Information technology (IT) has been India's great success story over the last 25 years. In fact, such has been the success of IT companies that a whole generation of parents has now wanted their children to work for an IT company.
In a country where almost any entrepreneurship remains a tricky bet, this success of IT is indeed very surprising. A standard explanation for the success is that the government did not interfere with the sector because it did not understand it and this allowed IT companies to grow and flourish.
In contrast, the government kept interfering with the way manufacturing companies were expected to operate, and look at the mess they made.
Like most simplistic explanations the problem with this explanation is also that it is 'only' partly true. As T N Ninan writes in his new book The Turn of the Tortoise: The Challenge and Promise of India's Future: "This is only partially correct because the tech sector did not grow independently; rather, it was built on a foundation provided by the government. It is the government that set up key institutes of technology which produced the leaders of companies like Infosys and HCL; the government (as well as private organisations) set up other engineering colleges which produced the bulk of the tech manpower."
Nevertheless, the engineering colleges set up by the government weren't set up to cater to Indian IT companies. They were set up for a totally different reason. We will have to go back in history to understand what really happened.
The Industrial Policy Resolution of 1956 envisaged a public-sector-led development of India. As Sanjeev Sanyal writes in The Indian Renaissance: India's Rise After a Thousand Years of Decline: "The private sector was tolerated but strictly held in check by industrial licences, while the public sector became the centrepiece of national policy. A Soviet-inspired Planning Commission was established."
Here we need to talk about a gentleman called P C Mahalanobis who founded the Indian Statistical Institute in two rooms at the Presidency College in Kolkata in the early 1930s. He became close to Jawahar Lal Nehru, the first prime minister of India, and was appointed as the honorary statistical advisor to the government of India.
As Mahalanobis said in a speech in November, 1954: "In dealing with the programme of industrial production one of the most important questions would be an adequate supply of trained personnel at all levels. This may indeed prove to be a serious bottleneck."
Given Mahalanobis's closeness to Nehru, this bottleneck was quickly removed. In order to tackle this bottleneck, the government moved its focus towards higher education. As Sanyal writes: "Rather than invest in the general primary education, the country used up all its education budget to provide specialized personnel for grandiose public-sector-projects...The needs of the Mahalonobis model...meant that the country had invested heavily in tertiary education and built up a handful of world-class institutions."
And this included many IITs and Regional Engineering Colleges (now called the National Institute of Technologies). Ultimately, these engineering colleges, along with a host of private engineering colleges established by politicians in the four southern states, ended up supplying a huge number of employees to IT companies. But this happened by chance. The government didn't plan it that way.
In fact such was the fascination for IT that by the late 1990s engineering graduates from the Indian School of Mines in Dhanbad, who were not exactly trained to work for IT companies, were also joining IT companies. The same thing was playing out all over the country where civil, mechanical and mining engineers, were all rushing to join IT companies.
Nevertheless, there was one area where the government did help IT companies. As Ninan points out: "It was the government which provided the satellite communications links that facilitated the birth of a business that could base itself in India and serve customers halfway around the world."
If the government had not done this, then all the labour-cost advantage that the IT companies were looking to exploit would have been of no use.
What also helped IT companies was the fact that there was no market for their services in India. The market for their services was in developed Western countries. These markets were already being serviced by Western IT companies. If an Indian company had to enter these markets, it had to compete with the best IT companies of the world. So there was no place for slack.
As Ninan writes: "A key explanation for success in one and failure in the other is that India had no domestic market for the software services that existed in US and elsewhere. The tech companies that started up knew from the beginning that they would have to service a global market and face global competition, unlike in, say, cement or paper manufacture, where producers could afford to be satisfied with the pickings that the domestic market offered, especially if it came with tariff protection."
Hence, Indian manufacturing companies did not have to compete with the best in the world. In the process they ended up producing shoddy goods which were overpriced and wouldn't sell anywhere else but India.
In fact, this also explains why one of the visions of the Make in India programme is "enhancing the global competitiveness of the Indian manufacturing sector." This, nearly 70 years after independence.
Vivek Kaul is the author of Easy Money. He can be reached at [email protected].
This column appeared in the December 2015 Issue of Mutual Fund Insight.
This article was originally published on January 15, 2016.
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