Much Beyond $40 bn

The economic impact of the IT industry extends much beyond $40 bn in revenue

and some 2 mn employees. Economists reject the criticism that the industry has

drawn from some quarters of late, putting the blame on faulty policies while

lauding the industrys role in bringing about a fundamental change to the way

Indian business worked. The next step to sustain the momentum is build

world-class higher education

Much before the Tatas bought Jaguar/Land Rover (or for that matter Corus),

much before Vijay Mallya owned a Formula 1 team, and much before the Ambani

brothers made it to the top echelon of the richest businessmen in the world, the

global business community had already developed a healthy respect for Indiathe

erstwhile land of Yoga, Kama Sutra, elephants, and snake charmers. It was not

the achievements of a few iconic Indians but the work of thousands of young

Indian engineers that had won this recognition. These engineers, who first

helped global businesses by not letting them get into a disaster at the turn of

the centurywhat was called the Y2K problemand subsequently kept doing more and

more to solve their business problems through IT have long served as Indias new

brand ambassadors (more correctly, new Indias brand ambassadors), well before

the world started recognizing the Indian growth story or Goldman Sachs coined

the acronym BRIC.

Way back in 2000, in a Shanghai metro rail, one Chinese computer

developeryes, that is what he described himself asstruggling to speak

English, immediately started asking about Wipro, Infosys, and Sattiam (Satyam)

when he learnt that he was speaking to an Indian. And mind you: that was five

years before Tom Friedman famously paraphrased Nandan Nilekanis thoughts that

the world was fast leveling out.

Today, few dispute Indian IT industrys role as the earliest brand ambassador

of Indian business, thanks to numerous foreign writers who have recorded the

journey, hundreds of analysts who have analyzed it and a larger number of

academicians in US universities who have studied the phenomenon thoroughly. What

has not got even a fraction of that attention, albeit a few largely academic

studies here and there, is how Indias IT industry has had a very tangible

ripple effect directly and indirectly on the broader Indian economy. Yes, there

have been anecdotal references to the employment generation but as many point

outand rightly sothat while the speed of that employment generation has been

unprecedented, not just in India but anywhere in the world, as an overall

percentage of the Indians in the working age, that is still too small.

As a result, some have even started questioning if the IT industry deserves

all the pampering that it is getting. Well, you can say IT is India, if you

are referring to the TINA factor of India in the offshoring business, said a

top bureaucrat in a television debate. But that does not mean India is IT, he

added.

Of late, sections of policy makers have been echoing the same sentiment. A

critic even described the tax concessions offered to the IT export units as

subsidizing American corporations IT budget by Indian taxpayers money. This

view has found its reflection in the last two Union Budgets. While acknowledging

the role of IT per se in nation building (as seen from the thrust on

e-governance) the finance minster has not found enough reasons to continue with

the STPI scheme, which many believe is the prime catalyst in making IT services

exports so widespreada virtual cottage industry in India.

There has also been somethough scantcriticism of whether a large and fast

growing export-focused industry is even good for the overall economy considering

that the domestic Indian industry, which is witnessing unprecedented growth,

competes intensely with the former for a common resource: manpower.

This story is an attempt to look at the tangibleeven if not always

quantifiable (as in building Brand India) impacts that Indian IT services

exports industry has had on the overall national economy and examining how valid

are some of the criticisms.

Most of the data and points have come from some of the early works in this

area. Notable among them are the studies of Professor Nirvikar Singh of

University of California, Santa Cruz, who has published multiple papers on the

subject; Dr Rashmi Banga, senior economist, UNCTAD, whose 2005 paper remains the

only serious balanced paper on the critical issues on Indias services-led

growth; CRISILs study on the subject done for Nasscom, released in early 2007,

and the recently released Nasscom Foundation report on Indian IT Industry:

Impacting Economy and Society, prepared by Deloitte. For anecdotal, but

impactful paradigms, we have turned to Raman Roy, BPO pioneer, and arguably the

first one to articulate the indirect impact of the IT/BPO industry on Indias

development, much before agencies like CRISIL and Deloitte quantified that.

