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Evidence suggests that the International Digital Divide may be increasing. This
chapter suggests that in order to maintain its relative technological position and to



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permission of Idea Group Inc. is prohibited.
ICT Growth and Diffusion 237


increase its comparative advantage in the IT sector, government policy should focus
on domestic ICT Diffusion. The chapter reviews several local public, private, and
public-private initiatives to spread the use of ICT throughout Indian regions that have
been successful and may serve to offer examples for future development. We conclude
that ICT-driven development may be achieved with supportive central government
policies, lessening the International Digital Divide.




Introduction
Today Information and Communication Technologies (ICTs) pervade almost all human
activities. In both developed and developing countries there is an intense debate
concerning the contribution of these technologies towards economic development and,
consequently, human welfare. In relation to the economic benefits, several cross-country
studies in recent years have indicated that the return on investment in information
technology created by increasing productivity and growth is substantial (Kraemer and
Dedrick, 2001; Pohjola, 2001). According to Pohjola™s study, the output elasticity of IT
capital was found to be 0.31 for a sample of 39 countries, which is quite high, and a figure
of 0.23 in the OECD sub-sample. Another cross-country study by the IMF (2001) also
provides a similar conclusion. Country-specific studies, of Singapore for example, have
concluded that the net return to IT capital is 37.9 percent compared to 14.6 percent for
non-IT capital, which is about two and a half times higher (Wong, 2001). These studies
also highlight that IT-induced productivity, and thereby economic development, is still
concentrated in developed countries and the developing countries are yet to gain the
same order of benefits as their counterparts in developed economies.
This leads us to the ongoing debate over the International Digital Divide. Examining the
present unequal access to ICT, it may be stated that new technologies reinforce the
disparities between developed societies and developing societies. Several studies
supplement this view. OECD (2000) stated that affluent states at the cutting edge of
technological advantage have reinforced their lead in the knowledge economy. The
benefits enjoyed by the most technologically advanced economies have not yet trickled
down to their neighbors. Many European countries are still behind the most advanced
countries, not to speak of poor countries in the Sub-Saharan Africa, Latin America or
South East Asia that are much further behind. Similarly, UNDP (1999) argues that
productivity gains from ICT may actually widen the gulf between the developed
economies and those that lack the skills, resources, and infrastructure to invest in ICT.
The impact of ICT can be seen from the perspective of two inter-related issues: ICT
growth and ICT diffusion. ICT growth refers to the growth of IT-related industries and
services and their effect on employment, export earnings, and the outsourcing of
activities. ICT diffusion refers to IT-induced development, which increases productivity,
competitiveness, economic growth, and human welfare from the use of the technology
by different sectors of the economy. Until now, India has mainly benefited from ICT
growth through a series of institutional innovations and policy measures, although it
would not be correct to say that the importance of ICT diffusion has not been recognized.



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238 Borbora


For example, the software policy of 1986 explicitly recognized the importance of the
balanced development of the software industry both for export and domestic use. But
of late emphasis has been given to the diffusion of new technology and ICT-induced
development. Therefore, in the Indian context, the often-cited success of the IT sector
has not been achieved by the harnessing of new technology to increase efficiency and
productivity, but mainly derived from earning foreign exchange by exporting IT-enabled
goods and services. India™s export performance in this sector is noteworthy in compari-
son with other producers of exports, not only in terms of its growth rates but also in terms
of its stability.
The current chapter will focus on the direct benefits of ICT growth, paying special
attention to the service sector. We argue that the role of IT in economic development has
not received adequate attention. The purpose of the chapter is to highlight the contem-
porary economic realities and to suggest that the ICT development should be the focus
of research and policymaking in India. We propose to undertake this both on the basis
of empirical facts and on the basis of the arguments regarding the International Digital
Divide. The central message of this chapter is that although ICT growth is important for
developing countries such as India, it is time to shift the focus towards ICT-induced
development. The following section subjects these issues to analytical and empirical
scrutiny within the limits of data availability.




The Digital Divide
The concept of the Digital Divide is a complex one that manifests itself in different ways
in different countries. This leads us to accept that there is no single definition of the
Digital Divide, although it is clear that there are growing disparities between the “haves”
and “have-nots,” and to conclude that the potential impact on society will be exacerbated
by technology. This divide poses both practical and policy challenges. It is also evident
that solutions that work in developed countries cannot simply be transplanted to a
developing country™s environment. Solutions must be based on an understanding of
local needs and conditions.
Broadly, we can examine both International and Domestic Digital Divides. Real dispari-
ties exist both in the access to and the use of information and communication technology
between countries (the International Digital Divide) and between groups within coun-
tries (the Domestic Digital Divide). The concept of the Digital Divide is grounded in
substantial empirical research (Norris, 2001) and the extent of the Divide can be
suggested with some statistics: “In the entire continent of Africa, there are a mere 14
million phone lines “ fewer than in either Manhattan or Tokyo. Wealthy nations comprise
some 16 percent of the world™s population, but command 90 percent of Internet host
computers. Of all the Internet users worldwide, 60 percent reside in North America, where
a mere five percent of world™s population reside” (Nkrumah, 2000). In addition to this,
even the positive outlook adopted by the Economist (2000) accepted that “One in two
Americans is online, compared with only one in 250 Africans. In Bangladesh a computer




