In the last three months of 2005, India played host to the heads of three multinational it companies, Cisco's John Chambers, Intel's Craig Barrett and Microsoft's Bill Gates. All three made announcements about investments, the amount involved in each case being in excess of $1 billion (Rs 4,500 crore) over the next three to five years. The specifics differ, but the three companies are pumping in money (and how!) to further their R&D and marketing efforts in the country. The R&D bit is easily explained: multinationals have long viewed India as a 'resource base' for their knowledge-oriented activities such as research, design and product development. The other bit, the marketing thingamajig isn't (as easily explained, that is). These huge investments are probably an indication that the companies expect India to witness a computing boom (read: increased usage of computers by companies large and small, and by individuals, spanning hardware, software, and applications) sometime within the next three years.

So, what transformed India from being a mere resource base for it firms into a market for their products and services? There are various reasons (and theories) doing the rounds, including the growing competitiveness of India Inc. and its desire to 'go global', the falling prices of hardware, and the rising prosperity of at least some part of the Indian population. All these are valid reasons, yet none of them qualifies as the main one. That would have to be increased connectivity.

Since the Indian government decided to allow private sector firms to enter the telecommunications sector in the mid-1990s, India's teledensity has zoomed: from 2.2 per cent in 1998 to 11 per cent at the end of 2005. Apart from providing efficient (or reasonably efficient) services at rock-bottom rates-telecom tariffs in India are the lowest in the world-these telcos also cater to companies, offering them a range of services (such as leased bandwidth on which they can run their applications). Now, the thing about most enterprise applications of the kind companies in the us and Europe use, and which companies in India are beginning to adopt is this: they are bandwidth-intensive, requiring a robust public internet infrastructure complemented by an equally robust private internet one. Thanks to the telcos, India has that, and with all other factors chipping in, it isn't difficult to see why a computing boom is on its way.

At another level, this phenomenon could see companies that have hitherto focussed on the us, Europe, Japan, even other parts of Asia and Africa, beginning to look closer home for business. Already, Tata Consultancy Services derives around 12 per cent of its revenues from the domestic market and Wipro boasts a division, Wipro Infotech that wants to be a home-grown IBM. A booming domestic market, and a growing one for offshored services should serve the cause of the Indian it industry well, although consulting firm Gartner warns that India's share of the offshored it enabled services market could come down from 85 per cent now to 45 per cent eventually.

In the short-term, however, the most significant challenge facing the industry will remain its ability to overcome infrastructural challenges in India and address concerns in some quarters regarding the governments of several states acquiring agricultural land from farmers and selling it at discounted rates to it companies. Land isn't it.

The Road Ahead For Indian IT

The NASSCOM-McKinsey team: From left, Noshir Kaka, Principal, McKinsey & Company, S. Ramadorai, CEO and Managing Director, TCS, and Chairman, NASSCOM, Kiran Karnik, President, NASSCOM, B. Ramalinga Raju, Chairman, Satyam Computer Services and Vice Chairman, NASSCOM, Vivek Pandit, Partner, McKinsey & Company and Jayant Sinha, Partner, McKinsey & Company

In the last week of December 2005, NASSCOM (National Association of Software and Service companies) and McKinsey & Company unveiled a report on the future of the Indian it and it enabled business. Shortly after the report was launched, its authors, and key nasscom functionaries sat down with Business Today's R. Sukumar for a discussion on the ffuture of Indian it. Excerpts

BUSINESS TODAY: The first thing that strikes me when I see this report is that it says that much of the growth of the it and it enabled services industry is going to come from the kind of things that the industry doesn't like to talk about. Companies like to speak about what they are doing in the area of application development and what they are doing in the area of research and development. They do not like to talk about what they are doing in the area of software and hardware maintenance. Yet, the report says the growth will come from that. Doesn't that mean profit margins will go down? And doesn't it mean that the link between revenue growth and manpower growth will be much more pronounced than it was in the past.

JAYANT SINHA: I don't think you can jump to those conclusions. First, what you are seeing is the law of large numbers. Application development and maintenance is a $6.5-billion (Rs 29,250-crore) industry right now. To continue to grow at 30 or 40 per cent a year is hard to do. And 16 per cent growth (which is what the report forecasts) is not shabby by any means. You will see a fair amount of growth in absolute dollar terms. In terms of revenue productivity and headcount implications, we have modelled a revenue productivity increase of about 3-4 per cent a year, which is effectively what the industry has been growing the number at, so it is not as if there will be any change in that.

KIRAN KARNIK PRESIDENT/ NASSCOM "The industry in now poised to take India, in the next five or 10 years, towards being a really strategic player for a critical thing the world needs"

B. RAMALINGA RAJU VICE CHAIRMAN/ NASSCOM "The growth of small firms that wish to imitate larger companies will come under threat. Each one has to do it in its own way"

S. RAMADORAI: More importantly, the operational efficiencies (that companies can use to their advantage) can improve profit margins and support some of the wage increases that are going to happen in that space. Looking at the broader canvas, whether it is infrastructure management, or BPO or platform-based BPO, these are opportunities where we can grow faster. And if we can bring in the same best practices with the IT experience, it's an enormous potential.

