Agriculture continues to stagnate, and manufacturing growth lags behind China and some other Asian countries. The action in the Indian economy is in services. Agriculture has stagnated because public investment in irrigation and other infrastructure has stagnated. This has been due to the weakness in taxation in the post-1991 era. One may ask why India has been so much more successful in information services than in manufacturing. The short answer is that the manufacturing sector is governed by laws that make firing difficult, and therefore hiring unprofitable. Less than 5 percent of Indian workers have jobs with the security these laws provide. The service sector never had such laws. Employment growth in Indian manufacturing has been slower than output growth, unlike in East Asia. Employment in information services in India has grown at the same rate as output. The harm to ordinary people done by the labor laws in manufacturing was recognized by Manmohan Singh when he was finance minister 15 years ago. Later, Vajpayee, as prime minister, clearly articulated what was wrong with the labor laws. But the labor laws remain and a generation of Indians has been denied opportunity. Manmohan Singh is again talking of changing the labor laws. His left allies are intensely opposed and he would have to risk his government to do so.
Despite such dysfunctional policies there is hope for the Indian economy. The dawning of the global Information Age has created a truly huge opportunity for India. To sustain even half the current growth rates in information services, India would have to transform members of its lower middle class, who are now in the majority, into the world’s most competent people at a speed, size, and proportion that no country has ever managed.
Currently, there are 2 million college-educated employees in IT companies, call centers, and other back-office shops. Each of these jobs generates five other jobs—in clerical work, restaurants, construction, etc. The pool of information-service employees has been doubling every two to three years. How long can this go on?
The greater worries are on the supply side. The basic driver of competency growth in India is private education. This is not simply an elite privilege. Teachers in private primary and secondary schools are themselves lower middle class, so their services are affordable to all but the poorest third or so. In higher education, the central and state governments have virtually stopped building new universities. All the new colleges that have enabled the outsourcing boom so far have been private. Government education has not worked well for the same reason as manufacturing—too much job security. Teachers get the same pay regardless of performance. In principle there is no reason the private higher education sector cannot continue its boom. Companies complain about the quality of graduates, but have been able to make up for shortcomings through in-house training. Prospective students and their families can judge the quality of colleges by the salaries of their graduates. Students from poor families who have done well in high school can borrow money for college.
On the demand side, the picture is brighter. The worldwide movement toward digital control of manufacturing, services, and finance will only intensify. Currently IBM has about a tenth of its employees in India. IBM’s India staff is growing by half again each year. Similar proportions and trends hold for other leading American companies like Oracle and Accenture. Many more American companies have been subcontracting work to Indian companies like Infosys and Wipro. Their larger Indian workflows have been recognized as contributing to rising profits. Anti-outsourcing movements in the First World will not disappear but have no chance of succeeding against the power of global markets.
The most visible and beneficial spinoffs from the information services boom has been in construction. The trend is toward not just new buildings but mini-cities with residential and office buildings along with urban infrastructure supporting populations in the tens of thousands. These mini-cities promote fundamentally different kinds of social and political interaction than existing cities. The municipalities provide far better basic services than the established cities. Their residents are less dependent on their caste or religions groupings.
Until now, the information services sector has grown without political opposition. As it gets larger, it will undermine ever-greater economic and political interests. The recent spat between former Prime Minister Deve Gowda and Infosys chief Narayana Murthy and the flurry of communist talk about unionizing the BPO sector are a taste of things to come. The greatest challenge facing the Indian political economy is to negotiate the redistribution of wealth and power that information-led growth will require and bring.
Sanjoy Banerjee teaches international relations at San Francisco State University. He writes about India, America, and the world.