Pakistan Inc. -- The IT Industry Edition

Monday, July 04, 2005

IT's Lost Decade: Does Pakistan of Today Mirrors India of 1995? -- I

IT's Lost Decade: Does Pakistan of Today Mirrors India of 1995? -- I
By Athar Osama
An abridged version of this article series is published in Dawn, EBR, July 4, 2005

One question that often floats around among Pakistani IT/software entrepreneurs, investors, and policymakers alike is whether or not and to what extent does Pakistan today represents an industry dynamic that is similar to India's from a decade ago? The underlying reason for seeking an answer to the above curiosity is to understand whether or not the current development of Pakistan's software industry represents a lower level of development in the natural progression of such an industry, as epitomized by India's, or if it represents a fundamentally different development trajectory. This is a perfectly legitimate concern for those aspiring to follow the example of Indian software Industry and replicate it at home.

To be fair, however, Pakistani entrepreneurs, investors, and policymakers are not alone in this aspiration. Many other countries around the world like Russia, China, Ukraine, the Philippines, Iran, Malaysia, and several countries of Eastern Europe aspire to become the next India or, at the very least, claim a respectable share of world's software export market. Only Ireland, Canada, and Israel--the lesser-powers of the software world--seem to have uniquely independent industrial development trajectories. Many policymakers, thus, spend sleepless nights thinking, strategizing, and day-dreaming about the goal of doing what India and China has done with the software and manufacturing industries respectively.

And it is, by no means, an unworthy goal to seek. Last year alone, India exported over $17 Billion worth of IT/ITES/BPO services to the world. Starting from scratch in 1970s, the Indian software industry has become the virtual "back-office" and "data-center" for the rest of the world. The dominance of Indian companies on the software export markets is reported to be so overwhelming that it accounts for around 50% of all "exportable" software and outsourcing services from the western world. Increasingly, therefore, India is being dubbed and embraced as an "emerging regional power" and a "software super-power" in capitals around the world.

How did India do it? Is the "Indian Miracle" replicable? One way to address this question is by looking at the early development of the Indian software industry and compare it with that of a new software exporting nation, like Pakistan of today. It is ironic, though, that despite all the hoopla of attempting to follow India's footsteps, the Indian software miracle is little studied and understood in the neighboring Pakistan. We use this opportunity to inform this analysis by comparing the software industries of these two countries. While these comparisons are tricky and their policy implications are subject to varying interpretations, they are nonetheless a first step towards understanding the Indian software miracle that may then lead to a prescription for an aspiring nation.

Some observers have already pointed out to anecdotal evidence in that respect. One notable observer, Mr. Anthony Mitchell, the CEO of US company that specializes in linking US clients with Indian capacity in ITES/BPO arena--recently spent a month in Pakistan, scouring the country's growing software industry and concluded that what he saw in Pakistan was very similar to how he found "India of the early 1990s" to be. For policy prescriptions at the national level and strategic planning at the organizational level, however, we need systematic and undisputable, rather than anecdotal, evidence.

Setting The Ground Rules

This article is a first attempt to bring some systematic analysis to the above question. While there is a lot of hype around the rise to prominence of the Indian software industry, systematic analyses that stand any kind of scientific tests are few and far between. Many of these are of a much recent vantage than what is needed to carefully examine the Indian miracle ten years in the past. We use Dr. Richard Heeks' work on the Indian IT/software industry as the reference for this analysis. Dr. Heeks--a lecturer in Technology Management at University of Manchester's Development Informatics Program--has spent well over a decade (starting from late-1980s to early-1990s) studying and writing about the Indian software industry and is now recognized as one of the authorities on the subject.

Our choice is essentially driven by three reasons. First, unlike some other, more recent, attempts to document the Indian software industry, Heeks' work fully encompasses our time-period of interest and beyond that in a very substantial manner. Heeks' earlier work, therefore, is un-tainted by the later-year hype around the Indian software industry. Second, unlike some of the more recent Indian academics (notable exceptions do exist), Heeks comes out as an impartial objective observer of the Indian "miracle". There is, therefore, a greater likelihood that Heeks' is the least biased of all the accounts for Indian software industry. Third, Heeks' treatment of the software industry is academic and comprehensive and it incorporates that of several other authors/academics engaged in this area. Heeks heavily draws upon and corroborates qualitative and quantitative (often secondary) accounts and sources of information on the Indian software industry.

