Master programme in Economic Growth,
Innovation and Spatial Dynamics
Impact of Information Technology Industry on Indian
Economy Since 1991
Mikhail Ramanouski
mikhail.ramanouski.877@student.lu.se
Abstract: This research paper examines an impact of IT industry on economic situation
of India since 1991. The major goal of this work is to study previous researches
dedicated to this topic, collect and analyze the necessary data related to this subject
and, finally, find out the extent of IT influence on overall modern Indian economic
situation and its position among other developed and developing economies. It is a
well known fact that India is a leading provider of up-to-date software solutions and
BPO services, but the purpose of this study is to support this statement with some
empirical evidences. This paper is focused on the impact of software manufacturing
and software-related service distribution. All types of call centers, data transcription
services, data entry outsourcing activities, etc. that are all parts of BPO will not be
considered. The center of attention in this research is software manufacturing activities
and software development services only. Software outsourcing is counted as a part of
software development services, so this economic concept is an element of this study.
The following measures of impact are selected: fraction of IT industry revenue from
total Indian Gross Domestic Product (GDP), changes in industry’s human capital, and
comparison of industry’s export numbers with other economic sectors.
Keywords: Indian IT industry, software export, software and economic growth, software industry and
human capital
EKHR21
Master thesis, first year (15 credits ECTS)
December 2012
Supervisor: Lars-Olof Olander
Examiner: Jonas Ljungberg
Website www.ehl.lu.se
Table of Contents
Chapter 1: Introduction .........................................................................................................................3
Section 1: Historical Background .....................................................................................................3
Section 2: Research Question ...........................................................................................................5
Chapter 2: Literature Review ...............................................................................................................6
Chapter 3: Data Collection .................................................................................................................12
Section 1: Gross Domestic Product ................................................................................................12
Section 2: Software Industry Revenues ..........................................................................................12
Section 3: Paid Employment ..........................................................................................................13
Section 4: Exports...........................................................................................................................14
Chapter 4: Methodology .....................................................................................................................15
Chapter 5: Results...............................................................................................................................16
Section 1: IT sector and GDP .........................................................................................................17
Section 2: IT sector exports ............................................................................................................18
Section 3: Comparison of IT exports with agricultural exports and merchandise exports ............19
Section 4: IT industry and employment .........................................................................................20
Chapter 6: Discussion .........................................................................................................................22
Bibliography .......................................................................................................................................25
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Chapter 1: Introduction
Section 1: Historical Background
Roots of worldwide IT industry go back to the beginning of 1970s. It was a long way from the
invention of microprocessor in 1971 to the modern trends and techniques in IT sector such as Cloud
Computing 2, Agile Software Development 3, etc. Third Industrial Revolution is associated with the
microprocessor introduction, and as many economists and scientists suggest the influence of this
technological revolution still plays a tremendous role on nowadays life of the society. It was a
stimuli that opened new era of human development where more and more aspects of our everyday’s
life became dependent on new inventions and modifications of the existing systems. Optimization
of business activities and customization of business solutions are essential parts of current business
cycles in all parts of the world. India is not an exception from this rule. Its economy is highly reliant
on IT industry, and during the past several decades this economic sector has turned into one of the
premier generators of country’s exports. It is rational to look at the phases of Indian IT industry
development in order to understand the reasons why India has become one of the leading software
producers and IT services providers. Looking at Indian IT industry historical background is a core
element for analyzing the economic impact this sector has nowadays on general Indian economic
situation.
The first period of IT industry development in India is associated with a time lag from 1968 to the
middle of the 80s. This is mostly a period when “IT had such minor impact that most people
thought of computers in terms of hardware only” (Harding, 1989, p.33). This was not the case only
for India. It was a worldwide trend, that the level of development in IT was limited to the supply of
hardware programmers to maintain this hardware. It was impossible to deliver any kind of software
due to technological limitations systems had, so the only valuable resource for hardware
maintenance, support and development were engineers. Also, this was the time of rapid brain drain
process from India, which, according to Annalee Saxenian, started after the World War II and
continued till the mid 80s. Indian Consulate in San Francisco provides a number of 700,000
immigrants from India who were living in the United States in the end of 1970s, and most of these
people were engineers and analysts who worked in the scientific fields. Just to compare this
number: according to Indian governmental statistics, each year India has around 60,000
technological graduates. It means that more than a sum of ten years skillful graduates, who had the
best qualification, migrated from Indian mainly to the United States and some European countries
with higher level of income.
Some technical limitations existed during that time that did not allow offshore outsourcing to be
chosen as an acceptable business model, i.e. the whole IT sector was limited mostly to the
production of hardware. Software as a part of IT was just launching. In addition to the technical
limitation of the existed systems, when onsite work of engineers and support team was required in
order to maintain and develop companies’ systems, strict governmental regulations had a negative
effect on the spread of Information Technologies in India. Protectionist policies within the country
did not allow existing foreign and privately-owned software companies to accelerate their presence
in India. “Import tariffs were high (135% on hardware and 100% on software) and software was not
considered and “industry”, so that exporters were ineligible for bank finance” (Dossani, 2005, p.15).
Such hostile attitude of Indian policy-makers toward international IT companies and internal
newcomers created insuperable obstacles for new entrants.
_________________________
2“
Cloud Computing is internet-based computing, whereby shared resources, software and information are provided to
computers and other devices on-demand, like a public utility” (International Monetary Fund).
3“
Agile Software Development refers to a group of software development methodologies based on iterative
development, where requirements and solutions evolve through collaboration between self-organizing cross-functional
teams” (International Monetary Fund).
Page. 3
Analyzing a case of IBM company is a perfect evidence of negative side of such protectionist
policies. The company entered Indian market and set up its manufacturing premises in 1951. The
corporation was slightly growing and increasing its presence and revenues over the years until the
mid 1970s, when new protectionist policies and huge import tariffs were introduced by Indian
government. This became unreasonable to continue companies’ operations in the country which
started provoking nationalization of company’s ownership. “According to IBM, it decided to pull
out of India in 1977 because of unreasonable government regulations which mandated 60%
domestic ownership of IBM’s Indian operations” (Harding, 1989, p.32). Such governmental
position was explained by the Introduction of Foreign Exchange Regulation Act (FERA) by Indian
parliament in 1973. According to this act, foreign company’s share could not exceed 40 percent in
any kind of joint ventures. In simple words, this act gave green light to the nationalization of all
international ownerships that were doing business in India.. Also, this act introduced a set of laws
and rules related to foreign exchange, according to which each person was presumed guilty unless
he or she could prove his/her innocence. This was against a worldwide practice where all people
were presumed innocent unless guiltiness was proved. Even minor economic violations associated
with foreign exchange were considered criminal offences and a violator could be imprisoned. Other
countries employed a strategy where the same violations were counted as civil offences. Such
unreasonably strict regulation was another incentive for IT companies to stop their business
activities in Indian market.
