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The development of the software industry in India and the particular role that it plays in the global economy has been influenced by a number of different factors, as outlined in the previous section. As emphasised by the global commodity chains approach, government policies also play an important role in industrial development and in creating an enabling environment for the integration of local industries in the global economy. In the case of India, policy has indeed played an important role in the development of the software industry. Policy makers set out to encourage software exports very early on. Simultaneously, they pushed to create and foster a domestic hardware industry. These dual objectives, however, led to some policy contradictions, which placed some obstacles in front of software developers and potential entrants into the industry, and may have delayed its development. In the 1990s, policy-making vis-à-vis the industry seems to have changed significantly. It now seems to be playing more of a facilitating role. Policy is no longer used to create certain results but to support and react to the industry's needs.

This section will highlight the policy changes that have occurred in India in the last three decades in relation to information technology. It will focus particularly on the policy environment in the late 1980s and early 1990s, in an effort to assess the extent to which policy changes may have been responsible for the boom in the Indian software industry.

3.1 The early years in software policy: an export focus

Since Independence in 1947, the goal of self-reliance has guided all spheres of policy making in India. Until the mid-1980s, India's development strategy was characterised by import substitution policies, which were aimed at nurturing domestic industry, including the computer hardware and software industry. These included extensive quantitative restrictions and high tariffs on imports, elaborate import licensing procedures, export subsidies, controls on foreign direct investment and an overvalued exchange rate (Ahluwalia, 1995, p. 21). The goal of self-reliance also led to a strong commitment to the role of science and technology in India's development strategy. These were areas that were emphasised in industrial policy as well as in the field of education. In addition to establishing the Indian Institutes of Technology, which were educational institutions located in various cities around India aimed at creating a large pool of technical skills, the Government of India (GOI) has had a computer policy since the creation of the Department of Electronics (DOE) in 1970. It was the first developing country to do so and to explicitly target software as a "thrust area", for its high skill requirements, its labour intensity, and its foreign exchange earnings potential.

In the area of software, the DOE started by launching "a programme for promoting the generation of computer software, particularly for export'...which consisted mainly of newspaper advertisements asking for interested companies to submit ideas to the DOE" (Heeks, 1996, p. 42). Simultaneously, policies were implemented to foster the hardware industry by protecting it from foreign competition. These included very high import duties, quotas and licensing requirements

The Software Export Scheme (see table 5 which is a compilation of all the main domestic policies that have influenced the Indian software industry) was launched in 1972. In addition, there was an emphasis on computer and software education and training. Any institutions that focused on training were allowed to import hardware at much lower import duties (interviews). In parallel, the DOE began to encourage public sector projects that dealt with software development. Public procurement of software gave priority to Indian companies. Until the mid-1980s, foreign investment was not permitted in many sectors of the economy. Exceptions were made for cases in which there would be a transfer of technology. A few such cases existed in the computer industry. However, in the mid-1970s, there was a move to reduce foreign ownership of computer firms. Some companies like ICL accepted this, reducing their share of the company's equity to 40 per cent, while others, such as IBM, chose to leave India in 1978 (Heeks, 1996, p. 56). When the state-run Computer Maintenance Corporation (CMC) was formed in 1976, most public sector software development and maintenance contracts were given to it (Evans, 1992, p. 7). "CMC was given a legal monopoly to service all foreign systems installed in the country...CMC played a special role in the service of IBM systems, particularly after Big Blue decided to leave India" (Brunner, 1995, p. 73).

The late 1970s and early 1980s saw a slight reversal in the import duties on hardware. It was found that there were a number of cases where hardware was being imported for the stated purpose of training or export but was actually being sold for domestic use. In further efforts to protect the domestic hardware industry, the import of second-hand hardware was banned and import duties on hardware were increased and were subject to greater restrictions (Heeks, 1996, pp. 43-44).

The DOE's actions did not, however, result in a strong domestic hardware industry. The state-run Electronics Corporation of India (ECIL) was the main beneficiary as very few licenses were issued to private producers of microcomputers. However, the microcomputers developed by ECIL were too expensive for general consumption and "lacked an adequate range of software" (Evans, 1992, p.5). To meet with the growing demand for computers, the DOE gave permission to ICL's Indian subsidiary, ICIM to produce microprocessor-based computers. This decision was extremely unpopular with the domestic private sector. In 1978, the Sondhi Committee Report on the state of the computer industry pushed for the issuance of more licenses for the private sector (Evans, 1992, 5 and Brunner, 1995, p. 74). As a result, by the time Rajiv Gandhi became Prime Minister in 1984, there were a few very strong domestic computer companies including HCL and Wipro (Evans, 1992, p.6).

3.2 Developments in the domestic software industry: the early years

Until the mid-1970s, IBM and ICL were the largest providers of hardware in India. As their hardware came with its own software there was little need for additional software. As needs became more complicated and applications could be customised, software development occurred in-house. Firms both inside and outside the computer industry developed software for their own needs. The government also had software developed internally for applications on its own computer system. For software development to be economical, firms and organisations that developed software had to be fairly large. As Indian firms started to realise the merits of computerisation, a domestic market for commercial software developed in India. However, according to Richard Heeks, due to the high import duties on computers and software, firms found it very difficult and expensive to focus on software development as their main activity. A number of domestic hardware producers, therefore, began to develop software and to provide services such as access to computers (1996, p. 69).

