Sujai Karampuri in Need Product Companies for India’s Growth makes an unconvincing case for encouraging the high tech industry in India. On the way he quotes data on the IT Services industry to prove his point that
“No matter what we do, contribution of IT-ITES will be marginal in contribution towards Indian GDP unless something dramatic happens.”
The primary conclusion of his data analysis is that the Indian IT Services industry has a low average revenue per employee ($22,000 per employee in 2005) versus Microsoft (over $600,000 per employee). And therefore
“Only a technology product company can add the right kind of money into India at a faster and quicker pace using smaller manpower.”
Here is my rebuttal:
What economic objective are we solving for? Let’s say that is GDP growth. Why then is revenue per employee (RPE) a metric we should care about? Are industries with higher RPE, higher growth industries as well?
Then there is this befuddling argument that since Microsoft (US software industry) has a much RPE compared to the Indian services industry, that India must have a stronger high-tech industry.
On similar lines, here’s my logic for why India must forget about retail banking and have a stronger investment banking industry – Goldman Sachs has an RPE of $1,317,000 while ICICI Bank’s is only $139,000. I think the analogy is apt. But the argument is wrong.
It is not necessary for a country to have a large and growing high-tech industry to grow. Countries like Singapore and Australia haven’t needed a strong high-tech industry to get wealthy. The software industry is actually highly concentrated in the US. Can you think of any software company headquartered in the UK?
The case for the high-tech sector in India being vastly more important than other sectors isn’t strong. Sectors like Financial Services provide the infrastructure for the economy to grow. Retailing, Infrastructure, Airlines – all serve objectives beyond just growth. When it comes to growth, IT Services is an industry where India has great comparative advantage. Software has that too, but less so.
Having said that, the fact is that this argument is immaterial. Software companies in India (IP based companies) are anyway sprouting like mushrooms (Gridstone Research, my company, is one of them). Not because of exhortations from bloggers but because there are people who have the skills and the aspirations to build businesses.