Geography, uneven development and distributive justice: the ...

Cambridge Journal of Regions, Economy and Society Advance Access published March 17, 2011 Cambridge Journal of Regions, Economy and Society 2011, 1–15 doi:10.1093/cjres/rsr003

Geography, uneven development and distributive justice: the political economy of IT growth in India

Anthony P. D’Costa Asia Research Centre, Department of International Economics and Management, Copenhagen Business School, Dalgas Have 15, DK-2000 Frederiksberg, Denmark, [email protected]

The aim of the paper is to apply a political economy framework both to explain the rise of the information technology (IT) industry and to analyse the spatial and developmental consequences of this growth, especially the distributive dimension on the wider society. The purpose is also to reveal the contradictions associated with the industry, question the crude optimism surrounding the IT sector’s transformative capabilities, and by extension, assess the ‘model’ of development implicit with its growth trajectory. As there is class bias in the workings of the sector, which excludes large swathes of the population and reproduces educational inequality, policy implications are briefly discussed. Keywords: political economy, development, IT industry, India, geography and power, class analysis JEL Classifications: B52, O15, R11

Introduction Much has been written on the phenomenal rise of the Indian software industry, which is a subset of the broader category of information technology (IT). Most of the explanations offered for its success have taken economic, business or innovation perspectives. Few have applied a political economy framework to explain the rise of the industry or analyse the spatial and developmental consequences of this growth, especially the distributive dimension of this growth on the wider society (D’Costa, 2003; Parayil, 2006). Likewise, few have questioned the implicit paradigm of development enshrined in the IT sector in terms of its implications for India’s economic and social progress. Academics have challenged the broader neoliberal model adopted by many developing countries, but critical treatment of the IT sector has remained

sparse. Consequently, the euphoria surrounding software export growth has been taken to an illogical conclusion, namely, that India’s development prospects lie in services exports, especially software. India’s National Association for Software and Services Companies (NASSCOM) boldly claimed that: The country is at an important juncture in its history, having completed the transition from an agrarian economy to a fully-fledged, firstworld economy, operating at the leading edge of contemporary technology. A key element in taking the country forward and maintaining its growth momentum will be the provision of a highly skilled and competent global workforce (NASSCOM, 2006).

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Received on May 17, 2010; accepted on January 31, 2011

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Indian industry and by Bangalore on the rest of the country. I show that heavy export dependence generates vulnerability and excessive dependence on the US market results in lost opportunities. Second, by showing the limits of the IT industry, I broaden the scope of the analysis by investigating the paradigmatic aspects of the IT ‘model’ of development. First, I reject the simplistic market-driven explanation of IT industry development and show that the state has not been marginal, as claimed by the industry and its boosters. Rather, the state has had an important bearing on the growth of the industry by reinventing itself (D’Costa, 2009a). Second, the IT and services sector in India cannot play an economy-wide role in structural transformation due to its inability to generate a sufficiently large number of jobs, truncating India’s leapfrogging to firstworld status. Third, the economic dynamics of the IT sector not only rest on inequality but also tend to reproduce class and other social divisions due to its education bias, thereby excluding a large section of the Indian population. In the next section, I develop a simple framework that shows how the interaction between geography and globalization produces uneven development as manifested by the hierarchies of place and social class. Both these hierarchies are empirically analysed in the sections that follow. I then examine the dependence of and associated accumulation challenges faced by the Indian IT industry, followed by a critique of the model of development by elaborating on the three fallacies listed above: that the sector’s success lies in market dynamics, that IT can bring about national transformation and that the sector contributes to social development. I conclude by discussing broad policy implications.

The twin hierarchies of geography and social class: a framework The starting point of the discussion is capital accumulation and uneven development at the global level. Historically, particular cities, regions and countries have emerged as centres of economic dynamism. States have played critical market-making and market-augmenting roles in this process. The industrial revolution in the UK, the rise of the American


Such a perspective could be dismissed as naive optimism. But the social and economic contradictions associated with the industry, and the model of development it projects, are important enough to take a closer look. India remains agrarian despite a declining share of agriculture to national income (20%) and the rising contribution of services (56%). India’s 2008 per capita income of US$1070 pales when compared to the high-income Organization for Economic Cooperation and development (OECD) average of US$41,168 (World Bank, 2009). Today 70% of India’s population live in rural areas, with large numbers eking out a living. They coexist uncomfortably with high-paid, urbanbased IT professionals. It is difficult to quantify poverty rates in India (Basu and Mallick, 2008, 463), but holistic alternative measures of poverty suggest that nearly 69%—more than 700 million Indians—live below the poverty line (Guruswamy and Abraham, 2006). India’s illiteracy rate remains more than 35%. The ‘first world’ that NASSCOM has in mind is India’s nouveau riche made up of business classes and high-salaried professionals, who represent a small fraction of India’s total labour force. Thus, India’s affinity with the rich countries, as claimed by NASSCOM, is more an aspiration than even a distant reality (see D’Costa, 2010). No one questions the remarkable social and economic transformation of India over the past two decades. But I question the crude optimism surrounding the transformative capability of the IT sector, and by extension, I challenge the policy implications wedded to the IT model of development. For example, the relationship between globalization and IT industry’s contribution to urban growth has been treated uncritically, although regional inequality and distributive dimensions are acknowledged (Narayana, 2010). Admittedly, critiques of neoliberalism abound, but there is little analysis of the political economy issues around IT development in a neoliberal context. To fill this gap, I analyse the socio-spatial and developmental impact of IT in two parts. First, I begin by describing the geographic and sectoral hegemony exercised by the US industry based in Silicon Valley on the

