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Indian Economy World

Chapter 1: Introduction

The Indian economy is the second fastest growing economy in the world today. It is second only to China. And if some statistics are to be believed, it is just a matter of time before it develops into the largest economy in the world. This document aims to answer the question whether there has been a significance impact of Information Technology (IT) on this sudden rise in the Indian economy.

A look into the recent history of the Indian corporate sector will show that in the early nineties, it was facing a developing crisis. There was an imbalance in the payment scheme. This led to the Indian government introducing a series of economic reforms in 1991. These reforms had a great role to play in the liberalisation of the Corporate Sector. This also eased the restrictions earlier imposed on the activities of the firms operating in the sector and increased the competition. It favoured foreign trade and opened up the financial sector to new investors. The number of foreign investors increased and there were a lot of new financial opportunities including large number of new equities.

Probably, these reforms deserve a lot of credit for the fact that the Asian financial crisis of 1997-1998 didn’t have a catastrophic effect on the Indian corporate sector. India withstood the crisis, and the economy survived. However, it was not like the corporate sector in India was completely immune to the crisis. An immediate impact was the lesser number of investments coming in. There was an increase in the non-performing loans (NPLs). A very important conclusion from this whole episode was the fact that the corporate sector has a very important role to play in the stability of the financial sector.

The nineties was a great period for the Indian companies, especially, in the first half of the decade. There was a great atmosphere for the companies as it was a period of high growth in sales, improvement in the profits and stronger finances. By the second half of the decade the rift between the performances in the companies started to show. The companies that had been maintaining high growth became richer and bigger. The divide was showing more.

The reforms of 1991 made a significant change to the environment the Indian companies operated in. According to Chopra et. al. (1995), the abolishment of the Industries Development and Regulations Act (1951) increased the competition. Many major laws were modified including the Companies Act. The authors think that this lifted the legal and regulatory burden imposed on the Indian companies earlier. The cut in tariff rates and the streamlining of the import licence lead to a steady increase in the foreign trade. The result was an increased number of tie-ups and joint-ventures between Indian companies and multinational companies. New technologies were imported, productive capacity was increased and new products were introduced without industrial licences.

Further, Chopra et. al. (1995), states that there was good support for the small scale industries with potential. They were de-reserved. This helped the small scale industries to grow along with the industry bigwigs and companies with multinational backing. Competition laws were introduced to curb anti-competitive practices. This ensured there was no abuse of market dominance.

According to the figure 1.1 obtained from the World Bank report released in 2007, the growth of the services sector can be seen to be much more than that of the agriculture or industry sectors. The service sector includes the IT and BPO (Business Process Outsourcing) service industries. While the growth in the agriculture sector has been negative and the industrial sector has been negligible, the services sector has seen a massive growth. The major contribution to this has been from the IT and IT enabled services segment. This will be discussed in later chapters.

The above figure (figure 1.2) shows the link between the increase in the GDP (Gross Domestic Product) per capita and the increase in export of goods and services. India is the main exporter of IT services in the world. The annual average growth of GDP per capita grew with rates of 3.4% between 1985 and 1995 and 4.3% between 1995 and 2005 (World Bank 2007). The economic growth is expected to almost double between 2005 and 2009.

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This dissertation aims at finding out what effect the Information Technology industry has had on the Indian economy. The Indian economy has been growing at an astonishing rate. The IT sector in India has been growing at an even higher rate. India exports IT services to US and UK, more than any other country. Its growth has been tremendous and the Indian economy’s growth is also progressing in an almost similar ratio. This report will examine and try to prove the hypothesis that the excellent growth rate of the Indian Economy at present is mainly due to the effect of its highly performing and growing IT industry. The research methodology is explained in a later chapter and also is the modes of data collection. Below is a brief description of the breakdown of chapters in this report.

Chapter 2 is the literature review. Part I explains International Economics, Economic Systems and the Microeconomic and Macroeconomic principles. Part II describes how nations measure and try to improve their Competitive Advantage. It includes a discussion on Porter’s Diamond Framework used to measure Competitive Advantage. Chapter 3 discusses the Indian Economy in detail in Part I and Part II gives an idea of the Indian Information Technology industry. Chapter 4 describes the Research Methodologies and the methods used in this report. Chapter 5 discusses the findings and analysis and chapter 6 the conclusions and recommendations.

Chapter 2: International Economics and Competitive Advantage of Nations

Part I: Understanding International Economics

2.1 Introduction

For decades people have been writing about economics and the changing trends in the international economy. Many have tried to predict how the future of the world economy is going to turn out and what the future holds for us in terms of the new players in world market. The truth is that it is always not so simple a thing to decode the way in which the world economies would evolve and the unexpected problems that would be looming around the corner. Even at the stage where the world economy slows down and many economies face a recession, it is not exactly a foregone conclusion when and if this will happen.

Before understanding more about economics it would be wise to start by understanding what an economy is defined as. Wikipedea, the world’s most famous online encyclopaedia, defines an economy as the realised social system of production, exchange, distribution and consumption of goods and services of a country or other area. This is a very simple yet very accurate description of the word economy.

It further explains that an economy is a result of processes involving technological evolution, history of civilisation, social organisation, geography, resource endowment and ecology. These can be summarised as the basic factors affecting an economy but there are many different authors and experts who think that there are many other factors that have to be included. This chapter expects to list and explain some of the main factors affecting an economy according to some of the best authors in the field. One such person is Jeffrey Curry who explains these in detail in his book, ‘A short course in International Economics: Understading the dynamics of the International Marketplace’. The chapter will also explain the different Economic systems that have and are being used as well as look at the macroeconomic and microeconomic principles.

2.2 Defining Economics

According to the online source World Scientific, economics is a social science that studies how society chooses to allocate its scarce resources, which have alternate uses, to provide goods and services for present and future consumption.

The book from the same source breaks-up the definition into little fragments and explains each term to give a better idea of the word.

It starts by explaining that goods refer to anything that is used to satisfy a want. Production of goods is to serve just that purpose which is to satisfy the want of the masses. Goods mainly refer to the physical items and the intangible items are refered to as services. And therefore, goods and services pretty much refer to the same thing.

It then proceeds to explaining about resources. Resources are the input that is used for the production of goods. For any sort of production there is always the need for resources. Land, labour, capital and entrepreneurship are all resources. Land and labour need no further explanation. Capital is used by an economist not as a reference to money but to a resource. Of course, the main idea of the word capital is money, but it also represents goods that have been produced for use in the production of other goods. Consumer goods are the goods that are produced directly for the use of the consumer. They directly satisfy the need of a consumer. Capital goods on the other hand are produced not with the purpose of directly satisfying the want of a consumer but to be used for further production of other goods. Entrepreneurs are the ones who reap the benefit or bear the loss of their business of supplying goods and services.

Scarcity is another term that needs very little explanation. It is though, very important in deciding a market of an economy. It is a measurement of the demand and supply that is in progress. When goods are in huge demand and the production cannot match it, there arises the scarcity of the goods. This can drive the price of the good high in the market and make it less available to the poorer segment of the society. Fuel is always a good example of scarce goods. Even though there is enough fuel in the market today to meet the demand, it is a resource that is non-renewable and soon running out. A very good definition of scarcity according to the book is the unlimited demand for limited goods.

Scarcity leads to choice. In fact it forces choice. Where there is scarcity there should be a system to make choices in order to save the resources and to cater to the needs of the people. Society has to come up with a system to allocate the resources in the best way possible to satisfy the needs of the people. There have to be alternate ways to make choices so that it does not affect the future of the economy and not just satisfy the present needs.

2.3 International Economics

Trade of goods between nations have been going on for centuries. Even in the earlier days there was a system of satisfying wants by trading goods between nations to satisfy the scarcity of goods. The methods and amount of goods traded has changed since. International business has grown to the highest level ever seen in the 2oth century. The exchange of goods, money and culture and the movement of people between the nations have been at its peak. The scale of trade is so large that even the smallest of nations or economy has to look outside its border for products and profits. The chapter will later highlight on how the economies of the world are interdependent and how its effects can be monitored.

Henry Hazlitt(1946) was one of the first writers on the principles of economics and revealed the myth behind many policy decisions of national governments. Even though his work dates back to so long ago in time, it is still a very good guide to refer to. His work brought to light a lot of the internal issues of economics. He believed that the driving force behind most of the economics decisions is self-interest. He believes this is true in both the private and public sectors. Another important thing according to him is the effect a decision on an economic issue can have on that economy or the world economy.

The main reason behind the nations trading goods is to get goods that they themselves do not have or cannot produce. There are many reasons why one nation does not have a product that another nation does. Availability of resources, geography and expertise are just a few of the factors. A simple thing like the geography of a country has a say in what kind of products it can produce. Climate and the kind of soil are the main factors for agriculture. And this was the beginning of trade. One country may have crop ‘A’ in excess while it may not be enough in quantity for another country. The second country on the other hand may have crop ‘B’ in excess. Both the countries may therefore enter an agreement to share their resources and trade the goods to satisfy the needs of their respective economies. Trade is not done just for food. It extends to all parts of the society, including manpower and technology.

The trade policies followed by different countries are different. Some countries follow a more open style trade while others prefer a closed style market. China is a good example for the tight control it imposes on international trade. The government of France and Japan have a more controlling approach on the industries and investments within its border. Most of the Arab countries also follow a strict control over the state of affairs within their country. They also deny ownership of land and industry to foreigners. Countries like Russia and India are now decentralising the economy. United States of America is the best example of the open market. They had opened their doors to foreign trade and investments since many years.

Some economists divide economics into two sub-divisions. They are positive and normative economics. Normative economics tries to explain how economies are supposed to operate where as, positive economics tries to evaluate how economies actually operate. According to David Hume (1739), a positive statement is one that gives an answer to the question ‘what is’. There isn’t an indication of approval or disapproval. Normative statement is one that expresses whether a situation is desirable or not. It answers the question ‘what ought to be’. The reason economists find this positive-normative distinction useful is because it helps people with contrasting views about what is desirable to communicate with each other.

The other two main principles of economics are the macroeconomic and microeconomic principles. This will be discussed later in this chapter.

