INFORMATION TECHNOLOGY IN INDIA The Quest for Self-Reliance

Information technology (IT) is one of the fastest spreading technologies in the world in terms of use and production. Its use is ubiquitous in the industrialized countries, to the extent that in the United States investment in IT accounts for about 50% of total new capital investment by corporations. The production of IT products and services is a major industry in the U.S., Japan, and Europe; several newly industrializing countries, such as Korea, Taiwan, Singapore, and Brazil, have become significant producers and users of IT; and many developing countries are beginning the process of computerization. This evolution of computers and other forms of IT has been marked by heavy government involvement in virtually all countries. Institutions such as the U.S. Department of Defense and Japan's Ministry of International Trade and Industry (MITI) have influenced and spurred the development of information technologies in various ways, including acting as leading users of IT, supporting research and development, and regulating and providing incentives to the private sector. While U.S. government policies have generally been implemented on an ad hoc basis, the Japanese government has pursued a more coordinated strategy. Believing that competence in IT will be vital to future economic development and observing the importance of government efforts in the developed countries, a number of

its ability to improve the quality or reduce the price of its products. Rent seeking (attempting to gain favorable treatment from policy makers) has taken precedence over innovation, and those businesses with the best political connections have profited while the economy as a whole had stagnated. Manufacturers rarely achieve economies of scale in production and have had little incentive to invest in technologies to reduce cost or improve quality. Consumers are forced to pay high prices for inferior items. Labor unions have fought automation that might threaten jobs, and have supported the status quo regarding imports as unionized workers prosper in protected industries. Finally, state-owned enterprises have remained generally inefficient and unprofitable, dominating key industries and hampering the growth of the private sector.
By the 1980s, it was apparent to the government that 35 years of inward-looking policies had not achieved rapid economic growth, selfreliance, or a major improvement in the standard of living for the Indian people. A reform process began to take form when Rajiv Gandhi took office as prime minister in 1984. Gandhi recognized that government regulation had become a major obstacle to growth and that the public sector was a drain on the economy. He initiated a program of economic liberalization aimed at making Indian industry competitive and increasing exports. His reform program included steps to simplify the tax system and shift import controls from licensing requirements to tariffs. But the most significant decision was to rely on the private sector as the primary source of new capital investment, while trying to improve the performance of the state-owned sector. But the reforms initiated were tepid at best. There was no effort to reduce subsidies for food and fuel, make state-owned enterprises more productive, or open up the economy to real competition from abroad. Tariff rates remained prohibitively high, and many licensing requirements were not eliminated. The government continued to prop up insolvent companies rather than allow them to shut down, and the FERA remained in effect, acting as a strong barrier to foreign investment.
The results of these reforms were mixed, as shown in Tables 1 and 2. For most of the 1980s, the economy did reasonably well compared to many developing countries (e.g., Malaysia and Indonesia). However, India entered a recession in 1989 and encountered serious balance-of-payments problems. In 1991 the government of Prime Minister Rao implemented a broad reform program, partly as a condition for receiving a twobillion dollar standby loan from the International Monetary Fund. Foreign investment restrictions were eased, with limits on foreign equity raised from 40% to 51%, and most licensing procedures abolished. The rupee was devalued by 30% and the government is considering moving to full convertibility. So far, the government has not changed national labor  Asia-Pacific Countries Country 1965-19801980-1988   laws, allowed state-owned enterprises to go out of business, or seriously reduced the size of the government bureaucracy. Such changes are considered necessary if foreign and domestic investment are to increase substantially.4 A broad indicator, composition of the workforce over time, is instructive of the evolution of the Indian economy. Table 2 shows that there has been a slight decrease in industry as a percentage of employment and a near doubling of service employment between 1965 and 1985. This pattern is hardly consistent with a country promoting industrialization, but it is consistent with the notion expressed by some observers that India is in fact a trade-oriented society and that its high degree of manufacturing is largely an illusion. This view is that the government really has a shortterm trading focus rather than a long-term focus on building a manufacturing base. The computer industry provides evidence of this; its practice of assembling imported components for final sale is closer to trading than 4. Economist, "Freeing India's Economy," May 23, 1992, pp. 22-23. manufacturing. Also, the practice of "bodyshopping" or sending programmers abroad on a contract basis shows a trading orientation.