The political economy of IT growth in India otherwise absent in economically vibrant China and India. They can, however, act as adjuncts to core economy production and in the process experience upward mobility in particular sectors. Thus, IT services are targeted towards high-income markets, such as the USA, and India is an adjunct to this accumulation model. Regions, along with the sectors they specialize in, can have undue influence on the national and world economy. These regions tend to corner global investments, attract talent and mobilize state support for infrastructure development. These in turn reinforce the resiliency of high-income markets. For example, despite deindustrialization of the USA, UK and Japan since the 1970s, New York, London and Tokyo were the top-tier cities in the world’s financial system in the 1980s (Sassen, 2001). Silicon Valley in the USA retains its high-tech preeminence and continues to attract Indian and Chinese IT entrepreneurs and professionals even as it increasingly farms out high-tech manufacturing to East Asia or India (Saxenian, 2004). In India, Kolkata and Mumbai were important British centres with their jute and textile mills, now long faded. Mumbai has repositioned itself with finance, entertainment and business services, while Bangalore and New Delhi (the National Capital Region) have risen and specialize in IT, software services and call centres (D’Costa, 2005). Bangalore emphasizes market-driven competitive exports, touts the importance of technical education and shows that the global economy is indeed flat (a` la Friedman) and that the city has a special place in it.1 Politicians in the USA point to Bangalore as a warning about the future of the US economy since Bangalore supposedly represents economic and technological convergence with other high-tech regions. However, as we will see, such anxieties are misplaced, as Silicon Valley and rich country markets still influence global production. Ironically, because of Bangalore’s hegemony over other regions in India, it sits uncomfortably with its hinterland of toiling masses and the teeming millions in backbreaking unskilled jobs in rural and smaller urban areas. Bangalore contributes substantially to national accumulation and thus serves as an 3 of 15


economy, redevelopment of Western Europe and Japan and the emergence of the Brazil, Russia, India and China (the BRIC economies) since the IT revolution of the 1980s are examples of global shifts in regional power. However, regions, despite economic decline, tend to be resilient, based on their ability to control the content and scale of accumulation taking place elsewhere. International outsourcing, subcontracting, joint ventures, franchises and so forth are examples of business arrangements by which production in farflung places is controlled. Control is also exercised by the particular mix of institutions found in core economies, which have been fine-tuned over time (see Hudson, 2009). This echoes Peet’s idea of hegemony exercised by particular ‘institutional complexes’ located in specific centres (Peet, 2007, 22). One of these institutions is the state, which has the double burden of nation building and class making— in effect supporting national capital accumulation. However, under global capitalism, the power of place cannot be assumed to be fixed. As economic conditions change and new capitalists emerge with new resource and market advantages, new centres of accumulation also surface. Here, the role of the state is crucial (Amsden, 1989; Cox, 2008; D’Costa, 1999; Johnson, 1984; Wade, 1990). Capitalists and policy makers expect that by supporting the bourgeoisie, there will be national economic change and societal transformation, but the outcomes are historically contingent on a host of factors. In practice, class-based capitalist markets generate uneven outcomes, whereby inequality, in the absence of countervailing policies, is a singular manifestation of development. Ironically, the state, in its enthusiasm to support national capital accumulation, can also be complicit in contributing to uneven development. The changing hierarchy of place is evident as older manufacturing centres such as Manchester, Pittsburgh, Leipzig, Bremen, St Etienne, Bilbao, Torino and Yokohama (Power et al., 2008) have been rivaled and superseded by Seoul, Pohang, Shanghai, Taipei, Hsinchu, Singapore, Mumbai and Bangalore as new centres for accumulation. However, dislodging core markets, such as the USA, Western Europe and Japan, is no easy matter due to high per capita incomes, a feature that is

