India's Information Technology Sector: What Contribution To Broader Economic Development?

Indias Information Technology Sector: What Contribution to Broader Economic Development !
"irvi#ar Singh$ %C Santa Cru&$ 'ctober ())(
Indias Information Technology Sector: What Contribution to Broader Economic Development

"irvi#ar Singh *rofessor of Economics %niversity of California$ Santa Cru& Santa Cru&$ C+ ,-)./$ %S+ 0irst Draft: 'ctober ())(
!bstract
What contribution can information technology 1IT2 ma#e to Indias overall economic development This paper offers some perspectives that can help ans3er this 4uestion$ using concepts and analysis from economic theory5 It e6amines the theory and evidence for comparative advantage$ complementarities$ and a special role in the innovation process$ as factors that ma#e IT special5 The paper also considers opportunities for future gro3th in Indias IT sector$ e6isting and potential constraints$ and possible policy responses that can help IT contribute to broader economic development5 Keywords: information technology$ soft3are$ complementarities$ recombinant gro3th JEL Classification: 7(8$ 9.:$ '8($ ':
This paper has been prepared for the conference$ <The IT=Soft3are Industries in Indian and +sian Development>$ sponsored by the State ?overnment of Tamil "adu$ the ?overnment of India$ and the 'ECD Development Centre$ to be held in Chennai$ India$ "ovember 88@8($ ())(5 I am especially grateful to +sho# Desai for stimulating conversations$ and for inspiring this line of in4uiry 3ith his o3n 3or# on IT$ and to Dilip Chenoy$ Ayle Eischen and Devesh Aapur for insights and suggestions on related 3or#5 +oyu Chen provided able research assistance5 "one of them is responsible for any remaining shortcomings$ and the vie3s e6pressed are mine alone$ and not those of any of the organi&ations mentioned5
Indias Information Technology Sector: What Contribution to Broader Economic Development ! "irvi#ar Singh$ %C Santa Cru&$ 'ctober ())(
1. Introduction
In his fore3ord to the ne3 "+SSC'7@7cAinsey Beport 1())(2$ Indias 7inister for Communications and Information Technology calls for a Coint industry@government effort to <ensure that the Indian IT sector remains a dominant player in the global mar#et$ and that 3e emerge as one of the leading countries of the ne3 millennium>5 The first of these goals remains a challenge$ but it is one for 3hich Indias information technology 1IT2 industry seems to be 3ell prepared5 The second stated goal is much broader$ much deeper$ and much harder to achieve5 Does it ma#e sense to pin so much hope on Indias IT industry What contribution can it ma#e to Indias overall economic development Can it help change the country$ reduce poverty$ change peoples lives for good 'r 3ill the benefits be restricted to an educated elite 3ith access to Cobs and po3er This paper offers some perspectives that can help ans3er these 4uestions$ using concepts and analysis from economic theory5 In this paper$ I assume a basic familiarity 3ith the general structure and performance of the Indian economy$ and the economic reform process that has been ta#ing place through the last decade or more5 Do3ever$ I provide a brief revie3 of the industry in this introduction5 The remainder of the paper is structured as follo3s5 In Section ($ I provide several possible ans3ers to the 4uestion of 3hat might ma#e IT special for gro3th and development5 In Section :$ I e6amine some of the evidence concerning 3hether the theoretical perspectives have empirical relevance for India5 In Section /$ I discuss the opportunities that e6ist for future industry gro3th and broader developmental impacts$ and the constraints that the industry and the economy face5 Section - provides some reflections on policy implications of the earlier discussion$ and Section . is a summary conclusion5
IT in India
Information technology essentially refers to the digital processing$ storage and communication of information of all #inds 85 Therefore$ IT can potentially be used in every sector of the economy5 The true impact of IT on gro3th and productivity continues to be a matter of debate$ even in the %nited States$ 3hich has been the leader and largest adopter of IT5 ( Do3ever$ there is no doubt that the IT sector has been a dynamic one in many developed countries$ and India has stood out as a developing country 3here IT$ in the guise of soft3are e6ports$ has gro3n dramatically$ despite the countrys relatively lo3 level of income and development5 +n e6ample of ITs broader impact comes from the case of so@called IT@enabled services$ a broad category covering many different #inds of data processing and voice interactions that use some IT infrastructure as inputs$ but do not necessarily involve the production of IT outputs5 Indias figures for the si&e of the IT sector typically include such services5
+ popular alternative is ICT$ for information and communications technology: the World Ban#$ for e6ample$ favors this term5 ( To give a sampling of research in the %S$ David 1()))2 emphasi&es the lag 3ith 3hich any ne3 technology affects productivityE ?ordon 1()))2 offers a s#eptical vie3 of the impact of IT on productivity$ arguing that the empirical evidence indicates that the impact is narro3 and limitedE Forgenson$ in the most comprehensive analysis$ finds that IT has contributed significantly to total factor productivity gro3th 1T0*?2 in the %S5 'f course$ higher T0*? implies higher overall gro3th$ ceteris paribus5
Since the numbers on Indias soft3are e6ports are 3ell publici&ed 13335nasscom5org2$ I 3ill provide only a brief revie35 The latest figures on the soft3are and services sector indicate that annual revenue 3as Bs /G) billion 1%SH 8)58 billion2 in ())8@)($ up from Bs5 :G( billion 1%SH G5/ billion2 in ()))@)8 1"+SSC'7$ ())(2 This translates into overall gro3th of (.I in rupee terms and ()Iin dollar terms5 While gro3th rates have been high$ Indias IT sector is still small$ relative both to the 3orld mar#et and to Indias ?D*5 World sales of soft3are and services in ())) 3ere H //) billion 1Desai$ ())(b25 Even if this did not gro3 at all$ Indias ())8@)( sales 3ould be Cust about (I of the 3orld mar#et5 To compare the soft3are sector to ?D*$ one has to estimate the fraction of sales that constitutes value added5 +ssuming this fraction to be t3o thirds 3ould imply that soft3are directly contributed about 85- I to ?D*5 The latest "+SSC'7 figures no longer include hard3are and peripherals$ 3hereas they did earlier 1Singh$ ())(25 %sing my earlier calculations$ the broader IT sector is probably one third again as big$ allo3ing for slo3er hard3are gro3th5 This 3ould imply that the IT sector is about (I of ?D*5 Despite Indias emphasis on import@substituting industriali&ation$ it has not developed a robust$ 3orld@class manufacturing industry$ and this includes IT hard3are5 7uch of Indias hard3are industry consists of assembly tas#s$ almost entirely for the domestic mar#et5 Indias soft3are industry is$ of course$ more robust ! at least in certain areas5 While selling pac#aged soft3are to consumer 1and most business2 mar#ets re4uires economies of scale and scope$ as 3ell as mar#eting and customer support muscle$ proCect@oriented components of soft3are development do not do so$ to 4uite the same degree5 To some e6tent$ therefore$ Indias soft3are industry remains narro3ly focused5 0or e6ample$ of Indias ())8@)( soft3are and services e6ports of Bs5 :.- billion$ t3o thirds came from IT services$ and close to GGI of that amount came from custom application development and application outsourcing 1calculated from "+SSC'7$ ())( ! see also Desai$ ())(a25 Indicators of the strength of Indias soft3are e6port capabilities include the depth of its base$ and the breadth of its global reach5 There are over ($-)) Indian soft3are e6porters$ and 3hile only the top five 1TCS$ Infosys$ Wipro$ Satyam and DC92 are ! or are approaching the status of ! global brands$ they together account for only about :-I of soft3are e6ports5 : The %nited States remains by far the largest mar#et for Indias soft3are e6ports$ its share of Indias soft3are e6ports being .:I$ 3ith Europe coming in at (.I$ and Fapan and the rest of the 3orld accounting for the remaining 88I 1"+SSC'7$ ())(25 Individual firms and organi&ations such as "+SSC'7 have sho3n themselves to be adept at targeting mar#ets 3ith substantial gro3th potential$ such as ?ermany$ and the reputations built in e6porting to the %S are proving important5/ IT@enabled services 1ITES2 have sho3n the strongest gro3th in the last t3o years5 They include a variety of types of service$ ranging from customer call centers$ to accounting services and other business process outsourcing$ to ?IS and engineering services5 Thus the re4uired degree of technical sophistication of the 3or#force and the level of use of IT can vary 3idely5 In fact$ the three categories I have mentioned ma#e up most of Indias ITES e6ports$ 3ith the first t3o sho3ing high gro3th and representing over .)I of the total of Bs5 J8 billion5
:
These figures are calculated from data in "+SSC'7 1())(2$ and e6clude IT enabled services$ 3hich are discussed separately later in this section5 / 0or e6ample$ see http:==3335tcs5com=ne3s=tcsKmedia=htdocs=sh)8=nov)8K0TKarticle5htm
2. Is IT Special in Theory?
IT may have a special role to play in gro3th and development simply because of empirical characteristics that apply at the current time5 In particular$ the recent and continuing rapid innovation in IT ma#e it a dynamic sector that is an attractive candidate as a contributor to gro3th for that reason alone$ much as the automobile industry 3as targeted by the Fapanese after World War II5 I ta#e up this case in the ne6t section5 'n the other hand$ there may be features of IT that ma#e it attractive from a theoretical perspective on economic gro3th5 0or e6ample$ IT may be one of the sectors in 3hich countries such as India have$ or can develop$ a comparative advantage5 Even if this is so$ IT is li#ely to share this characteristic 3ith several other sectors5 + some3hat more special characteristic of IT may be that it is a Lgeneral purpose technology 1?*T2$ distinguished by pervasiveness$ technological dynamism and innovational complementarities5 In this case$ IT is one of a special fe3 technologies: other e6amples of ?*Ts include steam and electricity 1both advances in po3er delivery systems2 and synthetic materials5 0inally$ IT may be uni4ue in its impact on gro3th5 In this vie3$ IT has a special role in the process of innovation$ because it affects the rate at 3hich potential ne3 ideas are converted into additions to the usable stoc# of #no3ledge in 3ays that nothing else can5 - The formali&ation of this special role is based on the model of recombinant gro3th 1Weit&man$ 8,,G25 I briefly consider each of these possibilities ! comparative advantage$ ?*Ts 1and complementarities more generally2$ and recombinant gro3th$ in turn5 I also consider other aspects of IT and development$ 3hich are not necessarily lin#ed to formal gro3th theory$ including greater efficiency in governance and in the 3or#ing of mar#ets5
Comparative !dvantage
The static theory of international trade is based on comparative advantage$ determined by relative factor endo3ments and=or technology differences5 In the former case$ a country 3ill e6port goods in 3hich use more intensively the factors of production in 3hich it has relative abundance5 In soft3are development and use$ the life cycle includes analysis and specification of re4uirements$ design$ coding$ testing$ installation$ maintenance and support5 7any of these activities$ particularly coding and testing$ involve relatively routine IT s#ills that Indias 3or#force has in large absolute numbers 1though small relative to the total population25 Dence$ attributing Indias soft3are e6port boom at least partly to standard comparative advantage seems reasonable5. 'ne can further elucidate the supply and demand factors that enabled this comparative advantage to play out5 The e6istence of the Indian Institutes of Technology 1IITs2$ the ubi4uity of %ni6 in academic environments$ and the relatively lo3 infrastructure demands of learning to use and create soft3are all 3or#ed in Indias favor on the supply side5 The use of English in Indias higher education system$ the increase in the use of %ni6 and related operating systems due to the
-
In this perspective$ IT includes communication technologies$ and pre@digital technologies such as 3riting and printing5 This is also consistent 3ith the ?*T vie3 of IT5 I am grateful to Aeshav Singh and Bhairav Singh for clarifying this uni4ue role of IT for me5 . "ote that$ to the e6tent that India is providing intermediate goods or services in its soft3are e6ports$ the situation is more comple6 than that of standard trade theory$ 3here only final goods are traded5
e6plosion of the Internet$ and the large number of M(A@related proCects in the late 8,,)s all contributed to demand for Indias soft3are industry services$ in addition to the general gro3th in IT in the 8,,)s5 +s Aapur 1())(2 emphasi&es$ the lac# of e6plicit government restrictions on this sector also helped5 Static comparative advantage theory e6plains patterns of trade$ but not gro3th5 0or that one can turn to theories of endogenous gro3th5 The ingredients of these models typically include differentiated capital inputs$ monopolistic competition$ production of ne3 inputs through BND$ and ultimately economy@3ide increasing returns that allo3 sustained gro3th to occur5 Dence these models shift a3ay from the e6clusive focus on capital accumulation that characteri&ed the neoclassical gro3th model 1as 3ell as the core of Indian post@independence economic policy25 The 3or# of ?rossman and Delpman 18,,82 and Bivera@Bati& and Bomer 18,,8a$b2 incorporates international trade and the evolution of comparative advantage into endogenous gro3th models5 In these analyses$ the economy is typically divided into manufacturing$ BND and traditional sectors$ so the IT sector does not necessarily fit neatly into any single model category5 0or e6ample$ design and development of soft3are have characteristics of BND$ 3hile IT@enabled services are more li#e manufacturing in their use of established techni4ues for production5 The general message of these models$ ho3ever$ is that e6ternalities associated 3ith monopolistic competition may give policy a role in influencing the evolution of comparative advantage in a direction that increases economic gro3th5
"#Ts and Complementarities

