CHAPTER SIX 6. INDIAN SOFTWARE INDUSTRY AND FOREIGN EXCHANGE RISK

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1 CHAPTER SIX 6. INDIAN SOFTWARE INDUSTRY AND FOREIGN EXCHANGE RISK 6. 1 Introduction The objective of this chapter is to discuss the evolution, growth, opportunities and challenges, of Indian software industry and to examine the relationship among Indian software industry, US economic activity, and INR-USD exchange rate volatility, Cointegration analysis suggested by Engle-Granger was used. 6.2 Indian Software Industry The Indian software industry has played a significant role in transforming India s image from a slow moving bureaucratic economy to a land of innovative entrepreneurs and a global player in providing world class technology solutions and business services. The industry has helped India transform from a rural and agricultural based economy to a knowledge based economy (NASSCOM, 2011). The Indian software industry has been a remarkable success story. It has grown more than thirty percent annually for twenty years, with 2008 exports projected at close to USD sixty billion. From about USD fifty million in exports in the late 1980s, the industry crossed USD hundred billion in the year 2013, contributing significantly to the GDP of India. India exports to more than sixty countries, with two-thirds to the United States, including half of all Fortune 500 companies. The Indian software exports account for sixty five percent of the total software revenue. Over eighty percent of exports are software services, which includes custom software development, consultancy and professional services. According to NASSCOM, the IT sector went on grow at a CAGR of twenty five percent during financial year , dominating the global IT-BPM market. The Indian IT industry has hit 290

2 revenues of USD 108 billion in Financial Year 2013 with exports contributing USD 76 billion. Significantly, IT-BPM segment account for about eight percent of India s GDP, while IT services remain dominant at fifty two percent. During the period bulk of the export revenue that is, sixty two percent came from the US, around twenty eight percent came from Europe. The Indian IT industry has crossed its revenues of USD 100 billion in the year The software sector can be divided into five major activities in declining order of complexity and skill requirements: (1) Project Management (2) Systems Analysis and Design (3) Software maintenance and support (4) Writing of Code and (5) Data Entry. The Indian software industry concentrated in the second and fourth activities and predominantly in fourth (Sen, 1995). Mr. N.R. Narayana Murthy, Chairman of Infosys Ltd., summed up the value proposition of the Indian software industry as faster, better and cheaper. According to Som Mittal, President of NASSCOM, currently over one lakh foreign nationals are working for Indian software companies around the world, a testimony of the industry s growing popularity abroad. The industry totally employs around three million people. India s IT workforce has gone global by setting up five hundred and eighty offshore development centres across seventy five countries and working in thirty five languages. The industry started more than two decades ago in English speaking countries, and got ninety percent of revenue then came from the US and the UK. This has changed over the years and revenue from both the countries is now down to seventy eight percent and the balance twenty two percent comes from non-english speaking geographies Historical Overview The Indian software industry started in 1970 with the entry of TCS into the domain of outsourced application migration work. According to Ramadorai, it began in early seventies with the main frame manufacturer, Burroughs asking its Indian sales agent, TCS to export programmers for installing system software for a US client. 291

3 Beginning in the 1970s a growing shortage of engineers for the expanding computer industry in the US and Europe, an oversupply of Indian engineers relative to domestic demand, and a growing international reputation for the skills of Indian engineers, provided an opportunity, for body shopping in which Indian firms such as TCS sent Indian engineers overseas to do software programming onsite, mostly in US firms for limited, billable projects (Bhatnagar, 2001) In India the software industry developed initially in Mumbai, has been concentrated in six to seven cities such as Bangalore, Hyderabad, Chennai, Mumbai, Delhi and Pune. Policy makers within the country viewed the software industry as an engine of growth, a source of employment and foreign exchange, among other favorable effects (NASSCOM, 2012). The Indian software industry comprises of few big companies, with a large number of small and medium sized companies. Many new companies were established in 1980s by entrepreneurs with ambitions of creating world class software development centers. Firms which had started primarily as subcontractors for technical manpower gradually shifted to managing complete parts or phases of projects, and then to delivering complete solutions from India. NASSCOM played an aggressive role in promoting the Indian brand abroad. In some ways, during this period, India was building a launching pad for the eventful take off of its software industry Structure of Software Exports Software is the interface between computer and human commands. According to Schware (1992) Software is a programme that translates the system of human logic into a set of electromagnetic impulses. In general, the term software refers both to the instruction that direct the operation of computer equipment and the information content, or data, that computers manipulate. (Nath and Hazra, 2002). The widely acknowledged model of software development process is known as the Waterfall Model proposed by Royce in 1970 (Arora et al, 2001). 292