First necessary and expected changes came in 1984 as soon as Rajiv Gandhi was elected as a new
Prime Minister in India. One of the first things he did on his post was an introduction of “New
Computer Policy (NCP-1984)” (Dossani, 2005, p.17). According to Rafiq Dossani, there were
several extremely valuable economic regulations that became first bricks in building a powerful
wall which is called nowadays “Indian IT industry”. The most significant parts of this policy were
dealing with: reducing “import tariffs on hardware and software (reduced to 60%)” (Dossani, 2005,
p.17); IT sector started to be recognized as an industry, it was called “delicensed industry”, “i.e.,
henceforth eligible for bank finance but not subject to the intrusive licensing regime” (Heeks, 1996,
p.44); foreign companies were allowed to establish independent and privately-owned firms and
export-oriented branches; and, finally, a strategy for software parks creation and export tax amnesty
for the members of these parks was approved. These policy improvements played important role in
attracting new IT companies in India and quickened the growth of international investments into
this economic sector. Texas Instruments Inc. (1986) and Citicorp Overseas Software Ltd. (1985)
were among the first large American companies that took advantage of operating in newlyestablished science parks in Bangalore and Bombay respectively.
The first steps toward IT industry liberalization in India were accompanied by the invention of PC
in the beginning of 1980s. This fact, in combination with workstation introduction, “revolutionized
the Independent Software Vendors (ISV) industry” (Dossani, 2005, p. 9). Unix operating system as
well as C programming language were introduced and all these factors led toward a situation where
software development, upgrading and maintenance became flexible and portable. It means that
hardware could be built in one part of the world by one producer and applications to be used with
this hardware could be manufactured and written by another software vendor. It dramatically
decreased the necessity of permanent onsite presence for programmers and system engineers. At the
same time, it created a number of opportunities and potentialities for new Indian IT companies,
because a possibility of low cost offshore outsourcing became more technologically realistic.
Tendency toward further liberalization of existing economic policies was promoted by the new
Indian government in 1991. Some serious and important steps were done in regard to attracting
foreign investments and accelerating IT industry development. The most valuable shift to
liberalization of Indian economy was associated with standardization of foreign ownership,
elimination of import tariffs for software and hardware, final removal of export taxes for all
Page. 4
software and hardware manufacturers, and applying worldwide recognized standards toward
intellectual property protection. Reorganization of governmental monopolies (telecommunication
sector for instance) and creating favorable climate for entrepreneurship were additional vital steps.
Tolerant amendment to Foreign Exchange Regulation Act (FERA) was made a bit later (in 1993),
but was forced by the reforms of 1991 and diminished seriousness of penalties for exchange rates
related violations. All the reforms’ actions stimulated international companies and investors to
consider India as a profitable potential business destination.
The significance of New Computer Policies in 1984 and major economic reformations in 1991 is
undoubted, but several social factors should be taking into account when studying impact of IT
industry on economic situation in India. The first element is that most of Indians are fluent in
English, which is traditionally considered a language of IT. This situation created a favorable
competitive advantage for Indian software companies. The second element is so called Argonauts’
importance. Annalee Saxenian in her book “The New Argonauts. Regional Advantage in a Global
Economy” uses the term Argonauts describing technical specialists who immigrated to the United
States during after-war period and later on returned to their home country (India in this case) when
economic reforms took place and civilized conditions for entrepreneurship were created. These
experts got necessary technological knowledge as well as management background required for
successful IT start-up companies or being employed in growing international software companies.
Both these factors created a valuable advantage for Indian IT market rapid growth and development.
Indian IT industry experienced several phases of reformations and policy changes since the late
1960s – beginning of 1970s. Some of these policy regulations in combination with obvious
technological limitations created negative atmosphere for IT sector spreading, but, finally, by the
end of 1991 this situation was corrected. Constructive policy changes took place and adding to this
detail some social factors such as English language prevalence and experience of returnees made a
perfect background for rapid IT industry growth in India.
There are always pros and cons of every economic process, and it is impossible to imagine a
situation when all sectors of economy and the whole population can benefit equally from a certain
industry or technology. Discussions on the influence of IT on total Indian economy is continuing
nowadays and there are some disputes about how these benefits can be distributed among other
domestic economic sectors more evenly. Later on, in this research, I will try to touch a base on these
controversies and will attempt to discuss them in more details. What is unique for all the previous
researches, books and materials dedicated to this topic is that none of them denies importance of IT
in formation of serious economic growth, demonstrated by India during recent years, especially
since the beginning of 21st century.
Section 2: Research Question
Every economic impact can be measured from various perspectives and the extent of this impact
can be studied differently. The selected method of examination usually depends on the type of the
analyzed factor. For IT industry I’ve chosen to pay attention to the changes in GDP that can be
associated with software industry, industry’s impact on human capital and role of the sector in total
country’s exports. Comparison on exports with some other economic sectors will be done to provide
some better understanding on the level of IT industry importance for the existed national export
rates. Some indirect impacts such as contribution to educational system development or prevention
of human capital from immigration will be focused as well. The main research question for this
study is:
What is the impact of IT industry on Indian economic development since 1991 in terms of fraction
from total Indian GDP, export rates and overall paid employment?
Page. 5
Chapter 2: Literature Review
The following section of this research is focusing on literature review for the selected topic. The
goal is to find some explanations of how software industry has influenced the development of
Indian economics since liberalization reforms that were started in the mid 80s and achieved its peak
in 1991. The idea is to find some supporting facts and data that software industry has already had
and currently demonstrating positive effects on overall Indian economic performance. Several
books and related researches will be analyzed in order to form a clear picture of the development of
Indian software industry and particularly its influence on Indian export rates, paid employment and
overall contribution to country’s GDP.
“China and India: Opportunities and Threats for the Global Software Industry” by
John McManus et al.
John McManus, Mingzhi Li, and Deependra Moitra in their book “China and India: Opportunities
and Threats for the Global Software Industry” are trying to analyze the reasons and effects for India
from becoming “leading software nation” (McManus et al, 2007, p.37). The authors are talking
about IT industry as “known globally for its superior software capability and leading to a new
identity for India” (McManus et al, 2007, p.37). They perform Political, Economic, Technological,
Environmental, and Legal (PESTEL) analysis in order to prove the importance of software industry
for Indian economy and are trying to outline the factors that were crucial for such rapid industry
growth and its increasing importance for Indian economy. According to the authors, Indian’s GDP
was around US $755 billion and it was demonstrating a growth of about 8.4 percent during 20052006 years. At the same time, Indian software industry demonstrated a revenue of US $29,6 billion
where more than US $ 23 billion was due to software and IT services exports. The growth rate for
the same period (2005-2006) was accounted to around 40 percent, which is almost 5 times more
than country’s GDP growth change.
The authors have mentioned the importance of political regime for the potentiality of IT industry
development. Indian case has proved it. They are linking to the different types of economic reforms
that took place in India since the beginning of 1970s and mention negative effects the protectionist
policy had on Indian IT sector, and, as a result, on overall Indian economy. Inability for foreign
companies to create their facilities in India unconstructively influenced Indian economy and were
the reasons for tremendous decrease in foreign investments, educational slow-down, and rapid
increase in the number of most skilful labor force immigration. Politics of economic liberalization
was a turn key for Indian IT sector. Since that time the industry demonstrated constant growth and
overall country’s economy was able to benefit from this tendency.
