National Law institute university

BHOPAL

Economics project on :-

IT INDUSTRY AND ITS IMPACT ON INDIAN ECONOMY

Submitted to Submitted by
C.RAJSHEKHAR Deepak Kaneriya
professor B.A.LL.B76

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 TABLE OF CONTENTS

Page(s)

CHAPTER 1: INTRODUCTION........................................................................................3

CHAPTER 2: POLICY CHANGES AND IMPACT ON THE IT INDUSTRY................4

CHAPTER 3: THE IT SECTOR.........................................................................................5

CHAPTER 4: ITES: INFORMATION TECHNOLOGY ENABLED SECTOR:..............8

CHAPTER 5: CONTRIBUTION OF THE IT AND THE BPO SECTOR TO THE

ECONOMY.......................................................................................................................10

CHAPTER 6: CONCLUSION..........................................................................................11

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 CHAPTER 1: INTRODUCTION
The success of India’s IT industry has captured the imagination of the entire
world with India becoming the key player in international software development and with
Indians both in India and in abroad being the pioneers of the global IT revolution. Now,
India's IT industry has begun to blossom. After showcasing their value by helping foreign
corporations debug computer networks in time for Y2K, Indian design and engineering
companies are now suppliers of everything from animation work for such Hollywood
films as The King and I to the 3-D imagery used in Airbus Industries flight simulators.
Software services outfits Wipro Technologies and Infosys Technologies provide a wide
range of Net-related products for foreign companies—from browsers used on new-
generation wireless phones to e-commerce Web sites.
The main catalyst for the wiring of India, however, is the surge in global demand
for electrical engineering and software of all kinds. As multimedia takes off, the need for
such services will mushroom. Indian companies are becoming proficient in chip design,
Web-based services, and telecom software, among other fields. While these skills are
scarce in the U. S. and Europe, India has them in profusion. The country's universities are
pumping out 120,000 engineering graduates a year, and the number reaches nearly 1
million when polytechnics and the country's 3,000 computer-training institutes are
included. And nearly 100 such institutes are opening every month. Many Indian outfits
are also known for high-quality work. Of the 21 companies worldwide that hold the
Carnegie Mellon Software Engineering Institute's highest ranking, 12 are from India—
including Motorola Inc.'s Bangalore subsidiary, Citigroup software subsidiary I-Flex
Solutions, Infosys, and Wipro. 1.
In this project I shall try to analyse the Impact of the IT industry on the economy
of the country and what are the changes in policy required and also try to chart out the
future of this industry.

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 CHAPTER 2: POLICY CHANGES AND IMPACT ON THE IT
INDUSTRY

The real impetus for the growth of the IT industry was provided by the economic
liberalization program of the government in the 1990’s, ever since then there have been
other government policies and initiatives which have benefited the industry which I shall
discuss in this chapter. Even though some economists have said that the economic
liberalization have not benefited industry in the manner that governments project it to be
it has whatever said and done benefited the IT industry greatly. The importance given to
the development of infrastructure in the country and the need to introduce and provide a
free hand to private players was realized. India has gradually opened up its markets
through economic reforms by reducing government controls on foreign trade and
investment. The privatisation of publicly owned industries and the opening up of certain
sectors to private and foreign interests has proceeded slowly amid political debate.

The Telecom Policy of 1994 was the first of its kind and also instrumental in the
growth of the IT industry , it had a number of very ambitious objectives such as including
availability of telephone on demand, provision of world class services at reasonable
prices, ensuring India's emergence as major manufacturing / export base of telecom
equipment and universal availability of basic telecom services to all villages. NTP 1994
also recognised that the required resources for achieving these targets would not be
available only out of Government sources and concluded that private investment and
involvement of the private sector was required to bridge the resource gap. The
Government invited private sector participation in a phased manner from the early
nineties, initially for value added services such as Paging Services and Cellular Mobile
Telephone Services (CMTS) and thereafter for Fixed Telephone Services (FTS). After a
competitive bidding process, licenses were awarded to 8 CMTS operators in the four
metros, 14 CMTS operators in 18 state circles, 6 BTS operators in 6 state circles and to
paging operators in 27 cities and 18 state circles. VSAT services were liberalised for
providing data services to closed user groups.2