2.4 Economic Systems

There have been numerous economic principles that have helped in the formation of the global economics as we know it today. These principles have been developed over the years in different countries and different cultures. This section of this chapter will look at some of these principles that have been the base of political systems. Economic systems are never permanent. It always evolves according to the times and trends.

2.4.1 Feudalism

The economic, social and political system that is bound by a class structure is called feudalism. Here nobility comes on top of the system and the peasants right at the bottom. There were other classes that came in between these two extremes. The nobles and the kings were the ones who owned the land. The peasants or the villains were the ones who would toil on these lands and serve the higher class. The other two main classes in between were firstly the tradesmen, artisans and knights who were more like the freemen and secondly, the magistrates or the barons who were appointed by the nobles and were answerable to them. A simple graph below in Figure 2.1 gives an idea of this system.

In this system the King or Noble controls the land. The lower class live and farm on the land. They have to then pay a share, which was normally the majority, to the ‘lord’ assigned to their land. This lord was then responsible for the safety and security of those peasants.

This system was in practice at some time or the other in most of the major economies of today. The main time of its existence was in the medieval age which was around the 15th century. Even though this system ceased from existence in most of the countries by the late 19th century, there still are shades of it in countries like China and the Arab nations. It is interesting to notice that there were three main origins of this feudal system. The end result was pretty much the same in all of them. The main systems were the European system, Arab system and Asian system. Like mentioned earlier, all of these had a similar outcome and led to next common stage.

2.4.2 Mercantilism

This is a theory that the prosperity of a nation depends on its capital. It states that the volume of the world economy and the international trade is unchangeable. It is widely believed that the mercantile system was a predecessor to capitalism. The economic policies of governments are based on this system. The capital of a country is determined by the gold it holds or the bullion held by it. The capital is further improved by the wealth it gains through trade. According to this policy, the government should try to implement a policy where the country exports more value of goods than it imports so that the nation’s capital increases.

This thought of economics was the main system in practice during the era between the 16th and the 18th centuries. This time is also considered as the starting point for viewing economics as a discipline. Before this period there was no special recognition to economics as a subject. Now, the country started putting serious thought into the policies that were being made and the effects they would have. It was also the period where for the first time there were discussions and debates on economic policies.

Under this system, there was a new way of taxing the merchants and the working class according to their production. It was much different to the methods used during the feudal times. The merchants would have to pay a tax to the government to run their business and they would get the protection and permission of the government to do business inside and outside the national borders in return. It was a more relaxed system to what was in practice before.

This also led to the formation of more colonies. The colonies, both existing and the new ones, were used to provide profit to the controlling nation. These searches for new colonies resulted in the discovery of even new continents like the North and South America. Some of the policies created during these periods still exist in some economies. Under this system, the government had a lot of power and they could control most of the aspects of the economy. It could finance new businesses and could decide whether to allow or disband monopolies. They could impose tariffs on trades and could control the way the labour was being managed. The most important thing probably was that it had the right to deny a country, which could be a potential threat to its status, to function within its borders. Many of these policies can still be seen in effect in many countries. The Arab nations are among these.

Shipping was used as the main means of transporting goods. Given the technology and the conditions available during those days, shipping provided to be the quickest and safest way to export or import large quantities of goods between distant economies. This saw to the rise of new laws and regulations to control the flow of goods between nations using this method.

England used the Navigation Laws of 1650 to stop foreign vessels from trading on its coast. They made sure that all the imports to England came only on English ships or on ships controlled by English captains or those from colonies of theirs. Then again they introduced the Staple’s Act in 1663 which said that all the goods from the colonies had to come to England first and then be distributed to the European nations. This gave England the controlling power over much the global trade. Military had a great role to play in the controlling of exports. The merchants would fund the cost of the military protection, to secure their trade interests.

Policies during this time aimed at increasing the gold import of the country. A wealth of a nation depended on the gold it had in possession and the strength of its military. Gold helped in strengthening the military. The nations tried to acquire as much gold as possible to strengthen their respective militaries. To effect this, the stronger nations would try to produce all the goods so that they would not have to import anything but would be able to export their goods in exchange for gold. The last thing they would want was to export their gold to a competing nation in return for goods.

The main reason behind the decline of mercantilism was the wars that followed this period. The Napoleonic wars in the early 1600s had weakened most of the European nations who were the main players in the international market. This brought America into the International limelight and also made the nations aware that there are other ways of managing an economy that could also prove good and effective than what was being followed. The industrial revolution (1750 to 1850) changed the complete image of the international marketplace. England overwhelmed the whole world by the progress it made. It abolished the mercantile system and became the undisputed leader of both the industrialised world and seas. Even though England had lost the American colonies, they still had more than they required, continuing to stay as a world power. After the two world wars, the mercantile system changed in most of the world. Trading in currencies became the norm.

2.4.3 Capitalism

This is the most common kind of economic or social system that is present in the world today. It is safe to say that most of the countries follow this system. Here the means of producing and distributing goods are owned by a small minority of people. This minority is referred to as the capital class. The majority of the people come under the working class who have to work in return for a wage or salary. The main concept in this system is the private property ownership and entrepreneurship.

The working class are given their pay to produce goods or services. These then generate profit for the capital class. In one sense the capital class do exploit the working class as the latter have to do all the work and are made to buy goods at a price that give profit. The capitalists live off the profits they make and invest some of it back into the business to increase the output and generate more profit. This division of class does not mean that all of the working class are poor. They do get paid differently according their abilities. The only thing is that they all have to get paid by a capitalist.

The driving idea behind capitalism is to produce and sell goods to make a profit, not to satisfy the needs of the people. To make the profit they will have to produce the goods that the masses require. The goods are produced with the idea that they should sell at a profit. They are not made just to satisfy the people and generate loss for the capitalist. This is not a case of the capitalists being greedy but the nature in which the capitalist has to perform to survive in the business. Unless they get a return for their investment, it is not worth doing the business. To overcome their competitors they have to keep making profits to reinvest in their business and create new and better ways of making more profit.

Britain in the nineteenth century and the USA in the twentieth century saw capitalism grow to be the norm of the social system. The government would not provide much resistance to the growth or activities of companies. They were allowed to operate in a free way and to expand as feely as possible. Business monopolies were created and they were encouraged rather than being sanctioned upon. The divide between the working class and the capitalists grew. Labour was being treated with very little respect. Even women and children were exploited. The rich capitalists had enough say in the government and even in the military affairs to be able to suppress labour revolts.

On important fact that always is overlooked when talking about capitalism is that even though there was this large divide between the working class and the capitalists, the whole of the society did come up. There were lots of jobs created in these huge companies and more people were getting work. Before the industrialisation people still had to work had to get money. They had to toil hard in their fields. Even the women and children used to work all day in the fields. So, when industrialisation came into place the people had a fixed source of income and opportunities to get paid according to their skills.

There were a lot of problems involved in capitalism. Some of these were the crowding of people in the urban areas, pollution and spread of diseases. Due to these negative aspects people would overlook the benefits it provided. There was constant criticism against the system. Slowly the governments introduced more regulations and legislations. Monopolies were dismantled and workers were given more rights. There were also unions that were being formed. The great depression in the 1930s crippled the world economies. Just before this people were already asking their governments to take control over the activities of commerce. The economic system needed changes.

2.4.4 Socialism

Socialism is the economic system in which the onus is on central planning. All the control on the means of production is in the hands o the government. Unlike in the capitalist system, there will be no private ownership or entrepreneurship. The production is done by the government with the purpose of serving the needs of the people. Profit making is no the driving thought. Pricing and individual product demands do not decide the market. Ownership of land and businesses by private parties is disallowed or in most cases banned. Socialism is a very complex idea. Not all interpret it as the same. This difference in interpretation and implementation has led to many different kinds of social economies. They are as discussed below.

State socialism is the kind of system where the government is set up in a capitalist society. Here certain sectors of the economy are controlled by the state with a social objective in mind and not profit making. Utopian socialism is the idea where all the people are treated as equals. Here there will be no class divide. Each person works for the benefit of the whole group. No one is concerned with personal gain and all are selfless. It follows the principle ‘from each according to his ability to each according to his work’. This system has failed even at a lower scale and never been implemented on a national scale.

Anarchism is the society where small self-governing groups come together freely by association. This idea is similar to that of Utopianism but without a central government. There is more of a collective ownership of property and no private ownership. The level of production is decided by an association of producers and similarly an association of consumers decide the price of products in the market.

Marxian socialism gets its name from the ideas of Karl Marx. Many believe that he had little to do with this idea and the true recognition should go to Lenin. It is based on the idea of a continuous class struggle. Each successive economy is revolutionised by the classes that it oppresses. Private ownership is only allowed for the consumer goods and the centre owns the means of production. In this system there will be no effect on the economy by the factors such as rate of investment, profit and competition.

Syndicalism follows the idea of having central planning but which is not done by a government. It will be done by a federation of individual, autonomous industrial unions. Private ownership is completely abolished. Guild socialism is the kind that Britain is familiar with. All the economic policies are formulated by the state and then have to be followed by the trade guilds. There is an equal share and representation in the government between the producer and the consumer.

Most of the countries in the world have practiced socialism. Even the so called capitalist countries have had a degree of socialism in practice. Communist countries like China and the USSR had followed socialism even though they were known as communists. The main reason why this idea needed change was that socialism on its own cannot prosper a society. It needs the assistance of capitalists in the economy. Another main reason is the human behaviour. People tend to have different goals, ambitions, intelligence and motivational levels. These differences in traits of people were ignored in socialism. Socialism declined in the late 1980s when Mikhail Gorbachev implemented the policy known as perestroika (restructuring). In this system private ownership and competitive markets were introduced.

2.4.5 Monetarism

In this social system it is the amount of money in circulation within a society that determines its growth and wealth. The government maintains a steady supply of money into the economy which is equal to the actual growth of the economy. If the money supplied by the government increases compared to the growth of the economy, it results in inflation. On the other hand, if the money supplied is less than the growth then there is deflation, where the prices of goods are reduced. The rates of interest vary in the same proportion as the inflation. When both are high the value of the currency drops in the international money exchange market. The money supply has an immediate effect on the buying power of the economy. If the inflation rate is high and raw materials cannot be bought the output of the nation reduces and can lead to a recession.