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standing and technical professional education.3 The necessity of having a technical professional degree virtually excludes India’s poor and minorities without a college education. Hence, the industry remains enclave in form. One could even argue that inequality is a structural necessity to engender the kind of growth that India is currently witnessing since tertiary education by definition is selective. This implies that without the bias towards upper classes and castes, it would not have been possible to generate the technical pool to drive postindependent India’s industrialization and, in pathdependent fashion, contribute later to India’s IT growth. We leave this alternative and controversial view aside to focus on how class hierarchies interact with the workings of the global economy. The relationship between globalization and inequality is complex, with different costs and benefits for different sectors and regions (Bardhan, 2006, 1393; Cornia and Court, 2001; Galbraith, 1998; McGrew and Held, 2002; Singh and Dhumale, 2000; Streeten, 1998; Wade, 1996). However, deregulation of protected sectors in emerging economies has compelled firms to respond to competition by leveraging low-wage labour and technical talent. At the same time, deregulation has also led to dismantling of the few social safety nets that exist for the poor, thereby worsening inequality. They do not have the endowments necessary to take advantage of opportunities thrown open by globalization (see Dre`ze and Sen, 1998). In tandem, core regions such as Silicon Valley continue to adjust flexibly to both cost pressures and new markets by mobilizing their institutional strengths and tapping large talent pools in India and East Asia. Offshoring software development in Bangalore is the hallmark of a redefined international division of labour, where the partnership between Silicon Valley and Bangalore, though close, is asymmetric.4 Some authors have attributed rising inequality to technological change (Castells, 2000; Wood, 1995).5 Technology, of course, is not exogenous to accumulation. As economic activities demand more skills corresponding to the deployment of new technologies, those with fewer skills are left


example of a particular model of development, namely an outward-oriented, service-based economy. The economic gains from software service exports are substantial with employment concentrated in the city. However, magnitudes are small relative to the total Indian workforce. The inherent inegalitarianism is apparent, given the intake of technical graduates and the output of well-paid technical professionals. The services-led development of the economy is tenuous since the generation of technical talent is highly skewed in favour of educated middle classes and is mediated by ‘social power’ (Reed, 2008). While power is socially constructed and structurally determined (Reed, 2008, 19), the forces of the global economy not only reinforce this inequality but also polarize society.2 Castells (2000) brings this up by juxtaposing the ‘rise of the fourth world’ with the global networked society. However, India is not the fourth world he has in mind, though very much integral to uneven developmental outcomes unleashed by new global forces. More importantly, given the workings of class structure and social power, it is evident that the world is not flat (Cox, 2008; Leamer, 2007) even as new technologies, entrepreneurs and production-sharing arrangements create selective prosperity (McCann, 2008, 355). As Harvey (2009, 1276) points out, capitalist markets favour those already well-off and hence it is not surprising to see billionaires springing up even in impoverished places such as India and Mexico. Far from homogeneity and convergence, the capitalist world is becoming more unequal with regional concentration of high-value economic production. The dynamism of new sectors in new regions is integral to uneven development, leading to a ‘reconstituted core’ (Hoogvelt, 2001). Thus, Bangalore converges somewhat with Silicon Valley but diverges drastically from the rest of India. The power of geography is accompanied by the power of a growing national bourgeoisie with an international outlook on accumulation (see Sklair, 2002). Unlike in other industries, the captains of the IT industry in India come from a wide variety of social backgrounds (Damodaran, 2008). But one feature that binds most of them is their middle-class

The political economy of IT growth in India

Critiquing the IT model of development This discussion has two parts. First, I describe the extent of India’s dependence on the US market. From this I postulate that the Indian sector is vulnerable to American political pressure, to losing other markets such as Japan and to missing out on the learning opportunities obtained from the diversification of both service and geographic markets. The second part discusses three fallacies—or partial truths—associated with the IT ‘model’ mentioned earlier. The first fallacy is that the state was not important for the industry’s growth and the sector’s success was due to market dynamics. On the contrary, I show that the industry’s development rested on complementary public resources. While IT has certainly changed the public image of India, the second fallacy, that IT can bring about national transformation, overlooks the intractable problems, notably in employment opportunities, and hence the limits to structural transformation. The third fallacy, that the IT sector contributes to social development, ignores the fact that the IT industry has thrived on pre-existing inequality and due to global market dynamics has tended to reproduce inequality.

Dependence on USA and challenges for the IT industry The industry has grown rapidly. Its share is 6–7% of gross domestic product and its export share to total exports is about 18%. The industry exported 77.5% of its output of software and services in fiscal year 2008 (NASSCOM, 2009), indicating its heavy reliance on the world market. What is stark is the US dominance over the Indian IT industry. The USA is India’s principal market and absorbed about two-thirds of India’s IT exports in 2004 (Table 1). However, the dependency ratio (the ratio of the region’s share of India’s exports to the region’s share of world IT services) for North America was 1.4, indicating India’s asymmetric relationship with the USA. In contrast, the second largest IT market in the world—Japan—absorbed just about 2% of India’s IT exports in recent years (Table 1). There are many implications for India of this lopsided geographical distribution, chief among them are the lack of diversity in product and service markets and missed learning opportunities by not serving 5 of 15


