India is at a crossroads today. Gloom has replaced what seemed to be an unending boom just a few years ago. After a decade of rapid growth led by the services sector, the Indian economy has hit a plateau. While services exports continue to grow and create a surplus in services trade, they only constitute 35% of the country’s total exports and are unlikely to compensate for the deep deficit in merchandise trade that stands at 10% of gross domestic product (GDP). This deficit in goods trade is partly attributed to the services-led route of economic development taken by India in the post-liberalization era, in contrast to a manufacturing-led route to development that creates a strong base for goods trade.
From a national policy perspective, excessive dependence on services is akin to putting all one’s eggs in the same basket. For a country of India’s size, diversity, and global aspirations, a more diversified economic basket is an urgent imperative.
The current situation has created a need to nurture and bolster “products” or “goods” industries. But the challenging question is where to begin, and which industry might lead the charge. Given India’s rise to prominence in the last two decades as a software hub, could software products be the ideal place to start?
Unlike manufactured products, software does not need major logistics infrastructure, nor does it depend on inputs other than human capital. Further, software products can be delivered through the cloud.
Therefore, the software product industry holds the potential to circumvent India’s relatively weak position in manufacturing and yet capture a high enough degree of value to address at least some of our economic challenges.
In addition to the direct benefit of a healthy software product industry to the national economy, technology can bring about an order of magnitude improvement in the effectiveness and competitiveness of other sectors, be they industrial or social. Industries as diverse as healthcare and jewellery could benefit from standardized software applications that enhance their competitiveness. Therefore, a competitive software product industry will not only benefit the economy but will have a ripple effect across the society at large.
Though the aspiration for a vibrant software product industry is compelling, international comparisons show that we have much ground to cover. While the number of engineers in the Israeli software industry is only a third of those employed in the Indian product industry (including MNC captives), Israeli start-ups raise almost double the amount of venture capital that Indian start-ups do. Further, we have thrice the number of start-ups as Israel, but Israeli investors managed 40 times the number of exits compared to Indian companies in 2011. So far, India’s software product industry is punching below its weight category and needs a fillip.
In the past we have failed to realize our potential in products. Take telecom as an example. We have created mobile services giants like Airtel but have no telecom product industry to speak of. Our air force is one of the largest in the world and yet we haven’t been able to get the light combat aircraft (LCA) deployed in 30 years. We have somehow not been able to develop a product industry in India.
A challenge as big as this one is unlikely to have a one-shot solution. Yet, a vibrant product industry is unlikely to emerge by chance either. The solution needs to emerge gradually and iteratively, based on a continuous dialogue between software product companies, investors, policy makers and potential customers. Shaping policy, funnelling investments and stimulating the market can potentially steer the software product industry in the right direction.