No single industry has so dramatically transformed life in an Indian city in such a short span of time as the IT industry has done in Bangalore in the last two decades. The very nature of IT — its potential linkages with virtually every aspect of life — has enabled it to play a powerful transformational role. It has dramatically changed the cityscape of the quiet, leafy retirement home that Bangalore once was. But even more importantly, it has created a new and young workforce, which has changed the way people live and work.

Bangalore is not only the capital of the Indian IT industry, but one of the four largest technology cluster in the world. Karnataka now accounts for a little over one-third of all Indian exports of software, most of it from Bangalore.

What were the reasons for Bangalore's emergence as the pre-eminent centre of the IT industry in India? That the city's salubrious weather was the main attraction is an oft-made argument, but one that is surely rather superficial in explaining the spectacular growth of the IT industry in the city over a two-decade period.

Modern manufacturing

In fact, the emergence of modern manufacturing, with links to manufacturing processes that had rudimentary electronics embedded in them, started even before Independence. For instance, as part of the war effort, the British Government established the Hindustan Aeronautics Ltd. in 1940. By 1960 it was employing over 20,000 workers.

In 1942, the Radio and Electric Manufacturing Company was established, which manufactured radio receivers and components. The Mysore Electrical Industries was established in 1945, in collaboration with a British private company. These were important from a software perspective because software development at this rudimentary stage was still generally hardware-centric.

The clutch of public sector units and defence establishments that were established after Independence — Hindustan Machine Tools, Bharat Electronics Ltd. (later a favourite hunting ground for recruitment by software companies), Bharat Heavy Electricals Ltd. and the Indian Telephone Industries — laid the basis for Bangalore's development as a modern Indian industrial cluster.

Government policies

Government policies also played a key role, often in unintended ways. In 1972, well before an IT boom was in sight, the Union Government announced the Software Export Scheme, which allowed software exporters and entities specialising in computer education and training to import hardware at concessional rates.

Even the much-maligned and now-repealed Foreign Exchange Regulation Act (FERA), which restricted the extent of foreign ownership of Indian companies, had unintended and positive spinoffs. For instance, IBM's departure from India in 1978 released about 1,200 software personnel into the Indian market.

While many professionals employed by IBM chose to leave the country, many remained in Bangalore to set up start-ups in the nascent industry. Wipro filled the vacuum by manufacturing 8-bit microprocessors for the Indian market, taking advantage of the protection offered to hardware companies in India in the mid-1980s. In fact, the protection for the hardware industry played an important part in the rapid growth of the personal computers market, which resulted in the wider use of computers in offices and homes.

Apprehensions allayed

The new Computer Policy of 1984 and the Software Policy of the same year for the first time explicitly recognised the existence of an IT industry. Texas Instruments established its first 100 per cent export-oriented subsidiary in Bangalore soon after, with the first direct link to its headquarters in the U.S. Professionals now recall, with some embarrassment, the apprehension they voiced then about the “sinister” motives of a foreign company.

Meanwhile, the Karnataka Government played its part in setting up the foundation for the IT sector. It established the Karnataka State Electronics Development Corporation (KEONICS) in 1976, and established the Electronics City soon after. KEONICS played an important role by providing support in terms of marketing, manpower training and testing to small private units in the city. The State Government also took the initiative to establish a Software Technology Park, the first of its kind in the country.

The mix of policy measures created an environment in which a vibrant cluster of IT companies could emerge in Bangalore. This was particularly important in the early years when companies were still on the learning-by-doing mode. Being located in a cluster enabled young companies to collaborate in order to quickly scale up operations to handle the large volume of data that the outsourcing boom offered.

Infosys, which was established by N.R. Narayana Murthy along with six engineers in Pune in 1981, relocated to Bangalore two years later. The company's initial ability to scale up operations quickly, and its movement up the value chain later, resulted in the company becoming an icon of the IT industry in the city. Large multinational companies also established their own “captives” by taking advantage of the IT ecosystem in the city. Innovative small start-ups, operating in niche segments, make up another segment of this vibrant industry.

Incentives

The liberalisation regime in the 1990s provided more incentives, particularly in the form of tax breaks for the IT industry. This played an important part in enabling the city to take advantage of the push towards outsourcing, which was based on the logic of utilising arbitrage possibilities arising out of wage differentials between advanced and developing countries.

The margins of companies have been affected by the global recession. Some in the industry argue that pressure to reduce costs will lead to even more outsourcing, while others argue that this will reduce opportunities. Indian IT companies are now showing a greater willingness to address the domestic market, particularly by using their experience to address opportunities in the e-governance space.

Bangalore is now the biggest hub for the IT sector in India, employing about five lakh persons – out of a total Indian workforce of about 22.3 lakh in the IT industry. More than 2,000 IT companies work out of the city.

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