India

imageINDIA STARTS UP

Country Guide: India

By David James

Upside Magazine

April 2000

David JamesGanesha is on the minds of many Indian software companies and IT entrepreneurs these days.  Ganesha is the Lord of all Beginnings and the Remover of Obstacles in the pantheon of gods of the Hindu religion, the religion of 80 percent of India’s population.  He is the elephant-headed god who gives support and encouragement to new undertakings and is a source of strength in times of rapid and uncertain change.

The obstacles for India in technology development, indeed for almost any kind of development, continue to be a lack of telecommunications infrastructure, a politically unstable government, a stifling bureaucracy, and illiteracy in excess of 40 percent of the population.

With a huge population of more than one billion people, India’s progress in telecommunications infrastructure is an enormous challenge.  India has a teledensity of only seven telephones for every 1,000 people, compared to 490 per 1,000 in the United States.  In some Indian cities, the waiting list for a telephone line can be ten years.  Electrical brownouts are another problem.  Companies typically install backup generators for electrical outages and utilize leased lines or satellite uplinks for their telecommunications needs.

Image of Ganesha, courtesy of www.sxc.huIn addition, government restrictions and high costs have impeded Internet development in India.  The government did not open the Internet to private subscribers until August 1995 and did not permit private companies to offer Internet services until November 1998.  Since then, more than 100 private Internet service providers have been licensed, and subscription costs have come down to 15 rupees (about 35 cents) per hour (and may go lower).  This is a lot of money for a country with an annual gross domestic product of only $384 per capita.  India’s National Association of Software and Service Companies (Nasscom) estimates that there are currently only about 1.5 million Internet users in India.  With poor telecommunications infrastructure and high illiteracy, Internet usage and development are apt to remain sluggish.

The government began implementing economic reforms in 1991, but it has moved ahead at the speed of a 2400 bps modem.  Although it has long been a stated goal of Prime Minister Vajpayee to convert India into a global IT superpower, efforts to date have been marginal and fragmented, hampered in part by India’s tradition of self-sufficiency, by its nationalist doctrine of Swadeshi (“putting India first”), and by protective tariffs and restrictions on foreign investment.

The slow pace of government reforms is due in part to weak political leadership.  Power is held from time to time by coalitions among some 176 political parties representing a wide range of interests in this huge, diverse country.  India has had 13 general elections since it gained independence from Great Britain in 1947, three of them occurring in the last three years.  The bureaucracy, on the other hand, has steadily grown and become more entrenched, expanding the complexity and reach of its regulations and restrictions.

Lately, however, Ganesha has been at work on behalf of India’s IT industries.  New undertakings are prospering.  Indian software companies are experiencing a boom, IT entrepreneurial activities are picking up, and venture capital and foreign investment are pouring in.  India's software exports grew by 68 percent in 1998 to about $2.23 billion.  And it is estimated that some $200 million of venture capital is currently available for Indian technology startups.

Indian software and IT leaders such as Infosys Technologies Ltd., Wipro Ltd., Satyam Infoway Ltd., and NIIT, Ltd. are enjoying record profits and are rapidly expanding overseas.  In March 1999, software developer Infosys became the first Indian company to list its shares on the Nasdaq.  The result was spectacular.  With an offering price of $34, its stock commenced trading at $47 and the company managed to raise more than $70 million against a high-side expectation of $53 million.  In October 1999, Satyam, India’s leading private sector Internet service provider (and chief competitor of Videsh Sanchar Nigam Ltd., the ISP of the government’s telecom monopoly), listed American Depositary Receipts on the Nasdaq with equally good results, raising more than $74 million.  Infosys, now with first-half 1999 pre-tax profits up 134 percent and with high value stock to trade, is reportedly on the hunt for acquisition opportunities in the U.S., presumably to gain new technologies or market share.  Satyam’s chairman, B. Ramalinga Raju, says that it will use its new funds to expand its Internet network and international gateway in India.

"The market capitalization of India's IT sector went up from $10 billion to $24 billion in the year 2000," says Nasscom's president, Dewang Mehta.  "This gives us an extra advantage to acquire companies in India and overseas."

"The success of these technology companies has ignited a new-found entrepreneurial spirit in India," claims B. V. Jagadeesh, co-founder and chief technology officer of Exodus Communications, Inc., Santa Clara, California.  Jagadeesh is one of many India-educated engineers who migrated to the U.S. and built successful technology companies here.  “Five years ago Indian entrepreneurs at home were focused on starting consulting firms.  Now they see the rewards of taking greater risks and developing new technologies and products.”  Jagadeesh recently gave the inaugural address to the new Bangalore chapter of The IndUs Entrepreneurs (TiE), a Silicon Valley networking organization.  “The excitement of these young entrepreneurs is vibrant, a real change from five years ago,” he says.

