IT services in India - driving manufacturing and economic growth?

Two steps could ensure the future economic prosperity of India. First is to maintain a dynamic informal sector. Second is to mobilise strength in information technology (IT). The informal sector can bear the burden of providing employment for India’s rapidly growing labour force. And IT can stimulate expansion in manufacturing and agriculture, as well as services.

The last decade has witnessedunusual developments in many developing countries. Faster growth in servicesthan in manufacturing industries is one. ‘De-industrialisation’ is another.Expansion of the informal sector is a third. India is a striking example of such changes. The Indianeconomy has expanded rapidly with per capita income tripling in the last twentyyears. India’s labour force is growing at two percent per annum. Butunemployment is also growing, particularly in the formal sector. And theleading growth sector has been services, not manufacturing.

This growth of serviceindustries has sparked controversy. Some economists predict that India’s institutional development and growing labour forcewill fuel greater economic growth during the next two decades. They say that India will outperform China. Some see India as pioneering a new development path, led by theservice industry. Others see service growth as unsustainable in the long-term,and are sceptical about India’s future economic prospects.

Research from theInternational Labour Organization uses India as a case study - to explore the impact of serviceindustry growth for economic policy, and for theories of structural change.  It analysesempirical facts about manufacturing and services at three levels: thecomparative international level, the interstate level in India, and the sectoral level. It notes that:

• Since 1997,services have grown faster than industry or agriculture.
• Structural changein the economy has been slow, compared to international competitors.
• Industrialperformance has been poor compared to other Asian countries such as Korea, Malaysia and Thailand.
• A majority of sub-sectorshave grown faster than Gross Domestic Product (GDP) with fastest growth inbusiness services, communication, banking services, hotels, restaurants andcommunity services.
• The IT sector hasgrown fast, but still accounts for less than one percent of GDP and employsless than one million people in a total labour force of 450 million.
• In 1998-2000,just eight percent of the labour force was employed in the formal sector, with92 percent absorbed by the informal sector.

The structural theory ofeconomic growth says that manufacturing drives economic growth, technologicalprogress and international trade. But the global IT industry now challengesthis belief. IT generates demand for service products, enhances productivityand increases the role of services in international trade through outsourcing,call-centres and back-office services. Analysis of empirical data from India confirms that IT services can drive economic growth.But it also warns that manufacturing should not be ignored.

The researchers offer severalpolicy recommendations:

• India must promote efficiency in its manufacturingsector - to meet demands for fast economic growth as the demand of formanufactured goods is likely to remain very high for a long time to come,at India’s present and projected levels of per capitaincomes.
• As IT services are fuelling expansion inmanufacturing, India should capitalise on IT strengths – to upgrademanufacture and agriculture as well as services.
• The informal sector will bear the burden of employingIndia’s growing labour force.
• The government should maintain as high a rate ofgrowth of aggregate demand as possible – so that small firms can surviveand expand, and the informal sector remains dynamic.