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March 29, 2000
The Rediff Business Special/Nirupam Bajpai, Navi Radjou
The ongoing infotech revolution: great prospects ahead for India
At the 1999 Indo-US Summit, appropriately titled 'Dynamic South' which was held in Madras, the US Ambassador in India, Richard Celeste, said the 'Silicon Triangle' in South India -- with Madras, Bangalore and Hyderabad as its vertices -- rivalled the Silicon Valley in California. (Click on the map alongside for a bigger image.)
Indications are multiplying these days that the world is rapidly making a transition from an industrial to a knowledge-based economy. In some parts of the world, that transition has already occurred.
In June 1999, a path-breaking study found that the Internet-based knowledge economy generated $ 300 billion in US revenue and created 1.2 million jobs in 1998 alone.
In just five years, it has already outpaced century-old industries like the energy sector -- 1998 revenue was $ 223 billion -- and could catch up with the auto industry -- $ 350 billion next year. Also, the average revenue per Internet economy worker is about $ 250,000, or about 65 per cent higher than his industrial economy counterparts.
While the second industrial revolution was initiated in the labour-intensive manufacturing industry by automotive pioneers like Ford, it is clear that the third revolution is driven by the knowledge-based services sector.
Brain as the key to sustainable economic growth
Today, it is brain and not brawn that is the key to sustainable economic growth. Consequently, the level of development of the services sector, particularly the knowledge-intensive segments, has become a key determinant of national competitiveness for economies around the world.
Against this backdrop, a developing country or region that aspires to achieve rapid growth and join the global knowledge economy ought to encourage the development of its services sector. This sector has been the engine of growth and employment in developed economies.
In the post-World War II period, it has led to a gross domestic product or GDP growth in these economies, more than doubling its share of GDP in the last 5 decades and substantially increasing its share of employment.
In the US, which leads the global IT revolution, services contribute to almost 80 per cent of the GDP. In Singapore, services account for 72 per cent of the GDP. In Ireland, the second-largest software exporter in the world, the service industries employ 65 per cent of the working population.
Service sector versus non-services sector: the new paradigm
Paradoxically, a key contributor to the 'servitisation' of the world economy has been the non-services sector. Companies engaged in every type of commercial activity -- be it agriculture, manufacturing, finance or government -- rely on the competitive edge that service firms offer to be integral to their business success.
This often is not apparent until you pore over the annual reports of MNCs. For instance, unlike what its name may suggest, General Electric today derives most of its income not by selling electrical appliances, but financial services.
Its financial arm, GE Capital, is today one of the world's leading financial services companies with assets worth over $ 300 billion. At General Motors, number 1 in Fortune 500 companies, the auto financing business -- GMAC -- brings home more revenue than actual car sales!
Why the services sector needs to be strengthened
From an economic development perspective, there are many compelling reasons for emerging economies to develop their services sector.
To begin with, expanding this sector helps create national wealth: a positive correlation exists between high GDP per capita and the intensity of services activity in the economy, mostly because compensation levels in this sector normally surpass those in agriculture and industry.
Moreover, in economies with a strong emphasis on services, people tend to climb the value-chain ladder much more rapidly.
Finally, since services businesses are typically skill- and not investment-intensive, they are ideal sources of growth for countries with scarce capital and a large, qualified workforce.
India, which possesses the world's second-largest pool of scientific manpower, stands to gain a lot by developing its services industries.
The advent of infotech sector into top league in India
The year 1998 heralded not only the pre-eminence of the services sector but also the key role-played by information technology within that sector.
Information services have become fundamental to the overall growth and development of the American economy and others around the world. In 1998, more e-mail than 'snail mail' was sent in the US and phone lines carried more data than voice.
In August 1999, the United States Postal Service acknowledged this by approving the use of the world's very first electronic stamp, provided by E-Stamp.com.
For a long time, however, it was difficult to evaluate the economic impact of the IT sector. Information available now allows us to demonstrate its positive effects on worldwide economies.
In June 1999, the US Department of Commerce released The Emerging Digital Economy-II, a far reaching document that highlights the strong correlation between IT and national prosperity.
This report finds, for instance, that between 1995 and 1998, the IT industries -- comprising IT producers and users -- contributed to an amazing 35 per cent of real economic growth in the US.
Also, almost half of the US workforce is expected by 2006 to be employed in IT-based industries.