4 Trade in software which is similar to service trade, is carried out mainly through a) Onsite Services, popularly known in industry circles as body-shopping, are rendered the factors move to the site of the receiver, software manpower is exported to help solve the users software related problems. The development and execution of the software will be done on site. Under this mode of export, it has been argued that the net export earnings will be substantially less than the total export earnings. b) Offshore services, involves limited movement of both the factor and the receivers. The software is developed offshore according to the specified requirements and exported to the users. This method could be cost effective and calls for more investment in the form of hardware and communication network. c) Offshore Packages or Software Product Development, where neither the factor nor the receiver moves and is also highly capital and labor intensive and also requires substantial marketing costs, however the net export earnings will be higher compared to other modes (Joseph and Harilal, 2001) Growth of Indian Software Industry At an annual growth rate of fifty percent over the last decade that is, , the Indian software and service sector has expanded faster than in any other countries of the world. Strong fundamentals of a large talent pool, sustained cost competitiveness and an enabling business environment are some of the significant factors which have enabled Indian software industry to grow exponentially since its inception. The Indian software industry has grown at a phenomenal compounded annual growth rate of over fifty percent during the 1990s from modest revenue of USD 195 million in to evolve into a USD 8.3 billion industry by Furthermore, the industry has earned seventy five percent of revenue that is, USD 6.2 billion from exports (Kumar, 2001). The growth rate of the Indian software Industry has been substantially higher than the global software industry. Apparently India is the only country in the world to register a growth rate of around fifty percent in the software industry (Kumar, 2001). 293

5 According to Raghavan and Nair, the Indian software and services sector has expanded faster than in any other countries of the world of comparable size. Such a wonderful and sustained growth rate has been unparalleled in any of the sectors of the Indian economy since independence (Illiyan, 2005). The contribution of IT sector to the GDP of the country has been significantly increasing from USD six billion in to USD sixty four billion in Within ten years time the share of IT sector recorded a five-fold increase from about 1.2 percent in to 5.5 percent in The major share of this contribution is by software and related service exports. In the industry accounted for just one percent of India s GNP. Its share nearly doubled by (NASSCOM, 2012) Factors Responsible for the Growth of Indian Software Industry India has availability of a large number of English speaking professionals and has second largest manpower or talent pool available after US. It is believed that the key to the success of the Indian software exports is the supply of trained low cost of software professionals. The estimated wage costs in India were about one-third to one-fifth of the corresponding US levels for comparable work (Arora et al, 2001). With a young demographic profile, where over 3.5 million graduates and post graduates are added annually to the talent base, no other country offers a similar mix and scale of human resources (NASSCOM, 2009). During 1980s the government of India, recognizing the growth potential of the software industry, took key policy actions to open up the sector. A policy change in 1998 that effectively ended a monopoly on internet service provider (ISP) gateways, allowed India s private sector to offer needed bandwidth to the growing industry. In 1990 the government created software technology parks in 30 locations across India to provide software companies access to high speed data communications and single window clearance for regulatory compliance. In 1998 a national telecom policy was announced to clarify the role of the regulator, transition from license fee to a revenue sharing model and open domestic long distance to private operators. In 2002 India liberalized international long distance to improve the communication system. 294

6 NASSCOM was created in 1988 and in 1900 STPs were established to represent a fundamental approach to policy making for the software industry. The companies registered with STPs account for about sixty eight percent of software exporters. Demonstrated process quality and expertise in service delivery has been a key factor driving India s sustained leadership in global service delivery. Since the inception of the industry in India, players have been focusing on quality initiatives to align themselves with international standards. Indian software industry has moved rapidly on the quality front. Indian software companies have adopted the ISO model as early as it was started. Indian companies have shifted to one of the important paradigms of quality, that is, Capability Maturity Model (CMM), enunciated by Software Engineering Institute (SEI). According to Computer Software Services Exports Statistical Year Book , over seventy five percent of world wide SEI CMM level 5 certified companies are Indian. Over 300 Indian computer and software and services have already obtained ISO 9000 or CMM level 2 certification. Another most important reason for the success of Indian software industry is the international linkage established by Indian software companies. These linkages were both in the form of equity strategic alliance and non-equity strategic alliance. The non-resident Indians living in US has played an important role in fetching software projects and many non-resident Indians have established software firms in India. NASSCOM, the apex association of Indian software and services companies has played a significant role in establishing a brand image for India in the global software service markets by participating in global trade fairs and events and organizing learning events in India that feature prominent experts from major markets. India s public investments in technical education beginning in the 1960s provided the foundation for growth of the IT industry. In the 1960s the government created a series of elite institutes for higher education in engineering and management, in collaboration with leading 295