This article heavily draws upon Dr. Richard Heeks' book titled "India's Software Industry: State Policy, Liberalization, and Industrial Development" published by Sage Publications in 1996. It presents a snapshot of the Indian software industry from its beginnings up to 1994/95. This work is available on Amazon for the more interested and diligent reader. The other point of reference for this analysis is a study funded by Pakistan Software Export Board (PSEB) on Best Practices and Strategic Challenges of Pakistan's Software Industry--the first of its kind objective analysis of the current state and dynamics of Pakistan's software industry--that provides some baseline firm-level data on software development in Pakistan and provides strategic insights into the current challenges and future direction of the nascent industry. The study is documented in a 125-page report available online ( for reference.

While Heeks' book, in its essence, addresses the broader question of industrial policy-style government intervention using the Indian software industry as a case in point--a question that is as relevant to Pakistan today as it was to India at the time of Heeks' writing--we would not, for now, address that particular issue and leave it for a later analysis. Instead, what is of greater interest and relevance to the question at hand is Heeks' fairly comprehensive treatment of the early years of the Indian software industry, complete with an extensive review of the (then) contemporary literature and secondary sources of data.

The beginnings of the Indian Software Industry

The beginnings of the Indian software "miracle" is set in backdrop of a highly regulated socialist-leaning policy environment comprising severe import-export restrictions, over-regulation, and bureaucratic meddling in the market, The first policy directive explicitly addressing the software industry was issued in 1970 by the newly created Department of Electronics (DoE) in the Indian government. It created the largely unsuccessful "program for generation of computer software" that was later revamped into a "Software Export Scheme" whose sole contribution was to "allow hardware to be imported for use in software export work" against a very humble requirement/goal that the importer make a "commitment to earn the import price (later amended to double the import price), in foreign currency, via software export within the following five years" (p. 42).

While throughout the 1970s and 1980s, the software export policy was gradually liberalized, it was becoming increasingly clear that most computers imported under the software export schemes were actually being leased out for the use of domestic market rather than used for creating exportable software. Despite these glitches, however, liberalization continued all through 1980s. Not unlike Pakistan's software industry, and for that matter any other country of that time, the seed for India's software industry was sown in the shadow of a much larger and mature hardware industry. The earliest producers of software were essentially hardware providers that did software as well. Tata Consultancy Services(TCS)--one of India's largest and most successful software operations today--was born in 1974 with an explicit intention of "export[ing] software in return for permission to import hardware" (under the scheme discussed above). This was merely two years prior to the time when Systems Pvt. Ltd--Pakistan's first software-hardware developer--opened shop in Lahore.

Needless to say that these early Indian "software" companies made some "half-hearted" forays into software export (p. 69). Many of these were more interested in importing hardware in the guise of developing software and often discontinued the latter as soon as they had fullfilled their export obligations. The real impetus for software development, however, came from the data processing departments of some large Indian companies that had developed small software groups to meet in-house requirements and had begun attempting to sell their internally developed software in the local market. Another "blessing in disguise" was the departure of IBM in 1978 that left India with 1,200 unemployed ex-IBM employees, many of whom quickly opened up small software operations and computer bureaux (operations that leased out computing capacity to firms in need of that resource) and thus began a flurry of entrepreneurial activity in the much more traditional Indian economy of those days.

India Discovers the World and Vice Versa

It was during the 1980s that Indian software developers discovered the promise of exports. These early Indian software firms gradually moved beyond having to fulfill the "obligation" of exporting software and slowly found exports to be an attractive market in and of itself. In majority of the cases, the domestic operations of major software exporters lost their importance all through the 1980s. It was also during this period that the western countries discovered Indian software industry. Many western multi-nationals ( e.g. Texas Instruments, GE Computer and Information Services, and Citicorp Overseas Software Ltd. etc.) began thinking of capitalizing on the cheap and talented Indian labor force to develop software as well as capturing the Indian software market. This was clearly the beginnings of the Indian software miracle.