?eneral models of endogenous gro3th emphasi&e the importance of BND in general 1for adding to the stoc# of #no3ledge$ 3hich in turn raises productivity of physical inputs2$ rather than IT per se5 The concept of ?*Ts$ introduced by Bresnahan and TraCtenberg 18,,-2$ provides a some3hat special role for IT$ as an e6ample of a ?*T5 ?*Ts have three #ey characteristics: pervasiveness$ technological dynamism and innovational complementarities5J Delpman and TraCtenberg 18,,Ga$ 8,,Gb2 model ?*T@led gro3th$ in 3hich sustained gro3th comes from the periodic$ e6ogenous introduction of ne3 ?*Ts5 7echanisms that 3ould give endogenous gro3th are ruled out$ but other3ise$ the frame3or#$ consisting of endogenous BND$ monopolistic competition and the introduction of ne3 intermediate inputs as the implementation channels for gro3th$ is similar to endogenous gro3th models5 In these models$ any ?*T has similar abstract effects5 'ne can say a little more about ho3 3ell IT fits the characteristics of ?*Ts5 *ervasiveness seems to be potentially a natural property of IT5 In the Indian conte6t$ doubts about achieving pervasiveness are centered on issues of cost and access5 Table 8$ ho3ever$ illustrates the important positive trends that support pervasiveness5 Technological dynamism refers to the potential for sustained innovation that come 3ith ne3 ?*Ts$ and is again illustrated by the dramatic fall in costs sho3n in Table 85 The complementarities of ?*Ts are vertical complementarities$ because ?*Ts spur innovation and lo3er manufacturing costs in do3nstream sectors$ 3ith positive feedbac# effects to the ?*T itself5 G There are also hori&ontal
J
See 9ipsey$ et al 18,,G2 for a detailed survey and e6amination of the concept$ as 3ell as the other pieces in Delpman 18,,G25 + complementarity is a particular #ind of e6ternality: see Bay 18,,G2$ pp5 88/@88-5 G Thus vertical complementarities are related to the older idea of lin#ages$ 3ith the do3nstream impact being a for3ard lin#age$ and the feedbac# being a bac#3ard lin#age5 See Basu 18,,J2 and Bay 18,,G2 for references and further discussion5
complementarities$ since the do3nstream sectors may face a coordination problem in e6panding sufficiently to encourage the improvement of the ?*T 1thus creating positive feedbac#25 "ote that international trade 3ith a more advanced country may be one 3ay to overcome some of these e6ternality problems5 Table 1: Falling Costs of Computing ($ Costs of computing
8 7h& of processing po3er 8 megabit of storage 8 trillion bits sent
1!"#
J$.)8 -$(-J 8-)$)))
1!!!
)58J )58J )58(
Source: *am Woodall$ <The "e3 Economy: Survey$> The Economist$ September (:$ ()))$ p5 .$ Chart 85
The general importance of complementarities 1aside from being one feature of ?*Ts2 in understanding gro3th processes has been described in most detail by 7atsuyama 18,,-E see also Ciccone and 7atsuyama$ 8,,.25 7atsuyama ma#es three useful observations5 The first is the identification of the differing roles played by hori&ontal and vertical complementarities$ such as 3as discussed in the previous paragraph5 The second is the difference bet3een technological complementarities$ emphasi&ed by 3riters such as Aremer 18,,:2 and 7ilgrom$ Oian and Boberts 18,,82 and the demand@based complementarities and pecuniary e6ternalities that drive models such as those of 7atsuyama5 The third point is the difference bet3een the effects of history and of e6pectations in affecting e4uilibrium outcomes and gro3th5 Either or both may 3or# against development and gro3th$ by preventing coordinated movement out of a Lbad e4uilibrium5 7atsuyama e6amines a range of models$ and sho3s ho3 gro3th may be arrested or sustained$ and 3hat #inds of inefficiencies might arise5 In particular$ the e6ternalities generated by the structure of complementarities can lead to inefficiencies that are best characteri&ed as coordination failures5 This set of problems also arises in the ?*T models of Delpman and TraCtenberg$ discussed above5 Without going into details$ I suggest that this literature has some relevance for thin#ing about the role of IT in Indian development5 In particular$ 3hile the success of IT so far may be the result of factors that have to do 3ith initial comparative advantage$ the fortuitousness of freedom from government controls 1Aapur$ ())(2 and integration 3ith the 3orld economy during the boom of the 8,,)s$ the #inds of problems that IT may face in the future$ as an engine of gro3th$ have to do 3ith potential coordination failures in providing other inputs along 3ith IT$ or in the do3nstream sectors that use IT5 0or e6ample$ if Indian manufacturing remains moribund because of the governments fiscal problems and their effects on the financial sector$ a significant mar#et for Indias IT sector may be stifled5 I investigate some of these issues in the ne6t section5
$ecombinant "ro%th
The gro3th model that best captures the special role of IT 1including communications$ and including non@digital methods of storing and communicating information2 is an e6tension of the recombinant gro3th model of Weit&man 18,,G25 Since this model is not 3ell #no3n$ and since the e6tension I propose here seems to be the best 3ay to capture the uni4ue role of IT in gro3th$ I spell out some of the formal details5 The central idea of this approach is that ne3 ideas are formed through combinations of old ideas5 The simplest case is 3here ideas can be combined in pairs$ and I stic# to this in my modeling5 Thus$ if At is the number of ideas 1the stoc# of #no3ledge2 available at the beginning of period t$ the number of potential ne3 ideas in period t is defined to be 182 Ht P At1At ! 82=( @ At-11At-1 ! 82=($
3here this formula uses the standard combinatoric formula for the number of possible pairings5 + #ey property of this formulation is that the increase in the number of ideas driven by 182 is faster than geometric gro3th 1Weit&man$ 8,,G$ 9emma$ p5 ::G25 In Weit&mans model$ all ideas are the same$ and the rate at 3hich potential ideas are converted into ne3 ones depends on a <success function>$ t1j2$ 3here j is the level of resources spent per potential Lhybrid seed idea$ i5e5$ BND5 If J / jH$ then the actual number of ne3 ideas is given by At P Htt1Jt=Ht2$ i5e5$ the number of potential ne3 ideas multiplied by the success rate5 Dere I suggest the follo3ing modification of Weit&mans model$ to capture the special role of IT in the innovation process5 Suppose that the stoc# of IT #no3ledge independently affects the success rate5 To 3rite this do3n formally in the simplest manner$ suppose that the total stoc# of #no3ledge can be split into IT 1A1t2 and non@IT 1A2t2$ 3here these t3o 4uantities sum to At5 I propose that the t3o stoc#s of #no3ledge increase according to the follo3ing relationships: 1(2 1:2 A1t P Ht t1J1t=Ht2 1A1t2 A2t P Ht t1J2t=Ht2 1A1t2
These t3o e4uations have the same e6tra term$ a function of the e6isting stoc# of IT #no3ledge5 0or simplicity$ this is assumed to be the same for both #no3ledge sectors$ and independent of time5 "aturally$ Q )$ so that a higher stoc# of IT #no3ledge increases the success rate$ other things e4ual5 Thus$ IT gives the gro3th process an e6tra L#ic#$ even beyond that 3hich comes from recombinant gro3th in general5 'ne might argue that other technologies can have similar effects$ in supporting innovation5 "evertheless$ it seems that the specialness of IT is precisely captured in 1(2 and 1:2: 3ithout 3riting$ 3ithout telephones$ 3ithout the Internet$ the success rate of converting potential ne3 ideas into actual additions to the stoc# of #no3ledge 3ould be lo3er5 The model is no3 closed in a simple 3ay$ follo3ing Weit&man5 The production function is given by 1/2 Yt P F1Kt , At25
This ma#es the simplest possible assumption$ that there is no difference in the impact of different types of #no3ledge in production5 Indeed$ the relative importance of IT versus #no3ledge of chemical and mechanical processes is not clear@cut5 The savings=investment e4uations are given by 1-2 1.2 1J2 Kt 1 @ Kt P sYt$ J1t P 1Yt$ J2t P 2Yt5
The first of these is the standard neoclassical gro3th model savings assumption5 The last t3o of these e6tend this proportional rate idea to the resources devoted to BND5 I close 3ith a discussion of the implications for gro3th5 Weit&man sho3s that long run gro3th in his model is at the rate F1s , !c"2$ 3here c" / lim t4 lim H4 Ht-118=H2$ and is interpreted as the limiting unit cost of BND5 In the e6tension I have suggested$ I 3ould conCecture that a modified version of this result holds5 The real interest 3ould lie in parametri&ing the function and seeing ho3 this affects the gro3th rate$ but this is beyond my current scope5 I discuss the empirical implications of the theory outlined here in the ne6t section5
&ar'et Efficiency( "overnance and Development

