Money Matters IT as economy ghetto and growth propeller

Money Matters
IT as economy ghetto and growth propeller
By Aniket Mukherji

The information technology (IT) industry is seen as a miraculous development that is changing India. IT has created high-paying jobs, generated exports, and given pride to an ancient culture that it can compete in the modern world with modern technology. The story of IT appears to be nothing but positive for India. However, there is a real danger that India could fail to learn the real lessons of IT success, thereby limiting its impact to just small parts of the country.

Many tourists visit the rust-free iron pillar at Qutub Minar in Delhi. Everyone takes pride in how advanced India was in metal work over two thousand years ago; creating a pillar that has withstood corrosion and rust despite its age. However, the iron pillar also shows that such advanced technology was kept in the hands of a privileged few people and had no impact on Indian society as a whole. It was never applied to make other useful things that could make life better for ordinary people. It was an ornament that did very little for the country.

The IT sector could follow the same path as the iron pillar if Indian government continues to ignore the real lessons of the IT success story and fail to apply them in other sectors of the economy.

The IT sector will remain a small part of the Indian economy for many years to come. It creates barely 2-3 per cent of India'sgross domestic product (GDP). The employment potential of the IT sector is also limited. IT and the related business process outsourcing (BPO) employ less than a million workers today. India'sworking population is expected to increase by about 83 million during 2004-2010. The IT sector cannot absorb more than a tiny share of that vast number of new workers.

The real contribution of the IT sector is the example it sets, and lessons it teaches. Most of the old rules that restrict investment and job creation in other industries do not apply to the IT industry. IT was freed from the licence raj and the inspector raj and has done well because of its freedom. The license raj has been reduced in India but the inspector raj is still very strong, at both the central and state levels. Why cannot other industries enjoy the same freedom from the license raj as the IT sector?

In addition to corruption, companies face long delays and many hassles before they can acquire the land they need to build their factory.

India'slabour laws provide excessive job security for a privileged small part of the workforce and no security for the other 90 per cent. Fortunately, the IT sector has been freed from the worst parts of labour laws, giving it more flexibility to hire the right workers and use them in a flexible manner. Why cannot the textile industry, which still exports more than the IT sector, enjoy just as much labour flexibility? The textile industry has far more jobs than IT. Giving it the same level of labour flexibility and freedom from the inspector raj would create millions of new jobs for ordinary people who lack the skills to work in the IT sector.

State governments compete among themselves to quickly provide land to IT companies that wish to locate in their state. For most other industries, however, getting land is a nightmare. In addition to corruption, companies face long delays and many hassles before they can acquire the land they need to build their factory. Providing other industries with access to land as quickly as land is given to the IT industry would help industrialize India much faster.

There are no caps on foreign investment in the IT sector and no need to get a Cabinet approval for such investment. As a result, all the major global IT companies have invested in India. Both the foreign companies and the Indian IT companies are growing every day, hiring more workers. Unfortunately, the government does not want to apply the same model to other sectors of the economy by opening them up to foreign investment.

Sectors like coal mining are kept away from foreigners and left to rot in the hands of a public sector monopoly, Coal India. The government promotes brand new IT campuses, or allows private and foreign companies to build them, while keeping out foreign investment from the coal sector. As a result, India imports coal while sitting on one of the largest coal deposits in the world.

The government still restricts foreign investment in retail stores and in certain types of real estate. If an advanced sector like IT, which can determine India'stechnological future, can be fully open to foreign investment, what strategic purpose is there in keeping foreign investment restricted in low-technology stores and shopping malls?

Many Indians are upset that Deve Gowda has recently attacked Narayana Murthy and the IT sector in Bangalore, accusing them of abusing their position. The Leftist unions in Bengal have disregarded the request of their own Chief Minister who wants to declare IT an essential service and thus not subject to strikes and hartals that regularly close down all offices and factories in Bengal.

Why should IT get special status, escape political bandhs, and avoid the problems of doing business in India? That is the question asked by politicians like Deve Gowda and Leftist trade unions.

These critics are half right. IT should not get special treatment. However, other industries should be given the same freedom and flexibility as the IT sector so that they can also thrive. The politicians and the Leftist unions have got it backward. They need to shift policies in the rest of the economy towards the policies in the IT sector, not to worsen the policies in the IT sector down to the poor level of other industries.

The real benefit to India from IT sector comes from learning lessons from its success and applying them in the rest of the economy. Otherwise, IT will remain as a modern version of the isolated iron pillar at the Qutub Minar, a new ghetto in the economy. Even worse, India will not be able to create jobs for the millions of young people that will be joining the workforce in the coming years.

(The writer is an economist based in New York City.)