Bridge the gap lest history repeats itself

By C. R. L. Narasimhan

One year into the new century, the Indian IT industry continues to tower over every other sector - the one bright spot proving India's competitiveness and having the wherewithal to spearhead economic growth.

Estimates that indicate the sector's exponential growth possibilities are in plenty. A National Association of Software and Services Companies/McKinsey report projects software exports to grow from the present $6.3 billion to $50 billion in less than 10 years.

Investment bankers such as Goldman Sachs have also been upbeat on the software sector. Software, just one component of the IT sector, is running ahead of others. Whatever accolades that come to it are appropriated to the IT sector as a whole.

This is not meant to be another dissertation on the software sector and the IT industry. Rather it is to show how a fascination - an obsession maybe - with one sector can affect the rest of the economy by creating an artificial chasm or divide.

Today, it is IT positioned above the rest. The stock markets everywhere have neatly divided stocks into those belonging to the new economy and the old economy and as a rule given a much higher value to the former. An end-of-the-year correction demonstrates how fragile those valuations can be.

In the domestic markets, IT stocks have been in the limelight. Though not always delivering on their promises, most of these have attracted investors by the hordes.

All the mutual funds have floated schemes that focussed exclusively on technology stocks. (The results, from their investors' point of view, however, have been disappointing).

The fascination with IT is even more basic and starts right at the school level. The current craze for software professionals is well-known. Engineering colleges have vastly increased the seats for IT-related courses to the inevitable detriment of the more traditional disciplines of, say, mechanical, civil or chemical.

And teachers who train the prospective IT-professionals need to be better equipped themselves for which, of course, they have to be paid at ``market'' rates.

Inevitably in an increasingly privatised technical education system the student has to pay more to get an engineering degree, more so if it is in an IT-related discipline. Employment opportunities, on graduation, are considerably brighter in the latter areas.

Educational or vocational preferences are not the topic but they help in clearly demonstrating the society's preferences of the day.

A matter of resource allocation

Derived from that, of course, one can see how the resources are allocated - not just educational but infrastructural and from every other economic standpoint.

The Nasscom and other agencies which pitch for the IT industry appear more credible than those which lobby for, say, the jute or the textiles industry.

The craze for the new economy has afflicted the ruling class as well. Note how several chief ministers tried to woo Mr. Bill Gates of Microsoft. While the CEO of GE, Mr. Jack Welch, who visited India at the same time attracted less attention.

And Mr. Chandrababu Naidu, Andhra Pradesh Chief Minister, has made a name for e-governance.

Clearly there are many things favouring the IT industry. No one need grudge the support - fiscal, educational or whatever - which its lobbyists seek.

The problem arises from two different directions. First, at a macro level it obviously does not make sense to downplay the contribution of the rest of the economy. But that is what is happening right now. Not only in the stock markets.

There is, interestingly, a belated recognition that brick and mortar companies and their stocks do matter. But for most of last year it was enough if an obscure company merely added the software tag to command fancy valuation.

Ultimately the demand for IT services emanates from the rest of the economy. Derived demand, therefore, can never be isolated from the other sectors. As for technology development, it is not as though other disciplines are static. Clearly salvation lies only in marrying the two - IT applications for established sectors.

It is true that exports especially to the U.S. are driving the software industry. But as recent experience shows the talk of an economic slowdown in America can be very bad news for Indian software companies.

The market quotations for even the most admired of them have plunged recently. The whole year's experience suggests that volatility can never be separated from technology stocks.

The second objection is more sector specific. The IT industry has to maintain its momentum and this is not saying in a financial sense only.

The awesome export targets are perhaps reachable but who can vouchsafe about the ethical standards of everyone, including those who claim to be big players?

Sadly market behaviour and perceptions have distracted attention from the traits that investors should look for - the standing of the players and their integrity. That, of course, should be common to all sectors whether belonging to the old or the new economy.

Should there be a chasm or a divide between one sector of the economy and the rest? It does not make sense. IT is a productivity - enhancing mechanism. Its tangible gains will have to be assessed over other sectors.

A decade ago, the financial sector hogged as much attention as the IT industry does today. There was a similar chasm between finance and the real economy.

Finance professionals developed a swagger, asked for an imported car at the time of their first employment and more relevantly created illusions about themselves. Sadly, not many of that vintage are around to brag about their success. Or more likely offer excuses for their numbing failures.

Finance company stocks have all but disappeared from the list of quotations. Mighty companies and industrial groups such ITC, Mafatlals and Lalbhais - the list can be very long indeed - saw a bright future in the finance business but have had a humbling experience.

The technology sector is obviously much better placed than the financial services area ever was. The quality of some of its entrepreneurs is first class. The whole industry is piggy-backing on them.

Yet perceptions such as stock quotes can fluctuate wildly. It is, therefore, important to bridge the divide between expectations and reality and between the new and the old economies.

As we enter the second year of the new century, it is hoped that history will not repeat itself.

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