structure and growth of india’s it exports (2)

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STRUCTURE AND GROWTH OF INDIA’S IT EXPORTS IMPLICATIONS OF AN EXPORT ORIENTED GROWTH STRATEGY

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IT sector India - summary of a paper

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STRUCTURE AND GROWTH OF INDIA’S IT EXPORTS

IMPLICATIONS OF AN EXPORT ORIENTED GROWTH STRATEGY

• In this era of IT revolution India enjoys comparative advantage in IT service exports.

This paper attempts to answer 3 questions

• how to characterise the recent growth performance of IT service exports(in the light of government initiatives)

• Implications of IT sector boom on other sectors competing for skilled manpower

• Are there any threats to sustained growth of IT exports.

STATE INITIATIVES• Till mid 1980s there wasn’t any specific policy

towards software development; its cost share of total cost of computer was negligible

• software wasn’t considered as a product amenable to trade

• Computer policy of 1984 for first time recognized the importance of software development; provided for setting up of separate Software Development Promotion Agency (SDPA) under the department of electronics (DoE)

• One notable institutional intervention has been the establishment of software technology parks(STP) to provide the necessary infrastructure for software export.

• infrastructure facilities available in these STPs include, modern computers and communication networks which are beyond the reach of individual firms.

• In June 2000, an STP was set up in Silicon Valley comprising a business support centre and an India InfoTech centre, with a view to facilitate software export by small and medium firms to the US.

• the supply of technical manpower appeared to be a major constraint.

• The stages in the development of software are

requirement specification, prototyping designing, coding , testing and maintenance.

Initial stages require high skilled manpower and skill requirement declines in higher stages.

• main sources of software professionals have been the public sector education institutes such as the Indian Institutes of Technology (IITs), Industrial Training Institutes (ITIs), and the engineering colleges.

• With the accreditation scheme started by DoE, a large number of private institutes were established for providing training.

• The structure of the current out-turn of technical manpower from these institutes indicates that the three categories, namely, Btechs , diploma holders and the ITI certificate holders account for nearly 70 percent of the total.

• The role of state in promotion of IT sector has been of a catalyst or facilitator and not that of direct participation.

• Focus of state initiatives has been mainly on promoting IT as an exchange earner neglecting its role in productivity enhancement and growth.

STRUCTURE & GROWTH OF IT EXPORTS

• There are mainly four different modes of service export-

(a) trade taking place with the movement of provider to the receiver;

(b) trade wherein the receiver is mobile and not the provider;

(c) movement of neither provider nor receiver is involved

(d) transactions wherein both provider and receiver move.

• Trade in software is carried out mainly through-

(a) on-site services – factors move to site ofreceiver; Software manpower is exported to helpsolve the users' software-related problems;

net export earning will be substantially lessthan the total export earning because a part ofthe foreign exchange earned will have to bespent in the importing country itself

(b) offshore services - software is developed off-shore according to the specified requirements and exported to the users

.

• method could be cost-effective because the software development process is carried out in the domestic country but requires investment in the form of hardware and communication network

• (c) Offshore products and packages- neither the factor nor the receiver of the service moves; highly capital and labour intensive; net export earning will be higher in this mode of export.

• one of the major objectives of India's software policies has been to increase the offshore component.

• comparative advantage of Indian firms has been in the export of services such as customised software development, with very few well known products of proprietary packages in the international market.

• Indian software industry competes primarily on cost advantage with very limited innovation capacity.

• very high regional concentration in exports, with over 60 percent of the total exports directed towards the US market.

• there are high entry barriers to the value-added software products market, which is dominated by large multinational companies spending 60-65 percent of the price component of packages on marketing and distribution.

• hesitation of the firms to go in for software products could also be seen in the context of the widespread software piracy in the domestic market.

• three major data sources pertaining to software export-

1. Ministry of IT

2. NASSCOM(National Association of Software and Service Companies)

3. RBI

• In this paper analysis of export trends based on NASSCOM data. The issue of net export earning is then taken up using firm-level data.

• Recorded growth in exports is above 50% for most of the period.

• wide margin between the recorded rate of growth in terms of rupees and dollars, which reflects the possible effect of devaluation of the Indian rupee vis-a-vis US dollar

• This booming exports has to be viewed in the light of comparative advantage that India has on account of the highly skilled, English-speaking manpower at relatively low cost

• While cost of software manpower continues to be lower in India compared to other countries, wage rates in IT sector are high compared to other domestic sectors.

• the salaries of software personnel have been growing at a rate of 25-30 per cent per annum

• For analyzing net exports the study used firm level data from CMIE.

• Sample of firms was taken which accounted for 25% of total exports.

• ratio of imports to exports remained at over 57 percent in the initial year, increased to over 64 percent in 1995 and declined to 51 per cent in 1997

• Since imports have also substantially increased, the net export earnings would be substantially less and not more than 50 per cent of gross exports.

Implications of IT Export Boom

• IT boom can be considered in the framework of open economy macro models developed in the context of the boom in primary commodity exports.

• The central argument of these models is that windfall booms of external income can even lead to the most unexpected outcome of de-industrialisation of the economy.

• Dutch disease is explained in terms of 2 effects of export boom- Resource movement effect and spending effect.

• Resource Movement Effect- Expansion and profitability of booming sector attracts resources from other sectors bidding up its price. Leads to contraction of non booming sector

• Spending effect- Extra income from export boom increases spending bidding up prices of tradable and non tradable leading to appreciation and affects competitiveness of other sectors.

• But if the labor market is segmented there may not be a general rise in wage rates since the other sectors can settle with second best;but it may have efficiency implications

• The software export boom could also lead to a reduction in the employment and output of the goods producing sector, which includes, hardware and communication

• Relaxation of visa restrictions for Indian personnel will have implications for Indian firms.

• If best brains are attracted by foreign firms , it will affect the competitiveness of our IT sector.

• need for a structural transformation of India's IT export sector, specifically in terms of upward movement in the software value chain

• there appears to be an urgent need for diversification not only in terms of product structure but also in terms of destination.

• Need for IT diffusion in various sectors of economy for productivity enhancement and sustained growth of IT sector.

THANK YOU