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India's IT industry is not as successful as it seems and other countries should think carefully before following suit, writes Athar Osama.

Since India, Ireland, and Israel emerged as 'software super-powers' in the mid-to-late 1990s, many developing countries have joined the race for economic development led by information technology (IT).

Information and communications technology can level the playing field between advanced and under-developed countries in terms of access to information and knowledge. But it cannot be a panacea for the developing world's quest for economic growth and prosperity.

Many countries have tried to replicate India's success by developing IT-led economic development strategies, designed to "propel their economies into the twenty-first century". Serious effort and precious resources have been spent on these endeavours.

But new evidence suggests that this might not be a viable way forward.

Fortunate circumstances

There is a growing sense that India's IT miracle may not be replicable. Through the collective examples of other countries such as Brazil, Iran, Pakistan, Romania, Sri Lanka or Ukraine, we now know that India's success arose from decades of sound human resource policies, institution building, and a historical accident in the form of the millennium challenge.

Critical decisions, taken decades ago, enabled India to take advantage of an opportunity when it presented itself. In the 1950s, for example, India established the Institutes of Technology that have since become the engine of growth for Indian IT and a symbol of its human resource advantage. When IBM moved out of India in 1978, it left behind several hundred unemployed Indian computer engineers who sowed the seeds of software entrepreneurship throughout the country.

This early-mover advantage has proved crucial to the country's success. India was fortunate enough to be at the right time and place — it capitalised on unique circumstances and never looked back. It's initial success in software exports also set in motion self-fulfilling prophecies not available to other countries. The most important of these was the image of India Inc., the inspirational success stories that have driven others to work hard and succeed, as well as the 'can do' attitude and confidence that now characterise India's corporate sector.

Exaggerated success  

In addition to these exceptional circumstances, growing evidence suggests that India's software 'miracle' may not be as deep as it is believed to be.

The inherent competitive dynamics of the software exports industry means that the exporter sees a small portion of the revenue generated. As much as 55-60 per cent of revenue from India's IT exports never make it back to the country.

Several credible sources, including the United Nations Conference on Trade and Development, have also questioned the validity of Indian data on software exports. A 2005 study by the US Government Accountability Office (GAO) found significant discrepancies between US and Indian data on IT outsourcing.

In 2003, for example, India claimed to have exported US$8.7 billion worth of software, most of which went to the United States. But US companies recorded just US$420 million worth of software imports from India — a remarkable 20-fold difference.

The GAO believes that this huge inconsistency arises, in part, from India misreporting financial data. For instance, India counts the earnings of all temporary workers in the United States as part of their exports figures. But this is against universally-accepted financial disclosure conventions suggested by the International Monetary Fund. The result is a gross over-representation of Indian software exports.

Several factors also point to a relatively small impact on economic development from India's IT industry. In 2005, for instance, the IT exports industry was a marginal job-creator, employing 770,000 people — just 0.21 per cent of the total labour force. Trickle-down effects on other parts of the Indian economy, such as job creation in the services sector or increased productivity due to higher use of IT in, say, manufacturing, are also largely absent.

Careful consideration

It may come as a surprise to the world's development community that India's IT industry has had far less impact on development than is often stated.

But it highlights the tough challenges that face would-be replicators of the Indian experience, who see IT exports as both a means and an end to their economic development goals.

A serious reassessment of the IT-led economic development policies and philosophies favoured by many developing country politicians and development planners is needed.

For most countries, IT would remain a marginal industry creating jobs for no more than a minor share of a country's labour force. It would perhaps not deliver broader economic gains unless accompanied by industrial development of the kind that occurred in the West during the first half of the twentieth century, or is taking place in China today.

There is certainly no harm in adopting forward looking science and technology-based development strategies. But doing so without considering a country's unique endowments, initial conditions, and political trajectories could be counterproductive.

Wholesale replication of an IT-led development philosophy might not be the best way forward.

Athar Osama is a senior executive at ANGLE Technology Group — an international technology and economic development consulting company. [email protected]

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