India as a knowledge economy: Aspirations versus reality

Print edition : January 19, 2002

The Indian vision of a knowledge-based economy will be realised only when it is based on the foundation of a robust industrial economy. To be truly beneficial, the rain of IT must fall at the right place, in the right quantity, at the right time and for the right purpose.

PRABHUDEV KONANA SRIDHAR BALASUBRAMANIAN

THE Indian software industry has compiled an impressive track record over the past decade. Entrepreneurs, bureaucrats and politicians are now advancing views about how India can transform itself into a knowledge-based economy by riding the information technology (IT) bandwagon. Isolated instances of villagers using e-mail are cited as examples of such transformation. Likewise, e-governance is being projected as the way of the future.

At a computer training centre in Kozhikode, Kerala. India's real progress into a knowledge economy will not come without a substantial development of its human potential.-

There is no dearth of fascinating stories about IT-enabled changes. But, there is little discussion about whether such changes are sustainable and effective when other areas of the economy continue to lag. For example, 79 per cent of India's population lives in villages with limited basic infrastructure. Over 60 per cent of the population is considered literate, but with literacy being defined as the ability to read and write simple words in any language, acquired with or without formal schooling. This criterion is so basic, that it is almost irrelevant in the context of a knowledge economy. Yet, Central and State governments have projected IT as a vehicle for social and economic transformation. Are we putting the cart before the horse here? Even if the focus on IT is justifiable, how must IT policy be designed so that the nation is benefited in a balanced way?

In this commentary, we discuss the implications of India's intensive focus on the IT sector. We argue that India should aggressively pursue manufacturing- and agriculture-based industries to build a robust industrial economy that can be made more efficient with IT. IT projects can certainly be pursued within the private sector. However, government policy should not be heavily skewed in favour of the IT industry when its benefits to society are unclear and when its role within the broader framework of national development has not been adequately articulated. Further, policy-makers should moderate their obsession with IT as a panacea for India's socio-economic problems.

We aim to encourage a debate on the role of IT, rather than to arrive at a consensus. With the recent collapse of the IT bubble, it is particularly important that this debate be held. Booms and busts have long existed in various markets. For example, during the tulip bubble in 1637, the irrational exuberance of buyers drove up the value of each tulip to several thousand dollars. A single Semper Augustus tulip was then three times as valuable as the most expensive estate in Amsterdam. However, apart from such frivolous booms and busts, even serious researchers (including Stephen Roach, the Chief Economist at Morgan Stanley) have struggled to demonstrate convincingly the benefits of IT. This reflects the widely recognised IT "productivity paradox".

Equally important, proponents of the "new growth theory", including noted Stanford University economist Paul Romer, have convincingly argued that human capital, which is a function of education levels and workforce skills, is a crucial input for economic growth. Human capital generates the ideas and knowledge that, in turn, decide how efficiently and effectively the traditional inputs of capital (such as plant and equipment) and labour are translated into output. The message is that an enormous pool of labour, in itself, is of limited value. Real progress into a knowledge economy will not come without a substantial development of India's human potential. Against this backdrop, Indian policy planners and politicians must ponder the following issues.

India as a knowledge economy

THE value of IT depends greatly on the existing level of economic development. IT can make existing assets and processes more effective and efficient, but cannot compensate for the lack of a basic infrastructure. What is appropriate for a developed economy is not necessarily appropriate for India, where basic elements of infrastructure including quality education, healthcare, electricity and drinking water remain in short supply.

The impact of IT is best understood when the differences between industrial and knowledge-intensive ventures are recognised. Industrial growth derives from investments in large-scale infrastructure (such as railways, roadways, power grids and dams). Such infrastructure supports the growth of physical-asset intensive industries (such as the steel and transportation industries) that create and move physical entities (such as goods, water and people). These ventures employ numerous workers with limited education and skills, and can uplift large sections of society.

In contrast, ventures in the knowledge economy usually involve the production of knowledge-intensive goods (like software), and the large-scale capture, movement and utilisation of information using sophisticated network infrastructure (such as computers, cable, fibre and routers). Beyond the physical labour required for initial construction, building and maintaining such infrastructure requires specialised knowledge.

In Bangladesh, with a mobile phone. A society that is deeply divided by social and economic fissures must think carefully about how it achieves economic and technological advance.-RASHEEDA BHAGAT

Despite the hype of the "new economy", the fact is that economic development is cumulative. The industrial economy made agriculture more productive. The productivity of agricultural labour skyrocketed with the use of industrial and biological innovations including tractors, irrigation systems, fertilizers, pesticides and genetically engineered seeds. Historically, industrial innovation in developed economies has created great wealth and improved living standards across societal divides. This progress has set them up in an ideal position to create and exploit knowledge as they transform into knowledge-based economies. Crucially, the greatest source of productivity and growth attributed to the knowledge economy derives not from the knowledge economy itself, but from its effects on the industrial economy. For example, IT can enable supply chains and factories to work more efficiently.