This is very much a part of the modern day economics of all the nations. It is very important for an economy to keep the price stable. Nations compare currency to those of more stable nations to determine how their economy is doing.

2.4.6 Communism

This system follows the principle ‘from each according to his means to each according to his needs’. It is in contrast with the utopian principle. In this sort of economy there has to be an abundance of goods and all will have to be selfless in favour of the benefit of the society as a whole. Money will not be used as a mode of exchange in this system. Work is not considered as a requirement but as a service to the community. There will not be a central body as there is no need to control all the people who are selfless. The only reason why people should come together is administrate production.

This idea has never been implemented on a national scale yet. It has been implemented on a small-scale basis but has had a short life-span. This is due to the human nature where all are not selfless. In today’s world, the communist countries are socialists who are looking forward to implementing the communist system in their society at some stage in the future. Cuba, North Korea and Laos are probably the only countries that still believe this is possible.

2.5 Microeconomics

Way back in the older days economics was divided into two main groups known as the pricing theory and the monetary theory. In the post-war era the same are known as microeconomics and macroeconomics respectively. The former concentrates on the day-to-day economic decisions and the latter on a larger view of the world. Both are equally important and cannot survive without the other.

Microeconomics is the study individual economic units. Workers, consumers, landlords, businesses, investors, share-holders and service providers are all economic units. The main goal is to study how and why these individual units make their choices and decisions. It also studies how the individual units combine to form bigger units. All the nations perform a microeconomic role in the whole global market.

Microeconomics deals with both the positive and the normative concepts. The former concentrates on the realities of economic life, while the latter states how things ought to be in an ideal economy. Stated below are some of the key aspects of microeconomics.

2.5.1 Pricing

The strength and stability of each market is determined by the price of goods and services within itself with respect to the other established economies in the world. There are two ways of measuring prices. The nominal way of measuring prices is checking how much money or currency will have to be paid to purchase a something. The real term of checking price is comparing the price of a product with other goods in the market over a set period of time. The national governments use CPI (consumer price index) as a scale to track the price of goods. They use this to keep track of the prices of the essential commodities.

2.5.2 Supply and Demand

This method is not very relevant in the social economies. It can be found more in the capitalist economies where the factors come into play in determining the price. Market mechanism is used. This can be explained as the tendency for the price of goods and services to adjust until the quantity supplied and the quantity demanded are equal. There is always a fluctuation in the market. When the price of a product is high and it is not an essential commodity, there will be a drop in demand and vice versa. Equilibrium is the state when the quantity supplied meets the quantity demanded.

2.5.3 Elasticity of Demand

Price elasticity of demand is when there is a ratio of proportional change in demand created by a proportional change in price. When there is a certain percentage of change in demand, the percentage of change in price is not always the same. They vary in the four cases as below.

Elastic demand is when price changes by a certain percentage and this effects in a larger percentage change in demand. This is the case normally in non-essential items. When there is an increase or decrease in price of most goods, the demand for it in the market increases or decreases with a very high margin.

Inelastic demand can be seen in the case of essential goods. When there is a change in the price by a certain percentage, the change in demand is of a lesser percentage.

Unitary demand can be noticed in cases such as that of luxury goods where price really is not a controlling factor for demand. Here the change in percentage of price will be equal to that of demand.

Cross demand is in the case where some goods are sold in conjunction with other goods. When there is a change in the price of one item, there will be a proportional change in the price or demand of the other. The price of the related good can increase or decrease even id the price of the primary good falls. And example of this is when the price of VHS cassettes increased when the price of VCRs dropped and its demand increased.

2.5.4 Utility theory

It depends on the consumer behaviour which means that it is the consumer who decides how they should spend their wealth. The choice of the consumer depends on their perception of how much satisfaction they will get from the purchase. This level of satisfaction is called utility. This is the same in the case of any product or service. The rate at which the total utility changes, is called marginal utility. Marginal utility reduces as consumption increases.

2.5.5 Product substitution

This idea explains that the competition of a producer is not just with other producers who produce similar goods but also with all the other products in the market. The reason for this is that the consumer may reduce the purchase of one product and increase the purchase of another product at any time. Say for example, a rice producer may find themselves under less demand if the trend shifts to eating more breads.

2.5.6 Profit maximisation

The idea behind this is that the producer should get as much satisfaction in selling their product as the consumer gets in buying them. The satisfaction of the producer is measured in the profit they can obtain from the sale. Profit maximisation is the process followed by a company to gain maximum profit possible from their product.

2.5.7 Pricing scheme

There are different pricing schemes used by companies in different markets. The kind of product also makes them choose different pricing schemes. The main types of pricing schemes are as explained below.

Component cost pricing is the method where a single component of the cost is taken into consideration. This is normally the major cost factor, and then it is expanded by a larger percentage to give the selling price. This is not a very good method as different costs vary with time and that will not be reflected in the price of the product.

Cost plus pricing is the method where the producer adds a percentage as a profit to the total cost of one unit. The margin of profit remains the same throughout the change in the price of product due to production cost changes.

Average return pricing where a fixed amount of profit and not a percentage is added to the whole cost of production and then it is broken down into individual unit price along with the profit already included. The seller will have to wait till all the products are sold to meet the target profit.

Breakeven point pricing is where the producer sets a level of sales to achieve profit. If the level of sales is below the breakeven point, the company makes a loss and if the level of sales goes above this point, it is a profit.

Competitive pricing is where the market determines the price. Depending on the number of producers available and the demand for the product, the producer will have to set a competitive price.

2.5.8 Monopolies, Oligopolies, Monopsonies and competition

There are different kinds of competitors involved in a market. The market is divided on the basis of the strength of the producer in this market.

A standard market is where there are many numbers of producers for a given product in the market. The consumer has the choice to decide which product to buy. The producer has to convince the consumer to buy their product. They will have to market their product to make it attractive to the consumer. It is the producer and not the retailer who decides the price in this market. The customer does not have much chance of bargaining with the retailer.

A monopoly is where the producer has a huge control over the market. There are mainly two types of monopolies. A regulated monopoly is where the government decides that someone should have the monopoly in a particular sector for the benefit of the people. Competition is outlawed in this system. There will be regulators who set the prices and the producers get the profit. The customer does not have much choice. They have to decide either to have the product or not. Natural monopolies are where a company gains the monopoly by their own effort. They may capture the market by their innovative ideas or by driving out competition. The government normally brings out regulations to control this kind of monopolies and they last for a shorter time period.

Oligopoly is like monopoly but by more than one company. There will be a few companies who control the market. These can be companies who sell identical products or can be those who sell differentiated products. Differentiated products are those that are similar in nature or serve a same purpose but are differentiated in the minds of the consumers. Different models of cars, is a good example for this.

Monopsony is where there is only one customer for a particular product. There may be more than one producer but only one person to sell them all to. This is like reverse monopoly. The price is set by the buyer. The government is a good example for this as there are lots of things that only the government of a country is allowed to buy, like defence weapons.

Oligopsony is the reverse of oligopoly where there are just a few buyers for a given product. Again the price is determined by the buyer. The manufacturers of car spare parts for major car manufacturers are a good example of this.

2.6 Macroeconomics

Macroeconomics is the study and analysis of the behaviour of a market in aggregate as well as the behaviour of the central body that affect both national and international economies. It looks at the total employment, consumption, trade, and investments. It does not look at the effect of just the individual or company decisions.

There are two main approaches in macroeconomics. The first and main one is the Keynesian school of thought which states that not all the buyer and seller come to a conclusion rationally. The market force is not desirable or efficient. The main decisions have to be taken by the government in favour of the benefit of the people. The other more relatively school of thought is that of the New Classical Macroeconomics. This believes that the consumer and producer always act as radical agents. The only time when the government can intercede is when there is a serious market failure that has been found and if they can lead to its correction. They always question if the government can actually avoid doing more harm than good by their actions.

2.6.1 Business cycles

Every kind of economy experiences fluctuations in its activity. There are both boom phases and recession phases in every economy. The rates of cycles differ with the causes.

Trade cycles are the most common cycles in practice. There is a fluctuation in aggregate level of output and employment relative to long term trends. The output is measured by Gross Domestic Product (GDP). This is the amount of total goods and services produced by all companies operating within the country. It is very hard to predict the length of the cycles. The change in the duration severity of the cycle is based on the economic decisions.

Real cycles are also very hard to predict because they are caused by drastic causes. Economic shocks, technical developments and social upheavals or wars are some of the factors that bring this cycle into effect. Real refers to a wide variety of economic terms and denote less theoretical factors.

Political cycles are those that are effected by the government in power. All the economies have some input from their governments. There is a belief that many governments deliberately manipulate the economic cycles to maintain political domination. They make different decisions when they come into power and when they near elections. They then slowly retract the decisions well into their terms. Governments use political cycles to quell unrest.

2.6.2 Inflation

Inflation happens when the value or the purchasing power of a nation’s currency drops in the international market. This results in the continuous increase of prices. Countries use the CPI, GDP and a producer price index to measure inflation. The different types of inflation are as follows.

Sectorial inflation is caused due to the supply and demand irregularities. There is always fluctuation of prices of products with respect to the other products due to the supply and demand. Sectorial inflation is where the price of a particular set of products increases. This happens normally only in essential products. This has a short term effect and may happen due to sudden change in circumstances.

Cost inflation when the cost of the factors of production increases. The change is reflected on the economy. When the cost of raw materials increase or when wages for labour increase, it leads to cost inflation. It is very hard to manage as wages have to be increased as a result of cost inflation and this leads to a need for further inflation.

Demand inflation is very straightforward. When demand cannot meet supply, the price of the product in shortage, increases. It can happen regionally or sectorially. This can then lead to cost inflation which is then very hard to manage.

Hyperinflation is a larger scale of cost inflation. This happens due to wars or famines. Some countries may have an inflation rate of 50% per month. It reduces the value of the national currency to a very low level.

Inflation tax is informal tax applied by the government over the already present tax. When inflation reduces the value of money, the value of government debt increases. Inflation tax is used to reduce this condition.

2.6.3 Savings

The amount of money people have to put aside after they spend on consumables is called savings. This can be used in a time of need. Savings is done normally with banks. The public get interest on their savings in most economies. The rates of interest differ according to different factors. Life savings, small savings, savings account, contract savings and national savings are different forms of savings.