behind. This is not just the labour-substitution effect with automation, where the less-skilled workers are displaced by machines; rather, the nature of work itself is transformed, demanding fewer relatively scarce skilled professionals. In developing countries, those with skills are likely to enjoy a larger skill premium compared to their counterparts in wealthy economies. This is due to wider social and economic gaps between those with skills and those without. There is also the cumulative self-reinforcing process of technological change (James, 2002) by which skill development puts the resilient advanced capitalist country regions far ahead of developing country regions (McCann, 2008, 365). Breaking out of this structural dependence remains a considerable challenge for late industrializers. Hence, exaggerated optimism about transforming largely agrarian societies such as India remains unwarranted under current capitalist dynamics. More importantly, core regions (Silicon Valley) and their subordinate partners (Bangalore) are mediated by the growing demand for technical professionals, which by definition excludes the majority of Indians (Yardley, 2010). Preexisting inequality is likely to be a good predictor of future inequality, especially when globalization opens up new opportunities that are skill based (Basu, 2006, 1364). Thus, Bangalore benefits from the dominance of Silicon Valley, but unskilled labour, which is typically shut out, faces a widening wage gap and persistent social hierarchy (see Chamarbagwala, 2006, 1999). If growth is accompanied by labour-saving technology, which is typical under contemporary capitalism, it is unlikely that benefits will accrue to unskilled workers (see Basu and Mallick, 2008). Furthermore, the interlocking nature of poverty linking low-caste standing and illiteracy (Reed, 2008; Thorat and Newman, 2010; UNDP, 2006) structurally disadvantages the poor, while salaries for software engineers and programmers keep going up (see Banerjee and Muley, 2008; D’Costa, 2003). With international mobility of technical professionals (D’Costa, 2008a), income inequality worsens. How the two interdependent processes of spatial hierarchy and social inequality interact to produce a false sense of a ‘successful’ model of development is discussed below.

D’Costa Table 1 Geographic Distribution of India’s IT Exports

N. America W. Europe Japan Latin America & Rest of the World Asia-Pacific TOTAL

IT Services Spending (US$ billion)

India’s Exports (US$ million)

India’s Market Share (%)

Relative Dependence Ratio

Share in India’s Exports (2004)

171.1 109.6 34.9 17.5

6,685 2,103 193 583

3.92 1.92 0.55 3.33

1.4 0.7 0.2 1.2

67.7 21.3 2.0 5.9

16.0 349.1

311 9,875

1.94 2.82

0.7

3.2 100.0

Share in India’s Exports (2007-08) US 61.4 UK 17.8 Continental Europe 12.3 APAC 6.4

technologically complex markets such as Japan (see D’Costa, 2003, 2006). Japan is known for its production engineering and its electronics industry. Both demand ‘embedded’ software, which goes into products such as automobiles. Japan’s total IT market in 2006 was 16.7 trillion yen, equivalent to US$146 billion (Japan Information Technology Services Industry Association, 2008) but India had a very small share of it.6 This indicates the limited engagement of India in the high-value Japanese market. India specializes in customized software and Japan’s largest IT segment is customized software services. Yet, India’s presence in Japan is very low due to the pull of the lucrative US market, closed subcontracting and business practices in Japan, unfamiliar Japanese cultural and language requirements (and vice versa), India’s technological shortcomings in hardware and Japanese reluctance to conduct international outsourcing in general due to high transactions costs (D’Costa, 2008a). The American pull can be seen from the substantial number of IT professionals hired by US-based companies, which include both American and Indian companies. Currently, more than 100,000 Indian students go to the USA to study annually, the highest number for any country, providing not only billions of dollars in revenues to educational institutions but also highly trained professionals as a sizeable number stay in the USA. In the recruit6 of 15

ment of IT professionals with employer-sponsored H1B visas given out to non-US residents, in 2005, India secured 48% (65,000) of all H1B visas, of which roughly 40% granted to Indians were for the IT industry. In L1 visas used by multinational companies to bring staff from subsidiaries to their US parent firm or branches, again, Indians have become prominent, increasing from 4.4% in 1997 to 43.8% in 2006 (US Department of State, 2007). The export of professionals is economically beneficial for individuals as well as for the country. However, the numbers of Indians in the US IT sector have attracted the attention of politicians and labour groups, which have put forth proposals to limit the number of LI and H1B visas. For example, it has been alleged that Indian firms in the USA bring in Indian IT workers under the H1B and L1 visas at the expense of American workers and drive down wages (Lacey, 2010; Matloff, 2003). It is clear that India’s IT relationship with the USA is double edged for both countries. For quite some time, the Indian industry has been locked into customized software services and lowend business process outsourcing (BPO) services (D’Costa, 2004). An estimated 27% of India’s total IT services exports in 2008 were BPO services (NASSCOM, 2009). India’s abundant Englishspeaking college graduates, albeit a small share of the workforce, make BPO services viable. However, rising wages in the sector due to growth of


Note: Relative dependence measures the region’s share of Indian exports vis-a`-vis the region’s share of world IT services spending. The data was obtained from NASSCOM directly, which has reported the data based on inconsistent export market categories over time. APAC is Asia Pacific and includes Japan. Source: NASSCOM,www.nasscom.org September 8, 2004, updated from NASSCOM website.