Indias Services-led Economy & IT



Call it unique characteristics of Indias knowledge culture or simply a late

mover phenomenon, Indias economic growth in the last few decades has been

driven almost entirely by services. While the faster growth in services by

itself is not a unique phenomenon, the cycle Indian economy has followed is

fairly unique.

Notes a paper, Critical Issues in Indias Services-led Growth, by UNCTAD

senior economist, Dr Rashmi Banga: During the 1990s, the contribution of the

service sector to the growth rate of GDP was nearly 60% in contrast to 54% in

middle-income countries, 43% in least developed countries and 34% in China. High

share of services in GDP is a unique feature of the Indian economy as in other

developing countries, decline in the agricultural sectors share has been

followed by growth in the manufacturing sectors share, and the shift toward the

services sector has occurred only in the final stages of growth.

Today, services account for more than 60% of Indias GDP. Most developing

countries, other than Mexico and South Africa, have a much lower contribution of

services to GDP. What is even more unique is the ratio of services to

manufacturing. With the exception of the US and France, no other large economy

has a services sector that contributes more than three times of what

manufacturing does! Indias manufacturing sector contributes only 19.3% of the

GDP, while agriculture contributes marginally more.

While growth in services is good and shows that India is fast entering the

league of mature markets, there are some critical issues that have caught the

attention of economists.

Dr Banga herself raised a few questions in the paper. She pointed out that

while in many countries growth in services is accompanied by a growth in

employment in those sectors, in India that has not been the case. The

extraordinarily impressive growth in services has not been followed by

corresponding growth in employment in services industries. In fact, the rise of

share of services employment has been much lower than the decline in the share

of employment in agriculture and manufacturing. In the year 2000, while services

contributed close to 50% of the GDP, its employment accounted for less than 30%

of the total employment. In contrast, in an economy like Singapore, which has a

66% share of services output in GDP, 70% of its total employment is in services.

This disproves the theorysuggested by somethat services employ less people.

The paper itself provides some insights to the reason. It finds that the

specific services that have grown the maximum have also recorded the maximum

productivity, thus, explaining the jobless growth. Indias IT services exports

industry stands right at top here. One of the fastest growing sectors among

services, this sector has also been the most productive. As a result, employment

in these sectors has not kept pace with the growth of output. This has impacted

the overall employment in services. Sectors like trade, hotels and restaurants,

community services, and construction which have high employment potential have

not grown as much as communications and IT services.

In a highly populated country like India, jobless growth is not always seen

positively and that has been the major criticism of the Indian IT industry. Not

only has it been more productive and hence less employment intensive (as

compared to many other services sectors), many critics say that the jobs it has

created are out of reach for majority of Indians.

Why IT Industry Matters



In the context of the above discussions, the obvious question to ask is: in

a country like India, with a huge population in the working age who need

employment, is IT the right sector to focus on, even if no one has major issues

with the industrys growth?

The most convincing answer to the question was given by Dr Subir Gokarn, the

chief economist of CRISIL during the release of the Nasscom-CRISIL Report, The

Rising Tide: Employment and Output Linkages of IT-ITeS.

We are not saying that the linkages and impact of the IT industry is maximum

or more than other sectors, but the fact that this is an export driven industry

means that we are gaining because of international trade, he said answering a

query.

In short, these businesses would have remained in the US or the UK. Instead,

they are coming to India. In fact, in a 2003 paper, Offshoring: Is it a win win

game? McKinsey Global Institute (MGI) quantified the value of this gain.

According to the report, every dollar spent on offshoring by an American

corporation results in a value creation of $1.45-1.47 for the global economy.

While America retains $1.12-1.14 of that, the offshore destination (like India)

gets 33 cents of that value, which is huge considering an American corporation

has made the investment.

The MGI paper also measured the break-up of the 33 cents that the offshore

destination gets using India as an example. It estimates that while the service

provider companies retain 10 cents as profit, nine cents go to suppliers, 10

cents to employees, three cents to the central government of India and one cent

to the state government.

In short, while the high productivity may not be generating a large number of

jobs in these sectors, the net impact on the Indian economy is huge as it gets

the jobs to India that would otherwise have been created in the US. The same is

true for the business with the suppliers and the wealth that is generated by the

service providers.

