Whenever a sector grows anywhere in the world there should be some economics behind the success otherwise it cannot be sustained for long and market forces will push it towards the equilibrium. Indian IT sector has seen phenomenal growth in last two decades and has enjoyed good and bad time of world economy. Most of the time it has largely been liberated from the government policies, even before liberalization began in 1991. From an economist point of few this success can be explained using growth theory that says that the growth depends on 1) Factors of productivity, 2) Total factor productivity, 3) Skills and motivation of workforce. I will discuss each of these in detail here
1) Factors of productivity : When the software industry was started by some early entrpreneurs in India, resources were under utilised and there was enough scope for growth before they touch the production frontier. Physical infrastructure has been a problem from the begining but these companies have solved these probelms by setting up their centers close the cities where they are not far from the international airports, abandone of universities to supply engineers and science graduates. Since one of the major input was engineers and they were in quite supply so it helped in growth. Quite good percentage (in absolute terms) of GNP was invested in some of the universities after independence of the country. This investment played key role in the growth of the companies in later years.
2) Total Factor Productivity: Some of the major factor that can be highlighted here are 1) Advances in the technology i.e. Internet that allowed engineers to work in global development centers and have live chat and deployment of software products worldwide and reduction of the computer cost over the years. 2) Redistribution of resources from lower to higher productivity sectors, i.e. many of the science students all over the country started to study computer programminig and IT related subjects and the supply of computer related institutes increased many fold. Even engineers from other streams started taking up jobs with the IT companies because of the higher salary and prospects of fast career growth. 3) Terms of trade: Government of India did not interven in the IT sector and the highly protectionist western countries never thought of applyiing import tax on IT related services. 4) Quality of labour force: Indian education system puts lots of emphasis on mathematics and english is second language for most of the educated people that helped a lot.
3) Skills and Motivation of workfroce: Indian universities produce millions of graduates (hundreds of thousands are engineers out of them) every years and basic education system puts lots of emphasis on numbers, these graduates are perfect match for he computer industry that also talks in numbers and some logics. These graduates are highly motivated young guys because they get their job at very early age and earn quite a good salary, get indepence from families.
All these factors have helped in attening sustainable growth over two decades in the country. As I always say if the fundamentals are correct for any company/industry it will grow over time and I see that Indian IT/software industy will continue to grow in near future. Though there are risk of exchange rate fluctuation, salary rise but these are manageble risks and should not affect the growth at large.
1) Factors of productivity : When the software industry was started by some early entrpreneurs in India, resources were under utilised and there was enough scope for growth before they touch the production frontier. Physical infrastructure has been a problem from the begining but these companies have solved these probelms by setting up their centers close the cities where they are not far from the international airports, abandone of universities to supply engineers and science graduates. Since one of the major input was engineers and they were in quite supply so it helped in growth. Quite good percentage (in absolute terms) of GNP was invested in some of the universities after independence of the country. This investment played key role in the growth of the companies in later years.
2) Total Factor Productivity: Some of the major factor that can be highlighted here are 1) Advances in the technology i.e. Internet that allowed engineers to work in global development centers and have live chat and deployment of software products worldwide and reduction of the computer cost over the years. 2) Redistribution of resources from lower to higher productivity sectors, i.e. many of the science students all over the country started to study computer programminig and IT related subjects and the supply of computer related institutes increased many fold. Even engineers from other streams started taking up jobs with the IT companies because of the higher salary and prospects of fast career growth. 3) Terms of trade: Government of India did not interven in the IT sector and the highly protectionist western countries never thought of applyiing import tax on IT related services. 4) Quality of labour force: Indian education system puts lots of emphasis on mathematics and english is second language for most of the educated people that helped a lot.
3) Skills and Motivation of workfroce: Indian universities produce millions of graduates (hundreds of thousands are engineers out of them) every years and basic education system puts lots of emphasis on numbers, these graduates are perfect match for he computer industry that also talks in numbers and some logics. These graduates are highly motivated young guys because they get their job at very early age and earn quite a good salary, get indepence from families.
All these factors have helped in attening sustainable growth over two decades in the country. As I always say if the fundamentals are correct for any company/industry it will grow over time and I see that Indian IT/software industy will continue to grow in near future. Though there are risk of exchange rate fluctuation, salary rise but these are manageble risks and should not affect the growth at large.
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