Three fallacies of IT development dynamics State-market interaction and IT growth The growth of the export-driven IT industry has been attributed to the absence of state intervention. This is only partly true. The industry’s rise can be explained through a market-driven shift in comparative advantage, which exploits relatively abundant, inexpensive human capital (Athreye, 2005). However, the state has intervened in various ways. First, without the state’s investment in technological and educational infrastructure in the 1960s and 1970s—designed for import-substitution industrialization—the industry would not have been in the position to exploit the IT opportunities of the 1980s.7 For example, in the 1970s, the state set up the National Informatics Center, the

Computer Maintenance Corporation, the National Center for Software Development and Computing Technology and regional computer centres. Second, business risks have been socialized, with the state subsidizing tertiary education and later investing in critical IT infrastructure such as software parks. In 1985, Electronics City was established in Bangalore; the International Technology Park established later was cofinanced by the state government of Karnataka. Third, the state directly promoted the Indian IT industry through an income tax exemption for over a decade. Fourth, Bangalore has a range of public sector research and educational institutions (such as Indian Institute of Science, Indian Institute of Management and Indian Institute of Information Technology), public sector entities (such as the Indian Air Force and Indian Space Research Organization) and high-tech manufacturers (Hindustan Aeronautics, Bharat Electronics and Hindustan Machine Tools) (Naidu, 2003). Weak research links with the IT industry notwithstanding, the presence of multiple high-technology organizations has fostered human capital formation in the city. It is therefore not surprising that the city of Bangalore and Karnataka state are major exporters of software services, with about 34% of national exports in 2008–2009 (Software Technology Parks of India, Bangalore, 2010). Thus, the state unwittingly led the industry, then allowed the market to follow, but continues to provide fiscal and infrastructural support. These actions have been so effective that Narayana Murthy (founder and CEO of Infosys, which has a market value of over US$33 billion) recently recommended that the tax exemption be lifted as the industry has matured (Money Control, News Center, 2010). This experience is squarely at odds with the market-driven neoliberal interpretation of IT growth.

IT employment and structural transformation The second fallacy of the IT model of development is its social transformative capability in terms of employment. This is due to the coexistence of a high 7 of 15


US demand for such services offers new competition from other low-cost countries such as the Philippines. Furthermore, the average revenue per employee for customized services and BPO is less than for IT products and engineering design (D’Costa, 2004), while the revenue per employee for the industry as a whole is less than in many other countries such as the USA and Ireland. The difficulty in moving up the value chain arises from inadequate technical competence and the stickiness of high-end IT development in the core economies due to costs associated with coordination, communication and control of multiple sites by multinationals (D’Costa, 2002). Some of these costs have declined considerably, making it easier to farm out more complex assignments (Ernst, 1999; UNCTAD, 2004). However, with the exception of a few firms, the local Indian industry remains on a low-innovation trajectory (D’Costa, 2004) due to a weak ‘ecosystem’ for research and development (D’Costa, 2009b). Top-down state-dominated academic and public research institutions have few links to the industry (Dahlman and Utz, 2005, 91; Sridharan, 2004). This is consistent with the recent observation by the Dean of Harvard Business School, Nitin Nohria, that Indian companies have always had a very strong engineering base, but no major global product developed in India (Silicon India, 2010).

D’Costa The IT sector in 1999–2000 and 2003–2004 employed 1% and 3% of all organized workers, respectively (NASSCOM, 2004, 186). According to a recent report (NASSCOM-Deloitte, 2008, 1), direct employment was estimated at 2 million by the end of the 2008 fiscal year. Indirect employment was estimated (with a multiplier of four) at 8 million (p. 3), with total annual employment creation estimated at 1.76 million by 2011–2012. Despite current and expected gains (due to increasing student enrolments in IT training), the difficulty of structural transformation should not be underestimated. First, the estimate of 2 million directly employed represents about 0.6% of the 2001 labour force. Second, in calculating indirect employment, a multiplier of four is higher than that of the steel industry, which has far more dense intersectoral linkages (D’Costa, 1999). The sundry services employment generated by the IT sector, including transportation workers, catering, domestic help, security guards and drivers (cited in NASSCOM-Deloitte, 2008), cannot be seen as a source of structural transformation at least for the foreseeable future. Intuitively, IT cannot have the same kind of multiplier effect as basic manufacturing for three key reasons. First, there is no natural resource base involved with software services, hence the absence of backward linkages to raw material and forward linkages to plant and equipment. Tertiary education is an important but limited backward linkage but class bias in tertiary education limits wider access and engenders inequality. Second, software is