It is really a win win game.

Measuring the Impact



We started with the objective of quantifying the impact of the IT industry,

and putting a value to that impact. However, economists themselves, including

those who have extensively worked on the subject, shied away.

Not everything is quantifiable, especially some of the socio-economic

impacts, says Dr Rashmi Banga, senior economist, UNCTAD.

Says Raman Roy, chairman and CEO of Quatrro BPO, and one of the first persons

to talk about the socio-economic impact of the IT/BPO industry, You can see

that in shopping malls, in coffee shops, in gadget stores, he says pointing to

the consumption boom in lifestyle segments.

A lot of it is very hard to quantify, says Dr Nirvikar Singh of University

of California Santa Cruz (UCSC). But he makes a very bold statementI believe

the whole Indian growth story would have looked very different without the IT

industry. He says it is beyond what economics could measuresuch as the

contribution to GDP and direct and indirect impact on employment and

consumption.

What we have tried here is to articulate the distinct and tangibleif not

always quantifiableeconomic impact of the IT services industry. We have

classified them into three categoriesdirect, indirect, and socio-economic. Most

direct impacts are not just quantifiable and have been quantified, they have

also been fairly well recognized. The indirect impacts are somewhat measurable

using economic principles, if not always exactly quantifiable. There have been

some efforts in the pastlike the Nasscom-CRISIL study to quantify them. Many of

them are also fairly recognized. The socio-economic impactsusually tertiary in

natureare more qualitative and arguably have more far-reaching impact than the

first two. A number of these phenomena may well be measured, even though their

impacts on society and economy may be difficult to assess today. Take, for

example, bridging the gender gap. While it is possible to measure the wage

difference between male and female professionals in the IT industry and how that

compares with that in other industries, that by itself does not measure the

impact on society.

Direct Impact



First things first. Two things stand out when one talks of the IT services

(including BPO) industry: growth in revenue and employment. The IT/BPO exports

industry is expected to cross the $40 bn mark in revenues in 2007-08, more than

double of what it recorded in 2004-05. That is despite a drop in exchange rates

during 2006-07, making offshoring somewhat costlier for US enterprises.

Contribution to GDP: The IT/BPO exports industry has steadily increased its

contribution to the national GDP. From just about 1.8% at the turn of the

century, it rose to 5.4% in 2006-07. Measured as a percentage of the services

sector, that is 9% of Indian services. In fact, the IT exports industry has

contributed significantly to the rapid rise of share of services in GDP, a

phenomenon fairly unique to developing countries.

Direct employment generation: According to Nasscom, the direct employment in

the IT/BPO industry is estimated to be about 2 mn by the end of 2007-08, growing

at a CAGR of 26% in the last decade. As per data from ministry of Labour &

Employment, IT services accounted for 12% of Indias total employment in the

organized private sector, making it the largest among all such sectors. While

this itself is a reason enough to claim that India is IT, the indirect

employment generation by the industry is even more impressive.

Indirect Impact



The indirect, tangible economic impact of the IT services exports industry

is several times larger. A pioneering study that CRISIL did for Nasscom whose

result was released in early last year, tried to quantify some of that impact.

Most of the figures here are taken directly from that study.

Indirect employment generation: The Nasscom-CRISIL study estimated that for a

turnover of Rs 1.3 mn in the IT-ITeS sector in 2005-06 (the financial year for

which the data was available for the study), as many as 5.2 mn jobs were created

in the domestic economy. Comparison with the direct employment in the IT/ITeS

sector in that year (1.29 mn), reveals that for every direct job in the

industry, four additional jobs were created in the Indian economy.

When one takes a slightly deeper look at the break-up of that employment, it

busts the myth that the IT industrys impact is limited to the upper, educated

echelons of society. The study estimated that some 65,685 drivers, 78,535

housekeeping and maintenance staff, 32,000 catering staff, and 23,000 security

personnel were employed to serve the IT industry. In fact, the study also

revealed that except for technology support services, all other jobs created

indirectly by the IT industry had people with highest education levels of class

X/XII and lower.