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 Although some of the objectives of this policy were not realized and the benefits
of the other projects not satisfactory it was still a very good beginning also, there had
been far reaching developments i in the telecom, IT, consumer electronics and media
industries world-wide. Convergence of both markets and technologies was a reality that
was forcing realignment of the industry. Telephone and broadcasting industries are
entering each other's markets. The new telecom policy framework would require to
facilitate India's vision of becoming an IT superpower and develop a world class telecom
infrastructure in the country.
The New Telecom Policy of 1999 was perhaps a more ambitious one with plans
to Strive to provide a balance between the provision of universal service to all uncovered
areas, including the rural areas, and the provision of high-level services capable of
meeting the needs of the country's economy, Create a modern and efficient
telecommunications infrastructure taking into account the convergence of IT, media,
telecom and consumer electronics and thereby propel India into becoming an IT
superpower, Transform in a time bound manner, the telecommunications sector to a
greater competitive environment in both urban and rural areas providing equal
opportunities and level playing field for all players and make available telephone on
demand by the year 2002 and sustain it thereafter so as to achieve a teledensity of 7 by
the year 2005 and 15 by the year 2010. This policy though ambititous has been largely
successful although the true effect of this policy is yet to be seen.3

Apart from this the introduction of certain legislations were also required so as to
regulate the IT sector and protect the rights of the consumers and the companies, The IT
act of 2000 was an extremely important piece of legislation in this regard. It brought e-
commerce with in the purview of the law and accorded stringent punishments to cyber
criminals, further, The act provided legal recognition for transactions carried out by
means of electronic data interchange and other means of electronic communication,
commonly referred to as "electronic commerce", which involve the use of alternatives to
paper-based methods of communication and storage of information, facilitated electronic
filing of documents with the Government agencies. Under this act the government puts

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forward the legal definitions of many IT related terms and outlaws computer crime. It has
given a special emphasis to check the privacy and security of the IT industry by taking up
the "security of the electronic records and secure digital signature" in a separate chapter,
It defines the secure electronic record as the one in which any security procedure has
been applied at any specific point of time, and from such point of time to the time of
verification.Also it regards the digital signatures as the one which are unique and can be
used to identify the subscriber. They should be created in the manner or using a means
under the exclusive control of the subscriber and is linked to the electronic record to
which it relates in such a manner that if the electronic record was altered the digital
signature would be invalidated. Or in short we can say that the digital signals have been
given as the same legal status as the physical signatures, and thus the documents are
acceptable in Indian Courts.4

The success of any business is greatly affected by the resources available and the
business polices of the nation. The tremendous heights that take the Indian Information
Technology industry to the top of the world cannot be only rewarded to the resources,
price cut outs, etc factor, but to a great extent it is the encouragement and promotion
techniques adopted by the Indian Government to take forth the Indian IT industry. IT Act
2000 along with the other changes in policies introduced by the government such as the
creation of TRAI the telecom policy of 1994 and subsequently 1999 and ofcourse the
economic liberalization which was the genesis, was a major development in this respect
which laid down a clear picture of the industry, and secures the Indian business, making
many domestic and offshore customers to rely over the Indian Industry and many
entrepreneurs to securely join or move ahead in the field thereby promoting investor
confidence in the country.

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 CHAPTER 3: THE IT SECTOR
Information technology essentially refers to the digital processing, storage and
communication of information of all kinds. Therefore, IT can potentially be used in every
sector of the economy. The true impact of IT on growth and productivity continues to be
a matter of debate, even in the United States, which has been the leader and largest
adopter of IT. However, there is no doubt that the IT sector has been a dynamic one in
many developed countries, and India has stood out as a developing country where IT, in
the guise of software exports, has grown dramatically, despite the country’s relatively
low level of income and development. 5 An example of IT’s broader impact comes from
the case of so-called IT-enabled services, a broad category covering many different kinds
of data processing and voice interactions that use some IT infrastructure as inputs, but do
not necessarily involve the production of IT outputs.

