India’s Information Technology Sector What Contribution to Broader Economic Development?

Nirvikar SinghUniversity 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

Year

GDP at current prices

(Rs. Billion)

IT sector (Rs. Billion)

IT sector (US $ Billion)

1994-95 9,170 63 2.0

1995-96 10,732 99 2.9

1996-97 12,435 137 3.8

1997-98 13,900 187 5.0

1998-99 16,160 248 6.1

1999-00 17,865 371 8.7

2000-01 19,895 554 12.2

IT Sector Decomposition

Year Hardware Software Other Domestic Export

1994-95 23.8 26.1 13.6 34.6 21.1

1995-96 36.8 41.9 20.2 59.0 26.6

1996-97 48.1 63.1 25.8 68.4 49.8

1997-98 52.4 100.4 33.8 88.5 73.4

1998-99 42.5 158.9 36.4 105.4 110.3

1999-00 65.7 243.5 61.6 152.7 176.3

(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

Manufacturing Value Added per Employee

Software Revenue per

Employee

Finland 112.6 77.6 66.2 France 99.6 78.6 128.0 India 10.1 4.2 7.1 Ireland 117.6 119.2 112.9 Israel 54.5 39.0 79.4

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

• Defined as pervasive, technologically dynamic, with complementarities in innovation

• Are ICTs particularly influential GPTs?• Complementarities in general

– Horizontal vs. vertical

– Technological vs. demand driven

– Forward and backward linkages

General Purpose Technology

Falling Costs of Computing (US $)

Costs of computing 1970 1999

1 Mhz of processing power 7,601 0.17

1 megabit of storage 5,257 0.17

1 trillion bits sent 150,000 0.12

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

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 TARAhaat’s 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

• IT’s success exposes key bottlenecks and areas where reform is needed

• Policy initiatives have to be general, not sector-specific, 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