Investing in India’s IT Sector: Opportunities for Foreign Companies

India’s information technology (IT) industry is thriving due to rising demand and favorable government policies. This has created highly lucrative opportunities for foreign investors who are looking to capitalize on the sector’s significant growth in revenue, workforce, and innovation. With its strong presence in the global IT landscape, India continues to be an attractive investment destination.

India is the third largest and fastest-growing hub for technology startups. In 2022, over 1300 startups were set up in the country. Out of these, 23 achieved unicorn status, making India the second-highest source of unicorn additions that year.

The IT sector contributes 7.5 percent to India’s GDP and serves as a hub for IT and software companies worldwide.

To further encourage investments, the Indian government has launched initiatives under the Digital India Scheme, established Software Technology Parks and Centres of Entrepreneurship, and has in place various sector-specific incentives to promote manufacturing and exports. The federal budget for FY 2023-24 has allocated US$11.77 billion for the IT and telecom sector.

Sector overview

The Indian IT and ITeS (information technology-enabled services) industry is experiencing remarkable growth, with a projected value of US$19.93 billion by 2025. According to Forrester’s Asia Pacific Tech Market Forecast, 2022-27, spending on IT in India is expected to reach US$523.5 billion in 2023. According to the National Association of Software and Service Companies (NASSCOM), the Indian IT industry’s revenue touched US$227 billion in FY 2022, registering a 15.5 percent year-on-year (y-o-y) growth.

The utilization of cloud technology is set to create numerous job opportunities for 14 million people and contribute  US$380 billion to India’s GDP by 2026.

India’s IT sector holds significant appeal for business investors owing to its advantageous operational costs, abundance of technically proficient workforce, and favorable business environment fostered by government policies. These policies specifically cater to the needs of investors, with a strong emphasis on areas, such as cybersecurity, hyper-scale computing, artificial intelligence, and blockchain technology.

With over five million employees, this sector has contributed 53 percent to India’s service exports. By 2025, it is estimated that the GDP contribution of India’s IT sector will reach 10 percent.

In FY 2020-21, India ranked third worldwide with 608,000 cloud experts across all verticals, including technology.

Market segments

ITeS

• Market size: US$116 billion in FY 2022.
• Over 81 percent of revenue comes from the export market.
• Banking, Financial Services, and Insurance (BFSI) continues to be the key vertical for the IT sector.
• IT services accounted for about 51 percent of the IT & BPM market revenue in India in FY 2022.

Business process management (BPM)

• Market size: US$44 billion in FY 2022. It is expected to reach US$54 billion by FY 2025.
• About 87 percent of the revenue comes from the export market.
• BPM had a 19 percent share of the IT and BPM market revenue in India in FY 2022.

Software products and engineering services

• Market size: US$13 billion for software and US$36 billion for engineering services during FY 2022.
• Over 83.9 percent of the revenue comes from exports.
• It reportedly had around 22 percent revenue share in the Indian IT space in FY 2022.

The following countries continue to dominate as the primary markets for India’s total IT software and services exports: United States (62 percent), United Kingdom (17 percent), and European Union (EU) (11 percent) in 2022.

Despite challenges faced by the existing markets, there is growing demand and emerging opportunities in Asia Pacific (APAC), Latin America, and the Middle East.

Hardware

• Market size: US$17 billion in FY 2022.
• The domestic market plays a significant role in this sector, accounting for a substantial share.
• It had around eight percent revenue share in the Indian IT space in FY 2022.
• Moreover, there was an estimated growth rate of 78 percent in hardware exports from India during FY 2019.

Key players in the ecosystem: Private sector firms and top performing Indian states

India is the world’s top offshoring destination for IT companies. After demonstrating its ability to provide both on-shore and off-shore services to global clients, emerging technologies now provide an entirely new set of opportunities for top IT firms in India.

Major foreign companies that have invested in the IT sector in India include Accenture, Cognizant, HP, Capgemini, IBM, Atos, Microsoft, Cadence, Intel, Dell, Agilent Technologies, Mentor Graphics, Oracle, Qualcomm, etc.

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Tata Consultancy Services (TCS) is India’s largest IT company by revenue. TCS’s revenue in 2022 was INR 16.7 billion. Other major Indian IT companies include Infosys, HCL, and Wipro.

Meanwhile, India added 60 global capability centers (GCC/GIC) in Q4 of FY 2022-23. Global consultancy EY estimates that by 2030, there will be 2400 GCCs across India. GCCs are offshore divisions of multinational corporations that operate worldwide, providing IT, finance, human resources, and analytics support services to their parent organizations.