Table 2 Share of Different Types of Employment in Total Employment (%)

Self-employment Casual Wage Employment (Sub-total %) Regular Wage Employment Formal Sector Employment

1983

1993/94

1999/2000

2004/2005

57.3 28.9 (86.2) 13.8

54.6 31.8 (86.4) 13.6

52.5 32.6 (85.1) 14.9

56.4 28.4 (84.8) 15.2

7.9

7.3

7.0

5.8

Source: Ajit K. Ghose ‘Globalization and India’s Development’, Lecture March 3, 2009, based on National Sample Survey Organisation, Government of India, data.

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and a low road to accumulation in India structured by the imperatives of capitalist dynamics at the global and local levels. India is largely an agrarian society, with 52% of the workforce engaged in agriculture. To induce large-scale transformation, massive employment growth in industry and services is needed. Can the IT sector be a lead industry to accomplish this, as its boosters imagine? In the organized sector (also called the formal or corporate sector), between 1991 and 2006, 870,000 jobs were lost in the public sector, while the private sector added 1,094,000 jobs (Government of India, Ministry of Finance, 2006, 2009). It is evident that job creation in the organized private sector, under which IT falls, is a formidable proposition since only 27 million people were employed in the organized private sector in a country of more than a billion people. In 2001, this sector employed a mere 9% of India’s workforce. The bulk of employment in India is self-employment (56%) and casual wage work (28%) (see Table 2). The vast majority of Indians are employed in the unorganized sector, both rural and urban, as cultivators, casual agricultural and urban workers, household industry labourers and self-employed in urban menial services (see Bardhan, 2006). It should be noted that this employment, which covers 85% of the workforce, can be best described as selfexploitation, with economic returns and wages at subsistence level. Despite high growth, including IT expansion, the structure of employment remains skewed.


Class bias in IT education and inequality Far from levelling society, the IT sector’s development is exacerbating inequality and uneven development due to a class bias in tertiary education (D’Costa, 2003). India’s education policy since independence has been biased in favour of the upper classes and castes. Since tertiary education is the bedrock of the IT industry, those social groups that have access are also the industry’s chief beneficiaries. Due to preexisting structural inequality and differential social power, the outcomes of the IT industry are highly uneven. There are many contradictions in India’s education policy (Agarwal, 2006), but the one that stands out is the gap between basic and tertiary education. The government established some of the country’s finest technical institutions and subsidized others to create a stream of technical talent. But it largely

failed to meet the basic education needs of the country. While literacy rates have vastly improved since Indian independence—from 18% in 1951 to 65% in 2001 (Government of India, Ministry of Finance, 2006, S-114)—they remain woefully inadequate. Education is a public good and serves middle-class aspirations well. Hence, governments are politically compelled to subsidize technical education, making it expensive in terms of national resource allocation. More resources devoted to tertiary education mean fewer resources for basic primary education. The class bias is inherent in tertiary education, and especially technical training, as it requires greater resources per student. However, as a matter of public policy and higher expected social returns, promoting higher education can be justified as long as basic education is not sacrificed. It is intuitively clear that in market-driven economies, households already enjoying higher economic and social status and favourably disposed toward higher education are the main beneficiaries of tertiary education. Broadly, there are two types of IT professionals: those that have a science and engineering background and those that do not (see Lowell and Findlay, 2001, 7). The former group is involved in software services through programming, management, consulting and so forth, while the latter group mostly works in IT-enabled services (ITES) such as call centres and back office business processing (BPO). There can be a considerable wage gap between these two groups. Nevertheless, both these groups within the Indian social milieu can be considered relatively privileged. Those in low-income households and rural families can access higher technical education if they have a good secondary education and the willingness to risk current income for future returns. Affirmative action programmes using preferential admissions quotas (for historically and structurally oppressed scheduled castes and tribes) to enter public universities and institutions of higher learning create opportunities. However, the persistence of social inequality bars most from a quality education and thus acts as a major barrier to upward mobility. For example, an analysis (based on the National 9 of 15


often an intermediate input for a service ultimately provided by the final client. Many such services are created on a modular basis. This means, just as in globally fragmented industrial production, Indian producers cannot reap all the benefits associated with complete projects. This is not a handicap as long as there is sustained growth, diversification and learning. The Indian industry fulfils some of these requirements but as alluded to earlier also suffers from weak institutional architecture for innovation. Hence, the transformative dynamic of the sector is likely to remain truncated. And third, India largely exports what is an intermediate input, which means it is not used by a local client. Since software is often deployed to enhance efficiency or new service provisioning, India misses out on the spillover effects through forward linkages. There is clearly a disjuncture between IT-led capital accumulation and job creation in India because structurally and institutionally, India still remains on the low road to accumulation. Unlike some of the other Asian economies that have created higher employment through labour-intensive manufactured exports, the Indian IT sector is not large enough to exhaust the near limitless supply of unskilled and less-schooled workers.