One way to get around high import duties on computers and to obtain the permission to import computers was to commit to a certain level of software development for export. In 1974, which Heeks suggests is "the year that marks the birth of the Indian software export industry" (1996, p. 69), Tata Consultancy Services (TCS) was established in Bombay. It was one of the first companies to get into the area of software exports. In 1978 Tata Burroughs Ltd (TBL) was formed as a joint venture between Burroughs, an American hardware company, which had a 40 per cent equity holding in the new company, and Tatas. Together TCS and TBL, which is now Tata Unisys, became the largest Indian software exporters (Heeks, 1996, p. 69). Other firms got into the act as well at that time. Another way to get around the high duties and elaborate licensing procedures was to set up a training or educational facility dedicated to software and hardware training. The Delhi-based company, NIIT got its start in this way in 1981. In order to have access to computer hardware, NIIT got into the market as a training facility and essentially "entered the market where there was no market. It was only in 1985, when the law with respect to the purchase of hardware was amended that NIIT changed its strategy somewhat. It added to its portfolio computer software development and technical support, initially for the domestic market but in 1988 "the company earned its first dollar from on-site professional services", and in 1990/91 the emphasis on foreign markets became a core activity (interviews, March 1996).

With IBM's departure, 1,200 software personnel were released into the Indian market. This had an interesting impact on the software export business. Many of these people had no option but to leave India if they wanted to pursue careers in information technology. Others set up their own small companies, as there were very few companies that were dedicated to the development of software and to software services (Heeks, 1996, p.70). The focus initially was on providing services for domestic clients, but as the domestic market was proving too difficult to penetrate, due to the very low level of computerisation and the high level of in-house development, the focus shifted to the export market.

3.3 Policy changes that led to the boom: Post 1984

The DOE's role underwent a transformation in the mid-1980s, a change that came from within. It became increasingly apparent to high level policy makers at the DOE and in the Government of India that the public sector was not able to supply the computer hardware and software that was needed by the domestic market (Evans, 1992, p. 7). The new approach was more supportive of the domestic software industry rather than the previous more restrictive and regulatory one. It also encouraged software exports and export-oriented foreign investment. In response to the success of companies like HCL and Wipro, a new Computer Policy was introduced in November 1984 which reduced many constraints on the industry (see table 5). Further liberalisation came in the form of the new Software Policy, which was implemented in 1986. "The new policy advocated what was called a `flood in - flood out' approach, allowing imports to `flood in' in the hopes that eventually exports would `flood out'" (Evans, 1992, p. 6).

Further evidence of this changed attitude came in 1986 when Texas Instruments (TI), proposed to establish a 100 per cent export-oriented, foreign owned and operated subsidiary (its first outside the United States). The DOE and the GOI were fairly quick in the processing of the license. Evans quotes a DOE official saying `"We broke 26 separate rules to accommodate TI's Bangalore subsidiary and are willing to break more"' (1992, p. 7).

The DOE's support for exports did not, however, extend to the export of know-how in the form of Indian programmers going abroad to provide onsite services to clients, which in 1989 accounted for over 90 per cent of software revenues (Schware, 1992, p. 151). In 1987, a decision was taken to impose a 15 per cent tax on foreign exchange expenditure on travel. This had substantial implications for the software industry because of the "body shopping" activities (Heeks, 1996, p. 47). Pronab Sen argues that "(T)he primary vehicle for software exports - on-site software development - was pejoratively termed as `body-shopping' and every effort was made to discourage it" (1995, p. M-19). The importance of body shopping in terms of establishing the Indian software industry's reputation and allowing Indian programmers and engineers to gain first-hand knowledge of the latest technologies.

TI's fully equipped software development centre, inclusive of satellite connectivity, made it clear to the DOE and the GOI that in order to foster the development of a vibrant software industry in India, it was necessary to provide an environment which would facilitate such activities. This realisation acted as a catalyst for the establishment of the Software Technology Parks of India Scheme in 1988. These STPs were envisioned to be like export processing zones, where the government provided infrastructure, buildings, electricity, telecommunications facilities and high speed satellite links (see box 1). In 1994-95, the STPs accounted for as much as $75 million in export revenues (Heeks, 1996, p. 142).

Until this time, telecommunications policies came under the auspices of the Department of Telecommunications. The DOE, however, saw an opportunity to boost the software industry and took the responsibility and the risk to install the appropriate telecommunications equipment so that Indian software companies would have an easy access to their clients and so that the delivery of software exports would be expedited. While the Department of Telecommunications

took "commercial approach" to the provision of telecommunications in theat telecom facilities were provided on a need and demand basis, the DOE took a "development approach" (interviews, March 1996).

