Introduction

India is the world's largest sourcing destination for the information technology (IT) industry, accounting for approximately 67 per cent of the US $124-130 billion market. The industry employs about 10 million workforces. More importantly, the industry has led the economic transformation of the country and altered the perception of India in the global economy. India's cost competitiveness in providing IT services, which is approximately 3-4 times cheaper than the US, continues to be the mainstay of its Unique Selling Proposition (USP) in the global sourcing market. However, India is also gaining prominence in terms of intellectual capital with several global IT firms setting up their innovation centres in India.

The IT industry has also created significant demand in the Indian education sector, espCSIally for engineering and computer science. The Indian IT and ITeS industry is divided into four major segments – IT services, Business Process Management (BPM), software products and engineering services, and hardware.

The IT-BPM sector which is currently valued at US $143 billion is expected to grow at a Compound Annual Growth Rate (CAGR) of 8.3 per cent year-on-year to US $143 billion for 2015-16. The sector is expected to contribute 9.5 per cent of India’s Gross Domestic Product (GDP) and more than 45 per cent in total services export in 2015-16.

Market Size

The Indian IT sector is expected to grow at a rate of 12-14 per cent for FY2016 in constant currency terms. The sector is also expected triple its current annual revenue to reach US $350 billion by FY 2025, as per National Association of Software and Services Companies (NASSCOM).

India, the fourth largest base for new businesses in the world and home to over 3,100 tech start-ups, is set to increase its base to 11,500 tech start-ups by 2020, as per a report by NASSCOM and Zinnov Management Consulting Pvt Ltd.

India’s internet economy is expected to touch Rs 10 trillion (US $146.72 billion) by 2018, accounting for 5 per cent of the country’s GDP, according to a report by the Boston Consulting Group (BCG) and Internet and Mobile Association of India (IAMAI). India’s internet user base reached over 350 million by June 2015, the third largest in the world, while the number of social media users grew to 143 million by April 2015 and smartphones grew to 160 million.

Public cloud services revenue in India is expected to reach US $838 million in 2015, growing by 33 per cent year-on-year (y-o-y), as per a report by Gartner Inc. In yet another Gartner report, the public cloud market alone in the country was estimated to treble to US $1.9 billion by 2018 from US $638 million in 2014. Increased penetration of internet (including in rural areas) and rapid emergence of e-commerce are the main drivers for continued growth of data centre co-location and hosting market in India.

Investments

Indian IT's core competencies and strengths have attracted significant investments from major countries. The computer software and hardware sector in India attracted cumulative Foreign Direct Investment (FDI) inflows worth US $20.42 billion between April 2000 and December 2015, according to data released by the Department of Industrial Policy and Promotion (DIPP).

Indian start-ups are expected to receive funding worth US $5 billion by the end of 2015, a 125 per cent increase in a year, according to a report by IT Industry association NASSCOM.

The Private Equity (PE) deals increased the number of Mergers and Acquisitions (M&A) espCSIally in the e-commerce space in 2014. The IT space, including e-commerce, witnessed 240 deals worth US $3.8 billion in 2014, as per data from Dealogic.

India also saw a ten-fold increase in the venture funding that went into internet companies in 2014 as compared to 2013. More than 800 internet start-ups got funding in 2014 as compared to 200 in 2012, said Rajan Anandan, Managing Director, Google India Pvt Ltd and Chairman, IAMA.

About 554 start-ups received funding this year compared to 342 during last year. Seed and venture capital funds made investments worth US $3.4 billion this year, three times the investment made last year. VC funding to the IT & ITes sector amounted to 55 per cent of total VC funding made this year.

Most large technology companies looking to expand have so far focused primarily on bigger enterprises, but a report from market research firm Zinnov highlighted that the small and medium businesses will present a lucrative opportunity worth US $11.6 billion in 2015, which is expected to grow to US $25.8 billion in 2020. Moreover, India has nearly 51 million such businesses of which 12 million have a high degree of technology influence and are looking to adopt newer IT products, as per the report.