BT: To my mind, one of the big things that happened for the it industry in 2005 was the ABN Amro deal, which saw a customer with a large value deal to contract out, choosing to deal directly with several Indian vendors rather than contracting it out to one large multinational firm that would then sub-contract parts of it out. Will we see more of that going forward, or will deals like that be more the exception than the norm?

NOSHIR KAKA: In traditional it outsourcing-that is exactly what the ABN Amro deal is-we will move away from small ticket contracts towards much bigger deals. We are also going to see a new kind of model evolving. For example, if you look at what has traditionally happened, a lot of tactical outsourcing and offshoring has occurred. You give it to a vendor; you do parts of your processes in a BPO, a third-party or captive (owned); by the time you evolve this network, you see a fragmented kind of service provider arrangement. What we see is an opportunity to consolidate the IT infrastructure, the IT application and BPO in an integrated play.

NOSHIR KAKA PRINCIPAL/ MCKINSEY & CO. "What we see is an opportunity to consolidate the IT infrastructure, the IT application and BPO in an integrated play"

VIVEK PANDIT PARTNER/ MCKINSEY & CO. "There will be only a couple of $10-billion companies. These are companies that can provide scale across processes and the technology stack"

RAMADORAI: I'd even extend it further. One is, the single player can have all the potential competencies, it infrastructure, maintenance and BPO. Two, partnerships are possible where you can leverage the competencies of others.

BT: But it obviously makes sense, at least from a company's point of view, to have all the competencies.

VIVEK PANDIT: I'd like make a point about something you said earlier, about margins. Many BPOs are really platform businesses. When you drive volumes, the incremental cost continues to drop. When you look at the industry over all, and you asked a question about whether we were headed for lower margins, you'd have to ask that question by service lines. I'd argue that some aspects of the BPO business will have higher margins than the combined industry has today.

BT: Continuing from the point you were making about an integrated play, what does it mean for the smaller company, say a $100-million (Rs 450-crore) software services firm based in India? Is being acquired the only future for such a company?

Eminent Domain and Land Acquisition Or why IT companies need to tread on this whole land-acquisition minefield carefully. Swati Ramanathan