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ICT Growth and Diffusion 239


costs the equivalent of eight years™ average pay.” From such studies and statistics, the
following patterns emerge:
There is a trend of growing ICT disparities between and within countries:
• All countries are increasing their access to and use of ICT. But those countries that
are the “information haves” are increasing their access and use at such an
exponential rate that, in effect, the divide between countries is actually growing.
• Within countries, all groups are increasing access to ICT. But the “information
haves” are increasing access and use at such an exponential rate that the division
within countries is actually growing.




ICT Diffusion
The Digital Divide is not a simple phenomenon, but a complicated overlapping set of
issues created by varying levels of ICT access, basic ICT usage, and the patterns of ICT
applications among countries and peoples. Developing countries may have to achieve
higher levels of per capita income in order to support the level of IT dissemination
throughout society that is a precondition for ICT-induced development. However, due
to the characteristics of ICTs, the leapfrogging of stages of development is possible as
long as supportive government policies are in place. In fact it can be argued that there
is an advantage in not having the problems associated with obsolete IT infrastructures
and legacy systems typical in early investing countries for late entrants. Investment
made in new technologies also complements investments already made in communica-
tion technologies such as satellites, telephone, and cable networks. Again newly
developed technologies like the “wireless in local loop” (WILL) can significantly reduce
the cost of last-mile connectivity, making it possible to connect remote villages cost-
effectively (Planning Commission, 2001). Many new computer technologies are essen-
tially multi-user by nature and there is scope for Internet kiosks, community Internet
centers and hubs to provide access for many users. As previously indicated, late entrants
such as India have the advantage of access to frontline technologies and cost-effective
infrastructure development without the sunk costs in extant systems carried by many
more developed countries (Planning Commission, 2001). There exists real opportunities
for promoting ICT diffusion through the involvement of both the public and private
sectors, NGOs and other stakeholders (Mansell, 1999).
The new technologies are mostly supply-driven and provide a greater scope for diffusion
agents to influence the technology diffusion process. There are a large number of
organizations involved in developing country™s ICT development and adoption. This
multi-institutional stakeholder network should be in the forefront of diffusion of ICT in
developing countries. In India recently there have been a number of ICT diffusion
initiatives undertaken by the government, the private sector, and NGOs for economic
development and to provide services to citizens. Some of the initiatives are in the initial
stages, but acceptance by local communities has the potential to transform technological
usage in rural areas of the country.



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240 Borbora


Bridging the Digital Divide: Selected Experiments from
Indian States

The following section details some of the government initiatives that are underpinning
technological change in Indian regions. This does not seek to be a comprehensive
survey, but rather to present a selection of initiatives to give a feel for the type of
development plans currently being undertaken. The first example examines an initiative
in the state of Andhra Pradesh, which includes 23 districts, 1,125 mandals, 295 assembly
constituencies and 28,245 revenue villages. This area has been digitized to a certain
extent by a state-wide area network (SWAN) called APSWAN. With this SWAN the state
is in a position to provide government-to-citizen services. Agricultural market yards have
been computerized and connected with state headquarters, providing the prices of
commodities and arrival times to markets and other important information to agricultur-
ists. This process has the aim of eliminating middlemen and, in policy terms, the
exploitation of farmers. This digital connectivity also brings transparency and efficiency
to the functioning of government. Other states are also trying to undertake similar
projects.
The second example considers the Gyandoot Dotcom project in Madhya Pradesh, which
has demonstrated the feasibility of universal access to information. The Dhar district has
been connected by 21 centers situated in 30 villages using locally made servers and
multimedia kits in a cost-effective way. Villagers are required to pay a nominal charge for
services such as accessing land records and for regular market updates. Each of these
centers has a potential clientele of around half a million inhabitants in the Dhar district.
The success has emphasized the social and economic benefits of mass empowerment.
The potential of this project has been recognized internationally for introducing a new
paradigm in the use of IT in bringing about social transformation.
In addition, the region of Uttar Pradesh provides more examples of central and state
government-initiated ICT service-based projects. Initiatives such Internet kiosks pro-
viding e-mail and access to computer education programmes are common. In eastern Up,
for example, Kashika Telecom has established a presence in low-cost dhabas (computer
kiosks) financed through bank loans. Such initiatives can be seen in Karnataka, Tamil
Nadu as well in the North Eastern States of India.
The private sector also has been responsible for developing new IT initiatives. The Zee
Interactive Learning System Project, for example, provides interactive multimedia learn-
ing using satellite, video, Internet, and a cable network for delivery at several “ZED point”
kiosks. This is directed towards educating rural children by constructing “knowledge
building communities” at an affordable cost even to the rural population. With a
continuing focus on education, the Intel Corporation has taken the initiative to set up
teacher training laboratories to train 100,000 schoolteachers in India. At the time of this
writing, Intel also envisages operating a “cyber school on wheels” project also targeted
toward educating rural masses.
Despite the initiatives outlined above, there is no specific central government policy for
ICT diffusion in India. However, the current evidence suggests that there has been some
degree of ICT diffusion created by both the activities of industry and discrete public and



