Search the Internet          Tips  Sites: Finance, Investment

Quality of govt, biggest threat to IT industry

Ashok V Desai

There is recurring debate in the country on the overseas versus the domestic market; many people feel that the industry should be selling more software at home.

This was the inspiration behind the Task Force on Information Technology: it deliberately raised projections of domestic sales above and lowered those of exports below past trends.

Those projections fell flat on their face: export growth since 1999 has exceeded the growth of domestic sales by an even greater margin, and the share of exports in revenue has continued to grow.

But this yearning for domestic growth, or bias against exports, persists; it is an expression of the strong xenophobic and autarchic forces that have always been present in this country.

Related to the yearning for greater domestic focus, but different in its inspiration, is the view that the industry should serve the masses.

It should help farmers sell their buffaloes and find grooms for their daughters; it must raise the awareness of the poor. These views come from the socialist strand, another persistent and powerful force in the country.

Without going into the merits of these opinions, I would only say that many people entered the IT industry with precisely these ideals of serving the country and serving the poor. They tried their best, but failed.

The domestic market has consistently been less profitable and more difficult to develop; some firms persisted in developing it, but the export tornado swept them along.

Any firm that wanted to survive and expand had to export, for that is where the market was growing, where profits could be made.

I do not really see this changing in the near future: India's economy is small and poorly developed, and has little capacity to use IT. It can be made to use more: the way to do it is by subsidising domestic sales - or sales to the poor if you wish.

The income tax concession on exports is slowly being withdrawn; it could be replaced by a similar concession on domestic sales. Alternatively, direct subsidies could be given to domestic sales of software.

There is a good argument for it, not based on autarky and xenophobia: the industry's success abroad depends on its domain expertise, and subsidy to domestic sales would expand this expertise with advantage to the country.

Another national obsession is with the training of software manpower. Manpower shortage has plagued the industry almost since its outset; consequently it has lobbied the government for the training of ever more programmers, generally with an engineering background.

This lobbying is understandable; but as I argued in the last article, the manpower shortage is at an end for now, and it would be wrong to assume that it would recur.

We have developed an untidy but effective system for training thousands of programmers quickly; it has worked in the period of the industry's most rapid growth, and it will work in the future also.

There is a case for reforming universities - giving them autonomy, increasing their material and intellectual resources and making them more responsive to the market. But this case is general, and not related to IT alone.

The real issue is, how much of the world IT industry will locate itself in this country. As I showed, a tiny percentage of the global IT market is served from India; and the markets served are confined to Anglophone countries and custom application software.

There are vast markets in terms of applications and regions which India has hardly touched. It is customary to see in this a great opportunity for Indian firms to raise their market share; but within that figure is also the failure of the Indian industry to win a higher share, and the possibility that its market share might fall - in the extreme, down to zero.

What I mean is that there is no inevitability about the industry's location in India. The large Indian firms are already partially foreign - in their markets, in their sources of capital, in their partnerships, often in their workers. The bulk of their labour force as well as their legal location are in India; but both could move out.

The IT industry is not tied to the soil, like tea or mica; it could fold up its tent and leave the country tomorrow.

Even without doing so, Indian firms could employ more Chinese and fewer Indians; or they could warehouse Indian programmers abroad, as some Israeli firms are already doing.

The turnover of IT firms run by Indians in the US was only slightly lower than the exports of firms located in India in 1998. The number of Indian programmers in the US is at least half the number in India, probably higher. These ratios could change either way.

Of the factors which will determine them, two are important. One is the internal and external security situation. India's confrontation with Pakistan as well as the Gujarat riots did enormous damage to the Indian industry's efforts to attract business from the west - especially efforts to get a share of the expanding BPO market.

To get this type of sensitive business, India simply has to join the secure part of the world; and it cannot do so as long as it keeps publicly scrapping with Pakistan. This is not a judgment; I am simply drawing the conclusion from what many in the industry have told me.

If we want sophisticated activities to locate and create employment in India, we simply cannot afford to continue our present internal and external security policies. China, in many ways a more autocratic and oppressive state, understands this; it has put all its external conflicts on the back burner and kept a tight leash on internal security.

There is international competition in security management; it strongly affects the growth of sensitive industries like IT, and hence national growth.

The other is the threat of Dutch disease. If the software industry continues to grow at its historical rate, its exports will finance all India's external payments for goods and services by 2008 and will exceed its GDP by 2013. That cannot happen: a part cannot exceed the whole.

Much before that, either the exchange rate will appreciate, or prices in India will rise faster than international prices, or imports will flood in.

Whichever happens, Indian industries will become less competitive and die; their decline has already begun. If domestic costs rise fast enough, the IT industry itself will become uncompetitive and leave India.

Keeping it healthy and growing in India requires skilful macroeconomic management - far better than our government has shown itself capable of. There is not even a sign that the government understands the issue. The greatest threat to the IT industry is the quality of government.

Powered by

ALSO READ:
It's manpower that drives the software sector
The changing structure of the IT market
More Specials
More Money Headlines