Monday, January 30, 2012

How much is India’s software and IT services sector contributing to growth and development?

Countering the claims that India’s India’s Software and Information Technology Services (SWIS) has few forward linkages to Indian firms, uses few domestic inputs, has limited employment effects and prefer foreign clients to domestic ones, Grace Kite argues that this sectors contribution to the Indian economy is now “over twice as large as its share of GDP”, which includes its forward linkages to other firms and its overall demand stimulus. In the financial year 2010-11, it produced US$ 60 billion of output, accounted for a fifth of the country’s exports and employed 2.5 million employees.

First, how has the domestic market for India’s software and IT services fared? Over 20 years through 2010-11, domestic sales have registered a compound annual rate of growth of over 27%. And since 2005-6, their rate of growth has significantly accelerated, so that it now equals the rate of growth of the sector’s export revenue. The increase in domestic revenue has averaged US$ 1.7 billion per year since that structural turning point.

Kites estimated that between 2005 and 2008 the impact of the SWIS sector’s domestic forward linkages (financial services, communications and manufacturing) contributed an average 1.3 percentage points per year to the country’s total GDP growth. This represented, on average, about 15% of the total.

Furthermore, regarding backward linkages, Kites argues that in 2005-06, 84% of the combined inputs of SWIS, IT enabled services and business process outsourcing (ITES-BPO)were purchased domestically.

Taking the direct effect of such purchases plus the indirect impact of the demand generated thereby for other products in the economy, estimates suggest that for every rupee spent on inputs by the SWIS and ITES-BPO sectors in 2005-6, another 0.6 rupee was generated somewhere else in the Indian economy. These combined direct and indirect effects accounted for 2% of India’s GDP.

What about the domestic effect of the consumer spending of SWIS workers? Estimates of this additional demand effect, both direct and indirect, have ranged between 0.6% of GDP (for 2005-6) to 0.75% of GDP (for 2008-9).

Regarding employment generation, in 2005-6, for example, it was estimated that the SWIS sector (together with ITES-BPO) contributed indirectly to the creation of 3.64 million non-IT jobs.

This total implies that for every worker employed directly in these IT sectors, jobs were created for an additional two workers in the Indian economy as a whole. The majority of these additional workers had much lower skill and education levels than those in the IT sectors.

The tight labour market for SWIS workers has also led to the rapid rise of educational institutions catering to the employment needs of this sector. India’s colleges and universities now turn out 300,000 technical graduates a year, more than any other country in the world except for China. Hence, employment in the educational sector has been significantly expanded.

Overall, the sector’s direct impact contributed 4.6% of India’s GDP. The impact of the sector’s forward linkages contributed another 2.8% of GDP. And the effect of its backward linkages contributed an additional 2.7% of GDP. India’s Software and IT Services Sector accounted for 10.1% of India’s GDP in 2005-6. So, its total impact was more than double the size of its own output (i.e., 4.6%).

There are good reasons to believe that these figures are significant under-estimates. The first reason is that the growth of the sector, as previously stressed, has been particularly rapid since 2005-6. Secondly, these estimates ignore the informal SWIS sector (namely, the effects of those firms not registered with the Indian government).

Lastly, these estimates do not account for indirect forward linkages, which are likely to be substantial. For example, if software and IT services help to improve health services or to enhance the provision of education, the indirect effects on labour productivity are likely to be significant.