The final aspect of ITs specialness e6plored here is that of efficiency gains and broader economic impacts5 Static gains from the use of IT come from more efficient use of scarce resources$ allo3ing higher consumption in the present: they are independent of any impact on gro3th5 Benefits that are measurable as increased mar#et@based economic activity$ and hence sho3 up in ?"* statistics$ are not the only component of development5 Development can include improvements in the capabilities of the population$ independently of any direct or indirect economic impact5 7inimum levels of education$ health and nutrition are perhaps the most important e6amples of such capabilities5 The ability to participate in democratic decision@ma#ing can also fall into this category5 'f course$ broad@based improvements in the capabilities of a population can have positive impacts on long@run economic 3ell being$ but this is not a necessary condition for desiring such improvements5 The role of IT in effecting improvements along non@economic dimensions must also be considered$ though this role may be harder to 4uantify5 Digital IT involves the electronic processing$ storage and communication of information$ 3here anything that can be represented in digital form is included in the term Linformation5 Information goods typically have the characteristic that one persons use does not reduce their availability for another person5 Thus$ a message or 3eather ne3s can be vie3ed by many people$ simultaneously or se4uentially5 Depending on the content of the ne3s or message$ different people may place different valuations on the information5 'nly friends and relatives may be interested in a personal message$ all farmers in a district may be interested in local 3eather ne3s$ and so on5 The ability to share information among users can impact the feasibility of providing it on a commercial basis5 IT dramatically increases shareability of information$ and this affects the economics of private provision of information goods and services5
Information goods may also be provided by the government5 The potential rationale for government provision e6ists for any goods that are shareable$ and 3here users cannot be e6cluded5 The classic e6ample is national defense$ but such goods may also be local in character$ such as public par#s or la3 and order5 'f course many local shareable goods can be provided e6clusively$ in 3hich case private provision is a feasible alternative 1in a club@li#e arrangement25 In such cases$ government provision may be Custified more on e4uity grounds than on the basis of failure of private provision5 In some cases$ government financing through ta6es or statutory user charges can be combined 3ith outsourcing of delivery to private providers to achieve both e4uity and efficiency goals5 'ften$ private provision is feasible$ but neglects the spillover benefits that it creates$ in 3hich case government subsidi&ation may be socially beneficial5 0or e6ample$ primary education has private economic benefits that people are 3illing to pay for$ but it can also have substantial non@economic benefits to the individual and to others in the society 1improved understanding$ ability to ma#e sound Cudgments$ political decision@ma#ing capacity$ and so on25 +dditional roles of government that are important to bring out are in redistribution to achieve e4uity obCectives$ and in regulation of private activities through licensing and certification5 In both cases$ the government also uses economic resources$ and IT has a potential role in increasing the efficiency of government5 0or both government and private provision$ one of digital ITs main direct benefits is in increasing efficiency by economi&ing on resource use5 Information that 3ould other3ise be conveyed through face@to@face contact$ post$ courier$ print delivery$ telegraph or telephone may instead be communicated in digital electronic form via the Internet5 Efficiency gains from Internet use are not automatic: the telephone$ in particular$ is an efficient means of communication for many types of information5 IT also re4uires ne3 investment$ so the benefits of trips$ time and paper saved must be 3eighed against the costs of installing and maintaining the ne3 infrastructure5 Efficiency benefits of IT are not restricted to the communication itself5 IT can improve the efficiency of the telephone net3or#$ and it can ma#e it possible to trac# and analy&e communications5 Word processing$ maintaining accounts$ inventory management$ and other such activities that may not re4uire long@distance communications are also made more efficient by IT5 E6perience 3ith IT in developed countries$ and the %S in particular$ suggests that information e6change related to the completion of mar#et transactions is especially valuable5 The ability of digital IT@based communications 1combined 3ith storage and processing2 to bring together buyers and sellers more effectively represents maCor potential gains5 These gains can come about through lo3er search costs$ better matching of buyers and sellers$ and even the creation of ne3 mar#ets5 The successes of auction 3ebsites and employment 3ebsites in the %S illustrate these gains5 In the rural Indian conte6t$ farmers selling their crops and buying inputs$ parents see#ing matrimonial alliances for their children$ and Cob see#ers are all potential users of Internet@based matching services5 0armers and fishermen can receive 3eather forecasts$ mar#et price 4uotes$ advice on farming practices$ and specific training5 IT can also reduce transactions costs for completing transactions$ such as mil# delivery by farmers to cooperatives$ or micro@ credit allocation and monitoring5
Efficiency gains of IT can also come about through the enabling of ne3 goods and services5 In many cases$ the ne3 good is related to something available earlier$ but is presented in a form that reduces costs and e6pands the si&e of the mar#et5 0or e6ample$ recorded music is a mass@consumption item$ 3hereas only a small minority of the population could afford or have access to live performances by the highest 4uality musicians5 Educational material is another e6ample 3here recording and duplication can replace more e6pensive$ s#illed@labor@intensive alternatives for delivery5 The possibilities for interactivity 3ith digital IT@based educational materials illustrate the advantages of digital IT over older technologies based only on recording and duplication5 Interactivity also implies personali&ation$ in that an individual can select the precise content that he or she 3ishes to see5 This feature also distinguishes IT@based content from 3hat 3as available through previous technologies5 0inally$ the sheer volume of information that is accessible through IT is much greater than before: this also allo3s ne3 #inds of services to be provided at a cost that is affordable to larger segments of the population5 ?overnance is 3ell recogni&ed as an area 3here IT can have a positive impact 1e5g5$ Ouibria and Tschang$ ())825 There are t3o broad classes of uses of IT for improved government functioning5 0irst$ bac#@office procedures can be made more efficient$ so that internal record #eeping$ flo3s of information$ and trac#ing of decisions and performance can be improved5 Second$ 3hen some basic information is stored in digital form$ it provides the opportunity for easier access to that information by citi&ens5 The simplest e6amples are e@mailing re4uests or complaints$ chec#ing regulations on a 3eb page$ or printing out forms from the 3eb so that a trip to pic# up the forms from a physical office can be avoided5 7ore complicated possibilities are chec#ing actual records$ such as land o3nership or transactions5 Still more complicated are cases 3here information is submitted electronically by the citi&en$ for government action or response5 The use of IT can increase transparency and accountability$ simply by re4uiring information$ such as basic complaints$ to be logged completely and systematically5 While successful e6amples of direct implementation of Le@governance initiatives e6ist$ there is also an alternative5 This comes from recogni&ing the fact that citi&ens typically incur private costs 1often substantial2 in availing of government@provided services5 If the use of IT can reduce such costs$ even lo3@income individuals may be 3illing to pay at least some fraction of the cost savings$ and there is scope for private provision of intermediate services that reduce the cost of access to government5 'f course$ this idea is not specific to IT: private intermediaries already help in filling out forms$ getting access$ and so on5 'ne difference that IT can ma#e is in reducing costs even further$ often by an order of magnitude5 In broad terms 1as is also the case 3ith electronic mar#etplaces and Cob@matching boards2$ IT changes the scope and nature of intermediation5
3. Is IT Special in Practice?
In the previous section$ I considered various theoretical reasons 3hy IT might have a special role to play in the process of gro3th and development for countries such as India5 I no3 turn to an e6amination of IT in Indias recent development e6perience in light of these theories5 I begin 3ith a brief discussion of the recombinant gro3th model in practice5 The model is highly styli&ed$ and is therefore difficult to directly relate to e6perience5 Do3ever$ I 3ill offer a couple
8)
of observations5 0irst$ the success of regions such as Silicon Ralley and Bangalore is consistent 3ith the model in the follo3ing 3ay5 In such regions$ the pro6imity and mobility of s#illed labor imply that potential ideas are combined and brought to fruition 3ith higher success rates than else3here$ even comparing across different locations 3ithin the same country5 In terms of the model$ this can be interpreted as a higher or 5 The second observation focuses on 5 The %nited States has been a leader in IT 1broadly construed ! in the model$ a high stoc# of A1t2$ 3ith related high rates of overall innovation 1e4uations 1(2 and 1:2 above2$ 3hile India has lagged in the use of broader IT$ particularly modern communication technologies such as the telephone and television$ 3hich 3ere treated as lu6uries by government policy$ and severely constrained in their gro3th5 The model suggests that such policies 3ould result in a lo3er $ and hence lo3er innovation5 In both cases$ these statements are asserted controlling for the level of income5 It seems to me that Indian policies negatively affected innovation in this basic 3ay5,
"lobal Dynamics and Comparative !dvantage

I noted earlier that the IT sector might simply have empirical characteristics that ma#e it a suitable gro3th engine at this time5 0or e6ample$ the Fapanese are said to have chosen the automobile industry for development in the 8,-)s because of its importance as a consumer durable$ its potential for gro3th 1high income elasticity2 and its use of a set of technologies$ mastery of 3hich 3ould benefit other manufacturing sectors5 IT is too broad a sector or category to provide a parallel$ but Lbusiness application soft3are services might capture 3ell the aspect of IT 3here India has had maCor success in the global mar#et$ and provide a closer parallel5 The Fapanese e6ample$ 3ith the initial s#epticism that met the countrys plan for an automobile industry$ and the t3o decades it too# to ma#e significant inroads into industriali&ed country mar#ets$ brings to mind some of the early responses to$ and e6perience of Indias soft3are sector5 'f course$ the Fapanese success in automobiles 3as driven in part by government policy$ and led by e6isting industrial firms5 Indias success in soft3are has been associated 3ith benign neglect by the government$ and the rise of ne3$ entrepreneurial firms5 Do3ever$ in both cases$ the success of the industry 3as driven by global gro3th in demand ! in one case through conscious anticipation$ in the other$ through serendipity5 To relate this to comparative advantage considerations$ the Fapanese consciously developed a comparative advantage in automobile production$8) 3hereas Indias pool of 3or#ers 3ith a particular set of soft3are and language s#ills that are valued in the international mar#et gave it an accidental comparative advantage5 Table ($ constructed from data in +rora and +threye 1())($ Table (2$ provides an indication of Indias comparative advantage in soft3are5 If one uses inde6es of value added in manufacturing and soft3are revenue as the comparators$ India is better placed in soft3are than in manufacturing vis@S@vis the %S5 Table $: %elati&e 'roducti&ity (ndices ()* + 1##
,
This statement is strengthened 3hen one considers policies that stifled competition and access to foreign innovations: see 7arCit and Singh 18,,/25 The recombinant gro3th model does not ma#e the resources devoted to BND a choice variable$ 3here it 3ould be affected by competition$ but one can e6tend the model in that direction 1'lsson and 0rey$ ())825 8) Dere one should note that predicting the pattern of production and trade of differentiated products such as automobiles does not rely on standard comparative advantage models5 "evertheless$ at an intuitive level$ the statement seems Custified5
88
Country
,anufacturing -utpu t per emplo yee 88(5. ,,5. 8)58 88J5. -/5-
,anufacturing .alue /dded per Emplo yee JJ5. JG5. /5( 88,5( :,5)
*oftware %e&enue per Employee
0inland 0rance India Ireland Israel
..5( 8(G5) J58 88(5, J,5/
Source: Constructed from figures in +rora and +threye 1())($ Table (25 'riginal data are from varied sources and those authors o3n estimates5
While India missed the boat 3ith respect to the labor@intensive manufactured e6ports that contributed to the East +sian miracle$ it may no3 be in a position to replicate this phenomenon 3ith labor@intensive soft3are services and 1even more labor@intensive2 IT@enabled services$ building on its apparent e6isting comparative advantage5 Even if e6ports of this nature cannot sustain earlier gro3th rates$ they can ma#e a substantial contribution5 0or e6ample$ ()I gro3th in a sector that is -I of the economy 1still 4uite a bit more than Indias current IT sector2 adds one percentage point to overall economic gro3th5 In the very short run$ therefore$ moving up the ladder of value added$ or establishing a broader hold on the value chain may not be a critical issue5 Indias e6perience in the 8,,)s already bears out the specialness of IT from the perspective of the spectacular e6port gro3th that occurred$ and one can interpret it as a fortuitous combination of global dynamics and comparative advantage5 Do3ever$ there are t3o reasons for not stopping here5 The first is a defensive one: greater automation of soft3are development and the emergence of other lo3@labor cost sources of competing IT s#ills may lead to e6port gro3th falling or even reversing$ as global demand for Indian programming services slo3s or falls due to automation5 The second reason is that it may be possible to do even better5 +s both real e6perience and endogenous gro3th models suggest$ comparative advantage is not fi6ed$ and countries can move to3ard producing higher value@ added goods and services as they gro3$ 3ith favorable conse4uences for long run gro3th5 88 +pplying endogenous gro3th models is not an automatic proposition$ since results are sensitive to assumptions5 0or e6ample$ learning by doing in manufacturing 1including soft3are production in this abstract conception2 gives different outcomes than the assumption of a separate BND sector that competes 3ith manufacturing for s#illed labor5 "evertheless$ upgradation is something to consider$ and I return to it in the ne6t section5
88
In addition to the Fapanese automobile e6ample$ one can note that several East +sian countries began as mainly assemblers of sophisticated components produced else3here$ and e6tended their presence in the value chain bac#3ard as they learned by doing5
8(
Complementarities( )in'ages and Spillovers