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ICT Growth and Diffusion 241


private initiatives. Within India, computers for accounting and management functions
are widespread, especially in private enterprises (as in Table 1). With regard to Internet
use, some industries are ahead of others. Evidence shows, in this time of liberalization
and globalization, that some firms are using technology to increase their productivity and
competitiveness. Some degree of ICT diffusion has been taking place, although it may
be mostly confined to the manufacturing sectors of the economy, even though this has
been a low central government political priority.




Table 1. Indicators of IT use in India™s industrial sector, 1997


Percent of Factories with:
_____________________________________________
Industries Total no. of Computers Robots or computer
Factories in office Network Internet in production
Food products 14,695 13.01 0.84 1.39 0.29
Other food products 8,109 24.17 1.38 2.01 1.64
Beverages, tobacco, etc. 8,669 47.81 0.36 0.28 0.14
Cotton textiles 9,227 22.28 0.54 1.87 1.37
Wool/silk textiles 3,989 49.76 1.25 2.28 0.25
Jute/other fibre textiles 503 16.70 0.40 3.78 0.60
Textile incl. apparel 5,409 51.32 3.18 11.31 2.09
Wood and wood products 3,787 8.98 0.40 0.95 0.24
Paper and paper products 6,304 38.50 1.84 3.73 4.71
Leather products 1,742 37.60 1.89 7.18 0.29
Basic chemicals/related 9,357 50.69 2.91 5.58 2.56
Rubber/plastic/coal 7,597 42.57 2.80 4.01 1.59
Non met. mineral product 11,376 13.37 0.41 0.95 1.09
Basic metal/alloys 6,915 41.94 0.93 3.69 1.72
Metal products 8,243 31.68 0.92 2.86 1.01
Machinery/equipment 8,203 44.46 2.12 5.63 2.66
Electric machinery 5,743 55.77 3.53 10.92 4.89
Transport equipment 3,999 46.96 1.63 7.15 2.58
Scientific equipment 2,243 48.02 4.01 14.00 3.97
Repair of capital goods 2,240 25.89 0.80 1.96 0.36
Electricity 3,644 64.71 0.93 3.10 3.24
Gas and steam 80 75.00 2.50 3.75 5.00
Water works and supply 293 10.58 0.68 1.02 0.68
Non-conventional energy 4 25.00 25.00 25.00 0.00
Storage and warehousing 1,078 0.37 0.37 0.09 0.00
Sanitation 102 0.00 0.00 0.00 0.00
Motion pictures, etc. 51 7.84 7.84 27.45 0.00
Laundry and others 94 0.00 0.00 0.00 0.00
Repair services 1,966 2.59 2.59 1.12 0.00
All Industries 135,679 34.70 1.50 3.72 1.77


Source: Annual Survey of Industries (CSO), 1997.



