India’s IT industry and industrial policy
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The role of the Indian government in helping foster the success of India’s IT industry is a point I disagree with Kalpana Kochhar about. Kalpana, World Bank regional Chief Economist for South Asia, posted a comment disagreeing with my views on the subject on ‘Africa Can Reduce Poverty’. Following is my counterpoint to her:
- No doubt the story of the Indian software industry is a story of private initiative. However, in addition to the indirect support of a large pool of competent talent educated at the country’s five institutes of Technology and at two Indian Institutes of management, the following direct measures from the government are also important for the sector’s success.
- As early as 1972, the Department of Electronics introduced a policy to permit duty-free imports of computer systems if importers would promise to export software and services worth twice the value of the imported computers within a specified time. This policy helped a number of leading companies in their inception stage.
- In the 1980s, the government formed a software export–promotion council and liberalized import rules for materials needed for the industry. Software was explicitly targeted as a key sector for export promotion.
- Software Technology Parks: The creation of NASSCOM in 1988 and the subsequent establishment of software technology parks (STPs) in 1990 represented a fundamental approach to policy making for the software industry. An important institutional intervention was the establishment of STPs to provide infrastructure for private companies to export software. Established in 39 locations, including most major towns, they provided ready-to-plug IT and telecom infrastructure. STPs also allowed single-window clearance for all regulatory matters. The benefits and approvals for STPs are similar to those of export-oriented units. Incentives provided in the export-import policy are also applicable to STP members. The companies registered with these parks account for about 68 percent of software exporters. These STPs enabled new enterprises to launch and small and medium enterprises (SMEs) to grow. One of the STPs’ key contributions is providing high-speed data communication services to the industry. The software technology parks of India (STPI) had international gateways at 39 locations (2003). For the last mile, users can connect through point-to-point and point-to-multipoint microwave links, and terrestrial fiber/copper cables were used (where feasible). The up time of STPI connections is 99.9 percent. STPI works with major international telecom operators, such as AT&T, Sprint, MCI, Intelsat, and British Telecom. STPI offers two main services: Softpoint service, secure and exclusive digital circuits for data and voice transmission; and SoftLink, Internet access on a shared basis.
- In the late 1990s, foreign companies were permitted to establish fully owned subsidiaries in the electronics-export processing zones. The Ministry of Finance made available fast, low-cost data-connection facilities, and reduced and rationalized duties, taxes, and tariffs.
- The Reserve Bank of India adopted several measures to support the IT industry. These included the acquisition of overseas parent-company shares by employees of the Indian company; companies whose software sales were over 80 percent could grant stock options to nonresident and permanent-resident employees; foreign exchange could be freely remitted for buying services; and companies that executed contracts in “computer software” abroad could use income up to 70 percent of contract value to meet contract-related expenses abroad.
- Tax holidays were given on company profits; tax breaks from corporate income and tax on profits were available to units in any free-trade zone, any software-technology park, or any special economic zone to the extent of 100 percent of the profits derived from the business.
I do not know why people ignore the contribution of those direct measures to the dynamic growth of India’s software industry.
It is a fact that India’s attempt to support the development of new industries failed in many cases. However, what should be the right reaction to those failures? Should we totally go against any government’s facilitation of industrial development or should we try to gain a better understanding of the reasons for those failures and the successes in other cases so that we can help the government improve its interventions in the future? I opt for the latter approach and that is what the New Structural Economics and the Growth Identification and Facilitation attempt to achieve. As I said in my rejoinder to the joint blog by regional chief economists, it is important for India and other low-income countries to find effective ways to facilitate their diversification and upgrading to new industries so as to generate jobs and to achieve dynamic economic growth for poverty reduction and convergence to higher income status.
I don’t think there is much dispute on whether the Indian government has done things to help the IT industry. The question is whether it created enabling conditions that facilitated the growth of the infant IT industry of the 1970s to the giant it is today -- or whether it disabled its growth for a long period, but became more friendly once private initiative had already helped the industry develop. And I think this is where my interpretation of the facts differs from that of Justin's.
So what was the government’s policy towards IT in the infancy stage of the industry?
India’s software exports began in the early 1970s with Tata Consultancy Services (TCS) sending programmers to the US to install the systems of Burroughs. You may wonder why programmers had to be sent to the US to write code when they could do it more cheaply on Indian shores. There were at least three government-initiated stumbling blocks that made it difficult to write code sitting in India:
1. In 1973, the government decreed that IBM and other multinationals could only operate in India if they sold at least 60 percent stake in their Indian operations to domestic interests. IBM worried it would lose control over its intellectual property and chose to leave India in 1978. Why is this exit important? IBM machines formed the largest base of installed computers in India at the time. Once IBM left, the government announced that it alone, through a state-owned subsidiary, would maintain and supply software to IBM’s machines in India. The consequence: domestic private firms could not get any significant local business, and more importantly, learn about computing on IBM’s machines -- the industry standard at the time.
2. The government imposed relatively high tariffs on imported hardware (135%) and software (100%). The government actively discouraged hardware imports, and it wasn’t until 1979, that TCS – India’s largest software house at the time – finally obtained permission to import a mainframe.
3. The cost of telecommunications was prohibitively high – the government did not think it important for people to own phones – so the state made it extremely expensive to connect India with the outside world by modem to download software and work collaboratively across the oceans.
While the government, led by Rajiv Gandhi, initiated an IT policy in the mid-1980s, tariffs on hardware imports remained high. What changed, however, was the advent of the workstation and Unix/C – now programmers were no longer dependent on importing the relatively expensive mainframe, but could work on the much cheaper workstation and make a profit despite the high tariffs. Even then, it should be noted that not a single software product of any significance was produced in India during this period, either by a domestic or a multinational firm. The services provided by Indian software firms – mostly system maintenance and small coding projects – occupied the bottom-rung of the value chain.
NASSCOM made a big difference to India’s fledgling IT industry, but it was an industry association, and it only became truly influential post 1991 under the leadership of Dewang Mehta. Mehta lobbied the Government on behalf of the fledgling Indian software industry, and was a key figure in gaining concessions while other industries struggled. To repeat, there was intense and persistent lobbying by private parties that eventually led to government concessions – these were not initiated by the government through its own strategic vision. In fact, Mehta helped at least 19 state Governments draft their IT policies and create the required infrastructure. It was only in 1999-2000 that India's IT giants Infosys and Wipro really took off.
I hope this helps clarify why I believe the biggest service the government did for the IT industry in India was to let the industry take the lead.
With apologies, I left out two important references from my earlier post, responding to Justin. Many of the points I made are from "Imagining India" by Nandan Nilekani, formerly of Infosys and "India Arriving" by Rafiq Dossani of Stanford's Shorenstein Asia Pacific Research Center.