The contribution of Indias IT sector with regards to the GDP of the nation is also
startling especially when compared to the contribution of the same in the United states
below I have provided a chart so as to illustrate my point.

India’s GDP and IT Sector ®6

GDP at current prices IT sector IT sector
Year (Rs. Billion) (Rs. Billion) (US $ Billion)
1994-95 9,170 63 2.0
1995-96 10,732 99 2.9
1996-97 12,435 137 3.8
1997-98 13,900 187 5.0
1998-99 16,160 248 6.1
1999-00 17,865 371 8.7
2000-01 19,895 554 12.2

For the year 2005-06 the Central statistical organization has estimated the IT
sectors contribution to be a mere 2.7 percent of the GDP although NASSCOM gives a

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more encouraging picture according to it the contribution is somewhere around 4.7
percent of the GDP.7 Even so the IT industry has a long way to go.

IT Industry and Software:

The basic distinction in IT is between hardware and software. The former refers,
to the physical components of processors, storage devices and communications devices.
The latter refers to the instructions that govern the flow and processing of information in
digital form, within and between hardware devices and components. The design of
hardware actually involves the development and use of appropriate software code, so
there are definite overlaps in the two categories. It is also possible to substitute software
for hardware in the basic design of circuits. The actual production of hardware is
classified within the manufacturing sector, and is more distinct from the development of
software. 8
India’s software industry is more robust than its hardware industry, at least in
certain areas. While selling packaged software to consumer (and most business) markets
requires economies of scale and scope, as well as marketing and customer support
muscle, project-oriented components of software development do not do so, to quite the
same degree. The software development and use life cycle includes analysis and
specification of requirements, design, coding, testing, installation, maintenance and
support. Many of these activities, particularly coding and testing, involve relatively
routine IT skills that India’s workforce has in large absolute numbers (though small
relative to the total population).

Despite its extremely promising exports the software industry as estimated by

NASSCOM gets about 30% of its revenues from domestic software sales and this number
according to them is going to grow to about 50%. This is a very promising sign for the
Industry with so many national players in the market and this would alos directly benefit
the economy of the country .

IT and Hardware Opportunities :

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 Despite India’s past weakness in hardware manufacturing, hardware still provides
opportunities. The design of hardware involves the development and use of appropriate
software code, and value has tended to shift to design activities as production hasbecome
increasingly commodified. India has already established some presence in areas such as
circuit design. However, hardware assembly should not be dismissed. The example of
firms like Dell and Cisco is useful here. Dell outsources most, if not all, of its component
manufacturing. It is, in fact, an extremely sophisticated assembler. Its value creation is
based on organising this assembly as efficiently as possible, doing so on demand, and
keeping its inventories absolutely minimal. Strong customer service plus management of
communications and logistics at both ends of the value chain are also keys to Dell’s
success. Dell’s positioning to take advantage of strengths in infrastructure and closeness
to a growing customer market is an important lesson for India. 9 The possibility of
designing and building lower-cost hardware in India may represent an opportunity in
niche markets. One example is the Simputer. Another example is low-cost Internet and
telecom access devices, as envisaged by nLogue (a commercial spinoff from an IIT
Chennai research group). Not all components have to be built in-house. What is essential
is designing products for the under-served domestic market, and managing the entire
value chain as efficiently as possible. Management and infrastructure are the key inputs
that are required. In some cases, including consulting as well as IT-enabled services,
multinational firms have relaxed some of the managerial constraints through their own
entry, importing managers as well as training local ones. As in any industry, the
availability of adequate supplies of inputs is critical for the growth of India’s IT sector.
Much of the caution about the prospects for India’s IT industry has been focused on
potential bottlenecks in the supply of skills, and the quality of the infrastructure.
Financial constraints are also a factor.