IT Infrastructure
The assimilation of any new technology requires the presence of an infrastructure with which to acquire, learn, and successfully apply the technology. This applies to both the use of the technology and the production of What immediately stands out in Table 3     are even comparable to New Zealand and Singapore (see Table 5). However, business R&D accounts for only 13% of the total, meaning that R&D is largely conducted by the public sector and universities where it may not be relevant to economic applications.
In an effort to create ties between research and industry, the government has established "science cities" around research institutions to serve as centers for high-tech industrial development. One goal of these centers is to attract NRI scientists and engineers living abroad to return to India as entrepreneurs, a strategy that has worked well for Taiwan in the Hsinchu Thus, the broad environment for IT diffusion in India is generally poor, although the situation seems to be changing under the present government.
The highly protected domestic market benefits local producers but at a high cost to users. Strict controls on foreign investment have limited India's access to critical technologies and capital. Although the government has been stable and democratic since independence, religious and ethnic clashes make India appear to be a relatively risky investment climate. The future of the economy may depend on the ability of the government to make reforms while maintaining political stability. The quality of India's IT infrastructure is spotty at best. India's strong suit is its human resource base, but this resource is not being deployed as effectively as it could due to the lack of dynamism in the private sector and problems in adjusting the educational system to meet the needs of industry. India's telecommunications network is desperately inadequate and is hampering the development of IT use and production. R&D spending is reasonably high for a developing country but is focused in the public sector. Government supported R&D has weak links to commercial demand, although some efforts are being made to improve the situation. Finally, capital is in short supply for a high risk industry such as IT. The development of IT production and use has been determined partly by general economic conditions and the nature of the infrastructure. However, the Indian government has directly intervened in the IT sector to a great extent as well, shaping the levels and patterns of both production and use.

Technology Policy
The history of IT policy in India can be divided into two distinct periods.
From the mid-1960s through the early 1980s, policies aimed at achieving technological self-sufficiency through state production, regulation of private production, and dislodging IBM from its dominant market position.
The second period, from 1984 to the early 1990s, saw a shift in focus to moderate liberalization of the industry and promotion of domestic IT pro-duction. Another era may now be in the making as the government moves toward more extensive liberalization of the economy.
1960s and 1970s: Indigenization and Self-Sufficiency 8 India was motivated to try to develop self-sufficiency in computers and electronics largely by national security concerns related to border conflicts with China and Pakistan. The government created an Electronics Committee to devise a strategy for achieving self-sufficiency in electronics within ten years by "leapfrogging" ahead to absorb the most advanced products and technologies available. The goal was to achieve eventually the indigenization of technology, whereby India would move away from dependence on foreign technology and produce its own. This approach not only responded to the perceived security risks, but also fit the ideology of self-sufficiency that drove much of India's post-independence political and economic agenda. IBM's exit was a seminal event, and it illustrated the extent of the government's ability to exert its power over multinational corporations and direct the development of the IT industry in India. The question that naturally arises is why the government chose a showdown strategy with IBM.
Apparently, it did not originally set out to drive IBM away, but felt that it could not allow the corporation to be exempt from the FERA without jeopardizing the government's ability to negotiate with other multinationals and implement its nationalist policy objectives. One effect of IBM's departure was to open up the market to a number of competitors, including ECIL, ICL, and the Tata-Burroughs joint venture. ECIL dominated the market for a time thanks to strong government support, but by the en of the 1970s, local private firms had emerged to control most of the market. Table 6 shows the evolution of the computer market structure from 1960 to 1980.
