35 years of liberalisation: How IT sector became India's dollar engine

India's IT industry was built not just on Y2K, but on the 1991 reforms that opened capital, technology, telecom and global markets, creating a powerful engine of exports and foreign exchange

When most people think about the defining moment for India’s information technology (IT) services sector, chances are that the year 2000 will come to mind. That was the height of the Y2K mania, a time when the global technology industry was reeling from the dotcom bubble that burst in the United States. 

Yet, for industry veterans back home the foundation of that rapid rise was laid nearly a decade earlier in 1991. The reforms of that year removed a host of restrictions and allowed enterprises to be enterprising. It primed the Indian industry to capitalise on the opening presented by the 2000 crash.  

That was, perhaps, the first instance till then of the government working closely with the private sector, senior executives tell Business Standard. The measures they crafted allowed the industry to scale rapidly and compete globally. 

Among the many changes introduced, a few reshaped the industry: The liberalisation of capital markets, zero duty on software and technology imports, the Software Technology Park framework, expansion of engineering education, and telecom liberalisation. 

Those interventions not only transformed India’s technology industry into a global powerhouse, but also created one of the country’s largest and most consistent sources of foreign exchange earnings. 

Powered by the changes, the industry’s revenue rose from a modest $150 million in 1991 to an estimated $283 billion in FY25, and is projected by industry lobby National Association of Software and Services Companies (Nasscom) to reach $315 billion in FY26. 

Building against the odds 

To understand why liberalisation mattered, industry veterans say one has to go back to the late 1980s, when exporting software from India was an uphill task. 

“It could take 12 years to get a telephone connection in Mumbai,” recalls Ashank Desai, founder of Mastek and one of the founding members of Nasscom. 

He adds that personal computers were scarce and prohibitively expensive. There were few software engineers, almost no development tools, poor international connectivity and a regulatory environment that viewed foreign exchange as a scarce national resource. 

Unlike entrepreneurs now, founders then struggled even to obtain foreign exchange to travel overseas and meet prospective clients. 

“I still remember going to the Reserve Bank of India (RBI) and explaining that I needed foreign exchange to generate exports. The response was, ‘You don’t have exports.’ My answer was, ‘Without foreign exchange, how can I build exports?’” Desai says.

Selling India overseas was often harder than selling software. 

The story of global customers associating India more with elephants and snakes than technology is well known. With multinational companies such as IBM having exited the country, many foreign clients questioned whether Indian firms were even capable of developing enterprise software. “What I remember most from the pre-liberalisation years is that every customer meeting felt like an audition, not just for TCS (Tata Consultancy Services), but for India,” says S Ramadorai, former chief executive officer and managing director of TCS and chairperson, Karmayogi Bharat. “We often had to promote India before we could promote TCS.” 

Yet, despite those constraints, Indian firms continued building capabilities, laying the foundations for what would become a globally competitive industry. 

As Ramadorai notes, liberalisation was a huge force multiplier in the success of the IT industry. It opened markets, increased access to technology, improved connectivity with global customers, and created an environment in which Indian companies could scale internationally. 

He adds that the reforms were just a catalyst, the foundation was laid much earlier through India’s investments in higher education, science, engineering, and institution-building after Independence. 

Ashok Soota, chairman and chief mentor of Happiest Minds Technologies, says in the pre-reforms era, Indian companies had to sell the concept of offshoring. 

“The nature of deals changed as the Indian industry exhibited its capability to handle a variety of different projects from offshore. This led to the evolution of many new segments such as infrastructure support, security and complex projects,” Soota says. The growing confidence in India’s attitude towards protection of intellectual property also played a key role in bringing many technologies here, he adds. 

Reforms that changed the game 

Industry leaders argue that the reforms addressed nearly every bottleneck the sector faced. 

Among the few that impacted the industry most, the transition from the foreign exchange regulation Act (FERA) to foreign exchange management act (FEMA) in 2000 was significant. “This marked a shift from a restrictive regulatory mindset to a more facilitative and business-friendly approach. It became significantly easier for Indian companies to manage foreign exchange, invest overseas, establish international operations, and participate more fully in the global economy,” added Ramadorai.

