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India’s Information Technology Sector:

What Contribution to Broader Economic Development?(

Nirvikar Singh
Professor of Economics
University of California, Santa Cruz
Santa Cruz, CA 95064, USA

First Draft: October 2002

Abstract

What contribution can information technology (IT) make to India’s overall economic development? This paper offers some perspectives that can help answer this question, using concepts and analysis from economic theory. It examines the theory and evidence for comparative advantage, complementarities, and a special role in the innovation process, as factors that make IT special. The paper also considers opportunities for future growth in India’s IT sector, existing and potential constraints, and possible policy responses that can help IT contribute to broader economic development.

Keywords: information technology, software, complementarities, recombinant growth JEL Classification: M21, L63, O12, O3

1. Introduction

In his foreword to the new NASSCOM-McKinsey Report (2002), India’s Minister for Communications and Information Technology calls for a joint industry-government effort to “ensure that the Indian IT sector remains a dominant player in the global market, and that we emerge as one of the leading countries of the new millennium”. The first of these goals remains a challenge, but it is one for which India’s information technology (IT) industry seems to be well prepared. The second stated goal is much broader, much deeper, and much harder to achieve. Does it make sense to pin so much hope on India’s IT industry? What contribution can it make to India’s overall economic development? Can it help change the country, reduce poverty, change people’s lives for good? Or will the benefits be restricted to an educated elite with access to jobs and power? This paper offers some perspectives that can help answer these questions, using concepts and analysis from economic theory.

In this paper, I assume a basic familiarity with the general structure and performance of the Indian economy, and the economic reform process that has been taking place through the last decade or more. However, I provide a brief review of the industry in this introduction. The remainder of the paper is structured as follows. In Section 2, I provide several possible answers to the question of what might make IT special for growth and development. In Section 3, I examine some of the evidence concerning whether the theoretical perspectives have empirical relevance for India. In Section 4, I discuss the opportunities that exist for future industry growth and broader developmental impacts, and the constraints that the industry and the economy face. Section 5 provides some reflections on policy implications of the earlier discussion, and Section 6 is a summary conclusion.

IT in India

Information technology essentially refers to the digital processing, storage and communication of information of all kinds[1]. Therefore, IT can potentially be used in every sector of the economy. The true impact of IT on growth and productivity continues to be a matter of debate, even in the United States, which has been the leader and largest adopter of IT.[2] However, there is no doubt that the IT sector has been a dynamic one in many developed countries, and India has stood out as a developing country where IT, in the guise of software exports, has grown dramatically, despite the country’s relatively low level of income and development. An example of IT’s broader impact comes from the case of so-called IT-enabled services, a broad category covering many different kinds of data processing and voice interactions that use some IT infrastructure as inputs, but do not necessarily involve the production of IT outputs. India’s figures for the size of the IT sector typically include such services.

Since the numbers on India’s software exports are well publicized (www.nasscom.org), I will...
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