A National Export-Led Growth Plan: Lessons from the Software Industry – Jyoti Saraswati

This article originally appeared in India’s Economic & Political Weekly. You can read it in its original context by clicking here.

Jyoti Saraswati is a series editor for Pluto’s IIPPE series, and author of Dot.compradors: Power and Policy in the Development of the Indian Software Industry (Pluto, 2012).

16/02/2013

Dissipating investor confidence in the economy suggests that now more than ever before the government needs an interventionist industrial policy centred on export promotion. However, a profound mistrust in the Indian state’s developmental capacity continues to hinder any progress in this area. The country’s software industry – an outcome of state-led export promotion – not only provides an example of successful state intervention but also proffers several wider points for an effective export-led growth plan.

The government’s decision to allow foreign direct investment (FDI) in the retail has generated a fierce domestic debate over its ramifications, both socially and economically. However, while the approval has been justified on the microeconomic grounds of improving supply chains and empowering small-scale producers, the rationale behind it is decidedly macroeconomic. With export revenues dropping and financial inflows starting to dry up, both related to the global economic downturn, anxieties regarding potential balance of payments (BoPs) problems had started to surface. The notification, deliberately portrayed as a “big ticket” reform to excite international investors, was expected to induce the level of financial inflows required to put paid to BoP anxieties and tide the economy over until global growth resumes.

This strategy appears to have backfired. The political paralysis over the notification and the negative international attention it attracted has dulled the ability of this move and any other big ticket reform to induce the scale of financial inflows required. This leaves the government in a serious quandary. It can either pray that the global economic crisis proves to be a transitory phenomenon so that exports and financial inflows will soon resume the pre-crisis levels, dissipating BoP anxieties in the process. Or, it can take pre-emptive action and adopt a series of initiatives to promote exports with the aim of generating surpluses on the current account and reducing the country’s reliance on international investors.

Given that a protracted worldwide economic crisis is a distinct possibility, if not probability, the purpose of this article is to present five important points pertinent to an effective national export-led growth plan in India derived from the success of the country’s software industry.

Strategic Alliance

It is conventional wisdom to see the Indian state as a byword for sloth and inefficiency, corruption and incompetence, a “Kafkaesque insect” diverting, distorting, or destroying all business initiatives that lay before it (Byres 1997: 14). Related, the alleged rolling back of the state from the economy as a result of the 1991 International Monetary Fund (IMF)-led economic reforms is believed to have led to India’s unprecedented economic growth through the 1990s and beyond (The Economist 2004).

These views underpin much of the literature on the Indian software industry whose rapid development is deemed to be a result of “the benign neglect” of the state and the onset of economic reform.1 Both viewpoints have been endlessly recycled in academic, policy and media circles, both in India and beyond. As a result, over the past decade India’s software industry has become the poster-child of neo-liberalism not only in India but globally as well (Friedman 2005).

It is deeply ironic therefore that the Indian software industry is quite possibly the standout example of prolonged and effective state intervention in India. Written out of neo-liberal accounts of the Indian software industry is the integral and positive role played by the state in supporting the industry’s development over the past four decades, itself reflecting a “strategic alliance” between the state and industry (Vittal and Mahalingham 2001). While there have been a myriad of effective interventions, two in particular were pivotal to the export success of the industry.

The first of these interventions was the 1972 Software Export Scheme, initiated by the newly-established department of electronics (DoE), a government agency with the mandate to establish an indigenous IT industry.2 The scheme provided management consultancy firms and interested entrepreneurs 100% loans for the purchase of then expensive computers with the stipulation that such computers were to be used for exports only and loans were to be repaid using foreign exchange generated by these.3 Via this scheme, the state initiated the establishment of an export-oriented Indian software industry with software exports from India to the United States (US) beginning in 1974 (ICMR 2004).

The second intervention by the state was equally significant. By the mid-1980s, Indian software firms were becoming increasingly aware of the possibility of service provision by remote delivery (via emerging advances in telecommunications technology) and the greater export opportunities it afforded.4 However, the firms neither had the means to access the nascent international telecommunications networks nor the resources to finance such infrastructure themselves. At the same time, the Indian government, facing BoP concerns, was keen to support industries with the potential for export. The combination of state imperatives with the interests of software firm led to the state agreeing to provide firms the necessary telecommunications infrastructure (Parthasarthy 2004). Within two years the International Packet Switching Service (IPSS) had become operational, providing Indian software firms the opportunity to provide services by remote delivery, significantly enhancing their competitiveness internationally and boosting their exports immeasurably (Saraswati 2008). The Indian state is not inherently defective and can foster, indeed even initiate, the development of internationally competitive industries.