D’Costa were higher for upper-caste Hindus than for disadvantaged groups: 70% of urban-based ‘forward classes’ (Hasan and Mehta, 2006, 3792) (roughly equivalent to Mohanty’s (2006) category of uppercaste Hindus) complete high school and are thus potentially available for college education. This contrasts with roughly 2% of STs, 7% of SCs and 23% of OBCs. The extent of persistent inequality, if not its reproduction in toto, is self-evident.9 If access to tertiary education is based on inequality, the global links of the IT sector accentuate inequality through high-income growth for IT professionals relative to other professions. High global demand suggests high growth in compensation rates for IT professionals, influenced significantly by the USA. Salaries in the Indian IT sector in 1997 ranged from Rs. 105,000 (US$2,500) per annum for a software programmer to Rs. 725,000 (US$17,262) for a network administrator (D’Costa, 2004, 61). At the time, these represented roughly 7% and 30% of US salaries in the same functional areas of work, suggesting that salary differentials between India and the USA were persistently high but converged somewhat moving up skill levels.

Figure 1. Share of SC and ST Enrollments in Technical Education. Source: Government of India, Ministry of Human Resource Development, www.indiastst.com.

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Sample Survey Census data for 2001) carried out by Mohanty (2006) finds that upper-caste Hindus in rural India tend to be landowners (60%), compared to scheduled castes (SC), scheduled tribes (ST) and other backward classes (OBCs), who mostly work as agricultural labourers (see also Bardhan, 2006, 1394, 1398). In urban India, upper-caste Hindus tend to have ‘regular’ jobs (56%), as opposed to the self-employment or casual work in the unorganized sector. Literacy data reflect the greater resources available to upper-caste Hindus relative to the structurally oppressed castes and tribes.8 Thus, the chances of tertiary education for SCs, STs and OBCs are quite slim. Between 1986–1987 and 2002–2003, the share of SC and ST students enrolling in technical institutions recognized by the All India Council for Technical Education, exhibited marginal improvement, with 10% of the slots filled by SC/ST students (Figure 1), although this is considerably lower than their share of the general population, which is approximately 28%. Dropout rates among underprivileged groups are considerably higher than for upper-caste Hindus (Mohanty, 2006, 2779, 2788). Conversely, completion rates


Conclusions In the twenty-first century, nonresilient older centres of capital accumulation have been replaced and augmented by new regions of economic production. Structurally, the role of services in national economies has become significant and trade in services has increased. India and its global service-producing regions such as Bangalore and its environs reflect this trajectory of global capitalism. India’s export structure has changed from primary products to low-wage manufactures and high-wage services, especially IT services. At first cut this is an envious development, given that a poor nation has been able to alter its export profile, generate substantial foreign exchange and foster viable employment opportunities for its technical graduates. But a second look raises some thorny concerns for development. The premise of this study was the presumed transformative capability of the IT sector in catapulting India to ‘first-world’ status. Export-orientation, technical education and market reliance are seen as the building blocks of a ‘new’ India without acknowledging that India is still an impoverished agrarian society, whose development imperatives demand domestic development, high-quality universal education and the provision of state-led infrastructure and other public goods. Specifically, targeting the poor with government programmes

and ensuring labour-absorbing production is likely to contribute to long-term transformation. Indian IT is a core activity but in a peripheral market. Its enclave-like character and class bias continue to reproduce economic and social inequality. Thus, uneven development remains a certainty under a globalized accumulation process unless offset by radical social and economic reforms and dismantling class bias in education. It also means creating incentives for the IT industry to diversify products and services and geographic markets such as Japan. India’s heavy reliance on the USA has yielded substantial economic benefits to the country. But such dependence has also undercut opportunities in other major markets such as Japan. It also means that India’s specialization will remain in customized services and BPO, areas that are subject to quick learning and thus future competition based on wage arbitrage. Also, based on IT growth, the power exercised by Bangalore and other cities has led to an unrealistic expectation about market- and export-driven transformation of the Indian economy. The common assumptions associated with the IT model of development have been shown to be false since the state has been active in the industry’s development, the industry is incapable of generating high employment growth and technical education requirements limit access to education for disadvantaged groups, which in turn reproduces inequality. Given the enormity of the social demands on the state, it is incumbent on both the state and successful sectors to work together to address India’s social problems. Through investments, both the state and the private sectors could boost domestic market development. The de facto neglect by the state of the nonglamorous low-value sectors should be addressed aggressively. Such a move would call for a shift in investment priorities to create largescale employment for the poor and historically underprivileged groups and a wide array of redistributive social policies to improve the quality of basic education and increase access to higher education and employment for the underprivileged groups. The industry could contribute to India’s development in various ways, acknowledging that the state 11 of 15


