Information and Other Technology Development

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INFORMATION AND OTHER TECHNOLOGY DEVELOPMENT India's information technology industry achieved exports of $12.8 billion in the year ending March 2004, equal to 19.8 percent of India's exports and 10.9 percent of current account receipts. Its total sales of $21.5 billion amounted to 3.5 percent of India's gross domestic product. India's new stellar "industry," information technology (IT) has given India an international reputation for high technology and has boosted Indian self-confidence.

The Early History of the Industry

A number system can be constructed out of three numbers: 0, 1, and any number greater than 1. The decimal system, which uses 10 to build the system, is a historical accident. The simplest number system is one based on powers of 2, the binary system; in this system, for instance, 2 would be represented by 10, 4 by 100, and 7 by 111. This system has been used in computers from the outset, as it is easy to give a physical form to a binary system: all it needs is a device that would give an interruptible power flow. A state in which power was interrupted would represent zero, and a state in which power flowed would represent one.

The first computers, constructed during World War II, employed radio valves, which were switched on and off to represent binary digits. But soon thereafter, the semiconductor was invented; it used much less electricity and thus did not overheat so easily, and it was sturdier. (V. Ramamurti, an Indian scientist, believed that the semiconductor was invented because the Allies feared the loss to Japan of India, the Allies' prime source of mica, which was essential to the making of radio valves.) Technological development of computers and of their multifarious applications has since been driven by the progressive reduction in the size and cost of semiconductors. They have now been so reduced in size that millions of them can be etched onto a small chip; chips are designed for specialized uses, such as for a laptop or a washing machine.

The first computers in the 1940s were as big as a house; by the 1960s, however, miniaturization of semiconductors had made it possible to create computers that were no bigger than a small room. At that point, IBM began to make a series of standardized computers; its 1620 and 360 series of mainframe computers found users all over the world, including India. The Indian government imported a few computers from the Soviet Union, especially EVS EM, its IBM 360 clone; but they were not popular, even in the government establishments where they were installed. IBM computers dominated the market. They were used for calculation, accounting and data storage in large companies, and in research laboratories. Tata Consultancy Services, India's largest software producer, was established in 1968 to run the computers acquired by the Tata group and to develop uses for them.

Tension has prevailed in relations between India and Pakistan since they were formed by the partition of British India in 1947. In the 1950s Pakistan joined two defense pacts under the aegis of the United States; in response, India moved closer to the Soviet Union. In 1971 a revolt erupted in East Pakistan. A war broke out, in the course of which India supported the separation of East Pakistan; it emerged as a new country, Bangladesh. During this war, the United States ordered its Seventh Fleet to the Bay of Bengal, worsening relations between India and the United States.

In 1973 India passed an amendment to the Foreign Exchange Regulation Act that required foreign companies to reduce their equity holdings in Indian subsidiaries to a minority. The law was initially implemented haltingly. In the 1977 general election, the Indian National Congress was defeated, and the Janata Party formed a coalition government. Its socialist minister of industries, George Fernandes, vigorously began to implement the 1973 act. Most foreign companies fell in line, with the exception of Coca-Cola and IBM, which closed down their operations in India. However, IBM's computers in India needed continued servicing; to ensure this, the government established the Computer Maintenance Corporation (CMC), which took over the erstwhile IBM subsidiary.

A major cost of using mainframe computers was the specialized manpower they required. It was the practice then to write programs for individual operations; when operations changed or expanded, the programs had to be modified. The data were stored in punched cards and tapes. Both were easily damaged, and data often needed to be reconstructed. Thus a mainframe computer had its complement of servicing staff; a small business could not afford such manpower.

By the 1980s, computer chips were becoming small enough to be embodied in almost portable minicomputers, and these were getting cheap enough to be used in small businesses. Manufacturers began to build into minicomputers a selection of programs that performed the most common operations, such as word processing, calculation, and accounting. Over the 1980s, the mini-computers shrank in size and weight and were transformed into personal computers (PCs). Indian agents who sold imported minicomputers and PCs also employed software engineers for sales assistance and service. Thus, in the latter half of 1980s, Indian software engineers were scattered. Some worked in CMC; others serviced the surviving IBM machines in companies, government establishments, and research facilities; and still others serviced minicomputers and PCs.

Meanwhile, in the United States, the computer industry was manufacturing PCs, which embodied standardized software. A great deal of work went into perfecting PC software. Other software companies translated customers' requirements into software packages and sold them off the shelf to be copied into their PCs' hard disks. As PCs developed, so did mainframe computers. The old computers, known as legacy systems, were loaded with data; and a running business, like a bank or an insurance company, could not do without records. The old computer users wanted to keep their old systems while at the same time acquiring new equipment; and they wanted the two to work together seamlessly. So programs had to be written to enable the new and old machines to talk to one another. That required knowledge of old and new languages; and it required patience and application. The work had to be done on systems that were in use; and often the programmer had to try out a number of approaches before achieving a workable solution. It was laborious, often frustrating work.