2.6.4 Recession

Recession is the worst state for an economy to be in. This happens when there is a low demand in the economy. The low demand causes the output to be low. The employment level drops as a result. Recession is declared when this state of affairs continue for two financial quarters. Recession within an economy can be tackled by the government, bankers and private enterprises.

2.6.5 Unemployment

The actual measure of unemployment is how many people who are old enough and capable to work, is unemployed. Different people use different methods to measure unemployment which are not right. The main mistake is that they look at the number of people they know who are seeking job. This is not the right representation for unemployment. There are different types of unemployment and they are as below.

Demand deficiency or Keynesian unemployment happens when there is an all around lack in demand for goods and services. The only way to tackle this is for the governments and private companies to create more jobs so that people feel happy to spend.

Classic unemployment is where the high wages, labour regulations and lack of productivity of employees stop the company from being able to employ more people. Only if the wage is lowered or labour laws are relaxed or the existing staff improve their production will this issue be solved.

Structural unemployment happens when there is a shortage of skill. The people available are not suitable for the jobs available or are too far away to commute. In this case the unemployed can be trained to gain new skills.

Frictional unemployment happens when the people are looking for better jobs to match their skills. They are ready to wait till they find the right job. This can be tackled by having recruitment centres.

Impaired unemployment is when people are kept out of jobs due to reasons other than their skills. Reasons like discrimination come under this. It can be controlled by punishing firms that follow such methods and bringing in more regulations.

Underemployment is when people are working in jobs that are far lesser than their educational qualifications or skill levels. This also includes the part-timers. The full potential of the people are not used and so the economy loses what it may have got otherwise.

To summarise, once again it is worth mentioning that macroeconomics and microeconomics are always co-existent. One needs the presence of the other. Governments concentrate on the macroeconomic issues but also think about its effects on the micro level for the individuals.

Part II: Competitive Advantage of Nations

2.7 Introduction

The most notable writer on the topic of Competitive advantage is the Harvard Scholar, Michael E. Porter. For almost two decades now, it is his Diamond framework that has been used as the main tool by the nations to define what their competitive advantage is. He had refined his earlier work and come out with a book called ‘The Competitive Advantage of Nations’ in 1990. This part of the chapter will study Porter’s Diamond framework and it’s implication to the competitive advantage of nations.

Porter contradicts the traditional theory of economics which looks at the common variables as the most important factor to determine an economy when he says, ‘national prosperity is created, not inherited’ (Porter, 1990). The old theory (Ricardo, 1928) that the other variables like the labour and interest rates are the main factor deciding the economy conclude that national advantage is inherited and cannot be created. There are lots of things that need to be understood to get a better idea of what Porter was implying. Different firms follow different methods that allow them to have a competitive advantage over others. In the global economy, one can consider nations to behave like these companies that are trying to get an advantage over the market. This leads to the quest for national competitive advantage.

According to Porter (1990), innovation includes both improvement of products and the development of completely new products and production methods. He says that innovation is just not the end result where something substantial is obtained but is also all the steps and efforts included in the whole process. Everything leads to new knowledge and improved methods of doing things and new ways of doing things better. In today’s world, improvements are made to products at almost a daily basis. Such is the rate at which the competition improves. Any advantage a firm has may be nullified by a competitor the very next day. Countries encourage companies to come up with innovative ways so that the result will be the competitive advantage of the nation as a whole. Those who stay a step ahead of the competition and try to explore different new possibilities are the ones who generally get the competitive advantage over the ones who actually have better technologies. Some firms come up with ideas never thought of that can actually change the whole set-up of the competitive structure. This chapter will discuss Porter’s Diamond framework, the determinants highlighting a nation’s economy according to the Diamond and some drawbacks of the Diamond.

2.8 Porter’s Diamond Framework

The diamond framework, as mentioned earlier, is the main framework used by the industry to analyse the nation as a whole unit. It allows the nation to look whether it is providing the facilities available for the industries operating within its border to grow in a way that it creates an effect on the global market. The Diamond framework gives a clear idea whether the firm’s competitive advantage, if any, is good enough to make it a main international player.

There are six main determinants under the Diamond framework for the country to measure its competitive advantage. These are factor conditions, demand conditions, related and supporting industries, firm strategy, structure and rivalry, chance and government. These are the determinants that form Porter’s Diamond framework. In this formation, the effect of one of these determinants reflects on the others. Again Porter (1990) says that there are two main factors that are very important to the Diamond formation which are domestic rivalry and geographic closeness. Perhaps, domestic rivalry is the most important factor as that is what makes the nations to compete with each other and come up with better and more efficient ways of production. Geographic closeness is also important as this gives the companies the same kind of laying field and they can benefit by seeing the progress of their competition.

Porter (1998) explained the effect of the determinants as very important to the competitiveness of nation when he said, “the availability of resources and skills necessary for competitive advantage in an industry; the information that shapes what opportunities are perceived and the directions in which resources and skills are deployed; the goals of the owners, managers, and employees that are involved in or carry out competition; and most importantly, the pressure on firms to invest and innovate.”. What he said can be explained in simple words that the environment within the country is what is most important. Only when it favours the growth of the company will it create an international competitiveness.

Figure 2.2: Porter’s Diamond Framework. Source: Porter, 1990

It is probably impossible for a nation to have advantage in all the determinants of the diamond, but it is important that they have more than one. More the number of determinants that a nation has an advantage in, the better will be its competitive advantage. According to the Diamond framework, there are three conditions which allow competitive advantage for companies. Firstly, if the nation does not restrict the amount of wealth and skills the company can gain. Secondly, the nation has to develop overall so that the companies have the ability to find new techniques. Lastly, if the companies stick to their policy of growth and the investors stay loyal to the cause.

2.8.1 Factor Conditions

According to Grant (1991), factor endowments lie at the centre of the traditional theory of international comparative advantage. This is uses to determine where the nation stands in-terms of the factors of production. All the different factors like the kind of labour available, the infrastructure and the other related costs come under this. According to Porter, the advanced and specialised factors are more important to the model. These are the highly skilled and educated labour and other important factors that are key for the industry. What he believes is that just having educated people is not enough for a nation’s competitive advantage but also there has to be the facilities available that are specifically suited for an industry to prosper. And, these can be only obtained if there is a good and steady investment available.

For a nation to have a competitive advantage, it’s not enough that the factors required are available but, there has to be means by which the factors can be improved or created. There have to be institutions where the factors required for the industry are created and improved continuously. Local rivalry helps achieve this as a by-product. The other parts of the Diamond have to be in favour if this has to work out well.

2.8.2 Demand Conditions

Demand condition is the term used to determine how demand for a good product produced by a country within itself, can improve its competitiveness. Porter (1998) says that it is the demand of the products within the country that helps the organisations to better their products and to know what to expect. When the home-market is very sophisticated in its demands, it helps the country to develop as the companies in it try to better their products in comparison to those outside. Therefore, it is not the quantity of demand that counts but the quality.

If the improved products stay within the country, there is little use for the nation with the advantage it gains. The company will have to promote the reasons for which they needed the better products, so that there will be a global interest in it. The nations will have to export their values and tastes through the media or their foreign relations. This will help both the home-market of small economies who cannot sell more than a limit within its borders and also large economies where they can increase production and improve the economy.

2.8.3 Related and Supporting Industries

Just having one main great industry that is superior in the global market cannot make a country have a competitive advantage. There have to be other good supplier industries and related industries that can complement the main industry. These related and supporting industries have to be as good as or better than the international standard. If this is not the case then they will just pull the other industry that is growing at a good rate. In most nations, the leading industry tries to improve the ones linked or supporting them so that it can have an effect on their operation. There also has to be a good flow of communication between these industries to keep helping each other.

The best advantage for a nation is when these supporting industries are also global competitors. This means that the nation and its main industry will have to spend less time and effort into developing them. When the supplying industry competes at a global level, they also will continuously try to develop and improve their factors so that they can then supply in the global markets. Having a global market for the suppliers helps them to stay steady even at times of a downturn in the home market. This is similar in the case of the related industries where there will be new methods being created and improved.

2.8.4 Firm Strategy, Structure and Rivalry

Firm strategy, structure and rivalry is made up of the framework in which the firms are fashioned, ordered and managed and also the rivalry at the national level. The aims of the owners, management and employees contribute to this. Organisations have to be in sync with the national goal of competitive advantage. Industries have to be set up in that context and the style of management has to be adaptive to the nation’s preference. Porter (1998) gives an example where engineering and technical background of senior executives has increased the appeal for methodical product and process improvement.

It is important for a nation to have the employees of its industries motivated and to improve the skills base. Different methods of appraisals are used for it. Nations have to keep looking at ways to recognise and retain the talented people they have before another nation takes them. This is very important when the nation is looking to have a competitive advantage.

As mentioned many times earlier, domestic rivalry is a key part to having a competitive advantage. Porter (1998) strongly believes that the domestic rivalry is not only when it comes to the prices but, the main contribution is better quality and services and innovation. A very good example of this is when a firm will not just relax when they have a new technology innovation but, try to improve it in fear another competitor may do it before them.

2.8.5. Chance and Government

Porter sees these as the two external factors. This does not mean that these two external variables are not important to the Diamond framework.

Chance events are those that are not directly under the control of the firms. Events like a new invention, wars, and sudden changes in global demand, external political developments and breakthrough in basic technologies are some of these chance events. These are factors that actually cannot be controlled by a firm or nation and may upset the whole structure that was in place, and give another nation the competitive advantage.

The decisions made by governments can make or break a nation’s competitive advantage. All the policies made by the government have an impact on the industry at some level. The government has to have proper consideration of how their policies may affect each factor of the diamond before passing them. Only if the government stays clever will the nation be able to have a competitive advantage.

2.9 Shortcomings of Diamond Framework

Even though Porter’s Diamond framework is considered to be effective by many countries, it is not free from criticism. According to Rugman and D’Cruz (1993), the framework is developed with MNEs originating in US, Japan and Europe blocks in mind, leaving MNEs in small economies without a proper analyzing-tool. According to them only these MNEs have the capabilities of creating the resources. Bartlett and Ghoshal (2004), state that MNEs are becoming less depending on one nation. They say that they use the Diamond framework to use different countries for different parts of their operations. Dunning (1993) also agrees that nation is not the main factor to decide the competitiveness of MNEs. Rugman and D’Cruz have come up with alternate models.

