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Indirect Impact
The indirect, tangible economic impact of the IT services exports industry is several times larger. A pioneering study that CRISIL did for Nasscom whose result was released in early last year, tried to quantify some of that impact. Most of the figures here are taken directly from that study.

Indirect employment generation: The Nasscom-CRISIL study estimated that for a turnover of Rs 1.3 mn in the IT-ITeS sector in 2005-06 (the financial year for which the data was available for the study), as many as 5.2 mn jobs were created in the domestic economy. Comparison with the direct employment in the IT/ITeS sector in that year (1.29 mn), reveals that for every direct job in the industry, four additional jobs were created in the Indian economy.

When one takes a slightly deeper look at the break-up of that employment, it busts the myth that the IT industrys impact is limited to the upper, educated echelons of society. The study estimated that some 65,685 drivers, 78,535 housekeeping and maintenance staff, 32,000 catering staff, and 23,000 security personnel were employed to serve the IT industry. In fact, the study also revealed that except for technology support services, all other jobs created indirectly by the IT industry had people with highest education levels of class X/XII and lower.

Output effects of capex/opex spend: The Nasscom-CRISIL study also estimated the multiplier effect of the capital expenditure and non-wage operating expenditure by IT/ITeS industry. In 2005-06, the industry spent Rs 309.9 bn in India on non-wage operating expenditure whose total impact on the economy through linkages to other sectors was Rs 577.8 bn. Similarly, the total capex spending by the industry of Rs 63.88 bn had an output impact of $125.8 bn through the linkages. Together a spending of Rs 373.8 bn on capex and opex generated a total output of Rs 703.61 bn in the Indian economy.

Impact of consumption by employees: The CRISIL study estimated that while in absolute terms the non-wage operating expenditure had the maximum indirect impact on the Indian economy, the largest multiplier was in the consumption spending by the IT/ITeS professionals. The study estimated that for a total spending of Rs 259.8 bn by the IT/ITeS professionals, the Indian economy generated Rs 550 bn as output impact.

Together, the above twocapex/opex spend and consumption by IT/ITeS professionalsaccounted for Rs 634 bn. In other words, every rupee output of the IT/BPO sector, an additional rupee was generated in the Indian economy through backward linkages and the induced effect.

Wealth creation and its impact: Most IT/BPO firms are first generation enterprises and their promoters have managed to create wealth and share a lot of that with the senior managers. These entrepreneurs and managers, in turn, have turned VC/angel investors to promote further entrepreneurship. Indian Angel Network, which counts among its members industry stalwarts such as Raman Roy (Spectramind/Quatrro), Saurabh Srivastava (Xansa), Pramod Bhasin (Genpact), Dan Sandhu (Vertex), and Sanjeev Aggarwal (Daksh) among others, is one such organized effort. The group does not just fund IT/BPO ventures but provides VC and seed funding for entrepreneurial efforts across sectors. Today, a little less than half of closed funding are in non-IT/BPO sectors, says Raman Roy of Quatrro.

This, as a phenomenon, is still new and hence it may be difficult to measure its impact right now but it goes beyond doubt that if India has to sustain its growth, it cannot just look at growing existing businesses incrementally. It needs to have innovations, which will come from new ventures. New ventures need a vibrant entrepreneurship environment and that, in turn, needs venture capital and guidance from successful entrepreneurs.

Socio-Economic Impact
Though far more difficult, and often impossible, to quantify, by far the biggest impact of the IT industry has been bringing about a big change in Indiawhether that is a boost of confidence among Indians about their own capability, a change in image of India abroad, a change in the way business is done in India, a radical change in the aspirations of millions of youth in the country about getting a fair deal in employment, and the biggest of them alla change in the way the governments treats investors.

Here are some more tangible impacts.

Turning globalization to Indias advantage: Not long back, globalization was looked upon as something that would give an unfair advantage to rich nations vis--vis developing nations. Today, it is the US that sees protests against job lossesit is a different point whether those fears are validto India. This is what Tom Friedman meant when he said the two threats to America remain Infosys and Al Qaeda. Though after three years, thanks to globalization again, those fears are proved to be invalid, the fact remains that the country, which was looked as a backward, poverty-stricken land with cast and communal divides, became one of the most envied and idolized country in the world purely because of one industrys achievementthe Indian IT services.

