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

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