According to the authors, in 2005 there were around 6,000 IT companies that offered all kinds of
customized software and special IT services, where around 40 percent of them were international
companies, subsidiaries or joint ventures. These companies provided direct employment to 878,000
professionals (the data is for 2005). At the same time, these companies created around 1,5 million of
indirect paid working positions, and companies’ overall revenues were estimated to be around 4,8
percent of total Indian GDP. In 2005 India owned “nearly 60 percent of the global offshore software
and IT services” (McManus, 2007, p.41), but this impressive performance was able to achieve only
around 3% of total global software industry, so India still has a lot of opportunities for further
development. The authors mention IT sector as an important contributor for Indian trade deficit
coverage, but permanent increase in natural resources prices had a strong negative effect on Indian
economy.
IT industry had some indirect positive effect on Indian economy as well. Constant increase in
foreign investments into Research and Development was one of them. “Microsoft, for example,
Page. 6
announced an investment of US $1,7 billion, IBM US $6 billion, AMD US $3 billion, and Cisco US
$1,1” (McManus, 2007, p.46). These investments should create additional job opportunities for
potential job seekers and, of course, such R&D investments were beneficial for the whole Indian
society, because it would provide some cheaper telecommunication services and software solutions
and would result in price decrease of such services for domestic users as well. Fast penetration of IT
solutions, Internet technologies, and modern software into Indian society is mentioned by the
authors as an extremely beneficial indirect outcome.
Increase in private investments into educational system is another indirect beneficial contribution of
IT sector to Indian economy. According to McManus et al, the popularity of IT jobs is growing and
that forced many young people to enter educational institutions and select engineering related
majors. In a country where illiteracy rate is over than 32 percent, such incentive is extremely
important. At the same, time Indian IT companies are investing into different grants and sponsored
educational programs. The book mentions governmental plans to create six new institutions
specifically with Information Technologies majors. Indian software companies should become the
major sponsors of these institutions.
“India’s Software Industry: State Policy, Liberalization and Industrial Development”
by Richard Heeks
Richard Heeks in his book “India’s Software Industry: State Policy, Liberalization and Industrial
Development” is trying to analyze the importance of software industry in general Indian economic
performance in post-reforms decade. He does it through a prism of linkages between liberalization
policy and software industry development. The major goal of the author is to prove that empirical
growth of the industry should not be associated with positive changes in Indian economy only. Such
rapid increase in revenues of IT firms has some negative sides as well. He employs both neo-liberal
model and structuralist model to outline and describe these positive and negative effects. He does
not deny the importance of IT sector and he is accepting the idea, that this industry has become one
of the leaders in GDP generation process for India, but reviewing this impressive growth from a
critical perspective is extremely important when measuring the impact of IT industry on Indian
economic situation.
Due to policy liberalization in India “aggregate estimates of industrial (software) growth –
production output, exports, jobs, number of firms – have all grown strongly” (Heeks, 1996, p.342),
but at the same time, the industry demonstrates marked dependence on foreign investments,
worldwide economic situation and expresses vulnerability to global demand changes. This is
happening due to a tremendous reliance of IT companies on foreign capital. The industry is mainly
service-oriented, that is why its employees have little contribution to the creation of software
products that can become an asset if the demand for services will go down. At the same, time the
industry is export-driven, and this means that most skillful workers are concentrating on meeting
foreign companies’ needs rather than improving Indian domestic necessities. Heeks argues that this
international orientation is supporting brain drain from India due to the possibilities for IT experts to
be employed by international companies abroad. The author agrees that this is a natural desire to
have a well-paid job, but he convinces Indian government that having too liberal regulations within
the industry is an additional incentive for Indian professionals to immigrate.
Huge international investments and cash inflows from foreign investors have limited benefit on
Indian economy as well. According to Heeks, with an increasing amount of foreign investments,
India is loosing its economic self-determination. Most of the money transfers are related to the
demand of foreign firms for research and development and IT services delivery. It means that these
inflows are concentrated only in certain software enclaves which can benefit from them in terms of
relative high incomes for a limited number of Indian employees. In addition, this unequal
Page. 7
distribution promotes social inequality within the country. Plus, the produced software goods or
delivered IT services have minor effects on Indian industrial needs in agriculture, manufacturing,
etc. Heeks argues that such uneven distribution should be limited by the government in order to
improve Indian economics. Collaboration with international software monsters should be
competitively equal in order to allow small-size Indian domestic companies to be not only
internationally-driven units, but to force these small legal entities to accelerate the production of
software goods for domestic use as well.
“Indian software industry began by being wholly domestic-oriented and partly import-substituting”
(Heeks, 1996, p.355). Later on the situation changed and IT industry in India has become mostly
export-oriented. According to Heeks, this shift has created a negative balance between export and
domestic-oriented production. The author agrees that valuable increase in revenues in IT sector has
influenced Indian economic positively. This industry has become the best paid sector of Indian
economy, and this fact attracts more and more specialists to be involved in IT activities. At the same
time, he proposes to start distinguishing between immediate quantity growth and long-term quality
growth of the industry and, as a result, long-term impact on overall Indian economic situation. What
India has now is a significant increase in software profits and number of jobs, but these short-run
profits are occurring due to deep penetration of international companies into this economic sector
and due to “super export orientation” of the delivered IT services. This rapid growth has little to
deal with the qualitative improvement of the industry. Reconsideration of policies is necessary in
order to persuade Indian IT companies to start concentrating on domestic needs and accelerate
software package production.
In this book Richard Heeks is trying to study two opposite opinions of IT industry’s impact on
overall Indian economy after the acceptance of economic liberalization principle by Indian
government. The first one is structuralist, which suggests that such empirical industry growth
should not be considered positively only. Increasing dependence on foreign capital and loss of
skillful human capital can have a negative effect on Indian economy in the long-run. The country
can loose its self-determination and millions of professionals will become extremely vulnerable to
unpredictable demand changes in foreign markets. This can result in inability for Indian IT
companies to be competitive on a global arena and will induce many Indians to start looking for a
better life abroad. Neo-liberal perspective, on the other hand, suggests that significant foreign
investments should be transformed into better efficiency for Indian domestic industries in the longrun. Indian economy has already started benefiting from rapid increase in revenues and significant
increase in available job positions. Current imbalance between domestic and export production
levels should start declining in the long-run. According to neo-liberals, current cooperation with
international software companies should help Indian IT firms to increase their share in global IT
market, create perfect ground for promoting their competitive advantage in the long-run and, finally,
this industry will start producing more software packages for domestic use.
“The Software Industry and Development: the Case of India” by Uma S. Kambhampati
Uma S. Kambhampati is examining the impact of software industry on the level of Indian economic
development by focusing on two economic aspects: contribution to GDP and exports and
contribution to the socio-economic sector. Society educational level as well as availability of up-todate infrastructural resources is mentioned to be among the key factors that explain the existing
level of software industry development. India. Low labor cost in combination with approximately
60,000 technical English speaking graduates allowed India to be qualified for a role of one of the
leading IT providers in the world, while major competitors such as Israel and Ireland did not have
an access to such talented pool. That is why a diversification process took place and India became
the premier player in the field of less complex solutions delivery. For a country, where around 34
percent of adults are illiterate (UNESCO, 2008), it is an outstanding position. Very weak
Page. 8
infrastructural ground was covered by the ability of private companies to invest in their own means
of communication. Such liberal regulations helped India to attract significant amount of foreign
investors. The author describes the influence of IT industry on overall Indian GDP growth and
exports as implicitly valuable and positive while such contribution to the socio-economic sector is
noticeable and important, but several assumptions should be considered when evaluating it.
