The It Industry and Economic Development in India

THE IT INDUSTRY AND ECONOMIC DEVELOPMENT IN INDIA

Abstract:

Many scholars have questioned the role of the IT industry in India’s economic development. Some have correctly highlighted the limited impact of IT firms in creating occupations accessible to less-educated people or the modest impact of industry output on the livelihoods of people from poorer households and communities. There are thus strong arguments against governments giving fiscal and industrial priority to the IT industry. However, this article explains why the state is unlikely to heed this redistributive agenda. It argues that state assistance to the IT industry has been predicated upon four main factors:

1. India’s surplus of skilled and technically qualified young workers
2. The dominant role of software services within the IT industry
3. The formation of political relations between industrialists and state institutions
4. The crucial role of software service export earnings in the stabilization of India’s external position
   
   Short of a radical change in the status quo, we are unlikely to see a commensurate change in policy settings.

Introduction:

The industry has been the recipient of fiscal support by successive governments at a national and regional level, including financial subsidies, favorable tax treatment and resource allocation such as land, water and electricity. In contrast, many critics question the contribution of the industry to economic development by emphasizing the small proportion of workers who work within IT firms or who rely on industry output to generate their livelihoods.

the IT industry has gradually become indispensable to India’s high-growth economy. The industry is now central to India’s trade and financial interface with the world economy. It has become embedded in the structure of the contemporary Indian economy and, thus, within the country’s economic policymaking framework. The comparative success of the IT industry has meant that there are few incentives for industrialists and policymakers to support a redistributive economic policy agenda.

A redistribution of economic resources is only likely in the context of a radical change in the political and economic circumstances that have given the IT industry its entrenched and embedded character.

In this article, it is argued that the provision of state finance and other economic resources to the IT industry has become part of an export strategy based upon earnings from the high-growth software services sector. This strategy has been framed by industrialists and policymakers as crucial to India’s economic development. There are four main reasons why these actors are unlikely to consider critical or alternative arguments. These relate to the ability of the IT firms to drawing upon existing reserves of skilled workers, the structure of the IT industry, the political character of state–industry relations and, finally, the role of software services in India’s macro-economic stability.
There are subcategories in the IT industry - software services, IT-Enabled Services or Business Process Outsourcing (ITES/BPO), and computer hardware manufacturing. The software services sector is the best performing among these followed by ITES/BPO. The leading role of software services within the industry has emerged historically from a narrow export market dominated by the USA and from the decline of domestic hardware manufacturing.

Competing Claims about India’s IT Industry

Today’s IT industry emerged in a period in which Indian governments gradually began to lift restrictions on domestic firms, trade and foreign investment in the 1980s. Software services exports have been regarded as both a consequence and a driver of these reforms. As a result, the industry has been viewed, in some quarters, as synonymous with the economic liberalization agenda.
While India’s economic transformation since the 1980s has been gradual, the 1991 debt crisis marked a watershed in which the idea of self-reliance as an economic goal was superseded by a belief in the existence of a ‘benign (liberal-capitalist) order’.

In this context, specialization in software service exports was said to reflect India’s comparative advantage in services provision and its skilled labor endowment, with the potential to radically transform the economic structure of the entire country.

Many industry and government reports have echoed these sentiments. According to the National Association of Software and Services Companies (NASSCOM), India’s peak industry body, IT services exports are crucial to India’s overall development. NASSCOM characterizes the industry as ‘IT-BPO’, which includes software services (export and domestic), software products, hardware production and ITES/BPO. NASSCOM claims that the IT industry creates direct as well as indirect employment and that information and communications technology are necessary for broader development goals such as poverty alleviation, the empowerment of disadvantaged communities and infrastructure creation.

However, many scholars have portrayed the IT industry as a type of enclave that generates few benefits for the wider population. Some have argued that the industry represents a small fraction of India’s total labor force. The rapid growth of the industry has been depicted as a form of ‘uneven’ development. It is also claimed that the industry has widened existing social and economic inequalities. The narrowness of the industry’s export orientation is also problematic for some scholars. Nearly two-thirds of software service exports are bought in the USA, while over three quarters of these services are remunerated in US dollars.

However, The IT industry has an output multiplier of 1.52 for 2003–04 (Government of India 2008). This figure is below the average output multiplier (2.09) for all 130 industries recorded in the data. Furthermore, 103 industries had an output multiplier greater than ‘computer and related activities’.1 Given that the indirect employment effect of industry demand does not appear to be significant or special in relation to other sectors, criticisms of the IT industry based on modest employment creation are well founded.
Many criticisms of the IT industry invoke an implicit argument for greater inter-sectoral equality. The claim that the IT industry over-relies upon export markets in the US embodies concerns about India’s vulnerability to external shocks. In addition, the success of software services has been problematized due to India’s comparatively unsuccessful hardware manufacturing industry.

...