To the e6tent that IT can have significant effects on the efficiency of operations in other industries$ there are strong complementarities bet3een the IT sector and the rest of the economy5 E6amples of areas 3here increased efficiency may be possible include accounting$ procurement$ inventory management$ and production operations5 These are all e6amples of <for3ard lin#ages>$ since IT adoption has positive impacts on the operations of a range of industries5 8( This is$ of course$ the standard argument in the %S for the virtues of the <ne3 economy> based on IT5 To connect these observations to the usual e@commerce Cargon$ I note that these benefits are situated in the B(B arena5 The difference for India is that it is starting from a much lo3er level of IT@adoption$ and the potential gains may be higher5 In fact$ developing countries have the opportunity to leapfrog over older$ more e6pensive approaches such as Electronic Data Interchange$ 3hich represent significant legacy investments in countries such as the %S5 7iller 1())82 surveys the potential for B(B e@commerce in India5 De gives the e6ample of Beliance Industries$ 3hich$ though still 4uite diversified$ is no3 heavily into production and distribution of chemicals5 'f the companys ()$)))@plus customers in India$ about :$))) are maCor buyers$ accounting for over three 4uarters of total sales5 These maCor customers are electronically lin#ed to a Beliance@controlled Internet@based mar#et e6change5 %sing leased@ lines$ customers can process orders$ and Beliance can communicate dispatching details$ better manage inventory$ carry out invoicing$ and provide customer support5 %sing this system$ Beliance has reduced receivables from :8) days to ,) days5 ?eneral cost improvements have come from an overall tightening and acceleration of processing 3ithin the company$ and bet3een the firm and its customers5 The speed of order delivery has greatly improved$ and inventories reduced5 + shift from leased lines to the Internet 3ill provide further cost savings5 There are not too many similar Indian e6amples$ but the e6isting ones do illustrate the possibilities5 In the conte6t of models of complementarities$ it is also important to recogni&e that the effects of IT use are not Cust in terms of cost savings5 IT implementation may enhance the 4uality of service beyond anything that is feasible through other methods$ thus effectively enabling the offering of Lne3 products and services5 0urthermore$ depending on 3ho the customers are$ the benefits may accrue to a broad cross@section of the population5 Improved efficiency in the stoc# mar#et as a result of automated trading and settlement may benefit a small section of the population 1though the indirect benefits of greater capital mar#et efficiency may be broader25 Similarly$ Internet ban#ing is mainly targeted at 3ell@off and upper@middle class individuals58: Do3ever$ the use of IT in rural ban#ing and micro finance can impact a much broader cross@section of the population5 The evidence of pilot schemes such as the SAS InfoTech Smart
8(
+lternatively$ the effect of the gro3th of the IT sector on the provision of technical education 3ould be an e6ample of a <bac#3ard lin#age>5 In either case$ there is a complementarity at 3or#5 8: 7iller 1())82 discusses the e6amples of DD0C ban# and ICICI ban#5 The former uses IT in several 3ays: for internal communications and data transfer$ to reach out to retail customers$ and as a clearinghouse for stoc#bro#ers5 "+SSC'7 1())(2 identifies the energy sector as one 3here IT firms can find domestic opportunities as the sector moves to3ard deregulation5 Do3ever$ privati&ation has become stalled in this sector 1Singh and Srinivasan$ ())(2$ and this may again slo3 IT adoption5
8:
Card proCect is encouraging5 Dandheld computers and smart cards can substantially reduce the costs of ma#ing loans$ as 3ell as monitoring them5 Beducing these transactions costs may turn out to be critical for the scalability and sustainability of micro finance schemes5 The success of proCects such as the SAS smart card 3ill depend$ in turn$ on the availability of appropriate$ lo3@ cost hard3are$ such as the Simputer$ an indigenously developed hand@held computer 3ith an integrated smart card reader=3riter$ illustrating another aspect of complementarities5 What ma#es digital IT special in these types of cases is its lo3 cost and fle6ibility$ as the result of t3o decades of very rapid innovation5 The e6amples considered so far are either scattered instances of IT use$ or are proCects that have yet to ta#e off5 Dence$ in practice$ IT in India has not reali&ed the potential for complementarities or lin#ages58/ The general problem lies 3ith the nature of the domestic mar#et for IT products and services$ 3hich 3hile not insubstantial$ has not played the full role it might have5 Its gro3th has been relatively slo3$ despite some good years5 The use of IT in Indian business is spotty5 'ne can argue that there is no problem: to the e6tent that e6ports provide much higher profit potential$ soft3are firms rationally concentrate on them rather than domestic sales5 This is partly true$ but it is not the 3hole story5 The nature of information goods in general is that they involve high fi6ed costs of production and lo3 marginal costs5 While customi&ation and service provision mitigate this property$ they do not negate it5 Beputation and e6perience effects$ on the other hand$ enhance the importance of economies of scale and scope5 Dence it is important for Indian soft3are firms to compete simultaneously in domestic and e6port mar#ets$ in order to ta#e advantage of these economies5 This is true even though the product@service mi6 that is being sold in different mar#ets is going to be some3hat different5 Since Indian soft3are firms can compete successfully abroad$ they should also be able to succeed in their o3n bac#yard5 8- In fact$ they have advantages in the domestic mar#et$ #no3ing their customers better$ and being closer to them5 Desai 1())(a2 emphasi&es another important aspect of the domestic mar#et$ as an arena for learning by doing5 +ccording to him$ the lac# of sufficient opportunities for using local mar#ets as a proving ground for soft3are hurts Indian firms vis@S@vis their competitors in the %S$ Israel$ or other countries5 In his vie3$ the domestic mar#et does not necessarily need to be large$ but must be challenging and demanding5 I 3ould add that si&e can only help: I 3ill return to these issues in the ne6t t3o sections5 The role of the government in supporting the rise of a Lchallenging and demanding domestic mar#et in India has been mi6ed5 In earlier reports$ "+SSC'7 noted the strong gro3th in domestic mar#et in 8,,,@())8 3as partly fueled by central and state government IT purchases$ for internal computeri&ation as 3ell as e@governance initiatives5 This effect appears to have petered out in ())8@)(5 Smaller IT firms 1in personal intervie3s2 e6pressed frustration that government procurement did not give preference to domestic suppliers5 In the %S and Europe$ these #inds of preferences have helped domestic firms to thrive in some circumstances$ though they may ultimately be inimical to competition$ innovation$ and hence long@run gro3th 1Tschang$ ())8$ p5 (.25 ?iven the governments o3n precarious fiscal position$ creating a
8/
Aumar 1()))2 does provide some evidence of for3ard lin#ages in the informal IT sector itself$ 3here the provision of IT maintenance$ data entry and customi&ation services for domestic users are developing5 De estimates the Cobs created in this 3ay at over half a million5 8The reverse need not be true$ as +rora and +threye 1())(2 emphasi&e in their discussion
8/
favorable environment for IT use in industry may be more important than direct government purchases5 In ay case$ the domestic situation is not static5 Bright spots already e6ist$ as in the case of accounting and inventory soft3are5 T3o strong domestic competitors e6ist here5 'ne is Bangalore@based Tally Solutions$ a private company that ma#es Tally accounting soft3are5 I do not have data on sales$ but my field3or# in *unCab suggested that Tally is a mar#et leader for small business accounting soft3are$ and that even small shop#eepers are interested in ac4uiring it and learning to use it5 0or larger businesses$ Tally has recently introduced a server version$ 3hich fits the needs of businesses 3ith multiple locations or offices5 The second product is E5T5 from Tata Consultancy Services 1TCS2$ 3hich is the oldest of Indias IT services companies$ currently the largest e6porter$ and a firm 3ith a substantial presence in the domestic business soft3are mar#et5 The t3o companies products are priced similarly$ and in each case one can find all the features of distribution channels$ after@sales support$ mar#eting$ and product versioning that e6ist in competitive %S mar#ets58. Dard3are may offer additional opportunities to Indian IT firms in the domestic mar#et$ and there are again important complementarities to consider5 9o3 cost hard3are specifically for the Indian mar#et may speed the adoption of lo3@end versions of soft3are such as Tally or E5T5 In developed countries$ the establishment of the *C mar#et too# place before the Internet too# off5 In a good e6ample of complementarities$ ho3ever$ the gro3th of the Internet has increased the demand for *Cs and other access devices5 Internet access is probably the most attractive use for many potential consumers of IT in India but Internet penetration may not go far enough 3ith hard3are designed for developed countries5 Internet #ios#s$ 3ith shared access$ are a solution that has emerged for urban and rural areas$ 3ith the start@up cost for a very basic #ios# having been brought do3n to under H8)))5 While Internet use is beginning to gro3 rapidly$ the number of subscribers remains minuscule$ at belo3 ( million5 The main reasons for this bac#3ardness have been the government long@ standing monopoly$ through RS"9$ of the countrys Internet gate3ays$ as 3ell as the general poor state and high cost of the telecoms infrastructure5 While the situation is no3 changing$ high costs of using the net3or#$ and its poor 4uality$ have represented a maCor impediment to reali&ing possible lin#ages bet3een IT and the rest of the economy5 8J 7odels of complementarities typically emphasi&e pecuniary e6ternalities5 +rora and +threye 1())(2$ on the other hand$ suggest that there are strong direct spillovers from the IT sector to other services industries$ in the form of improved managerial practices that have developed in IT and are easily applied to a range of services5 In fact$ they argue that soft3are for
8.
It is 3orth recalling that RisiCalc$ the first spreadsheet program$ 3as the <#iller app> that helped drive the adoption of personal computers5 Small business accounting soft3are may play a similar role for IT adoption in India5 8J Desai 1())(a2 is characteristically bold and forthright on this point5 De says$ <The real use of internet is in business communication5 +nd for that use$ fast and reliable telecommunication is the #ey5 If this 3ere understood$ the government 3ould Uprovide a free broadband bac#bone to the entire country5> While Desai dismisses consumer use$ such a bac#bone 3ould presumably also allo3 a dramatic e6pansion of consumer use as 3ell5 0urthermore$ as %S e6perience has sho3n$ lin#ing businesses and consumers efficiently is important for a host of IT applications5
8-
e6port by itself has fe3 other lin#ages5 + particular e6ample of spillovers or diffusion of management practices$ emphasi&ed by +rora and +threye$ has been in the case of ITES5 Aapur and Bamamurti 1())82 argue for even broader impacts$ e6tending to industries such as biotech$ chemicals$ media and entertainment$ and construction all re4uire #no3ledge services that go beyond the basic definition of IT@enabled services$ and have all benefited from the change in management approach 3rought first 3ithin the IT sector5 0inally$ I discuss e6pectations$ 3hich can have a positive or negative role in determining the nature of e4uilibrium 3here complementarities matter5 The argument of Aapur 1())(2$ that Indias success in soft3are e6ports has increased the confidence of Indians$ may also be couched in terms of a positive shift in e6pectations$ helping to overcome a potential coordination failure5 7ore broadly$ Aapur gives the effect of ITs success on attitudes in India pride of place among the sectors impacts: <the success of IT$ more than any other change$ has helped legitimi&e capitalism in a country 3hose intellectuals have long harbored suspicion of mar#ets and the private sector5> 1p5 8):25 De goes on to discuss changes in attitudes to entrepreneurship$ business culture$ and reputational effects$ 3hich can include both hori&ontal and vertical impacts on e6pectations of entrepreneurs and customers in other #no3ledge@based sectors5 Thus$ in Aapurs vie3$ these Lindirect effects may be 4uite pervasive$ more so than the technology itself5
Efficiency and Broad*Based Development