Erroneous Claims

The Indian government sees FDI as an integral element in the country’s development. This view is partly related to the notion that it was pivotal to the development of the Indian software industry. As asserted in a 2001 report from the World Bank-affiliated International Finance Corporation, “software exports, the earliest harbinger of a more widespread IT expansion, began only in 1985 when Texas Instruments established its subsidiary in Bangalore” (Miller 2001). More recently, the National Association of Software and Service Companies (NASSCOM) claimed that IT-related FDI invigorated innovation and skill-upgrading amongst local firms (NASSCOM 2010).

However, such claims are erroneous. As already pointed out, software exports from Indian firms began back in the 1970s, facilitated by the 1972 Software Export Scheme. While Texas Instruments was the first transnational corporation (TNC) to establish a software development centre in India, IT-related FDI began arriving in India en masse only from 2000 once Indian firms had demonstrated unequivocally the viability of the country as an export platform for software services (Saraswati 2012). FDI was therefore certainly not the “harbinger” of India’s IT expansion.

Moreover, not only was FDI inconsequential as a “catalyst”, its contribution to the expansion and structural upgrading of the industry once it eventually arrived has also been negligible. TNC subsidiaries established in India have been primarily engaged in the provision of lower-end IT-enabled services (ITES) such as call centres. For a variety of structural and political reasons, parent firms have preferred to keep higher-end services based in their home country and major markets. And for all the hyperbole, IT-related FDI still accounts for just 15% of the industry’s total revenues (The Hindu 2011).

What this points to is the fact that instead of “glamorous” investments from abroad, the expansion and structural upgrading of the industry witnessed over the past two decades has been driven primarily by domestic firms growing rapidly and moving to higher value-added segments of the industry. Using the last available data, Indian software firms accounted for 85-90% of the higher-end software service exports (Ghosh and Chandrasekhar 2006). Moreover, India’s three largest software firms – Tata Consultancy Services (TCS), Infosys and Wipro – alone generated nearly a quarter of the industry’s revenues (OECD 2010b: 41) and half of its exports (Roy 2008). Therefore, large domestic firms should be central to any export-oriented growth and development strategy.

Catch-22 Experience

Establishing international competitiveness and moving up the value chain does not come easy in any industry or for any firm. In the software services industry, the transition from lower-end software services to the more complicated middle and upper tiers of the market is wrought with difficulties. While the lower-end services contracts tend to be awarded by corporate clients on the basis of price, higher-end services are awarded on the firm’s experience and previous track record since clients need to know that a firm has the capabilities to deliver the required services. Firms are therefore caught in a Catch-22 situation: to move into the higher-end software services market they need to gain suitable experience, but to gain suitable experience they already need to be in the higher-end services market.

Indian software firms escaped the Catch-22 situation by providing services in the less competitive domestic market, often using formal connections or informal networks to guarantee quality to India-based clients. This way they were able to gain experience in the higher-end service provision, which helped them secure higher-end contracts with overseas clients. Put simply, the domestic market provided the commercial space for the Indian software firms to gain technical skills and business acumen and also acted as a springboard for the firms’ subsequent export success.

Several examples illustrate this. The first Indian firm to export software services was TCS in 1974. Its initial software export contract was to provide services for the US-based Institutional Group and Data Company, a data centre for 10 US banks. While the Tata brand itself was a mark of professionalism overseas, crucial to TCS’ contract was its earlier experience of domestic software provision – between 1969 and 1972, TCS had provided software services for 15 Indian banks (ICMR 2004).

Computer Maintenance Corporation (CMC), a software firm established in 1975 by the Indian government to service the country’s installed base of computers, following the acrimonious departure of IBM, took a slightly different route. As a public sector unit, CMC soon took on the responsibility for providing software services for the Indian government, typically on infrastructure-related projects such as the computerisation of the Indian Railways’ timetabling and reservation system. This experience was then utilised by the firm to win contracts with the London Underground and other overseas clients. 5

Wipro provides another interesting example. The firm’s idiosyncratic origins are well known – a company trading in vegetable oil that diversified into computer manufacturing and then go on to become one of the world’s major software service firms (Hamm 2006). As a premium manufacturer in an industry awash with screwdriver assembly, Wipro was one of the few companies that provided after-sales software services and maintenance for its customers.6 It was this service provision that provided the basis for Wipro to first seamlessly switch IT emphasis from hardware to software in the late 1980s and then successfully penetrate the overseas market. The country’s domestic market can play an important role in facilitating export competitiveness and should be treated as a major asset.