“India’s software exports have increased from US $ 225 million in 1992/93 to US $ 3,010 million in
1998/99, a rate of growth of approximately 1,238 percent over this 6-year period. This represents an
increase from 1,26% of India’s total exports in 1992/93 to 8,83 percent by 1998/99” (Kambhampati,
2002, p.28). This numbers look self-explanatory. The growth of more than one thousand percent
within just 6-years period looks really impressive. According to Kambhampati, software exports
numbers in the year of 1998/99 were close to 1/3 of textile industry exports and 1/2 of exports from
agricultural sector, which involves around 50 percent of the entire Indian population. The
contribution to country’s GDP was growing extensively as well (from 0.5 percent in 1992/93 to 1,5
percent in 1996/97). Basically, it means that software sector has improved its influence on total
country’s GDP growth rate and it has become one of the major foreign exchange contributors to
Indian economy.
Number of direct employees within the industry has increased from 160,000 in 1996 to 380,000 in
2000. Still, this number was only about 2 percent from total private sector employment, but,
assuming the fact that the number was more than doubled within 4 years, the tendency to this share
increase is obvious. Such prestige of IT industry was able to convert brain drain process into “brain
circulation” (Saxenian, 1999). The increase in IT workforce proves the fact that software vendors
were able to defeat infrastructural shortcomings and continued contribution to the growth of IT
importance to overall Indian economic situation. .
As mentioned by the author, limited domestic market orientation, unequal regional concentration,
inequality in income distribution and uneven employment opportunities are some negative sides of
rapid IT industry growth. Export-driven industry does not donate enough into other domestic
industries. The only exception is financial sector, where institutions were investing comparatively
large amounts into automation of their activities. Kambhampati argues that such internal linkages
should be expanded in order to allow other domestic industries to start benefiting from improved
productivity and up-to-date software solutions for business operations. Regional concentration
should be reconsidered as well. Southern and Western urban parts of the country are the ones that
host most software parks and employ the majority of IT specialists. Indian government has already
launched a program that should change this situation and redirect the flow of IT companies to other
parts of the country. Inequality in income distribution is a part of concentration problem, so this can
be changed if the distribution of IT firms within the country will become more even. Gender
discrimination should not be considered as a problem because, according to the author, a conducted
survey shows that approximately 10-12 percent of software developers in IT companies are women.
At the first sight, discrimination might take place, but statistics says that only 10 to 15 percent of
technological students in higher educational institutions are women, so this number is close to the
one provided by the survey.
“The Indian Software Industry: the Human Capital Story” by Ashish Arora &
Surendkumar Bagde
This research prepared by Arora and Bagde is focusing on one of the key elements of IT industry
existence and development, which is human capital. The goal of this research is to track the
interdependency patterns software sector and human capital have had since the start of Golden era
for Indian IT industry (since 1991). Other researches were focusing on the importance of human
capital as well, and many of them negatively measured the impact of IT industry on this part of
Page. 9
Indian economy due to IT companies’ centralization in certain urban parts of the country. The
authors of this research are trying to extend the study of this impact by providing some clear
empirical evidences. The research includes fourteen major Indian states for the period from 1993 to
2003. Total population of these selected states is around 83 percent of total Indian population, and
this territory covers 79.2 percent of total country’s GDP. The results show that revenue per
employee growth and rapid increase in number of employees are the key success factors for
significant rates of Indian IT industry development, and, as a result, success in constant increase of
total country’s export rate.
The authors have examined correlations between IT centralization and human capital and have
come to a point that this situation is a stick with two ends. From one perspective, IT companies have
negative impact on Indian economy in terms of unequal income distribution and uneven
geographical location, making South and West territories are the only ones that are benefiting from
constantly increasing demand for Indian software products and IT services. Launched governmental
programs that should stimulate software companies to spread more evenly to other parts (preferably
rural) of the country have not provided any visible results so far. Moreover, existing software parks
and hubs are constantly investing into educational system of these specific states, which decrease
the availability of highly professional education for the remaining territories of the country.
Another perspective suggests that being close to available pool of educated resources was a natural
decision for first IT companies. They initially started opening their premises at states where
educational system could provide the necessary human capital to cover companies’ technological
and managerial needs. It was the government who created such instability in the spread of important
technological knowledge. It means that initial location of the majority of engineers and technical
specialists predetermined geographical location of new IT companies and multinational
subsidiaries. According to the authors, seven major IT states such as Bangalore, Chennai, Bombay,
etc. contributed around 95 percent of total software exports in 2002/2003, but at the same time these
seven states cover only 48 percent of overall country’s population and 57 percent of the total
industrial production in India. So, initial availability of technical graduates from both state and
private institutions were persuading new IT firms to enter only certain geographical states and, as a
result, to increase imbalance in job distribution, which is still effecting the overall Indian economic
performance.
“The Software Industry and India’s Economic Development” by Ashish Arora & Suma
Athreye
Arora and Athreye are giving quite positive grade for IT industry in influencing overall Indian
economic growth. The key success factor for industry’s development is its relatively low per hour
rates when compared to other European or North American countries. This global competitive
advantage at the same time is an advantage for domestic Indian economy, because IT sector has
significantly higher wages compared to other Indian industries. “Success of the industry has
increased the relative value of professional workers, not only programmers, but also managers and
analysts” (Arora and Athreye, 2001, p.1). At the time, when Indian software industry employees
were able to earn only a small part of the income of similar employees in developed countries, these
incomes were approximately twenty times more than internal Indian averages. Overall Indian
economy was benefiting from such rapid development with no doubts. Especially, the parts where
IT firms have the highest concentration such as Bombay, Bangalore, etc. Longitudinal economic
improvements of these regions were not limited to IT sector only. The benefits from increased rate
of foreign investments and professional education of IT related human capital were transferred to
other economic sectors in terms of higher productivity and improved infrastructure.
Page. 10
There are some indirect advantages from IT sector expansion as well. Government has started
investing into educational programs in order to improve the quality of its educational system and
increase the quantity of graduates with bachelor or master degrees. Arora and Athreye suggest that
the cooperation between governmental educational programs and corporate investments should
improve the total quality of secondary and primary education at least for the regions where IT sector
has the highest rate of involvement. For the country, where illiteracy rate is extremely high, longterm perspective of increasing the volume of highly educated and well trained workforce is very
important. This should have efficient outcome not only for the particular industry, but for other
economic sectors as well. Another positive economic impact is the increase of multinational
companies and international subsidiaries. Such companies are employing internationally-recognized
standards of management (ISO, CMM), and this is an excellent chance for Indians to learn these
methods of work organization without leaving the country. According to the authors, new
entrepreneurship opportunities, reconsideration of the importance of human capital and reexamination of educational system’s importance is the major contribution IT industry has had on
overall Indian economy since the beginning of liberalization reforms.
