Exploiting information technology for development : a case study of India

\A/ DP2 4C Toly Iqqq 246 U World Bank Discussion Papers Exploiting Information Technology for Development A Case Study of India Nagy Hanna  Recent World Bank Discussion Papers No. 189 Poverty, Populatiot, and the Envirotitnetit. Stephen D. Mink No. 190 Natumral Gas in Developing Couitries: Evaluating the Benefits to the Environtnetit. John Homer No. 191 Appropriate Macroeconomic Matagetnetit in Indonesia's Open Economy. S?.dia Ahmed No. 192 Telecommunications: World Bank Experience and Strategy. Bjorn Wellcnius and others No. 193 Ihfonnation Systems Strategiesfor Public Finatncial Managementt. Hy-wcl M. Davies, Ali Hashim, and Eduardo Talero No. 194 Social Gainsfromn Female Education: A Cross-National Study. K. Subbarao and Laura lRaney No. 195 Touards a Sustaitiable Development: The Rio dejaneiro Study. Edited by Alcira Kreinmer, Thereza Lobo, Braz Menezes, Mohan Munasinghe, and Ronald Parker No. 196 Eastern Europe in Traisitiotn: From Recessiott to Growth? 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Loayza (Continued on the inside back cover.)  246 121 World Bank Discussion Papers Exploiting Information Technology for D evelopment A Case Study of India Nagy Hanna The World Bank Washington, D.C.  Copyright 0 1994 The International Bank for Reconstruction and Development/Thy WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the UJnited States of America First printingJuly 1994 Discussion Papers present results of country analysis or research that are circulated to encourage discussion and comment within the development community. To present these results with the least possible delay, the typescript of this paper has not been prepared in accordance with the procedures appropriate to formal printed texts, and the World Bank accepts no responsibility for errors. Some sources cited in this paper may be informal documents that are not readily available. 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ISSN: 0259-210X Nagy Hanna is principal economist in the Public/Private Sector and Technology Development Division of the Asia Technical Department, South Asia Regional Office. Ubrary of Congress Catnloging-in-Publication Data Hanna, Nagy. Exploiting information technology for developmnent: a case study of India / Nagy Hanna. p. cn. - (World Bank discussion papers ; 246) Includes bibliographical references and index. ISBN 0-8213-2865-4 1. Information technology-Government policy-India. I. Tide. 11. Series. HC440.155H36 1994 338.47004'00954-dc2O 94-12671 CIP  CONTENTS FOREWORD .............. ABSTRACT ....................... . vii ACKNOVWLEDGEMNT ........................ ix ACRONYMS & ABBREVIATIONS ........................ x EXEC[TIIVE SUMMARY ................... xi I. STRATEGIC IMPLICATIONS OF THE INFORMATION TECHNOLOGY REVOLUTION 1 IL. NDIA'S NEEDS AND OPPORTUNITrES FOR INFORMATICS .................. 5 Logistics and Infrastructure ........... ............................ 5 Social Applications and Public Administration ........................... 6 Financial Sector . .............................................. 9 Manufacturing .............................................. 11 Effective Use and Diffusion ..................................... 13 M. SUPPLY CHARACTERISTICS AND CONSTRAINS ........................ 19 Hardware Manufacturing ........................... ......... 19 Telecommunications and Data Communications . ........................ 25 Software Services ............................... 28 Constraints on the Software Industry .......................... .. 35 IV. POUCIE, INSTITUTONS, AND CAPABILTIES. 40 Policies ....................................... 40 Institutions .............. ......................... 44 Informatics Labor Force ....................................... 48 V. STRATEGIC ELEMENTS AND OPTIONS .53 Country Experiences in Informatics Development and Diffusion .53 Towards a Strategy Objectives .60 Basic Objectives .60 Main Elements and Options .62 (a) Mobilizing Demand .62 (b) Strengthening Supply Capabilities .64 (c) Formulating Policy and Developing Infrastructure .65 Areas fbr Action Plan .67 Informatics Policy and Institutional Development .68 Informatics Manpower Development .71 Data Communications Development .74 Public Sector Modernization .75 Financial Sector Modernization .77  -iv- Software Industry Development and Diffusion . ......................... 78 Roles for Private Sector and Government ............................. 82 RE'ERENCES ........................ 83 ANNEXES .......... 90 1. The Information Technology Revolution: International Experience ............... 91 2. Government Policies and Strategies for the Software Industry .................. 96 3. Supply-Demand Analysis fbr Computer (Software) Personnel ................... 102 4. Main Institutions of the Software Industry ............................... 105 5. Country Experiences in Promoting Diffusion of Information Technology (Microelectronics in Industrial Applications) ............................. 107 6. Japanese and Singaporean Experiences: Comprehensive Strategies ............... 115 7. Software Export Development Fund (SEDF) .118  -v- FOREWORD This paper presents the issues and options involved in formulating a national strategy for information technology development and diffusion in a developing country. Using India as a case study, this paper takes into account the emerging international experience in this new field and blends it with Indian economic conditions. It also benefits from extensive interactions with Indian business leaders, private sector associations, and policy makers. This paper is neither a blue print plan nor a formal or informal Bank proposal. Policy makers and business leaders, both in industrial and the newly industrializing countries, are facing complex choices in responding to the potential of information technology. The paper draws on emerging best practices. However, India will need to adapt such practices to its institutional and economic conditions as well as aspirations. Any detailed blueprint for a national information technology plan should emerge from extensive discussion and consultative mechanisms between the public and private sectors in India. Detailed design of action plans need to be based on detailed studies of the demand of information technology and assessment of alternative programs and delivery mechanisms. The paper thus only describes a vision and an approach towards the formulation of a strategy. It outlines the strategic issues and options and possible elements of a national strategy that would need to be further developed through the collaborative efforts involving public and private sector leaders. This paper is expected to be of wide interest also to other countries as they address this emerging and challenging area of development. Harold W. Messenger Director Asia Technical Department   -vii- ABSTRACT This paper proposes a framework for developing a national strategy for information technology development and diffusion in support of economy-wide competitiveness. The specific country case is India, a developing economy with substantial promise to become a global player in the software services. It is also a country where timely information is scarce and transactions costs are high, and thus provides a developmental context for demonstrating the strategic impact of this technology. The study first analyzes the information and communication needs of India's economy and the constraints to a dynamic domestic market for information and software services. The study then assesses the competitiveness of India's hardware and software industries. Translating the potential of information technology into effective demand and successful application requires concerted action by the public and private sectors on developing policies, institutions, investments and capabilities. The study outlines the rationale for a coherent and long-term strategy for information technology specifically tailored to enhance India's competitiveness and exports. The main elements are: (a) measures to mobilize demand in the private sector and to target strategic applications for public sector modernization; (b) programs to strengthen software industry capabilities and export networks; and (c) policy and infrastructural measures to strengthen both supply and demand and lay the foundation for sustained development. Various options are proposed in support of each element of the strategy. The respective roles of government and private sector are explored. The argument is put forward that national information technology strategies could provide a coherent framework to exploit synergies and develop collaborative actions, and that governments can play key roles as catalysts, regulators, investors, users and strategists.   -ix- ACKNOWLEDGEMENT This study is the product of many interactions and the synthesis of many ideas that I gained from working with Indian policy-makers, businessmen, academics, and consultants, as well as World Bank colleagues. In particular, Robert Schware contributed to the chapter on Supply, and Joseph Bredie to the Informatics Labor Force issues. I benefitted from the comments and ideas of many Indian colleagues, especially: N. Vittal (Secretary, Department of Electronics), N. Vaghul (Chairman, ICICI Limited), F.C. Kohli (Chairman, Tata Consultancy Services), N. Sheshagiri (Director General, National Informatics Center), Saurabh Srivastava (Managing Director, IIS), Prakash Hebalkar (President, ProfiTech), Ashok Parthasarathi (Additional Secretary, Ministry of Science and Technology), Rajiv Kumar (Economic Adviser, Department of Economic Affairs), Roy Paul and N. Gopalaswami (Joint Secretaries, Department of Electronics), Arindam Bose (Director, Department of Electronics), and Dewang Mehta (Executive Director, National Association of Software and Services Companies). I also benefitted from the peer review and support of many World Bank colleagues: Daniel Ritchie, Khalid Siraj, Gobind Nankani, Sidney Thomas, Javed Khalilzadeh-Shirazi, Carl Dahlman, Ashoka Mody, Arvind Gupta, Jeremy Openheimer, Geoffrey Gowen and Shakuntala Gunaratne. Sandor Boyson of the University of Maryland provided an independent and global perspective. Bruce Ross-Larson provided selective editorial assistance. Alloysius Ocheni provided valuable secretarial support.  Acronyms and Abbreviations CAD - Computer Aided Design CAM - Computer Aided Manufacturing CASE - Computer-Aided Software Engineering CH - Confederation of Indian Industries CMC - Computer Maintenance Corporation CRISP - Computerized Rural Information System DOE - Department of Electronics DOT - Department of Telecommunications EC - European Community EDB - Economic Development Board GNP - Gross National Product GOI - Government of India IISC - Indian Institute of Science IT - Information Technology MAIT - Manufacturers' Association of Information Technology NASSCOM- National Association of Software and Service Companies NCST - National Center for Software Technology NIC - National Informatics Center NIE - New Industrializing Economy NPC - National Productivity Council OECD - Organization for Economic Cooperation & Development R&D - Research and Development RBI - Reserve Bank of India TCS - Tata Consultancy Services TUL - Tata Unisys Limited VSNL - Overseas Communication Corporation Limited  -xi- EXECUTIVE SUMMARY The abundance of cheap labor and raw materials is no longer sufficient for global competition. Information, flexibility, product quality and fast response are the key new factors, and Information Technology (IT) plays a critical role in these areas. That is why policy-makers in industrialized countries--and in an increasing number of developing countries--view information technology as a critical infrastructure for competing in an information-intensive global economy. They also see the potential gains from using IT-based processes to enhance their access to global knowledge, markets, and capital. And they view IT as a fast-growing strategic industry that is likely to be the world's largest before the end of the 1990s. These views--of information technology as infrastructure and as core capability for development- resonate with India's aspirations to modernize its infrastructure, transform its industry, and join the global economy. In a word: IT is transforming the way people do things--all things. Computing and communications technologies have--by increasing the amount and timeliness of information available to economic agents--dramatically increased the information intensity of processes, occupations, and institutions, as well as that of products and economies. In industrial countries, IT is enhancing the workings of markets and reducing transaction and coordination costs within and across enterprises and institutions. It is also modernizing such traditional "low tech' industries as textile and footwear, and revitalizing and transforming such basic industries as automotive and capital goods. Throughout industry, it is profoundly transforming competitive strategies, product development, manufacturing processes, and procurement practices. Similar transformations are occurring in all services: finance, trade, distribution, marketing, education, and health. These changes are inducing managerial and organizational innovations and new business practices--such as outsourcing, de-layering, time-based competition, lean production, just-in-time procurement, and flexible manufacturing. Now pervasive in OECD markets, these practices influence how--and how much--developing countries will participate in global trade in manufacturing and services. India presents a major case study of the importance of IT to developing countries, the need for national IT strategies, and the adaptation of IT diffusion programs of advanced economies to the conditions of industrializing countries. As a developing country, India faces pervasive forms of information poverty, its infrastructure and financial services are in need of substantial modernization, and its potential for exporting labor-intensive software and information services is very promising. Although the significance of IT and the specific design of national IT strategies and programs are likely to vary among developing countries, some elements are expected to be similar. Moreover, differences among programs and variations in country experiences should enrich the options and instruments available for developing countries to exploit the opportunities and cope with the challenges arising from the ongoing information technology revolution. This study thus explores the strategic issues and specific options facing India's informatics sector and, at the same time, provides a model or case study of developing national IT policies and strategies for other developing economies.  -xii- The Potential for IT in India India can become an important player in the global information industry by the year 2000. By marshaling its vast human, industrial, and technological resources to expand its software sector--the engine of the information industry--India can raise the productivity of domestic manufacturing and services. It can also capture a far greater share of the $360 billion global software market and the $1 trillion global IT market. With a compound annual growth of almost 30% between 1987 and 1991, the Indian software sector has expanded almost twice as fast as the world-leading U.S. software industry did during 1984-87, though from a small base. There is now a critical mass of more than 700 software firms in the country. A few large companies, such as Tata Consultancy Services (TCS) and Computer Maintenance Corporation (CMC), have state-of-the-art technical capabilities. The Indian IT industry, particularly software, has an impact far beyond the sector. It has been a source of dynamism and technological innovation. It has provided demonstration effects for other industries, in terms of export-orientation, strategic alliances and foreign investment. It has been building India's image abroad in terms of entrepreneurial and technological capabilities. It has been India's window on the ongoing global technology revolutioii. It continues to provide a strong domestic voice for liberalization and competition. And it is likely to be a major channel for modernization and technological change throughout the economy. Along with its critical mass of software suppliers, India has an enormous pool of potential users. Well-established capital-goods, consumer electronic4 and pharmaceutical industries, large transport and distribution networks, and a growing financial system constitute a substantial source of potential demand for software. Closer interaction between the software sector and these large users would create a virtuous circle that would lead to the creation of new software products for local productivity enhancements--and for export. India could also become a major supplier of IT applications that address the common needs of developing countries. Already, India has developed innovative applications in railway reservation, irrigation control, agricultural extension, medical diagnosis, geographic information, and various expert systems. In many other areas, it could leapfrog traditional methods by finding new ways of delivering the massive social and extension services its population requires, such as distance learning and village information utilities. Given India's know-how and the low sophistication of fT users in many developing countries, India could deliver successfully developed computer applications, training, maintenance and consulting services that would be highly relevant to the needs of other developing countries. Another plus for India is having one of the largest scientific and technical cadres in the world. Indians have a worldwide reputation for mathematics and computer programming, and this cadre is critical in the diffusion and customization of software across many institutional and industrial settings.  -xi"- But only as IT is diffused more broadly and a critical mass of domestic users is developed will the promised benefits be realized. And the acquisition of technological capabilities, particularly for new generic technologies such as IT, requires conscious adjustment and sustained effort on the part of the user and among users and suppliers. In addition to an appropriate incentive framework, the response of potential users of IT depends on information, finance, skills, and infrastructure. While the final capability building and institutional learning to exploit the power of IT takes place inside user organizations, users have to depend on external sources for critical inputs that they cannot create easily and economically. Each of these inputs has its own markets and each may suffer from market failures. That such market failures exist is borne out by the fact that all industrial countries and NIEs have invested in setting up specific programs and institutions to support the functioning of the skill, capital and information markets that are relevant to IT development and diffusion. These programs rely on inducing potential users to adopt emerging "best practices" in IT investment and management, through information and educational services, R&D and training incentives, and the subsidized use of specialized consultancy services. The experience of these countries suggests that carefully designed policies and programs can accelerate technological mastery and deepening, and can thus produce high rates of industrial development and economic modernization. In India, these necessary adjustments are likely to be difficult. Inadequate policies and management skills slow down the adoption and lower the benefits of modern information and communications systems. A substantial lack of awareness exists of the potential benefits and associated costs of IT, particularly among small and medium-sized enterprises and public institutions. The physical and institutional infrastructures for IT diffusion are at an early stage of development. All this could change through the development of appropriate policies, infrastructures, and capabilities to adopt best practices in IT investment and management. The Costs of Inaction Given its strategic assets, India is (potentially) well-positioned for global competition in software services, the core and most promising segment of the IT industry. But efforts to formulate and launch a program to achieve that leadership have so far been fragmented. The activities of various ministries and industry associations need to be coordinated and strengthened through a coherent national strategy--to broaden the domestic market, facilitate the development of a competitive software industry, and build the necessary policy framework, infrastructure, and institutions. The costs of inaction would be high. India has a window of opportunity that may not stay open long. Given the fast pace of the IT industry, India could lose its market share in a few years. Many low value-added activities of the software development process are being automated in OECD countries, and new software productivity and quality-enhancing tools may erode the competitive advantage of India's low wages. Lacking domestic demand and an infrastructure for information technology assimilation and diffusion, India is losing many of its talented software engineers. Sixty percent of IIT graduates in computer science leave for jobs overseas, and similarly high percentages of employees leave India's largest exporters of software. Moreover, other industrial and developing countries are targeting the IT industry and adopting aggressive marketing and capability development programs. Singapore and China have  -xiv- teamed up in Softech I to pool Singapore's strengths in applications software with China's pool of low-cost computer professionals. Korea has set a target of $6 billion in annual software exports by 1996. Given such initiatives, India needs to respond soon with a coherent strategy that builds on its distinctive competencies--or leave itself at a significant disadvantage. The costs of inaction will be even higher for the rest of the economy. The continuing low adoption of IT and associated managerial practices will put businesses at a competitive disadvantage. International business practices are changing in fundamental ways, with the help of modem information and communication systems, placing ever more stringent requirements for reliable deliveries and customized services in increasingly shorter time intervals and with low reject rates. As these practices are becoming pervasive in OECD markets, they are likely to dictate much of the future participation of developing countries in trade and manufacturing. Unless modemnized, India's infrastructure will increasingly become a binding constraint; for the entire economy. Check clearing within India takes up to 6 weeks, instead of 6 days. About 10 percent of the values of traded commodities is spent in paperwork at the ports. When effectively applied, IT benefits have been often dramatic. For example, automation of the railways reservation system, which handles over 11 million passengers a day, has reduced waiting time from 80 minutes to 5. Substantial improvements in India's information and comrnunication infrastructure are needed to build a flexible fast moving economy. India's economy also suffers from prevailing information poverty and uncertainty. The substantial data resources of India are tied up within public institutions, unprocessed and unused, even though the private sector and the public at large are required to supply substantial amounts of data that often leads to high transaction costs. The small fraction of public information disseminated is in paper format, severely reducing its value for other government agencies and for potential private information retailers. Legal and regulatory information are in short supply, and judges, litigants, and those in business and govemment often operate blind. This resul-ts in considerable delays in courts and uncertainty and unpredictability about rights, obligationis, and potential liabilities. Information asymmetry between suppliers and users of public services often lead to corruption and major uncertainties. At present, the entire control of land ownership information is with a minor village official, and modernizing and updating such records assume special significance with increasing transactions and services in the rural economy. As India liberalizes and opens up its economy, information problems and slow transactions could generate significant losses and bottlenecks, and undermine participation in the information-based global economy. Equally important, information scarcity leads to policy mistakes, poor decision-making, slow learning processes, barriers to foreign investment and joint ventures, and narrow participation in the development process. India is already investing substantially in data collection and processing and in IT hardware and systems development.' These investments are likely to increase, regardless of whether a coherent IT strategy is adopted. The challenge is not merely to apply and diffuse IT into key sectors. It is also to rationalize public expenditure on data collection and processing, I The public sector accounts for approximately two-thirds of the market for hardware, peripherals, and communications devices. Public sector hardware investments have traditionally been biased toward larger and more expensive systems-mini and mainframe computers, although a process of diffusing smaller computers and distributed networks of personal coanputers is now beginning in the public sector.  -xv- to facilitate appropriate IT investment in the private sector, and--perhaps most important--to build local capabilities that ensure the effective use of IT investments and get the most benefits from them. Without concerted actions to draw on international best practice, India's growing investments in IT could be wasted. The effective use of IT requires the building of local capabilities, learning processes, demonstration projects, and consultancy and support services. It also requires cooperative links with international IT suppliers. And it requires appropriate policies and incentives to reduce learning costs and risks of new technology adoption and a national infrastructure to facilitate adoption and fully realize the potential benefits. Current Constraints Despite some areas of strength, India's ability to establish a long-term, vibrant IT industry, and to promote wide exploitation of information technology in support of export and modernization, is constrained by several major and interdependent problems: S The policy framework is poor. Despite recent policy improvements, import restrictions and tariffs on personal computers and software remain extremely high, by international standards. Public procurement practices undervalue software and support services and favor procurement from two public corporations. The public sector lacks information systems standards. The private sector does not have easy access to public information resources. The legal protection for software is weak, and there is a narrow focus on software exports. e The gaps in the quantity and quality of IT manpower to serve both export and domestic demand are growing, exacerbated by the brain drain. There are severe shortages of software engineering and project management skills because of body- shopping practices and the limited output and low quality of IT graduates from most public institutions. The quality of private training institutes is uneven. Software firms and user organizations, particularly small ones, invest little in training. * Data communications infrastructure and network-based value-added services are rudimentary, due in part to barriers to entry by the private sector. The terrestrial public telecommunication network is inadequate, as are satellite and other altemative communication networks, because of the large investments they require and the low priority telecommunications has been given over several successive development plans. * The use of Information Technology by the public sector, including commercial banks, is limited and ineffective due mainly to poor planning and coordination in information systems and databases. Other reasons include the under-investment in software and support services, the low awareness and computer literacy of public administrators, the neglect of complementary investments in training and institutional adjustments, and the diffused mission of the National Informatics Center.  -xvi- * The use of Infonnation Technology by private organizationrs is also limited, particularly among small and medium enterprises. Reasons: Awareness of the potential benefits is low. There is reluctance to use management and IT consultancy firms for intangible services to diffuse best practices in IT adoption and management and to facilitate the corresponding institutional change and the redesign of business processes. Nor are there relevant extension and support services-or strong user associations to articulate interests of users and facilitate communication with suppliers. Local suppliers invest little in user education and market development and there is a stark asymmetry in knowledge among IT suppliers and users. * Sofiware firms are deficient in marketing, productivity, and quality, mainly because of the predominance of small software houses with limited capacity for marketing and in-house training. Financial institutions are not prepared to deal with the intangible assets and unfamiliar markets and risks of software firms. There are few sources of assistance for quality improvement and market development. Access to software productivity tools and up-to-date technology platforms is limited, as is access to international expertise and information on overseas markets. Although awareness of software firms concerning quality and marketing has increased in the last few years, the high upfront learning costs are an obvious barrier. These constraints should neither detract from the recent policy reforms nor from the substantial technical capabilities and progress achieved in IT use in different segments of the economy. The use of information and the diffusion of IT are inevitably conditioned by social and cultural factors which are relatively slow to change. India's institutions are very complex and diverse, and IT use is strongly influenced by these diverse management and organizational cultures. Information and communication needs of different sectors and ministries are also heterogenous, and responsibility for IT investment planning and information resources management is inevitably a line management function. Some industrial managers and information systems specialists are attempting to overcome the constraints to IT introduction and effective use, and some have made impressive progress. But a coherent national strategy to improve the overall enabling environment and national support infrastructure for IT could certainly enhance individual managerial and institutional efforts and help spread their best practices. Moreover, India's recent policy improvements and capability developments should be assessed in relation to India's potential and the aggressive strategies adopted by competitors in this strategic sector. The Need for a National Information Technology Strategy A coherent IT strategy can clarify government priorities and guide foreign assistance. Such a strategy would have to be based on clear understanding of the potential of this technology for revitalizing traditional industries, creating new services, modernizing key sectors, and improving public management. It would not be enough to increase the supply of IT. It would be also essential to build user capabilities to manage and invest in IT, to develop user-responsive expertise, and to integrate systems arnd solutions for users. Demonstration projects, enabling infrastructures, and a critical mass of organized users are typically the route to a stronger and broader domestic market-the learning ground and springboard for software exports. The thrust  -xvii- of the strategy should be on the domestic use of IT to enhance India's international competitiveness and key public services. In developing its strategy for IT, India can benefit from what OECD countries and such NIEs as Korea and Singapore have learned about national policies and programs to develop and diffuse IT throughout their economies. Their experience suggests that government can-as user, regulator, and catalyst--influence the successful and cost-effective use and supply of IT. Almost all OECD governments have policies and programs to promote the development of software (and microelectronics) and accelerate the diffusion of IT applications, particularly among small and medium-sized enterprises. There is widespread acknowledgement that market failures and lags in market adjustments--particularly in IT, where information asymmetries and skill and institutional adjustments are substantial--can justify carefully structured and monitored public interventions. National programs have been designed to motivate and reduce risks and learning costs for early adopters, to create a critical mass of suppliers and support services, to promote local adaptation and exports, and to widen the pool of skills. Government initiatives have created supporting infrastructure and mobilized finance for (the predominantly small) software firms. Experience suggests that government can serve most usefully as a catalyst. But it does not need to assume all responsibilities for IT diffusion. The focus should be on market- enhancing policies. The scope is great for using private consultancy services, professional and industrial associations--and for hybrids of private and government agencies--to diffuse best practices and deliver support services to small- and medium-size users and new adopters of IT applications. Cost-sharing schemes have often been used in OECD and the NIEs to accelerate and induce private investments in IT-based modemization, diffuse best practices, promote firm- based training, and develop market-responsive intermediaries. In addition, governments have carried out targeted programs to exploit IT to modernize public administration services, improve communication and access to their substantial public information resources, and reduce transaction costs between public and private agents. As the largest user of IT in most economies, governments have used their public computerization programs to build key elements of a national information infrastructure, generate demonstration effects, and create demand and competitive markets for local IT suppliers and support services. Consider Singapore: It formulated a national IT strategy under the leadership of the National Computer Board and with extensive involvement of the Economic Development Board, interested government ministries, business associations and universities. The six main elements of Singapore's strategy are: * Policies and instnitions such as establishing National Computerization Committees, and standardizing key technical and information areas (Electronic Data Interchange, software development process). * Skills development through computer literacy in schools, broad-based civil service training, computer science education in universities, and specialized software training institutes (with assistance from multinationals).  -xviii- * State-of-the-art telecommunication services at internationally competitive rates. * Large-scale demonstration projects such as civil service computerization program, and the creation of TradeNet to link ports and customs to importers, exporters, freight forwarders, cargo agents, and shipping agents. The return on investment for the first phase of the civil service computerization program was 170%, due to better revenue collection, new services and productivity increases. Savings for traders from TradeNet use are about one billion dollars annually. * Software industry development through enforcing copyright laws, providing specialized financial services to small software enterprises, promoting joint-ventures with multinationals, establishing innovation centers for technology transfer, and supporting innovative software product development. * Promoting IT use in small enterprises, through cost-sharing for consultancy services, sectoral surveys to identify common needs, and funding for developing common software packages for these needs. Towards a Strategy Drawing on international best practices, India may consider the following six areas for strategy development and action planning: * Formulating IT policies and building IT institutions to increase competitiveness and standardization in public procurement of information systems, enhance access to public information and databases, and create competitive markets for information services. A national IT strategy would consider strengthening the key institutions for IT--to provide strategic and policy leadership, coherence among IT-related policies and programs, decentra]ized capacity for implementation and innovation, strong links between suppliers and users, partnerships between public agencies and private associations, and capabilities for experimentation, monitoring, and evaluation. India may review Singapore's experience with the National Computer Board and adapt this model to the Indian context. The role of DOE should change from regulation to promotion. Such a strategy would also address those policies and procedures which restrict access to imported hardware and software, such as high tariffs, and multiplicity of taxes and customs and licensing procedures. It should actively recruit If multinationals to localize production in India and to build strategic alliances with domestic suppliers. * Developing IT manpower by expanding and upgrading selected public educational institutions and linking them to local software industry and foreign universities. Professional and trade associations may also be mobilized to set standards and improve the quality of private training institutions. Government may explore various incentives and financing schemes to promote in-house training by software firms. Government may also consider schemes to encourage multinationals and leading local software firms to provide high quality education in software engineering, target  -xix- priority end-users for training, and promote greater interaction among IT companies and training institutions. * Developing the data communications infrastructure to facilitate contact among software developers and local users and among Indian and foreign software firms for export--and to develop distributed IT applications that are urgently needed by government and financial institutions. One option is to create a public-private utility that would make lumpy investments and take the associated risks unlikely to be taken by the private sector alone and requiring a private-public partnership. To accelerate its commercial viability, a significant part of capacity could initially serve the government and the banking system. Other near-term solutions to the data communication constraint should be systematically examined, including the expansion of NICNET, and support to public-private initiatives of some states such as Maharashtra to establish a state-wide network for businesses and universities. The tariffs structure for international data communication is prohibitive for small and medium software firms; VSNL may consider its restructuring. The government may also explore policies and standards to facilitate communication among various data networks and evolve a national high speed data communication infrastructure. Broader reforms of the telecommunications sector could certainly accelerate the development of a national information infrastructure. * Modernizing infonnation and transaction systems in the public sector to complement the ongoing policy reform process and improve transactions between government and business. Priority areas for computerization may include tax administration, customs and excise duties, trade data collection, and public expenditure management. The development of such major applications should be open to competitive bidding. Government may also consider promoting the standardization of public information and the development of strategic databases, and the diffusion of best practices among public agencies in the areas of system design, technology selection, procurement, operation, and maintenance, and end-user training and support. In this context, the role and capabilities of the National Informatics Center, the Government's arm for public data collection and dissemination, should be critically appraised and enhanced. * Modernizing financial systems to exploit the power of modern information and communication systems in improving financial services, portfolio management, and banking supervision. A national strategy for computerization of financial institutions would anticipate the policy, human and organizational changes required to exploit the full potential of IT in improving financial services and the management of financial institutions. A national strategy would also design IT diffusion programs in ways that would also mobilize demand for software and consultancy services and promote specialization in the potentially large market for financial systems development. Examples of priority banking applications are payments clearing systems, interbranch funds transfer, transfers between corporations and major bank branches, foreign exchange and trade transactions, linking major stock exchanges, and internal management information systems. A modern automated payment system could become the core of a broader infrastructure to provide value-added financial services, including in insurance, stock exchanges, and off-shore financial services.  -xx- * Promoting the production and use of ITby the private sector. The Government may review the experience of OECD and East Asia NIEs in facilitating the adoption of promising IT applications by small and medium-sized enterprises--organizing and increasing the bargaining power of local industry users. A national strategy for India may also pilot programs to meet the special financial needs of software firms, mobilize local consultancy services to improve the quality and productivity of software houses, and promote marketing and strategic alliances between foreign and local software companies. Diffusion programs would also induce the use of local and international consultancy services (through cost-sharing arrangements) to raise awareness and promote best practices in the adoption of promising IT applications by small- and medium-sized enterprises. It should be recognized that IT is an emerging industry and infrastructure in a developing country and as India, with severe data limitations and embryonic policies and programs. The sector does not lend itself to long-term and detailed blueprint plans. Many of the options described are therefore derived from extensive consultations with experienced local suppliers and users, and from emerging lessons of experience with IT diffusion policies and programs of the OECD and NIEs. These limitations should not detract policy makers from setting the strategic directions for the sector and exploiting the current "window of opportunity" for India's IT industry. What is needed is a national consensus on the vision, the broad directions for change, and the commitment to act, and that seems to be emerging. The elements of a national strategy would require further generation and assessment of options for implementation, detailed design and feasibility studies, and perhaps more important, pilot testing and continuous learning from experience. In particular, programs to diffuse IT in manufacturing enterprises and financial institutions should be carefully designed, tested and phased. Program designers should align diffusion services with user needs, rely on market signals (such as user cost-sharing), exploit private-to-private delivery of technology extension services, and draw on other lessons from successful programs in OECD countries and NIEs. Roles for Private Sector and Government Successful IT strategies typically rely on complementary roles for the private sector and the Government. For India, the private sector would be the primary beneficiary, especially those small and medium enterprises in sectors where IT and IT-based services would be critical to competitiveness. Public services and infrastructures of high priority for computerization would be those critical to reducing transaction costs for the private sector. Measures to improve quality, productivity, marketing and product development among software houses may be cost-shared with the private sector and perhaps most effectively delivered by local and international consultancy firms. Similarly, measures to diffuse best practices in IT investment and management would be carried out by the private consulting industry and trade associations. Incentives may be provided to private training institutions to improve quality of training. Professional associations could be used to design and administer accreditation and quality enhancement programs. Thus, national IT policies and programs should be designed to induce maximum response and participation from the private sector in financing and implementing a national IT strategy.  -xxi- The Government may consider three broad and complementary roles: * To implement policies for creating competitive markets in IT products and services and for investing (or inducing investment) in data communication infrastructure, software manpower, and IT user education. * To improve investment and use of IT resources in public administration; and to target a few large applications that would be selected to support export and private sector development, reduce transaction costs between public and private sectors, provide demonstration effects, and at the same time create markets for software development and value-added services. * To develop--in collaboration with private sector institutions--incentives, extension services, and other market-enhancing measures and programs to address specific market failures (and externalities) in the supply and diffusion of IT, particularly for small software firms and user enterprises.   -1- I. STRATEGIC IMPLICATIONS OF THE INFORMATION TECHNOLOGY REVOLUTION Information technology (IT or informatics) covers all activities and technologies that involve the handling of information by electronic means: that is, information acquisition, storage, retrieval, processing, transmission and control. Information technology dramatically increases the amount and timeliness of information available to economic agents--and the productivity of processes to organize, process, communicate, store, and retrieve information. Its quantitative changes in GNP and in occupational structures have been sufficiently large to generate a qualitative transformation, often referred to as the "information economy' or "post- industrial society." This profound transformation has major implications for developing countries, as producers and users of this technology. And any national strategy for information technology development and diffusion must take into account those far-reaching but still far- from-understood implications for the global economy and for various industries and services.' The share of information activities in national economies has steadily increased. The proportion of information workers in the working population of OECD countries averaged close to 50 percent in the early 1980s. According to a conservative estimate, the share of information workers in India was about 15 percent in the late 1980s. Where did they work? Most were in education, research, telecommunications, broadcasting, printing, publishing, and the computer and software industry. Their activities were inputs to the production and distribution of non-informational goods and services. They also provided such business services as consulting, accounting, advertising, credit reporting, and reservation systems. Such services grew at almost 50 percent a year in the United States between 1975 and 1987, from $3 billion to $130 billion. Although accounting for a small proportion of the information sector, business services have been growing very rapidly in industrial and developing countries. This technology has the potential to transform both the processes and the products of the entire economic sphere--as well as all types of market transactions, institutional linkages, and human interactions and learning. Since nearly all economic activities rely on information acquisition, processing, and transmission, the scope for the use of this technology is unbounded. Information is the "lifeblood' of competitive markets, and improvements in information technologies are transforming whole economies into fast-moving information-intensive economies--and globalizing production and competition in many industries and services.3 2 This section briefly draws on the extensive and growing development literature that deals with these issues (see bibliography). This literature is mainly derived from the experience of industrial countries and a few newly industrialized economies (NIEs). See, for example, C. Freedman, Technology Policy and Economic Perfonnance Lessons from Japan, University of Sussex, 1987 and N. Hanna, The Informanon Technology Revoluson on Economnc Dewlopnwnt, Staff Working Paper Series 120. World Bank, 1991. 3 For a broad and popular appreciation of the pervasive impact of information technology, see Alvin Toffler, Power Shift (1991).  -2- Information technology offers opportunities for "technology blending' through capital-saving organizational and managerial innovations. It can be introduced as a modification to existing equipment or to blend new service routines and innovations with older manufacturing processes. For example, IT users can take advantage of multi-sourcing, just-in-time procurement and manufacturing, flexible production, real-time monitoring of processes and transactions, global procurement, and electronic franchising and retailing.4 Knowledge and ideas are at the heart of the development process, and informatics has been transforming the processes of research, education, learning, publishing, and knowledge generation, transmission and retrieval. It is creating global communities of researchers, scientists, engineers and educators. Electronic and computer-aided publishing are changing the nature of today's printing, distribution, graphics, photographic, writing and allied industries.5 Informatics presents major challenges to the education systems and offers vast and new possibilities for learning, such as accelerated, tailored, and distance learning.6 It also holds a great promise for empowering knowledge workers and communities, for capturing and mobilizing local information resources, for plugging into the growing global knowledge base, and for alleviating the pervasive uncertainties and information problems that face developing countries. The major actors in industrial countries--firms, governments, and such multilateral agencies such as OECD and the EC--believe that their future position in the international market depends on the rapid development of national capabilities to produce and innovate with information technology.7 Their combined and collaborative efforts have led to massive R&D investment and the creation of indigenous informatics industries and capabilities. And they are now paying greater attention to policies, infrastructure, and human resources for the broad diffusion of this technology through established and new industries.' These efforts and those of NIEs such as Singapore, Taiwan and Korea provide important lessons for India. Despite the uncertainties and despite the lack of a detailed blueprint, developing countries cannot afford to miss or ignore the ongoing information revolution. 4 For example, The Machine that aanged the World, MIT, 1991. R.J. Solomon, 'Electronic and Computer-Aided Publishing: Opportunities and Constraints,' in OECD (1989), op. cit. ' Now krfomation Technologies: A Challenge to Educanon, OECD, 1986; and Educanion and Developmrnt. Evidence for New Priorites, World Bank Discussion Paper, 1990. X For an early recognition of this trend see the whole issue of World Development, Vols. 13, No.3, 1985. A forthcoming special issue of World Development vol. 20, no. 12, 1992, has focused on the diffusion of IT and the role of government in accelerating this diffusioa process. " See for example, lfornation Technology and New Growth Oppornunities, OECD 1989.  -3- The experience of the most successful industrializing countries suggests that governments can influence the use of IT through its role as an investor and consumer, and as catalyst, strategist or regulator. As an investor, the government continues to have an important role in the development of information technology manpower, telecommunications infrastructure, specialized R&D institutions, software parks and teleports, and other IT-related infrastructures and institutions. Governments are dominant consumers of IT in all countries, and their procurement practices are influential in determining standards, domestic competition, common adoption practices, and in general, the pace and character of IT use. As catalysts, governments have designed mechanisms and programs to speed up the learning and diffusion process through demonstration projects, subsidized consultancy services, and training and information services. Most OECD countries and NIEs have introduced a special set of programs that focused on the modernization of small- and medium-firms. The larger countries have also targeted the electronics hardware for promotion as a strategic industry, although there is a growing recognition that software is now the fastest growing and most profitable segment of the IT industry, and thus a clear shift of support towards software services and diffusion capabilities.' Governments have also actively recruited high growth information companies fromn abroad and provided incentives and engineered strategic alliances to selectively and rapidly build local IT capabilities. A further and, more significant, role of the government arises if coordinating the different facets of IT is critical to capturing externalities and encouraging private investment in the development and diffusion of IT. In East Asian NIEs, in particular, governments have played such a role by investing simultaneously in spxialized education and training, demonstration projects (such as civil service-wide computerization; inter-ministry networking, trade and financial networks), telecommunications infrastructure, and technology diffusion institutions. By acting on a broad and coherent strategy, governments in these economies have sought to create an environment conducive to private investment in and effective adoption of IT. The different implementing agencies (public and private) were able to act in concert, exerting significant peer pressure. The various programs served to demonstrate how the different elements of IT (hardware, software, training, infrastructure, standards, management) could be judiciously brought together in a given project, making successful implementation more likely. 10 9 Much has been made over the past few years of the transformation of the information technology industry from providing hardware to offering software and services. The year 1990 was a watershed in this regard: for the first time, worldwide spending on software and services equaled spending on hardware (both systems and data communications). This trend is expected to continue over the next decade, with packaged software and professional services growing in importance. As a result, the policy and institutional framework must support industry efforts to mobilize resources for an increasingly complex and specialized business with large projects, large systems, sophisticated telecommunications networks, distributed systems, and the like. 10 See Annexes 5 and 6 for OECD and NIE country experiences. A study of OECD countries and NlE's programs to promote IT diffusion is almost completed by the ASTTP Division, and is expected to provide guidelines and best practices in designing such programs for developing countries.  -4- How should developing countries respond to the opportunities and challenges of the information technology revolution? How could they adapt the lessons of experience of OECD countries and the NIMs to their own conditions? The answers are far from simple. This paper focuses on India as a case study in addressing the issues and options for a national information technology strategy formulation. As a developing country, India faces pervasive forms of information poverty, high transactions costs, slow moving logistics, poor financial services, and underdeveloped infrastructures. Yet, India has significant potential both as a user of the new information and communication technologies and as an exporter of the global, labor- intensive and fast-growing software and information services industry. The study thus explores those specific issues and options facing India's informatics sector and, at the same time, provides a model of formulating national IT strategies and programs for other developing economies.  -5- II. INDIA'S NEEDS AND OPPORTUNITIES FOR INFORMATICS India's new policies for trade and industry make information and communication services a key need for both businesses and Government. IT applications are a source of major productivity gains and quality improvements throughout finance, manufacturing, infrastructure-- as well as in agriculture, education, health, and public administration. Exports increasingly depend on timely market information, on computer-assisted product design, and on global electronic procurement and subcontracting. These practices are guiding foreign investment, technology transfer, and outsourcing. India cannot risk falling behind in adopting these business practices that have become essential to industrial competitiveness and economic modernization. Logistics and Infrastructure Informatics is integral to the management and effective supply of infrastructural seices. Ports, railways, airways, private truckers, national distributors and retailers, increasingly depend on electronic systems for processing transactions and monitoring goods movements. Power distribution, telecommunications, and other infrastructure also depend on software applications and control systems for productivity and quality improvements. Such applications, while costly, could ultimately reduce the immense investment requirements for infrastructure and logistics in India. They could also help integrate India's huge but fragmented domestic market. Above all, they are essential for global competition, with the added benefit of conserving energy and environmental resources. About 10 percent of the value of traded commodities is spent in paperwork and going throxigh required procedures: 118 pieces of paper are needed to get a consignment to its destination, and for export clearance, 258 signatures are required."1 These cumbersome practices add substantial costs to traders and manufacturers, and result in excessive delays, inventory costs, and lost opportunities. Meantime, computer-aided "paperless trading" is taking hold in OECD countries and in the trade centers of Asia. Improved information and communication systems are often used to fundamentally redesign and streamline the customs and trading documentation process as well as the rest of the transport and distribution swapping information on markets, freight rates, ship movements, and available capacities in ports, railways, trucking, and customs services. Consider Singapore: It established TradeNet to facilitate the electronic submission of trade documents by traders to the various government agencies, and the responses from these agencies to the sender. TradeNet also enables the agencies to interchange trade information and documents electronically to speed port operations, cargo clearances, management information, "H.J. Peters, India's Growing Conflict Between Trade and Transpol, World Bank, 1990.  -6- and statistics gathering, and the approval of imports and exports. Documents that once took a day to process (in Singapore) are now cleared in 15 to 30 minutes. Savings for traders from TradeNet are estimated at one billion US dollars annually. TradeNet has obviously increased the efficiency and competitiveness of the Singapore trading community. It has also induced small businesses to computerize. Several large on-line transaction systems have been implemented in India,"2 including the Railway's passenger ticket booking system and the Indian Airlines passenger reservations and departure control system. The railway's application, carried out by a local software company (CMC), provided a demonstrated effect of IT's contribution to improved services for more than 11 million passengers a day, more than the total population of Belgium. It has reduced waiting time in the reservation queue from 80 minutes to five, and is reducing corruption as well.'3 What's next? Substantial improvements remain to be realized in the management of railways, and the Railways recently proposed computerizing freight and equipment tracking. Similarly, computerization of the Bombay Port and other major ports and customs is an imperative for expanding exports and attracting foreign investment. Moreover, national distribution systems for such basic inputs as fertilizers and for basic foodstuffs could benefit substantially from improved databases and from computerized decision support and monitoring systems. Social Applications and Public Administration Despite the information intensity of public administration and services, informatics use in these areas typically lags behind business applications. The opportunities for social applications are significant in India, but little public investment has been targeted to them. Moreover, some of the most promising applications already developed in India have not been commercialized or widely disseminated. The tightening of the national budget and the accelerated pace of policy changes have increased the demand for policy analysis, transparency, expenditure control, and program monitoring and evaluation. They have also heightened the need to reduce transaction costs between the public and private sectors and to modernize major public transaction processing systems. Key candidates for such modernization programs are customs, tax administration, land records administration, and state treasury management. These programs would provide substantial downstream effects and clearly increase the productivity of key government operations. 120n-line transaction processing Is the computer processing of data relevant to individual business transactions at their time of occurrence. Typical applications include reservations processing, point of sale applications, telephone switching, order processing and distribution, sales management, port information, materials handling, equipment tracking and control, etc. 1M. Khan, 'Impact of Microelectronics in India, * Science and Public Policy, August 1987.  -7- The National Informatics Center (NIC) has developed some innovative and highly relevant social applications in rural health care, rural development, employment and labor market, public distribution of food and civic supplies, education administration, natural resources management, district administration, and public information. Some of these programs have improved the availability of information at central agencies, such as the Planning Commission, but the accuracy and completeness of data are major problems. The Indian Institute -of Management at Ahmedabad has initiated pilot projects in the Sundernagar district of Gujarat to use information technology to change the planning and monitoring of important rural development programs. A few states have established State Computerization Committees to assist in technical matters relating to the introduction of information systems. But considerably more experimentation is needed to improve the collection, sharing, and use of information to support district decision-making and service delivery. There are other examples of trying to wrest the benefits of IT investment in public administration. Karwar District in Karnataka State has a pilot project to use computer technology in project monitoring. The district administrator re-allocated funds for a jeep to purchase a microcomputer, and after one year, Karwar District moved from 18th to 3rd rank within the state in implementing its development programs. As a result of this success, a Computerized Rural Information Systems Project (CRISP) has been expanded to other districts to provide local officials with monitoring systems. 4 Since then, central and local administration have undergone a learning process with profound implications for future administrative reform and for the decentralization of planning and implementation of national programs such as the Integrated Rural Development Program (Box 1). Another example is an irrigation project authority that has developed software for use in the design of more than 1,500 kilometers of canals, with cost savings of 7 percent over manual design. Most of the engineers use the software because it saves time in estimating earth works. Manual estimation for preparing tenders used to take 9-12 man-months, a task now done in 2-3 days. The savings in engineering costs and accelerated procurement are, of course, substantial. Govermment operations, especially project management, can benefit greatly from reliable data and information sharing. Constant monitoring and review--and timely instructions for corrective measures for thousands of projects in each state--can be achieved only with information at the grass root level. Transparency and open access to information increase productivity and financial accountability of irrigation and other dispersed works--which account for about 40 percent of the Eighth Five-Year Plan outlay, estimated at $175 billion. "4A. Singhal, and E. Rogers, India's Information Revolution, Newbury Park, Sage Publications, 1989.  -8- Box 1: Introducing Computerized Information System To Improve Integrated Rural Development Program Management In the mid-1980r, GOI realized that a msive amount of dat had been oollectd for managing the Integrtd Rural Development Program (IRDP) but that not much of it had been used effectively for micro-level planning and implemntation at the district level or for policy making and monitoring at the state and central governments. A pilot experiment at the KArwar District that introduced computerized decision-support systems resulted in a maited increae in the district's performance, by improving efficiency of report generation, enabling officers to devote more time for vital extension duties, and improving access to accurate and timely data for decision making and monitoring. Suocess factors included: management ownership, adequate trining and effort to modify inefficient proocdurcs. Based on this experiment, the Computerized Rural Information Systems Project (CRISP) wu extended to the whole country in 1987. In the early phase, 1987-90, CRISP was developed by the center as an overlay to the exsting IRDP manual monitoring system, and did not reflect the reality of the local environment. Historic tensions that had cxited between the center ndl the stat were further agravated by a system design process that did not involve consultation with sate governments and district administtors concerning their requirements. Effortu to computerize were also hampered by inadequate initial trining, poor user interface (in English rather than Gujarti), aLienation of directors of the district rural development agencies, the shortage of dedicated staff for data entry, poor accountability and monitoring of computer maintenance companies, and the lack of a data-sharing culture. Regular reports sti had to be produced manually. Since 1990, the center bepn to recognize the need to address the institutional and human resource ues involed, u well as the sources for rcsistance to change. Central and state governments convened to explore the creaon of a separate computer cadre within the administrtion. The sheer presence of the microcomputer at the ditrict agencies has prompted curiosity and self-larning among local administrators. State-level support to end-user applcations further triggered initiatives from many local agencies to provide a local infrastructure for end-user support. Most local agencies now indicate that the computer has reduced the time required for preparing their monthly reports by half. Some districts are begging to identify useful categories of information for planning and monitoring purposes and are contemplating the use of independent marketing agencies to collect ongoing data on productivity and income ofrural poor households. The trend towards end-user oomputing applications has also trigged change in the normal unctioning of IRDP administration. In some districts, the director ha decided to geneate more accountability and involvement in IRDP implementation among extension worken. Rather than measuring aggrepte target, the performance of each village-level worker will be monitored based on the extent to which each village in his area has bee upliAed. Local initiatives in oomputerizaion have aslo brought about changes in the working-group relationships. For example, junior office re tarting to perceive the value of computers in bringing them into direct contact with the director to discus potentia computer applications for their agencies. Gradual change has been underway in the perception of information technology as a tool for IRDP manoageent by administrators at all levels. New uses of IT at the district level are emerging, quite apart from the intentions of the original designr. Information technology has acd as a probe to reveal inefficiencies in basic administrtive processes and organization and has begun to be used as a vehicle for promoting change within public administration. This process is still at an early stage. The existence of both opportunities and threats in applying IT for development planning and implementation suggests that the poces of change needs sensitive and informed management, which should take into account the complex web of socio-political and culturl factors in development administtion. Somue: S. Madom, Publc Adminstrion and Development, Vol. 13, 3748 (1993) The legal system - essential to private sector development and to effective public administration and governance -- could also benefit from IT. Judges, litigants, and those in  -9- business and government often operate "blind" or with incomplete and unreliable information about the rules that govern transactions. This results in considerable uncertainty and unpredictability about rights, obligations, and potential liabilities. India has one of the largest bodies of rules and regulations in the world.'5 Yet there is no organized or effective legal information system which if automated would do much for governance and private sector development. Financial Sector The financial sector is one of the largest markets and earliest adopters of information technology, and in many countries financial applications have been a (iriving force for the development of a large local market for informatics.