Losing the IT advantage?

India has a valuable head-start over China in a field where the gains to early entry are large, says Matthew C J Rudolph

This week Pramod Mahajan, the peripatetic Union minister for information technology (IT), will take his road show to the People’s Republic of China (PRC). Ostensibly, the trip is a promotional exercise, but he should also consider the visit a reconnaissance venture. The fantastic momentum surrounding India’s first experience with a globally competitive leading sector may already be spawning some dangerous complacency. Mr Mahajan’s trip to the Middle Kingdom could provide an educational and sobering reality check.

While cheerleading for India’s burgeoning IT industries, the New Delhi team will also be scouting for co-operative ventures for ICE (information, communications, and entertainment) firms back home. Indeed, in areas such as IT-related training and maintenance, there are significant complementarities between India’s strengths and Chinese demand. NIIT for example, has already signed joint agreements in the PRC. But Mr Mahajan should note with care the limits of such complementarity, for rivalry lurks just around the bend.

From a medium-term perspective, Chinese infotech poses a serious threat to India’s future global IT market-share. India’s global advantage in IT rests on a tripartite foundation; good education of the IIT variety, competitive wages, and English language competency. On the first two, China already competes. That leaves English. Five years ago, hardly any young Chinese professionals spoke English.

Now, along with computer learning centres, English education facilities are mushrooming in every major urban area. Taiwanese-style cram schools are training highly motivated university graduates in various computer languages and English. The two skill sets are increasingly bundled together. Today, most upwardly mobile urban Chinese are learning English; 13 million of them are browsing web pages (often multi-lingual ones), and will soon be picking stocks on WAP-enabled mobile phones.

While sophisticated programming still requires complete English fluency, data entry, and bulk modification do not. His hosts will certainly give Mr Mahajan a tour of Beijing’s high-tech Zhongguancun district, China’s answer to Bangalore. From there it is a short ride to Tsinghua University, the country’s top technology university (the PRC’s IIT), the benchmark institution providing the human capital behind China’s IT drive.

The fruit of Zhongguancun’s prolific programmers is already serving a large and growing demand among computer users and IT services in China’s formidable home market. This translates into economies of scale for software and services written and transacted in Chinese characters in a market that few outsiders can penetrate. This provides a strong base that will allow aspiring Chinese IT majors to subsidise their forays across East Asia and into the low-end of India’s English language markets. In hardware, China is already the world’s top producer of computer peripherals.

The dense networks linking the PRC to Taiwan -- Asia’s most cost-effective chipmaker --means it will not be long before the Middle Kingdom can seriously provide some of the units needed to expand domestic PC penetration.

However, this exercise has been very costly and inefficient. Profit margins in the global PC market are thin and narrowing. Unlike its Indian counter-part, the Chinese government need not fight with obstreperous telecom bureaucracies and unions in the race to provide band-width. In spite of all this, until recently, Chinese IT firms were hamstrung by limited access to finance.

As happened in India in the mid-90s, Chinese IT markets are set to explode when the funds arrive. This autumn two new high-tech stock boards will open in Shanghai and Shenzhen. Mainland IT majors have long relied on Hong Kong listings, and a few have already begun to exploit the former colony’s own new high-tech board.

Furthermore, Chinese regulators are preparing an ensemble of measures that will soon make things easier for IT firms to raise funds abroad, and to encourage the entry of foreign portfolio and venture investments. On his return flight, Mr Mahajan may want to contemplate four clear policy implications of the Chinese high-tech challenge:

1) Quality of Service: In Mumbai and Beijing all in and out-bound international data traffic go through state-run monopoly controllers, VSNL and China’s Ministry of Information Technology. These international portals constitute tremendous bottlenecks. India can and should beat China to the punch here. This fall it will be two years since 1998 agreement to allow private ISPs to set up their own international portals.Domestically, leased lines in Delhi often work slower than dial-up service. Talk of e-commerce is empty when Internet service is unavailable for days at a time in Mumbai. Many see IT as India’s messiah. The ICE revolution is often explained by the absence of interference from the mantri. It will be richly ironic therefore, if the dead hand of the Nehruvian planning state, acting through the telecom bureaucracy, were the cause of India’s failure to exploit her advantage of early entry.

2) Penetration: The government faces a policy trade-off between encouraging computer use (which means lowering tariffs and restrictions to provide cheap computers), and cultivating a domestic computer industry (which means higher tariffs and restrictions). The game of hardware autonomy, though deeply ingrained in the state’s Nehruvian reflexes, may no longer be worth the candle. Data is the future. Prospective earnings and employment lie in software and services, and in winning the early fight for their global market-share. The Indian government should stop worrying about where computers are assembled, and focus on getting as many as possible into the hands of its citizens. Moreover, India should not be happy with where it is today. As long as many infotech professionals encounter their first real computers only as adults, Indian business will not migrate along the global IT product cycle.

3) Education: Greater penetration may also be the most important variable in the education equation. But, the government should continue (pace the parivar) to emphasise bilingual education. The country as a whole will benefit if India’s globally-oriented business, and not just IT, can continue to communicate with, and contribute to, the “wired” world of English. Many European countries manage to maintain local languages even while operating externally in English.

4) Finance: Fortunately, much of India’s new financial regulation developed over the last decade in tandem with the IT industry. Moreover, growth in IT promises to attract its own funding. The key is to avoid fixing a system that is not broken. However, skirmishes have already broken out at the regulatory frontiers. The recent debate over how to manage the forex needs of IT corporates shopping for acquisitions abroad, is a hint of what lies ahead.

The RBI will have to fight its pseudo-mercantilist instincts if it wishes not to starve the goose that lays the very same golden eggs it is trying to protect. Amidst the recent hype surrounding India’s IT revolution, a whiff of hubris may have crept in. The rate of change in IT is still very fast, and won’t plateau soon. Now that India has discovered a leading sector, it must avoid miring itself at front of the product cycle, as happened following the impressive gains achieved by heavy industry during the first several five-year plans.

This is doubly so if Indian firms are training their own competitors in China. India has a valuable head-start over the PRC in a field where the gains to early entry are large. Mr Mahajan’s trip should be a reminder not to squander that opportunity. Matthew C J Rudolph, a doctoral candidate in political science at Cornell University, is currently visiting at the Indian Council for Research on International Economic Relations,