Output effects of capex/opex spend: The Nasscom-CRISIL study also estimated

the multiplier effect of the capital expenditure and non-wage operating

expenditure by IT/ITeS industry. In 2005-06, the industry spent Rs 309.9 bn in

India on non-wage operating expenditure whose total impact on the economy

through linkages to other sectors was Rs 577.8 bn. Similarly, the total capex

spending by the industry of Rs 63.88 bn had an output impact of $125.8 bn

through the linkages. Together a spending of Rs 373.8 bn on capex and opex

generated a total output of Rs 703.61 bn in the Indian economy.

Impact of consumption by employees: The CRISIL study estimated that while in

absolute terms the non-wage operating expenditure had the maximum indirect

impact on the Indian economy, the largest multiplier was in the consumption

spending by the IT/ITeS professionals. The study estimated that for a total

spending of Rs 259.8 bn by the IT/ITeS professionals, the Indian economy

generated Rs 550 bn as output impact.

Together, the above twocapex/opex spend and consumption by IT/ITeS

professionalsaccounted for Rs 634 bn. In other words, every rupee output of the

IT/BPO sector, an additional rupee was generated in the Indian economy through

backward linkages and the induced effect.

Wealth creation and its impact: Most IT/BPO firms are first generation

enterprises and their promoters have managed to create wealth and share a lot of

that with the senior managers. These entrepreneurs and managers, in turn, have

turned VC/angel investors to promote further entrepreneurship. Indian Angel

Network, which counts among its members industry stalwarts such as Raman Roy (Spectramind/Quatrro),

Saurabh Srivastava (Xansa), Pramod Bhasin (Genpact), Dan Sandhu (Vertex), and

Sanjeev Aggarwal (Daksh) among others, is one such organized effort. The group

does not just fund IT/BPO ventures but provides VC and seed funding for

entrepreneurial efforts across sectors. Today, a little less than half of

closed funding are in non-IT/BPO sectors, says Raman Roy of Quatrro.

This, as a phenomenon, is still new and hence it may be difficult to measure

its impact right now but it goes beyond doubt that if India has to sustain its

growth, it cannot just look at growing existing businesses incrementally. It

needs to have innovations, which will come from new ventures. New ventures need

a vibrant entrepreneurship environment and that, in turn, needs venture capital

and guidance from successful entrepreneurs.

Socio-Economic Impact



Though far more difficult, and often impossible, to quantify, by far the

biggest impact of the IT industry has been bringing about a big change in

Indiawhether that is a boost of confidence among Indians about their own

capability, a change in image of India abroad, a change in the way business is

done in India, a radical change in the aspirations of millions of youth in the

country about getting a fair deal in employment, and the biggest of them alla

change in the way the governments treats investors.

Here are some more tangible impacts.

Turning globalization to Indias advantage: Not long back, globalization was

looked upon as something that would give an unfair advantage to rich nations

vis--vis developing nations. Today, it is the US that sees protests against job

lossesit is a different point whether those fears are validto India. This is

what Tom Friedman meant when he said the two threats to America remain Infosys

and Al Qaeda. Though after three years, thanks to globalization again, those

fears are proved to be invalid, the fact remains that the country, which was

looked as a backward, poverty-stricken land with cast and communal divides,

became one of the most envied and idolized country in the world purely because

of one industrys achievementthe Indian IT services.

This is what Dr Nirvikar Singh of UCSC calls the spillover effect. The

spillover happened in two ways, he says. One, Indian IT services firms built

world-class organizations in India for the first time. Two, they built the

reputation that Indians could do it. The second is often called building Brand

India.

Dr Singh attributes the upbeat mood within even the Indian manufacturing

industry about going global to a confidence that the Indian IT services industry

instilled among them.

To their credit, Indian IT services firms led India Inc in many ways getting

global business to India, in listing in the US (Infosys was the first to list on

NASDAQ), and building multi-ethnic workforces by recruiting from campuses and

industry in the countries that they did business in (TCS has employees belonging

to some sixty seven nationalities).

While a large section of the Indian manufacturing industry in the 70s and 80s

demanded protectionism policies, Nasscomthe apex body of IT services

firmswelcomed non-Indian companies as its members.

