- Information-Technology-Enabled Services and India's Growth Prospects
During the first three decades (1950–80) of India's planned insular economic development, real GDP grew at an annual average rate of around 3.75 percent. The 1980s saw a limited opening of the economy and hesitant reforms. The growth rate accelerated to 5.7 percent, fueled by fiscal profligacy financed in part by external borrowing at high interest rates. A severe macroeconomic and balance-of-payments crisis in 1991 following the first Gulf War, the collapse of the Soviet Union (which was not only India's model for planned economic development but also its arms supplier, a partner for barter trade, and a supporter of India's interests in the Security Council of the United Nations), and the fear of being left behind by the rapid growth of China since its opening in 1978 led Indian policymakers to break away from its inward-oriented, state-directed, and controlled development strategy and open the economy to external competition and investment.
After addressing the crisis with the assistance of the International Monetary Fund and the World Bank, the policymakers launched a process of systemic economic reforms that is still in progress. The economy responded to the reforms and quickly rebounded from the crisis-induced fall in growth of GDP to 1.3 percent in 1991–92. The growth rate accelerated, peaking at 7.8 percent in 1996–97. Subsequently it has fluctuated, falling to a low of 4.0 percent in 2002–03, largely because of a severe drought-induced decline in agricultural output, and rising to a peak of 8.5 percent the very next year, in large part owing to the recovery of agricultural output (MOF 2005, appendix table 1.6). The latest available data show that in the fiscal year of 2004–05, GDP growth was estimated at 6.9 percent, [End Page 203] and in fiscal year 2005–06 it is also expected to be around that level (RBI 2005a, table 1).
India's record of sustained growth since 1980 is second only to China's among large economies, so much so that, in discussions about global economic prospects generally or about global demand for natural resources (including, most important, fossil fuels), the impact of Chinese and Indian growth is explicitly mentioned. However, India has succeeded only modestly in raising its share of world merchandise trade to 0.8 percent in 2004 from a low of 0.5 percent in 1983, while China's share has more than quintupled, from 1.2 percent to 6.4 percent, during the same period. China ranked third from the top in the share of world merchandise trade in 2004, while India ranked a distant thirty-first in 2003 (WTO 2005, appendix tables 1 and 3; WTO 2004, table I.3). In global trade in commercial services (in which trade in information-technology-enabled services [ITES] and business process outsourcing [BPO] are included),1 India has done relatively better, with a share of 1.5 percent and a rank of twenty-one in 2004 as compared to China's 2.8 percent share and ninth rank (WTO 2005, appendix tables 2 and 4). Both China and India are expected to gain a significant share of the global market of textiles and apparel with the expiration of the infamous Multifibre Arrangement. Apparel imports from China are already being targeted for restrictions by the United States and the European Union, and China itself is restraining exports in anticipation. Similar actions against Indian exports are possible, although India as a founding member of the World Trade Organization (WTO) is not subject to the special provisions of China's Agreement of Accession to the WTO that have been used to restrict China's exports.
India's software services exports in 2003–04 amounted to $12.2 billion, or nearly half the total services exports of $24.9 billion. Earnings from ITES and BPO accounted for another $3.6 billion (RBI 2005b, p. S343; MOF 2005, p. 111).2 A high-level strategy group set up by the All India Management Association (AIMA), comprising leaders from industry, academia, and the government, deliberated on...