In the previous section$ I discussed some of the potential improvements in mar#et and government efficiency$ and possible implications for development5 'ur discussion of lin#ages has brought out some of the actual and potential gains$ ranging from large corporations such as Beliance to micro finance schemes5 Dere I add some additional illustrations of the role of IT in improving efficiency5 +s an e6ample of information processing enhancing efficiency in agricultural mar#ets$ Cha#ravarty 1()))2 describes IT use at mil# collection centers in cooperative dairies5 This permits faster and safer testing$ better 4uality control$ 4uic#er and more accurate payments to farmers$ and time savings for farmers in their deliveries5 The falling cost of information processing means that such success stories can potentially be 3idely replicated5 +nother efficiency gain is in the communication of information$ 3here the e6amples are many5 0armers and fishermen can receive 3eather forecasts$ mar#et price 4uotes$ advice on farming practices$ and specific training5 'ffers to buy or sell livestoc#$ or other t3o@3ay communications are also possible5 Some of this information dissemination and e6change is best done through voice media such as fi6ed or mobile telephones$ 3hile other types re4uire the capabilities of the Internet5 8G Some evidence suggests$ not surprisingly$ that richer farmers and fishermen$ as 3ell as middlemen$ are faster adopters of such technologies 1 The Economist$ ())8a2$ but falling access costs 3ill broaden information access and its benefits5 In some cases$ corporations dealing in agricultural products have moved to provide their suppliers 3ith Internet access to improve mar#et efficiency$ production efficiency$ and even bargaining po3er5 The most significant e6ample is ITC$ 3ith its e-choupals5 Their annual report 1ITC ())(2 states:
8G
Eggleston et al 1())(2 provide some 4uantitative evidence for the mar#et efficiency effects of improved communications and information transfer$ using data from rural China5
8.
*roCect Le@ChoupalUlin#s the Indian farmer 3ith domestic and international mar#ets UIt already reaches out to more than half a million farmers to provide 3eb@enabled real@time information on the 3eather$ best farming practices and commodity prices5 Through virtual clustering$ these Le@Choupals are conferring the po3er of scale on even the smallest of individual farmers5 ThisUe@ infrastructure 3ill dramatically enhance efficiency in the purchase and sale of agri@inputs and farm produce$ 3ith direct benefits to the farmer5 JJ) Le@Choupals are already operational$ covering /$-)) villages across four states in India5 Even if one allo3s for the possibility of e6aggeration in this statement$ and even if one is not satisfied 3ith the distribution of bargaining po3er and benefits bet3een a large corporation and small farmers$ the scale of 3hat has been implemented so far is evidence of the efficiency benefits of IT in Indias agricultural sector5 +nother area of impact involves communication of information in a more fundamental 3ay5 IT@based delivery mechanisms can overcome traditional barriers to 3idespread delivery of education at all levels5 Completely aside from the importance of IT training for the gro3th of IT e6ports$ even basic education may be enhanced by the use of IT5 While it may seem parado6ical that delivery of basic education should rely on Lhigh tech$ there is nothing ne3 in this5 The radio and television have been very successful distance@education media in the past$ and computers and the Internet offer several advantages$ in terms of the potential for interactivity$ customi&ation and sheer volume of material5 ?iven the poor state of basic education$ 8, 3hile improved incentives for teachers and school administrators 1either in the public or private sector2 3ill help$ technology can play an important complementary and even substitutive role5 0or e6ample$ T+B+haat 1a semi@commercial subsidiary of an "?'2$ in attempting to develop a net3or# of rural Internet centers in a district in *unCab$ found that even in the absence of reliable connectivity that 3ould allo3 access to a variety of Internet@based services$ it 3as able to tap into an underserved mar#et for education in the vernacular medium in the basics of computers and the English language5() The T+B+haat e6ample illustrates several general points5 0irst$ in all attempts to introduce IT to rural India in a manner that promotes development$ sustainability is a #ey issue5 The T+B+haat franchisee model offers important promise in this regard 3ith respect to incentives and scalability$ though there have been difficulties in implementation5 Second$ the e6periment validates the idea that IT costs have come do3n sufficiently to ma#e rural IT services financially viable5 Third$ the issue of complementarities$ both technological and pecuniary$ raises its head again5 'ne maCor roadbloc# for T+B+haat has been the poor 4uality of e6isting telecoms infrastructure5 This has severely limited the scope of services that its franchisees could offer$(8 and is an e6ample of government failure5 'n the other hand$ the provision of complementary inputs such as financing and physical infrastructure$ through subsidi&ed loans
8,
See Dre&e and ?a&dar$ 18,,J2 and the *B'BE report 18,,,25 'ne can also ma#e a case for access to IT based on broader notions of development$ such as Sen 18,,,25 That the poorest of the poor can benefit is borne out by instances such as the famous in the hole@in@the@3all@computer 1http:==3335niitholeinthe3all5com=home5htm25 () See Aaushi# and Singh 1())(2 for more detail on the T+B+haat effort5 T+B+haat is also offering speciali&ed courses in using Tally accounting soft3are5 The demand for these courses in small to3ns indicates the depth of penetration of the soft3are5
8J
from nationali&ed ban#s and the use of local government buildings$ have been important in reducing startup as 3ell as operating costs5 The most important complementarity emerged 3hen the *unCab Technical %niversity 1*T%2 4uic#ly piggybac#ed on T+B+haats efforts$ enhancing the franchisees initial financial viability through its o3n offerings of college@level IT education5(( This e6ample suggests ho3 the #inds of coordination failure identified in the 3or# of 7atsuyama and others may be overcome5 There have been numerous e6amples of successful pilot e@governance programs in India5 These include: Computer@aided registration of land deeds and stamp duties in +ndhra *radesh$ reducing reliance on bro#ers and possibilities for corruption Computeri&ation of rural local government offices in +ndhra *radesh for delivery of statutory certificates of identity and landholdings$ substantially reducing delays(: Computeri&ed chec#points for local entry ta6es in ?uCarat$ 3ith data automatically sent to a central database$ reducing opportunities for local corruption Consolidated bill payment sites in Aerala$ allo3ing citi&ens to pay bills under 8J different categories in one place$ from electricity to university fees E@mail re4uests for repairs to basic rural infrastructure such as hand pumps$ reducing reliance on erratic visits of government functionaries(/ +s in the broader case of using the Internet for communications and transactions$ sustainability of e@governance initiatives is a significant issue5 Since governments at all levels are financially strapped$ the initial investments and ongoing e6penditures for IT@based service delivery may act as a barrier to adoption as 3ell as to long@run sustainability5 Do3ever$ my field3or# suggests that a franchise model can be successful here5 9o3@cost rural Internet #ios#s$ a tiered franchising model$ and a suite of basic government access services for 3hich users are 3illing to pay$ are #ey components of 3hat Drishtee$ a spin@off of the ?yandoot proCect in 7adhya *radesh$ is implementing in several parts of India5 (- Cooperation of local governments and subsidi&ed financing have been important elements for Drishtee$ as in the case of T+B+haat$ 3ith the former being obviously critical in the case of Drishtee5 In terms of the discussion in the previous section$ the Drishtee model can increase transparency and accountability$ simply by re4uiring information$ such as basic complaints$ to be logged and aggregated completely and systematically outside the government5 In this respect$ the use of a non@governmental intermediary such as Drishtee may have advantages over purely internal government initiatives$ beyond that of financial viability5
(8
+n e6ample from field research in Bathinda district of *unCab in December ())8 illustrates: a farmer told us he had ta#en computer lessons at the T+B+haat #ios#$ bought a home computer$ and signed an Internet service contract so that he could e6change email 3ith his brother in Toronto$ Canada$ as 3ell as loo# for information on agricultural practices5 +ll three IT@related products and services depended on basic telecom availability5 See also *rahalad and Dart 1())(25 (( Subse4uently$ T+B+haat has chosen to forbid its franchisees from offering *T% courses$ in an attempt to solidify its brand and 4uality control5 Whether this is the optimal strategy re4uires a separate analysis5 (: These t3o e6amples are from Bhatnagar and Sch3are 1()))2$ 3hich also provides broader e6amples$ including ones driven more by the efforts of "?'s than governments5 (/ These three e6amples are from India Today 1()))2$ 3hich also lists several other similar proCects5 (0urther details of Drishtees efforts are in Aaushi# and Singh 1())(25 'ur Drishtee field3or# has been in Sirsa District of Daryana5
8G
It is important to note that once Internet access is available$ its benefits are not restricted to e@governance5 Individuals can obtain mar#et information$ training$ Cob information$ advice on farming techni4ues$ and so on$ as discussed earlier in this section5 This is certainly part of Drishtees long run model5 Dere also$ a commercial approach may provide more fle6ibility5 0or e6ample$ in Faipur district in BaCasthan$ Drishtee has piggybac#ed on the e6pansion of a fiber optic company$ and combined its Internet #ios#s 3ith cable TR franchises for greater and more immediate financial viability5
4. Opportunities and Constraints

Indias strength has been in soft3are rather than hard3are$ for reasons I have discussed5 I have also discussed the different routes that Indias soft3are industry can ta#e: more of the same$ moving up into higher value@added activities$ and moving out into related areas such as ITES5 These opportunities are not mutually e6clusive$ and$ given the right policy environment 1Section -2$ Indias IT industry can pursue all of them5 +s Desai 1())(c2 puts it$ <They VIndian IT firmsW do not need adviceE they are scanning the mar#et and 3ill ta#e informed decisions5> 0or e6ample$ the annual #ata$uest maga&ine survey 1#ata$uest$ ())(2 provides details of ho3 the large firms$ in particular$ have tried to develop ne3 lines of business and consolidate by ac4uiring smaller competitors5 In all these cases$ of course$ reputation matters5(.
ITES
ITES currently are the poster boy for the possibilities that e6ist for Indias IT sector5 Their rapid gro3th is not Cust fueled by call centers$ 3hich re4uire IT infrastructure$ but other3ise a different set of Lsoft s#ills5 Do3ever$ I have noted in the introduction that business process outsourcing represents a significant chun# of Indias ITES$ and this involves higher@level s#ills5 The list of ITES segments constructed by "+SSC'7 also displays ample scope for 3or# that is 3ell beyond any IT@version of s3eatshops 1Table (25 +nother method of organi&ing the categories comes from Baman Boy$ then CE' of Spectramind 1since ac4uired by Wipro2$ 3ho suggests five categories of Ltele3or#ing: data entry and conversion$ rule@set processing$ problem@solving$ direct customer interaction and e6pert L#no3ledge services$ ran#ed in terms of increasing sophistication and value added 1 The Economist$ ())8$ p5 .)25 "ote that in this categori&ation$ direct customer interaction is high on the list$ and reflects the comple6ity of this often@maligned category 1also reflected in the difficulties of CB7 soft3are in ma#ing significant inroads25 In practice$ even 3ithin a single one of the 8) service types listed in Table ($ there is room for speciali&ation and focus5 0or e6ample$ Da#sh 1Table :2 has a ,)I concentration on customer service$ 3hereas DC9 0rontline 1a division of DC92 is 8))I focused on technical support 1#ata$uest$ ())($ p5 8:/25 The high gro3th proCections for ITES depend on government policy 1Section -2 for achievement$ as 3ell as sufficient managerial and mar#eting e6pertise5 Do3ever$ the fact that
(.
BanerCee and Duflo 1()))2 sho3 that reputation effects are 4uite important for Indian soft3are e6porters5 +rora et al 1()))2 and +rora and +threye 1())(2 discuss Indian firms efforts to signal 4uality by hiring engineers$ and through international certification of their processes5 They document the positive impact of the latter on value added per employee5
8,
India currently serves only )5-I of the global mar#et by value suggests that the scope for gro3th is indeed high$ even in the face of competition from other developing countries5 Table $: (T0Enabled *er&ices Types

Customer Interaction Services Business *rocess 'utsourcing = 7anagementE Bac# 'ffice 'perations Insurance Claims *rocessing 7edical Transcription 9egal Databases Digital Content 'nline Education Data Digiti&ation = ?IS *ayroll = DB Services Web site Services
Source: http:==3335nasscom5org=itKindustry=spectrum5asp
Table 1: (T0Enabled *er&ices Companies (ndian T2ird 'arty (TE* Companies (Call Center 3 4'e6l services Spectramind ?T9 9td Da#sh Tracmail 0irstring Epicentre (/6J Customer5com Customerasset 1ICICI 'nesource2 Brigade Corporation
5(*6 ,ultimedia6 Engineering 3 7esign *er&ices

*entamedia ?raphics Bolta India Infotech Enterprises ?eometric Soft3are B7SI
Leading Capti&e %emote *er&ices Companies (alp2abetical list