E-commerce is the new trend for the international consumer. According to Laudon and Laudon (2003) and Parsons and Oja (2006) e-commerce includes internet activities like shopping online, e-auctions, ordering tickets online, online banking and stock trading and online education. The ease of shopping, the wide selection and the home delivery system has made online shopping very popular. There is again the issue of national boundary (or lack of it), when it comes to e-commerce. If someone has a credit card and an internet connection, it does not matter which country they are in to shop online. Porter (2001) dismissed e-commerce from having a great impact on the world economy. He did not see the e-commerce industry as a separate entity that it has now become.

Chapter 3: Overview of the Indian Economy and Indian IT Sector

Part I: India and Its Economy

3.1 Introduction

India – the largest democracy in the world, the second most populous country in the world, the seventh largest country in terms of geography and now, since recently, the second fastest growing economy in the world.

Indian economy has been on the rise since recent years. The attention of the world has been on the speed of the rise of the Indian economy. India is continually trying to overcome challenges like inflation and other complexities involved in managing such a large economy. The economy has grown by 9.2% in 2007, which was a little below the growth rate of 9.6% in 2006. There have been different reasons that have contributed to this rise of India. There have been many market reform, foreign investments, increasing foreign exchange reforms and flourishing capital markets have all played its part in this growth.

2008 has been a testing time for all the economies in the world. India also faces similar problems. Even though the inflation rate set by the Reserve Bank of India was 4%, the actual inflation by the mid of this year was around 11%. This is the highest level of inflation seen for more than ten years. The cost of oil and food increasing in the world market and the price increase for raw materials needed for construction are the main reasons for this.

The interest to invest in India by the foreign countries and Indians residing outside India is still on the rise despite these issues. There are many foreign countries setting up operations in India and many mergers and acquisitions going on. This trend is expected to rise or remain steady as many investors want to grab the opportunity of what they think is an undervalued economy. Indian companies are giving hope to the economy by flourishing not only in the domestic market but also expanding abroad. There are now four Indians the top ten of the Forbes’ Rich list. This is more than any other country and the largest contribution in the last four years to the Forbes Global list has been from India than any other country.

This chapter will look at the current trends in the market and look at reasons why the economy has grown to reach its current position.

3.2. Recent Trends in the Growth of the Indian Economy

The growth of the Indian Economy has been above 7% for the past ten years and it has stayed consistently above 9% in the past three years. Only China has had a better growth rate than this for the past few years. Over half of India’s population use agriculture as their source of income. Natural causes like floods and droughts keep the poverty level in India’s population high. The growth of the economy has seen the poverty level reduced by as much as 10%, but considering the population of India is over a billion, poverty is still rife.

Significant changes to the structure of the economy by the government, has helped the overall growth of the national economy. India’s public debt is still very huge. There are lot of issues with corruption and restrictions at both the national level and the state level. The biggest growth in India has been in the service sector in the past few years. Last year (2007), the growth rate of the service sector was just above 11% and its contribution totalled up to above half of the GDP. The growth in the industrial sector during the same period was 10.63% and contribution to the GDP was 29%. Contribution from agriculture was only 17%. The growth of the manufacturing sector reflects the growth in the economy. It grew from just under 9% in 2005 to 12% in 2006. These figures are represented below. The growth of the communication sector was well over 16%. The high investment rate and the good savings rate have definitely helped in the growth of the economy to this proportion. The percentage of gross capital formation in GDP has risen noticeably from 22.8% in 2001, to 35.9% in the 2006. During the same period, the gross rate of savings as a percentage of GDP recorded a very good growth from 23.5% to 34.8%.

3.3 Globalisation of the Indian Economy

India got her independence from the British rule in the year 1947. Having a large population, the GDP was huge right from the beginning but the per capita income was very low. A high percentage of the population were under the poverty level. There were very few cities and the villages were not well connected, lacking roads or any good means of transport. This led to a Capitalistic structure for the economy. The focus of the government grew very soon in bringing people from the villages to the cities to boost the industrial sector that was not well established but performing.

The government took control of the major businesses very soon. The capitalist tide had been turned. Now there was a socialistic approach and the companies had to obtain licences from the government for all their activities. This period of time that stretched till the early nineties was known as the ‘Licence Raj’. This slowed down the growth of the economy. The government controlled everything. Many of the main sectors including the banking sector were nationalised. The companies needed permission for all their activities including importing new goods. This caused the economy to grow at a snails pace. The government eventually started bringing in new steps staring in the early nineties that helped change this scenario and help grow the economy.

3.3.1 Devaluation

In international trade, foreign currency is the major mode of payment. All developing nations build up a good foreign currency base so that they can involve in trade and improve their economy. The nations have very few options when this currency base starts dying down. The easiest option available is to borrow more foreign currency. The problem with this is that the nation who lends the currency will want it back in the same currency or another strong currency. If the economy is not doing well, the nation who borrowed can find themselves in a huge debt when having to pay back. Devaluation of the currency is the other option. This is sometimes a forced devaluation as the market may not perceive the currency of the nation to be as strong as the government does.

India devalued its currency for the first time in 1966. India had to devaluate her currency due to the high inflation rate bringing in no interest from the foreign markets. The prices in India, pre-devaluation, were much higher than the rest of the world and so there was more import than export. The effect of this devaluation was not significant as America didn’t invest in India. The reason for this was that America was at war with Vietnam and India had a stand opposing the war. America didn’t think they had to invest in someone who was not for their views. Because of this reason, the devaluation did not bring any significant growth to the economy.

1991 was the year that was a landmark year for the Indian economy. There were many changes in policy and relaxation in lots of restrictions that led to the beginning of the real significant growth of the Indian economy. By 1991, Indian economy was facing a crisis similar to that of the 1960s. Inflation rate was very high and the government did not have enough money to continue trade for even another month. The government had a huge world debt looming over it. The Gulf war was the final step that destabilised the Indian economy. The rising oil prices and a slowdown of the world economy left India with no option but to devalue the currency by 18% and 19%. This led to the increase in foreign investments and more interests from the foreign markets.

3.3.2 Disinvestment

Again in 1991 there were a lot of economic reforms to help the economy grow and become globally competitive. This new reform was collectively known as Liberalisation, Privatisation and Globalisation (LPG model). The effect of this reform could be seen in all major sectors.

One of the key developments on liberalisation was something known as broad-banding. Previously, private companies were only allowed to produce what they were set-up for. Broad-banding gave the company permission to create varied products as long as the raw materials required were the same. This went a long way into liberalising the economy. Some other steps that helped were those like deregulating many industries. An example of this is deregulation of the trucking industry which helped the companies to bid for services to transport goods, at competitive prices.

The current Prime Minister Mr. Manmohan Singh was the finance minister at that time. He was Cambridge educated and had a very futuristic view for India. He was the one who initiated the major liberalisation of the Indian economy when it was facing the huge crisis. He took quick steps like cutting expenditures, raising taxes, devaluing the exchange rate, and implementing monetary restriction to overcome the balance of payment problem. It was under him that the licence raj came to an end. He also lifted the ban of foreign direct investment. Tax rates were also equalised and the burden eased off the trade industry. There were also a number of financial reforms that helped the companies to borrow freely and helped the banks to operate with much ease.

3.3.3 Foreign Direct Investment (FDI)

India allowed Foreign Direct Investment across a wide variety of industries. The government has allowed most of the Indian market to be open to foreign investments. The limits on foreign ownership had also been removed. Having a wide range of investment opportunities and the lack of unwanted restrictions significantly increased the foreign investment in India.

3.3.4 Non Resident Indian (NRI) Scheme

The Non Resident Indian scheme opened up the Indian market to the NRIs with the same benefits as that of foreign investors. A lot of concessions were given to the NRIs and the government also exempted NRI investment from being taxed. This increased the investment from the NRIs to up to 60% of the market.

3.4 Advantages of Globalisation in India

There have been a lot of advantages to India and none more than the GDP growth. The growth rate of GDP is above 9% and the Indian Prime Minister predicts it will reach 10% very soon. The foreign exchange reserves have grown from $39 billion in 2000-01 to $180 billion in 2007. It is expected that India will cross the $200 billion mark in the near future.

By the end of 2006, there was an FDI inflow of around US $43.29 billion. Electrical equipment sector saw an investment of 18% and the service sector 13%. India has got the fourth largest FDI inflow. 45% of the worldwide outsourcing market belongs to India.

3.5 Disadvantages of Globalisation

Just like everything else, globalisation also has its downsides. Agriculture which has been and still is the backbone for the Indian society has lost its priority in the economic sense. In the early fifties agriculture provided employment to over seventy percent of the population and contributed to over half of the GDP, but this fell to 22 percent in 2007. almost 60% of the Indian population still depend on /agriculture. As a result, the per capita income of the farmers has been significantly reduced and they are being pushed more towards poverty.

Part II: Indian Information Technology (IT) Industry

3.6 Introduction

The information Technology (IT) industry is right now the pride of India in its quest for global recognition. It is still in its infancy in comparison with the other sectors. Even at this early stage the world attention is on the Indian IT industry and the growth it has recorded in the recent years. The world sees India as the global powerhouse for computer software development and Business Process Outsourcing (BPO). The growth of the IT industry in India has been phenomenal. It has grown from just about US$ 150 million in 1990-1991 to US$ 5.4 billion in 1999-2000. Its growth has been unmatched by any other industry in India.

Indian Software Industry 1995-2000 (US $ million)







Domestic software Market







Software Exports







Indian Software Industry







Figure 3.5: Growth of Indian Software Industry. Source: NASSCOM Report

The growth rate of the computer software exported by India has been steadily above 50 percent since 1991. This has been due to the change in the India economic policies discussed in the previous part of this chapter. The exports alone in the year 1999-2000 amounted to US$ 4 billion. The trade representation of the Indian IT industry is done by the National Association of Software and Services Companies (NASSCOM). Even though the domestic market for software is growing in India, it is the export market that has contributed to the growth of the Indian economy significantly. According to NASSCOM statistics, cumulative annual growth rate (CAGR) for the export market has been over 62 percent for the five years before 2000. During the same time, the growth of the domestic market was around 46 percent.

