1. Introduction

Information technology software and services (IT-ITES) industry has emerged as one of the most dynamic sectors in India's economic boom, with an annual average growth rate of over 26 per cent during the past 8 years, from 2000 to 2008. The industry has grown from a mere US $ 150 million in 1991-92 to a staggering 64 billion by 2007-08. It accounted for about 5.5 per cent of India's GDP during 2007-08, up from 1.2 percent in 1998 and is expected to have provided employment to over 2 million IT professionals by March, 2008.  The growth of industry is export driven. In 2007-08, the total software and hardware exports increased to $40.3 bn, which was over 63% of the total revenue generated in the sector. IT-ITES exports made up 44.7 % of India's total service export revenue in 2007-08, up from 4.9 % in 1997.

Emergence of a strong Indian IT industry has been facilitated by concerted efforts on the part of the Government, particularly since the 1980s. The most crucial support has been the tax incentives offered by the government to the industry. However, many experts are now questioning the prospects of broad-based growth led by this sector and the relevance of pampering the sector with lavish tax benefits at the cost of other sectors. This article revisits the contribution of the IT sector to the growth of the Indian economy. It argues that the industry can play an instrumental role in facilitating economic growth and that there is need to give it a further push to gear it up for facing the challenges from rival countries.

2. Contribution of the IT industry

The IT industry has been an important driver of India's economic growth in recent years. According to the NASSCOM figure, it contributed 5.5 percent of GDP in 2007-08 up from 1.2 per cent in 1998. In what follows, we examine the contribution of the IT industry to the Indian economy.

Exports

This sector has played an important role in the export performance of the country. India's manufacturing exports have increased from $33.5 billion in 2000 to $145 billion in 2007 while that of total services increased from over $11 billion in 1998 to $89.7 billion (900 percent) in 2007. It must be noted that this growth in service sector exports was driven largely by IT and IT enabled services. The share of this sector in service exports has increased from 16.26 percent in 1998 to over 44.7 percent in 2007 (Table 1)

    Table 1: Contribution of the IT sector in India's exports: 1998-2007

                                               *pertain to financial year

                                                Source RBI; WTO website

Table 2 shows the export-sales ratio (export intensity) of firms in 5 major exporting sectors of the economy : IT, gems and jewellery, automobile, pharmaceutical and textiles. It may be observed that IT firms export 38.5 percent of their sales in foreign markets. Only 'gems and jewellery' has higher export intensity than the IT sector. Other sectors are far behind.

       Table 2:  Export intensity of firms in selected export oriented sectors: 2000-2006

                                               Source: PROWESS Database

Foreign exchange potential

Since the import intensity of firms in this sector is very low, foreign exchange potential of the sector is very high. According to the CMIE database, net foreign exchange earning per unit of exports has been roughly 0.35 in the pharmaceutical sector, 0.42 in the textile sector, and merely 0.14 in the gems and jewellery sector. In the automobile sector, it has been negative. As compared with these sectors, the average foreign exchange earning per unit of export in the IT sector is 0.54 , where the sector comprises of both hardware and software units. 

      Table 3: Net foreign exchange earnings per unit of exports

                                                               Source: PROWESS

A survey of software firms in 4 centres : Chennai, Noida, Gandhi Nagar, and Trivendrum reveals that foreign exchange potential of software firms is substantially higher than the industry average (Table 3). It is as high as 99 percent in some cases. Thus, despite the fact that 'gems and jewellery' is the most export oriented sector, the IT sector emerges as the largest foreign exchange earner for the country.

    Table 4: Foreign exchange potential of software  firms : 2007-08

                                 Source: Primary survey of software firms conducted by the author

Employment

The IT sector is also an important source of employment (Table 5). Growth of the IT industry has generated demand for skilled manpower at various levels of specialization. Semi-skilled and moderately skilled manpower are on demand in various activities involving IT applications like data processing, back office operation, call centers, medical transcriptions, claims processing (like insurance claims), web designing etc. In addition, there is demand for trained manpower for after sales service, repair and maintenance of hardware and customer support services in both hardware and software. According to one estimate there is a deficit of about 10,000 teachers in the field of software training (NASSCOM website). The total direct employment in the Indian IT-ITES sector is estimated to have grown from 190,000 in 1998 to 1,621,000 by 2007 (NASSCOM website).

Table 5: Knowledge Professionals employed in the Indian IT-BPO sector 2000-1 to 2007-08

                                            *Figures do not include employees in the hardware sector

                                            Source: NASSCOM

 
Though the direct employment elasticity of this sector is 0.11, indirect employment generation is of huge order. In addition to the over 2 million-strong workforce employed directly in the industry, Indian IT-ITES is estimated to have helped create an additional 6 million job opportunities through indirect and induced employment. Indirect employment is generated due to expenditures on telecom, power, construction, facility management, auto, transportation, catering and other services. Induced employment is driven by consumption expenditure of employees on food, clothing, utilities, recreation, health and other services. Job opportunities are across a wide range of sectors, and for both skilled and unskilled labour.