This is what Dr Nirvikar Singh of UCSC calls the spillover effect. The spillover happened in two ways, he says. One, Indian IT services firms built world-class organizations in India for the first time. Two, they built the reputation that Indians could do it. The second is often called building Brand India.

Dr Singh attributes the upbeat mood within even the Indian manufacturing industry about going global to a confidence that the Indian IT services industry instilled among them.

To their credit, Indian IT services firms led India Inc in many ways getting global business to India, in listing in the US (Infosys was the first to list on NASDAQ), and building multi-ethnic workforces by recruiting from campuses and industry in the countries that they did business in (TCS has employees belonging to some sixty seven nationalities).

While a large section of the Indian manufacturing industry in the 70s and 80s demanded protectionism policies, Nasscomthe apex body of IT services firmswelcomed non-Indian companies as its members.

In all aspects, Indian IT services firms rode on globalization. If India is unequivocally being put forward as how countries have leveraged globalization to level (well, flatten Mr Friedman) the world, it is largely because of the Indian IT industry.

Impact on working of government: In terms of bringing about the change, the most difficult change, in any country anywhere in general and in democracies in particular, is to bring about a change in the workings of the government. The fact that the IT industry has managed to do that fairly well, without too much of lobbying, speaks volumes of its achievement.

There are two reasons why this has been possible.

One is what Dr Singh of UCSC says is another aspect of the spillover effect. The IT industry grew because of the non-interference of the government. Their success made the government understand the value of non-interference, he says. He says, that was far more instrumental in the success of the IT industry than the export subsidies.

The other reason has to do with a very practical realization by local politicians. The impact most visible to the ordinary citizens of a state of any industrialization is job creation. While it is true that manufacturing creates more jobs and is more secular in its spread of employment to all classes of society, none matched the IT industry in terms of speed of job creation. This characteristic of IT/BPO meant jobs being created in the tenure of the same state government, unlike many a time in manufacturing. While one government grants licenses, by the time the jobs come up, another government takes credit. In the IT industryand more so in the BPO industrythe jobs are created fast and the governments can show it to the electorate as their achievements. This helped the state governments being aggressive in marketing their states and creating a conducive environment for investment. Once the culture changed, it became easier for other investors, too, to come and invest in states.

Education: The IT industry understands that the Indian success story has been possible largely because of Indias education. To sustain the growth, the manpower has to be generated at a faster rate. Many IT services firmsthrough their CSR activitieshave targeted this area. While CSR itself cannot be termed a unique contribution of IT industry alone, this aspect of CSRin bettering school education and special emphasis on maths educationwhich is derived from a very long-term business objective of the IT industry, will have a positive impact on Indias education, the benefit of which will be accrued to the country as a whole.

Bridging gender gaps: Another important but unrecognized contribution of the IT services industry is bridging the gender dividenot always with a social objective. Says Dr Rashmi Banga of UNCTAD, The wage gap between male and female employees is the minimum in IT industry, as compared to any other.

She says the multiplier of employment generation for women in this industry is also the maximum as compared to any other.

The Criticisms
All its direct and indirect impact notwithstanding, the IT services industry has often been criticized for being elitist. The fact that it enjoyed tax incentives for so many years has only made the criticism stronger, evoking responses as extreme as growing through artificial stimulants and as being the lobbying force for securing subsidies for large US corporations by poor Indian taxpayers hard-earned money.

While in most IT industry forums, those criticisms are often dismissed through sarcastic comments and jokes, some of them are worth examining into.

The employment gap: As discussed in the beginning, many economists have pointed out that the growth in employment in Indias services sector has not kept pace with the output growth in it. For example, though the services sector in India contributes close to 60% of GDP, the employment in this sector accounts for only 30% of the total jobs. It has also been pointed out that it has happened because industries like IT, with high productivity, have grown faster than others. Also, while the Nasscom-CRISIL study has identified the linkages with other industries, it is common knowledge that many other services sectors such as construction and trade have far better linkages domestically. As an export industry, the IT industry has no forward linkages and even backward linkages are limited. Dr Gokarn of CRISIL admitted this while releasing the report, clarifying that what the Nasscom-CRISIL study does is that it quantifies the output effect of the linkages of the IT industry and does not claim that it is better than other industries.

The points are, by and large, valid, feel both Dr Banga and Dr Singh. But the criticism of IT the industry is not valid, says Dr Singh. Dr Banga echoes similar thoughts. If an industry is growing well and having good productivity gains, you do not hold it against that industry.