According to N. Kumar(2000), the contribution from the software industry to India’s GNP is only one per cent, but its contribution to the growth of GNP is over 7 percent. Even though the employment in the industry is very low compared to the national workforce of over 28 million people in 1997, the employment in the IT industry had grown from 160,000 in 1997 to over 400,000 in 2000. This part of the chapter will discuss the structure of the Indian IT sector, its contributions other than that to the GDP, and the reasons why the IT sector is such a success in India.

3.7 The Structure of the IT Industry

The Indian IT sector consists mainly of two industries. The main industry is the IT services industry. This deals mainly in the development and export of software and other related services. The second industry is the Business Process Outsourcing (BPO) sector. India has a large market for BPO.

According to the latest NASSCOM survey (refer figure above), the IT-BPO industry recorded and overall growth of 28 percent. This includes the domestic industry. The revenue generated by the industry was around US$ 52 billion, up from US$ 39.6 billion in 2006-2007. The growth of the software and services exports segment was about 29 percent. And revenue generated was in excess of US$ 40 billion in comparison with the amount of US$31.4 billion in 2006-2007. The domestic segment grew by 26 percent to give revenue of US$ 11.6 billion.

Considering just the exports, IT services exports grew by 28 percent to generate revenues of over US$ 23 billion and the BPO exports were up by 30 percent generating revenues of US$ 10.9 billion. Engineering services and products export gave revenues of US$ 6.4 billion and grew at 29 percent. The survey projected the overall growth of the software and services revenues to grow by 21-24 percent to reach US$ 50 billion in the financial year 2008-2009. The above information is also supported by the below figure, obtained from the ‘IT Industry Fact Sheet’ published by NASSCOM.

USD billion

FY 2004

FY 2005

FY 2006

FY 2007E

IT Services






























Engineering Services and R&D, Software Products















Total Software and Services Revenues

Of which, exports are














Total IT Industry (including Hardware)





Figure 3.7: Sector-wise break-up of the IT industry. Source: NASSCOM

Private Limited Companies dominate the IT industry in India. Over half of the total number of IT companies is privately owned. The liberalisation policies explained earlier in the previous part of this chapter played the main part in this revolution. Less than 10 percent of all the companies have a parent organisation outside India, with the majority being from United Kingdom or United States. Most of the major It companies were formed either in the late 1980s or the early nineties.

3.8 Contribution to Employment

A very important contribution of the software industry has been to the employment sector. Employment has grown significantly in India since the boom of the IT and IT Enables Services (ITES) industry in India. Since the IT industry is comparatively new, statistics are not easily available. It is therefore not possible to represent the growth rate in employment. A representation in the figure below shows the employment in different parts of the industry in 2005.


FY 2004

FY 2005

FY 2006

FY 2007E

IT Services










Engineering Services and R&D and Software Products





Domestic Market (including user organizations)











The total employment in the IT software and services sector was expected to be around 1.6 million in the year 2007. the government and the industry have collaborated to help achieve more growth and to improve the employment rate in the sector. NASSCOM has introduced NAC (NASSCOM Assessment of Competence) to assess and certify skill for entry-level and lower-management executives. NASSCOM has been working in tandem with the education sector for IT workforce development. It has also signed MoUs with UGC and AICTE to take forward these initiatives. It has suggested having special education zones. NASSCOM is also proposing to introduce finishing schools for IT professionals to make them more accustomed to the working environment and prepare them to get going right as they step into companies. They are looking to start this initiative with the help of the major educational establishments like IIT and NIT.

3.9 Reasons for India’s Success

There are quite a few reasons why India has been the favourite destination for the focus of the world to import IT services from and to export business processes to. Many countries have a few of these advantages, but India has come about to having most of the advantages to tempting people to its shores. Some of the reasons are briefly explained below.

3.9.1 Talent in Science and Technology

India has the best resource of human talent in science and technology after only the US. As depicted earlier, there are more than 1.6 million software programmers in India. The number of software professionals in total is twice this at 32 million. The growth of the software talent pool is expected to be around 60,000 each year. The strong technical skills and eagerness to accommodate clients by the Indian programmers is a huge advantage in pulling foreigners who sometimes outsource work to get specialised engineering talent. Probably 50 percent of the software engineers working in the Silicon Valley are Indians or NRIs. This is a great testament to the quality of technicians India can produce. Lots of the NRIs who gained experience from other countries like US have returned back to invest in new companies and educate a better qualified generation.

3.9.2 Cheap Cost of Labour

One of the main driving factors for foreign investment in India was the low cost of Labour. The cost of Labour in India is only a quarter of the world labour cost. The salary for an Indian professional would only be a fifth or even an eighth of that for one in a developed country. Software industry is one that requires a high number of employees. This low cost of labour made the countries like US and UK order more software from India and shift their R&D programs to India.

3.9.3 Ease of Communication

India being the second largest English speaking country after the US presented the investors a very good advantage. The number of English speaking professionals is better than almost anywhere else in the world. This made it easy to communicate and lesser time and effort in training for the investors. It is easy for the Indian professionals to use the English based software instruments and export directly to English-speaking countries. This has also been a main factor in the growth of the BPOs.

3.9.4 Geographical Advantage

India is exactly opposite the US on the world map. The time difference is 12 hours. Indian software companies develop the software during the day time and it is transmitted via satellite in the night time. This is the daytime in US. When they test the software and propose changes it is night in India. By the time it is morning again in India, the information will be transmitted from America. This ensures that there is a 24 hour work cycle.

3.9.5 Government Policies

The change in Economic policies, as discussed earlier in this work, played the most important part in the transformation of India from a mere backward developing country, into a global IT superpower. The government made IT a part of its agenda. It began when the government wanted to stay ahead in the electronics development craze which took over the world in the eighties. The Ministry of Information and Communication Technology plays an active part in developing the infrastructure for the IT industry. There are many IT-parks dedicated to providing IT services in different parts of the country. The best talent from all around the country are placed in these places. The IT Bill was passed in 2000 to provide a legal framework for recognising e-contracts and to prevent computer crimes.

3.9.6 Legal Amendments

India introduced a new patent law in 1994, which is one of the strictest of its kind in the world. This gave a lot of importance to the protection of intellectual property rights. This patent law helped the piracy level to drop to a level that is similar to the western countries. The level of piracy in other developing countries is still around 90 percent. The improved legal system gained the trust of the entrepreneurs and made them invest in India.

Chapter 4: Research Methodology

4.1 Introduction

Researches are done for many different purposes and in many different fields of interest. Before explaining the kind of research followed by this dissertation and how the data was collected, it will be helpful to understand a little bit more about research methods and ways of collecting data for a research. This chapter will discuss these in detail.

Although there are innumerable number of researches conducted in various disciplines every day, very few of these are done in the pure form. People do not create new research methodologies to do a research every time. There are already well-established methodologies available for research that have been time-tested and proved to be effective. Most of the researches done are applied researches. The research, or the result of it, is applied to some discipline. All sorts of disciplines and professions use research methodology to improve their field of work or profession. All research has to have a methodology. The researcher has to decide which methodology is apt for their work. The validity of the findings of a research depends to a very large extent on the kind of methodology used.

This research has followed a qualitative approach. There was a lot of secondary data already available to support the findings of the research. Questionnaires were sent out to the top IT-BPO companies and the response of those who replied was recorded. This research can also be classified as a descriptive research as the variables which are the economic conditions of India and the performance of the IT companies cannot be modified by the researcher. This chapter explains the different types of research available and what they are, steps involved in a research process and the tools available for data collection.

4.2 Types of Research

The two main approaches available to research are qualitative approach and quantitative approach. Researches are divided into different types.The basic types of research are descriptive, analytical, applied, fundamental, qualitative, quantitative, conceptual and empirical. These are explained below.

4.2.1 Descriptive Research

This kind of research involves different types of enquiries related to fact-finding and surveys. This kind of research is used to describe the state of affairs as it exists. It is not used to find something new, but to allow the researcher to find out how things are at present. Most of the social science related researches are descriptive. The researcher who has little or no control over the variables, use descriptive research. The variables cannot be changed by the researcher to test its effect. The researcher bases their findings on the data already available. This dissertation is of a descriptive kind as the researcher has no control over the variables.

4.2.2 Analytical Research

In an analytic research, the researcher uses the facts and figures available and analyse this to come to a conclusive result. The researcher critically evaluates all of the facts and information and derives a conclusion from it.

4.2.3 Applied Research

Applied research is also known as action research. The research is done to find an immediate solution to a problem. This kind of research is normally done on an industrial r organisational level and also for finding solutions to problems in a society. It is normally based on concrete problems on business or social levels. It is safe to say that applied research is done to find solutions to practical problems.

4.2.4 Fundamental Research

Fundamental research is also known as basic research or pure research. It is mainly associated with generalisation or for the formulation of a theory. The information is gathered for knowledge about some topic. This kind of research is used for mathematical problems, for natural phenomenon or to make a generalisation based on human behaviour. This is generally used to find information which relates to broad base of applications. It helps add to already available information.

4.2.5 Qualitative Research

Qualitative research is done on some phenomenon involving quality. This is used in researches like those involving studying human behaviour. It is used for finding the reasons or interests that lead to choices. A way of gathering this information is by conducting interviews and depth interviews in particular. Psychological factors are associated with this kind of research.

4.2.6 Quantitative Research

Quantitative researches involve quantity or numbers. It is used to measure a quantity or amount. This is used to quantify the variation in a phenomenon, issue or a problem. Statistics are used only to support the findings in this kind of a research

4.2.7 Conceptual Research

Conceptual research is that which applies to some idea or theory. It is used to develop new concepts or to improve the existing ones.

4.2.8 Empirical Research

Empirical research is done on the basis of experience or observation alone. It does not depend on data. It has very little to do with theory or system. This research is done using available data. The findings of empirical research are generally verifiable by observation or experiment. It is an experimental type of research. The facts have to be first obtained by the researcher and the hypothesis is already thought of beforehand. The researcher has to then find the right way to get to the result. They will then have to collect enough information to be able to get to this result. Proof obtained from empirical studies is considered to be the strongest available.

