ICT Investment and Economic Growth in India: An Industry Perspective

Abstract

The role of information and communication technologies (ICT) in driving economic growth has been well-established in the literature. By reducing communication and transaction costs, and improving the quality of capital, ICT helps firms improve their productivity and growth. Given her linguistic and engineering skills, India has been pioneering in ICT exports, in particular, the export of software services since the 1990s. However, there is hardly any attempt to understand how Indian industries have been taking advantage of the massive growth potential of ICT use in their production process, looking into the experiences of different industries. This has been primarily constrained by lack of adequate, disaggregated data on the ICT use by industries. While a few studies have attempted to understand the contribution of ICT to aggregate economic growth, the role of ICT at a detailed industry level is hardly studied in India. This paper is a first attempt to construct ICT investment series for the registered or organised segment of manufacturing industries in India, and one of the first few attempts that have made so far to build such ICT series for the aggregate Indian economy. The study extends the capital asset database in India KLEMS to include ICT investment, i.e. investment in hardware, software and communication equipment, in respect of different manufacturing industries. The paper also provides preliminary estimates of the contribution of ICT capital to growth in the aggregate economy and registered manufacturing sector.

Appendix 1

Another way of estimating NAS consistent ICT series for organised manufacturing is to consider the reported NAS software data as the benchmark, and obtain hardware as a residual. That is, for years for which the NAS software data is available (1998 onwards), consider the NAS data as the benchmark estimates for the aggregate registered manufacturing. Hardware investment for the first year of the data for which the software data is available in NAS can then be obtained using the aggregate economy software/hardware ratio. This way we can obtain the total investment in ICT for the first year as the sum of hardware and software. For all other years, the total ICT investment may be obtained by applying the growth rate of total ICT investment in ASI. The hardware series can then be calculated as the residual after subtracting the NAS reported software investment from this total. More formally,

$$ {\text{GFCF}}_{{{\text{HARD}},1998}}^{J} = \frac{{{\text{GFCF}}_{{{\text{SOFT}},1998}}^{J} }}{{\emptyset_{1998} }} $$

where ${\text{GFCF}}_{{{\text{HARD}},1998}}^{J}$ is the GFCF in hardware in 1998 in total registered manufacturing sector, ${\text{GFCF}}_{{{\text{SOFT}},1998}}^{J}$ is the total registered manufacturing investment in software in 1998 and $\emptyset_{1998}$ is the software to hardware ratio for the aggregate economy in 1998. Subsequently, total ICT investment in total registered manufacturing sector may be obtained as:

$$ {\text{GFCF}}_{{{\text{ICT}},1998}}^{J} = {\text{GFCF}}_{{{\text{SOFT}},1998}}^{J} + {\text{GFCF}}_{{{\text{HARD}},1998}}^{J} $$

And for t > 1998

$$ {\text{GFCF}}_{{{\text{ICT}},t}}^{J} = {\text{GFCF}}_{{{\text{ICT}},t - 1}}^{J} \left[ {\frac{{{\text{GFCF}}_{{{\text{ICT}},t}}^{J\_asi} }}{{{\text{GFCF}}_{{{\text{ICT}},t - 1}}^{J\_asi} }}} \right] $$

Since the software data is taken as such from National Accounts, the hardware can be obtained as a residual:

$$ {\text{GFCF}}_{{{\text{HARD}},t}}^{J} = {\text{GFCF}}_{{{\text{ICT}},t}}^{J} - {\text{GFCF}}_{{{\text{SOFT}},t}}^{J} $$

While this is still a less perfect approach, the positive side of it is that it ensures complete consistency with NAS reported software data and the trend in aggregate ICT investment in ASI.