In 1990-91, India went through a severe financial crisis that was exacerbated by the Gulf War. The high oil prices that resulted were a drain on the foreign exchange reserves, which were already quite low. This crisis precipitated the launching of a major liberalisation programme by the Narasimha Rao government. Many of the reforms that came out of that programme had a direct bearing on the software industry, especially the abolition of quantitative restrictions for intermediate and capital goods. On the macroeconomic front, the devaluation of the rupee, while making Indian exports cheaper, made software imports more expensive. All the benefits that were available to export oriented software firms were retained and the foreign exchange for travel tax was abolished (Heeks, 1996, p. 48). In addition, there were some policies that explicitly addressed the software industry (see table 5). Further support to the industry came from changes in tax policy in 1992 (see table 5).

The Software Technology Parks (STP) Scheme became operational in 1988. It comes under the Department of Electronics of the Government of India, but functions as an autonomous body. Its purpose is to encourage and support small software exporters, by giving 100 percent export-oriented firms a tax-free status for five years within the first eight years of operation. In addition, it provides them with office space and computer equipment, access to high-speed satellite links and an uninterrupted supply of electricity. The STP scheme also provides services such as import certification, software valuation, project approvals, market analysis, marketing support and training. Established firms that are 100 per cent export-oriented can also apply to become software technology parks to enjoy the benefits of the tax-free status and the duty-free import of hardware, in addition to access to telecommunications infrastructure. Further advantages of the scheme include "single window clearance" for projects. For the smaller projects, i.e. less than Rs. 30 million only STP clearance is required, 100 per cent foreign equity is permitted, and there are no restrictions on location. STPs are connected by an integrated network, SoftNET, whereby subscribers can lease a point to point digital 64 kbps channel, and have access to the Internet with their own TCP/IP number, which would give them e-mail, remote log in, and file-transfer services as well as access to the World Wide Web. The STP facilities also provide video-conferencing services between Bangalore and the rest of the world. The export obligation amounts to "1.5 times the CIF values of the hardware imported including software + 1.5 times the annual wage bill. The obligation on the hardware part will be fulfilled over a period of four years". Approximately 400 software companies around India are involved in this scheme. STPs are currently located in Bangalore, Bhubaneswar, Delhi/Noida, Gandhinagar, Hyderabad, Pune and Thiruvanathapuram.

Source: STPI brochures

3.4 The Indian software industry in the post-1984 period

The policy in the early years to protect the hardware industry had another important impact on the software industry. It forced Indian computer firms to shift focus away from mainframes, which were the mainstay of the multinationals, towards producing and using micro or personal computers. This led to a generation of software engineers who gained a great deal of experience in programming for PCs, in operating systems like MS-DOS and particularly UNIX, which was an operating system for non-IBM compatible computers based on Intel and Motorola chips. This operating system was preferred and pushed by the CMC and the DOE. Three Indian companies, HCL, Wipro Information Technologies Ltd, and DCM DP, became the first in the world to build computers that were based on UNIX. This research and the knowledge that was created, provided Indian software engineers with a competitive edge when the computer policy was liberalised in the post-1984 period and when the mainframe technology gave way to the personal computer technology in the global software industry in the latter half of the 1980s. (Heeks, 1996, pp. 214-216).

After the 1984 change in the hardware policy, there was a large influx of PCs into India. This gave software firms a great deal of additional local business but the domestic market continued to lose its relative importance vis-à-vis export (Heeks, 1996, p. 70). The Government's approval of TI's plans to set up a subsidiary encouraged Indian firms to take notice of the potential market in the United States for their software development talents and to consider the possibility of branching out into software exports, including bodyshopping. It also allowed them access to satellite facilities. Furthermore, venture capital companies, such as Technology Development and Information Company of India, began to take an interest in funding software companies (Schware, 1992, p. 159, and Heeks, 1996, p. 47).

As mentioned in section 2, the Indian software industry has been growing steadily at over 40 per cent a year since 1990, reflecting a tremendous response to the changes in policy and to the opening up of the international market. However, both globally and even within the Indian economy, the software industry still does not yet figure prominently. Software exports accounted for 40 per cent of total electronics exports in between 1991 and 1995, up from 10 per cent in 1980 and 20 per cent in 1985. They accounted for only 1.8 per cent of total Indian exports in 1994/95, up from 0.5 per cent in 1980 (Heeks, 1995, p. 75). Given that R&D investments had allowed Indian companies to make breakthroughs in building UNIX based computers and software in the early 1980s, it is all the more surprising that India has been unable to capture more of the international software market and that it has taken so long.

To summarise, policy has largely been responsible for the tremendous scientific and technological resource base that India has. From early on in India's independent history, high-tech industries were fostered; thus creating an expertise that is currently being exploited by the software industry. Some policies, however, for example. the quantitative restrictions on imports of hardware and software during the early years, reduced the initial prospects for growth in the software industry. The high level of protection that currently exists against competition in the area of consumer software reduces the incentive of Indian companies to improve in this segment of the market. There is clearly much room to grow in the domestic market and internationally. Moreover, the skills and technology with which to expand exist in India. It is a question of finding the right balance in the policy arena to support the industry in its efforts to gain access to and compete in the global marketplace.