4.2.9 Other Classifications of Research

The above types of research cover almost all the kinds of the research. Researches can also be classified into some other types though it is an extension of the above different types. These classifications are: one-time research or longitudinal research, field research or laboratory research, conclusion-oriented and decision-oriented research.

4.3 Steps Involved in a Research Process

According to Ranjit Kumar (2005), there are eight steps involved in a research process. They are as listed below.

4.3.1 Step 1: Formulating a Research Problem

The first step of any research problem is to formulate a research problem. To get to this, a literature review has to be conducted. Doing this will bring clarity to the research problem and help in choosing the right research methodology. It will also help the researcher to understand the area of research better. Before writing the literature review, the researcher will have to look at the already available literature on the topic. They should review the literature and then develop a theoretical and conceptual framework for the literature.

Once the literature review is done, based on it the researcher can formulate the research problem. The problem has to be formulated in a way that it gives more information on the topic than that is already available. The researcher will then have to identify the variables involved in the research. They will have to find all the related variables that may affect answer to the main problem. Once all this has been done, a hypothesis will have to be formed.

4.3.2 Step 2: Conceptualising a Research Design

There are different ways in which a research can be done. A researcher is the one who has to decide what the right way to follow is, to get a right result for the problem being researched upon. There are different research designs that can be implemented. If the study design is very vast, the option the researcher has is to choose between cross-sectional study design, before-and-after study design or longitudinal study design. If the research is based on a reference period, the options available are retrospective study design, prospective study design and retrospective-prospective study design. For study designs based on nature of investigation, there is the experimental study design.

Some other types of designs are action research, feminist research, cross-over comparative experimental research design, replicated cross-sectional research design, trend studies, cohort studies, panel studies, blind studies, double-blind studies and case studies.

4.3.3 Step 3: Constructing a Design for Data Studies

There are different ways to collect data for a research. Interview, questionnaires and observation are some ways of primary data collection. There are secondary data collection methods available too. The data collections methods are discussed later in this chapter.

4.3.4 Step 4: Sampling

Sampling involves selecting the target audience or specimen for the research. The researcher has to determine who the target audience is for the research and according to that they will have to design the data collection process. Sampling is done on basis of many different reasons. Age, sex, language, education, profession are all just a few examples.

4.3.5 Step 5: Writing a Research Proposal

The research proposal will give a good idea of how to proceed with the actual research. The proposal involves many steps such as writing an introduction, the problem to be researched upon, the aims and objectives of the research, the hypothesis to be tested, the study design, sampling, data collection methods, problems and limitations and the work schedule.

This proposal will be very similar to the actual research document. The researcher will only have to add or modify the proposal as the research progresses.

4.3.6 Step 6: Collecting the Data

This is the stage of the research where the researcher will start to collect the data. They will have to follow the data collection methods that they had decided on when writing up the proposal. This is not a very easy step and may be very time consuming.

4.3.7 Step 7: Processing Data

The data that had been collected from the samples will then have to be processed to get a representation of the response of the samples. There are many ways of processing the data. The method to be chosen by the researched depends on the kind of data collection method used. The data can be processed using software also available.

The data will then have to be represented in tables or graphs so that it is clear for anyone reading through. There are different types of tables and graphs. Some kinds of graphs that commonly used are: histograms, bar-charts, stacked bar-charts, 100 percent bar-charts, frequency polygons, cumulative frequency polygons, stem-and-leaf displays, pie charts, line diagrams or trend curves, area charts and scatter grams.

4.3.8 Step 8: Writing the Research Report

Writing the report is understandably the last step. The researcher will have to combine the processed data and findings along with the proposal and also include all the references, bibliographies and appendices. This final report should be able to clearly evaluate the research and its findings.

4.4 Data Collection Tools and its Usage in this Dissertation

There are different ways available to collect data. Data can be divided into two groups. One is primary data and the other secondary data. Primary data is that which is not available and which has been directly obtained by a researcher from their sampling group. Secondary data are those that are already available. The different data collection techniques are explained below.

4.4.1 Using Available Information

In today’s internet age, there is hardly any topic on which information is not available. It is not necessary that all available information is true, but it information in any case. Even if it was not for the internet, there are always different ways in which information can be accessed. It can be through books, magazines or journals. For any research, the first step is to collect the available data and analyse it. This is secondary data. This method of collecting and assessing secondary data was done in this report. As this dissertation is about the Indian Economy and the effect of the IT industry on it, it is necessary to get the economic figures and other information to be able to see how the Indian economy and the IT industry in India and the world wide had been performing.

4.4.2 Observation

The observation method involves observing the behaviour and characteristics of living beings, objects and phenomenon. Different observation techniques can be used in different situation. For observing human behaviour either a participant observation technique or a non-participant observer technique can be used. The participant observer method is where the observer is a part of the situation and has a contribution to it. The non-participant observation is where the observer does not get involved in the situation but just observer either from a visible or from an invisible distance.

Observations are of two kinds. One is the open observation where the observer is visible to the samples. The other is the concealed observer who is not visible to the samples or the samples are not aware they are being observed. Observation can also be done on objects. Observations are also called measurements when they are made using a defined scale.

This method cannot be implemented in this work as the kind of research does not need an observation on anyone or anything.

4.4.3 Interview

Interview method of data collection is one that involves asking verbal questions to the respondents. It can be a one-on-one interview or a group interview. The response given by the respondents to the interview is noted down by the interviewer. It may also be recorded on tapes like for phone interviews. Interviews are of mainly two types. They can be of a high degree of flexibility or a low degree of flexibility. High degree of flexibility is in the interviews which are very detailed and of a personal nature. The interviewer must be able to ask different questions when the respondent is uncomfortable, to be able to keep the flow of the interview and slowly drift back to the topic. Low level of flexibility is used in an interview where the number of questions is very large and where the interviewer knows quite well about the subject and has an idea of what to expect from the interview.

This method could not be used for this project as the sampling group consists of the major Indian IT companies who are located at different parts of India and whose representatives would not entertain it.

4.4.4 Questionnaires

Administering written questionnaires is probably the most common method of data collection used in academic researches. Most questionnaires require the respondents to reply in the written format. Questionnaires can be either send to the respondents with instructions on how to answer and return them, by gathering all the respondents in a common place and asking them to respond to it, or by delivering them directly to the respondents and collecting it from them later.

Questionnaires are of two kinds. Closed questionnaires are those which have a multiple choice or a yes-or-no answer. They do not ask explanations to answers. Open-ended questionnaires are those which ask the responded to express their views on the question asked.

This the method of data collection used in this dissertation. The questionnaire was designed and sent out to the major IT-BPO companies in India. It was posted to them along with a letter asking them to fill it out and requesting them to send it back through post, e-mail or fax. Many of the companies did not respond to the questionnaire. They objected to taking part in the research. Out of the companies that did respond, one send back the reply by fax and the others attached a scanned copy through e-mail. The answered questionnaires are attached in the appendix at the end of the report.

This mode of data collection did not work smoothly. There were some difficulties faced while trying to collect data. It was not possible to deliver the questionnaire directly to the management of the companies in the sample group as they are located in India and travelling there was not an option the researcher could choose. It took too long to get the questionnaire to the people concerned within the company and again it took more time than expected to receive replies from them.

4.4.5 Focus Group

A focus group is where a group of people are gathered together to discuss freely on a particular topic. Focus groups are limited to around 8 to 12 people so that there is a productive discussion. The people participating in the focus group are allowed to voice their opinions on a variety of topics relating to an issue. The method of observing a focus group can also be either open or concealed, though it is normally open.

This method was impossible to implement in this research just because of the difficulty of getting representatives of all the top IT and BPO companies to get together. The sampling group was too large and located in different areas.

4.4.6 Projective Techniques

In this kind of an interview, the respondents are made to respond to a verbal or visual stimulus and their reactions are recorded. This is mainly used in medical researches.

This method is not applicable to this dissertation.

4.4.7 Mapping and Scaling

Mapping is mainly used in cases where there is a need for a visual display of the relationships and resources. It is used in construction and mechanical research purposes.

Scaling is the method used to allow a researcher to categorise variables through the replies of respondents, which they would not have been able to do themselves. This is mainly used in finding out how things appeal to people and reasons for it. This is generally used for marketing researches.

These methods are not applicable to this dissertation.

4.5 Advantages and Disadvantages of Data Collection Methods

Chapter 5: Findings and Analysis

This chapter will discuss the findings obtained from the data collected and will analyse the data to be able to come to a conclusion. Secondary data collection methods were used to collect the data on the performance and growth of the Indian Economy. This data is easily available from books and by searching the internet and online information. Much of this was discussed in chapter three.

The first part of chapter two discussed what factors affect an economy and also showed the different economic systems that have affected the world and Indian economies. India, before being a British colony was just a mass of land with many different provinces. Each province had its own rulers and social systems. There was not a nation and therefore no national economic system or evidence. It was only under the British rule that the whole land came under one power. Although the British were using up resources from all over India, there was no official recognition for it as a nation and therefore there is no substantial evidence as to how the nation grew or how the economy performed. One fact for sure though was that it was an underdeveloped economy.

The measurement of the Economy started only since India gained its Independence from Britain in 1947. This was when India got its official recognition as a nation. All the provinces were combines to form a country which was divided into states based on geography or language. The first government was formed in 1947. India has gone through the various stages of economic systems, starting from the feudal system and ending in its current state of a socialistic nation with leniency towards capitalism.

Various economic policies have affected the Indian Economy throughout the years after its independence. As discussed in chapter 3 (Part I), the most important change was the economic reforms that were introduced in the year 1991. The restrictions that were imposed on the nation as a strict socialistic state were relaxed. Until then, the state had owned everything. All the industries and sectors were state owned and limited permission were given to entrepreneurs to grow their business. There was a lack of encouragement to foreign investors who saw an opportunity to capture the market. Permission was required from the government to be able to make any changes to the mode of operation. Limitations were placed which hindered the companies from growing.

The reforms in 1991 changed this system and the companies were given much more freedom of operation. They were allowed to run or expand their business as they liked as long as it wasn’t against the interest of the nation. They allowed free flow of foreign and NRI investments and also opened most parts of the market to capitalists.