Eminent domain has been described as one of the most draconian of government powers. It allows cities and states to take people's private property without their consent -for use in public projects. Around the world, eminent domain is viewed as a cause for concern and debate. It has been at the heart of a bitter legal battle in New London, Connecticut. The city is using eminent domain to buy land for redevelopment next to a new Pfizer plant. The justification is creation of jobs and tax revenues; the families who are losing their homes say it's a violation of their constitutional rights. Cities are drivers of economic growth, providing employment opportunities that attract human resources. In India, between 1901 and 1991, our urban population grew 8.5 times, from 25 million to 217 million; but the number of urban centres increased only 2.5 times, from 1,827 to 3,768. Among these, the top 23 cities accounted for 31 per cent of the urban population in 1991, and their share has grown larger in the past 10 years. By 2020, there will be 75 such agglomerations accommodating more than 1 million citizens each. Cities and municipalities need to develop clear economic identities and provide intelligent planning to strengthen competitive advantages. Housing, retail, entertainment and infrastructure requirements must also be included in this planning process. But how should this planning take place? How should we allocate land to encourage economic growth? How do we mitigate the social and financial cost to farmers who are held hostage to government powers of eminent domain? Who should bear the cost of provision of infrastructure? What about the environmental cost? What about the utilisation of precious resources such as water and electricity? Without adequate answers to these questions, each of these is a flash point waiting to flare up at the slightest provocation. In India, attracting smokestack industries in the past, and it companies in recent times has been (and still is) a matter of great pride for state and local governments. Land has always been considered a fairly cheap carrot. So what's the big deal now? Why is there such a fuss when it is it companies? There are two significant reasons that come to mind. First, rapid urbanisation, as a result of which land-like water-has become a scarce and precious commodity. This trend is becoming unmistakable now: land will only get dearer. Second, acquisition is a coercive procedure. There must be a balance between individual and collective rights. The government and the beneficiary of acquisition must be required to prove long-term development value for the larger public good. While the case for providing employment is a very reasonable one, what happens when industries lose their employment rationale? For example, Mumbai's textile mills went into a decline during the 1980s, and closed shop. However, the 600-odd acres of land they sit on remains an extraordinarily high value asset, worth thousands of crores. In the mid-1990s, the government of the day decided to allow the mill owners to demolish the mills and develop their properties in order to clear unpaid dues to their workers, provided 200 acres of land was given to the government for critical public infrastructure. A 2001 amendment reduced that to 32 acres. A Public Interest Litigation (PIL) filed by the Bombay Environmental Action Group challenged the modification and a Mumbai High Court ruling on October 18, 2005, ruled that the land be shared three ways, with the government using its two shares for social housing (200 acres) and public spaces (200 acres). This ruling is being challenged in the Supreme Court by the mill owners. Similarly, land distributed by the government for a song in Peenya industrial estate in Bangalore, is being sold for profits far in excess of what the owners can make from simply running their companies. Unfettered allocation can act as an arbitrage on land, given the powerful land economics at play. So what is the solution? One approach could be that if the government does acquire land, then it leases this to business. The lease could be long-term, even 25-50 years and extendable through a public and transparent process, subject to certain conditions. This allows the land to be retained as public stock, enabling intelligent recycling as per future economic, social and public needs. Mill land or industrial land allocation could have been recycled, allocating it to it or biotech companies. Companies will still have an incentive to make investments in buildings and related assets, since these investments are depreciated in their books over a maximum period of 30 years. Another market-based approach could be to create a land bank trust (LBT), which could pool in all the land for any development and that could be owned proportionately by both government (or even private infrastructure companies that will finance development), as well as the original land owners (rural farmers, for example). The land can be developed and leased out to interested companies at market value. This LBT option has many advantages: the original owners continue to retain a proportional stake in the land; the government is compensated with proportional ownership stake in the land, ensuring that future re-allocation decisions can be controlled; the up-side valuation of land over time is not lost to the original owners; such ownership instruments act as liquid investments even for farmers; market forces will dictate pricing and no preferential treatment will come into play. The need for greater care on land issues is not restricted to private industry. Of equal concern are the decisions and deals related to public land and public sector undertakings. In Bangalore, government-owned industries such as HMT, BEL, BHEL, HAL and Karnataka Soaps and Detergents Ltd, are all sitting on hundreds of acres of expensive urban land. Even beyond the more fundamental question of the validity of government continuing in these businesses, the employment generated and profitability of each of these PSUs must be measured against the optimal utilisation of the urban land they occupy. A second question is about who makes the decisions on the sale, transactions and re-use of public land. Take the example of state-owned NGEF in Bangalore. Reports of a bidding battle between two developer consortiums over the purchase of NGEF's 143 acres estimate the value of the land at about Rs 1,600 crore. The state government, in the meantime, is also considering reviving the debt-ridden NGEF by selling 53.91 acres at a price of Rs 1.96 crore an acre. This decision highlights some serious questions: Is it acceptable for public enterprises to sell valuable public land to pay off debts? Is there any guarantee that if this public enterprise is revived, it will now be viable? Will the money generated by the sale ploughed back for development of the city from which the land has generated the profit? Should the decision be handed down from government without any public consultation on the optimal re-use of public land? The current process of haphazard decision-making on public land is clearly inadequate on many fronts. We cannot let the need for urgent remedies hijack the search for intelligent and sustainable ideas. An LBT could be one arrow in the quiver of solutions worth considering. The author is an urban planner and founder of Janaagraha, a Bangalore-based citizens' organization

B. RAMALINGA RAJU: More and more companies are trying to grow on account of their focus in a given area. You can provide some service in a niche area.

It is my personal view that in the next five to 10 years, the internal changes in the industry will be difficult to predict, although it is quite clear that growth will continue overall. The growth of those companies that wish to imitate the larger companies, even though they are much smaller, will come under threat. Each one has to do it in its own way.

RAMADORAI: When a smaller company wants to compete with a bigger company and do the same things, the only differentiator is price. We need to create an ecosystem where there are verticalised specialists, platform-based BPO organisations, application it specialists, and the like. There can be players of all types, whether they are $100-million organisations or $10-billion ones. Each company, each niche player, has to define its position. But there are only a certain number of players that can be ...

BT: ... in Tier-I. And there are only a certain number of vendors a client will want to deal with. It is not going to go hunting for best of breed in everything.

PANDIT: That's right. The industry has a very long tail right now. And there will be only a couple of $10-billion companies. These are companies that can provide scale across processes and the technology stack. They would have to have delivery capabilities all over the world. They would have to have direct sales teams all over the world. Most of the second tier companies we are talking about today are today partnering for those capabilities, or do not have the resources. For some, the way out may be acquisition, and for a few there may be increased specialisation.

SINHA: Let's dwell on this idea of a global champion. I think it would be a remarkable aspect of the Indian economy if we can create two or three such companies that are North of $10 billion (Rs 45,000 crore) in revenues and $50 billion (Rs 2,25,000 crore) in market capitalisation, and are deriving something like 80 per cent or 90 per cent of their revenues from export earnings. We are well on track to do that. The transformational impact, in terms of the halo effect, on India is going to be remarkable. If you look at what a Toyota or a Honda or a Nissan have done for Japan, that's what some of these it services companies will be able to do for India.

KIRAN KARNIK: This industry is now poised to take India, in the next five years or 10 years, towards being a really strategic player in the global marketplace for a critical thing that the world needs. This industry is going to position us very very differently: its size and scale, and the fact that it is export driven gives us a very unique advantage.