April 25, 2023
Indian Economy|Development Strategy
Next step for the infotech boom
By Nitin Desai
Next step for the infotech boom
The information technology service industry is facing headwinds because of the economic slowdown in the West and, perhaps, new developments in technology that are altering the balance between humans and machines. The answer to this slowdown requires us to understand the dynamics of the spectacular growth of the infotech industry and its exports over the past three to four decades, and how these dynamics need to be altered in the years ahead.
The history of the infotech industry in India is a story that reflects the successes and setbacks caused by public policy from the early years of independence. Its present status reflects:
- The long-term vision of science and technology development in the Nehru era of planning, which created a capacity to at least keep track of technology developments.
- The rapid expansion of engineering education (of varying quality) that is the basis for India’s global comparative advantage in medium-skill service supply.
- The setbacks that emerged with the shift in focus in the 1970s to public sector electronic hardware manufacture and the high import duties on hardware to promote this.
- The shift in the mid-1980s to software development and, even more important, the promotion of partnership between the public and private sector.
The policy focus in the 1970s shifted on public sector companies manufacturing hardware, mainly for defence, space and atomic energy, as a part of the self-sufficiency strategy and partly because of the emerging sanctions on dual-use technologies. The public enterprises that were set up at that time developed the skills required for specific needs, mainly for governmental applications, but had a limited impact on the economy. The high tariffs on hardware imports constrained the development of the service industry.
The change that has made the infotech service industry an economy-wide impact force came in the mid-1980s with the new policies announced by the Rajiv Gandhi-led government in 1984. The tariffs on hardware imports were substantially reduced and software technology parks were established, and they provided satellite links to major IT developers, enabling them to directly transmit the work done in India abroad. But much of their returns initially came from sending their software personnel abroad to provide services in-situ.
The big change occurred towards the end of the last century when computer programmes designed with two- digit year numbers had to be modified in a tedious and time-consuming process to take four-digit year numbers. The Indian software service companies could do this at low cost because their worker wage levels were about one-sixth or so of the US and European wage levels. Software exports from India increased nearly 2.5 times in dollar terms between 1998–1999 and 2000–2001 Another change that generated new options for the Indian software service firms was the establishment of the euro currency, which also required similar tedious changes in computer programmes.
Since then, the India software service industry has forged ahead to become a key global player in the trade in software services and internet technology-enabled services. Its annual exports have grown from around $3 billion in FY2000 to $181 billion in FY2022 with a direct employment level of 5 million. It has moved beyond body- shopping and cost-arbitrage advantage to become a major supplier at the more sophisticated ends of software services.
The growth of the infotech industry in the post-1980s era is also an interesting example of Indian entrepreneurship. The top five companies of today, include just two from the large conglomerates and most of the rest, including two of the top five and 25,000 smaller start-ups, have been developed by software engineer-entrepreneurs.
The past three decades have seen a successful growth of the infotech service industry. But looking ahead we need to recognise that its future will depend on two things — a greater presence on the frontiers of infotech development and better integration into the needs of the national economy.
The industry is a major global player but not yet a major innovator. The R&D spending of the major companies is about 1 per cent of turnover, which is way below the levels for global internet players not just in the developed world but also in China. With the rapid emergence of artificial intelligence (AI), India’s cost advantage in low-cost services will be eroded unless it itself becomes a major player in AI and other new technology developments. This will require substantially greater investment in R&D by both the government as well as infotech companies. There are other areas that are becoming more important, like cloud computing, where most users in India are dependent on foreign suppliers of cloud services.
It is also necessary that the infotech service industry increases its focus on domestic sales, which at present are just a little above 20 per cent of their turnover. This is understandable as the infotech service industry’s cost advantage relates only to the local costs for developed country infotech users. However, with the advantages of infotech service companies moving beyond cost advantage to their competence in more complex infotech applications and uses, they can offer advantageous services to domestic users.
The potential and the need for this will increase with the development of an open access digital framework by the government, with assistance and cooperation with private sector software pioneers like Nandan Nilekani. This digital public network includes Aadhaar, which allows verification of identity in digital contacts, the Unified Payments Interface (UPI) with transactions amounting to Rs 13 trillion in January 2023, and new developments like the Open Credit Enablement Network (OCEN) and the Open Network for Digital Commerce (ONDC). Access to the digital frameworks has shot up with the growing number of smartphone and internet users and bank deposit holders.
India has a unique system of partnership between the government and the private sector in the development of the digital economy. The infotech service companies must now see themselves as a major domestic supplier of services and not just as globally competitive exporters. The latter capacity has to be retained and that will now require a substantial greater commitment on R & D spending by the companies and an increased effort by the government to promote infotech research in IITs, universities and elsewhere.
In some ways, this integration of domestic and international market development and technology development is a broader message applicable to other industries also. The growing size of India’s domestic market can become a base for export growth, particularly if it is combined with measures to reach the frontiers of technological services. Export growth will stimulate product development and cost reduction, while domestic market growth will lead to scale advantages. Even supposedly export-oriented foreign companies enter India not just for low-cost assembly of their products for the global market but also for easier access to the large and growing Indian market. Hence, always coordinate and even combine policies for export growth and domestic market development. This is the crucial next step for the infotech service industry.