Page. 11
Chapter 3: Data Collection
The major goal of this research is to evaluate the impact of IT industry on overall Indian economic
situation since the beginning of liberalization reforms back in 1991. According to similar previous
researches and analysis, this impact is significant, but some empirical evidences for this statement
should be added. In this particular study I am going to focus on the following economic factors in
order to estimate how software sector has effected Indian economic performance: GDP, exports
growth and its contribution to human capital. Reliable data sources should be carefully selected
while gathering the proper numbers to make sure that the results are representative.
Section 1: Gross Domestic Product
After detailed examination of the available data sources, I’ve selected International Monetary Fund
database as a source for Indian GDP statistics. This resource definitely can be considered reliable.
Another advantage of this data source is that it has statistics for the whole period of this study (from
1991 to 2008). It means that the numbers are calculated with one single conversion rate for all
years. This approach allows avoiding any bias that can occur if the numbers are taken from different
resources in national currency at different point of time. The amounts represent real GDP numbers
in prices of 1999, so the annual growth rates are calculated based on these volumes.
Table 1: India's GDP (in US dollars, mln)
Year
Amount
Annual Growth, %
1991
275,973
2.136
1992
288,075
4.385
1993
302,303
4.939
1994
321,042
6.199
1995
344,642
7.351
1996
370,697
7.56
1997
387,820
4.619
1998
411,008
5.979
1999
439,433
6.916
Source: International Monetary Fund (IMF)
Year
2000
2001
2002
2003
2004
2005
2006
2007
2008
Amount
464,445
482,494
504,486
539,053
581,622
635,196
697,553
762,927
818,972
Annual Growth, %
5.693
3.885
4.558
6.852
7.897
9.211
9.817
9.372
7.346
Section 2: Software Industry Revenues
Data on annual IT industry’s revenues is an essential part for further calculation of its impact on
India’s GDP. The most reliable source that can provide accurate information about India IT
companies’ performance is the National Association of Software and Service Companies
(NASSCOM), which acts as a chamber of commerce for approximately 95% of Indian IT
companies. NASSCOM was established in 1988 and since that time it is the major trade body for
national software companies, private firms and multinational subsidiaries. This non-profit
organization publishes annual reports that are used by most of researches, publishing houses and
official institutions as the credible and trustworthy resource about Indian IT industry development.
Its worth mentioning that value-added revenues will be taken into account because these numbers is
the only available data for the industry, so presumably there should not be any conflicts in
comparing GDP numbers’ growth with IT value-added revenues growth.
Table 2: India's IT industry revenues (US dollars, bln)
Year
Amount
Annual Growth, %
Year
1991
0.38
40.397
2000
1992
0.491
29.211
2001
Amount
8,298
9,958
Annual Growth, %
49.810
20.005
Page. 12
1993
1994
1995
1996
1997
1998
1999
0.701
0.975
1,224
1,755
2,636
4,011
5,539
42.770
39.087
46.587
43.382
50.199
52.162
38.095
2002
2003
2004
2005
2006
2007
2008
12,455
16,517
21,621
28,447
37,726
47,841
60,041
25.075
32.613
30.901
31.571
32.619
26.812
25.501
Source: compounded by the author based on NASSCOM annual reports. Annual growth rates are calculated
by the author
Section 3: Paid Employment
a) IT industry
NASSCOM is chosen as the source for collecting information about IT industry employment
numbers and rates. Being the most reliable entity in the industry, this organization is publishing
strategic reports with the most important information about software industry for potential investors
and all kind of consulting companies (ex. NASSCOM-McKinsey Report 2005). It means that this
kind of information can be classified as official and reliable. Number of employees in the industry is
an essential part of such reports. Direct employment only is included into such regular studies
prepared by NASSCOM. Influence of IT industry on direct employment rates will be further studied
in this research.
Table 3: India's IT industry direct employment (thousand)
Year
Amount
Year
1991
56
1992
61
1993
69
1994
84
1995
106
1996
140
1997
156
1998
189
1999
214
Amount
2000
2001
2002
2003
2004
2005
2006
2007
2008
242
350
411
481
588
808
1,288
1,610
2,014
Source: collected by the author from NASSCOM Strategic Reviews
b) Paid employment (national level)
In order to measure an effect of IT industry on human capital as a part of Indian economy, it is
necessary to have the data about overall paid employment in the country. International Labor
Organization (ILO) is the best resource for such data series. I’ve researched ILO’s database and
have found continuous data for the period from 1991 till 2005. Statistics for the remained years
(2006-2008) is not available either in this database or somewhere else (World Bank, UN, WTO,
UNESCO). ILO is a trustworthy data source, so the numbers about paid employment numbers on
national level are considered accurate.
Table 4: India's paid employment (thousands)
Year
Amount
1991
26,733
1992
27,056
1993
27,177
Year
Amount
2000
2001
2002
27,960
27,789
27,206
Page. 13
1994
1995
1996
1997
1998
1999
27,375
27,987
27,941
28,245
28,166
28,113
2003
2004
2005
2006
2007
2008
27,000
26,443
26,458
NA
NA
NA
Source: International Labor Organization (ILO)
Section 4: Exports
a) Software/IT industry exports
Exports are considered to be one of the key factors of every economy. Growth in exports usually
characterizes the positive changes within economy or particular economic sector. That is why
analyzing exports changes for Indian IT industry is very important. This economic sector sometimes
is called “export-driven industry”, it means that most companies that are involved in the industry are
internationally-oriented. Such direction has made IT sector one of the major sources of foreign
exchanges for Indian economy. The data for IT sector exports is taken from NASSCOM
organization based on its annual reports and strategic reviews.
Table 5: India's IT sector exports (US dollars, bln)
Year
Amount
1991
0,128
1992
0,164
1993
0,225
1994
0,330
1995
0,450
1996
0,734
1997
1,100
1998
1,759
1999
2,600
Year
Amount
2000
2001
2002
2003
2004
2005
2006
2007
2008
3,400
5,300
6,200
9,370
13,467
20,053
28,259
40,432
47,339
Source: NASSCOM
b) Exports in agricultural and merchandise sectors
IT industry exports rates and growth tendency will be compared with agricultural and merchandise
sectors later on in this research. The data for these two industries is taken from World Trade
Organization database. This is an official statistics for India and information from this source can be
classified as highly reliable.
Table 6: Exports in agricultural and merchandise sectors (in US dollars, bln)
Year
Agriculture
Merchandise
Year
Agriculture
1991
3,361
17,727
2000
5,931
1992
3,676
19,628
2001
6,218
1993
4,167
21,572
2002
6,541
1994
4,399
25,022
2003
6,985
1995
6,322
30,630
2004
8,663
1996
7,040
33,105
2005
10,271
1997
6,863
35,008
2006
12,499
1998
6,235
33,437
2007
16,523
1999
5,835
35,667
2008
21,372
Merchandise
42,379
43,361
49,250
58,963
76,649
99,616
121,808
150,159
194,828
Source: World Trade Organization (WTO)
Page. 14
It is important to note that all the numbers in Chapter 3 are given in real prices in US dollars based
on conversion rate from Rupees. The real value is calculated in constant prices of 1999.