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 CHAPTER 4: ITES: INFORMATION TECHNOLOGY ENABLED SECTOR:

IT-enabled services currently are the poster boy for the possibilities that exist for
India’s IT sector. In the case of this sector work that was earlier done in the developed
world, particularly the US, has been 'outsourced', or contracted out, to locations in India.
the activities outsourced include call centres, medical transcription, data entry, ticket-
reconciliation, claims processing, credit card administration, and such other routine office
work as can be performed at remote locations. While this work requires knowledge of
English, it does not require superior education or skills. Indeed, some of it is so
mechanical and repetitive that it is in danger of being eliminated: "Optical-character-
recognition software is automating the work of Indian data-entry workers. Electronic
airline tickets are eliminating some of the ticket-reconciliation work airlines carry out in
India. Eventually, natural-language speech recognition is likely to automate some of the
call-centre work that is currently going to India, says Steve Rolls, the heir apparent at
Convergys, the world's largest call-centre operator." Other countries too are entering the
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same business, particularly those once colonised by an English-speaking country: the

call-centre business is booming in the Philippines. The problem with this is that the only
reason that these jobs are in fact outsourced to India is because of the low wages so the
problem would occur when the wages in India also rises or when other poor countries
start joining this industry.10 Indian ITES chiefs are thus anxious to ensure that the
production of 'cyber-coolies' in India is adequate to maintain an excess supply of labour
power. The biggest supply may be of BPO (business-process outsourcing) workers who
do not need to use the telephone much: claims processors, credit-card administrators,
health-insurance workers and so on. Indian universities churn out 2.5 million graduates a
year. Perhaps a quarter to half of these have the right skills to do this sort of BPO work,
says NASSCOM's president, Kiran Karnik. To improve that ratio, he is working with
India's University Grants Commission to have three-year degree courses supplemented
by one-year technical certificates in IT or American accounting standards. Thus
university education in India is to be tailored to providing labour supply for the
requirements of American and British corporations' low-value work. As a recent study by
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the V.V. Giri National Labour Institute has pointed out, the call centre industry "leads to
a wastage of human resources and de-skilling of workers" which will have a high impact
on Indian industry in the long-term.

SKILLS:
A major reason for the success of India’s software industry is the large supply of
labour with some IT skills. India graduates perhaps about 140 000 engineers a year
(2002-03 estimates), second only to the United States worldwide27. Not all these
engineers go into the IT industry, and not all IT professionals have engineering or
computer science qualifications. Once one adjusts for these factors, the estimated number
of new IT professionals is currently about 100 000 per year. India’s stock of IT
professionals is estimated at about 520 000 (2001-02), so that IT industry revenues per IT
professional (assuming that all of them work in the industry, which is unlikely) are about
$25 00028. Projections imply IT industry revenues will increase severalfold over the next
few years. Some of this growth will be due to increases in revenue per IT professional,
but the rest will require an increase in numbers. To the extent that much of this future
growth will come in IT-enabled services, the additional employment there may come in
areas where different, easier-to-acquire skills are needed.11
Whether growth comes in revenue per employee or number of workers, there are
implications for training. Increasing revenue per IT professional requires improvements
in managerial and marketing skills29, as well as the production of more highly-trained IT
people. Training more people in IT requires investments to increase the capacity of this
component of the higher education sector. Desai (2002d) argues that there will be enough
programmers, and that management skills will be the bottleneck. In fact, a particular mix
of high quality IT education and management training may be what is particularly
needed. Given the rapid expansion of regional engineering colleges and of private IT
training30, the real need may be concentrated investment in the IITs, which represent the
frontier for education in engineering. This approach would be consistent with the O-ring
view of value creation in this sector.