The large wage differential between OECD and developing countries is a significant motivator for international migration. Uneven development is a normal feature of capitalism. However, under globalization and consequently, reduced social protection, inequality tends to worsen. When preexisting inequality limits access to education, the participation of minorities and lowincome groups in education-intensive economic activities is severely limited (see Government of India, 2006).10 However, the economic and social benefits from IT-led accumulation are not trivial in a labour-abundant economy. But expansion in this segment lifts only a few in a largely impoverished economy and thus cannot be seen to transform the rest of the economy in a fundamental sense.

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Endnotes 1 By flat, Friedman (2007) means that countries, regions and companies tend to converge economically due to the diffusion of information and communications technologies and the various forms of offshoring that rely on such technologies. But see Cox, 2008; D’Costa, 2003; McCann, 2008. 2

Reed’s focus is largely on the internal structural makeup of India in terms of social groups such as Hindus, Muslims, and castes and how agency can be mobilized to shatter the power of dominant groups. The framework I develop takes for granted the structural inequality but links it to the functioning of the IT sector in the world economy to demonstrate how regional and social powers are reproduced. 3

Of course the formation of an Indian middle-class predates India’s participation in the global IT industry (see D’Costa 2005), which relied on educated middle-class professionals. Nationalist policy that forced multinationals such as IBM and ICL to exit the country provided Indian firms the space to develop competencies.

4

A good example is Apple’s iPhone 4. The high-value idea and innovation emerged from California but its manufacture takes place in low-wage China, with China’s share of the value estimated to be a mere 7% (Barboza, 2010).

5

Friedman (2007) sees technology as a source for convergence or equality. 6

In 2008 about 16% of the US$40 billion software and services output of India was in high-value engineering services (mainly embedded software) (NASSCOM, 2009).

7

The development of a hardware sector behind protectionist walls created some domestic capability but with global software services in demand the hardware industry virtually disappeared (Majumdar, 2010).

8

For every 1,000 upper-caste Hindus (UCH) aged seven and above, rural literacy was 817 compared to 466 for SCs and 422 for STs (Mohanty, 2006, 3779). In urban areas the respective numbers stood at 966 (UCH), 662 (SC), and 700 (ST). 9

The fact that there are more literate SCs, STs, and OBCs today suggests that state programmes to help in their upward mobility, imperfect and insufficient as they may be, are having an effect.

10

For other types of social divides in Bangalore in the context of the IT industry, see Dittrich (2005). 30.


has contributed greatly to the industry’s success and that corporate social responsibility requires that the industry contribute to social development in turn. One avenue would be for firms to contribute a fraction of their corporate income to a fund, which could, for example, assist workers who lose their jobs due to globalization (Basu 2006, 1370; see also CIOL, 2008). Reallocation of resources and distributive measures are a tall order, given the persistent grip of the dominant classes and castes in a path-dependent fashion over the economy and society. With new income and rent-earning opportunities in a liberalizing economy, such dominance is further reinforced. Hence, it could take several generations to reduce social inequality, and thus, Indian transformation is likely to be unequal and incremental at best. But to ensure that it moves in the right direction, redistributive institutions must be constantly honed to attain these social goals. India is endowed with a vibrant, functioning democracy and various underprivileged groups are politically mobilized. However, political participation at the lower levels must be strengthened since patronage continues to usurp whatever political voice the poor and dispossessed may have. The best approach, increasing access to education and employment and dismantling the interlocking structural nature of poverty, has been thoroughly internalized by democratic India; the only question is how the Indian political and business elite will respond. Continued pressure on the establishment and rejection of governments and political parties that fail to deliver must remain high on the civic agenda to transform political democracy to economic democracy. The Indian state’s ambition to be a global power inevitably suggests a redirection of its priorities in favour of the underrepresented so that it can realize that ambition. The absence of these measures in the larger political economy of India can only mean that transformation will remain a distant goal, as will the IT industry’s dream of contributing to India’s rise to the ranks of the advanced capitalist countries.

The political economy of IT growth in India Acknowledgements Special thanks go to Govindan Parayil for inviting me to Oslo to work on this. Earlier versions have been presented at the Institute of Development Studies, Kolkata: Indian Institute of Management, Kolkata; Danish Institute of International Studies, Copenhagen; Georgia Institute of Technology, Georgia State University, Atlanta; Indian Council for Research and International Economic Relations, New Delhi, Roskilde University, Roskilde and Queen Elizabeth House, Oxford. I thank Janette Rawlings for her strong editorial hand. However, all errors and omissions are mine.

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