While data on Indian software industry is highly patchy and hence un-credible, there are atleast a couple of sources that date back to the early 1970s. In this regard too, India closely mirrors the Pakistan of today where few credible systematic attempts have been made to gather comprehensive data on the industry--not atleast till very recently. Of the two types of data available on Indian software industry, the government sources of data cover only the level of exports and number of registered software firms, while private sector ( e.g. Dataquest and IDC) does a better, albeit less credible and corroborated, job of capturing constructs such as industrial output, exports, employment, productivity, and number of active firms. "Neither set of figures can be regarded as accurate", observes one Indian analyst, while cautioning against believing too much in the available data (p. 67). While much of this skepticism seems valid, a cursory look at the available data does provide some interesting insights into the early days of the Indian software industry.

The first year of reporting for total software exports is 1980 when Indian software companies exported $4 million worth of software. The exports touched $100 million mark in 1989/90 and stood at around $500 million in 1994/95. Throughout the 1981-1994/95 timeframe, United States represented the single largest market for Indian software averaging around 60-65% of the total exports. One observer estimates, based on very narrow market segmentation, that India took about 20% of the foreign "opportunity" for internationally subcontracted software services in mid-1990s ( p.75). It, however, only represented 0.15% of the total world computer services and software market and 1.7% of the total US market in 1994/95. While these figures represent a minuscule portion of the overall US software market and even India's total exports, they are, nonetheless, reflective of the strong above-average growth of the software sector in India.

A Flurry of Missed Targets and Dashed Expectations

The export target for the 7th Indian five-year plan was Rs. 3000 million but the industry missed this figure by a large margin (Rs. 1250 million) in 1989/90. In a curious reincarnation of what has repeatedly happened in Pakistan recently, such government targets remained in vogue and were repeatedly moved forward. The most popular and "enduring" of such targets was the $1 billion worth of software export target that was supposed to be achieved in 1994/94 when it was first announced in 1992. Needless to say that the target remained illusive when its time came and in 1994, it was to be achieved in 1996; and in 1996 it was to be achieved in 1998 and so on (p. 74). (Note here that Pakistan also announced that it would reach a similar target in FY2000 that it has not been able to reach as of 2005 and is nowhere near reaching anytime soon either)

As the industry grew and looked outwards, the statistics also revealed the changing make up of the industry's output. Software export figures represented one-half of the overall software production (export+domestic) in mid-1980s and three-quarters in mid-1990s thus making the size of the overall software industry in India to be around $55 million in 1985 and $700 million in 1994/5 (p. 72). Exports primarily comprised services while domestic consumption was made up of packaged software--that too, according to one observer, consisted primarily of re-sale of imported software to domestic consumers.

The bias towards exports was so severe that fifteen of the top-twenty-five software producers in India earned less than 20% of their software revenues from domestic market. Roughly one-third of India's export earnings in 1994/94 came from companies that had no domestic market base for software services sales. This trend, once again, mirrors Pakistan's software industry of a few years back when companies like VROOM, Enabling Technologies, and Cressoft reigned supreme. The dotcom bubble burst and the recession in the US software markets has forced many Pakistani software operations to focus, atleast temporarily, to the domestic market.

"Bodyshopping" Becomes Synonymous with India Inc.

It was around the end of 1980s and early-1990s that India first adopted and then perfected the art of "bodyshopping". This was to become, for a few years thereafter, the world's predominant mode for getting around the Millennium-bug issue. Not only did the western companies welcome the possibility of hosting a large number of cheap Indian programmers doing fairly low-level grunt work to deal with millennium bug and other legacy issues but also liked the flexibility it provided for their own IT departments. This was also the beginning of the mass exodus of large number of Indian programmers to US in the 1990s.

While bodyshopping had a profound effect on the Indian software landscape--which changed forever as a result--it also had a depressing effect on net software export earnings for India. Since a large portion of Indian software export contracts came through onsite work, it required Indian companies to spend a large portion of these earnings on the travel, lodging, and marketing on the clients' site. According to one estimate, the net software export earnings averaged around only around 55% of the gross earnings recorded by companies. Of the $500 million in gross export earnings reported by Indian companies in 1994/95, for example, only around $170 million was left net of onsite expenditures thus reducing the overall "gain" to the Indian economy.