Preferential hubs

India has the largest market share in the global service sourcing industry. Computer hardware and software have attracted the highest FDI inflows, totaling US$9.39 billion in FY23.

Karnataka

Karnataka received the largest share of FDI inflow in FY21-22 in the computer hardware and software sector (53 percent) followed by Delhi and Maharashtra (17 percent each).

Karnataka is the preferred location in the country for investing in Electronic System Design and Manufacturing (ESDM). The state is well positioned to innovate in the sector, with 85+ chip design houses and ESDM skilled resources available. Karnataka hosts 400 ‘Fortune 500’ companies and has the largest workforce in advanced manufacturing (IoT, automation, Industry 4.0) and skilled craftsmanship.

Karnataka leads India’s technology sector in terms of both investments and exports. Many new IT and ITeS business opportunities are emerging in Karnataka’s automotive, electronics, food processing, heavy machinery, and textile industries. In addition, the state is actively investing in skill development across all regions.

Telangana

Telangana achieved the highest IT exports, at a growth rate of 31.4 percent in FY 2022-23. Telangana has surpassed the national IT export growth rate of 9.36 percent. The state’s IT exports soared from INR 18.3 billion in 2021-22 to INR 24.1 billion in the financial year 2023, representing a remarkable increase of INR 5.77 billion. The growth is driven by demand from the BFSI industry.

Attractive policies of the state of Telangana:

• The Telangana State Industrial Project Approval and Self Certification System (TS-iPASS) provides for automatic approvals based on self-certification and provides incentives to encourage IT companies to come to the state.
• The Government will create an IP cell to enforce intellectual property laws and expand cooperation with international agencies to encourage and incentivize IPR registration in India.
• The Government will identify suitable land parcels for IT clusters, encourage private developers to develop IT parks in PPP mode, and create infrastructure of the highest standards.
• A Critical Infrastructure Fund (CIF) will be kept meeting urgent maintenance works in existing IT Parks.

Enabling policies and incentives

The Ministry of Electronics and Information Technology (MeitY) in India has introduced several schemes to foster the development of the IT sector in the country.

Software Technology Parks of India

The establishment of Software Technology Parks in India (STPI) aims to facilitate the development and export of software, provide IT/ITeS-related services, and support small and micro entrepreneurs. The Indian government has implemented measures such as duty-free import of hardware and software specifically for software technology parks.

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STPI play a crucial role in offering project management and consultancy services for data centers and execution of IT projects. Furthermore, the government has taken initiatives to promote the IT/ITeS industry in smaller cities, with STPI playing a key role in spreading digital technologies across the country.

To date, 63 STPI centers have been established, and 22 have received approval, underscoring the significant progress in expanding IT infrastructure and services throughout India.

Domain Specific Centre for Entrepreneurship (CoE)

STPI is introducing Centers for Entrepreneurship (CoEs) across different regions of India to offer comprehensive support and guidance to aspiring entrepreneurs in emerging technology sectors. These CoEs will be established through collaborative efforts and will be led by dedicated Chief Mentors and renowned experts who will serve as brand ambassadors. The primary focus of the CoEs will be to provide assistance in areas, such as awareness, training, mentorship, incubation support, laboratory facilities, funding opportunities, and guidance for entrepreneurs. 

Next Generation Incubation Scheme (NGIS)

NGIS is a futuristic and comprehensive incubation scheme entrusted by MeitY to STPI to drive the rise of India as a Software Product Nation. To be function from 12 locations across India, it will support 300 startups/entrepreneurs/SMEs in the field of IT/ITeS/ESDM and target 50+ patent/IPs from Indian startups. NGIS provides seed funding of up to INR 3 million (US$36,605.2) for the development of embedded electronics in various cities in India.

Electronic Manufacturing Cluster (EMC)

EMC provides a manufacturing base for the manufacture of electronic equipment in India as well as the establishment of an electronic equipment supply chain in India.

National Policy on Software Products (NPSP)

The National Policy on Software Products aims to develop India as a global software product hub through innovation, commercialization, IP, technology startups, and skill sets. In FY2022, the Indian software product industry achieved historic results, generating US$13 billion in total revenue.