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242 Borbora


ICT and the Service Sector
Economic globalization has facilitated the internationalization of the service sector and
the advances in ICTs have made it possible for firms to provide novel services that are
creating new forms of international trade. Service industries provide links between
geographically dispersed economic activities and play an important role in the growing
interdependence of markets and production activities across nations. As technology
develops, it further reduces communication costs, stimulating the faster growth of the
international trade in services.
For developing countries such as India, the internationalization of services and the
development of the ICT sector have provided an opportunity as well as a challenge. The
opportunity has been in terms of the potential exports of services and of service-related
foreign investments and trade. The challenges are for designing appropriate regulatory
environments for the service sector as it is an important factor influencing productivity
and competitiveness, providing the necessary investments in the ICT sector and
adapting the education system in line with the requirements of the Information Age.
Until recently economists characterized the service sector as generally non-tradable
activities whose growth was perceived to be a by-product of expansion of the primary
and secondary sectors. The changes in the service sector driven by development in ICTs
have changed this conception and today service industries are regarded as a pre-
condition of economic growth. The main growth in this area has been the rapid expansion
of knowledge-intensive services (KIS), such as professional and technical services,
advanced health care, education, banking, and insurance. The growing tradability of
services has been a direct outcome of these changes, and many developing countries
have benefited from the outsourcing of services by multi-national companies (MNCs)
made possible by ICTs. Today service industries are important investors in IT through-
out the world, and KISs that have high income elasticity are growing in both developed
and developing economies. Technological innovation has expanded the opportunities
for the provision of services, and electronic networks such as the Internet are a dynamic
force for creating new possibilities for trade between distant areas. Technological
developments in ICTs are driving not only the internationalization of services but also
of manufacturing and primary industries, as technology blurs the boundaries between
products and services. In the United States, for example, as much as 65 to 75 percent of
employment in manufacturing may be associated with service-based activities (Braga,
1996). With falling communication costs the potential for international outsourcing in
both the service and manufacturing industries has grown.
Service activities such as data entry, the analysis of income statements, the development
of computer software and financial products are mostly exportable services. The impact
of ICTs on the tradability of services is not only limited to international markets, but has
facilitated the expansion of services within and between regions, from firms to final
consumers. Even services in which consumer-provider interaction has been very high,
such as education and health services, are today offered using high technology in ICT.
Advances in computer-mediated technology make it possible to effectively gain the
benefits in distance education and tele-medicine without relocating to provider loca-
tions. Trade in commercial services has been growing exponentially, and with the


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ICT Growth and Diffusion 243


internationalization of services the flow of FDI to developing countries has increased
faster than global trade and output. Services now represent a much higher share of FDI.
The prospect for the continuing internationalization of services through FDI is bright as
the demand for services is still in the growth phase. Developing countries are attracted
to FDI in services as a means of obtaining the transfer of technical and professional skills
and know-how.
As modern service industries are highly ICT-dependent they require human and financial
capital input. Developing countries such as India are carving out areas of comparative
advantage in IT-based services, and one of their key strengths is the ability to offer
access to large numbers of highly trained and lower-cost IT professionals. This phenom-
enon not only acts to expand exports, but also helps domestic producers gain access to
more efficient and diversified services in world markets. Efficient producer services are
increasingly important in this outward-oriented development strategy.
Developing countries have much scope for the expansion of traditional service export
areas. Data entry was one of the first services to be the subject of international
outsourcing. Software programming is another activity that is increasingly traded
internationally. India has taken a big lead in these areas and one estimate suggests that
India has captured roughly 12 percent of the international market for customized
software. Yet another area of strong comparative advantage is in “back office” service
activities. For example, several US and UK-based insurance and accounting companies
now send claims overseas for processing. In manufacturing, service activities such as
logistics management, design, and customer services are being outsourced internation-
ally. It may be difficult to estimate precisely the size of these markets, but from the
perspective of developing countries the potential impact in terms of higher exports over
the long term is significant. These important developments reveal that developing
countries with large workforces and a modern technology infrastructure can success-
fully exploit the changing patterns of international production made possible by ICTs.




The Indian IT Export Scenario
The growth of IT exports from India over the last decade has been the subject of
considerable interest to developed as well as developing economies. This attention has
been stimulated by studies demonstrating that the spillover benefits and linkages with
the rest of the economy from the IT sector are extensive (Joseph, 2002). The contribution
made by Software Exports to India™s Economy is shown in Table 2.
Table 2 illustrates the sustained growth of foreign exchange earnings represented by
Software Exports to the Indian economy, and highlights the rapid increase made after the
liberalization of the Indian economy to the international services sector began in 1991.
Whether the IT sector with its export-oriented growth strategy will generate significant
spillovers and linkage effects with the rest of the economy is not the focus of this chapter,
but on the basis of available data this seems unlikely. The Indian IT industry appears to
be locked into activities such as low-level design, coding and maintenance with
negligible linkages to rest of the economy (D™Costa, 2001). As these activities are


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244 Borbora


Table 2. India™s software exports (gross foreign exchange earnings)

Year Software Exports(US$m) Export Growth (%)
1980 4.0 -
1981 6.8 70%
1982 13.5 99%
1983 18.2 35%
1984 25.3 39%
1985 27.7 9%
1986 38.9 40%
1987 54.1 38%
1988/89(Apr-Mar) 69.7 (29%)
1989/90 105.4 51%
1990/91 131.2 24%
1991/92 173.9 33%
1992/93 219.8 26%
1993/94 314.0 43%
1994/95 480.9 53%
1995/96 668.0 39%
1996/97 997.0 49%
1997/98 1650 65%
1998/99 2180 32%
1999/2000 3600 65%
2000/01 5300 47%
2001/02 6200 17%
2002/03 7800 (est.) 24%


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