State Intervention

The period following the 1991 IMF-led economic reforms has been characterised as undergoing a process of liberalisation with the state rolling back from the economy. However, this is only partially correct. Though the state has certainly withdrawn from many sectors, it has increased its interventions in other sectors, and in new ways. The Indian software industry is one such industry in which the state has intervened more extensively in the so-called period of liberalisation with the objective of promoting exports.

It has continued to invest heavily in the infrastructure the industry demanded and required. This has most obviously entailed support and subsidy in maintaining and extending the country’s telecommunications infrastructure, often in partnership with private firms and state governments. The Software Technology Parks of India (STPI) initiative is the most recognisable aspect of this intervention. But government investment in education restructuring and even airports has been justified, at least in part, on the grounds that it facilitates the expansion of the software industry. Moreover, throughout the 1990s, the state’s support for the industry took on an international dimension. It began first to subsidise marketing events abroad aimed at facilitating contacts between Indian software firms and overseas clients. However, as the industry developed, the state has even begun to pursue the interests of the industry in international fora such as the World Trade Organisation (Ghosh 2006).

The experience of the Indian software industry over the past 20 years supports the argument that the Indian state should not be seen as pro-market but be understood as pro-business (Kohli 2010), i e, it is able and willing to intervene in support of selected sectors and industries regardless of the neo-liberal rhetoric it may espouse and the international diktats it claims to adhere to. Indeed, the state can continue to play a significant supporting role for firms, industries and sectors.

First-Mover Advantage

Most advocates of state intervention recommend a latecomer catch-up model centred on the state providing an infant industry protection to domestic firms entering mature industries with standardised technology.7 This worked in the past for Japan and South Korea and now appears to be producing impressive results in China. But despite some notable successes – pharmaceuticals and machine tools stand out in this respect – it did not generate the same levels of development when practised in India. Its reintroduction is, therefore, unthinkable.

However, the success of the Indian software industry suggests a different, some might argue opposite, model of state intervention – its identification of nascent sectors and emerging trends in mature industries and the implementation of appropriate policy to imbue local firms with first-mover advantage. For example, while most developing countries were dreaming of partaking in computer hardware manufacturing, the Indian state had already identified the developmental opportunity of software and its appropriateness in particular for India.8 In 1968, Narasimhan wrote in a government report: 9

[Software] is a labour intensive activity except that it requires intellectually skilled manpower …software development would seem to have a very high employment potential in a country like India …the export potential, as well as value-added, in the case of software is very large.

The Software Export Scheme, 1972 was implemented on the back of this report, which initiated an export-oriented software industry in India long before other developing countries (and indeed many developed countries). This meant that when it became possible to provide software services by remote delivery, providing firms from developing countries significant commercial advantages over western rivals, the only firms with the experience and contacts to capitalise fully on the opportunity were those from India. A strategy facilitating the first-mover advantage may be more likely than the latecomer catch-up to successfully engender internationally competitive domestic firms.

Some Qualifications

This article is not intended to be a hagiography of the industry and should not be taken as such. Rather, the aim of this article was twofold: first, to highlight what the Indian state intervention in an industry can achieve in terms of promoting exports via the shining example of the software industry; and second, to identify several points pertinent to how and why the state and industry were able to accomplish this.

The software industry is by no means the panacea to India’s developmental ills as some have claimed.10 Indeed, insofar as its lobbying has led to the zealous enforcement of anti-software piracy laws, it is at least partially responsible for India’s poor performance in IT diffusion with adverse ramifications across the economy.11 Nor is the industry entirely without its own internal problems. The recent emergence of a comprador class within NASSCOM pursuing the interests of major foreign firms has certainly influenced IT policy in a direction not necessarily conducive to the long-term health of the industry (Saraswati 2012).

Space constraints do not allow for a fuller exploration of the applicability of the points raised in the article to other industries and sectors in the Indian economy. Some may claim that the specificity of the industry means its export success is not replicable; others may disagree. However, what the article does demonstrate unequivocally is that the argument against a broad-based, state-initiated export plan on the faux-historical grounds that it is inherently defective or via the legal argument that it breaks with international rules and regulations is invalid.

Notes

1 For the view that the software industry benefited from the state’s benign neglect see Balasubramanyam and Balasubramanyam (2000). For the argument that the 1991 liberalisation catalysed the growth of the industry, see Ghemawat and Patibandla (1998).