In all aspects, Indian IT services firms rode on globalization. If India is

unequivocally being put forward as how countries have leveraged globalization to

level (well, flatten Mr Friedman) the world, it is largely because of the

Indian IT industry.

Impact on working of government: In terms of bringing about the change, the

most difficult change, in any country anywhere in general and in democracies in

particular, is to bring about a change in the workings of the government. The

fact that the IT industry has managed to do that fairly well, without too much

of lobbying, speaks volumes of its achievement.

There are two reasons why this has been possible.

One is what Dr Singh of UCSC says is another aspect of the spillover effect.

The IT industry grew because of the non-interference of the government. Their

success made the government understand the value of non-interference, he says.

He says, that was far more instrumental in the success of the IT industry than

the export subsidies.

The other reason has to do with a very practical realization by local

politicians. The impact most visible to the ordinary citizens of a state of any

industrialization is job creation. While it is true that manufacturing creates

more jobs and is more secular in its spread of employment to all classes of

society, none matched the IT industry in terms of speed of job creation. This

characteristic of IT/BPO meant jobs being created in the tenure of the same

state government, unlike many a time in manufacturing. While one government

grants licenses, by the time the jobs come up, another government takes credit.

In the IT industryand more so in the BPO industrythe jobs are created fast and

the governments can show it to the electorate as their achievements. This helped

the state governments being aggressive in marketing their states and creating a

conducive environment for investment. Once the culture changed, it became easier

for other investors, too, to come and invest in states.

Education: The IT industry understands that the Indian success story has been

possible largely because of Indias education. To sustain the growth, the

manpower has to be generated at a faster rate. Many IT services firmsthrough

their CSR activitieshave targeted this area. While CSR itself cannot be termed

a unique contribution of IT industry alone, this aspect of CSRin bettering

school education and special emphasis on maths educationwhich is derived from a

very long-term business objective of the IT industry, will have a positive

impact on Indias education, the benefit of which will be accrued to the country

as a whole.

Bridging gender gaps: Another important but unrecognized contribution of the

IT services industry is bridging the gender dividenot always with a social

objective. Says Dr Rashmi Banga of UNCTAD, The wage gap between male and female

employees is the minimum in IT industry, as compared to any other.

She says the multiplier of employment generation for women in this industry

is also the maximum as compared to any other.

The Criticisms



All its direct and indirect impact notwithstanding, the IT services industry

has often been criticized for being elitist. The fact that it enjoyed tax

incentives for so many years has only made the criticism stronger, evoking

responses as extreme as growing through artificial stimulants and as being the

lobbying force for securing subsidies for large US corporations by poor Indian

taxpayers hard-earned money.

While in most IT industry forums, those criticisms are often dismissed

through sarcastic comments and jokes, some of them are worth examining into.

The employment gap: As discussed in the beginning, many economists have

pointed out that the growth in employment in Indias services sector has not

kept pace with the output growth in it. For example, though the services sector

in India contributes close to 60% of GDP, the employment in this sector accounts

for only 30% of the total jobs. It has also been pointed out that it has

happened because industries like IT, with high productivity, have grown faster

than others. Also, while the Nasscom-CRISIL study has identified the linkages

with other industries, it is common knowledge that many other services sectors

such as construction and trade have far better linkages domestically. As an

export industry, the IT industry has no forward linkages and even backward

linkages are limited. Dr Gokarn of CRISIL admitted this while releasing the

report, clarifying that what the Nasscom-CRISIL study does is that it quantifies

the output effect of the linkages of the IT industry and does not claim that it

is better than other industries.

The points are, by and large, valid, feel both Dr Banga and Dr Singh. But

the criticism of IT the industry is not valid, says Dr Singh. Dr Banga echoes

similar thoughts. If an industry is growing well and having good productivity

gains, you do not hold it against that industry.

The right question to ask is why is it that other industries are not

growing, says Dr Singh. You cannot expect the IT industry to create all the

jobs in the economy.

And you do not hold back growth of one industry because others are not

growing, says Dr Banga. Both of them blame government policies for this. Dr

Singh does recognize that it is a major issue and says it is high time the

government took measures to boost growth of manufacturing which is far more

labor intensive.

