The software industry and India's economic development

Suma Athreye Department of Humanities and Social Sciences Indian Institute of Technology Hauz Khas New-Delhi 110016 India. [email protected] First version: December 2000 April 2001 Abstract: This paper assesses the contribution of software to India’s economic development paying particular attention to the role of the software in the absorption of labour and the development of human capital in the Indian economy. India’s specialisation in software has been driven by two sorts of wage advantages that have reinforced each other: the lower wages for Indian software developers relative to that of their US and European counterparts makes Indian software cheaper in global markets, while the higher wages earned by software professionals in India relative to that in other industrial sectors has ensured a steady stream of supply of software professionals. However, the impact of this growth has been limited to a small section of the Indian economy, and there are questions whether the current growth can be sustained without a significant growth of domestic demand. We believe that export led growth is sustainable in the medium term. On the other hand, the success of the software industry has contributed to an increase in the relative value of professional workers – programmers, but also managers and analysts. In turn, the growing importance of human capital has lead to innovative models of entrepreneurship and organisation, pioneered by the software sector, which are slowly taking root and spreading to other parts of Indian industry. A potentially important and under appreciated contribution of the software industry is thus as an exemplar of good entrepreneurship and corporate governance to the rest of Indian industry. Though less visible than the macro contributions to employment and foreign exchange, this role is a source of productivity improvement for all industry, which can have powerful longterm benefits for India’s industrialisation and growth.