*16 In India, however, numerous constraints have retarded the adoption and productive use of modem information and communication systems by financial institutions and insurance companies. To belyin to loosen these constraints, the Reserve Bank of India has carried out two studies on the use of IT in commercial banks. And interest is now growing in initiating a modernization program that would systematically use IT to redesign current business processes and services. Part of this program would be to modernize payment systems, reduce floats, improve monetary management, and provide links with fiscal planning and monitoring. The underdevelopment of information collection, dissemination, and analysis in the commercial banking systems has had the following consequences: (a) The opportunity costs have been high (for banks and for their clients) on large sums of money tied up as interbranch items in transit--due to a mamual, paper- based system of interbranch settlements. For example, check clea.-ing takes 6 weeks, instead of 6 days! The opportunity costs for individual banks are also high because of largely manual interbank payments settlements. Transaction balances maintained by banks and their clients tend to be higher than if the settlement mechanisms between banks and branches were more efficient and automated. (b) The possibility of fraud (and delayed discoveiy of fraud) is another byproduct of manual, paper-based systems for processing transactions. A major area of concern in some bank branches, this danger is now extended to the nascent and fast-growing stock markets. With timely information, the $2-3 billion stock market swindle might have been forestalled. "Ancient Hindu and Muslim law; British colonial law; hundreds of laws enacted on a yearly basis by a national parliament and 26 state legislatures; decisions of one supreme court and 18 state high courts that constitute binding precedent; hundreds of thousands of regulations issued each year by hundreds of central and state level administrative authorities. '6See Brazilian Infonmatics: A Guide to the Transition, ed. A. Fishlow and P. Evans, 1992.  -10- (c) Banks have been reluctant to accept and conform to capital-adequacy ratios that are based on risk-weighing of assets because there is no precise information on their asset composition. (d) Portfolio management capabilities are weak because of delays in obtaining and processing information about distribution and quality of assets among branches. This problem is particularly acute for small agricultural and industrial loans where single banks as well as the entire banking system often end up overlending to one sector in one region. The long reaction times for such lending problems add to portfolio deterioration. Portfolio diversification strategies are also difficult to put in place because the information base is inadequate. The inadequacy of portfolio information also makes it difficult for banks to resist populist lending programs. (e) Banks cannot precisely differentiate the costs for various financial products, instruments, and services. So, they are constrained in their ability to price services according to demand, offer differentiated products, and modulate their fee structure fcr these products. The results: banks underprice their fee-based services because they do not know enough to negotiate with their clients, and there is no price differentiation among banks for their financial services. (f) Banks cannot obtain a timely, comprehensive picture of the banking relationships of a specific firm, slowing the response to clients. (g) Banks cannot identify and analyze centers of high activity, resulting in poor allocations of manpower and inflexibility in switching resources. Without such information, the negotiations with unions over work allocation are inevitably difficult. (h) In many branches, there has been an increasing buildup of arrears in the daily balancing of accounts because the expansion of business operations has far outstripped the capacity of manual bookkeeping procedures to keep track of daily transactions. This has increased the danger of fraud, the dissatisfaction of customers, and the possibility for a complete breakdown of the checks and balances in the branch accounting system. The opportunities for IT applications in the financial sector are thus substantial. The effective use of IT in banks could allow them to increase fee income and improve portfolio management and assessment, resource allocation, accounting control, and service quality. Better information handling would also enhance the productivity of banks, particularly when reinforcing the ongoing reforms. For most Indian commercial banks, about 20 percent of the branches account for more than 80 percent of the banking business. By focusing on these high-activity branches, the efficiency gains would be substantial. Software applications could also enhance services through credit cards, automated teller machines, electronic fund transfers, and foreign exchange and treasury management. The growing stock markets in India are also in the process of computerizing, to speed access to information, particularly on the health of participating financial institutions. Some specialized  -11- financial institutions, such as Industrial Development Bank of India (IDBI) and Industrial Credit Investment Corporation of India, Ltd. (ICICI), are relatively advanced and have applied IT to credit monitoring, project appraisal, funds management, and foreign currency management. But other major banks, such as the National Bank for Agriculture and Rural Development, and the majority of commercial banks are far behind in exploiting information systems for their huge branch networks and transaction volumes. Similarly, insurance, leasing, and other financial service companies lag behind, offering a large market and substantial learning opportunities for the local software industry. The Government is well aware of the urgency to modernize the financial services, and the Minister of Finance has recently indicated the importance of updating banking technology. Despite efforts by the Reserve Bank of India, progress so far has been disappointing. Labor and management have resisted change, and institutional adjustment has been slow. The potential for developing common applications and information standards to reduce costs and learning period, and to promote common infrastructure and transactions among banks, has not been exploited. But the recent experience of the State Bank of India in initiating computerization in few of its branches suggests that there are opportunities to accelerate these processes and to share experiences with other interested banks. Manufacturing The competitiveness of India's major industries is likely to change as a result of worldwide diffusion of IT in both products and industrial processes. Take the case of the machine tool industry, a critical subsector of capital goods and characterized by rapid technological change. Increasing computerization in manufacturing, first through computer numerically controlled (CNC) machines, and lately through flexible and integrated manufacturing (FMS and CIM), has transformed worldwide demand and competition in the machine tool industry. The Indian industry was slow to react to this technological revolution. Most Indian manufacturers and users of machine tools let the technological revolution bypass them for a decade or so. By the time they began to react, the development of indigenous CNC systems has been beset by both hardware and software problems. Meantime, and since early 1970s, most industrialized countries have taken proactive policies and programs to foster the development and diffusion of CNC machine tools. The most successful among them, Japan and Germany, have had the most sustained and systematic programs to promote micro-electronics diffusion in their machine tools industry and factory automation in targeted user industries. Also, in contrast to India's fragmented response, where some 40 firms began to produce 29 different types of CNC machine tools by late 1980s, the Korean machine tool industry concentrated on thrce types of CNC machines, to achieve international competitiveness. Successful countries from both the industrialized and NIE groups have taken deliberate and orchestrated measures to ensure that their machine tool industries would adjust to and take advantage of the ongoing micro-electronics and information technology revolution.'7 "J1.P. Wogart, A.K. Mehta and A. Mehta. Technology and Comnp,efiveness: nTe Case of Brazil'ian and Indian Machine Tools. Sage Publications, New Delhi. 1993  -12- Fundamental changes in the management of industrial processes, in evidence throughout the world economy, have been also spurred by improvements in information and communication systems. One of the most popular applications of IT is planning a company's materials requirements and equipment use, which brings savings of as much as a quarter in assembly and labor costs and a third in inventory investment. Contributing to environmental protection as well as international competitiveness, these applications are enabling corporations to out-source more products, both locally and globally. Some large Indian enterprises that have already introduced such systems could become a source of local know-how for smaller enterprises. Another major application area--Computer Aided Design (CAD) and Computer Aided Manufacture (CAM)--caters to the engineering industries: automotive, machine tool, heavy machinery, light engineering, electronics, microelectronics, and construction. But it is also used extensively in garments, leather, footwear, and other fashion industries, shortening the product development times by 30 to 90 percent. It has thus contributed to the significant shortening of product cycles, and increased the diversification and differentiation of products. CAD-CAM is closely tied to other IT applications in procurement, manufacturing, marketing, and distribution--prornoting just-in-time manufacturing, total quality management, flexible manufacturing systems, and a host of other innovations in management and business practices. The Indian market for manufacturing applications is still underdeveloped.'8 The high costs of hardware and software in India (four to five times their costs to Western counterparts), the low awareness of management, the inappropriate technical support from vendors, the lack of adaptations to local requirements from consultants--these are some of the key factors limiting adoption and effective use. While IT-induced changes in manufacturing and international business practices pose serious challenges to enterprises of all sizes, they are most problematic for small and medium-size industrial enterprises in India. As with all IT applications, implementing these systems requires enterprises to introduce basic changes in business processes and operating procedures. 2.2 Recent policy reforms, including trade liberalization and deregulation, are likely to promote competition and increase the need (and effective demand) to deploy IT in manufacturing. But supply response (for IT adoption) is likely to be constrained by several market failures: information, finance and capability failures.'9 Carefully designed programs may effectively address these specific market failures. The Confederation of Indian Industries, the National Productivity Council, and several private associations have shown increased interest in supporting a national program to accelerate the diffusion and effective use of promising IT applications among medium-size enterprises. "In the United States, CAD-CAM forms about 10% of the total IT market, compared with less than 2% of India's much smaller IT market. 9 There is a substantial literature on such market failures to the acquisition of technological capabilities, including, for example, S. Lall, Building Industrial Competitiveness in Developing Countries, Paris, OECD Development Center, 1990; Operations Evaluation Department, World Bank Support for Industrialization in Korea, India and Indonesia, World Bank, 1992.  -13- Best practices in introducing such applications in manufacturing have emerged, and the diffusion of these practices in India could lead to productivity and quality enhancements and to stronger links among large and small enterprises. Many OECD countries and all first-tier Newly Industrializing Economies (NIEs) have developed appropriate diffusion programs to overcome market failures and accelerate the acquisition of these technological capabilities, particularly among small and medium entetprises. Effective Use and Diffusion National spending on computer hardware and software in India is estimated at 0.4 percent of GDP (1990), compared with software competitors--0.6 for Mexico, 0.8 for Korea, 1.1 for Ireland, 1.3 for Singapore, and 1.4 for Israel. Most OECD countries spend between 3 and 5 percent of their GNP on hardware and software. India's information sector is also smaller than other Asian countries. Total value of output of information goods and services in India is estimated at 11I% of GDP, compared to 26% for Singapore, 15% for S. Korea, and 14 % for Malaysia.20 In terms of informatics penetration into various sectors of the economy, such as manufacturing, transport, and finance, IT remains relatively marginal to corporate strategy and operations. Few small and medium-size enterprises use infonnatics. 