BPO Promotion schemes

To promote job creation and spread the IT and ITeS industry in smaller cities and towns, the government introduced two schemes: the India BPO Promotion Scheme (IBPS) and the North East BPO Promotion Scheme (NEBPS). These initiatives aim to provide financial support to eligible companies through Viability Gap Funding (VGF), with the aim of generating employment opportunities for young people and encouraging investment in the IT/ITeS sector.

So far, these schemes have helped the establishment of 246 BPO/ITES units across 27 States/UTs, resulting in over 51,584 direct job opportunities. The implementation of IBPS and NEBPS is carried out by the Software Technology Parks of India (STPI), and a total budget of INR 5.43 billion (US$66.25 million) has been allocated for these schemes. Eligible companies can receive financial assistance of up to 50 percent of permissible expenditure, with a maximum limit of INR 100 thousand per BPO/ITeS seat.

Electronic hardware schemes

Special Economic Zones (SEZ) Scheme

The SEZ Act, 2005 and SEZ Rules came into effect on February 10, 2006, simplifying procedures and providing single window clearance for matters relating to central and state governments. The main objectives of the Act are to generate additional economic activity, promote exports of goods and services, promote investment, create employment opportunities, and develop infrastructure facilities. The exports by IT/ITeS units in SEZs for 2020-21 were INR 5.1 trillion (US$62.22 billion).

Electronics Hardware Technology Park (EHTP) Scheme

EHTP is an export-oriented scheme launched by the Government of India to encourage entrepreneurs to establish manufacturing units of electronic hardware equipment. It provides various benefits and assistance to increase production and export of electronics goods and services.

The Electronic Hardware Technology Park Scheme encourages foreign investment and provides 100 percent foreign equity benefits, duty-free services, income tax exemption, export house or trading house status, refundable central sales tax, single window clearance system, outsourcing and CST charges reimbursement.

Export Oriented Unit (EOU) Scheme

The Export Oriented Units (EOU) scheme is an Indian government program that promotes exports and creates jobs in the export sector. It provides exporters with tax breaks and subsidies to help them start and grow their businesses.

It is divided into two parts: increasing exports from specific industries and expanding their exports. Companies that participate in the EOU scheme receive a variety of benefits, including tax breaks and subsidies.

Export Promotion Capital Goods (EPCG) Scheme

The zero-duty EPCG Scheme allows exporters of electronic products to import capital goods at zero percent customs duty, subject to an export obligation of six-times of duty saved. The concessional three percent duty EPCG Scheme allows import of capital goods at 3 percent customs duty, subject to an export obligation of eight-times of duty saved.

Duty Exemption and Remission Schemes

Duty Exemption and Remission Schemes are based on the government’s commitment to exporting goods and services, allowing for duty-free import/procurement or replenishment of inputs used in the export product.

Deemed exports

Deemed exports are transactions in which goods supplied do not leave India and payment is received either in Indian rupees or free foreign exchange. They are eligible for benefits under various schemes, such as Advance Authorization, Duty Free Import Authorization, Duty Free Replenishment Certificate, and Export Promotion Capital Goods (EPCG).

Digital India

The government has announced funds to promote emerging sectors, including deep technology, and the MeitY has launched schemes/programs to assist technology startups. According to the NASSCOM strategic report 2023, there are 27,000 technology startups recognized in India, with over 3,200 deep tech startups.

TIDE 2.0 Scheme

The TIDE 2.0 Scheme provides financial and technical support to incubators engaged in supporting ICT startups using emerging technologies such as IoT, AI, blockchain, and robotics.

Domain specific Centres of Excellence

The MeitY has implemented 26 CoEs to drive self-sufficiency and create capabilities to capture new and emerging technology areas, making India an innovation hub.

SAMRIDH Scheme

The SAMRIDH Scheme supports existing and upcoming accelerators to further select and accelerate potential software product-based startups to scale.

Next Generation Incubation Scheme (NGIS)

The NGIS scheme discussed earlier is proposed to be implemented over a three-year period with a budget outlay of INR 950.3 million (US$11.59 million).

Support for International Patent Protection in E&IT (SIP-EIT) Scheme

The SIP-EIT Scheme encourages international patent filing by Indian MSMEs and startups to encourage innovation and recognize the value and capabilities of global IP.

GENESIS (Gen-Next Support for Innovative Startups)

The Gen-Next Support for Innovative Startups (GENESIS) has been launched by the MeitY to discover, support, grow and make successful startups in Tier-2 and Tier-3 cities with emphasis on collaborative engagement among startups, government and corporates.

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