The decline of ECIL was due partly to its own inability to produce competitive products but was exacerbated by changes in policy. The DOE had come under criticism in the late 1970s for blocking the efforts of private sector firms to produce hardware and for protecting ECIL at the expense of users and domestic competitors. The government responded by giving permission to several private companies such as HCL, DCM, and ORG to produce data processing systems and import parts and components. Soon these companies had supplanted ECIL as the major computer suppliers to the Indian market.  1960-1966 1967-1972 1973-1977 1978-1980   To promote IT use, imports of designs, drawings, software, and technology were liberalized for manufacturers and R&D units in other sectors.
Actual end users were allowed to import computers and subsystems, with virtually automatic approval for systems costing less than about US$8,000.
Nevertheless, the policy was limited and still within the bounds of an import-substituting, state-directed strategy of IT development. Domestic 11. "The New Software Policy: Dr. Seshagiri Clarifies," Dataquest, January 1987, pp. 82-95. sic economic advantages in the field of software in the form of human resources, and that promoting software production could provide a source of economic growth, foreign exchange earnings, and jobs. The software policy was a tacit admission that policies to protect domestic hardware producers were stunting the development of the software industry by denying programmers access to necessary hardware and to software development tools.
Under the policy, licensing requirements were removed on software imports and the duty was reduced to 60%. This was reduced in 1990 to 25% for computers and software used by software producers.12 Previously, most popular software packages had not been allowed in the country at all.
Also, firms setting up export-oriented software operations were allowed access to foreign exchange for the import of hardware and/or software in return for meeting export targets. In order to facilitate training of computer professionals, imports of hardware and software designed for computer aided instruction were allowed with a 60% duty. Foreign exchange was also made available for hosting foreign experts and importing training equipment. In 1990, a 100% income tax exemption was extended to profits from software exports and the double taxation of software imports (income and customs) was eliminated. Also, it was decided to develop twelve additional software technology parks.
Unlike India's hardware policies, software policies have not attempted to promote any particular companies or establish state enterprises. As Seshagiri put it, the policy is based on the idea that "there should be a freewheeling condition . . . because we cannot anticipate . . . what kind of software is going to be dominant in the world two years hence." The government clearly sees the software policy as very liberal, and by past standards it is. But by international standards, a 60% import duty is hardly liberal, especially with export requirements attached. While the policy helped software exporters, it did little for companies developing products for the domestic market. Also, penetration of foreign markets is an expensive and risky proposition and the policy provided little direct support to exporters, such as market intelligence or export finance facilities.  * Government has promoted the use of IT applications in priority sectors such as cement, steel, coal, petroleum, power, telecommunications, and transport. * Government has supported the creation of administrative databases in areas such as agriculture, irrigation, education, health, and public grievances. Computers was launched, and in the next five years the number of institutions conducting degree/diploma-level computer courses increased tenfold and the output of trained IT professionals grew from 1,000 to 10,000. By maintaining high barriers to computer imports, the government has created a situation where it is most profitable for hardware makers simply to assemble imported components for resale. For software companies, the lack of access to hardware for programming and the small domestic hardware base has made it more profitable to send workers abroad to do contract programming rather than to develop programs at home.
The policies chosen in the past have often been driven more by broad political and economic considerations than by a desire to diffuse IT use and production broadly. The heavy emphasis on self-sufficiency was related to ideological and security concerns, while the 1980s push for software exports was largely due to balance-of-payments concerns. The paucity of policies to improve the IT infrastructure is evidence of a lack of focus on long-term growth of IT use and production. Without the necessary human resources, telecommunications networks, research capabilities, and capital availability, India's potential as an IT producer and user remains limited.

IT Diffusion Production
The Indian government's attempts to spur the development of an indigenous IT industry appear to have been quite successful in several respects.
