Apr 1, 2007

IT Services Or IT Products Or Something Else?

There is an interesting debate going on a couple of blogs about what India needs most today to power economic growth. Is it IT Services Or IT Products? Which one should the enlightened pursue harder and which has the potential to contribute better to economic growth? Sramana argues for products while Basab defends the IT Services story.

It is now a well established fact that the downstream impact of the IT-ITES industry on the Indian economy is manifold. NASSCOM recently released the results of its study on the multiplier effects. Here is a quote from the indianeconomy blog:
* For 1 job created in IT-ITES, 4 jobs are created in rest of the economy
* Re 1 spent on OPEX generates additional output of Rs 0.9 (Multiplier 1.9x). Re 1 spent on CAPEX 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

While the case for IT products is also undeniable, India first needs more of labor intensive industries, preferably the manufacturing types that employ low skilled labor more than it needs IT products. That alone will establish a large industry base that when maturing will generate demand for IT products - yes, you need to first serve local markets before taking on global ones like every successful product major. Look at who the successful Indian companies are buying IT products from? If you take the case of India's incredibly successful telecom sector as an example, most of the top players (Bharti Airtel, Idea, Hutch Essar) have engaged IBM for its products and platforms (services too).

In addition to the direct contribution to GDP a manufacturing base will also generate demand for Indian IT products. Most companies often cited (the likes of Microsoft, Nokia) catered to local markets first before going global and increasing their revenues per employee (Microsoft is more than half a million per employee and Nokia is closer to a million per employee). A solid manufacturing industry base will also guarantee that more low skilled people will get lifted out of poverty and thus ensure political stability leading to continued reform which will in turn create the right ecosystem for generating Intellectual Property. Today's well known constraints that inhibit this include a hamstrung archaic labour laws, VC ecosystem, overloaded judiciary etc.

Once you have sufficient milk in the vessel, churn will automatically happen to produce cream! As Indian industry matures, IT product companies that cater to them will mushroom and then blossom to take on the world! So let us first help by pushing the Indian establishment to organise reforms that spur low skill intensive manufacturing. Products will take care of themselves.


Hari said...

Totally agree with your views Ram.
True progress in GDP cannot be achieved without involving the large population of low-skilled labour and only manufacturing can achieve that. Involving them in the race for progress brings it's own challenges and oppurtunities that the IT industry can then address with it's products. And a ready market for IT products can be the burgeoning domestic market. In that sense, a good ecosystem for the IT industry can be created and the true maturing of the Indian IT industry can also be achieved.

Ram Medury said...

Yes Hari. It is tough to convince the presently successful Service companies to invest heavily into products given the risk/reward equation. Need for non-linear growth is already moving them slowly in that direction.

Industry observers ought to push for labour law reforms so that mass employment for low skill labour can be generated.

Sanjay Bhadra said...

I think the mulitpliers framework for evaluating an industry's impact on society/country is really best - it obviates or should supercede more subjective opinions like labour intensive etc. Agree umeployment is a huge problem - and more than an economic problem. But until we see the numbers/mulitpliers - we cannot conclude whether Products or Mfg are better for our country.

Manohar Madgula Atreya said...

Ram - this (IT) industry is a cost for the busines (though competitive advantage to the business). Any discussion which thinks ahead should focus on enhancing cost/productivity rather than employment or technology. Thus, I feel that fousing on high value (even though early from a capability perspective) will give us gains in the long run. See what Cisco is doing in India, that is what will truly revolutionize what will happen here.

Ram said...

Manohar, while high value is always welcome, without a supporting base (as in a pyramid) it is not sustainable and does not help the local economy. Unfortunately due to license raj and archaic labour laws, our economy has structured itself into pockets of high value manufacturing which may be good for those pockets but does not help the overall economy. We really need reforms that will enable low-skill manufacturing to take off in a big way. The resulting food chain will create domestic demand for high value mfg and a domestic market for IT products.

Enhancing productivity of IT services is an important topic too, may be calls for a separate post.

Ram said...

Sanjay, so we are saying that with the multipliers for IT services, it is definitely good for the economy.

The other argument in this post is about stimulating a large manufacturing base which will then create a demand for IT products in the domestic market.

Only then will these two twains meet when we are able to create IT products that first succeed domestically and then globally.

Yuva said...

necessity is mother of invasion... product based on US(run indians also) since market is there.

point is: domestic market has to be created and WEB2.0 is good example and a step forward.