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India the IT leader is under-invested in IT deployment : NASSCOM news
29 April 2005

Mumbai: NASSCOM has announced research findings of a report on Information Technology in the Economy of India conducted by Sallstrom Consulting & Nathan Associates Inc and supported by Microsoft Corporation India Private Limited. The report was released by Montek Singh Ahluwalia, deputy chairman, Planning Commission, government of India.

The report highlights the fact that investments in information technology (IT) continue to be a major driver of economic growth across 30 countries examined for the report. While providing a comparative snapshot of where India stands vis--vis other countries in the region on the IT investments scale, the report also seeks to analyse the reasons and challenges that need to be addressed to strengthen India's position in the global IT space.

It also highlights that economy of India has the lowest IT capital share. Only 3.5 per cent of total economic capital in India is hardware and software. This is the lowest vis--vis the average IT capital share of 5.7 per cent amongst the other eight countries that are underinvested in IT. While among the 21 economies identified as invested in IT, the average IT capital share is 23.9 per cent.

Highlights of the report:

  • Despite being a global IT leader, India's economy is underinvested in IT with IT capital share being only 3.5 per cent of total capital - the lowest among 30 economies considered for the report.
  • IT uptake positively impacts all countries - developed and developing - effecting an average high of a 3.6 per cent increase in GDP and an average of a 4 per cent greater contribution to labor productivity thereby spurring economic growth.
  • As a result of being underinvested in IT capital, economic growth and productivity are low in India - GDP per hour worked in India is less than three-fourths of the average rate in all economies underinvested in IT capital.
  • Benefits of IT are least dispersed in India relative to other economies under invested in IT including China. This is primarily due to low PC penetration (7 PCs per 1,000 people), low Internet penetration (16 internet users per 1,000 people) and limited number of secure Internet servers ( 0.3 secure internet servers per 1 million people)

Commenting on the report, Kiran Karnik, President, NASSCOM said "In India - the private sector, the government, and academia - have spent significant time and resources focusing on developing the export potential of India's software industry. Given that great success, we know with time and attention, it is possible to grow the domestic industry and increase domestic IT uptake. Through our exports, we have helped the rest of the world reap the benefits of IT investment. Now it is time to bring those benefits to India."

The key inference of the report is that in economies invested in IT capital, a 10 per cent increase in IT capital increases GDP 3.6 per cent while a 10 per cent increase in labor hours increases GDP 4%. In contrast, in economies underinvested in IT capital, a 10 per cent increase in IT capital increases GDP only 1.6%; a 10 per cent increase in labor hours has no statistically significant impact on GDP. As IT capital deepens in an economy, IT capital adds more to GDP and, more importantly, labor becomes more productive.

Detailing the findings, Robert Damuth, Nathan Associates Inc said "Despite India's global IT dominance, internally, the country has low level of IT investment - only 3.5 per cent of total capital - and minimal dispersal of IT capital of 30 countries evaluated, leading to lower direct contributions to GDP and insignificant labor contributions to GDP."

Commenting on the key recommendations highlighted in the report, Laura Sallstrom, Sallstrom Consulting said, "Policy makers need to borrow from the success of the commercially based software export sector. There are several critical levers to apply, but it appears that piracy rates (75 per cent for software), and enforcement challenges in the intellectual property area are exacerbating uptake issues."

For India's economy to become invested in IT capital, the government must develop and implement policies that promote investment in IT by businesses, households, educational institutions, and the government itself. Policies should focus on promotion of software asset investment in India. The seven policy areas which will be key to IT capital deepening in India include:

  • Positive government enablement
  • Trade and Tax policy reforms
  • Access to finance capital for domestically focused IT companies
  • Research and Development, Intellectual Property protection, investments in improving human capital and Physical IT and communications infrastructure.

Elaborating on the relevance of the report, Ravi Venkatesan, member- NASSCOM Executive Council and Chairman, Microsoft Corporation India Private Limited said, "The concerns highlighted in the research results today establish the fact that IT can serve to be a vital catalyst for ushering in faster economic growth, increased employment opportunities, tax revenues for local economies and enhanced productivity. It's imperative therefore that as a nation we prioritize our development goals and use IT as an enabler for effecting all round economic growth and creating a vibrant economy in which local businesses thrive and local jobs are created."

Other key highlights of report:

  • In addition to being underinvested in IT capital, the existing IT capital in India is not widely dispersed. Penetration of personal computers (PCs) in India lags all economies examined with a rate of only 7 PCs per 1,000 people - equivalent to only one-fourth of the PC penetration rate in China and only approximately one-half the PC penetration rate in neighboring Sri Lanka.
  • Internet uptake in India is the lowest with only 16 Internet users per 1,000 people, an uptake rate equivalent to less than 35 per cent of the uptake rate in China.
  • One cost of being underinvested in IT capital is slower economic growth in India. Throughout economies invested in IT capital, IT industries (producing and using combined) contribute between 28 per cent to 57 per cent to real growth in GDP. More important, in most of these economies the contribution of IT using industries is stronger than the contribution of IT producing industries.
  • Productivity in India is lower than three-fourths the average rate in other economies underinvested in IT. When examining real GDP per capita, India lags China and Sri Lanka, but leads Bangladesh and Pakistan.

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India the IT leader is under-invested in IT deployment : NASSCOM