Indias Information Technology Sector

What Contribution to Broader Economic Development?

Nirvikar Singh
University of California, Santa Cruz

OECD GOI - GOTN International Conference on The IT/Software Industries in Indian and Asian Development November 11-12, 2002

Outline
1. Introduction
2. Is IT Special in Theory and Practice? 3. Opportunities and Constraints 4. Policy Thoughts 5. Conclusion

1. Introduction
Success of IT well known Can it be more than an enclave for software exports?

What can be achieved and how?

Can we ensure that the Indian IT sector remains a dominant player in the global market, and that we emerge as one of the leading countries of the new millennium?

The IT Sector
GDP at IT sector IT sector current (Rs. Billion) (US $ Billion) prices (Rs. Billion) 9,170 10,732 12,435 13,900 16,160 17,865 19,895 63 99 137 187 248 371 554 2.0 2.9 3.8 5.0 6.1 8.7 12.2

Year

1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01

IT Sector Decomposition

Year 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00

Hardware Software Other Domestic Export 23.8 36.8 48.1 52.4 42.5 65.7 26.1 41.9 63.1 100.4 158.9 243.5 13.6 20.2 25.8 33.8 36.4 61.6 34.6 59.0 68.4 88.5 105.4 152.7 21.1 26.6 49.8 73.4 110.3 176.3

(Rs. Billion)

Firms and Markets

2500 exporters
Top five
TCS, Infosys, Wipro, Satyam, HCL Account for about 35% of software exports

Export markets
US 63% Europe 26% Japan and other 11%

IT-Enabled Services
Customer Interaction Services Business Process Outsourcing/ Management; Back Office Operations Insurance Claims Processing Medical Transcription Legal Databases Digital Content Online Education Data Digitization / GIS Payroll / HR Services Web site Services

Total: $800 M in 2000-01, growth 70%

Back Office: share 30+%, growth 40%

Customer interaction: share 20%, growth 100%

2. Is IT Special in Theory and Practice?

Source of comparative advantage
Special type of general purpose technology (GPT)

Special role in recombinant growth

Increased efficiency of markets and of governance

Comparative Advantage
Static and dynamic versions
Relative Productivity Indices (US = 100) Country Manufacturing Output per employee 112.6 99.6 10.1 117.6 54.5 Manufacturing Value Added per Employee 77.6 78.6 4.2 119.2 39.0 Software Revenue per Employee 66.2 128.0 7.1 112.9 79.4

Finland France India Ireland Israel

Source: Constructed from figures in Arora and Athreye (2002, Table 2). Original data are from varied sources and those authors own estimates.

General Purpose Technology

Defined as pervasive, technologically dynamic, with complementarities in innovation
Falling Costs of Computing (US $) Costs of computing
1 Mhz of processing power 1 megabit of storage 1 trillion bits sent

1970
7,601 5,257 150,000

1999
0.17 0.17 0.12

Source: Pam Woodall, The New Economy: Survey, The Economist, September 23, 2000, p. 6, Chart 1.

Are ICTs particularly influential GPTs? Complementarities in general

Horizontal vs. vertical Technological vs. demand driven Forward and backward linkages

Linkages: Bangalore to Bathinda

Recombinant Growth
Central idea is that new ideas are formed through combinations of old ideas The state of IT knowledge affects the success rate of turning potential new ideas into practical ones

Writing and telephones, not just Internet and computers

This makes IT special Indian policy neglected modern communications, for example

Market and Government Efficiency

Economize on resource use Increase quantity and quality of buyer-seller matches Internal resource use within organizations (public or private) More efficient information exchange throughout value chain (public or private) Greater transparency and accountability

3. Opportunities and Constraints

ITES
Hardware Broad-Based Growth Skills Infrastructure Finance

ITES
Diverse categories Range of skill sets Management and infrastructure The O-ring model may matter (complementarities within the firm)

Hardware
Design with outsourced manufacturing Low-cost versions targeted to developing countries (e.g., Simputer)

Management and infrastructure again

Broad-Based Growth
Complementarities, leap-frogging, operational efficiencies Jobs: automation vs. new IT-enabled services

Examples
Handhelds, smart cards and micro-finance Milk collection in dairy cooperatives Market information Education content and delivery

Bathinda

Business in Bathinda
TARAhaat: Subsidiary of Development Alternatives, a
large NGO

A commercial enterprise, but 51% ownership by a nonprofit foundation

Social mission: the creation of sustainable rural livelihoods through improved information flows and education that can be enabled by IT Implementation through a business model that involves franchising information kiosk owners TARAgyan is developing educational content and software for use in TARAhaats information kiosks Includes teaching courses in Tally accounting software

Domestic Market for IT

Smaller size

Different requirements
Managerial attention

Internal Internet access and use

Domestic infrastructure in general

State of Indian industry

Skills
Stock of technical professionals: > 500K

Adding over 100K a year

Real growth is in customer interaction services Different skill-set, easier to ramp up

Engineers may not be so scarce today what complementary inputs do they need?

Infrastructure
Electric power matters for everything Water, roads, ports hardware Telecommunications everything, especially software Technological change has made everything possible in telecoms if policies are right

Finance
Problems of directed credit, financial repression and fiscal deficits Some progress in securities markets, corporate governance, corporate law and tax policy Nascent venture capital industry US $ 1 B in 2000-01 Pending issues of changes in tax and accounting regulations

4. Policy Thoughts
Where does targeting make sense? What kinds of tax-subsidy policies? Software exports Telecoms Venture capital Education Broad reform areas: labor, infrastructure, finance, small scale reservations

Governance
Enhance domestic demand for IT

Operational efficiency
Access and transparency

Empowerment and accountability

Examples
Andhra Pradesh: agricultural land records Urban service delivery: forms, bills, etc. Gyandoot / Drishtee: complaints, forms

5. Conclusion
IT is a fast-growing, export-oriented sector Also definite potential for contributing to broad-based growth much more than software exports ITs success exposes key bottlenecks and areas where reform is needed

Policy initiatives have to be general, not sectorspecific, or narrowly targeted IT as the thin end of the wedge IT can also contribute to broader economic development governance,education, operational efficiency, market efficiency