+merican E6press +6a Business Bechtel Convergys Dell Computer Delphi +utomotive e@0unds International e?ain Communications eServe Intl 0idelity 0ord ?alileo ?E Capital Dealthscribe D* DSBC 7cAinsey N Co5 Sallie 7ae Standard Chartered World Ban# World "et3or# Services
Source: "+SSC'7 1())(2
+ard%are
Despite Indias past 3ea#ness in hard3are manufacturing$ hard3are still provides opportunities5 The design of hard3are involves the development and use of appropriate soft3are code$ and value has tended to shift to design activities as production has become increasingly commoditi&ed5 India has already established some presence in areas such as circuit design5 Do3ever$ hard3are assembly should not be dismissed5 The e6ample of firms li#e Dell and Cisco is useful here5 Dell outsources most$ if not all$ of its component manufacturing5 It is$ in fact$ an e6tremely sophisticated assembler5 Its value creation is based on organi&ing this assembly as efficiently as possible$ doing so on demand$ and #eeping its inventories absolutely minimal5 Strong customer service plus management of communications and logistics at both ends of the ()
value chain are also #eys to Dells success5 Dells positioning to ta#e advantage of strengths in infrastructure and closeness to a gro3ing customer mar#et is an important lesson for India5 The possibility of designing and building lo3er@cost hard3are in India may represent an opportunity in niche mar#ets5 I have mentioned the Simputer5 +nother e6ample is lo3@cost Internet and telecom access devices$ as envisaged by n9ogue 1a commercial spinoff from an IIT Chennai research group25 "ot all components have to be built in@house5 What is essential is designing products for the under@served domestic mar#et$ and managing the entire value chain as efficiently as possible5 7anagement and infrastructure are the #ey inputs that are re4uired5 In some cases$ including consulting as 3ell as IT@enabled services$ multinational firms have rela6ed some of the managerial constraints through their o3n entry$ importing managers as 3ell as training local ones5 +s in any industry$ the availability of ade4uate supplies of inputs is critical for the gro3th of Indias IT sector5 7uch of the caution about the prospects for Indias IT industry has been focused on potential bottlenec#s in the supply of s#ills$ and the 4uality of the infrastructure5 I add financial constraints to this combination$ and discuss each of these briefly5
S'ills
+ maCor reason for the success of Indias soft3are industry is the large supply of labor 3ith some IT s#ills5 India graduates perhaps about 8/)$))) engineers a year 1())(@): estimates2$ second only to the %S 3orld3ide5(J "ot all these engineers go into the IT industry$ and not all IT professionals have engineering or computer science 4ualifications5 'nce one adCusts for these factors$ the estimated number of ne3 IT professionals is currently about 8))$))) per year5 Indias stoc# of IT professionals is estimated at about -()$))) 1())8@)(2$ so that IT industry revenues per IT professional 1assuming that all of them 3or# in the industry$ 3hich is unli#ely2 are about H(-$)))5(G *roCections imply IT industry revenues 3ill increase several fold over the ne6t fe3 years5 Some of this gro3th 3ill be due to increases in revenue per IT professional$ but the rest 3ill re4uire an increase in numbers5 To the e6tent that much of this future gro3th 3ill come in IT@enabled services$ the additional employment there may come in areas 3here different$ easier@to@ac4uire s#ills are needed5 Whether gro3th comes in revenue per employee or number of 3or#ers$ there are implications for training5 Increasing revenue per IT professional re4uires improvements in managerial and mar#eting s#ills(,$ as 3ell as the production of more highly trained IT people5 Training more people in IT re4uires investments to increase the capacity of this component of the higher education sector5 Desai 1())(d2 argues that there 3ill be enough programmers$ and that management s#ills 3ill be the bottlenec#5 In fact$ a particular mi6 of high 4uality IT education and management training may be 3hat is particularly needed5 ?iven the rapid
(J (G
These and subse4uent figures are from "+SSC'7 1())(b2$ Chapter -5 This uses H8:5- billion as the si&e of the Indian IT industry$ and is overstated to the e6tent that it e6cludes some types of employees5 +rora et al 1())8a2 construct a lo3er estimate of H8-$.)) for 8,,G@,, 1their Table 825 (, The implication is that changes in the product@service mi6 to3ard that involving higher value@added tas#s 3ould be associated 3ith these improvements$ resulting in increased productivity5 This is a complementarity argument at the level of the internal 3or#ings of the firm$ as formali&ed by in the L'@ring theory of production$ developed by Aremer 18,,:25 See also Basu 18,,J2$ Chapter (5
(8
e6pansion of regional engineering colleges and of private IT training$ :) the real need may be concentrated investment in the IITs$ 3hich represent the frontier for education in engineering5 This approach 3ould be consistent 3ith the '@ring vie3 of value creation in this sector 1footnote (,25
Infrastructure
?overnment failure in the realm of infrastructure provision has been a maCor characteristic of Indian economic development5 'f the various infrastructure constraints$ probably that of electric po3er is the most fundamental$ and the most difficult one to tac#le5 I 3ill not address it here$ because the subCect is too large$ and it is not central to my analysis$ though electric po3er is clearly necessary for an IT industry5 :8 'ther infrastructure constraints$ such as 3ater$ roads and ports$ have served as greater bottlenec#s for manufacturing5 In fact$ one of the reasons soft3are e6ports 3ere able to ta#e off in India 3as their lac# of dependence on these latter #inds of infrastructure5 The development of soft3are par#s by eager governments has helped to rela6 physical infrastructure constraints 3here they did e6ist5 Do3ever$ a severe potential constraint is the poor overall state of Indias telecom infrastructure5 The benefits of 3ell@functioning telecommunications are much broader than Cust in IT$ but the Internet and the associated IT boom have made Indias telecoms bottlenec# a greater concern5 The soft3are industry uses international data lin#s for accessing clients hard3are$ communicating by e@mail$ e6changing files among Coint development teams$ and carrying out remote diagnosis and maintenance 3or#5:( IT@enabled services use voice lines for call centers$ and data lines for transmitting electronic files bac# and forth5 Internet@based media companies also re4uire data lin#s5 +t the same time$ rapid technological change and the success of Indias IT industry are together leading to solutions5 International lin#s are an obvious area for improvement if the Indian soft3are industry is to reali&e its lofty gro3th proCections5 Belated$ but no3 rapid$ deregulation is li#ely to remove international band3idth constraints5:: Several problem areas remain$ 3hich 3ill re4uire attention5 These include the system of interconnect charges$ licensing fees and deposit re4uirements for entry$ restrictions on franchising$ band3idth allocations$ and so on5 The challenge of building a financially viable$ robust and e6tensive telecoms infrastructure still e6ists5:/ The tendency of government regulators still appears to be to over regulate$ one prominent e6ample being the re4uirement for ne3 private telecoms to meet old@style 4uotas for installing village telephones$ 3ithout ade4uate regard to efficiency or financial viability 1see Section -25 With appropriate policy adCustments$ technological progress$ including domestic innovation$ may be an important factor in removing current telecoms infrastructure constraints5
:)
See +rora and +threye 1())(2 and Aapur 1())(2 and the references therein5 The former paper emphasi&es the regional concentration of engineering colleges in India5 :8 See Dossani and Cro3 1())82 for an e6cellent survey and analysis of po3er sector reform in India5 :( See Dee#s 18,,.$ 8,,G25 :: See Singh 1())(2 for further details and additional references5 :/ T3o sources for trac#ing policy issues and broader concerns are 3335trai5gov5in$ the 3ebsite of the Telecoms Begulatory +uthority of India$ and http:==3335tenet5res5in=*apers=papers5html$ 3hich features the 3or# of the IIT@ Chennai group headed by +sho# FhunChun3ala5 The most recent of these is 3335tenet5res5in=*apers=techolo5html5 See also FhunChun3ala 1()))25
((
+sho# FhunChun3ala 1footnote :/2 gives the e6ample of cable services in India$ 3hich are priced at H( to H/ per month$ and have :-@/) million subscribers5 +t this #ind of price point$ ho3ever$ a rural telecoms operator in India cannot recover set@up costs for access$ 3hich are about HG)) using conventional technologies5 The goal of innovations by FhunChun3alas team$ therefore$ has been to bring the cost of combined Internet and voice access do3n to H())5 The latter figure 3ould ma#e access affordable to -)I of Indian households at current income levels5 Without such innovations$ government targets of increasing Indias teledensity fourfold 1from / to 8- per hundred2$ or Internet access tenfold are empty rhetoric5
,inance
+ stri#ing feature of the Indian economy pre@reform 3as its inefficient use of capital5 Belatively high savings rates 3ere associated 3ith relatively lo3 gro3th rates5 0inancial sector reform in India has focused on ma#ing the countrys organi&ed capital mar#ets more efficient5 Simple institutional improvements such as electronic trading and settlement$ guidelines for corporate governance$ and so on$ have been introduced5 Do3ever$ the nature of the financial system overall still involves Lfinancial repression$ 3ith the ban#ing sector and a large number of other financial institutions being subCect to par#ing of government and state enterprise deficits and to directed lending5:- These problems mean that substantial inefficiencies remain in the financial system5 This has negative implications for industry overall :.$ but particularly for a fast@ gro3ing sector such as IT5 0or IT start@ups in developed countries$ venture capital has been e6tremely important$ and this should be the case for India also5 While the initial lac# of a venture capital industry in India may have been positive$ in the sense that the policies to create one could be considered from scratch$ efforts to do so have tangled 3ith e6isting ma&es of financial regulations and legal restrictions$ including ta6 and corporate la35 +n important beginning 3as made by a committee on venture capital appointed by the Securities and E6change Board of India 1SEBI2$ Indias chief financial regulator5 The committees report 3as adopted by SEBI in Fune ()))$ but many of the changes re4uired are beyond SEBIs Curisdiction5:J Despite policy hurdles$ 3hich are still receiving attention$ venture capital in India is starting to ta#e off5 + government sponsored RC fund$ the "ational Renture 0und for Soft3are and IT industry 1"0SIT2$ 3as launched in December 8,,,5 States such as +ndhra *radesh$ Aarnata#a$ Delhi$ Aerala$ ?uCarat$ and Tamil "adu have also set up their o3n venture funds5 It is not clear ho3 effective government@sponsored funds can be$ since venture capital involves high ris#s that are not normally associated 3ith government activities$ and government intervention may be subCect to other incentive problems5 *utting aside these issues$ it is true that venture capital funding in Indias IT sector increased from HG) million in 8,,J@,G to over H8 billion in ())8@)(5:G If a venture capital industry can flourish$ and stoc# mar#et institutions can continue to
::.
See Singh and Srinivasan 1())(2 for a more detailed discussion in the conte6t of federalism and reform5 It is arguable that the problem of lo3 gro3th in Indias manufacturing is substantially attributable to difficulties in financing investment5 'ne aspect of this is therefore slo3 adoption of IT for internal use5 :J Important overvie3s of the issues are in Dossani and Sae& 1()))2 and Dossani and Aenney 1())825 Bafi4 Dossani 3as one of the members of the SEBI committee5 :G The data$ and other information on Indias RC environment$ can be found at http:==3335nasscom5org=artdisplay5asp catKidP.85
(:
develop$ the gro3th of Indias IT sector can be fueled$ but the problems of the rest of the financial sector still cast a shado35
5. Policy Thoughts
The overall goals of economic policy in India are standard: high gro3th together 3ith macroeconomic stability and poverty reduction5 Balancing these goals is the difficult part5 0or e6ample$ incentives for e6ports$ such as ta6 brea#s$ are designed to spur gro3th$ but may adversely affect the governments fiscal deficit5 +s 4uantitative controls have receded in importance$ such ta6@subsidy policies have become more significant policy components5 The gro3th of Indias IT sector$ and the success of the soft3are industry in particular$ has tended to s#e3 policy to3ard the industry$ 3ith targeted incentives being implemented or recommended5 Targeting incentives to the soft3are industry is not necessarily the best method to promote the industry$ nor to achieve broader goals of gro3th and human development5 *roviding implicit or e6plicit subsidies to the industry can introduce distortions$ and it involves forgoing other uses of funds$ given the severe budget constraint that the government faces5 Broader promotion of the IT sector also suffers from some of the same problems5 Investing heavily in government@sponsored IT@related training is problematic 3hen basic education in India is so poorly provided by the public sector5 *olicy goals for the IT sector might be better met by focusing on infrastructure provision$ enabling the private sector to play a role here as 3ell5 The telecoms sector is a case in point5 Broad@based gro3th of Indias IT sector 3ill depend on improving the telecoms infrastructure$ on training enough people for the sector and using them effectively and efficiently$ and ma#ing capital available for gro3th5 0or telecoms$ the regulatory frame3or# is crucial$ 3hereas for human resource development and use$ the labor la3s matter greatly5 It may also be noted that la3s that directly constrain manufacturing remain on the statute boo#s$ and adversely affect areas such as manufacturing or assembling hard3are ! the problem here is one that still affects Indian manufacturing in general5:, In India the regulatory institution for telecoms is the Telecom Begulatory +uthority of India 1TB+I2$ 3hich 3as constituted in 8,,J and given greater and clearer authority in ()))5 /) The scope of the TB+I includes establishing 4uality of service parameters$ monitoring compliance$ e6amining technology choices$ and so on5 /8 It is supposed to establish a level playing field and encourage competition$ but it has lac#ed clear authority precisely 3here it needs it the most$ in setting entry fees and some interconnection charges5 %nfortunately$ bringing 4uality of service$ technology choice$ and universal service obligations 1%S's2 into the regulatory mi6 only serve to muddy the 3aters$ and divert attention from the central tas# of enabling effective competition5
:,
I am grateful to *5D5 Aaushi# 1personal communication2 for this point ! by his count$ there are over /)) central government statutes governing manufacturing$ as 3ell as numerous state la3s5 De also notes that the soft3are industry escaped these constraints partly by not being recogni&ed by the government as an Lindustry5 /) See Dossani and 7ani#utty 1()))2 for details5 /8 See for e6ample$ the paper by 75S5 Rerma$ Chairperson of the TB+I 1Rerma$ ()))25
(/
%S's are being built into licensing deals for private service providers5 These ta#e the form of 4uantitative targets for installing rural telephones$ and funds created through a form of ta6 on basic service$ to be used for proposed subsidies for rural users5 It is not clear that numerical targets have any use at all$ 3hen licensing and interconnection fees ma#e it uneconomical for local access providers 3ith lo3er@cost technology to enter5 The distinction bet3een rural users in general$ and shared access through Internet #ios#s is crucial$ but has not been accepted by maCority of a TB+I committee that reported on the %S'5 /( 7y o3n investigation of the startup problems of T+B+haat and Drishtee suggests that a narro3ly targeted subsidy for enabling reliable telecoms access 1including solutions such as that of the IIT Chennai group2 to Internet #ios#s ma#es most sense5 Desai 1()))2 e6amines the problems of labor la3s$ using the Beport of the SubCect ?roup on Ano3ledge@Based Industries 1()))2 as his starting point5 The report calls for e6emption for the IT sector from a broad set of rules relating to labor$ including provisions relating to overtime$ 3or#ing conditions$ restrictions on contract labor$ and dismissal of 3or#ers5 Desai suggests that the main function of the labor la3s in this sector is to enable government labor inspectors to demand bribes5 De also argues for broader reform of labor la3s$ and rightly points out the potential for distortions if one sector is given an e6emption5 De also ac#no3ledges the political difficulties of more comprehensive reform5 In this case$ the IT sector may usefully serve as the thin edge of the 3edge that begins cutting do3n some of the 3orst problems 3ith Indias labor la3s$ in particular the lac# of permitted fle6ibility in contracting5 The development of ITES$ 3hich broadens the scope of this ne3 approach to 3or#ing conditions regulation$ 3ill be a litmus test of the changing role of labor la3s in India5 7y e6amination of the role of the IT sector in broad@based development also suggests the importance of the financial sector5 While it seems that large IT firms can rely on retained earnings or the stoc# and bond mar#ets for gro3th$ startups need a venture capital industry that is Cust beginning to emerge5 +s in the case of labor la3s$ one can argue that the policy environment must be geared to3ard industry in general$ and not Cust the IT sector$ or even Cust #no3ledge services5 Some of the greatest difficulties face small@scale entrepreneurs$ 3ho have been protected by reservations$ but 3ho do not necessarily have easy access to the right #inds of help they need as startups5 +gain$ my research on the e6perience of the local franchisees of T+B+haat and Drishtee suggests that the nationali&ed ban#ing sector$ 3ith its system of directed credit$ and simultaneous forced holdings of government and *S% loans$ 3hich have left ban# portfolios in bad shape$ is not 3ell placed to provide small@scale financing of this #ind5 In particular$ in the case of T+B+haat$ difficulties in obtaining startup capital from ban#s appeared to be one impediment to e6pansion of the franchising scheme$ even 3ithin a small geographic area5 /: This is 3here the overall macroeconomic problem of the fiscal deficit appears to tric#le do3n all the 3ay to the village$ 3ith a negative impact on development5
/(
See the report at http:==3335trai5gov5in=recom5htm$ and especially the t3o +nne6es$ 3hich are a dissenting comment by Ba#esh 7ohan$ and the rest of the committees response5 See also Dey 1()))2 and Singh 1())(25 /: Drishtee 3as able to avoid this problem to some e6tent$ 3ith smaller@scale #ios#s that allo3ed poorer entrepreneurs to avail of targeted government loan schemes5
(-
7y general assessment of the policy environment is therefore that$ 3ith one e6ception$ the policy problems are mostly general ones$ and not specific to IT5 *roblems in financial mar#et institutions$ labor la3s$ and regulation in general are best dealt 3ith from an economy 3ide perspective$ as I elaborate on in the conclusion5 The e6ception is the case of rural telecoms and Internet access$ 3here it seems that narro3 targeting of limited subsidies 1through 3aiving certain fees rather than e6plicit payments2 for startup costs may be 3orth3hile in generating gro3th of communications$ and of enterprises that use communications5 'f course potential benefits do not necessarily translate into actual ones5 0irms and managers can ma#e mista#es in their IT investment decisions$ but this is no different from any other #ind of investment5 In a reasonably competitive industry$ 3ith sufficient information available$ there is al3ays pressure to ma#e the right decisions$ re3ards for those 3ho do$ and punishments for those 3ho do not5 Indian industry must be allo3ed to follo3 this model to reali&e the potential benefits of IT5 If it is discouraged from ma#ing such investments$ the domestic mar#et for Indian IT 3ill not gro3$ 3ith negative conse4uences for the IT sector as a 3hole5 This line of thought again argues in favor of a sound competition policy$ rather than any specific incentives5
6. Conclusion
The main emphasis of this paper has been to stress that IT has some special characteristics$ both in theory and practice$ 3hich ma#e it a promising engine of broad@based gro3th in India5 I have discussed ITs role in ma#ing recombinant gro3th possible$ the presence and evolution of comparative advantage$ and the importance of complementarities$ lin#ages and spillovers5 I have provided some evidence for the potential of the IT sector to be more than Cust a soft3are e6port enclave5 +t the same time$ the final message of the paper is some3hat counterintuitive$ in that I do not recommend special incentives for the IT sector5 Instead$ the sector and the economy as a 3hole 3ill benefit from a continuation of a broad reform agenda$ some aspects of 3hich I discussed in the previous section5 If there is any e6ception to this general conclusion$ it is in providing the conditions for rapid increases in access to modern communications 1voice and data2 for Indias population5 Special subsidies or e6port incentives are li#ely to be inefficient 3ays of stimulating the gro3th of the IT sector$ or of positive spillovers for the rest of the economy5 Similarly$ special central government initiatives to increase the availability of IT training and related education are also li#ely to represent a mistargeting of scarce government resources5 The same stricture applies$ to some e6tent$ to state government policies to encourage the IT sector5 // State governments also may be better off removing general restrictions to doing business$ as 3ell as providing an enabling institutional infrastructure 1appropriate la3s and regulations2$ rather than attempting to target the IT sector through a form of industrial policy5
//
Bangalore in Aarnata#a is 3ell #no3n as a regional IT center in India$ having developed initially 3ithout much e6plicit government support5 The governments of +ndhra *radesh 1Eischen$ ()))2 and Tamil "adu 1BaCpai N BadCou$ 8,,,$ and BaCpai N Do#eniya$ 8,,,2 have led in attempts to establish IT@based industries 3ith conscious government policies5 'ther state governments$ such as *unCab 1see 3335d4india5com=mar8-,,=ne3s5htm2 are follo3ing suit$ 3ith mi6ed success5
(.
The e6ception$ in the telecom sector$ is based on my vie3 that it has particularly strong complementarities 3ith the broader IT sector5 *olicies to achieve development goals 3ould do better to emphasi&e removing barriers to innovations that 3ill support lo3er@cost access to telecom net3or#s of all #inds 13ireless and fi6ed$ voice and data25 Rery specific$ targeted$ startup subsidies to enable 3idespread$ shared access to telecoms and Internet in rural areas are li#ely to have high social returns$ since it appears that financially sustainable franchise models e6ist5 These high returns include better governance$ as 3ell as #no3ledge that is an important input into Lempo3erment$ or Ldevelopment as freedom 1Sen$ 8,,,25 In this respect$ I 3ould argue that rural IT access is an important complement to and enabler of local government reform in India 1Bao and Singh$ ()))25
e!erences
