Expanding IT hubs in India

India’s information technology (IT) stride shows definitely a healthy growth. Among the services sectors, IT has continuously been on the path of expansion – not only in term of adding to the gross domestic product (GDP) but also in creating more jobs. According to Forrester Research, Inc., a US-based independent technology and market research company, the Indian IT market is expected to grow by 18% in the year 2008 to reach US$ 38 billion, which is second highest growth rate after China's. However, China is likely to attain a 20% growth.

However, when it comes to IT or IT related services, we think of Bangalore, Chennai, Mumbai, Hyderabad, Kolkata, Gurgaon and Noida, as much of IT and BPO service industry (about 95%) are confined to these seven cities, with around 36% of services concentrated in Bangalore alone. Now, the government plans to change the scenario, and rightly so.

Given the expansion new boost and in response to the challenge from rising infrastructure and employee costs, the government is planning to build 43 new IT cities across the country in order to tap the huge surge in demand for IT-enabled services (ITES) over the next 10 years. The cities, as the government estimates, will altogether generate employment for around 3.5 million people by 2018.

The proposal, suggested by a high-level group on service sector, has been cleared by the Planning Commission. The objective of the proposal is to create self-contained satellite townships with commercial space for renting and a commensurate increase in residential accommodation, education, healthcare, retail and recreational facilities. Under the ambitious proposal, the government plans to shift 40% of the business to the upcoming 43 cities by 2018.

So far, India has been able to retain its leading position. However, the emergence of countries like Vietnam and the Philippines has put India IT and BPO companies in sort of tough competition and indeed some of the companies are losing their global cost advantage. These Asian countries offer similar services at cheaper rates and are threatening India's status as the world's back office.

Another reason is the high rate of attrition in these cities, and is going up, which makes the companies find it difficult to recruit quality employees in the big cities. No less is the concern of infrastructure constraints in Bangalore, Gurgaon and Noida, as the expansion has reached saturation level. Hence, the plan to build 43 new cities is aimed towards addressing some of these issues. It is felt that these new towns will provide a steady supply of workers besides being specifically geared towards the needs of the IT and BPO sectors.

The NASSCOM-McKinsey Study 2002, which envisaged the strategies and implications for Indian IT companies, says: “the Indian IT software and services sector is on track to achieve its long term target aspiration of US$ 77 billion, and which includes IT services export US$ 28-30 billion, ITES exports US$ 21-24 billion, product and technology US$ 8-11 billion and domestic market 13-15 billion. However, the revised Nasscom-McKinsey Study 2002 says that by 2008 the industry would employ 4 million people, account for 7 percent of India's GDP and 30 percent of India’s foreign exchange inflows."

The IT software and services industry has been divided into four major categories: IT services exports sector; ITES exports; product and technology services; and the domestic market. As per the Nasscom-McKinsey study, “IT services exports will touch US$28-30 billion by the year 2008, the ITES segment will account for US$21-24 billion, while the products and technology services industry will contribute around US$8-10 billion to overall revenues. The domestic software market will generate revenues of US$13-15 billion.”

The proposed strategy will help in many ways: it will help stop huge migration from smaller cities to metros, as every graduate with IT skills from hundred of such cities run for BPO jobs in Gurgaon or Noida. And after a few years of job environment, these young men and women feel not scaling on the growth ladder though glamour is there. Moreover, savings among junior level IT workers are also not done due to huge expenses on rentals and life style. As a result, attrition rate has become a perennial problem.

Opening IT sector in smaller cities will absorb the English-speaking, IT-skilled graduate in their native cities. It will also fetch nearby talents, as earning-more-expending-less scenario will prompt the job seekers remain in their home cities. Above all, expansion of IT sector to other cities will help ease the growing pressure on metros like Delhi, Mumbai and Bangalore.