The "leapfrogging" argument, whereby India skips heavy infrastructure building and transforms directly into a knowledge economy, is therefore suspect. Proponents of leapfrogging describe how isolated villages without conventional telephones have directly adopted cellular phones. The example provides excellent symbolism. However, the underlying principle is not scalable to the level of the national economy where many complex sub-systems work together. Consider the transportation sub-system. The laws of physics do not allow IT to substitute the physical movement of goods by a "virtual" movement. A lightning-fast information network will not in itself help achieve faster and cheaper transport. Better roadways and railways will.

IT, job growth and government policy

INDIAN IT firms have focussed on developing and delivering IT services to advanced economies. Even if India became the world's software factory and the most optimistic projections of IT-related jobs (including jobs in call centres and design centres) were upheld, this industry will employ at most a few million people. In a nation with over a billion people, this constitutes but a dent in the employment statistics.

Further, a social planner should be concerned not just with the creation of wealth, but also with its distribution across social divides. The IT industry holds limited potential for wealth to trickle down to the poorer sections of society. Unlike a steel plant, IT engenders few opportunities for the uneducated. Any transfer of wealth from the IT sector (for example, by taxing the IT sector to fund social spending) would be achieved through the heavy hand of government. This represents, at best, a dubious economic proposition. In fact, the rapid growth of IT will likely lead to a digital divide in the short term, where the rich and educated are empowered and enriched by IT and the poor are oblivious to its impact.

Before embracing IT, Indian policy planners must carefully evaluate whether investments in other areas would yield higher, and more equitable, returns. For example, consider the jute industry. This industry sustains over five million Indian households. In the late 1980s, while working for an industrial development bank, one of us was puzzled by the government's blanket ban on the use of plastic (for example, high density poly ethylene) to package cement, fertilizers, foodgrains and other commodities - only jute was to be used. Considering that jute bags were more prone to spillage and rat-induced destruction, this regulation appeared to have no rational economic basis. (Jute packaging has improved much since then.) However, this policy had some important redeeming features when viewed from a social perspective.

But, can India employ technology in the jute industry to achieve both economic and social objectives? Imagine using the power of technology (including IT) to derive new and innovative uses for jute; to expand the domestic and export market base for jute products; to position jute as a natural, inexpensive and biodegradable substitute for plastics; and to improve the efficiency of local jute markets so that jute growers can get better prices. Now imagine how these initiatives could benefit millions of Indian households.

This does not call for every jute cultivator to access the Internet. A public or private agency with the right incentives and with access to domestic and international marketplaces can orchestrate these initiatives. Governmental incentives for research and development (R&D) related to improving jute products and finding new uses for jute would deliver more benefits to jute farmers, than would e-mail access.

In a school in Dharmapuri village in Maharashtra. In the current Indian environment a rush into e-learning will only lead to squandered resources.-PAUL NORONHA

As illustrated in the case of the jute industry, Indian policy planners frequently overlook two important points. First, the creative application of IT in a range of manufacturing and agricultural industries can yield much greater returns at a societal level, compared with software production and export. Second, not all technology is information technology - traditional R&D related to design and manufacturing remains extremely important. Such R&D can be enhanced by IT (for example, via virtual collaboration and computer aided design), but not substituted by it.

The country needs to be particularly careful not to give short shrift to the manufacturing sector. China is not known for its strengths in IT, although it now has some presence in the area. But, what China has accomplished in terms of its core industrial base is striking. Foreign direct investment (FDI) in China was of the order of $40 billion in 2000 despite all the noise about alleged labour and human rights abuses. Chinese exports exceeded $200 billion in 2000, with the United States alone accounting for $100 billion of these exports. In fact, the value of "footwear" exported annually by China to the U.S. (worth about $9.2 billion) itself compares with or even exceeds the total value of India's annual IT exports.

Why are these numbers relevant? Exporting footwear creates millions of jobs for citizens who lack sophisticated skills. According to some reports, a total of 34 million export-related jobs have been created in China, with exports to the U.S. alone accounting for over 20 million jobs in the last decade. These jobs have improved living standards for a substantial fraction of Chinese society. There is much we need to learn from China about how the manufacturing sector can deliver robust and equitable economic growth. Taiwan, Malaysia and South Korea have also flourished using similar approaches.