7 universities in the US. One reason for concentration of software companies in the southern India is the proximity of the locations to a very large number of engineering colleges (Kumar, 2001). The phenomenal growth of Indian software exports can be attributed to the growing respect for Indian software industry in the international market. According to the estimate by NASSCOM (2000), Indian software companies earned around sixteen percent of their export revenue from Y2K related work in and twelve percent in The Indian software industry earned an accumulative total of USD two and half billion from , from Y2K solutions. This is one of the significant factors for the growth of Indian software industry. During the initial phase Indian software exports were dominated by onsite development than offshore development. However, in the recent past, the dominance of offshore software development has been increasing. This shift has been possible because of establishment of STPs, which inter alia provided access to modern telecommunication facilities, and liberalized policies towards telecom sector which has led not only to the entry of private sector in telecom companies but also low telecom tariff and high speed data communication links to the industry. Besides the above facts, more liberal foreign investment policies, geographical time difference with the western world enabling round the clock development and proactive role by NASSCOM are other factors that gave fillip to the faster growth of India s software exports. Government policy changed to a supportive stance with the election of a new prime minister, Mr. Rajiv Gandhi in The New Computer Policy (NCP) of 1984, which consisted of a package of reduced import tariffs on hardware and software. In 1985 all export revenue including software exports, were exempted from income tax. The NCP was designed to serve as a catalyst for the software industry and the establishment of Software Technology Parks (STPs). Until there was virtually no policy support for the software sector, since then the government has taken a number of positive steps. The government of India visualized the importance of electronics and information technology and its critical role in the economic growth of country, and as a result, established the Department of Electronics (DOE) in 1970 and the 296

8 Electronics Commission in In 1999, to benefit the emerging digital economy, the central government has created a new Ministry of Information Technology by merging the DOE, National Informatics Centre (NIC) and Electronics and Software Export Promotion Council (ESEPC). Various policy announcements like the Import Policy (1983), Computer Policy (1984), Electronic Policy (1985), and Software Policy (1986) laid the foundations for the liberalized growth of IT industry in the country. Information Technology Act (2000) and Communication Convergence Bill (2001) of the Government clearly showed the direction in which the country is moving to facilitate a single communication network catering to all types of technologies such as Internet, Datacom, Telecom, Wireless, Wireline, Fixed, Mobile, Cellular, Satellite Communications and e-commerce. National Task Force on Information Technology and Software Development (1998) of the Central Government has suggested a plan of action to make India, information technology super power in the world. The Data Security Council of India (DSCI) was launched in 2007 to institutionalize efforts to further enhance the information security environment in India. Supportive policy and active private enterprise have helped in creating an enabling business environment to facilitate the rapid growth of Indian IT-BPO (NASSCOM, 2008). The Information Technology Ministry has set up various autonomous organizations such as C- DOT, C-DAC, CMC, STQC, CCA, NCST, ERNET, DOEACC, SCI etc., to address the requirements of different sectors of IT in a focused manner. These organizations are playing a major role in training and development of human power for electronics and computer industry. In 1992 the government extended the tax exemption on export profits available to merchandise exporters through section 80-HHC of the Income Tax Act to software exporters by introducing Section 80-HHE was on an annual basis. Section 10A and 10B of Income Tax Act, which provide income tax relief to EPZs and 100 percent EOUs were extended to software exports from such schemes in

