The incredible impact of IT

The information technology and BPO (business process outsourcing) industries are fascinating success stories which Indians are justifiably proud of. The IT/BPO industry has put India on the global map and demonstrated that there is no reason why Indian companies cannot aspire for leadership and excellence.

While everyone is aware of how well this industry has done and its growth trajectory, I had till recently never seen any study from the financial community quantifying the impact of this sustained growth on the broad economy.

This gap has now been plugged by the release of a new report by CLSA entitled 'Chain Reaction' (written by Bhavtosh Vajpayee and Anshu Govil). The report tries to lay out the implications of strong IT sector growth across the economy and some of its conclusions are fascinating.

The report points out that while IT/BPO exports have been on a tear over the last two decades, reaching about $30 billion in the financial year 2006-07, over the next three years the industry will double ($60 billion export target in 2010) and thus its incremental impact over the coming three years will be similar to what it has achieved over the last 20 years.

The industry is expected to create over 1.7 million new jobs directly and using a conservative multiplier of 1.4 (every IT job is expected to create 1.4 new jobs in other sectors), about 2.3 million indirect jobs over 3-4 years. This level of job creation implies that the IT industry will absorb 80-85 per cent of all the employable engineers and about 60 per cent of all quality graduates. While this is great for youngsters entering the job market, it highlights the difficulty the rest of corporate India will face trying to hire young professionals.

If the IT industry alone is going to hire 80 per cent of all engineers, then who will join manufacturing and other industries? Where will we get engineers, for example, to get up the 100 million tonnes of cement capacity coming up over 4-5 years? This highlights again the need to dramatically boost the capacity and quality of our education system, and the imperative for every large Indian company to put in place adequate internal training and hiring infrastructure.

The quality of this infrastructure will be a competitive advantage.

From a broad economy perspective, this job creation is good news as the report points out that every year about 4 million people enter the job market in urban India, and thus over the coming 3-4 years the IT industry (both directly and indirectly) will absorb nearly 35 per cent of this emerging urban workforce.

If you take both urban and rural India, about 13-14 million people enter the working age population annually, and the IT industry has the potential to employ 10 per cent of these people.

The impact of IT on real estate also is significant. Using a Cushman & Wakefield projection of 850 million square feet of residential demand till 2010, the report points out that 70-75 per cent of this incremental residential demand will cater only to the IT sector (for both rental-cum- owned housing). Even for commercial space, the demand projection is for 155 million square feet of commercial space in India till 2010.

The IT sector alone will account for about 65 per cent of this, even after assuming that the sector builds about 50 per cent of its own space and leases only 50 per cent. Going by the above, the real estate story in India may have less hype on demand than many investors currently think. There is no doubt that the IT sector will not be allowed to gobble up 65 per cent of incremental commercial space.

The growth of the IT sector will also play a huge role in creating a vibrant middle class in India. Between 2002 and 2010, India will add 4.4 million households to the upper middle class, of which about 20 per cent will be accounted for by IT. Between 2002 and 2010, the report points out 21 million households will be lifted out of the category earning less than Rs 100,000 per year, and the IT industry through indirect job creation will account for at least 20 per cent of this uplift.

Even on the tax front, the impact is tangible; over the next 3-4 years, 13-14 per cent of all income tax collections will come from IT employees.

The report predicts that 20-25 per cent of India's nominal GDP expansion over the next three years will come from the direct and indirect impact of the IT sector, which is a huge number for one sector to deliver.

While one may differ on certain assumptions made in the report and some of the findings, it is clear that over the coming 3-4 years IT will be a critical driver of India's growth.

If this is the impact IT will have, it will be interesting to try and forecast what the impact of the emergence of retail and financial services on the Indian economy will be.

These are two new sectors which have the potential to employ millions and really broadbase growth across regions and skillsets. If the IT sector can have this quantum of impact by directly employing 3.5 million people over the past 20 years, what will be the impact of organised retail and insurance, which will employ at least 5 million in 5-7 years? These may be less-paying jobs but their impact will be magnified by the compression in scale up time.

Also the investment in retail (with Reliance alone investing Rs 25,000 crore) seems to be many multiples of the money invested in IT.

For all the panning by the left of MNCs, the fact is that if you trace the history of the Indian IT industry, its birth and growth can really be traced to the willingness of GE, Nortel and one or two other global companies to outsource work to India. If they had not come to India, this industry would never have taken off. It once again highlights the importance of opening up and integrating our economy with the world.

The impact of IT is significant also as a role model for companies and individuals. It has set the precedent of how to build wealth through market cap and good corporate governance, and changed the goalpost of investor expectations.

The industry has delivered despite all the infrastructural and procedural headaches and stopped corporate India from hiding behind those excuses. It demonstrated that if freed of governmental interference and outdated legislation, Indian companies can be world-class.

The impact of gaining global scale in just one industry is there for all to see. Are there any other sectors where India can aspire for global relevance? Is the generic pharma story big enough? Can auto components/auto drive manufacturing? Will the textiles industry finally achieve its potential for job creation?

We need at least one more sector to break out and deliver global scale. Given the current confidence of corporate India, I am sure it will happen.