The right question to ask is why is it that other industries are not growing, says Dr Singh. You cannot expect the IT industry to create all the jobs in the economy.

And you do not hold back growth of one industry because others are not growing, says Dr Banga. Both of them blame government policies for this. Dr Singh does recognize that it is a major issue and says it is high time the government took measures to boost growth of manufacturing which is far more labor intensive.

Clustered growth: Another acquisition against the IT services industry is that it has not seen uniform growth. Says Dr Banga, Yes, most other industries are far more uniform in their spread than IT. She says that the industry cannot be blamed for this, however. What we need is policy interventions: something similar to the incentives given to the manufacturing units if they set up in backward districts. She believes that though by that the growth will not be uniform, it will certainly take the industries to certain areas in states like Kerala where educated workforce is available across the state.

Dr Singh, on the other hand, does not see this as a problem. Clusters are not necessarily a bad thing. Even in the US, there are clusters and they have been doing well. No one criticizes them. He, however, agrees that state governments should have policies that would help companies to spread within a state.

Competition for limited human resource: A relatively new criticism comes from those who see the IT industrys hiring of most of the educated manpower as a challenge to the growth of the domestic industry. They feel the BPO companies lure away the kind of manpower that the domestic industries like insurance and retail would need by offering higher wages, thanks to their earnings in dollars. Almost the same sentiment is echoed by many senior executives in the manufacturing industry who accuse the IT industry of turning bright electrical/mechanical engineers into efficient coders.

Again, it is the faulty government policies that should be blamed, says Dr Singh. He says while the rising of wages and competition for labor is a good thing for employees, it just exposes how ill prepared India is to meet the demand of the workforce, despite no dearth of people. He unequivocally blames the higher-education policy of the government for this, a thought that Dr Banga also endorses completely. Both of them say the real problem lies in the government controlled higher education. Both say that while foreign universities would love to come to India if restrictive policies are removed.

This is a classic case of what you call artificial constraint, says Dr Singh. In addition to education sector reforms, Dr Banga sees hope in moving the low-end BPO jobs to other countries. While companies today are trying to do that for reasons of margins, she gives an economic imperative to it. Many low-end BPO jobs is where the retail industry and other such domestic industry competes with the BPO industry. But retail jobs have to be created in India. The low-end BPO jobs can move to other countries. While she acknowledges that this reason would never drive the industry to look at this option, their own business imperatives would do so. She says that will automatically take care of this issue.

Govt Policies Should Change
Though it is not the objective of the story to look into and prescribe policy measures, it is probably apt to list down some thoughts that have been emphasized by the economists that we spoke to as well as what has been highlighted in some of the academic papers.

Interestingly, while some of the problems mentioned above are often dismissed lightly by the discussions in IT industry forums, the academic papers on the subject as well as the economists that we spoke to agree with them, by and large. Where they differ from the critics who raise the issues are in not holding the IT industry responsible. The consensus is: the fault lies in our policies, not with the IT industry.

The most critical issue on which all agree is that we have lesser supply of skilled manpower than what is needed to sustain the growth momentum, be it in domestic industry or exports. The solution, as Dr Banga and Dr Singh both emphasize, is in removing restrictions in higher education that will allow private enterprises to supplement government efforts in education and bring in quality foreign education to Indian shores, thus, removing the artificial supply constraint.

Dr Singh says the government must learn from the success of the IT industry and apply some of the learnings to promote labor-intensive manufacturing to create more jobs. We have to ask ourselves: why are we not as cost-competitive as China? The answer lies not in the wage differences so much as it does in productivity differences?

He says the government, should focus on manufacturing and seriously take steps to make India competitive in that, if needed, by offering some subsidies there.

Dr Banga proposes an integrated services policy. She also urges state governments to incentivize the industry to go to secondary townships, addressing the issue of non-uniform growth.

So far, the New India has grown due to absence of negative intervention by the government; it is time we have some positive intervention to sustain this growth. Education sits right at the top in the list of such proposed interventions. We have seen IBM, Accenture, HP having more people in Bangalore than anywhere else. How about Stanford, Berkley, and MIT having more students in Pune (or some other city) than anywhere else in the world?

Shyamanuja Das
shyamanujad@cybermedia.co.in

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