E-commerce as a tool for transformation of business
The most remarkable facet of the emerging 'digital economy' is electronic commerce. The Internet, which enables e-commerce, is radically changing not only the way businesses serve and communicate with their customers, but also the way they manage their relations with suppliers and partners.
Both the new Internet-based companies and the traditional producers of goods and services are transforming their business processes into e-commerce processes in an effort to lower costs, improve customer service, and increase productivity.
The value of e-commerce transactions worldwide is growing exponentially and is expected to reach $ 3.2 trillion by the year 2003.
Driven by customer demand and business imperatives, the digital economy is becoming truly global. In May 1999, 171 million people across the globe had access to the Internet, over half of them in North America.
While North America and Europe occupied a large absolute share of the Internet world, Asia-Pacific is catching up fast. It is estimated that by 2003, the Asia-Pacific region, with 81 million Internet users, will overtake Europe and become the world's second-largest Internet user population.
Singapore for instance has already launched an ambitious e-commerce initiative with the target of S$4 billion products and services transacted electronically through Singapore, and 50 per cent of businesses to use e-commerce by 2003.
The Internet, apart from enabling e-commerce, is also contributing to the rapid internationalisation of the services sector. It makes it possible to free the production and consumption of information-intensive service activities.
These activities - computing, accounting, personnel, marketing, distribution, etc. - play a fundamental role not only in the services industries, but also in manufacturing and primary industries. As much as 75 per cent of employment in manufacturing units in the US may be associated with service activities.
Typically, MNCs process the value-added services at home and outsource those with high labour-content to low-cost international service providers. India and the Philippines have, thus, emerged as favourite destinations for software outsourcing.
Lately however, IT Enabled Services or ITES, or 'remote processing', which involves using software rather than writing it, is being described as the next major driver of technology-led services industry.
These services -- e.g., customer interaction services -- typically involve a much higher degree of consumer-provider interaction and bring in more revenue.
Riding on the popularity of the Internet, this knowledge-added services market is expected to skyrocket to $ 200 billion by 2010, according to McKinsey & Company. Several countries like Ireland, the Philippines, India and China are vying for a piece of this lucrative pie.
IT as an opportunity to leapfrog stages of development
Inspired by Singapore's success, several developing countries consider IT a unique opportunity to leapfrog whole stages of industrial development. Having missed the first two industrial revolutions, they are eager not to miss the third one -- the making of the knowledge economy.
A few developing countries are, indeed, closing the gap, some of them at breathtaking speeds. In China, five years ago, just one per cent of the population owned a telephone. Today, more than 110 million people, or 10 per cent of the population has it.
China's Internet users are expected to grow from 4 million at the end of 1999 to 10 million by the end of 2000, compared to a paltry 1.5 million in India by the same year. China is aggressively developing its IT-based services sector.
Between 1980 and 1990, China's agricultural sector grew at almost 6 per cent per annum, while its services sector grew at an astonishing 13.1 per cent per annum.
China's service sector activities used to be labour-intensive, but are now increasingly capital and knowledge-intensive as China is determined to emerge Asia's services hub in the 21st century.
The engine of growth of the booming Indian IT sector is the software industry, which has grown at an average annual rate of 60 per cent between 1992 and 1999.
The Indian software industry, which today employs 160,000 professionals, has zoomed from a mere $ 20 million 10 years ago to $ 4 billion in 1998-99, of which $ 2.6 billion was exported.
The industry has clearly emerged a major export earner for the country, contributing to 8 per cent of total merchandise exports. It has also achieved worldwide reputation for providing excellent quality.
Numerous local software firms have earned ISO 9000 as well as SEI-CMM certification, with five of them having reached Level 5 -- only 9 firms worldwide have reached this level.
India has achieved this feat by leveraging its most valuable resource: highly skilled manpower. The country today boasts of the second-largest English-speaking pool of scientific manpower in the world and graduates 70,000 computer professionals every year, in addition to the graduates from the prestigious Indian Institutes of Technology or IITs.
Technical excellence explains why India was identified by 82 per cent of American companies as their top destination for software outsourcing, according to a World Bank survey.
Nirupam Bajpai is Research Fellow and Director of the India Programme at the Centre for International Development or CID at the Harvard University. Navi Radjou is a consultant at the Harvard Institute for International Development.
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