India’s information technology sector seems to have a dream. The Nasscom Industry Association predicts that the sector is likely to end the current fiscal year (2021-2022) with a total turnover of $ 227 billion after a 15.5 percent increase, the highest in ten years, by adding $ 30 billion to income.
If the industry maintains a growth rate of 11-14 percent over the next few years, it is projected that by 2026 it will reach a huge total turnover of $ 350 billion.
Apart from its own growth prospects, this sector is crucial for the country as exports of software and services make up almost half of India’s total exports. According to RBI statistics, in 2020-21, India’s total exports amounted to $ 291 billion, and part of software and services amounted to $ 134 billion.
Sustainable growth in the IT sector has become possible because the industry now has more than just costs – lower global standards, which Indian engineers are willing to work for – which used to be its only feature. Now the industry boasts the rapid development of innovation capacity, which comes in two ways.
One is industry leaders who offer integrated business solutions instead of performing only individual tasks and projects. Indian IT leaders are now increasingly meeting with their customers ’executives to determine what is good for the business and then develop an IT path to achieve this. To do this, they had to acquire what is called knowledge of the field – that drives a particular industry. As such, they now supply not only IT solutions but also consulting services that help in developing an IT roadmap in which IT solutions and projects are a part.
The second way is to deliver innovation through startups. They are now growing and, in many cases, attracting foreign funding through private and venture capital players. The fact that startups take place is shown by three aspects – the total number of startups, total funding and, most dramatically, the growing number of unicorns – private firms worth more than a billion dollars (estimated at the estimated value of the company obtained by total shares multiplied by at the share price). All startups, not just unicorns, are driven by high technology and are heavily supported by IT.
The number of startups increased from more than 700 in 2016-17 to more than 14,000 in 2020-21, an increase of 20 times over four years. The list of global investors in Indian startups and unicorns is headed by Sequoia, Tiger Global, Accent and Softbank – the biggest of the names. Venture funds worth more than $ 6 billion were launched in India in 2021. In 2021 alone, more than $ 39 billion was invested in Indian startups. The sharp rise in funding for Indian startups has been driven by the recent success of public startup releases and the pandemic that has prompted the adoption of digital technology, highlighting the role of technology companies.
Earlier this year, India boasted 83 unicorns. Of these, as many as 44 were added last year (2021), highlighting that this is a very recent phenomenon. India now ranks third in the world in the number of unicorns after the United States and China, ahead of Britain, which is now in fourth place.
The happiness of the industry is that throughout its life it received active support from the then government, directly from the 1991 budget, in which the then Minister of Finance Manmahan Singh exempted revenues from software exports from income tax. After that, governments actively changed the regulatory environment for the industry so that ease of doing business – a problem for many industries – began to improve.
In the middle of last year, the current government carried out reforms for “other service providers” to make work from home and work from anywhere easier, and the distinction between domestic and international “other service providers” was removed. Other reforms are planned, for example, in the field of SEZ exceptions.
It is not the case that the IT sector does not have its share of problems and challenges. The most important of them is the lack of skills. When the people-oriented sector is growing so fast, players in the sector are competing with each other, trying to attract skilled people. This competition leads to a very high level of disappearance – staff leave for the best deals. At the same time, IT companies are forced to dramatically increase the compensation packages they offer to retain staff or be able to attract the right staff. In the process, IT companies raise their staff compensation bills to a level where it is bound to affect profits.
So far, we’ve talked about the number of startups that are emerging, the investments that they attract, and the estimates that they achieve. But estimation is also an arithmetic and sometimes a theoretical number. If a company successfully closes a new round of funding, say, a couple of hundred million dollars, then the price it receives for the issued share determines the value of the company.
But such an assessment is not always possible. In fact this is often not the case. Estimates begin to fall when there is a bearish run in the stock markets, which affects how much and at what cost companies will be able to raise capital in the near future. This is, in fact, what is happening now. The threat of war over Russia’s fearful invasion of Ukraine has led to a fall in the stock market, and this will inevitably affect future estimates.
Strongly growing compensation accounts of companies negatively affect what ultimately matters: the outcome. Earnings and profitability are declining, reducing the attractiveness of future stock offers among ordinary investors. The big challenge now facing Indian IT companies is ensuring that their profits grow healthy, albeit not as strongly as their profits.