China could pose a threat to India’s IT, offshoring strength

China could pose a threat to India’s IT, offshoring strength

India’s position as a global powerhouse in software and back-office offshoring could be under threat from China in the next three-five years, said Nasscom, India’s software lobby group, in a white paper released on Tuesday.

The paper said this could happen if the country does not focus on issues such as education and infrastructure, and the government does not create favourable policies for the software and back-office industries. According to Nasscom, exports by the two industries added up to $31.4 billion (Rs1.29 trillion) in 2006-07.

“Though China is far from being immediate competition to India in the software services space, it does have great potential to catch up and we need to keep in mind that it is moving rapidly, particularly in the education space where they are making huge investments," said Kiran Karnik, president, Nasscom.

China is a dominant player in the global hardware business. IT products accounted for more than 90% of its $150 billion-in-revenue technology market in 2006.

The country hasn’t made much headway in software and back-office services, but the Nasscom paper said China could leverage its large domestic market, an educated workforce and conducive government policies to become a strong player in these two industries.

China’s software and services sector is growing at a compound annual growth rate of 31% and is estimated to touch $28 billion in revenues by 2010 from the current $12 billion. By then, India’s software and service exports alone would be around $60 billion, according to Nasscom.

Analysts and industry experts, however, are not too worried about China overtaking India. They said it will take China much longer—another 10-12 years—to come up to where India is today in the software and back-office space.

“China might be a threat to India when it comes to providing cost savings to its global customers. In the short term, maybe pieces of low-cost simple transactional work such as data entry work that does not require much customer interaction, might go to China, but substantial high-end work that involves complex intellectual property will stay in India," said Gaurav Gupta, country head for research firm Everest Group.

Japan and Korea are China’s largest export markets for software and back-office services, and account for around 60% of revenues.

India mostly serves the US and UK markets, which together account for more than 80% of its total exports of software and back-office services.

Nasscom is concerned that the government will not extend tax incentives to software and back-office firms beyond 2009, when an existing scheme comes to an end.

Karnik said continuing with these incentives would ensure that India does not “lose out strategic investments in the ­sector".