Bangalore: A shift in business to growth markets such as India and China, where global firms have built low-cost products for the local market, and the pressure to cut product development costs is fuelling growth in India’s engineering services industry.

Bulk of this growth is coming from auto firms looking to replicate frugal engineering concepts such as those used on Tata Motors Ltd’s ultra-cheap Nano car, information technology (IT) industry lobby National Association of Software and Services Companies (Nasscom) and consultancy firm Booz and Co. Inc. say in a report released on Thursday.

Tracking opportunities: Nasscom president Som Mittal. Hemant Mishra/Mint

The market opportunity for engineering research and development in India is estimated to reach $45 billion (around Rs2.1 trillion) by 2020. Of this, at least $5 billion would be spent by Indian firms locally, Nasscom and Booz say in their report.

The engineering research and development (R&D) services industry contributes $8 billion to India’s $50 billion software exports.

“This is high value work," said Som Mittal, president of Nasscom. “There is tremendous opportunity for India as it is already a preferred destination for global R&D. It also impacts a lot in building an ecosystem that includes manufacturing."

Booz and Co.’s Vikas Sehgal, who authored the report, said around 150,000 people are employed by the engineering services outsourcing industry in India, and this would increase to at least 1 million jobs in a decade.

Already, nearly one million people work in government labs and private firms building aeroplanes and tractors, among other products, and their knowledge can be exploited for grooming employees in the services companies.

Global spending on engineering R&D surpassed $1 trillion in 2009 and is expected to touch $1.4 trillion by 2020, the report says. Automotive, consumer electronics and telecom are the top spenders on engineering R&D globally.

India has close to 300 global firms such as Nokia Oyj. and General Motors Corp. that use local talent to build products for both the domestic and global markets. Around 80 Indian firms such as HCL Technologies Ltd, Wipro Ltd and Infotech Enterprises Ltd, too, employ engineers to work on projects for customers such as Boeing Co. and United Technologies Corp.

While there is huge demand from global firms to outsource engineering work to India, Nasscom cautions that India needs a national innovation policy to promote local research, build skills and create a support system.

The report advocates opening up of government labs for collaborating research with private industry. “The concern is the overall supporting eco-system—the absence of linkages to manufacturing capabilities," said Mittal.