Some of the major developments in the Indian IT and ITeS sector are as follows:

• PurpleTalk Inc, a US based mobile solutions company, has invested US $1 million in Nukkad Shops, a Hyderabad based uber-local commerce platform that helps neighbourhood retail stores take their businesses online through a mobile app.
• KartRocket, a Delhi based e-commerce enabler has completed its US $8 million funding round by raising US $2 million from a Japanese investor, which will be used to enhance Kraftly, a mobile-first online-to-offline marketplace targeting small sellers, individuals and home-based entrepreneurs in India in product categories such as apparel and accessories.
• JustRide, a self-drive car rental aggregator, has raised US $400,000 in pre-series A round of funding from a group of angel investors, including Redcliffe Capital’s Mr Dheeraj Jain, which will be used to enhance its technology.
• Mumbai-based baby care and kids products e-tailer, Hopscotch.in, has raised US $13 million in a Series C round of funding from Facebook co-founder Mr Eduardo Saverin, which will help the firm in growth and expansion of its technology platform.
• MoMark Services, a mobile based customer engagement platform for small and medium businesses, has raised US $600,000 from YourNest Angel Fund and LNB Group, to scale up its product offerings and talent acquisition.
• Shouut, a social discovery app by Giant Tech Labs Pvt Ltd, which helps consumers discover deals, buy event tickets or redeem coupons, has raised US $500,000 in angel funding from a high net-worth individual angel investor based in India.
• Apple Inc. plans to set up its first technology development centre outside the US in Hyderabad with an investment of US $25 million, which is expected to create 4,500 jobs, as per Mr Jayesh Ranjan, Secretary, IT for the state of Telangana.
• Xpressbees, an e-commerce logistics firm operated by Busybees Logistics Solutions Private Limited, has raised US $12.5 million in a Series A funding, led by its existing investors SAIF Partners, IDG Ventures, Vertex Ventures and Valiant Capital, which will be used to strengthen technology initiatives and processes of the firm.
• Housejoy, an online home services provider, has raised Rs 150 crore (US $22 million) in a Series B round of funding led by Amazon, and which also includes new investors such as Vertex Ventures, Qualcomm and Ru-Net Technology Partners.
• • Global PE firm Blackstone Group has acquired a minority stake in an Indian travel, transportation and logistics software firm, IBS Software, for US $170 million, by buying the stake from General Atlantic and few other shareholders.
• India’s top-tier IT company, Infosys Ltd, has bought a minority stake worth US $3 million in Whoop, which is a US-based start-up that makes activity trackers worn by athletes.
• Microsoft Ventures is planning to incubate 500 start-ups in India in the next five years with a vision to create a viable and profitable business out of the booming start-up sector in India.
• National Association of Software and Services Companies (NASSCOM) plans to open four more tech start-up incubation centres in different parts of India, in addition to existing three, in support of Government of India’s ‘Start-up India’ initiative.
• Nasscom Foundation, a non-profit organisation which is a part of Nasscom, has partnered with SAP India to establish 25 National Digital Literacy Mission (NDLM) centres in 12 cities across India, as a part of Government of India's Digital India initiative.
• Infosys, India’s second largest Information Technology services company has acquired US-based Noah Consulting, a provider of advanced information management consulting services for the oil and gas industry.
• US-based Callidus Software Inc, cloud-based sales, marketing, learning and customer experience solutions provider, has opened its centre in Hyderabad and also launched its ‘The Lead to Money’ suite in Indian markets.
• Wipro Ventures, Wipro’s US $100 million corporate venture arm, plans to invest in early-stage Venture Capital (VC) funds based in the US to pursue a strategy of investing/partnering country-focussed VCs.
• A recent study by research firm International Data Corporation (IDC) suggests that India may soon be able to catch up with the global technology trends that have disrupted enterprises, industry and the way consumers behave and transact.
• Reliance is building a 650,000 square feet (sq ft) data centre in India—its 10th data centre in the country—with a combined capacity of about 1 million sq ft and an overall investment of US $200 million.
• Intel Corp plans to invest about US $62 million in 16 technology companies, working on wearable, data analytics and the Internet of Things (IoT), in 2015 through its investment arm Intel Capital. The Indian IoT industry is expected be worth US $15 billion and to connect 28 billion devices to the internet by 2020.
• Indian e-commerce industry is expected to grow at a CAGR of 35 per cent to reach US $100 billion size in the next five years, as per a study by Assocham-PricewaterhouseCoopers.

