The Indian IT Industry in 'Crisis': Learning from China

I wrote a post yesterday on the 'crisis' of the Indian IT industry. My essential point in this was that while the Indian media sees a sudden crisis in the Indian IT sector and summarily blaming it on Trump, the problems were simmering for a long time and blaming it on Trump Administration's current or intended policies would be mistaken. And, besides, while a number of observers - Rajat Gupta, formerly of McKinsey fame (and Galleon infamy), being the latest - blame the leadership of Indian IT companies for lack of vision and inaction, I thought this was unfair, it was hard to change business models for mammoth publicly listed companies: In fact, this is exactly what these companies are trying to do, triggering all the crisis talk.

However, all this don't point to a solution, which some reading the post pointed out. To this, I do not think there is any silver bullet. Many, Rajat Gupta included, have spoken about educational change, but that is neither short term nor can happen on its own. The two hundred year old culture of Indian middle classes of educating themselves for a job is unlikely to vanish away short of a complete catastrophe. Some talks of start-up ecosystems, but in India, the start-ups are limited to the privileged and the celebrity, and while many Indians on the other end of the spectrum have always been entrepreneurs, the street-level entrepreneurship in India is seen as a sign of failure, not of ambition and grit. And, the culture of innovation - that some people think is missing - does not happen on its own, without a 'venturesome economy', where the consumers are not risk-taking and everything remains so top-down.

Instead of pretending to find an easy solution though, it may be more profitable for us to draw some lessons from China. Indeed, this is bound to raise eyebrows - what does Indian Software industry have to learn from China - but I think our impressions that India is global IT leader may be mistaken. For this, my debt of gratitude should go to Roopen Roy, whose blog post a few years ago contrasted the trajectories of IT industries in the two countries very effectively (see here). Before I proceed to my views, and elaborate why I think the comparison has value in the present context, it is worth disabusing ourselves from the notion of India's IT leadership by looking at some of the figures quoted by Mr Roy: Indian IT industry is projected to be worth $225 billion by 2020 (by Nasscom, an industry body) compared to the estimated size of China's software industry, $868 billion in 2016. About 20% of Indian IT revenues are from the domestic market, whereas approximately 50% of China's is. And, whereas the biggest names in Indian IT are TCS, Wipro, Infosys, Cognizant (despite its US roots) etc., all IT services companies, the biggest in China are Alibaba, an e-commerce company, Tencent, a product company taking on Facebook, and Baidu, a search engine company.

So, here is the paradoxes: The Chinese IT industry is perhaps 5 times the size of India's, but we hear about it less because they are more focused on domestic market, and play less of the global outsourcing game (of which India has a 50+% market share). However, the Chinese IT companies are successfully playing the 'product' game, and even leading the technology race (for example, the development of 5G standards). One could point to the restricted market access in China for Western companies, both in terms of active legislation and the Chinese language being a barrier, and indeed, echoing the standard western complaints, point to the Chinese model of 'copy-and-catchup'. But that hardly holds water as the Chinese companies are now competing successfully with Western ones in the product game, and filing for patents as fast the American companies do. 

My point is that the narrative of industrial development we have come to believe in, the free market thesis driven by individual enterprise, needs revising. The idea, borrowed from British Industrial Revolution (or from the standard narrative of British Industrial Revolution), is that the Government should get out of the way and let an industry develop, and the global competition, a demand side factor, will ensure innovation and competitiveness, rather than any supply side factor. But what is happening in Indian IT perhaps shows the limitations of this idea in three related ways.

First, that the Indian IT industry developed as an offshoot of globalisation - opening of Indian markets, availability of submarine cables and commercial availability of bandwidth etc - and established a dependent relationship with global markets from day one. One may make the assumption that a company, successful in providing basic services, would climb up the value chain, the experience of Indian IT shows that the reality works the opposite way. In fact, if there were a few Indian IT companies focusing on newer technologies in the 90s, they were superseded by the work other companies were doing in Y2K work. The latter could carry on doing application maintenance whereas many of the former lost their shirts in the Dotcom burst. Instead of climbing the value chain, Indian IT industry remained a victim of its success.

Second, one may easily overlook this, but the roots of the Indian IT Industry were very much in the 'import substitution' culture of the 70s and 80s (many Indian IT companies, HCL and Wipro among them, started off when IBM was made to leave India in 1977). Its growth was sustained by computerisation of government services and financial services (mainly government owned those days). However, since the 90s, the Government embraced the model of limiting the state involvement and generally desisted from big and transformational IT projects (which has made a comeback recently, in the form of Aadhar cards and various e-Governance projects. So, the government stopped playing the role of 'the entrepreneurial state', as the economist Mariana Mazzucato would call it. This is in line with the Thatcher-Reagan era consensus, but completely at odds with the reality of what the American government had done (funding research, developing military technologies which were later commercialised, and being the first customer of the IT). China followed the model of US government of the 60s and 70s, whereas Indian government allowed the Indian IT industry to develop itself following the logic of global markets.

Third, the government also allowed the Higher Education to grow through private initiatives, following the logic of the markets. This meant an enormous expansion of the Higher Ed system, but all in a dependent relationship with the IT industry, which was the employer of choice and whose patronage built or destroyed institutional reputation. The Higher Education was allowed to develop as a factory for IT Talent. There was none of the deliberate policy-making befitting an entrepreneurial state guiding the development of the sector, but rather, apart from social conservatism, the policy was guided by the free-market model of a series of market-based dependencies. Just the opposite in China, where private education was allowed, but the management of these institutions were minutely controlled (often, it is hard to distinguish public and private institutions in China). The Indian companies which copied Western business models - local E-commerce companies, payment service providers, Uber knockoffs - built cheap and cheerful models, but all within the context of global open market model, content to dominate local markets and hopeful, more often than not, an exit through acquisition of a bigger global rival. 

In conclusion, I believe that the pride India displays about its successful IT industry is somewhat misplaced both in degree and its content. We are looking at the wrong parameters when we celebrate the dominance of India in the global outsourcing market: Benchmarking against China, and indeed, against South Korea or Taiwan, would have a sobering effect. Further, that the Indian IT industry developed as a product of globalisation, and free of Government policy (mostly), is not a great thing: The limits of the model is now well exposed. The bad news is that this may adequately out the myth inherent in the free-market thesis of development. The good news is that the current, activist Indian government can perhaps step in now to transform the IT Industry. This may indeed seem like wishful thinking, but given the consensus that urban job creation in India needs some emergency measures, this may indeed be a good place to start.   


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