Clustered growth: Another acquisition against the IT services industry is

that it has not seen uniform growth. Says Dr Banga, Yes, most other industries

are far more uniform in their spread than IT. She says that the industry cannot

be blamed for this, however. What we need is policy interventions: something

similar to the incentives given to the manufacturing units if they set up in

backward districts. She believes that though by that the growth will not be

uniform, it will certainly take the industries to certain areas in states like

Kerala where educated workforce is available across the state.

Dr Singh, on the other hand, does not see this as a problem. Clusters are

not necessarily a bad thing. Even in the US, there are clusters and they have

been doing well. No one criticizes them. He, however, agrees that state

governments should have policies that would help companies to spread within a

state.

Competition for limited human resource: A relatively new criticism comes from

those who see the IT industrys hiring of most of the educated manpower as a

challenge to the growth of the domestic industry. They feel the BPO companies

lure away the kind of manpower that the domestic industries like insurance and

retail would need by offering higher wages, thanks to their earnings in dollars.

Almost the same sentiment is echoed by many senior executives in the

manufacturing industry who accuse the IT industry of turning bright

electrical/mechanical engineers into efficient coders.

Again, it is the faulty government policies that should be blamed, says Dr

Singh. He says while the rising of wages and competition for labor is a good

thing for employees, it just exposes how ill prepared India is to meet the

demand of the workforce, despite no dearth of people. He unequivocally blames

the higher-education policy of the government for this, a thought that Dr Banga

also endorses completely. Both of them say the real problem lies in the

government controlled higher education. Both say that while foreign universities

would love to come to India if restrictive policies are removed.

This is a classic case of what you call artificial constraint, says Dr

Singh. In addition to education sector reforms, Dr Banga sees hope in moving the

low-end BPO jobs to other countries. While companies today are trying to do that

for reasons of margins, she gives an economic imperative to it. Many low-end

BPO jobs is where the retail industry and other such domestic industry competes

with the BPO industry. But retail jobs have to be created in India. The low-end

BPO jobs can move to other countries. While she acknowledges that this reason

would never drive the industry to look at this option, their own business

imperatives would do so. She says that will automatically take care of this

issue.

Govt Policies Should Change



Though it is not the objective of the story to look into and prescribe

policy measures, it is probably apt to list down some thoughts that have been

emphasized by the economists that we spoke to as well as what has been

highlighted in some of the academic papers.

Interestingly, while some of the problems mentioned above are often dismissed

lightly by the discussions in IT industry forums, the academic papers on the

subject as well as the economists that we spoke to agree with them, by and

large. Where they differ from the critics who raise the issues are in not

holding the IT industry responsible. The consensus is: the fault lies in our

policies, not with the IT industry.

The most critical issue on which all agree is that we have lesser supply of

skilled manpower than what is needed to sustain the growth momentum, be it in

domestic industry or exports. The solution, as Dr Banga and Dr Singh both

emphasize, is in removing restrictions in higher education that will allow

private enterprises to supplement government efforts in education and bring in

quality foreign education to Indian shores, thus, removing the artificial supply

constraint.

Dr Singh says the government must learn from the success of the IT industry

and apply some of the learnings to promote labor-intensive manufacturing to

create more jobs. We have to ask ourselves: why are we not as cost-competitive

as China? The answer lies not in the wage differences so much as it does in

productivity differences?

He says the government, should focus on manufacturing and seriously take

steps to make India competitive in that, if needed, by offering some subsidies

there.

Dr Banga proposes an integrated services policy. She also urges state

governments to incentivize the industry to go to secondary townships, addressing

the issue of non-uniform growth.

So far, the New India has grown due to absence of negative intervention by

the government; it is time we have some positive intervention to sustain this

growth. Education sits right at the top in the list of such proposed

interventions. We have seen IBM, Accenture, HP having more people in Bangalore

than anywhere else. How about Stanford, Berkley, and MIT having more students in

Pune (or some other city) than anywhere else in the world?

Shyamanuja Das



shyamanujad@cybermedia.co.in