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Indian IT industry’s past sins threaten its future

LiveMint logoLiveMint 25-04-2017 Sundeep Khanna

India’s beleaguered $150 billion IT services industry is facing an existential crisis following its discovery that US president Donald Trump did mean to go through with his pre-election threats to review a critical tool of its trade, H1B visas. This comes on top of the erosion of its competitive edge by automation and robotics. Already, the layoffs have started as projects get trimmed and margins take a hit.

Predictably, India’s software services exporters are in a state of paralysis in the face of these threats. Lacking a well-honed, long-term strategy to cope with the political and economic forces aligned against it, the industry has responded timidly—petitioning and invoking contributions to the US economy and producing numbers to state its case. This hasn’t cut much ice with the Trump administration, which has gone through with an executive order even while promising more draconian measures to protect American jobs. Contrast that with his kids-glove treatment of China. All his threats of naming the country as a currency manipulator before the elections seem to have been silenced once the reality of possible Chinese retaliation hit home.

The Indian software services industry is a custodian not merely of its own fortunes but that of the future of an entire nation. Even as industry leaders Tata Consultancy Services Ltd, Infosys Ltd and Wipro Ltd examine the impact of these recent setbacks on their bottom lines, concluding mostly that it will be marginal, there is a far bigger issue at stake. India’s success in software services exports has given it a unique competitive strength. In an increasingly digital world, India has the manpower and the head-start needed to build the kind of global position that, for instance, Germany has in engineering or before that Britain built with its naval fleet.

But as management guru Michael Porter warned, the competitive advantage of nations isn’t an inheritance on which a country has a perpetual lien. It is something a country needs to keep working on through innovation. In his original piece in 1990 for the Harvard Business Review, The Competitive Advantage of Nations, Porter wrote: “Ultimately, the only way to sustain a competitive advantage is to upgrade it—to move to more sophisticated types.”

By sitting back and continuing to rely on its cost-based arbitrage model for over two decades, the software industry has placed in jeopardy not merely its own fortunes but that of India too. Those who think that Trump’s executive order notwithstanding, it will be business as usual in the hallways of business processing offices in Bengaluru and Gurugram, might want to take a look at the recent and not-so-recent past.

The fate of India’s auto components industry, once touted as a potential world beater, is a good reminder. Despite its promising beginnings, India’s share in global exports has remained stuck below 1% over the last decade, as component makers failed to scale up and deal with the realities of a changing market. As a consequence, the value of auto component exports increased from $5.1 billion in FY09 to $10.8 billion in FY16 (according to data from the India Brand Equity Foundation), way below the sector’s Vision 2015 target of $33 billion set by the Auto Component Manufacturers’ Association back in 2003-04.

Long before that, of course, there was the example of cotton exports in which India was the world leader in the 17th and 18th centuries before going into a decline from which there has been no comeback. Till the 18th century, India was the world’s largest producer of cotton textiles, as well as a major exporter. By the early 19th century, however, it had been supplanted by Britain as the world’s largest cotton textile producer, dominating not just the world export markets, but even selling back to India.

A 2005 research paper, Cotton Textiles and the great divergence: Lancashire, India and shifting competitive advantage, 1600-1850, by Stephen Broadberry and Bishnupriya Gupta of the Department of Economics, University of Warwick, analyses the decline and offers a sharp insight into its causes. “Low Indian wages acted as a spur to labour-saving technical progress in the British cotton textile industry. As British productivity increased, a point was reached where Britain’s higher wages were more than offset so that unit labour costs were lower in Britain and the reversal of competitive advantage occurred.” The similarities with India’s woes in software services are uncanny.

While the Y2K opportunity at the turn of this century provided India’s software services exporters the wings to fly, and gave India the boasting rights of being the IT backroom of the world, their subsequent inability to upscale their skills and their wares has led up to the current crisis. The industry needs a leaven of fast innovation and that too on a very large scale to posit itself as a provider of technological solutions to the world, just as China has become the go-to for all manufacturing—from zips to steel. That is the only language the guardians of global trade are likely to listen to.

Sundeep Khanna is a consulting editor at Mint and oversees the newsroom’s corporate coverage. The Corporate Outsider will look at current issues and trends in the corporate sector every week.

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