Chapter two also showed that the economic system of a nation does not stay stable. There are many factors that affect an economy and it keeps changing with time. Similarly, the Indian economy has also faced a lot of changes due to many different reasons. It is a continuously changing scenario and needs constant attention and review. Trade cycles and inflation have had its effect on the economy. It has fluctuated over the years. There was and still is a massive problem with the high unemployment rate.

The Indian government implemented many steps to develop the economy and make it a nation that is a global competitor. The second part of the second chapter looked at some of the steps that nations take to gain competitive advantage over other nations and how the competitive advantage is measured. The Indian government opened the economy to foreign investments and foreign entrepreneurs. As chapter three describes, though there were many different industries in which changes had appeared, the most significant one was that in the IT sector.

There were many factors why the India was chosen as the best place to invest for IT services and IT Enabled services. Again, as the chapter revealed, Indians were known well in the US and UK for their technical strength. The education system in India was superior to many other developing nations, especially in the fields of science and technology. As the number of software engineers and IT experts grew, they moved out to the foreign markets to get good job and better lifestyle. This enlightened the developed world to the quality of IT professionals and technicians that India could produce. This went a long way to encourage the foreign nations to invest in India. The Indian government also changed the economic policies to give the NRIs same rights as the foreign investors. This made many of the experienced Indian Diaspora living in the developed countries to invest in India.

The returning Indians brought with them the experience gained and better skills and transferred this to the people working in the organisations belonging to them.

Chapter three also showed how the IT companies helped a great way in retaining and employing the graduates and other educated professionals. IT became the main source of employment for most of the educated public who would have to go abroad to find jobs or be unemployed otherwise. This also helped the growth of the Indian Economy by improving the per capita income.

The GDP has been growing at a very high rate in the past ten years. The economy had a slight dip in growth in 2000 when there was a global IT slowdown. The GDP has been rising constantly since 2003, when the IT industry started booming once again. The BPO sector had expanded tremendously in India just before this huge rise in GDP. Also evident from the information is that the growth of the GDP in in-line with the growth of the service sector.

Chapter three showed that the service sector has grown more than the industrial or manufacturing sectors in the past year. The industrial sector had a slight growth but the agricultural sector had a negative growth. It was the only the service sector that has a tremendous growth. In the service sector, the main contributors were the IT services and IT enabled services segment. The IT exports have been growing at a very good rate since the past five years. This is the same period of time when the GDP has been growing.

To find out the opinion of the IT and BPO sector, a questionnaire was prepared (refer Appendix 1). It was sent out to the Top 10 IT and BPO companies in India (refer Appendix 2 and Appendix 3). Many of the companies did not respond. Replies were received from three of the top 10 IT services company and one of the top 10 BPO companies.

Respondent 1 is from Tata Consutancy Services BPO in Bangalore, which is the fifth best BPO in India according to the NASSCOM ratings (Appendix 2).

Respondent 2 is from the Infosys Technologies Limited in Mumbai, which is the second largest IT software and services company in India.

Respondent 3 is from Wipro Technologies Ltd. in Pune, which is the third largest IT software and services company in India.

Respondent 4 is from Satyam Computer Services Ltd. in Pune, which is the fourth largest IT software and services company in India.

Respondent 1 is a Technical Engineer. Respondents 2 to 4 are at the management level in their respective companies.

All the respondents agreed that their companies were growing on a much larger scale than the growth of the Indian Economy and all of them thought that the IT industry is the main contributor to the growth of the Indian Economy.


The method used for the data collection was a questionnaire as mentioned earlier. It was a mixture of open ended and closed questions. Due to the research following a qualitative approach, the data for analysis is not quantitative. The result of the analysis can therefore not be represented in graphs or charts. They are explained in the section below.

All the respondents confirmed that IT and IT related services were the main business concerns for their organisations.

Except for one, all the respondents’ companies were established in the 1980s. The company of Respondent 1 was established in 1968, respondent 2 in 1981, respondent 3 in 1980 and Respondent 4 in 1987. This shows that majority of the top IT sector companies are still quite new.

Three of the four respondents said their companies had global operations ranging between 30 and 66 companies worldwide. One of the respondents did not respond to this question. The massive growth of the IT companies in the limited time of their growth can be verified by this.

Two respondents said that their companies operated in 13 and 21 Indian cities. The other two did not respond.

All of the respondents agreed that the growth of their companies were much higher than the growth of the Indian economy. Respondent 1 and 3 thinks the reason for this is the Business strategies executed by their companies while respondent 4 thinks the growth is due to the increasing demand for software and IT services globally. Respondent 2 thinks it is due to favourable economic conditions like investment opportunities for foreign companies.

All four of the respondents thought the major impact of the IT sector on the economy was by providing better employment opportunities and creating more jobs. Respondent 3 also added that there is a huge impact on the nations GDP due to the IT exports.

All four respondents again agreed that the IT sector would continue to grow. Respondent 1 voiced his concern that the growth might be limited for a short duration of time due to the current economic crisis in the US and UK.

When asked to state their opinion on whether joint-venture establishments will be a norm in the future, all the respondents agreed to it, but had different reasons and impacts to give. Respondent 1 thought that having more joint ventures will improve the quality of output produced by Indian companies. Respondent 2 thought that foreign companies will want to enter the Indian market and tie-up with well-performing Indian companies as India is soon going to be the IT superpower of the world. Respondent 3 thought that foreign companies would like to mix the cultures and technologies of both the countries to generate a better result. Respondent 4 thought it joint-ventures would be a norm purely for profit making. Foreign companies would try to combine operations with Indian companies just to concentrate effort and generate a better profit.

The respondents did not comment on the growth rate of profits of their companies as it was against the HR policies of the company, but results were available online. Almost all of the Top 10 IT and BPO companies recorded growth of at least above 22 percent with the growth of the top 5 companies recording annual growths of above 40 percent for the financial year ending in March 2008. The revenue generated by these companies was in billions of US dollars. They ranged between US$ 1 billion and excess of US$ 5 billion.

All of the companies expect to keep growing at a similar rate.

Chapter 6: Conclusions and Recommendations

The questions this research aimed at finding an answer to were whether the IT industry has had a significant impact on the Indian economy and whether it was right for the government to shift the focus towards improving the IT sector for a national growth. This research has allowed drawing a conclusion that seems to answer these questions quite conclusively.

The growth of the IT sector in India is quite remarkable without doubt. No similar result can be seen anywhere else in the world. The IT industry is still in its developing stage and the growth of the Indian economy is already only behind that of China. It is expected that the Indian economy will overtake the growth-rate of the Chinese economy in the near future. The credit for that will definitely go to the growth of the IT-BPO services sector.

The decision by the government to allow more freedom of operation to the foreign investors is the main reason this has happened. The foreign entrepreneurs know that they have a good chance of multiplying their investments by investing in the Indian economy. It is not only the IT companies that are improving but there are also the other related sectors of the economy that are progressing as a result. The level of education has definitely improved and so has the standard of living and per capita income. The GDP is increasing every year, along with the increase in the export of IT and IT enables services. As more joint-ventures and companies are created, there will be more growth in the economy.

However, it is not right for the government to ignore all the other industries and concentrate on the growth and development of the IT sector. As seen in earlier chapters, majority of the Indians depend on agriculture for their livelihood. The government must protect the interests of these people. As global food prices are rising and the shortage for crops like rice is increasing, the government should provide facilities to increase the agriculture industry. To gain a competitive advantage as a nation, all the sectors of the economy has to improve as discussed in the earlier chapters.

The growth of the service sector is expected to dip in the current year due to the economic problems in the US and UK. These two countries are the main importers for the Indian IT products and services. The effect of the financial crisis is predicted not to be too damaging and the economy is expected to grow at a good rate even though not like it would have been if there were no global economic worries. The Indian government will have to create more markets to export the IT products and services too. This will help both the service sector and the economy to prosper further.

To conclude, it was definitely a right move by the government to focus on the growth of the IT sector so that the effect can be felt on the growth of the Indian economy. Also, the IT industry has played a major role in the growth of the Indian economy and there is still much room for development and growth. The Indian IT sector can surely be a world leader. The growth of the Indian economy can definitely overtake that of China if the service sector, and the IT industry in particular, grow at such a high rate.


The Indian government will have to provide the IT industry with necessary facilities to grow and should support moves by companies that would help them grow. There is definitely a lot potential for growth in the IT sector. The government should provide help to create infrastructure to help develop the Indian IT sector into the world’s best IT sector. The government will also have to make efforts to create more markets for exporting IT services and products to. This can be done by improving the trade relations with the other countries.

The government will have to join with the IT industries to help create ‘centres for excellence’ as proposed by NASSCOM, which will help develop the skills of the IT professionals after their formal education. This will help improve the qualities of the professionals and make them ready for a better performance in the IT industry as soon as they start. The government will also have to create ways to get the experienced Indians working abroad to invest in India and impart their knowledge gained to the Indian professionals.

Finally, the government will have to develop other sectors of the economy and other industries, along with the IT industry, so that the whole economy can grow at a higher rate. The government will have to take steps just like the changes in policy and economic reforms introduced, that helped the establishment and quick growth of the IT industry, to help other industries. For India to become a major economic superpower, growth and development will be required in all the sectors. Only then will the Indian economy be the best in the world and India have a competitive advantage over its rival nations.

Limitations of research

This research could not get replies from all the parties in the sample group, therefore the analysis is based on a just a select few in the sample group.

The research could not record the effects of the global financial crisis that is imminent in 2008.

Recommendations for Future Research

An economy never remains the same for a long period of time. With this in mind, the information given in this research would not represent the performance of the economy in a few years time. The global financial crisis will definitely have an impact on the exports of the IT industry as many of the exports are to financial organisations. As the major economies face recession, the state of affairs could change as soon as next year. There is a need to constantly review the performance of the industry and the economy.

More research can be done to analyse the changes in the growth of the industry along with the growth of the IT sector. The IT industry, as mentioned many times earlier, is still at a primitive state. As growth of the industry increases and new challenges are faced, the result to the problem discussed in this report could change. For anyone conducting a future review on this topic, the best method to follow would be to use this report as a base and collate new information to match with that provided with this research to identify any change in the result obtained here.

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