Growth of the Industry in India and the United States

By the late 1980s, there were many Indian engineers in the United States. The Indian government had expanded engineering education in the 1950s, but its engineering industry could not absorb the number of engineers that its institutes produced. The brightest engineering graduates began to go to the United States to pursue higher degrees and were soon absorbed into the U.S. industry. Graduates of India's five elite Indian Institutes of Technology (IIT) found easy entry into the United States, and over two-thirds of them routinely emigrated. Thus by the 1980s there was a large diaspora of Indian engineers in the United States, and many of them entered the new computer hardware and software industry. When they encountered shortage of programmers, they turned to India for supplementing the supply. They tapped grapevines of their old friends and colleagues in India. Some just went to the Indian metropolitan areas, checked into a hotel, advertised for software engineers and recruited them on the spot. This "bodyshopping" deprived Indian employers of their programmers. Indian sellers and manufacturers of PCs and private users of mainframes could not afford to lose their staff. They took a number of defensive steps. First, a number of them went into body-shopping themselves: they began to hire out entire teams of programmers. Today's foremost software exporters, Tata Infotech, Patni Computer Systems, and Wipro, began as computer manufacturers, all between 1977 and 1980. Second, they realigned wages so as to retain their more experienced staff. Third, they developed active and anticipatory recruiting techniques. The standard method was campus recruitment. In response to their demand, the intake into engineering and IT courses increased. Fourth, with the recruitment of fresh graduates, Indian software firms also developed short, focused training programs designed to bring them up to speed quickly. Finally, Indian software firms meticulously recorded the progress of work every day, so that if a worker left a job half done, someone else could immediately pick up the threads.

By 1985 satellite links made the export of software possible without having to send programmers abroad. At that time, however, the Indian government did not allow private links, so Texas Instruments gave it the equipment, which it then proceeded to use from its Bangalore establishment. IBM, which wanted to set up a link in 1988, ran into the same problem: the government insisted on retaining its monopoly in telecommunications, the rates offered by its Department of Telecommunications were exorbitant, and it was inexperienced in running Very Small Aperture Terminal (VSAT) links.

In 1991 the Department of Electronics broke this impasse, creating a corporation called Software Technology Parks of India (STPI) that, being owned by the government, could provide VSAT communications without breaching its monopoly. STPI set up software technology parks in different cities, each of which provided satellite links to be used by firms; the local link was a wireless radio link. In 1993 the government began to allow individual companies their own dedicated links, which allowed work done in India to be transmitted abroad directly. Indian firms soon convinced their American customers that a satellite link was as reliable as a team of programmers working in the clients' office.

Another important change was in the import regime. In the 1980s, an importer of hardware had to get an import license from the chief controller of imports and exports, who in turn required a no-objection certificate from the Department of Electronics. That meant going to Delhi, waiting for an appointment, and then trying to persuade an uncooperative bureaucrat. In 1992 computers were freed from import licensing, and import duties on them were reduced. As a result, it became possible for Indian software firms to work on the same computers as their clients.

Satellites and import liberalization thus made offshore development possible, with a number of implications: It enabled firms to take orders for complete programs, to work for final clients and to market their services directly. Work for final clients also led firms to specialize in work for particular industries or verticals: it led in particular to India's specialization in software for banking, insurance, and airlines. It gave India a brand value and a reputation.

The next big technological change was the World Wide Web. Even when satellite links became available, they could be used only by exporters who had their own satellite disks or shared the STPI ones. The Internet, which gathered pace after 1996, offered the same links on telephone lines, although they were slower; and as the number of firms using the Internet expanded, the potential market for software expanded accordingly. Since it was easier and cheaper to obtain telephone lines than satellite links, the Internet greatly increased the number of potential exporters, bringing many small, resource-poor Indian firms into the market.

The late 1990s saw a surge in the Indian IT industry. To assure potential clients of their permanency, Indian software companies built large, expensive campuses, where they made working conditions as attractive as possible, to help them retain workers. Trees grew and streams flowed inside buildings, and swimming pools, badminton courts, meditation rooms, auditoriums, and restaurants were provided.

The IT boom in the United States was the source of India's software exports. It ended in 2000; the downturn in India was delayed until early 2001. The low-cost Indian programmers' market in the United States expanded. More Indian programmers got an H-1B visa in 2001–2002 than in any previous year. Of the 331,000 H-1B visas issued in the United States that year, 191,000 were issued to software engineers, and 137,000 of those went to Indians. Although export growth slowed down, exports still continued to grow. From an average annual compound rate of 52 percent between 1993–1994 and 2000–2001, export growth fell to 22 percent in the next two years.

However, demand for Indian programmers also fell in 2002. For the first time since body-shopping began in the late 1980s, Indian companies did not face a labor shortage. Body-shopping virtually ceased; and firms that depended on it closed down. So did many small firms, which served local firms.

As realization of low wages in India spread, new services and new companies began to locate in India. Until 2000, most call centers serving the U.S. market were in the United States; the only countries that had offshore call centers were Britain and Ireland. After 2000, both U.S. and Indian firms began to set up call centers in India. Back-office functions, such as record transcription, accounting, and documentation, also began to be moved to India. In 2003–2004, exports of such IT-enabled services were estimated to be $3.6 billion.

Major international IT firms have set up a presence in India, mostly doing work outsourced to them by their head offices. The software industry has grown to a size at which it affects the larger economy, particularly in its major centers in the south: Bangalore, Chennai, Poona, and Hyderabad. The industry's export revenues have added to India's bulging reserves of foreign exchange. As a result, the Indian economy has been flush with liquidity, and interest rates have been halved since the late 1990s.

India's IT development has created a model of placing high international value on India's educated manpower. Some 150 global companies, including General Electric, Oracle, DaimlerChrysler and Hyundai, have set up research and development centers in India. Indian pharmaceutical companies are turning research and development into internationally marketable products, doing research on commission for companies abroad. Indian companies are venturing into bioinformatics. India's hospitals are attracting patients from neighboring countries. The Anglophonic educational system planted decades ago by the British has begun to bear global fruit.

Ashok V. Desai

See alsoIndian Institutes of Technology (IITs) ; Industrial Growth and Diversification ; Intellectual Property Rights


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