2 For in-depth studies of the DoE, see Evans (1995) and Pingle (1999).

3 For a detailed study of the scheme, see Heeks (1996).

4 As explained in OECD (2010a: 7).

5 Information available on CMC’s corporate website at http://www.cmcltd.com/

6 The 1978 Minicomputer Policy ushered in the screwdriver assembly system.

7 For an excellent exposition of this see Chang (2002).

8 Though by the early 1970s, India would also succumb to the allure of computer manufacturing.

9 Cited in C R Subramanium (1992: 76).

10 This view underpins many articles on the industry found in magazines such as ForbesFortune and BloombergBusinessWeek.

11 India’s international ranking in IT diffusion fell from 136th in 1997 to 146th in 2003 – see data from the United Nations Commission for Trade and Development (UNCTAD), viewed on 18 November 2012 (http://unctad. org/en/Docs/iteipc20065_en.pdf).

References

Balasubramanyam, V N and A Balasubramanyam (2000): “The Software Cluster in Bangalore” in J Dunning (ed.),Regions, Globalisation and the Knowledge-based Economy (Oxford: Oxford University Press).

Byres, T, ed. (1997): The State, Development Planning and Liberalisation in India: A Study in Planned Development(Oxford: Oxford University Press).

Chang, H J (2002): Kicking Away the Ladder: Development Policy in Historical Perspective (London: Anthem).

Evans, P (1995): Embedded Autonomy: States and Industrial Formation (Princeton: Princeton University Press).

Friedman, T (2005): The World Is Flat: A Brief History of the 21st Century (London: Allen Lane).

Ghosh, J (2006): “The Political Economy of Self-Delusion”, Macroscan.

Ghosh, J and C P Chandrasekhar (2006): “IT-driven Offshoring: The Exaggerated Development Opportunity”,Macroscan.

Ghemawat, P and M Patibandla (1998): “India’s Exports Since Reforms”, Economic & Political Weekly, 28 February.

Hamm, S (2006): Bangalore Tiger: How Indian Tech Upstart Is Rewriting the Rules of Global Competition (New York: McGraw-Hill).

Heeks, R (1996): India’s Software Industry: State Policy, Liberalisation and Industrial Policy (Thousand Oaks: Sage).

ICMR (2004): TCS: The Pioneer of the Indian IT Industry (Hyderabad: ICMR).

Kohli, A (2010): Democracy and Development in India: From Socialism to Pro-Business (Oxford: Oxford University Press).

Miller, Robert (2001): Leapfrogging? India’s Information Technology Industry and the Internet (Washington DC, International Finance Corporation), 15.

NASSCOM (2010): Captives in India (New Delhi: NASSCOM).

OECD (2010a): Technology Outlook 2010 (Paris: OECD).

– (2010b): The ICT Sector in India: Performance, Growth and Key Challenges (Paris: OECD).

Parthasarthy, B (2004): “Globalising Information Technology: The Domestic Policy Context for India’s Software Production and Export”, Iterations, 3.

Pingle, V (1999): Rethinking the Developmental State: India’s Industry in Comparative Perspective (New York: St Martin’s Press).

Roy, S (2008): “The Software Saga Should Continue”, Business Standard, 23 July.

Saraswati, J (2008): “The Indian IT Industry and Neoliberalism: The Irony of a Mythology”, Third World Quarterly, Vol 29, No 6.

– (2012): Dot.compradors: Power and Policy in the Development of the Indian Software Industry (London: Pluto).

Subramanium, C R (1992): India and the Computer: A Study in Planned Development (New Delhi: Oxford University Press), 76.

The Economist (2004): “The Remote Future”, The Economist, 19 February.

The Hindu (2011): “IT Sector to Post 18% Growth Next Fiscal”, The Hindu, 24 March.

Vittal, N and S Mahalingham (2001): Information Technology: India’s Tomorrow (New Delhi: Manas).

Dot.compradors

Power and Policy in the Development of the Indian Software Industry

Jyoti Saraswati

Argues that the celebrated Indian IT industry is in fact a substantial obstacle to a broader-based, more egalitarian form of development in India.

“This important book blasts open the myths about what is seen as the Indian economy’s most successful sector. Dot.compradors will become required reading not only for those concerned with the Indian software industry, but anyone interested in the Indian economy and in this particular trajectory of development. “ – Jayati Ghosh, Professor of Economics, Jawaharlal Nehru University, New Delhi

“A very important intervention. Saraswati’s book fills a very important gap in the existing literature… A must-read for courses on economics and management in India.” – Chirashree Das Gupta, Associate Professor, Ambedkar University Delhi

£17.99 only £16.00 on the Pluto site

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