2 See Vijay KeLkar, 'India's Information Economy", Delhi, February 1991.  - 14 - Figure 1: Performance and Potential of IT GNP/Capita (1989) e40 Z,816 Japan _00 20,913 U.S.A. gm _ ~~~~~~~~599 17,834 Germany 482 87 490 9.259 Singapore 310 140 8.694 CISAJSSR 330 405 6,098 Taiwan 260 172 4:299 Wor1dwide 162 125 350 3,953 Korea 220 _100 2,426 Brazil 210 9 318 India 0.7 l l 1 1 0 200 400 600 800 1000 Number per 1000 people * Phones E TVs U Computers Source: Egil Jiiuslin and Karen Jitussln. The 1992 Computer Ind. Amanac 5th Annual (Comp. Ind. Inc., Nevada)  -15 - Figure I illustrates the diffusion of IT in a range of countries, including India. It suggests that access to computers and telephones in India is far below worldwide average, and far behind other NIEs such as Brazil and Taiwan. Although the figure indicates that IT diffusion is related to the level of economic development, it also suggests that the NIEs have diffused IT well ahead of others and thus used IT as a leading growth generating factor. In contrast, the low access to IT may have deprived India from exploiting its technically educated workforce to become a serious competitor in the international software market. Table I indicates that, compared with other Asian countries, India's domestic market for IT has been mainly in manufacturing and government administration; the share of banking and the financial sector is the lowest among Asian countries' IT markets. The main factors behind India's underdeveloped domestic market and limited use of IT are: * The national policy framework and strategy for IT development and diffusion are inadequate. Current policies favor local hardware manufacturers, at high costs to potential users and to software and information producers (paras 3.2-3.8). Public infrastructure (data communication) and private support services (consulting) are poor, reducing the return from investments in IT and information resources (paras 3.12-3.18). - Indian hardware and software suppliers invest little in educating users, in providing professional advice, and in marketing. Most marketing is for the short- term but highly profitable activity of exporting programmers (paras 3.25-3.36). v Until recently, macroeconomic and trade policies have led to a highly protected and regulated economy--and weakened incentives to invest in IT resources, skills, and technology (para. 4.2-4.5). * Government procurement policies and information management practices are poor (paras 4.6-4.10). Government practices unwittingly underprice the software and support services, under-invest in complementary inputs, and discourage the development of a competitive domestic market for information goods and services. Government has not yet exploited the potential externalities from its procurement activities or the potential demonstration effects from its information management standards and practices, even though public sector demand for IT (goods and services) represents about 60 percent of the total domestic market.2' * Informatics professionals lack business orientation--while business organizations invest little in understanding the technology. Moreover, computer and information literacy is scant and business managers are poorly prepared to 2'Worldwide, the public sector plays a central role as the largest producer of information and consumer of IT goods and services. It buys over 40% of the informatics hardware sold worldwide.  Table 1 IT Sales By Industry Sectors (1992) Industry Sector Autralia | India Japan Malysia Singa- South Taiwan Thailand _ _ _ _ _ _ _ _ _ _ _ ~~~~~ ~~~~~~~ ~ ~ ~ ~~pore Korea ___ Govenument (%) 27.0 15.2 7.9 10.0 20 18.6 29 28 Banking, Finacc &In wance 23.8 8.1 26.8 27.0 27 25.3 25 37 Manufacturing (%) 17.4 23.5 25.7 13.0 16 44.1 12 5 Transportation (%) 2.3 11.5 3.0 9 2 - Distribution (Wholesalo, Retail) 10.8 10.1 9.4 8.0 8 8 12 Medical Care (%) 7.3 5.8 - 2 8 Service Industry (%) 2.0 8.6 5.5 4.0 - 6 - Education & Reseach (%) 3.0 9.1 - 3.0 2 1.8 5 Home & Individual (%) 3.8 2.1 - 2.0 4- 2 IT Industry (%) - - 16.9 - - 7.5 - - Other Industries (%) 2.6 6.0 7.8 30.0 14 2.7 9 10 IT Market Size (US$M) $5,018 $880 $56,278* $540 $1,152 $3,633 $675* $665 * Japan and Taiwan's data are for the information services industry. Source: ASOCTO Countries.  -17- manage the skill and institutional changes associated with the introduction of IT. * Links are weak between local suppliers and users of IT. Domestic users are not organized to share experience, exert pressure on suppliers for quality and fair play, or to learn along with suppliers. * Potential users are unaware of the technological options and of the best practices to realize the benefits--such as the needs to adopt new managerial practices and business processes, to undertake complementary investments in relevant training and support services, and to identify and pilot strategic applications. * IT users are unwilling to pay for "intangible" services such as technical assistance or consulting services for planning infornation systems, redesigning business processes, analyzing information requirements, educating senior staff in information resource management, or providing professional advice on hardware and software acquisition. Yet, international experience indicates that hardware costs are typically less than 20 percent of the total, with the rest going for training, end-user support, and software maintenance. Another limiting factor is the bureaucratic culture of the public sector. Indian public administration is notorious for unnecessary paperwork, excessively hierarchical management, inflexible personnel policies, and limited attention to service. In some agencies, resistance to the use of information systems is compounded by staff (particularly those in banks) who fear that computerization would lead to massive layoffs. Changing this culture calls for selective and strategic applications of IT and for complementary investments in change management. It also presents opportunities for redesigning work processes, reducing managerial layers, enhancing accountability and performance monitoring, and improving the quality of working life. Various impediments to absorption of information technology in Indian institutions need to be systematically addressed. Fears and concerns of users manifest themselves in various forms: skepticism regarding the benefits, apprehension regarding job loss and skill obsolescence, and lack of faith in the system's reliability. Substantial user education and evolving local solutions through indigenous software development and adaptation, with close involvement of the users, is an effective strategy to overcome such impediments. To overcome management and workers' fear of the unknown, the stakeholders must be involved in the selection, design and implementation of IT applications. Skepticism over potential benefits should be tackled through strategic choice of application areas, demonstration effect and pilot projects, phased implementation, and clear articulation and management of benefits. Reliability could be enhanced through selection of simple and user friendly systems, and interaction with users to ensure common understanding of the required reliability standards. Concerns about employment impact may be addressed by management and policy makers by stressing capital and energy saving applications, and selective and phased introduction of IT. Indian institutions must  -18- inevitably cope with the imperatives of technical change, establish forward-looking training programs, and create enabling environments for their employees to adapt to changes in their work. Finally, the crucial link between IT (particularly software) exports and a strong domestic client base has been largely overlooked. Software exports, expanding at 40 percent annually in the past few years, are a bright spot in India's overall export performance. But an internationally competitive software industry cannot be sustained without an equally competitive (and expanding) home base for learning and competency development. Until recently, government policies and promotional efforts in the software industry have focused almost exclusively on exports of software manpower. Such exports have lower profit margins than software packages and turnkey projects and do not provide learning for high value-added skills-- such as project management, systems design, and systems integration, skills that must be developed in home markets. The domestic environment for the diffusion and effective use of IT is nevertheless changing, and there is a window of opportunity to capitalize on this change and accelerate the process of building a significant share in the fast-growing global market for software and related services.22 2'See, for example: Soft.re: An Emerging Indutry Need for Developing Domestic Market, a seminar sponsored by UNDP Delhi, August 6, 1991; in particular, see articles by N. Vittal, (Secretary, DOE) and F.C. Kohli, pp. 3- 20.  -19- Im. SUPPLY CHARACTERISTICS AND CONSTRAINTS Hardware Manufacturing The availability of computers at competitive prices is an essential pre-requisite for successful diffuision of information technology in any economy. Policy makers in many advanced economies view the computer industry itself as a "strategic industry", given that in the future, international competitiveness and productivity growth would largely depend on the effectiveness with which computers can be applied across the economy. Worldwide, computer and peripheral hardware is a US$300 billion business that has been growing at more than 10 percent a year. The main reasons for such rapid growth are, the declining cost of information processing, the proliferation of new products, and the horizontal integration of consumer electronics, communications, and computer products. Although market entry has become easier with personal computers and the widespread availability of basic components, sustained growth in this industry requires that smaller companies manage the transition from low-cost assembly (the stage the Indian computer hardware industry is currently in) to more research-intensive and design-intensive operations. The Indian Government has been influencing the computer hardware industry since the 1960s. Government policy initially protected the industry from foreign competition through high tariffs and quantitative controls on imports. Coupled with industrial licensing requirements which severely regulated entry and exit of firms, such protectionist measures, no doubt, affected the speed and nature of technological progress in this industry. In 1971, domestic production of comnputers was enrusted to a sole producer--ECIL, a public enterprise. Similarly, by setting up Computer Maintenance Corporation (CMC) in 1976, the maintenance of an estimated 400 computer installations was "indigenized" following IBM's exit from India. However, due to stringent policies governing foreign collaboration with domestic computer firms, Indian firms had little access to international technology. Policy changes since the mid-1980s fostered domestic competition, opened avenues to international and domestic technology sources, and encouraged the growth of efficient producers. On the whole, the growth performance of the entire hardware sector appears to be most impressive.23 As shown in Table 1, the value of hardware production increased at an average annual rate of 19.8% between 1987 and 1991. Production of information technology (IT) products--the largest segment of the hardware industry-- increased from Rs. Billion 20.7 23 Following the Department of Electronics, "Hardware' is defined here to include, very broadly: (a) Information Technology Products; (b) Electronic components; and (c) Consumer Electronics. The 'Information Technology Products' sub-sector, in turn, comprises four main segments: (a) Computer Hardware and Peripherals; (b) Industrial Electronics; (c) Communication and Broadcast Equipment; and Strategic Electronics.  -20- in 1987 to Rs. Billion 46.9 in 1991, reflecting an average annual growth rate of nearly 23%.24 The production of computers--the core of information technology--also registered an impressive growth rate of 22% per year during 1987-91. This includes micros, minis, superminis, Table 2. The Hardware Industry: Production, Composition, and Growth 1987-91 (Value in Rs. Million) The Share of Each Sub-sector in Total Production of Hardware is Illustrated Within Parenthesis. Electronics Industry 1987 1988 1989 1990 1991 Average Subsectors Annual Growth 1987-91 Total Hardware 47,200 63,000 83,090 92,000 97,250 19.8% Of which: IT Products 20,700 27,110 38,350 44,200 46,940 22.7% (43.9%) (43.0%) (46.2%) (48.0%) (48.3%) (a) Computers 3,750 4,860 7,000 8,200 8,300 22.0% (7.9%) (7.7%) (8.4%) (8.9%) (8.5%) (b) Industrial Electronics 6,850 9,350 12,100 14,000 14,100 19.8% (14.5%) (14.8%) (14.6%) (15.2%) (14.5%) (c) Broadcast & Communication 7,100 9,000 14,250 16,300 19,350 28.5% Equipment (15.0%) (14.3%) (17.2%) (17.7%) (19.9%) (d) Strategic Electronics 3,000 3,900 5,000 5,700 5,190 14.7% (6.4%) (6.2%) (6.0%) (6.2%) (5.3%) Electronic 7,000 10,250 14,400 15,200 17,500 25.7% Components (14.8%) (16.3%) (17.3%) (16.5%) (18.0%) Consumer Electronics 18,200 24,000 28,000 29,380 30,000 13.3% (38.6%) (38.1%) (33.7%) (31.9%) (30.9%) Production in EPZs 1,300 1,640 2,340 3,220 2,810 21.3% _ (2.8%) (2.6%) (2.8%) (3.5%) (2.9%) Source: Electronics: Informntion & Planning Vol 19 No.9 of June, 1992. 