Labor Supply in the Indian IT Industry

Introduction

India is a land of extremes; for every thing that exists in its socio-economic structure, there exists an opposite
somewhere close by. On one hand, the wealthiest person in India is in the process of building a billion Dollar
mansion-house, on the other, several million slum-dwellers live on government owned land in shanties that each
cost less than hundred U.S. Dollars. Similarly, although the eight Indian Institutes of Technology (IITs) produce
approximately 4,000 graduates in engineering and computer science that are among the best in the world, about
one-fourth of all high school graduates who want to pursue engineering or computer science are unable to do so,
primarily because of cost.

According to research conducted by Evalueserve – a global research and analytics firm (www.evalueserve.com) –
about 85% of the labor supply for the IT industry (including both exports and domestic products and services) in
India is composed of engineers (with four-year degrees) and those with five-year degrees in Masters of Computer
Applications (MCA). The remaining 15% comprises of graduates (both five-year masters and three-year
bachelors) in computer applications, mathematics, and sciences. During 1998 and 2008, the number of engineering
and MCA graduates has grown at an annual rate of 13.5%. Whereas the class of 2004 had approximately 273,300
engineering and MCA degree graduates, the class of 2008 had approximately 454,200. Furthermore, since
inflation in India during this decade was approximately 7% per year, the total money spent on technical and IT
education for such graduates grew by 20% – 21% every year (during 1998 and 2008). Even though the annual
growth rate of 13% – 14% in the number of graduating students is quite impressive, the demand of such
professionals is likely to grow even faster and at an annual rate of 15% – 16% until 2016 (see Viewpoint, “India’s
Role in the Globalization of IT Industry,” CACM July 2008), and hence it is likely that there would be a shortage
of 100,000 to 150,000 such graduates by 2016.

The expenditure by the Indian government on technical and IT education increased from approximately 12.9
billion Indian Rupees (i.e., 375 million U.S. Dollars at the prevailing exchange rate) in 1996 to 37.2 billion Indian
Rupees (830 million USD at the prevailing exchange rare) in 2006. Even though the Indian Government’s overall
expenditure on technical and IT education in India grew at an annual rate of 11%, this growth rate fares poorly
when compared with overall growth rate of 20% – 21% mentioned above. Even more disconcerting is the fact that
the Indian Government’s technical education expenditure as a percentage of total education expenditure actually
dropped from 4.09% in 1996 to 3.87% in 2006. Furthermore, according to the National Knowledge Commission
(www.knowledgecommission.gov.in) that advises the Prime Minister of India, approximately 75% of the current
funds go towards salaries and benefits, 15% towards rent and utilities, and the remaining 10% is not even
sufficient for maintenance let alone upgrading laboratories, buildings or libraries, or for pursuing research.
Therefore, the National Knowledge Commission – and the government has acceded to – a 190% increase in such
funding from 2008 to 2009. However, it is not clear whether the Indian Government has any additional money to
spend especially because the Indian school (K-12) system requires even more urgent attention.

According to the University Grants Commission (UGC) of India (www.ugc.ac.in), the number of engineering
colleges also increased from 571 in 1998 to 1,645 in 2008, which represents an annual growth rate of 11.2%.
Currently, out of the total 1,645 engineering colleges in 2008, about 85% are privately owned, 10% are
government colleges, and others are parts of deemed universities and those that partly funded by the central, state

or local governments. About 88% students graduate from private colleges and others graduate from government-
owned or government-aided colleges. Broadly speaking, private engineering colleges can be classified into two

categories. Less than 10% colleges belong to the one category whose management and advisory boards comprise
of eminent and experienced individuals with substantial knowledge of technical education systems around the
world. On the other hand, more than 90% private colleges belong to the second category and were mainly started
with the intention of making profits and by and large they do not provide high quality education, because of
which, they are also often unable to enroll enough students or faculty. Since earning profit is the main motive for
most private institutes, it is not surprising that many Indian citizens feel that such profit-making institutions should
not be allowed, whereas, others still welcome this private initiative because it fulfils an otherwise unmet need.

The All India Council for Technical Education (AICTE; www.aicte.ernet.in) is a part of the Indian government
and acts as an advisory and statutory body that was established for proper planning and coordinated development
of technical education system (throughout the country). AICTE approves new colleges after these colleges have
fulfilled certain criteria related to the availability of land for the college, total built area, books-to-student ratio,
student-to-faculty ratio, and a minimum number of laboratories. National Board of Accreditation (NBA) is an
autonomous body constituted by AICTE in 1994 and it provides accreditation to individual programs run by
engineering colleges, which is critical to ensure quality standards. Although NBA accreditation is mandatory for
all engineering colleges, it can be only processed after at least two classes have graduated from that college, which
implies that any new engineering college remains outside the purview of the accreditation process for the first five
years of its existence. Currently, at least 80% engineering colleges do not have proper accreditation from NBA.
Finally, many colleges find it extremely cumbersome and frustrating to get all approvals and accreditation from
AICTE is a part of the Indian government. Hence, the National Knowledge Commission has requested the Indian
government to set up a separate regulatory authority that is autonomous and devoid of any direct control by the
Indian government.