Jagadeesh says that he and other U.S.-based Indians are personally helping to fund technology start-ups in India.  In addition, Indian and U.S. venture capital firms are investing in young companies there.  In one example, Walden-Nikko India Management, an affiliate of San Francisco’s Walden Group, and U.S.-based Draper International, have joined Exodus Communications CEO K. B. Chandrasekar in backing Gray Cell, a Bangalore firm.  Gray Cell has a Web-based product that links mobile phones with the Internet and can collect requested information from multiple Web sites into one package.  In another example, Pramati Technologies (P) Ltd. of Hyderabad, a developer of Internet and middleware software products, recently received $1.4 million in first round financing from Citibank N.A. Private Equity.  Jay Raghavendra, Pramati’s founder and CEO, says, “With venture capital now available in India, there has never been a better time to build software in India.”

William Draper, head of venture capital firm Draper International, believes there will be many such investment opportunities in the next five years.  "In the past, India has provided the grunt work for technology design that was done in the U.S.  But in the next five years there will be more and more design work done in India, and this will require a lot of venture capital."

The key question is whether India-based techies and entrepreneurs have the stuff to move up the technology value chain.  If the successes of counterpart Indian émigrés to the U.S. are any indication, the answer is an unqualified yes.  The first generation of Indian/U.S. entrepreneurs includes successes such as Kanwal Rekhi, who sold the networking firm Excelan to Novell for $250 million in 1989; Sabeer Bhatia, co-founder of Hotmail, which was sold to Microsoft for $250 million; and Vinod Khosla, founder of Sun Microsystems Inc.  Now a new generation of Indian/U.S. entrepreneurs is building its own success story, often with the financial backing of first generation entrepreneurs.  According to a June 1999 study by University of California-Berkeley professor AnnaLee Saxenian, nine percent of Silicon Valley tech startup firms during 1995-98 were led by Indian immigrants.  Indeed, the successes of Indian/U.S. entrepreneurs may serve as a model and stimulus for their counterparts at home.

And there is plenty of talent at home.  Notwithstanding India’s high illiteracy rate, there is a large pool of highly skilled, English-speaking technical workers, supplied by 1,832 educational institutions and polytechnics, including the prestigious Indian Institute of Technology, training about 68,000 computer software professionals every year.  Currently there are more than 250,000 software professionals working in India.

Where are the big opportunities for Indian entrepreneurs?  S. Rajeev, director of Java technologies for Sun India in Bangalore, a subsidiary of Sun Microsystems Inc., believes that wireless and Internet technologies and services hold great promise.  “Because of India’s poor telecom infrastructure, wireless connections, if cheap enough, can rapidly expand Internet usage and development.  Content creation and Internet-enabled services, such as call centers and medical record transcription, are also good bets, owing to India’s low cost, technically proficient, English-speaking pool of skilled workers,” he says.

Jagadeesh of Exodus Communications believes that the big opportunities lie in improving infrastructure connectivity at all levels.  "Because so many new technologies can leapfrog the old technologies, you can get tremendous capacity to fuel growth.  As new fiber is laid, and DSL and cable connections carry data, India will have tremendous capabilities.”

In addition, there are opportunities in outsourced software development services.  Firms such as Moon-Stone InfoTech of Hyderabad and Lama Information Technologies Ltd. of Bangalore are examples.  These and similar firms do labor-intensive programming for offshore customers over the Internet, using high-speed datacom links.  Programming costs can average as low as $35 an hour per programmer, compared to costs of up to $200 an hour in the U.S.

Happily, Ganesha, Lord of all Beginnings, has also been at work lately as the Remover of Obstacles.  As for the Indian political obstacle, there has been a turn for the better.  In India’s recent general election, held in August 1999, Prime Minister Vajpayee’s Bharatiya Janata Party (BJP), a party strongly committed to economic and technological progress, won a solid victory.  Observers believe that the BJP may be able to remain in power for the next five years and carry out many of its objectives.  A number of Vajpayee’s colleagues share his IT objectives.  For example, Chandrababu Naidu, the chief minister of the state of Andhra Pradesh, who carries a laptop with him wherever he goes, is typical of many economically progressive politicians who are part of the BJP coalition.

But Ganesha is known also to be the Placer of Obstacles if he is not duly worshipped.  In October 1999, the central government, moving ahead with its plans for India to become a global IT superpower, announced the formation of a new ministry, the Ministry of Information Technology.  Now other government ministries and departments, notably those relating to communications, information and broadcasting, and science and technology, are engaged in a bureaucratic turf battle.

Separately, India’s National Association of Software and Service Companies (Nasscom) reports that salaries of Indian software professionals rose by 21 percent in 1998.

Perhaps Ganesha has chosen not to help overcome that most nagging of Indian obstacles, the government bureaucracy, and perhaps he has decided that rising costs should be a new obstacle for India’s technology development.

We must wait and see.  After all, the Lord of all Beginnings is an entrepreneur.

About the Author

English