has really come of age in the past five years, primarily because of the liberalization of the telecommunications sector and the resultant sharp fall in prices.

He said the drop of almost 85 percent in the price of telecom services between 1998 and 2001 acted as a "catalyst to growth in external demand for IT and IT enabled services".

"In the last five years we have seen a sea change in IT and telecoms infrastructure," Ahya told CNN.

"There is still work to be done in general physical infrastructure, but India's business process outsourcing (BPO) success would not have been possible without this IT infrastructure," he said.

Ahya believes India's successful software model is a good reflection of the skills available in the country. "It is true to us," he says.

Plus, he says, IT has changed India's growth story. He nominates the most important aspect as the contribution it has made to India's savings rate.

Morgan Stanley believes that with increased competition from the private sector, telecom costs in India will be the most competitive in the region.

Similarly, it expects the sector to be a key driver of economic growth in India over the next 10 years.

Underlying this trend is India's competitive advantage -- the average salary of a fresh IT sector employee is just 15 percent of that in the United States.

Though India lags in primary education, it puts a heavy emphasis on higher education, particularly in its Indian Institutes of Technology (IIT). This leads to the availability of a large number of English-speaking graduates who can take part in IT opportunities.

While education is hugely important, so too is PC and Internet access, and the related issue of the affordability of computers in India.

Ramadorai of TCS believes that from a current price level of around 35-40,000 rupees ($760-$870), the price of a basic computer must come down to 10,000 rupees (about $217) to increase penetration levels in Indian society.

There is another issue that is a cause for concern in the city of Bangalore -- the Indian technology hub that is followed closely by Hyderabad, Chennai and more recently, Pune.

Bangalore is becoming a victim of its own success -- its rapid transformation into India's Silicon City has not been matched by an upgrade of public infrastructure. In roads, power, transport, water and pollution, it struggles to meet the needs of its high-earning and demanding citizens.

One result is that companies such as Infosys and Wipro -- the very names whose lush campuses epitomise Bangalore's IT success -- are looking elsewhere for expansion.

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