In contrast with manufacturing, the direct benefits to IT (such as employment in IT jobs) are likely to flow to the few who already have the benefits of education. The trickle-down effects of IT (such as cleaning and maintenance staff for IT firms) are likely to be modest or non-existent outside the large cities. The benefits of IT implementation across other industrial sectors (such as employing IT to make transportation and supply chains more efficient) will likely be substantial, but Indian industrial policy does not point in this direction at the moment.

It is also time to discard the notion that the manufacturing sector is inherently less appealing because it may involve some physical labour. In the more advanced economies, a skilled factory floor worker is frequently paid more than a call-centre employee. Empowered with technology, the factory worker can add value at a remarkable rate. In India, the reverse often holds. Mundane call-centre jobs, often outsourced from more developed economies, absorb well-educated, English-speaking workers whose abilities could be employed much more productively elsewhere.

The emphasis on IT would be less objectionable if it did not contrast sharply with the treatment meted out to other industrial sectors. Consider the Vijayanagar steel plant. The plant had the potential to transform the poverty-stricken Bellary district in Karnataka. The feasibility study for the plant was completed in 1967 and its foundation was laid in 1972. Finally, in 1995, more than a quarter century later, the government divested its interests in the (yet incomplete) project. A scaled-down, modified version of the project is now up and running under the auspices of the private sector. Meanwhile, the market for steel has evolved to an extent that the assumptions that anchored the initial feasibility study are worthless.

The actions of governments in India tend to be biased in favour of the IT sector. For instance, software taxes levied in Karnataka were removed within a week in response to pressure from IT companies. Many workplace inspection procedures have been suspended for IT companies, while other sectors are subjected to myriad regulations, many of which have not been re-evaluated for relevance and effectiveness for decades. The government needs a more balanced policy, one that ensures that the core industrial sector is not ignored in the rush toward IT.

IT and education

IT is fashionable to say that India's population constitutes its greatest asset. This viewpoint is misleading. People are assets only when they participate meaningfully in the cycle of value creation and consumption by exercising buying power, or creating products and services of value, or by creating and harnessing knowledge. A large fraction of India's population does not meet, or even come close to, this asset standard. To transform such a situation, a renewed focus is required on the two pillars that have supported the growth of every successful economy - a strong infrastructure core and widespread access to education. Now to discuss the IT-education interface.

Selling parts of used computers on a Chennai street.-SHAJU JOHN

Distance learning and e-learning are already being flaunted in some quarters as solutions to India's education challenges. The argument proffered is that IT can enable the cheap and widespread delivery of education. This reasoning ignores the key challenge - how can the children of the poor and the uneducated be provided with the incentives to come to school, stay in school, and progress to higher institutions of learning? The answer lies in understanding physiology, psychology and economics, rather than in implementing technology. For all its drawbacks and implementation problems, the mid-day meal programme launched by the late Chief Minister M.G. Ramachandran in Tamil Nadu addressed this challenge head on. The programme recognised a simple, but fundamental, fact - the brain cannot feed when the stomach itself is unfed. It provided parents with the incentive to send their children to schools, rather than to the fields. For the children to whom the benefits of education seemed like a distant, hazy mirage, it provided an immediate, tangible reason to stay in school.

There is little reason to believe that IT-based learning will advance meaningfully the cause of Indian education. Problems that are enmeshed in the social and economic fabric of Indian society need to be addressed primarily with solutions that are of a social and economic nature. Throwing technology at these problems will not make them go away.

In addition, creating the infrastructure and content to support effective e-learning is very expensive. Many universities in the U.S. are still struggling to achieve effectively learning objectives in the virtual setting. This problem will be compounded in the Indian environment owing to the diversity of languages and the lack of infrastructure. A rush into e-learning at this stage will only lead to squandered resources.

Presenting technology as the solution to India's educational challenges is troublesome in two ways. First, it diverts attention from issues that should really be on the front-burner. Once this happens, building back momentum in the correct direction is difficult. Second, by building castles in the air that will soon be blown away by the winds of reality, it does a serious disservice to the more limited, but yet substantial and real benefits of technology.

IT and culture

A KNOWLEDGE economy is characterised by a culture of innovation. For such a culture to take root, innovation must be rewarded and intellectual property must be protected.

A culture that truly enhances innovation supports the view that to try hard and fail is perfectly fine. Yet, the Indian psyche has historically been averse to blessing the risky venture. In fact, education has been viewed as a way to avoid risky options, rather than as an enabler of intelligent risk-taking and entrepreneurship. Such a cultural mindset hinders innovation because meaningful innovation is almost never without significant risk.

This attitude transcends into the corporate arena. Consider how static the Indian automobile industry was for three decades before the refreshing winds of competition brought about rapid change. Competition breeds innovation. Not surprisingly, even as markets have become increasingly competitive, R&D spending by U.S. firms has increased sharply, at an annual rate of over 6 per cent during the period 1995-2000.