24 Information technology products accounted for almost half of total hardware production in 1991, whereas the respective shares of consumer electronics and electronics components were approximately 31 % and 18%. Hardware produced in EPZs accounted for less than 3% of total hardware production.  -21- mainframes to engineering workstations, peripherals and so on. Moreover, the pace of innovation in the computer industry has increased, and the technology gap with international producers of computers has narrowed.2 The entry of a large number of small and medium- scale firms in the 1980s played a substantial role in the acquisition of international computer technology and provided a seed-bed from which a number of successful firms grew to considerable size.26 A closer look at growth trends, however, indicates that in the early 1990s, the hardware sector could not sustain the momentum of growth achieved in the late 1980s. Compared to annual growth rates of over 30% in the late 1980s, hardware production grew at a mere 5.7% in 1991 (Table 3). All three main segments of the hardware industry have suffered from lower growth rates in the recent past. The production of computer systems and peripherals grew by a poor 1.2% in 1991, raising concerns about the future of this key industry, and perhaps more importantly, its implications for widespread use of information technology in India. Table 3. Hardware Production: Sectoral Growth Trends 1987 1988 1989 1990 1991 Total Hardware 36.4% 33.5% 31.9% 10.7% 5.7% Of which: IT Products n.a. 31.0% 41.5% 15.3% 6.2% (a) Computers n.a. 30.0% 44.0% 17.1% 1.2% (b) Industriai Electronics n.a. 36.5% 29.4% 15.7% 0.7% (c) Communication and Broadcast Equipment n.a. 26.8% 58.3% 14.4% 18.7% (d) Strategic Electronics n.a. 30.0% 28.2% 14.0% -9.0% Electronic Components n.a. 46.4% 40.5% 5.6% 15.1% Consumer Electronics n.a. 31.9% 16.7% 4.9% 2.1% Production in EPZs na. 26.2% 42.7% 37.6% -12.7 Source: Electronics: Information & Planning Vol 19 No.9 of June, 1992. u The computer industry made significant qualitative gains during this period. A few manufacturers introduced computer systems based on standard microprocessors with a speed of 50 MHz. There was an overall trend towards open architecture, adding more sophisticated features like higher processing powers, speed, better resolution and networking features. See Rastogi (1992), "Electronics Production and Export Profile: 1991" in Electronics: Information & Planning, Volume 19 No. 9, June 1992. 26 For an excellent treatment of this phase of India's computer industry development, see H.P. Brunner (1991), 'Small-Scale Industry and Technology in India: The Case of the Computer Industry," Small Business Economics, 3:121- 129, Kluwer Academic Publishers.  -22- One of the main reasons for poor growth performance of domestically manufactured computer hardware and peripherals appears to be their excessively high prices, which have restrained effective demand for their use." These high prices are, in turn, to a large extent, the result of high tariffs and other restrictions on both imported inputs as well as imported computers (paras 4.4-4.5), indicating that policy changes have not gone far enough in enhancing competitiveness in this industry.28 High prices of computers (both the imported as well as the domestically produced) have severely impeded effective demand for the use of computers--or in other words--the diffusion of information technology across the economy. As far as computer hardware is concerned, India has some way to go in order to become internationally competitive. The entire hardware industry for instance (including consumer electronics, and electronics components as well) is predominantly domestic market- oriented; less than 6% of hardware production was exported in 1991. As with production, the exports of hardware witnessed a significant drop in 1991--largely due to reduced exports of IT products, which accounted for over 75% of total hardware exports in 1990 (Table 4). Concomitantly, the "export-orientation" of IT products (i.e. exports as a share of production) dropped from approximately 10% in 1990 to about 6% in 1991. Similarly, computer exports dropped from a peak of Rs. Billion 2.9 in 1990 to Rs. Billion 1.8 in 1991.29 Table 4. Exports of Hardware 1987-91 (Value in Rs. Million) 1987 1988 1989 1990 1991 Av.Annual Growth l______ _______ (1987-91) Exports of Hardware 2,415 3,740 6,270 7,300 5,700 23.9% Of which: I I T_==- IT Products 1,152 1,983 3,410 4,320 2,710 23.8% Electronic 960 1,280 2,290 2,140 1,780 16.7% Components Consumer Electronics 303 477 570 840 1,210 41.1% Source: Elecronics: Information ,IP?ni-g vol It No. of June, 992. 27 Indian microcomputer prices, for instance, were twice higher than international prices, and the prices of some peripherals are slightly higher than world prices. However, by the early 1990s, India had considerably narrowed the technological gap in computer manufacturing, and prices for modern systems are estimated by some to be not more than 50 percent above world market prices. 2 For microcomputers for instance, imported inputs constitute around 95 % of the total materials bill, limiting the domestic computer industry almost completely to assembly. See V. Kelkar and K. Varadarajan (1990), "India's Computer Industry: Perspectives and Options for Latecomer Strategies," Paper presented to the OECD Development Center Research Project on "Technological Change and the Electronics Sector," Paris, May 1989. 29 The relative stagnation of hardware production and exports for 1991 may be largely explained by the domestic recession at the time, the collapse of trade with the Eastern block countries, and the fiscal squeeze on government.  -23- Several recent trends are likely to have major implications for India's hardware manufacturing. First, the share of hardware revenue in total IT production has dropped from 44% in 1990 to 37% in 1992, and profitability is under increasing pressure with the gradual liberalization of 1T imports. Second, the so-called 'unorganized' sector or 'gray' market share of the total domestic hardware market has increased dramatically in the last two years up to 20%; these small producers are able to assemble and sell personal computers at half the cost of the formal sector. Third, the importance of brand names is likely to increase for the corporate sector and other brand-conscious buyers, thus profiting the top five companies or so. The middle players are likely to be squeezed out, as they would neither have the economies of scale nor brand name advantage. The suppliers are thus likely to be divided into multinationals, large Indian producers and the gray market. Corporate strategy for local personal computer manufacturers would likely be to leverage economies of scale, develop dealers and altemate marketing channels, and build strategic alliances with multinationals. Other trends are related to workstations, large systems, and local area networks. For workstation producers, the Indian customer base is likely to change significantly. Currently, R&D institutions and universities have the largest share. In the medium term, workstations are likely to spread more to the commercial sector. For these producers, corporate strategies may aim at extending application areas to the private sector and to provide better support and training services. For large and medium systems (multi-user systems), pressure will increase from distributed processing. Producers of this segment will need to position products for specific applications and develop capabilites to become systems integrators. Networks are rapidly gaining grounds in India's private sector, but the supply and demand are constrained by the availability of network specialists. Growth is likely to be driven by specialization and the increasing need for network-based applications. Corporate strategies for network suppliers may involve developing specialist groups, for various types of users or services, developing dealer channels, and linking up with other specialist suppliers to offer integrated services. Overall, fundamental shifts in the mode of computing are proceeding world-wide as well as in India and user needs are going away from stand-alone applications. It is far from clear whether Indian hardware suppliers will be able to make this transition. Investing in computer production is unattractive for India (and most other developing countries) for four reasons: the large investment costs; the great degree of technological risks; the massive government funding for informatics R&D in the U.S., Japan, and Europear. Community nations; and the shift towards highly differentiated complementary goods and services--for nomogeneous hardware platforms. The industry will have to consolidate under a few domestic manufacturers large enough to reap scale and scope advantages. The industry will also have to build strategic alliances with IT multinationals. There may be a room, however, for a few small producers of high quality customized computer and network-based systems. The industry needs to be pushed in these directions by appropriate trade, technology and industrial policies (Box 2).  -24- Box 2: How Computer Manufacturers Are Adjusting to the Changing National and International Environment? Libealization of the Indian market and the ongoing globalization of the information technology industry ar having their impact on Indian IT producers. The group of nine Tata companies, who have a large presence in the IT industry, represent an interesting case of how large domestic players are adjusting to change. The nine Tat, companies are Tate Consultancy Services (TCS), Tata Unisys (TUL), Tata Honeywell, TELCO (computer division), Tata Elxsl, NELCO (computer division), PSI Data Systems Ltd., OMC Computers and TISL (recent joint venturm with IBM). These companies share common strengths: established name, good foreign tie-ups, wide product range, market rach, good professionals, and credibility abroad. They also share common weaknesses, monolithic organizational structure, slow decision-making, overlapping activities, centralized management, low innovation rate, and limited focus in domestic market. Changes in the environment are forcing these companies to examine their strengths and weaknesses, redefine their strategies and market sgments, seek synergies among themselves and build strategic alliances with different multinationals. The following table summarizes their activities. Company Year of Turmover Foreign Collaborator(s) Products/ Name startup 1992-93 Activitia _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ fin _R S C r)O_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ TCS 1968 217.0 Northern Telecom. Oracle, Software exports, turnkey McDonnel Douglas, SAS Inc. solutions, packaged software TUL 1978 91.0 Unisys, AutoDesk Microsoft, Minis, micros, software SCO exports, packaged software, consultancy TISL 1992 - IBM Micros, minis, software exports TATA 1989 17.1 Silicon Graphics Minis, workstations Elxsl OMC 1984 24.25 IMSI, Silicon Graphics CAD/CAM, workstations, micros, data processing solutions PSI 1976 18.7 Bull SA Micros, minis, mainframes, software exports TELCO 1985 4.64 - CASE Tools (Computer D iv.) _ _ _ _ _ _ _ _ _ _ _ _ _ _ TATA 1984 61.0 Honeywell Process control systems Honeywell Nelco 190 190.0* HW Italy, Bull, Memotec Data Minis, supermninis * Computer division's turnover not available.  -25- Box 2 (continued) Despite its reputation, the Tata group is having difficulty adjusting to the IT industry's puhe. In IT, unlike steel, technology changes so rapidly that continuous and close monitoring is required, and new products have to be developed and marketed in quick response. IBM had to restructure itself and created 13 Baby Blues to focus on diffcrent market segments. Likewise, the Tatas are expected to delegate more decision-making powers to the companies within their focusod market segmcnts, and to build morc collaboration and synergy among them. TISL, for exampic, can become systems integrator for banking solutions. For softwar services export, TCS can coordinate with othcrs like TUL. Companies may have to move from computer manufacturing, where economics of scale matter, to software and systems integration; already hardwarc revenues are dropping and software has become a major growth area for some Tatas, rcflecting a trend of the global IT industry. As computerization in the banking scctor and other key segments of the domestic market takes off, low performing ventures such as NELCO may reverse its performance. As domestic end-users are freed to source IT globally, the Tatas should seek to excel in dcfining and delivering IT 'solutions' to the Indian industry. They also need to invest more in solution packaging and marketing. They must become agile and strategically exploit their strengths as they compete in an increasingly competitive and exciting domcstic market as well as abroad. Sourc: Adapted from Daquat (India), January 1994, pp.116-127. India's policies and institutions may therefore be geared toward: (a) Allowing access to a highly competitive supply of information technologies at costs as low as possible. (b) Increasing the supply of complementary inputs (such as software and support services) essential for the diffusion and effective use of IT in the economy. (c) Allowing hardware imported by free trade zones to be utilized for the domestic industry provided export commitments have been met. Telecommunications and Data Communicationse Telecommunications is a key part of the informatics sector. It is driven by advances in software and microelectronics, and in turn, it enhances the benefits and helps diffuse information and information systems. India has extremely low availability of telecom services, less than what most competing countries had over a decade ago (0.45 telephone lines per 100 inhabitant for India in 1987, compared with 0.59 for Thailand, 1.76 for Malaysia, and 3.32 for Mexico in 1977). In addition to the high (and unmet) demand for plain "old" telephone services,