Government Initiatives

Some of the major initiatives taken by the government to promote IT and ITeS sector in India are as follows:

• Mr Ravi Shakar Prasad, Minister of Communication and Information Technology, announced plan to increase the number of common service centres or e-Seva centres to 250,000 from 150,000 currently to enable village level entrepreneurs to interact with national experts for guidance, besides serving as a e-services distribution point.
• The Railway Ministry plans to give a digital push to the India Railways by introducing bar-coded tickets, Global Positioning System (GPS) based information systems inside coaches, integration of all facilities dealing with ticketing issues, Wi-Fi facilities at the stations, super-fast long-route train service for unreserved passengers among other developments, which will help to increase the passenger traffic.
• The e-Tourist Visa (e-TV) scheme has been extended to 37 more countries thereby taking the total count of countries under the scheme to 150 countries.
• Department of Electronics & Information Technology and M/s Canbank Venture Capital Fund Ltd plan to launch an Electronics Development Fund (EDF), which will be a 'Fund of Funds' to invest in 'Daughter Funds' which would provide risk capital to companies developing new technologies in the area of electronics, nano-electronics and Information Technology (IT).
• The Human Resource Development (HRD) Ministry has entered into a partnership with private companies, including Tata Motors Ltd, Tata Consultancy Services Ltd and real-estate firm Hubtown Ltd, to open three Indian Institutes of Information Technology (IIITs), through public-private partnership (PPP), at Nagpur, Ranchi and Pune.
• Government of India is planning to develop five incubation centres for 'Internet of Things' (IoT) start-ups, as a part of Prime Minister Mr Narendra Modi's Digital India and Startup India campaign, with at least two centres to be set up in rural areas to develop solutions for smart agriculture.
• According to research firm Gartner Inc, the Indian government is expected to increase its spending on information technology (IT) products and services by 5.2 per cent to US $6.88 billion in FY 2015-16.
• The Government of India has launched the Digital India program to provide several government services to the people using IT and to integrate the government departments and the people of India. The adoption of key technologies across sectors spurred by the 'Digital India Initiative' could help boost India's Gross Domestic Product (GDP) by US $550 billion to US $1 trillion by 2025, as per research firm McKinsey.
• India and the US have agreed to jointly explore opportunities for collaboration on implementing India's ambitious Rs 1.13 trillion (US $16.58 billion) ‘Digital India Initiative’. The two sides also agreed to hold the US-India Information and Communication Technology (ICT) Working Group in India later this year.
• The Government of Telangana has begun construction of a technology incubator in Hyderabad—dubbed T-Hub—to reposition the city as a technology destination. The state government is initially investing Rs 35 crore (US $5.14 million) to set up a 60,000 sq ft space, labelled the largest start-up incubator in the county, at the campus of International Institute of Information Technology-Hyderabad (IIIT-H). Once completed, the project is proposed to be the world’s biggest start-up incubator housing 1,000 start-ups.

Road Ahead

India is the topmost offshoring destination for IT companies across the world. Having proven its capabilities in delivering both on-shore and off-shore services to global clients, emerging technologies now offer an entire new gamut of opportunities for top IT firms in India. Social, Mobility, Analytics and Cloud (SMAC) are collectively expected to offer a US $1 trillion opportunity. Cloud represents the largest opportunity under SMAC, increasing at a CAGR of approximately 30 per cent to around US $650-700 billion by 2020. The social media is the second most lucrative segment for IT firms, offering a US $250 billion market opportunity by 2020. The Indian e-commerce segment is US $12 billion in size and is witnessing strong growth and thereby offers another attractive avenue for IT companies to develop products and services to cater to the high growth consumer segment.

Exchange Rate Used: INR 1 = US $0.0147 as on March 01, 2016

References: Media Reports, Press Information Bureau (PIB), Department of Industrial Policy and Promotion (DIPP) statistics, Department of Information and Technology

Disclaimer: Council for Start-up India is not responsible for any error in the information.