Chapter 4: Methodology
This quantitative research paper is persuading an idea to measure the impact of IT industry on
Indian economy. This question will be measured from three perspectives: influence of IT on total
Indian GDP growth, importance of IT industry exports in contributing to overall country’s export
rate and, finally, to investigate how Indian IT sector has contributed to the changes in paid
employment in India. Data sources and types of used data are described in Data Collection section
of this research. It is worth mentioning that all data sets are collected from reliable sources. These
data series are longitudinal and cover the period from 1991 to 2008, so it will give an excellent
opportunity not only to measure the impact of the industry on certain point time, but to evaluate the
continuous tendency of this influence.
The first measure of the software industry impact is how rapid growth in IT sector revenues has
effected changes in country’s GDP. In order to track this correlation I will try to follow annual
changes in both measures: GDP and IT sector annual turnover. The changes will be shown on both
nominal scale and annual changes scale. At the beginning, I am going to look at these economic
factors separately by creating separate graphs for each of these two factors. Later on, these two
aspects will be combined into one graph to visually measure the growth of GDP and IT revenues
since 1991 on one graph. One more analytical technique that will be used to measure the impact of
increasing IT revenues on Indian GDP change is correlation analysis. This analysis will be done for
annual numbers in IT revenues and annual nominal numbers for GDP. The goal is to explain
whether Indian GDP growth and rapid IT sector growth are correlated or not. If so, whether this
correlation is positive or negative. Correlation will be calculated with a help of Excel’s Analysis
ToolPack.
The second characteristic of the impact is a change in IT industry export rates. By applying annual
analysis I will follow the growth in IT exports since the beginning of nineties. The results will be
presented with the help of visual ads in both nominal numbers and log scale. The idea is to track the
changes and empirically support the idea, that IT sector is mostly export-driven. To measure the
significance of IT exports I will compare annual results and annual changes with export rates of
other major Indian economic sectors such as agriculture and merchandise (i.e. the total export of
produced goods within the country). Merchandise does not include either software goods and
products or agricultural goods, so there will not be any conflict in comparing these measures. The
results of such economic cross-sectoral comparison will be presented with the help of visual
elements.
Page. 15
Chapter 5: Results
This section of the research represents the empirical findings of this study. The numbers are taken
from the following data sources: International Monetary Fund (IMF), World Bank, International
Labor Organization (ILO) and Indian National Association of Software and Service Companies
(NASSCOM). More detailed explanation of data collection and techniques can be found in Data
section of this research. Methods of data analysis and employed analytical tools are described in
Methodology part of this study. The speed of growth has been breathtaking, from 0.38% in 19911992 to 5.5% in 2007-2008. Information technology services and software has been raking in
billions of dollars into the Indian economy. In the economic year of 1999-2000, information
technology had 284,000 employees. Six years late, the numbers have more than quadrupled to well
over 1.63 million jobs.1
(In USD billion)
2003-2004
2004-2005
2005-2006
2006-2007
2007-2008
(projected)
Export
Domestic market
Revenue
%contribution to
national GDP
% annual growth
in revenue
12.8
3.9
16.7
3.5
17.7
4.8
22.5
4.1
23.6
6
29.6
4.8
31.4
8.2
39.6
5.2
-40
-10
50
7
28.2
33.7
31
30
-27
Source: NASSCOM
The numbers are expected to increase with each economic year. It is noteworthy that the indirect
jobs that information technology has created are well above 8 million. In addition, there are more
than 2 million people employed in the hardware sector all thanks to information technology. Since
numbers do not lie, it can be said that information technology is the leading in employment
generation in all of India. The numbers of jobs are doubling with each economic year. On the
upscale, the economic growth occasioned by information technology has produced several ancillary
businesses. On the forefront of these businesses are real estate, catering and transportation.
Analogously, this has led to a high cluster of young consumers with similarly high incomes. Also,
this has been mirrored in the increment in tax collection. Information technology in India has its
niche in exportation of software. Export has been attributed as the force behind the growth of the
industry. As well, it has been the number one foreign exchange earner for India ever since it’s
spurring growth.2
The export aspect of information technology and service sector has been recording an annual
growth rate of 50% every economic year. Compared to other countries of similar size, India is miles
ahead in the information technology docket. Its growth rate has stood unparalleled and many
countries are signing bilateral agreements on their information technology strength. Although,
Indian software export comprises only 2% of global software and ancillary services; its allocation in
the customized software development market has moved from 11.9% in 1991 to 19.5% in 2000.3
The International Labor Organization points out that in the year ending 2003, India’s information
industry constituted only two-tenth of 1 percent of the entire country’s labour force. The wage
differentials usually arise from cost savings gotten from off shoring and offshore outsourcing
1
2
3
According to NASSCOM strategic reviews
According to NASSCOM strategic reviews
According to NASSCOM strategic reviews
Page. 16
conclusions or decisions. Therefore, there is an upper limit to exactly how much labor intensive
low-wage destination-country production can be actualized. Vis-à-vis home-country production
whilst still representing a fruitful business decision, and from subsisting conditions where the staff
numbers are numerous from a low-wage destination country, corporations will be more keen to
raise wage costs.
It is noteworthy that developing countries worldwide including India, which is arguably the most
fruitful and profitable destination for off shored and offshore-outsourced information technology
service jobs, will not achieve the major significant employment thrust from off shoring or offshore
outsourcing.
India’s information technology industry trade body, industry job creation grew from 284,000 in the
economic year 1999-2000 to a massive 1,287,000 in the economic year 2005-2006 at the
approximately 200,000 individuals each fiscal year. Interestingly, a big portion of this employment
created would have been primarily for servicing the small, albeit growing, local Indian information
technology market. Nevertheless, it is considered obvious that the export-oriented sector would
have created the many employment slots. NASSCOM reports indicate that in the economic year
ending of 2005 exports accounted for $17.7 billion of the entire information technology service and
software sector returns of $22.6 billion, or approximately 80 percent, give or take.
Indeed, entry into the Indian information technology by foreign or international players has not
contributed towards India’s GDP as compared to the indigenous firms.
Dynamic industry is arguably a snapshot, and the high octane competition between demarcation of
indigenous and international players based in other countries plays an important role. It is no secret
that the domestic players are being bought by the bigger players of the information technology
sector and then after sold across Indian borders.
Section 1: IT sector and GDP
Information technology contribution to the GDP of India has been increasing in five-folds. For
instance, in the 1997-1998 economic years its contribution stood at 1.2% then by 2007-2008 it had
attained the 5.5 % mark. The information technology revenues in 2004-2005 had ‘out-contributed’
other major contributors like construction, mining, electricity, gas and water supply by more than
20%. For some sectors it had contributed more than three times.
If we look at the growth rates of IT sector and country’s GDP the situation will be quite different.
Between 1991 and 2000 India demonstrated an average real GDP growth rate of 5,56% per year
while IT sector was increasing its revenues on average of 42.43%. With the beginning of new
century the difference became a bit smaller, but still IT industry was demonstrating much better
performance than overall Indian GDP. During the period from 2000 and 2008 average GDP growth
for India was equal to 7.18% per year while software industry average revenues increase was
30.55% annually.