9 A mix of provider, industry and government initiatives are helping further strengthen India s lead. India s young demographic profile complemented by a vast and growing academic system continues to add to its pool of educated talent. In the financial year 2009, as a proportion of GDP the sector revenues were estimated to be around six percent. Software and service exports accounting for over ninety nine percent of the total exports, reached USD forty seven billion and directly employed over one million seventy lakh professionals (NASSCOM, 2009) Challenges of Indian Software Industry The most formidable challenge faced by Indian software industry is sustainability of high growth rate of software exports in future. Though software exports registered an annual average growth of more than fifty percent during , it has come down to around thirty percent since Furthermore, countries such as China, Russia, Philippines, Canada and Ireland have started emerging as competitors to India in the international market. In software industry, good communication infrastructure is considered vital for the continued growth and more particularly for offshore software development. Overall, the data communication infrastructure in India is expensive and in limited supply. Even though the country is known for its human resource for software industry world over, it has been struggling hard to meet the growing demand for skilled professionals. The imminent challenges for Indian software industry are volatility of Indian Rupee vis-à-vis US dollar, US economic slowdown since 2000 as sixty percent of our software exported to US and US immigration Bill, which proposes to cap the number of H1B and L1 visa holders employed on-site. 6.3 Relationship between Indian Software Industry and US Software Industry The Indian software industry is largely complementary to US software industry. Indian software companies provide essential maintenance and development services, enabling US software companies to use their scarce in-house staff for higher value added work, such as design and 298

10 develop new types of applications. The rise of Indian software industry has provided substantial benefits to US software companies, both users and developers of software. US software companies benefit because Indian software companies compete fiercely among themselves for contracts. India exports its software and services to more than 100 countries. Out of which US continues to be the most favored destination for Indian software exports as it is the world s largest software market (Illiyan, 2005). It is a well known fact that export oriented software and service sector is indeed the driving force of Indian software industry and it is widely held as the engine of growth and earner of foreign exchange. The significance of the US market for Indian software exports is due to the fact that US is by far the world s largest software market. The US information technology and financial services companies have moved much faster than their European counterparts to take advantage of offshore activities. The US had relatively more liberal immigration rules for work or residence than most other developed countries (Chakraborty and Jayachandran, 2001). 6.4 Relationship between Indian Software Exports and INR-USD Exchange Rate Volatility Foreign exchange rate is a key factor in foreign trade. Recent changes in global economy such as recession and looming threat of deflation in the US and Europe has contributed to the weakening of the USD against major other currencies including the rupee. This has affected India s export sector, especially information technology sector because sixty seven percent of their revenues come from US and about ninety percent of exports are invoiced in USD. Consequently operating margins of information technology companies have been hit hard. The volatility of the INR against USD has been one of the greatest concerns especially for information technology sector companies (NASSCOM). The Indian software industry started in with modest software exports crossed USD 100 billion in It has emerged as a major export earner for the country, contributing eight 299

11 percent of total merchandise exports. India exports to more than 100 countries and over half of Fortune 500 companies outsource their software requirements from India. The growth in Indian software industry has been spurred mainly by the growth in export market demand. The export market is concentrated in the US and Europe. Almost two-thirds of the software revenue of Indian companies accrues from export sales in the US market. It is a known fact that export oriented software and services sector is indeed the driving force of Indian software industry and considered as the engine of growth and earner of foreign exchange. In 2008 software and service exports were around USD forty billons and directly employed nearly over two million professionals. While the US and UK remain the largest export markets accounting for about sixty one percent and eighteen percent respectively in the financial year 2007 (NASSCOM, 2008). As a proportion of national GDP, the sector revenues have grown from 1.2 percent in financial year 1998 to an estimated 5.8 percent in financial year 2009 (NASSCOM, 2009). During , the share of computer and software services accounts for 4.33 percent in India s GDP at current prices. Out of the total production around seventy seven percent was exported. India s share in the world market during the year is estimated to be 7.8 percent as compared to 6.83 percent estimated in the year According to Computer Software and Services Exports Statistical Year book , during the past five years, on an average India has been exporting software services to over 147 countries and US remains the top destination for India s exports. During US accounted for a share of over fifty one percent of India s total export of software services. In value terms, software exports to US were around USD 30 billion. The Indian software industry business model is export oriented, where the majority of the revenues comes from exports, exposes these businesses to risks involved with foreign trade such as exchange rate fluctuations. In the recent past, volatile INR-USD exchange rate has been one of the biggest challenges faced by Indian software industry. 300