While one side of the cultural coin pertains to the incentives for innovation, the flip side pertains to its protection. Ideas, unlike property, cannot be protected by building a fence around them. Intellectual property protection is not a purely economic issue; it also has important cultural dimensions. The economic angle can be addressed with stronger patent laws and punitive procedures. However, the cultural angle will decide whether such protection can be enforced meaningfully. Addressing the cultural angle is a challenge. It requires that even without the threat of punishment, one should learn to draw a clear, disciplined boundary in everyday life between what is one's to take and keep, and what is not.

Making such a cultural shift requires that India stop treating intellectual property rights in a casual manner. For example, a frequent argument heard in support of piracy goes along these lines - "If we could afford it, we would pay for it. We pirate because we cannot pay for it." But then, how does an inability to pay for something ever translate into a justification to obtain it for free? One would be highly challenged to apply this logic to hotel stays, vacations, or even a television set. Piracy exists in every economy, but rampant piracy dilutes the incentive to innovate. In the context of intellectual property, economic measures and cultural shifts should proceed hand-in-hand before the spirit of Indian entrepreneurship can take full flight.

The road to technology

A SOCIETY that is deeply divided by social and economic fissures must think carefully about how it achieves economic and technological advance. The path, in some ways, is more important than the outcome itself. The economic travails of modern-day Russia provide a striking example of the results of chaotic advance.

In the Indian context, particular attention needs to be paid to when, where, and in what form IT and other technological advances are encouraged. There are, indeed, many low-hanging fruits to be harvested. For example, a recent article in The New York Times described how a fisherman working off the coasts of Kerala used a cellphone on the seas to obtain information about spot market prices for fish at Kochi and Kollam. The fisherman netted the equivalent of an additional $1,000 in annual income merely by deciding to deliver his catch to the more remunerative market each time his boat came in. This striking example of how simple information flows can enhance market efficiency can be replicated in many ways, and in many markets. However, the stakes are quite different when it comes to the formulation of a national IT policy. Any national policy requires some trade-offs between the benefits to industrial sectors, regions and classes of people. In formulating a national IT policy, the quest for superior technology must be moderated by an understanding of its implications at the social level - what might be good for a private company or an entrepreneur may not always be good for society and vice-versa. For example, a municipal corporation that purchases automated road-laying equipment may find that it either does not use the equipment at all, or that it uses the equipment and allows numerous labourers on its payroll to idle. In this case, technology policy and labour policy are inextricably linked within the overall social context. It is shortsighted to advance doggedly on one front while turning a blind eye to the other.

Successful technology adoption will move in measured steps, at a pace and in a direction that are in harmony with changes in the socio-economic fabric. The role of the government in ensuring such harmony should not be underestimated. This is especially true in India where the government remains responsible for a significant fraction of the economic output, and where it is actively reshaping rules and regulations as the country integrates into the global economy. From the triumph of the capitalist systems across the globe, there is now ample empirical support for the view that governments must ultimately govern with a light touch. At the same time, several economies that have attempted rapid, unstructured transitions into the capitalist mode have declined. There is a strong argument to be made that the Indian government must not simply get out of the way in the spirit of laissez faire, but must instead play a key role in pacing and shaping this transition.

INFORMATION technology can change the way a society communicates, collaborates, lives, works and plays. The growth of the IT sector in India symbolises the potential of Indian industry to perform at world-class standards. This success demonstrates much of what can go right when the spirit of human enterprise is given free rein.

However, the success of IT at the corporate level in India cannot solve its myriad economic and social challenges. Just as copious rainfall can lead to dramatic floods, an obsession with IT and the knowledge economy is not useful. To be truly beneficial, the rain of IT must fall at the right place in the right quantity, at the right time and for the right purpose. Economic policies of a developing country cannot be based on "herd" behaviour and on what is hot in the international market for that year or decade. Neither does the aggressive pursuit of IT represent the sole, or even an obvious, pathway to a first class economy despite the glowing success of high-profile IT companies. Noted economist Paul Krugman, in arguing that someone who has made a personal fortune would not necessarily know how to make an entire nation more prosperous, phrased it best. "A country," he wrote in an article in the Harvard Business Review, "is not a company!"

Dr. Prabhudev Konana (pkonana@mail.utexas.edu) is Associate Professor of Management Science and Information Systems at the McCombs School of Business, The University of Texas at Austin. Dr. Sridhar Balasubramanian (balasubs@bschool.unc.edu) is Assistant Professor of Marketing at the Kenan-Flagler Business School, The University of North Carolina at Chapel Hill. He is also associated with The University of Texas at Austin. Both authors have significant research and professional interests related to technology-intensive markets and strategy.

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