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India's IT sector key to 'leapfrogging' into high growth economy

Ela Dutt
India Abroad Correspondent in Washington

India is the most likely country to employ a strategy of leapfrogging past technologies through its information technology acumen, to accelerate its rates of economic growth, but this must be combined with more widespread economic reforms to become a reality, asserted the International Finance Corporation, the private sector arm of the World Bank.

'Leapfrogging: India's Information Technology Industry and the Internet' released on Thursday, maintains that "while the technology offers considerable promise for India, it will have to be combined with more widespread reforms if the promise is to be realised."

Nevertheless, the IT industry's rapid growth, in a climate of minimal governmental controls and regulations, "has provided an example of how productivity might be enhanced throughout the Indian economy through the use of IT and the internet," said Guy Pfeffermann, director of the economics department at the IFC.

The development of the software sector sets the example of how deregulated industry could thrive in the country as a whole.

While Internet development in India is still in its infancy in terms of numbers of connections and overall use, "the promise it offers for increased productivity and enhanced economic growth in the future is likely to be significant".

Most benefits today come from business and not consumer use of the medium, the report notes, adding that global connections will be much enhanced by the country's liberalized access to international internet gateways and to privately-provided undersea cable access.

"The access alone could offer Indian companies business opportunities that otherwise would flow to other, better connected Asian competitors."

By basically keeping its hands off the IT sector and in fact, actively encouraging it, the government had allowed the software sector to become a large and growing export industry, "hopefully leading the way for other technological developments to facilitate rapid internet expansion."

But the IFC cautions against "too much enthusiasm." Deregulation of industry in general had a long way to go, and along with poor infrastructure, low public investment and overall educational attainment, hinders "leapfrogging," that might be anticipated from the expansion of the internet alone.

"With the possible exception of China, India has been affected more by changes in IT than any other developing country, yet the country remains very poor by any standard," the report emphasizes.

Though the license raj is gone and protections are being pared away, and in IT, India has in some ways, become a world leader, "yet the degree of penetration of such new phenomena as the internet is still quite modest."

The extent of gains from wider internet penetration is "a matter of conjecture" at this stage, the paper claims.

Even in the US the productivity gains from IT vary widely. But gains from the internet for a country like India could be substantial and effect the economy in even more profound ways than in the case of industrialized regions, authors say.

For business to be global, the wider reality is that if Indian companies are to become more internationally competitive, ready access to wideband Internet services will be of paramount importance.

"The Indian government has recognized this requirement and is moving quickly to improve both international gateways and the country's fibre optic infrastructure, both largely through incentives directed to private sector providers," the report says.

The strides made in software development and export, "cannot be said to have had a major development impact on a country as large and as poor as India," and yet, a case can be made for taking a broader view of the sector in terms of its potential for the larger economy, authors contend.

The example set by the software industry is not lost on government, the IFC believes.

"The hope is to become an international leader not just in software development, but to leapfrog many other developing countries by establishing a world class telecommunications infrastructure and associated technology capabilities."

But matching plans to reality will require enormous effort, coordination, capital investment, and freedom from regulations, the report cautions.

Whether the international standing India's software industry has given to the nation will result in enhanced FDI and technology transfer, is "decidedly problematical in today's political and economic environment in India," the IFC says.

"A weak set of national and state governments is plagued by high fiscal deficits and seems unwilling or politically unable to rein in the subsidies that are largely the cause."

This along with the perception of FDI being a continuation of imperialism under another guise, "continues to make life difficult for those investors who have shown recent interest in establishing a greater Indian presence."

While it is still premature to determine whether the internet will become a "leapfrogging technology for India, enabling it to radically improve economic growth, changes are coming in as one speaks, and within the next two to three years, at least the major cities will be connected with high-speed fibre optic networks.

Alongside with deregulations and compliance with WTO obligations of less tariff and quota protection, it could be the stimulus for businesses to find ways to improve productivity, service quality, transparency, and efficiency in the next decade.

The government's new policy of allowing private ISPs to establish international gateways, has had positive effects though some rather draconian security measures continue.

But assuming smooth implementation of the new telecom policy, "the way seems clear for a rapid expansion of internet connections and, derivatively, of an expansion of both consumer and B2C commerce.

"If the Internet is to be part of a set of "leapfrogging" technologies, as it clearly could be, then the set of conditions that made possible the expansion of the Internet needs to be extended to most other sectors of the economy."

While India may not have succeeded in generalized education and literacy, its encouragement of technical education, has made it an exporter of engineers and scientists.

Silicon Valley alone boasts some 150 Indian millionaires and a disproportionate number of technical visas go to Indians coming into the US.

"At home, the large group of technically-qualified persons in India, to some degree utilizing their Indian-American contacts, has formed the backbone of a rapid growth in IT investment in India, a growth continuing today.

From a mere 20 million in venture capital going to Indian high tech firms in 1996, the amount has increased to 750 million in 2000.

"Few developing countries can even approach this level of technological sophistication," the report says.

Paradoxically, with just 26 million fixed line phone connections, and barely 2 million people using the internet compared to 6 million in China, rapid development of the communications and data transmission network is essential, but there is a long way to go, according to the IFC.

Despite a substantial middle class, the report says, most people in India worry about obtaining the essentials of life, not in gaining access to telephones, much less internet service.

But with an adequate telecommunications network, the audience could increase substantially. Breaking the deadlock between not enough users and not adequate telecommunications infrastructure is the key to determining Internet growth and growing the attractiveness of the country as a destination for high tech foreign investment.

Internet use for commercial purposes is based on rapid transactions and delivery of products faster and more reliably.

"It is the last step of this process that is at risk in an India-like environment, because the physical infrastructure to deliver products from supplier to customer speedily is largely absent."

Despite these general problems, opportunities for Indian companies to expand business relationships with foreign firms could be enormously enhanced through the Internet.

Using examples of Reliance Industries, HDFC Bank and ICICI Bank, the report points to increasing demand for electronic transactions, but concedes that private banks account for barely one-fifth of total deposits.

Of the hundreds of commercial websites surfacing in India, the IFC notes, "some of these sites will succeed, but most in all likelihood will never reach financial viability for a variety of reasons," like in the US.

Still enough could survive to begin to change how business is done in India. B2C Web sites' "future viability can be seriously questioned," because of the limited penetration of PCs in Indian households, with fewer than 4 million computers, maybe 20 per cent of which are used in homes.

The extensive development of B2C Web sites "probably is premature at this stage of India's development," the report concludes.

As with B2C Web sites, the B2B sites "are likely to end up as casualties" for many of the same infrastructural problems.

"But already there are indications that acceptance of the internet as a way of revising business practices to gain efficiencies is quite widespread," the report qualifies.

The low overall penetration of personal computers and Internet connections as well as the spotty existence of PCs among potential users, all work against B2B sites, as do hard-to-change traditional business habits.

One rapidly expanding business for Indian companies is the provision of back-office services to international clients, the report says.

Between 50,000 to 100,000 people are employed in this industry in India and it generates export earnings of $500 million.

Growth is expected to increase to ten times those employed currently, and income expected to reach $10 billion in 10 years, according to predictions, which IFC calls overly optimistic.

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