How India's ER&D sector overtook BPM in the tech industry for the first time

The ER&D sector, which involves product engineering-led software development, was the fastest-growing segment of India's tech industry.

India’s Engineering Research & Development (ER&D) sector is set to surpass Business Process Management (BPM) in revenue in FY25, a major shift in the country’s technology industry. The change in the sector is attributable to the increasing role of digital transformation across industries and India’s deep engineering talent pool, say experts.

This assumes significance at a time when chief executives of the largest contributor in the tech industry -- the information technology (IT) services industry- are calling for an overhaul of the business model amid artificial intelligence (AI) disruption.

ER&D revenue grew by nearly 30 percent to $55.7 billion in FY2025, overtaking BPM, which reached $54.6 billion, according to the Annual Strategic Review report by industry body National Association of Software and Service Companies (Nasscom), released on February 24, 2025.

ER&D companies focus on designing, developing, and innovating products, software, and systems, while BPM (Business Process Management) companies handle outsourcing of business operations like customer support, finance, HR, and analytics to improve efficiency.

The ER&D sector was the fastest-growing segment of India's tech industry, significantly outpacing BPM (11.7 percent), IT services (6.7 percent), software products (5.9 percent), and hardware (5.5 percent). Together, these five verticals make up India's $283 billion tech industry.

"A lot of disruptions have been in industries that are very engineering-heavy. They are manufacturing-heavy, like automobiles, autonomous cars and so on. India has a spate of good engineers who have the engineering mindset and ER&D mindset," Rajiv Gupta, BCG’s Telecommunications, Media & Technology practice head in India, told Moneycontrol on the sidelines of the Nasscom Technology & Leadership Summit 2025 in Mumbai.

What worked?

The shift could be gauged in the previous year itself when the ER&D sector alone contributed 48 percent to the total software export revenue addition in FY24.

“Digital engineering is expanding into sectors like BFSI (banking, financial services, and insurance), healthcare, and retail, with nearly two-thirds of the large deals centred on this shift,” Nasscom said in its report .

Moreover, over 1,680 of India’s approximately 1,750 GCCs (Global Capability Centers) house ER&D services, according to a joint report by Deloitte and Nasscom, released on January 29, 2024. A sizeable percent of the top 50 global engineering service providers is headquartered in India, the report further said.

Global companies are increasingly investing in product innovation and software-driven solutions, driving demand for ER&D services. Subsequently, this is making India a preferred destination for outsourced engineering talent.

Recently, a prominent player in the space - L&T Technology Services (LTTS)- told Moneycontrol that the ER&D sector is set to outpace the IT industry soon, driven by automation, AI, changing compute and storage dynamics, and supply chain restructuring.

To be sure, the IT services sector is currently almost three times larger than the ER&D sector, and even at its current growth rate, it would take the ER&D sector more than 3.5 years to catch up with the present revenue levels of IT services .

Keerthi Kumar, Partner, Deloitte India, says India’s ER&D segment has come a long way on the back of a robust ecosystem, comprising the world’s largest GCC base, leading Engineering Service Providers (ESPs), third-largest startup community, and globally renowned academic institutions.

“This is naturally reflected in the 8 percent CAGR over the past four years for India’s ER&D segment, the fastest-growing and the second-largest segment in the Indian tech industry, and more noticeably, the 55.4 percent growth contribution for the net tech exports the country witnessed between 2023 and 2024,” Kumar was quoted as saying in the joint report.

Will IT giants dominate ER&D?

Despite this rapid expansion, IT services companies are yet to dominate the ER&D space.

Gupta believes that traditional IT players like TCS, Infosys, and Wipro will try to capture more of this market, but new players might also emerge as leaders.

"There will be competition. Will large IT services firms capture this space, or will new players take the lead? That depends on how strategic moves play out," he added.

So far, Infosys has acquired two companies to strengthen its offerings in ER&D services by 2024 while HCLTech bought an automotive engineering services provider in 2023. HCLTech will establish a dedicated ER&D services centre to serve Olympus Corp.

US-based Cognizant's Belcan acquisition is also in line with the trend of Indian IT firms.

Analysts believe this inorganic strategy highlights a broader industry trend where IT firms might leverage the merger and acquisition (M&A) route to counter sluggish organic expansion.

Traditionally, ER&D services are largely provided by domain specialists, such as L&T Technology Services, Cyient, Tata Elxsi, and others. However, with ER&D spends gathering pace over the past couple of years, IT services companies are increasingly looking to tap into this new growth area.

Gupta says everyone is making all the right moves around. However, the question is how well they execute. He says not everything in the Indian tech sector has to happen with TCS, Infosys, Wipro, HCLTech, etc. “They have contributed massively and if they continue doing so, very good. But we have now 450 such companies in India. Somebody else may be the winner.”