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refrain was tiresomely extraordinary. In its recently
released results on the performance of India's software
and IT-enabled services sector during 2004-05, the National
Association of Software and Services Companies (NASSCOM)
declared that the sector had once again notched up a
record of sorts. Its revenues had grown by 32 per cent
over the previous year, the highest rate since the slowdown
of 2001, surpassing the agency's own 25 per cent projection.
Once again, exports were principally responsible for
this dynamism, having grown by 34 per cent. And domestic
revenues of the industry, though lagging behind, also
grew at an impressive 23 per cent.
In absolute terms too the size of the software and IT-enabled
services sector is now impressive. NASSCOM estimates
the size of the industry at $22 billion, comprising
of 4.8 billion of domestic revenues, $12 billion of
software and services export revenues and $5.2 billion
of revenues from exports of IT-enabled services and
business process outsourcing (BPO). Thus, even when
the hardware segment of the IT industry is excluded,
gross revenues from IT services have come to account
for as much as 3.3 per cent of GDP. Needless to say,
gross revenues tend to be higher than the value added
(or the excess of revenue over purchases of raw materials,
intermediates and power and fuel) in an industry, which
determines its contribution to GDP. However, based on
a sample of 209 software companies included in the CMIE's
Prowess database, it has been estimated that value added
in 2002-03 amounted to as much as 92 per cent in this
industry, making gross revenues a close approximation
of value added in the services sector.
By way of comparison, the gross revenues from IT services
was in 2004-05 about 20 per cent higher than the GDP
generated in India's construction sector and almost
three times as much as the GDP in mining and in electricity,
gas and water supply. What is more, gross revenues from
IT services exceeded 12 per cent of GDP generated in
India's services sector as a whole, which accounts for
more than 50 per cent of the nation's GDP. Thus, even
though the software and IT-enabled services sector started
from a small or negligible base a decade back, its rapid
expansion at an annual compound rate of more than 30
per cent per annum between 1998-99 and 200405 has ensured
that it is today an important presence in the economy.
There are two aspects to the rise to maturity of this
sector that are well recognised now. First, it has been
driven predominantly by external demand. Exports of
software and IT-enabled services have risen at a compound
annual rate of 38 per cent a year since 1997-98, and
overwhelmingly explain the rapid rise of the sector.
Second, within exports, in recent years IT-enabled services
have emerged the dynamic segment, growing at an amazingly
high annual compound rate of 56 per cent per annum when
IT software and services exports were growing at less
than half that rate.
Given the importance of exports in explaining the sector's
growth rate, it is not surprising that its rise to dominance
has substantially increased its contribution to India's
foreign exchange earnings. According to Reserve Bank
of India estimates, net invisible earnings from exports
of software (and IT-enabled) services rose from $5.8
billion in 2000-01 to $11.8 billion in 2003-04 and $12.2
billion during the first nine months of 2004-05 (April-December).
If that trend had persisted during the rest of last
year, net earnings from software services exports would
have amounted to $17.1 billion in 2004-05, which is
a number that tallies with NASSCOM's software and IT
services exports figure.
This has made IT services exports an important component
of India's total (merchandise and non-merchandise) exports.
The ratio of IT services to merchandise exports has
risen from 13 per cent in 2000-01 to an estimated 20
per cent in 2004-05. Further, the ratio of net II services
export earnings to total net invisible earnings rose
from 53 to 59 per cent between those two years.
It is well known that private transfers or remittances
from Indian residents abroad together with revenues
from IT have helped India notch up a current account
surplus during the three years 2001-02 to 2003-04. While
remittances are the result of the short-term migration
of natural persons, IT services earnings are the result
of a process of digital migration facilitated by the
technology that allows for the cross-border supply from
remote locations of a range of services, often in real
time. Thus the provision of labour services through
actual or digital migration have substantially strengthened
India's balance of payments. Even during 2004-05, despite
the sharp increases in oil prices and India's non-oil
import bill, the deficit on the current account has
been held down because of flows on account of these
forms of migration.