Spill over effects

Even though the industry is export driven, it has generated significant spillover benefits in the economy in a significant way. The industry is linked to many other sectors in the economy. Several industries including civil aviation, automobile, construction and hospitality are directly affected by the industry. It has had a huge multiplier effect on the Indian economy by catalyzing the growth of a number of industries including transport, hospitality, real estate and catering. It has also propelled an increase in wages and salaries and consumer spending. Table 6 presents the share of 'compensation to employees' in total wage bills of firms in selected export oriented sectors in India. It may be noted that wages and salaries form nearly 44 percent of the total sales in this sector. It is several times higher than 9% in the auto ancillary sector, which is the next best. Multiplier effects of the income generated in the IT sector are therefore expected to be significantly higher.

Table 6: Wage-sales ratio in selected export oriented sectors in India : 2000-1 to 2006-07

                                                             Source: PROWESS

A research conducted by CRISIL (for NASSCOM) estimates the spill over effects of the industry based on a combination of I-O, surveys and financial statement analyses. The main highlights of a  NASSCOM study are as follows.

• The IT-ITES industry has had a multiplier effect on other sectors of the economy with an output multiplier of almost 2 through its non-wage operating expenses, capital expenditure and consumption spending by professionals. 

• USD 15.85 billion spent by the IT-ITES industry in the domestic economy in FY06 generated an additional output of USD 15.5 billion.

• For 1 job created in IT-ITES, 4 jobs are created in rest of the economy.

• In 2005-06, maximum additional employment was generated through consumption spending (2.49 million) followed by operating expenses (2.1 million) and capital expenditure (0.63 million).

• Re 1 spent on operating expenditure generates additional output of Rs 0.9 ( Multiplier 1.9x). Re 1 spent on capital expenditure generated additional output Re 1 (Multiplier 2x).

• Re 1 spent by IT-ITES professionals generates additional output of Rs 1.1 (Multiplier 2.1x).

• In terms of potential impact on the economy by 2010, total economic output could be as high as $120 billion, while jobs created (direct + indirect) could cross 115 million.

The E-readiness Report (2006) published by the “National Council of Applied Research” estimates the direct and indirect requirements along with their total impact on the economy by using the Social Accounting Matrix (SAM). The SAM framework helped estimating these impacts at a disaggregated level — by sectors and by socio-economic groups in the country. Table 7 presents estimations of income effects of IT production.

Table 7: Effects of IT production on incomes generated (by economic class) Rural

                                                                      Source: E-Readiness Report (2006)

The estimates indicate that if there is an increase in the value of production by Rs 100,000 then total income impact on the households would be in tune of Rs 151,000. This is substantially higher than the CRISIL estimates of 1:1 effect. The major effect of this expansion of household income would be on affluent household groups in the rural and urban areas. For instance, income of the most affluent rural household group would increase by Rs 25000 and that of most affluent urban household group would increase by Rs 23000. However, they are not the sole beneficiaries. Other household groups also witness an increase in their income. For instance, even the poorest of the household groups in both rural and urban areas, see their income increasing by Rs 1000 individually. The report also observes that the sector wise effect of this increase is maximum on the IT sector itself leading to an increase in output of Rs 369,040 million followed by trade, other transport services, banking and food products.

In sum, the rapid growth in this industry may have a profound impact on the socio economic dynamics of the country.

Tax revenue generation

Generally, it is believed that the sector is not generating revenues for the government. We estimated the elasticity of corporate profit tax (CIT) with respect to profits. Estimates are presented in Table 8. It shows marginal relationships between corporate tax and PAT and profit elasticity of tax in 4 major industries. One can observe that, unlike the popular perception, IT industry also bears tax burden to the extent of 11-12%. Tax incidence on textile industry had been significantly lower than the tax burden on the IT industry until recently. Pharmaceutical sector which exports 33 percent of production pays 16 percent tax. In auto sector, which has the negative foreign exchange potential, the tax incidence is 25 percent. What is more interesting to note is that the profit elasticity of tax in IT industry is higher than other industries even with current lavish incentives offered to the industry.

 Table 8 : Marginal tax rates and profit elasticity of tax in selected export oriented sectors in India : 2003-2008 IT sector

                                 Source: PROWESS database

Clearly, The Indian IT-BPO industry has emerged as major contributor to the economy in terms of its contribution to export earnings, investment, employment and overall economic and social development.

3. Competitiveness of the industry and policy implication

The industry is facing stiff competition from rival countries. An over time analysis of Kearney's attractiveness index of major IT outsourcing countries reveals that there has been increase in the attractiveness index of the rival developing world relative to that of India. To withstand global competition, Indian companies have started moving up the value chain by entering  in IT consulting and system integration, hardware support and installation and processing services. According to NASSCOM, the industry's vertical market exposure is well diversified across several mature and emerging sectors. Banking, Financial Services and Insurance (BFSI) remained the largest vertical market for Indian IT-BPO exports, followed by high-technology and telecommunications, together accounting for nearly 60 per cent of the Indian IT-BPO exports in 2006-07.
These developments notwithstanding, most countries are inching closer to India. Though, China and Southeast Asian countries remain the primary alternates to India, Latin American and Caribbean countries have shown a marked improvement in their position. Newer contenders in Central and Eastern Europe are emerging and outshining more established locations. Middle East and African countries (MENA) are also increasing their visibility as outsourcing locations and are bridging gaps with India in terms of the attractiveness. It is therefore important for the government to ensure that it provides the right environment for this sector to flourish and to play its full role in driving diversification and upgradation of the economy. Elimination of tax benefits may erode the cost competitiveness of the industry and may be counter productive.