The revenue in terms of gross from information technology surpassed the 12% mark of the entire
GDP focusing on India’s service sector. Simply, that tallies to about 54% of the entire GDP. From a
critical point of view, these estimates appear to not be reflecting the situation on the ground. The
numbers do not inculcate telecommunication, which has two tenets of equipment and services, mass
communication output, for example television and other electronic products which are very integral
to the information technology sector. In case the two areas are included, information technology
contribution to India would be much higher.
Page. 17
NASSCOM has reported that information technology in India has raked in a massive $39.6 billion
in tax income for the year ending 2006-2007. Moreover, it recorded a 30.7% growth and not the
27% which had been projected. Technically speaking every rupee which has been spent in
information technology will effectively produce two rupees as output in the economy. In addition it
will create at least four new jobs.
Graph 1 shows that IT industry fraction in total GDP is slightly growing with each year. It was
equal to almost 5% in 2008 and, according to the tendency, its importance should increase in the
next years. After performing correlation analysis for GDP growth (nominal numbers) and IT
revenues increase its becoming clear that these two factors are highly correlated (coefficient is
0.9941). This positive correlation proves the fact that IT has a positive impact on Indian GDP
growth.
60
50
40
30
20
10
0
Real GDP growth rate
IT industry growth rate
IT part in total GDP
19
91
19
93
19
95
19
97
19
99
20
01
20
03
20
05
20
07
Percentage
Graph 1: IT Industry Fraction in Total Indian GDP
Year
Source: International Monetary Fund, NASSCOM
Section 2: IT sector exports
Indian IT sector exports have being demonstrated constant growth since 1991, but the remarkable
part of this growth has begun in late 90s. According to NASSCOM, IT exports have increased from
$128 mln in 1991 to $47,339 mln in 2008. This is a growth of 38,8 thousand percent for less than
two decades. This real export boom for the industry began due to suddenly increased demand for
low cost outsourcing services in the turn point of the 21st century due to millennium IT crises and
significantly improved internet connection technologies.
If we look at the log scale of this growth it does not look so impressive, but still it shows constantly
increasing level of IT exports.
Page. 18
Source: NASSCOM
According to statistics, IT exports revenues are accounted for approximately two thirds of total
Indian IT sector revenues (NASSCOM). That is why this industry is correctly called an exportdriven economic sector.
Section 3: Comparison of IT exports with agricultural exports and merchandise exports
When comparing these three economic sectors and their exports’ rates it is obvious that
merchandise sector is the leading one. Its export amount in 2008 was around $195 bln, when IT and
agriculture had $47,3 bln and $21,3 bln respectively. It is noticeable that both merchandise and IT
sector exported more than agricultural sector even considering the fact that half of 467 mlnn
workforce (ILO, 2008) in India is involved in agriculture and IT sector in 2008 counted only 2,01
mln direct employees.
Source: World Trade Organization, NASSCOM
What is interesting is the fact that back in 1991 agricultural sector was far in front of IT in terms of
exports. Its export number was equal to $3,3 bln when IT sector exported goods and services only
for $0,13 bln. There was a long catch-up process demonstrated by IT industry and by the year of
2002 their exports numbers were almost identical ($6.2 bln for IT and $6.5 bln for agriculture).
Starting 2003 IT industry triumphed over agriculture and the difference between export rates of
these two economic sectors was constantly increasing.
Page. 19
Section 4: IT industry and employment
The third measure of IT industry impact on total Indian economic situation is its influence on
country’s human capital. It is worth mentioning that only direct employment in IT sector and its
influence is studied. First of all the nominal number of employees in the sector was increasing faster
since 1991, but, the employment growth has become really noticeable after 2000, when IT industry
in India has started experiencing a boom in demand for its offshore services. In nominal numbers it
has increased from 242,000 employees in 2000 to 2,014,000 workers in 2008. In percentage terms
this tremendous growth is equal to 732% for a period of 8 years. Basically, the average annual
employment increase is around 30.3%. This is the best performance among all industries in the
country. Again, this number is characterizing direct employment only.
Interestingly in 1991, agricultural exports were a record sixteen times more than information
technology exports. A decade later they both had similar contributions in the export sector. The
dawn of 2008 saw information technology supersede agriculture in the same area. The race between
the two is just exhilarating; the International Labor Organization places the 467 million slots in
India’s workforce, 52% are involved in agriculture.
On the log scale there is a constant growth demonstrated by the industry as well. The growth is
constant and stable for the whole period, but on this scale it is distributed equally for the whole
studied phase (1991-2008).
Source: NASSCOM
If we look at the rates of total paid employment, the results do not look so optimistic. It is obvious
that liberalization reforms had good incentives for many entrepreneurship opportunities in the
country and this resulted in slight, but constant paid employment increase from 26,733,000
employees in 1991 till 28,166,000 paid workers in 2000. Asian market crises of 1998 and global
economic recession that started in 2000 had negative influence on total paid employment rate in
India. It became declining annually and reached a level of 26,458,000 employees in 2005, which is
even smaller that it was in 1991.
On a log scale the situation is similar. A slight growth from 1991 till the end of 90s and after that
the continuous decline with the major down point in 2004 and 2005.
Page. 20
Source: International Labor Organization
When comparing log scales of total paid employment and IT sector employment, it is obvious that
IT sector was not following the trend and this sector still was contributing a lot in order to improve
the overall situation in paid employment. Graph 6 demonstrates that paid employment remained
almost stagnant for the whole period with minor ups and downs, while the IT industry is moving
straightly to meet the level of total paid employment.
Source: International Labor Organization, NASSCOM
The performed correlation analysis for IT industry and total paid employment showed that IT
industry did not influence the decline in total paid employment. The negative coefficient
(correlation coefficient is equal for -0.5146) could be predicted because the negative performance of
the whole total paid employment rate cannot be positively correlated with constantly increasing
numbers demonstrated by software industry.
Shifting focus to the nominal numbers, the growth becomes more visible. In 1991 it stood at US
$0.38 billion and in 2008 it was US $ 60.04 billion. Mathematically speaking, the industry has
replicated itself, in terms of turnover, more than 150 times in less than twenty years. Studies
indicate that the same is set to record an annual contribution of 10% to its GDP by 2012. The
growth has not come without criticisms. It has been argued that information technology has
concentrated its efforts in the Western and Southern parts of the country compared to other regions.
Page. 21
Chapter 6: Discussion
The purpose of this study is to measure the impact of IT sector on Indian economic situation since
the beginning of liberalization reforms in 1991. According to the received results, the overall
performance of IT industry was much better for this particular industry than for the whole economy.
It demonstrated steady increase in revenues and tremendous growth in exports. Also, employment
rate for the industry was growing constantly. It is helpful to understand the overall importance of IT
industry by focusing on three economic elements: fraction of the industry in total GDP, increase in
exports comparing to other leading industries and contribution of the sector to the total paid
employment.