+ggar3al$ Bala#a B5 1())82$ 0aculty scarcity at IITs threatens #no3ledge capital$ 7arch 8,$ http:==3335ciol5com=content=ne3s=trends=8)8):,)(5asp5 +rora$ +shish and R5 S5 +runachalam$ Fai +sundi and Bonald 0ernandes 1()))2$ The globali&ation of soft3are: the case of the Indian soft3are industry5 + report submitted to the Sloan 0oundation5 Carnegie 7ellon %niversity$ *ittsburgh *+5 http:==3335hein&5cmu5edu=proCect=india=publications5html5 +rora$ +shish$ R5 S5 +runachalam$ Fai +sundi and Bonald 0ernandes 1())8a2$ The Indian Soft3are Service Industry$ %esearch &olicy$ :)$ 8(.J@8(GJ5 +rora$ +shish and Suma +threye 1())(2$ The Soft3are Industry and Indias Economic Development$ 'n(ormation Economics an) &olicy$ 8/$ (-:@(J:5 +rora$ +shish$ +lfonso ?ambardella and Salvatore Torrisi 1())8b2$ In the footsteps of the Silicon Ralley Indian and Irish Soft3are in the International Division of 9abour$ paper presented at the conference$ LSilicon Ralley and its Imitators$ Stanford Institute for Economic *olicy Besearch$ Fuly ()))5 BaCpai$ "irupam and "avi BadCou 18,,,2$ Baising the ?lobal Competitiveness of Tamil "adus Information Technology Industry$ Development Discussion *aper "o5 J(G$ 'ctober$ Darvard Institute for International Development5 BaCpai$ "irupam and +nupama Do#eniya 18,,,2$ Information Technology@9ed ?ro3th *olicies: + Case Study of Tamil "adu$ Development Discussion *aper "o5 J(,$ 'ctober$ Darvard Institute for International Development5 BanerCee$ +bhiCit R5 and Esther Duflo 1()))2$ Beputation Effects and the 9imits of Contracting: + Study of the Indian Soft3are Industry$ *uarterly Journal o( Economics$ 88-$:$ ,G,@8)8J5 Basu$ Aaushi# 18,,J2$ Analytical #evelopment Economics$ Cambridge$ 7+: 7IT *ress5
(J
Bhatnagar$ Subhash and Bobert Sch3are 1()))2$ 'n(ormation an) +ommunication Technolo,y in #evelopment- +ases (rom 'n)ia$ "e3 Delhi: Sage *ublications5 BCorhus$ Fennifer 1())(2$ Indias Infosys Struggles through Transformation$ .an Jose /ercury 0e1s$ 0ebruary 88$ 8E5 Bresnahan$ Timothy and 7anuel TraCtenberg 18,,-2$ ?eneral *urpose Technologies: <Engines of ?ro3th>$ Journal o( Econometrics$ .-$ G:@8)G5 2usiness 3ee4 1())82$ India :5): Its soft3are outfits ta#e on the 3orld$ 0ebruary (.$ //@/.5 Ciccone$ +ntonio and Aiminori 7atsuyama 18,,.2$ Start@up Costs and *ecuniary E6ternalities as Barriers to Economic Development$ Journal o( #evelopment Economics$ /,$ ::@-,5 Das$ ShyamanuCa 1())82$ The Indian Challenge: Will TheyU'r Wont They $ 7arch J$ http:==voicendata5com=content=topKstories=8)8):)J):5asp5 #ata$uest 1())82$ SW I"D%STBM: Wor#ing around the Slo3do3n$ 0ebruary 8/$ http:==d43ee#5ciol5com=content=search=sho3article5asp artidP(8(//5 David$ *aul +5$ %nderstanding Digital Technologys Evolution and the *ath of 7easured *roductivity ?ro3th: *resent and 0uture in the 7irror of the *ast$ in Eri# BrynColfsson and Brian Aahin$ eds5$ 5n)erstan)in, the #i,ital Economy$ Cambridge$ 7+: 7IT *ress$ ()))$ /,@,G5 #* 3ee4 1())82$ 7edical Transcription: "ot in the *in# of Dealth$ 0ebruary ($ http:==3335ciol5com=content=search=sho3article5asp artidP(88(G5 Desai$ +sho# R 1()))2$ The *eril +nd The *romise: Broader implications of the Indian presence in information technologies$ Wor#ing *aper$ +ugust$ CBED*B$ Stanford %niversity5 Desai$ +sho# R 1())(a2$ What is this Soft3are $ 2usiness .tan)ar)$ Fuly G$ ())(5 Desai$ +sho# R 1())(b2$ Indias 7ar#et Shares$ 2usiness .tan)ar)$ Fuly 8-$ ())(5 Desai$ +sho# R 1())(c2$ The Changing 7ar#et Structure$ 2usiness .tan)ar)$ Fuly (($ ())(5 Desai$ +sho# R 1())(d2$ Soft3are 7anpo3er$ 2usiness .tan)ar)$ Fuly (, ())(5 Dey +tanu 1()))2$ "e3 Telecom *olicy 8,,,: + Critical Evaluation$ paper presented at Conference on Telecommunications Beform in India$ +sia=*acific Besearch Center$ Stanford %niversity$ "ovember , N 8)5 Dossani$ Bafi4 and Bobert T5 Cro3 1())82$ Bestructuring the Electric *o3er Sector in India: +lternative Institutional Structures and 7echanisms$ Wor#ing paper$ +sia=*acific Besearch Center$ Stanford %niversity5 Dossani$ Bafi4 and 7artin Aenney 1())82$ Creating an Environment: Developing Renture Capital in India$ Wor#ing paper$ +sia=*acific Besearch Center$ Stanford %niversity5
(G
Dossani$ Bafi4 and S5 7ani#utty 1()))2$ Beforms in the Telecommunications Sector in India: +n Institutional Rie3$ paper presented at Conference on Telecommunications Beform in India$ +sia=*acific Besearch Center$ Stanford %niversity$ "ovember , N 8)5 Dossani$ Bafi4 and 9a3rence Sae& 1()))2$ Renture Capital in India$ The 'nternational Journal o( Finance$ 8($ /$ 8,:(@8,/.5 DrX&e$ Fean and Daris ?a&dar 18,,J2$ %ttar *radesh: The Burden of Inertia$ in +martya Sen and Fean DrX&e$ 'n)ian #evelopment- .electe) %e,ional &erspectives$ Delhi: '6ford %niversity *ress5 Economist, The 1())8a2$ +nother #ind of net 3or#: 7obile phones in India$ 7arch :$ -,5 Economist, The 1())8b2$ 'utsourcing to India: Bac# office to the 3orld$ 7ay -$ -,5 Eggleston$ Aaren$ Bobert Fensen and Bichard Yec#hauser 1())(2$ Information and Communication Technologies$ 7ar#ets and Economic Development$ 3or#ing paper$ Economics Department$ Tufts %niversity and Fohn 05 Aennedy School of ?overnment$ Darvard %niversity5 Eischen$ Ayle 1()))2$ "ational 9egacies$ Soft3are Technology Clusters and Institutional Innovation: The Dichotomy of Begional Development in +ndhra *radesh$ India$ %niversity of California$ Department of Sociology5 ?ordon$ Bobert F5$ Does the L"e3 Economy 7easure %p to the ?reat Inventions of the *ast $ Journal o( Economic &erspectives$ 0all ()))$ 8/1/2$ /,@J/5 ?rossman$ ?ene and Elhanan Delpman 18,,82$ 'nnovation an) 6ro1th in the 6lobal Economy$ Cambridge$ 7+: 7IT *ress5 Danna$ "agy 18,,/2$ E6ploiting Information Technology for Development: + Case Study of India$ World Ban# Discussion *aper (/.5 Dee#s$ Bichard 18,,G2$ The %neven *rofile of Indias Soft3are E6ports$ ID*7 Wor#ing *aper "o5 :$ 'ctober$ %niversity of 7anchester5 Dee#s$ Bichard 18,,.2$ 'n)ia7s .o(t1are 'n)ustry- .tate &olicy, 8iberalisation an) 'n)ustrial #evelopment9 Sage *ublications$ "e3 Delhi$ Thousand 'a#s and 9ondon5 Delpman$ Elhanan 18,,G2$ 6eneral &urpose Technolo,ies an) Economic 6ro1th$ ed5$ Cambridge: 7IT *ress5 Delpman$ Elhanan and 7anuel TraCtenberg 18,,Ga2$ + Time to So3 and a Time to Beap: ?ro3th Based on ?eneral *urpose Technologies$ Ch5 : in Delpman 18,,G25 Delpman$ Elhanan and 7anuel TraCtenberg 18,,Ga2$ Diffusion of ?eneral *urpose Technologies$ Ch5 / in Delpman 18,,G25 'n)ia To)ay 1()))2$ Is e@?overnance for Beal $ December 88$ pp5 J)@J-5
(,
FhunChun3ala$ +sho# 1()))2$ %nleashing Telecom and Internet in India$ *aper presented at the Conference on Telecommunications Beform in India$ +sia=*acific Besearch Center$ Stanford %niversity$ "ovember , N 8)5 Forgenson$ Dale W5$ Information Technology and the %5S5 Economy$ American Economic %evie1$ 7arch ())8$ ,8182$ 8@:(5 Aapur$ Devesh 1())(2$ The Causes and Conse4uences of Indias IT Boom$ 'n)ia %evie1$ 8$ 8$ ,8@88)5 Aapur$ Devesh and Bavi Bamamurti 1())82$ Indias Emerging Competitive +dvantage in Services$ Aca)emy o( /ana,ement E:ecutive$ 8-$ ($ ()@:85 Aaushi#$ *5D5 and "irvi#ar Singh 1())(2$ Information Technology and Broad@Based Development: *reliminary 9essons from "orth India$ %C Santa Cru& Wor#ing *aper$ in progress5 Ahoo$ Ernest 1())(2 The Simputer: + Dandheld for the 7asses $ C"ET "e3s5com$ Fanuary 88$ http:==ne3s5com5com=(8))@8)/)@G)G:(85html5 Aremer$ 7ichael 18,,:2$ The '@Bing Theory of Economic Development$ *uarterly Journal o( Economics$ 8)G$ :$ --8@-J-5 Aumar$ "agesh 1()))2$ "e3 Technology Based Small Service Enterprises and Employment: The Case of Soft3are and Belated Services Industry in India$ International Centre for Development Besearch and Cooperation$ "e3 Delhi5 9ipsey$ Bichard ?5$ Cliff Bec#er$ and Aenneth Carla3 18,,G2$ What Be4uires E6planation $ Ch5 ( in Delpman 18,,G25 7atsuyama$ Aiminori 18,,-2 Complementarities and Cumulative *rocesses in 7onopolistic Competition$ Journal o( Economic 8iterature$ ::$ ($ J)8@J8)5 7ilgrom$ *aul$ Mingyi Oian$ and Fohn Boberts 18,,82$ Complementarities$ 7omentum$ and the Evolution of 7odern 7anufacturing$ American Economic %evie1$ 7ay$ G8$ ($ G/@GG5 7iller$ Bobert B5 1())82$ 9eapfrogging Indias Information Technology Industry and the Internet$ I0C Discussion *aper "o5 /($ 7ay$ The World Ban#$ Washington$ DC5 "+SSC'7 1"ational +ssociation of Soft3are and Service Companies2 1())(a2$ FY;2.o(t1are an) .ervice 'n)ustry &er(ormance$ Fuly 8G$ 3335nasscom5org=do3nload= 0Mo(@ results5pdf "+SSC'7 1"ational +ssociation of Soft3are and Service Companies2 1())(b2$ The 'T 'n)ustry in 'n)ia- .trate,ic %evie1 2;;2$ "e3 Delhi: "+SSC'75 "+SSC'7@7cAinsey 1())(2$ %eport- .trate,ies to Achieve 'n)ian 'T 'n)ustry7s Aspiration$ "e3 Delhi: "+SSC'75
:)
Ouibria$ 75 ?5 and Ted Tschang 1())82$ Information and Communication Technology and *overty: +n +sian *erspective$ +DB Institute Wor#ing *aper Series "o5 8($ Fanuary5 'lsson 'la and Bruno S5 0rey 1())82$ Entrepreneurship as Becombinant ?ro3th$ Wor#ing *aper$ Department of Economics$ ?Zteborg %niversity$ S3eden5 *ohCola$ 7atti 18,,G2$ Information Technology and Economic Development: +n Introduction to the Besearch Issues$ WIDEB Wor#ing *aper "o5 8-:$ "ovember$ %nited "ations %niversity5 *rahalad$ C5 A5 and Stuart 95 Dart 1())(2$ The 0ortune at the Bottom of the *yramid$ http:==3335strategy@business5com=media=pdf=)(8).5pdf5 *B'BE committee 18,,,2$ *ublic Beport on Basic Education in India$ Centre for Development Economics$ "e3 Delhi: '6ford %niversity *ress5 Bao$ 75 ?ovinda$ and "irvi#ar Singh 1()))2$ Do3 to Thin# about 9ocal ?overnment Beform in India: Incentives and Institutions$ *aper presented at International Conference on Second ?eneration Beforms in India$ 7adras School of Economics$ Chennai5 Bay$ DebraC 18,,G2$ #evelopment Economics$ *rinceton: *rinceton %niversity *ress5 Bivera@Bati&$ 9uis +5 and *aul 75 Bomer 18,,82$ Economic Integration and Endogenous ?ro3th$ *uarterly Journal <( Economics$ 8).$ (:-:8@---5 Bivera@Bati&$ 9uis +5 and *aul 75 Bomer 18,,82$ International Trade With Endogenous Technological Change$ European Economic %evie1$ :-$ /:,J8@8))/5 Sa6enian$ +nna9ee 1()))2$ The Bangalore Boom: 0rom Brain Drain to Brain Circulation $ forthcoming in Aenneth Aeniston and Deepa# Aumar$ eds5$ 2ri),in, the #i,ital #ivi)e- 8essons (rom 'n)ia$ Bangalore: "ational Institute of +dvanced Study5 Sa6enian$ +nna9ee 1())82$ Bangalore: The Silicon Ralley of +sia $ Wor#ing paper "o5 ,8$ Center for Besearch on Economic Development and *olicy Beform$ Stanford %niversity$ 0ebruary5 Sen$ +martya A5 18,,,2$ #evelopment as Free)om$ '6ford$ '6ford %niversity *ress5 S?AI 1()))2$ SubCect ?roup on Ano3ledge@based Industries$ *rime 7inisters Council on Trade and Industry5 %ecommen)ations o( the Tas4 Force on Kno1le),e-base) 'n)ustries9 *rime 7inisters 'ffice$ "e3 Delhi5 http:==3335nic5in=pmcouncils=reports=#no3l= Singh$ "irvi#ar 1())(2$ Information Technology as an Engine of Broad@Based ?ro3th in India$ in The Future o( 'n)ia an) 'n)ian 2usiness$ ed5 *5 BanerCee and 05@F5 Bichter$ 9ondon: 7acmillan5 Singh$ "irvi#ar and T5"5 Srinivasan 1())(2$ Indian 0ederalism$ Economic Beform and ?lobali&ation$ paper for comparative federalism proCect$ CBED*B$ Stanford5
:8
Tschang$ Ted 1())82$ The Basic Characteristics of S#ills and 'rgani&ational Capabilities in the Indian Soft3are Industry$ Wor#ing *aper "o58:$ +DSB Institute$ To#yo5 Telecom Begulatory +uthority of India 1()))2$ Consultation *aper on Issues Belating to %niversal Service 'bligations5 TB+I$ "e3 Delhi$ Fuly :5 Rerma$ 75 S5 1()))2$ TB+Is 'bCectives and *olicy 0ocus in a Changing Environment$ *aper presented at the Conference on Telecommunications Beform in India$ +sia=*acific Besearch Center$ Stanford %niversity$ "ovember , N 8)5 Weit&man$ 7artin 18,,G2$ Becombinant ?ro3th$ *uarterly Journal o( Economics$ 88:$ ($ ::8@ :.)5 Woodall$ *am 1()))2$ The "e3 Economy$ The Economist$ September (:$ Survey p5 .5
:(

India's Information Technology Sector: What Contribution To Broader Economic Development?

Transféré par

Informations du document

Titre original

Copyright

Formats disponibles

Partager ce document

Partager ou intégrer le document

Options de partage

Avez-vous trouvé ce document utile ?

Ce contenu est-il inapproprié ?

Droits d'auteur :

Formats disponibles

India's Information Technology Sector: What Contribution To Broader Economic Development?

Transféré par

Droits d'auteur :

Formats disponibles

Indias Information Technology Sector: What Contribution to Broader Economic Development !

"irvi#ar Singh$ %C Santa Cru&$ 'ctober ())(

Indias Information Technology Sector: What Contribution to Broader Economic Development

"#Ts and Complementarities

&ar'et Efficiency( "overnance and Development

"lobal Dynamics and Comparative !dvantage

*oftware %e&enue per Employee

0inland 0rance India Ireland Israel

..5( 8(G5) J58 88(5, J,5/

Complementarities( )in'ages and Spillovers

Efficiency and Broad*Based Development

4. Opportunities and Constraints

5(6 ,ultimedia6 Engineering 3 7esign er&ices

Leading Capti&e %emote *er&ices Companies (alp2abetical list

Source: "+SSC'7 1())(2

Vous aimerez peut-être aussi