This brigade will charge India into glory!

Written by Vivek Bharati | Updated: Mar 31 2006, 05:30am hrs
The contribution of IT and BPO sectors to Indias economy is much bigger than its export achievement or the brand equity in foreign markets that has raised Indias economic profile abroad. Over the years, it has become a key driver of both growth and diversification of the economy. What started as a small phenomenon has now acquired sufficient momentum to pull up other sectors. Indeed, IT has emerged as a good example of a leading sector that generates unbalanced growth in the beginning but develops strong linkages over time to make a difference to the growth performance of the entire economy. It is time development theorists and policy makers analysed the true contribution of the IT sector in Indias march towards becoming a trillion-dollar economy.

First, we must note the IT industrys contribution to altering the risk profile of Indias economy by providing strong support to Indias foreign account. The foreign exchange earnings of around $22.5 billion this year have helped us to sustain our reserves, despite the high level of global crude oil prices. India had failed to survive the global oil price shocks of 1973, 1980 and 1990. Unlike IT now, there was no sector then that could cushion the impact of an external shock by its strong presence in global markets.

Thus, IT has ensured exchange rate stability and insulated our overall business climate from uncertainties that could have arisen otherwise. While Indias manufacturing has revived in recent years, the fact remains that we are faced with a merchandise trade deficit of nearly $45 billion in the current year. Few countries can cope with both large energy and merchandise trade deficits. The US manages because of its strong service sector. We have done it because of our IT industry.

But this is only half the story. The strong pull effect of our IT industry on other sectors has still not been amply recognised. First, the IT industry has brought about a rapid expansion of some of our key cities across states as IT companies have built large campuses to meet their global demand. The fact is that the current real estate boom owes its origin to the growth impulses imparted by the IT industry. Over 70% of all new construction of commercial real estate and a good part of the housing demand is because of the IT industry.All this is creating dem-and for manufactured products like steel, cement, paints, fittings, furniture etc.

The young employees of the IT industry and their different spending habits have also catalysed demand growth for modern retailing, automobiles, apparel and fashion, entertainment and other services, such as retail banking. And because of the strong mobility linked with IT services that requires travel across borders, this sector has also created new demand for tourism, civil aviation and hospitality. What is more, IT has also triggered new investments in education and training. Just to get some idea of the impact: this year the IT industry would expand Indias middle class by creating around 300,000 new jobs and across states in different cities. Next year, this number could increase to 500,000.

That IT is a change agent for the economy is seen in its impact across sectors
Food processing can transform rural India, just like IT did for urban India
A thrust on other such sectors will create strong economic growth linkages, too
Since these are much better paying than for first-time entrants to the job market for rural migrants in a manufacturing activity, their impact is much bigger. Around half of the new employees could be expected to buy cars, houses and consumer durables, thus creating strong demand growth for these sectors. These are strong linkages that are catalysing a structural transformation of the Indian economy.

It could be argued that the linkages created by the IT sector have helped Indian manufacturing. The revival of the latter in recent years does seem to be correlated with the critical mass acquired by the IT industry in recent years. Indeed, the IT industry has emerged as one big cushion, not just against external shocks but also against future demand recessions. Given our unique global positioning in IT, the sector would continue to expand rapidly in the foreseeable future. It is estimated that by 2010, IT could be contributing 10% to our GDP.

If one accepts that IT has played the role of a change agent or leading sector, the implications for the Indian economy are hugely positive. This is because we possess a number of other sectors that have the ability to play this role in the future and if their potential is harnessed, we can sustain a double-digit rate of growth for a long time. The catch is that unlike IT, that was totally driven by market forces and private investment and did not require much intervention by the state, other sectors would need substantial attention from the government and care-fully crafted policy interventions to facilitate expansion of infrastructure for logistics and movement, ware-housing and energy supply.

Food processing has the ability to transform rural India just the way IT has changed parts of urban India. India has potential to grow most crops and become the food bowl of the world. Aggressive forays into the global market through export of processed food, organic food and fresh produce can unleash linkages that can redefine Indias countryside by ushering in a second green revolution.

Similarly, there are segments of manufacturing where India can emerge as a global player. Autos and the auto component sector show signs of developing a critical mass, and support to this activity can accelerate growth. But one area we have missed out on is electronic hardware, where batch processes can create millions of new jobs and forge linkages with other sectors, such as construction, housing and consumer durables. It is time we selected a few sectors with potential to play the role of leading sectors and created a framework for accelerating their growth. It is time we went into mission mode to launch new initiatives in such areas. The finance ministry would have to lead the charge.

The writer is an advisor to Ficci. These are his personal views