When it came to the capital market liberalisation. Before the reforms, companies could not freely price their shares and there was no recognition of sweat equity. Raising growth capital was extremely difficult. 

“If those reforms had not happened, companies like Mastek and Infosys would not have been able to raise capital. Without capital, we could not have invested overseas in sales and marketing. Without those investments, we could not have grown,” Desai says. 

The second was reducing duties on software and technology imports. 

Desai recalls approaching then Finance Minister Manmohan Singh with an unusual demand. While most industries sought import protection, the software industry asked for zero duty on software. 

“He asked us: ‘Are you sure? Everyone comes asking for higher duties.’ We told him we wanted technology at the lowest possible cost so people could learn. The government agreed.” 

Equally transformative was the creation of the Software Technology Parks of India (STPI), which helped companies build software from their own facilities instead of being confined to export processing zones. Combined with tax incentives and dedicated satellite links, STPI became the backbone of India’s offshore delivery model. 

Ramadorai also identifies telecom reforms among the defining interventions. 

“The liberalisation of telecommunications improved connectivity, lowered bandwidth costs and made it possible for Indian firms to collaborate seamlessly with customers around the world,” he says. 

Telecom costs were a major impediment. A 64 KB leased line once cost nearly ₹20 lakh. As connectivity improved through the 1990s, offshore software development became commercially viable, fundamentally changing the economics of the industry.

Alongside, the education reforms were equally significant. Engineering graduates increased from roughly 100,000 annually in the early 1990s to nearly 1.5 million by 2020, largely due to the expansion of private engineering colleges. That talent pipeline became the backbone of an industry that today employs more than 6 million people directly. 

The forex engine 

If Y2K established India’s technological credibility, software exports quietly transformed India’s external sector. 

The 1991 reforms were triggered by a balance-of-payments crisis that left India with foreign exchange reserves of just $5.8 billion. By FY26, those reserves had risen to over $691 billion. 

Several factors contributed to that growth, including remittances, foreign investment and capital inflows. But economists and industry leaders argue that software services emerged as one of India’s most reliable generators of dollar earnings.

Indranil Pan, chief economist of YES Bank, agrees. “Software exports became a reliable source of dollar inflows into India and contributed to the stability of the country’s external accounts, particularly when goods exports never really took off,” he says, when asked if the sector has contributed to the country’s forex reserves. 

RBI data show software service exports rising from about $6.3 billion in FY01 to more than $203 billion by FY26, while imports of software services remained relatively small. That meant a substantial portion of export earnings translated into net foreign exchange inflows. 

 

The significance of the industry’s contribution lies both in its scale and consistency, says Ramadorai. “Today, India’s technology sector generates over $220 billion in exports annually and contributes a substantial services trade surplus. These steady forex earnings have played an important role in offsetting the country’s trade deficit in goods, strengthening India’s external position, and supporting the growth of forex reserves.” 

This contribution is significant when one looks at sectors that are vulnerable to commodity cycles or resource constraints.

Desai goes further. “Over three decades, the industry has generated exports running into trillions of dollars. Even after accounting for overseas spending, the net forex earned has been enormous. Without the IT industry, India’s forex position would have looked very different.” 

Unlike merchandise exports, software services have relatively low import intensity, making them exceptionally valuable from a balance-of-payments perspective. Together with remittances, they helped cushion India’s chronic merchandise trade deficit and strengthened macroeconomic stability. 

Today, the sector contributes roughly 7 to 7.5 per cent of India’s GDP per industry lobby Nasscom, directly employs millions of people and has transformed India into one of the world’s largest exporters of technology services. 

For Ramadorai, however, the industry’s legacy extends beyond economics. “I would go a step further and describe the Indian IT story as one of the most successful development stories to emerge from the post-colonial world,” he says.  

However, it is not without its share of criticisms. Some argue that the software industry benefitted at the cost of the hardware and manufacturing segment. 

Today, in a world where artificial intelligence (AI) is changing how technology impacts every aspect of software development, questions are being raised on the sustainability of the services sector. 

Says Pan, “The bigger question is the incremental value creation possible from here, especially with AI. I find it difficult to see India becoming a producer of AI; we are more likely to remain consumers.”