12 During the period , the exchange rate of the rupee was officially set by the RBI in terms of a (weighted) basket of currencies of India s major trading partners and there were significant restrictions on not only capital but current account transactions as well (Bose, 2006). The movement towards market determined exchange rates in India began with the official devaluation of the rupee in July In March 1992, a dual exchange rate system was introduced in the form of the Liberalized Exchange Rate Management System (LERMS). In March 1993, India moved from the dual exchange rate regime to a single, market determined exchange rate system based on demand and supply in the foreign exchange market. The INR has been fluctuating a lot against dollar. The INR has declined by nearly twenty five percent from on April 1 st, 2013 to Rs on August 28 th, On September 2, 2013 the rupee breached an all time low of INR 68.75, the biggest one day fall in last twenty years. This kind of change has a huge impact on business and it requires a strong strategy to handle such exchange risks. The fluctuating INR has also depreciated significantly against major currencies such as Euro, Yen and Pound. But the most impact on the software industry is from USD fluctuation only because nearly seventy percent exports from India are to the US. According to Som Mittal, President of NASSCOM, volatility is not good for business in the long run. It will be positive for the industry in the short-term making them more cost competitive. He also said that it is a real problem. We do not know where [at what rate] to hedge, our customers do not where to hedge. The gains from the falling rupee are not likely to be very significant as most IT companies hedge their foreign exchange position. The industry needs a stable currency as it helps in signing contracts. He also added that volatile and uncertain currency would create problems for the industry as it would make it difficult to evolve a strategy. Uncertainty was a matter of concern for the industry as a whole. In the industry s perspective, a stable currency would enable it prepare for long-term contracts and hedging strategies. Though the depreciating currency could have short-term benefit for the IT industry, such considerations were narrow as majority contracts were being taken on the longer term for five years. The companies entering into longer term contracts hedge at the constant prices so that the contract could be covered for the period. We cannot depend on 301

13 currency management for profits. We do not think our core competency is currency management. It is to get the business delivered and get the money. In 1947 that one rupee was indeed equal to one dollar. Ten grams of gold was above INR in 1947, today it is about INR The rupee was and per US dollar in 2004 and 2010 respectively. The rupee was remarkably stable during 2004 and However, in the month of august of 2011, 2012 and 2013 it was 44, 55 and 68 respectively. The rupee became highly volatile after 2011 due to various uncertain factors prevailing in global financial markets. The INR exhibited two-way movements during moving in a range or INR per USD. The rupee initially depreciated against the USD during the year, reaching INR on July 19, 2006 reflecting higher crude oil price, FII outflows and geo-political risks in the Middle East region. The rupee, however, strengthened thereafter on the back of moderation in crude oil prices, revival of FII inflows and weakness of the USD in the international markets. The rupee appreciated further to reach INR per USD on May 7 th, 2007 due to increased supply of dollars in the market. Thereafter, however the rupee depreciated to INR per USD on May 16 th, At this level, the rupee appreciated by 6.7 percent over end March 2007 and 9.2 percent over end March Against the Euro, the rupee appreciated by 4.7 percent over end March 2007, but depreciated by 2.4 percent over end March 2006 (Rakesh Mohan, 2007). The INR has largely been volatile since January 2009, trading in a wide range between INR and Since 2011 the rupee has been depreciating and from an annual average value of 46.6 in 2011, the currency weakened to 53.4 in 2012 and in 2013, the average value has depreciated further to While the downward spiral in rupee s value which hit a historic low of INR per USD in the month of august 2013, is expected to provide short-term benefits, it will affect signing of new contracts by domestic IT firms (NASSCOM). The appreciation or depreciation of the INR, as the case may be is more influenced by the weakness or strength of the USD. 302

14 Foreign exchange risk is the change in the domestic currency value of assets and liabilities to the changes in the exchange rates. This may be positive or negative. Positive exposure gives rise to gain and negative exposures gives rise to loss. Foreign exchange risk is measured by the variance of the domestic currency value of asset or liability or an operating income, which can be related to unexpected changes in the exchange rates (Gandhi, 2006). According to Infosys Chairman Mr. N R Narayana Murthy, for every one percent movement in the INR against the USD has an impact of approximately fifty basis points on operating margins of a software company. 6.5 Cointegration Analysis In this section, an attempt has been made to examine the relationship among Indian software exports, US economic activity, and INR-USD exchange rate volatility, using Engle-Granger two- stage Cointegration method. To test the hypothesis that, there exists no significant statistical relationship among Indian software exports, US economic activity, and INR-USD exchange rate volatility, quarterly data for the period I st Quarter to IV th Quarter was collected and used for analysis. Data Notation Table S.No. Notation Variable Source Units of measurement 1 lswx Software Exports RBI USD Million. 2 lex Exchange Rate RBI INR/USD. 3 lfea US GDP BEA USD Billion. 4 lvol INR-USD Volatility 14 - Absolute percentage change of INR-USD Table Based on Bailey and Tavlas (1988), volatility was computed as absolute percentage change of exchange rate. 303

