India’s IT industry and industrial policy

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:

1. 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.
2. 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.
3. 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.
4. 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.
5. 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.
6. 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.
7. 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.