The Indian software industry has been growing at a fast clip over the last few years.

Major reasons for the same include the outsourcing boom, greater competition worldwide, resulting in companies having to cut costs and spend more on technology to become efficient.

The other reasons are high quality of services provided by Indian firms, constant diversification into new markets, and movement up the software value chain, resulting in IT companies getting better billing rates for their services.

Key Positives Huge outsourcing potential With the value proposition of offshore development being well established, corporates in the West are increasingly outsourcing to Indian software companies. Also, the fact that India's share in the global software and services industry is a mere 3% provides Indian IT companies with a huge potential to grow going forward. Moving up the value chain Indian software companies are consistently broadening their portfolio of offerings and moving fast up the software value chain. Not only will this help Indian companies garner higher billing rates but it will also give them an opportunity to work far more closely with the top management of client companies. Scale benefits of past investments In anticipation of a higher demand for their services going forward, Indian software companies have rapidly ramped up their employee base and opened development centres and sales offices abroad. These initiatives are likely to pay-off over the long-term as these companies are likely to derive benefits of large scale as they grow larger in size. Global Delivery Model The Indian offshoring model, or the Global Delivery Model, has been one of the biggest positives for the growth of the Indian software sector. Large companies like Infosys [Get Quote] and Wipro [Get Quote] have indeed refurbished this model to accommodate to the changing times. What more, the fact that MNC technology majors like IBM, EDS and Accenture have tried to replicate this model, gives it greater authenticity. Other positives Among other positive factors for the Indian software industry, the major ones are - large availability of talented manpower, cost advantage and geographical advantages (time-zone advantages).		Key Negatives High reliance on the US markets The US market's share in India's software and services exports is in the region of 60 - 65% (FY04). Such a high degree of dependence on a single geographical location spells high risk for the Indian software sector. Over that, backlash in the US against outsourcing of jobs to low-cost countries like India has raised some medium-term concerns for Indian software companies, although by and large, the opposition has died down, and it is now business as usual for the corporates looking to cut costs in an increasingly competitive world. Decreasing cost advantage Increasing competition from global technology majors has not only threatened Indian IT industry's cost leadership, Indian software companies have also been made to face intense competition for talent. All these pressures mean lower stagnant billing rates and higher employee costs going forward. This is likely to affect margins and, consequently, the profitability of Indian companies High rates of attrition High attrition, especially in the middle and senior positions, continues to damage the performance of Indian software companies to a certain extent. Apart from competition for talent from MNC technology majors, internal factors like job dissatisfaction and higher aspirations (in case of BPO companies) have led to such high attrition in the Indian software sector. Hardware and domestic markets While India's software and services exports have witnessed robust growth over the past few years, the growth in the domestic and hardware market has been relatively staid. This is a key cause of concern for the growth of the Indian IT industry.

This is part of Equitymaster's Budget 2005-06 series. Equitymaster.com is one of India's premier finance portals. The Web site offers a user-friendly portfolio tracker, a weekly buy/sell recommendation service and research reports on India's top companies.