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CHAPTER 5: CONTRIBUTION OF THE IT AND THE BPO
SECTOR TO THE ECONOMY

The contribution of IT and BPO sectors to India's economy is much bigger than
its export achievement or the brand equity in foreign markets that has raised India's
economic profile abroad. Over the years, it has become a key driver of both growth and
diversification of the economy. What started as a small phenomenon has now acquired
sufficient momentum to pull up other sectors. Indeed, IT has emerged as a good example
of a "leading sector" that generates unbalanced growth in the beginning but develops
strong linkages over time to make a difference to the growth performance of the entire
economy. It is time development theorists and policy makers analysed the true
contribution of the IT sector in India's march towards becoming a trillion-dollar
economy. 12
First, we must note the IT industry's contribution to altering the risk profile of
India's economy by providing strong support to India’s foreign account. The foreign
exchange earnings of around $22.5 billion this year have helped us to sustain our
reserves, despite the high level of global crude oil prices. India had failed to survive the
global oil price shocks of 1973, 1980 and 1990. Unlike IT now, there was no sector then
that could cushion the impact of an external shock by its strong presence in global
markets.
Thus, IT has ensured exchange rate stability and insulated our overall business
climate from uncertainties that could have arisen otherwise. While India’s manufacturing
has revived in recent years, the fact remains that we are faced with a merchandise trade
deficit of nearly $45 billion in the current year. Few countries can cope with both large
energy and merchandise trade deficits. The US manages because of its strong service
sector. We have done it because of our IT industry. 13
But this is only half the story. The strong pull effect of our IT other sectors has still not
been amply recognised. First, the IT industry has brought about a rapid expansion of
some of our key cities across states as IT companies have built large campuses to meet

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their global demand. The fact is that the current real estate boom owes its origin to the
growth impulses imparted by the IT industry. Over 70% of all new construction of
commercial real estate and a good part of the housing demand is because of the IT
industry. All this is creating demand for manufactured products like steel, cement, paints,
fittings, furniture etc.
The young employees of the IT industry and their different spending habits have
also catalysed demand growth for modern retailing, automobiles, apparel and fashion,
entertainment and other services, such as retail banking. And because of the strong
mobility linked with IT services that requires travel across borders, this sector has also
created new demand for tourism, civil aviation and hospitality. What is more, IT has also
triggered new investments in education and training. Just to get some idea of the impact:
this year the IT industry would expand India’s middle class by creating around 300,000
new jobs and across states in different cities. Next year, this number could increase to
500,000. 14
Since these are much better paying than for first-time entrants to the job market
for rural migrants in a manufacturing activity, their impact is much bigger. Around half
of the new employees could be expected to buy cars, houses and consumer durables, thus
creating strong demand growth for these sectors. These are strong linkages that are
catalysing a structural transformation of the Indian economy.
It could be argued that the linkages created by the IT sector have helped Indian
manufacturing. The revival of the latter in recent years does seem to be correlated with
the critical mass acquired by the IT industry in recent years. Indeed, the IT industry has
emerged as one big cushion, not just against external shocks but also against future
demand recessions. Given our unique global positioning in IT, the sector would continue
to expand rapidly in the foreseeable future. It is estimated that by 2010, IT could be
contributing 10% to our GDP. 15

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 CHAPTER 6: CONCLUSION

In this project I have analysed the contribution of the Indian IT industry to the
economy I feel that the future for this industry is very positive but there are a few policy
changes that are required such as Special subsidies or export incentives are likely to be
inefficient ways of stimulating the growth of the IT sector, or of positive spillovers for
the rest of the economy. Similarly, special central government initiatives to increase the
availability of IT training and related education are also likely to represent a mistargeting
of scarce government resources. The same stricture applies, to some extent, to State
government policies to encourage the IT sector. State governments also may be better off
removing general restrictions to doing business, as well as providing an enabling
institutional infrastructure (appropriate laws and regulations), rather than attempting to
target the IT sector through a form of industrial policy.

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 BIBLIOGRAPHY
Nirvikar Singh, “Information Technology and Indias Economic development”, working
paper, April 2002.

Nirvikar Singh, “ Indias Information Technology Sector: What contribution to Broader

Economic Development”, OECD Working Paper, March 2003.

WEBSITES:

http://presidentofindia.nic.in/scripts/sllatest1.jsp?id=107.

http://www.mit.gov.in/eg/article-indiawired.asp

http://www.tenet.res.in/Papers/IT-Trans/ittrans.html

http://www.rupe-india.org/41/reality.html

http://www.blonnet.com/2006/02/18/stories/2006021803820900.htm

www.nasscom.org/it_industry/indic_statistics.asp

www.adb.org.

http://www.trai.gov.in/TelecomPolicy_ntp99.asp

www.softwareprojects.org/indian-it-industry.htm

www.oecd.org

www.apnic.net/mailing-lists/s-asia-it/archive/2003/04/msg00018.html