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

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IT sector India - summary of a paper

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  • STRUCTURE AND GROWTH OF INDIAS 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 wasnt any specific policy

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

    software wasnt 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

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