Dearth of qualified faculty is currently the biggest challenge for engineering and IT education colleges in India. A
recent report titled “Faculty Development in Technical Education” by Rama Rao et al. (http://www.isteonline.in/)
estimated that currently there is a shortage of 75,000 faculty members (who have a minimum of Masters degree in
engineering or Information Technology) and this shortfall is likely to exceed 100,000 by 2011. Moreover, about
95% of the 1,645 engineering and IT institutions in India do not have research programs, and in 2005, all the
engineering and IT institutions put together awarded only 968 doctoral degrees. Multinational companies (e.g.,
IBM, Microsoft, Google, Yahoo) are exacerbating this shortage by opening research centers and paying their
employees three to five times more than the corresponding universities and institutes in India. Furthermore, since
private institutes are mainly looking to make profits and since government funded colleges and universities can
only provide same – or similar – salaries as those provided to other employees of the Indian government, very few
colleges in India are able match the salaries being provided by these multinational companies. Moreover, a recent
survey done by Evalueserve regarding the preferences of IIT graduates shows that going forward fewer IIT
graduates are likely to pursue academics, which would further decrease the availability of such faculty members.
Given this backdrop, even premier institutes like IITs have 10% to 15% unfulfilled faculty positions but this
situation is really pathetic for second and third tier colleges. Hence, to mitigate this shortage, many colleges have
started requesting retired faculty to come back and teach, whereas, others are hiring fresh graduates (with only a
Bachelors degree) who are not able to find jobs elsewhere.

Since there is an acute shortage of faculty and since previously retired faculty members or those with sub-standard
skills are being recruited to teach in most engineering and IT colleges, the curriculum in most colleges India has
remain unchanged during the last two decades. For example, grades (or “marks”) are still determined by only a
final examination and not by grading intermittent tests, laboratory work or homework assignments, and the final
examinations only tend to test students’ memory rather than their creativity or learning. Because of this reason,
most students forget even the basics related to microprocessors, Internet Protocol or even the Java language by the
time they graduate. Also, there is severe need for students to learn “soft skills” (e.g., verbal and written
communication as well as project management skills) and the ability to “think independently” especially for the IT
industry that has become global during the past decade. Hence, it is not surprising that a recent study done by the
strategy consulting firm, McKinsey and Company (www.mckinsey.com/mgi), shows that only 25% of engineering
graduates would have the requisite qualifications to be employed in the Indian IT exports industry, whereas, those
who do not possess such skills would be forced to work in the domestic IT industry or change their careers
altogether, thereby, earning half to two-thirds of what they would have earned otherwise.

Since only 12% students (with an engineering or MCA degrees) graduate from colleges that are partly or wholly
funded by the Indian government, most others resort to taking education-related loans from Indian banks. Since
2001 the amount of such education-related loans has grown from 5 billion Indian Rupees in 2001 (i.e., 110 million
USD at the prevailing exchange rate) to 140 billion Indian Rupees by 2007 (i.e., 3.45 billion USD at the prevailing
exchange rate). Moreover, the educational loan as a fraction of total bank credit has also increased from about
0.17% in 2001 to 1.07% in 2007, and there has been a nine-fold increase in the number of student-borrowers from
approximately 110,000 in 2001 to more than 1 million in 2007. Such a rapid increase in the number as well as
amount of loans is causing substantial discomfort within the Indian middle class, especially because 25-30 years
ago, there were almost no private colleges and the previous generation had to pay almost no tuition fee for college education. Keeping this in view, the Indian Government has recently announced setting up National Student Loan
Guarantee Corporation, which will underwrite most – if not – all student loans and would have a provision for

waiving off loans if a student works for a government agency or in an under-served region in India for a pre-
defined amount of time. Underwriting of loans by the Indian Government will of course allow the banks to

become liberal in giving loans and would also reduce carrying costs for the students. However, this may also
imply a bigger fiscal deficit for the Indian Government, which is already reeling from an already burgeoning
deficit.

Keeping all of the above in view, many IT export companies in India have already created their own institutes and
campuses, and begun training new employees. For example, Infosys plans on spending US $170 million during
this year in training, and Wipro has its own training campus where it can train more than 5,000 employees
simultaneously. Given below is a quick summary of some other key programs that some of the highest revenue IT
exporting companies have initiated during the last four years:

• Tata Consultancy Services (TCS) started a seven-month program, Tata Ignite, in 2006, wherein it would train
  science and mathematics graduates (with three year degree courses) to become software professionals, and
  then employ them.
• Infosys Technologies launched Campus Connect in May 2004 to increase the quality and quantity of the IT
  talent-pool and sustain the growth of the IT industry itself. It intends to increase the employability of students,
  and by March 2008 a total of 490 colleges were included.
• Wipro Technologies recently launched Mission10X that is trying to promote changes to current teaching-
  learning paradigms. This program will include 1,000 faculty members in 2008, another 3,000 in 2009, and yet another 6,000 faculty in 2010.
• Satyam launched the Satyam Entry-Level Engineering Development (SEED) program, which is a four-months
  training program for entry-level engineers who will be eventually employed by Satyam.
• HCL Infosystems along with Microsoft Corporation India announced the establishment of “Centre of
  Excellence (CoE)” in April 2008, which will provide training and certification to 50,000 students on Microsoft
  technologies, in three years, across 100 training centers (called HCL Career Development Centers).

Overall, Evalueserve estimates that the IT exports industry may end up spending approximately US $1.1 billion –
or about 3% of the revenue that it earned – during 2008-09. Finally, even though the Indian IT exports industry is
doing its part in education and training, there is only so much it can do, and it is clear that the undergraduate
system in India needs to be improved quickly, effectively, and efficiently.