15 From the table 6.5.1, it can be understood that the data pertaining to software exports and INR- USD nominal exchange rates, which is a proxy for price competitiveness between India and US were collected from the Reserve Bank of India (RBI) and US GDP values which are proxy for Economic Activity of US were collected from Bureau of Economic Analysis (BEA), US. Volatility 14 was computed as an absolute percentage change of INR-USD quarterly exchange rates. All the series have been subjected to log transformation. The data has been denoted as lswx for log of software exports, lex for log of INR-USD exchange rates, lfea for US Economic Activity, and lvol for volatility of INR-USD exchange rate. Engle-Granger or Augmented Engle-Granger Method According to this method, first, all the series must be checked for stationarity or unit root using Augmented Dickey-Fuller (ADF) test. From the table 6.5.2, it can be understood that the computed absolute t-statistic values of all the variables were less than the absolute critical values at both 5% and 1% significance levels. Therefore, the null hypothesis of a variable has unit root has been failed to be rejected and concluded that all the variables are non-stationary in levels. Step 1: Checking all the variables for stationarity using ADF test Variable Critical Test H 0 : Has Unit Values Statistic Root 1% 5% Decision lswx t < CV Do not Reject lex t < CV Do not Reject lfea t < CV Do not Reject lvol t < CV Do not Reject Source: Data Analysis. Table

16 Since all the variables were found to be non-stationary in levels, their first differences were computed and again tested for stationarity or unit root using ADF test. If these first differenced series are found to be stationary, then a Cointegration regression equation can be estimated. Critical Variable Test H 0 : Has Unit Values Statistic Root 1% 5% Decision lswx t > CV Reject lex t > CV Reject lfea t > CV Reject lvol t > CV Reject Source: Data Analysis. Table denotes the first difference operator and all the variables were tested for stationarity or unit root using ADF test. From the table 6.5.3, it can be inferred that the computed absolute t-statistic values of all the variables were more than the absolute critical values at both the 5% and 1% significance levels. Therefore, the null hypothesis of a variable has unit root has been rejected and concluded that all the variables are stationary at first difference. Step 2: Cointegrating Regression Equation: lswx t = β 1 + β 2 lex t + β 3 lfea t + β 4 lvol t + ε t lswx t = lEX t lFEA t 0.029VOL t + ε t Variable Coefficients t-statistic p-value Intercept *** lex *** lfea *** lvol * Table R 2 =0.970 d=0.957 Adjusted R 2 : ***Significant at 1%. F-Statistic: P-value:.000 *Significant at 10%. Standard Error of the Regression:

17 According to Engle-Granger Cointegration method, the residuals (ε t ) of the Cointegration regression equation should be checked for stationarity, if they are found to be stationary then it can be concluded that there exists a long-term stable relationship among all the variables existing in the Cointegration regression equation. However, the estimated residuals are based on the estimated Cointegrating parameters (βs), the Dickey-Fuller (DF) and Augmented Dickey-Fuller (ADF) critical significance values are not quite appropriate. Engle-Granger has calculated these values, which are known as Engle-Granger (EG) or Augmented Engle-Granger (AEG) critical values (Gujarati 2008, p.842) Variable t- statistic AEG Critical Values 1% 5% H 0 : Has Unit Root Decision Residuals (ε t ) t > CV Reject Source: Data Analysis. Table From the table 6.5.5, it is evident that the computed absolute t- statistic value of residuals is more than the absolute critical values at both 5% and 1% significance levels. Therefore, the null hypothesis of residuals has unit root has been rejected and concluded that residuals are stationary. Thus, according to the results of the Augmented Engle-Granger (AEG) test, it can be concluded that there exists Cointegration or long-term equilibrium relationship among all the variables of the Cointegrating regression equation. There exists a significant positive relationship between Indian software exports and US economic activity and a significant negative relationship between INR-USD exchange rate volatility and Indian software exports. 306