After the 1984 computer policy was announced, production shot up 100% while prices declined by 50%. 14 On the other hand, from 1980 to 1982, before the policy was in place, production of computers had increased by over 300%. As Table 7 shows, sales of Indian computers soared in the 1980s, but there is no clear evidence that the growth rate was substantially affected by government policy initiatives. What probably caused the takeoff was the decision to permit private sector companies to produce microcomputers, which corresponded to the introduction of the personal computer in the United States. It was thus possible for Indian producers to purchase components from abroad and assemble them into PCs for the local market. A boom in microcomputer sales began in 1986 when HCL dropped its prices dramatically, starting a price war that greatly increased the affordability of PCs in India. Price competition brought the prices of microcomputers down from about $4,000 in 1986 to $1,600 in 1987.15 The growth in production is impressive, and one may conclude that the policies implemented in the 1980s were beneficial in that they at least partially opened the industry to international technology. Also, policies have achieved a measure of indigenization in that the industry is dominated by Indian firms and firms with a majority of Indian equity, as seen in Table 8.
Only   SOURCE: Dataquest, 1987, in Singhal and Rogers, 1989, and Dataquest, 1990  These firms depend on international linkages for technology and components, and while production is up and prices down, the Indian hardware industry is still mainly a screwdriver operation. And despite the government's plans to use kit assembly as a stepping-stone to indigenization, the high profits attainable from assembling imported components act as a disincentive to developing more integrated manufacturing capacity.
A major drawback to achieving international competitiveness is the fragmented nature of the industry. By 1988 there were 250 computer manufacturers in India, all competing for the small domestic market. As Table 8 shows, the largest had sales of only $102 million. To achieve more efficient production levels and move down the learning curve more rapidly, Indian producers could consolidate into fewer firms, but existing policies discourage consolidation. Although the 1984 hardware policy removed production limits, the MRTP still restricts agglomeration that could allow one or a few firms to dominate the market. Another option would be to expand exports, but exporting is difficult and risky in the brutally competitive international market, while the protected domestic market offers more assured profits to local producers. India's IT hardware exports grew in the late 1980s, as Table 9 shows. However, much of this was due to exports to the Soviet Union, a market where Indian producers now face stiff competition from Western firms in the future as restrictions on computer exports to the former Soviet states are lifted. Realistically, India's potential as a hardware exporter is very limited. International competitive advantage depends mainly on technological and manufacturing capabilities, both weak spots for India.
Unlike the hardware industry, the Indian software industry has shown rapid growth in export production (see Table 10), and both Indian firms and multinational corporations are now developing software in India for international markets. The growth rate accelerated somewhat in 1986, coinciding with the 1986 software policy, although it is impossible to show a causal relationship between the two events. While the industry has clearly achieved notable export success, it is worth looking at the nature of the export sector. Currently, 70% of India's software exports come from "body-shopping," in which Indian programmers are sent abroad on a contract basis to write code for a foreign customer. 17 This takes advantage of the wage differentials between India and the industrialized countries and gets around the infrastructure problems detailed above. However, as a long-term strategy, this has limited potential. Other countries are tightening up their immigration laws, making "body-shopping" more difficult; furthermore, many of the programmers stay in their host country to earn higher wages after completing their contract. Finally, much of the work done in this manner is low-value code writing, which is being replaced in some host countries by automated code generators.
Only a few local companies, such as Tata    big exporters are subsidiaries of foreign multinationals such as Texas Instruments and Citicorp. Some companies in other industries are also developing software export businesses to keep in-house programmers occupied and to earn foreign currency needed for imports. India's software industry has competed mainly on the basis of low-cost skilled professionals. However, this strategy is becoming less viable as the demand for programmers is driving up salaries. Over the last two years, salaries in the software industry have risen by 50%, according to a local recruitment firm. In the future, the industry will have to emphasize quality and enter higher value-added markets such as systems design, systems integration, and packaged software. Capital is another requirement for developing a software industry. Banks are generally too conservative to invest in such a risky sector, and no software company is yet listed on any Indian stock exchange. While a company like Tata can draw on the resources of its large associated business house, some sort of venture financing facility needs to be developed for the smaller start-up companies.
