India�s Information and Communication technology (ICT) sector is a perfect example of the positive externalities generated by globalisation in a developing economy. ICT has tremendous potential to generate growth through significant export surpluses and substantial increases in income and employment. It is this, perhaps, that has prompted India to concentrate on the ICT sector as one that offers the greatest potential to boost growth. This is reflected in the sharp rise in investment (as a percentage of GDP) from 3.8 per cent to 5.6 per cent between 2002 and 2007. Will this help boost productivity and growth rates? What challenges does India face in proclaiming ICT as her �engine of growth�? It may perhaps be useful to look at the experiences of OECD for an answer.
ICT investments and its links with sustainable growth have been a major research topic in OECD economies. The OECD manual on ICT and economic growth puts forward three reasons why economists and policymakers have shown a deep interest in the effects of investments in ICT on growth. First, ICT investments contribute to overall capital deepening and hence aids in raising labour productivity. Second, rapid technological progress in the ICT producing sectors and the greater use of ICT by firms would help raise multifactor productivity (MFP) growth. Third, the network effects generated by ICT through lower transaction costs and more rapid innovation will improve the efficiency of the overall economy. It has been widely established that the impact of ICT is channelised through two sectors: ICT-producing and ICT-using sectors. Sectors that produce or distribute ICT products are classified as the ICT-producing sectors while extensive users of ICT, like the banking and financial services sector, constitute the ICT-using sectors.
In many OECD countries, the ICT-producing sector has seen very high rates of productivity growth, especially in the 1990s, which translated into better economic performance. ICT manufacturing has made the largest contributions to aggregate productivity growth in Finland, Ireland, Japan, Korea, Sweden and the United States though the ICT-using sectors, i.e. sectors that are intensive users of ICT, constitute a much larger part of the economy. To get an idea of the relative contributions of the ICT producing and using sectors, we have examined data pertaining to the United States.
If we disaggregate the total factor productivity growth (TFPG) of 1.05 for the total US economy for the period 1995-2000, we find that the ICT producing sector contributed 0.71 and ICT using services contributed 0.68 to TFPG. The contribution of non-ICT sectors was negative at -0.34 per cent (mainly because the non-ICT sector is dominated by sectors like agriculture where productivity growth has, at best, been sluggish). Data available for the period 1979-1995 also show that ICT producing sectors has the highest share in TFP growth. The much higher contribution of ICT-producing sectors to productivity growth as compared to ICT using sectors can be attributed to more rapid technological advances in ICT producing sectors and to the rapid growth of the sector as a result. Besides, it is possible that the existence of a domestic ICT producing sector spurs the development and adoption of ICT applications for specific purposes within a country. The experience of OECD countries, thus, indicates that though ICT using services take the growth path to a higher level, it is the ICT producing sectors that are the true �engines of sustainable growth�.
What lessons can India learn from the OECD experience? The most important one is that it needs to take a fresh look at the pattern of investment in the ICT sector. According to the limited data available for India on ICT from CMIE, more than 95 per cent of India�s ICT investments have been in the ICT using sector. If the experience of OECD countries is anything to go by, it is apparent that steps have to be taken to correct the skewed investment pattern in the sector to encourage much higher investment levels in the ICT producing sector.