The overall share of IT sector in total Indian GDP has grown from 0.014 percent in 1991 to 7.33
percent in 2008. This is a serious contribution assuming the fact that annual industry’s revenues rate
was 36.5 percent. None of the economic sectors within the country were able to achieve such
outstanding performance. In nominal numbers the growth looks even more impressive: US $0.38
bln in 1991 and US $60,04 bln in 2008. It means that for a period of less than 20 years the industry
was able to increase by 158 times in terms of turnover. According to NASSCOM, the share of IT
sector in total GDP is expected to increase on annual basis and achieve 10% in 2012. The
accomplished importance increase and future predictions make me positive to think that a share of
7.33 percent in total GDP is not the highest boundary for the software industry. In this research only
visible empirical effect on GDP is measured, but there are some indirect influences as well. For
example, increasing amount of international investments is one of them. Some economists such as
Richard Heeks are referring to the fact that these foreign cash inflows are oriented for exports of
goods and services only. This is hardly to be true, because many supportive economic sectors are
benefiting from the increase in IT sector revenues. Indian telecommunication sector is one of them.
Doing software business nowadays is impossible without constant access to broadband internet and
high-quality phone lines. That is why IT companies continue investing into ISPs (Internet Service
Providers) and Telecommunication companies. The development of these companies cannot be
limited to the delivery of services to IT companies. By improving their lines, hardware and
software, these companies are able to improve the quality of the services and decrease the costs of
internet access to other economic sectors and to regular Indian citizens.
Another critique of existing software industry is its limited concentration in certain urban regions in
Southern and Western parts of the country. Such imbalance was initially predetermined and has
nothing in common with the politics of software companies and foreign investors. Historically there
was an imbalance in the number of technical graduates in the country i.e. most of the technical
institutions were located in South and West. So, the companies were persuading the idea to open
their facilities in the places where skillful labor force was available. Organizing first software parks
in Bombay or Bangalore was a decision of Indian government because it was expostulating the goal
to provide jobs to the increasing number of graduate employees and stop brain-drain process. This
was a win-win situation for both government and IT start-ups. Nowadays, both parties have realized
that such course has to be modified in order to avoid future growth in inequality of income
distribution and prevent domestic labor migration. That is why private IT companies and
government are introducing a set of economic programs that have to provide good incentives for IT
industry new players to move to other parts of the country and preferably to rural areas.
The second direct measure of IT industry importance is its increasing role in India’s exports rate.
According to World Trade Organization, the total exports for the country in 2008 is accounted for
US $355 bln where US $ 47.3 bln belong to IT industry. It is making IT sector one of the leading
contributors to the exports growth. Initially IT sector was developed for domestic market purposes,
but competitive advantage of low labor costs in combination with availability of technically skilful
Page. 22
human capital made India one of the favorite outsourcing destinations. This study results show that
rapid increase in interests for Indian software products and IT services started with the beginning of
21st century. This occurred due to the increasing willingness of major Western companies to
decrease their operational costs and India with its good English language level seemed to be the
right choice. The presented numbers in Results section show that back in 1991 the ratio between
agricultural exports and IT exports was 16 to 1. It means that agricultural sector exported 16 times
more than IT sector. By the year of 2002 this ration was almost 1 to 1 (US $6.5 bln for agriculture
and US $6.2 bln for software industry). By 2008 this ration has changed to 2.2 to 1 and this time IT
industry had superiority. The race of IT exports growth in comparison with agricultural sector is
amazing assuming the fact that, according to International Labor Organization, 52 percent out of
467 mln available workforce is involved in agriculture.
IT sector is sometimes criticized for being too export-oriented. The main points of such criticism are
that such export orientation can lead toward loosing of self-determination by the country. Heeks and
Arora mentioned in their works that it is extremely negative for overall Indian economic situation to
be so dependent on exports, because it produces minimum benefits for domestic market.
Automation of other industries and employment of produced software should be mainly focused on
domestic needs in order to improve productivity of other economic sectors. It is undoubted, but
India is still a developing country with 22 percent of population living below poverty line
(Government of India, 2007) and unemployment rate of 9.5 percent (CIA factbook, 2009) and it is
extremely difficult for the internal powers to boost IT industry growth. That is why attracting
foreign investments to accelerate IT industry’s growth looks like the right solution. Having around
US $13 bln IT revenues (in 2008) generated from domestic market is still a good result for such
young industry as IT.
Software industry’s contribution into India’s human capital is the third measure of this industry
importance. This economic sector has demonstrated a constant growth in its employment rate since
the beginning of nineties with a rapid and significant increase in this raise since the beginning of
new century. This indicator is an extremely important factor for total Indian economy considering
the fact that the total paid employment rate in 2005 (26,5 mln) was even below the index of 1991
(26,7 mln). IT industry, in its turn, was able to increase its share in total paid employment from 0.21
percent in 1991 to 3.05 percent in 2005. This valuable contribution into total paid employees is
measuring direct IT sector employment only. If we add IT indirect employment numbers, definitely
this share will be even higher.
Some indirect improvements in Indian human capital that are associated with software industry or
caused by IT sector should be discussed as well. One of them is what Saxenian calls “brain
circulation”. It means that a lot of former immigrants are either coming home after living abroad for
a number of years or improve their linkages with their home country by accelerating entrepreneurial
relationships growth between Indian producers and Western buyers. These people is the most
skillful and experienced part of Indian human capital and they can bring to the country not only
financial opportunities, but to share their Western experience in companies’ organization and
management. This indirect positive impact cannot be traced in monetary terms, but this has clear
constructive influence on the development of this industry and overall Indian economy.
Moreover, Indian IT industry has influenced overall economic system. Becoming a member of IT
society is prestigious nowadays in India and it forced many potential students to choose technical
majors for continuing their studies. At the same time, these technical specialists are not the only
ones who are able to receive important international experience while working for IT companies.
Export orientation of the companies and increasing amount of international subsidiaries educate
managers and busyness analysts to adopt internationally recognized work principles and processes.
This education is transferred to other economic sectors later on.. Faster development and
Page. 23
improvements in educational system is one more indirect beneficial impact of IT sector on Indian
economy. By realizing the importance of having enough graduates to meet IT sector demand,
government launched a number of educational programs and opened new institutions that have
become available for Indians.
Overall impact of IT industry on Indian economy can be characterized as positive. This sector has
played an important role in increasing Indian GDP growth rate and, especially, has had a crucial
importance on boosting Indian exports since early nineties. Human capital has benefited from this
industry as well by constantly increasing number of paid work positions. Employees in IT sector
have the highest income among all industries and this helps to establish steady middle class within
the country. Some indirect positive influences such as increasing number of governmental and
private institutions as well as prevention from further increase in immigration rate are of great
importance for overall Indian economy. It is obvious that projected annual GDP growth of 10
percent (Fedec, 2010) within the next couple years is hardly to be possible without continuous
contribution from IT industry. There are some negative sides of this sector such as centralization in
certain areas (South and West) as well as industry’s high dependence on exports, and these
unconstructive effects are currently discussed within India. Software industry is a young sector and
these minor negative effects will be eliminated in the long-run with the help of governmental
programs and economic incentives introduced by Indian politicians.
Page. 24
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