Beyond the specific problems mentioned above, there is a larger concern about the heavy emphasis on export-led growth in the software industry. Other barriers to usage are the price of equipment, usually two to twoand-a-half times the world price, and import barriers that have made some classes of equipment virtually unavailable. The export obligations placed on importers of computers make it almost impossible to import equipment  , 1985-1990 Spending for IT (in US$ millions) Technology Sector 1985Sector 1986Sector 1987Sector 1988Sector 1989Sector 1990 Hardware 299   And the computerization of the railway reservation system has improved efficiency on a transportation system of vital importance to poorer Indians.

Conclusions
The focus of Indian industrial policy since independence has been achieving self-sufficiency through import-substituting industrialization and government ownership of key industries. In the IT sector, ideological and security concerns led to a focus on indigenization and technological selfsufficiency. In the 1970s, the government implemented heavy regulation and government production to achieve these goals, but by the early 1980s, The reasons for this combination of outcomes can be found in the interaction of environmental factors and policy choices. For example, hardware policies protected the local market without requiring local content in domestic production or demanding that producers meet performance standards. In addition, the local electronics industry lacked the capacity to produce components for computers. Given this combination of policy incentives and environmental factors, local computer makers responded by assembling imported components and charging a premium price in the protected market. The software industry faced an environment in which human resources were abundant, but infrastructure was poor. They also faced a set of hardware policies that denied them access to necessary tools, except for developing software for export. Given this situation, the industry developed a strong export bias based on shipping people rather than products, and has lagged in production for the domestic market. The international environment is also critical in an industry such as IT. The rapid technological change and falling prices for hardware worldwide made India's prospects for developing an export-oriented hardware industry, or catching up technologically, very dim. But the international shortage of programmers created an opportunity for India to capitalize on its abundance of programmers.
Policymakers must consider the broader picture when designing IT policy and treat it as part of an overall economic strategy in which sound economic policies will benefit the IT sector and the diffusion of IT will have positive effects on economic development and social welfare. If liberalization is to take place, it needs to have a positive agenda, as Evans points out, rather than just a negative agenda of reducing state intervention.20 India's past experience and present resources, along with the experience of other developing countries, suggest some specific conclusions regarding future policy: 1. The greatest potential benefit of IT in India is in effective application of the technology to achieve economic and social development goals. There are tremendous gains to be made from the computerization of government, not only to improve delivery of existing services but to improve policy planning and implementation through more effective provision of information to policy makers. Local governments, small businesses, farms, and schools could use cheap microcomputers to gain access to distant information sources and improve their own operations. The government can facilitate this process by improving the communications infrastructure as it has done with NICNET, and by training people to use computers.
2. In the process of developing national information networks, the government could support the domestic IT industry. While it may be most cost effective to use foreign sources for sophisticated hardware, these projects also require software development and systems integration that are within the capabilities of Indian professionals. Working on such projects would enable local firms to develop a wide range of experience that could be applied to other projects, both at home and abroad. Along with liberalizing access to hardware and improving the communications infrastructure, this type of support could enable the software and systems integrations sectors to develop in a balanced, sustainable way. As Schware argues, producing for the do- 492 ASIAN SURVEY, VOL. XXXIII, NO. 5, MAY 1993 mestic market gives companies the skills and a strong financial basis for entering export markets. They will also have the capabilities to manage projects abroad or to developed packaged software for export, rather than depending on bodyshopping.
3. Hardware production in India should not be protected at a cost to users or the software and services industries. Given India's present endowments, it makes more sense to reduce tariffs and encourage hardware producers to move into other areas or link up with multinationals. Local content requirements for government procurement would provide incentives for MNCs to produce in India or work with India's producers. This could actually lead to higher value-added production in India and maintain the viability of some of the local hardware firms.
The present shift toward liberalization of the economy presents the possibility of major changes in IT strategy. Allowing 51% foreign ownership and reducing the level of bureaucratic red tape may encourage more multinational companies to utilize India's large and skilled labor pool, especially for software production. However, these changes are just a start, and it is not clear whether further reforms are forthcoming for the economy as a whole or the IT sector. There are compelling reasons for change but strong ideological and political barriers exist, and the present government holds a tenuous electoral position. Indian economic policy is in a time of transition, and it is unclear what the ramifications will be for IT policy.