The Peril and the Promise, Broader Implications of the Indian Presence in Information Technologies

The boom in India’s software exports creates a rare opportunity to raise India’s growth rate while it lasts, and could, if handled correctly, raise its long-term growth rate even after the boom ends. The kind of growth that has transformed East Asian economies within a generation is within India’s reach. But if mishandled, the boom could disrupt the economy in the short run and leave it poorer in the long run. Mishandling is inherent in the current economic institutions and policies; urgent macroeconomic reforms are essential if India is to take full advantage of the software boom. The danger emanates from two trends that have emerged from a dialogue between the government and the software industry. First, the industry has asked the government for exclusive concessions and promotional measures, some of which have already been granted. These favour the software industry at the expense of other industries; such industry-level concessions complicate administration and increase the scope for corruption. Second, the government and the industry have agreed on a projected export growth rate that is much lower than what has been achieved in the 1990s, and have instead sought to boost the growth of the domestic software market by means of a range of government expenditure programmes and subsidies. Such measures benefit the industry at the expense of the taxpayer. The correct policy would be to maximize the export growth rate, and to use the export earnings to maximize growth of real GDP. Rapid growth of software exports would, by itself, tend to raise exchange reserves and money supply; it would encourage appreciation of the Rupee and fuel domestic inflation. Both these effects would make domestic producers less competitive, and would lead to demands for increased protection. On past record, the government is likely to yield to such demands. Greater protection would make producers even less competitive, and bring down exports, including software exports.