Initially remittances were far more important than software
services earnings. But partly because of a slowing of
remittance inflows in 2004-05, it is estimated that
the ratio of software services earnings to remittance
inflows has risen from 45 per cent in 2000-01 to 60
per cent in 2002-03 and 83 per cent in 2004-05. This
makes the role of the IT sector in shoring up the current
account of India's balance of payments quite crucial.
Finally, the software and IT-enabled services sector
is becoming a major source of employment at the margin.
The only available estimates here are those from NASSCOM,
which indicate that employment rose from around 285,000
in 1999-2000 to just above one million in 2004-05, or
at a compound rate of about 28.5 per cent per annum.
This is indeed remarkable given the fact that rate of
growth of employment during the second half of the 1990s
(1993-94 to 1999-2000) as per NSS statistics amounted
to just 0.67 per cent in rural areas and 1.34 per cent
in urban areas. Further, since aggregate revenues from
software and IT-enabled services grew at the same pace
over that period, it appears that for every one percentage
point growth in output, employment in the sector also
rose by a percentage point. Thus the phenomenon of jobless
growth does not appear to be true of this sector at
all.
In sum, the current and evolving role of software and
IT-enabled services in India's economy is indeed substantial.
The sector is proving to be a major growth pole within
the services sector, which in turn drives GDP growth
in the country. Not surprisingly, there is much concern
as to whether the sector can sustain a high, even if
not the dramatic, growth rate; whether that growth would
continue to support India's balance of payments; and
whether the benefits of this growth would spill over
onto the rest of the economy.
The answers to all these questions would depend on how
we interpret the structural characteristics of growth
in the IT sector. There are a number of such characteristics
which need to be flagged. The first is that while the
external market is the prime driver of growth in this
sector, that market is dominated by one country: the
US. This makes the industry vulnerable. Any slow down
in the US can have a dramatic impact on the fortunes
of the industry.
Second, India today dominates the global market for
outsourced software and IT-enabled services. NASCCOM
quotes an estimate according to which India today accounts
for 44 per cent of the global outsourcing market. This
ratio goes up to 55 per cent if only the ITeS-BPO segment
is considered. If current growth rates are to persist
either the global market would have to grow at that
rate with a stable Indian share or the industry would
have to increase its share of the global market over
time. That is indeed a touch difficult.
Third, since the ITeS-BPO sector accounts for a rising
share of total revenues, India's dependence on the less
skill-intensive segments of the software and IT-services
sector is rising. This makes it even more difficult
to maintain market shares, especially without a substantial
drop in revenues per employee, since competitors are
more easily generated.
Finally, even if India's share of outsourcing revenues
remains high, the net benefits of this are still unclear
because of the dominance of a few firms and a substantial
share for captive offshore outsourcing by international
firms in the ITeS-BPO sector. According to NASSCOM figures,
in 2003-04 the top 20 software and IT services exporters
accounted for as much as 61 per cent of total export
revenues. And captive ITeS-BPO providers accounted for
as much as 65 per cent of the value of ITeS contracts
outsourced to India. This kind of concentration not
only makes the linkage effects of the growth of the
industry less significant, it also has adverse implication
for the net foreign exchange earning of the sector after
taking into account repatriation of profits and other
payments abroad.
Finally, the absolute employment contribution of the
software and IT services sector makes its position within
the Indian economy that of an enclave. Even at just
over a million, the number of worker in software and
IT services amount to just one quarter of one per cent
of all workers in India as per the 2001 Census, or one-third
of one per cent of all main workers in 2001 or two-thirds
of one per cent of all workers outside agriculture and
household industry. This suggests that a sector whose
presence in terms of its contribution to GDP and its
contribution to India's currently comfortable balance
of payments position is indeed substantial, cannot make
much of a direct difference to a substantial section
of India's population. Hence an excessive dependence
on this sector for growth at the margin may be inequalising,
unless players in the industry make a substantial contribution
to the State's tax revenues that can sustain expenditures
on employment generation and social provision.
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