Bodyshopping, in some sense, reflects the most significant departure between the software industries of India of 1995 and Pakistan of today. Bodyshopping helped the Indian software industry in truly remarkable ways. Perhaps with the exception of the strong university education system (the IITs, for example) the practice of bodyshopping was the single most important factor that put India's software industry on track of where it stands today. Not only did it provide the critical demand-side impetus to the IT/software profession in India and enabled hundred and thousands of Indians to learn "on-the-job" and develop much necessary client-relationship skills but also enabled India Inc. to place its sons and daughters into the corporate echelons of the United States from where they were able to deliver the goods for their country. For Pakistan, with some minor exceptions ( e.g. Systems Pvt. Ltd. and Millennium Software Pvt. Ltd.) bodyshopping never really became as predominant a force as it did for India. Whether it would ever be in the near future also seems like a distant possibility. With the increasingly stringent US visa policy (post-9/11) and the backlash against foreign workers in the US, bodyshopping seems like a lost opportunity for Pakistan.

In this first of the series of two articles, I have outlined the primary motivation behind undertaking this analysis. I also laid some ground rules and identified sources for comparing the early performance of India's software/IT industry with that of Pakistan today. I then went on to trace the beginnings of the Indian software "miracle" while at the same time comparing its salient features with Pakistan's. Finally, I attempted to introduce some statistics, that are available through various sources, to develop a more concrete sense of the state and dynamics of the Indian software industry up until mid-1990s.

I hope this exercise in historical retrospection and analysis in the tradition of "looking behind to look ahead" would provide some food for thought and reflection in the debate on the replicability of the Indian software miracle across other aspiring countries of the world, especially Pakistan. I close this first article at that thought without drawing any conclusions of my own. Instead, I would let the readers pour through these facts about the early development of the Indian software industry and derive their own conclusions vis-a-vis similarities and differences with the current reality in Pakistan as well as the follow-on implications of these conclusions. For the readers who would like to have a crash course on Pakistan's software industry, I would gladly refer them to PSEB project website ( or my blog (

In the second of this two-article series, I would look at several other qualitative aspects of the Indian software Industry and present my own conclusions about what that means for Pakistan's software Industry. (to be completed)

Athar Osama is a Doctoral Fellow in Policy Studies at the RAND Graduate School for Policy Analysis in Santa Monica, California. He specializes in technology and innovation strategy and policy areas. He maybe contacted at


  • Some truths about Pakistan...
    1. Pakistan and Pakis are only good at one kind of IT and its International Terrorism, not Information Technology. When it comes to international terrorism, Pakis are the contemporary masters. Pakistan is the epi-centre of global terror networks with almost all Islamic terrorist organizations having links with the local populace there.
    2. Add to this, A.Q.Khan, the person who is regarded as a national icon(NATIONAL MORON is more like it!), practically ran a Nuclear Walmart peddling nuke technology to rogue states like North Korea & Iran.
    3. Pakistan is run by a dimwitted military dictator who has gone on record claiming that Paki women get raped in order to get Canadian visas and become a millionaire. WHAT A MORON !!!

    To think that Pakistan can ever emerge as a player in the Information technology space is merely wishful thinking.
    Buying out a few people like Anthony Mitchell types to put a spin on reality isn't going to change things on the ground.

    The reality is that "Pakistan is a failed, regressive islamic rogue state".

    By Blogger Chandan, at 3:04 AM  

  • Very good paper here. Naseeb Networks is a case study that fits well in your paper because as a new media company we launched, to provide customized online recruitment solutions to companies in Pakistan. It began from zero market share and now has 4000 employers who post jobs on the site and over 400,000 job seekers who have registered. Recently a mega nationwide job fair in Lahore, Karachi and Islamabad had more than 100000 attendants and about 300 employers who exhibited. Out of this fair 4000 job offers were made on the day of the event.

    A true success story which points to both the workable infrastructure in place in Pakistan and the need for right business ideas to be executed in this developing market.

    By Blogger Sheherzade, at 12:41 AM  

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