Inaugural address by Shri Deepak Parekh at CSI 45th Annual National Convention
Mr. Deepak Parekh
Chairman, HDFC
Future Challenges of the Indian Economy and the Role of the IT Industry
Good evening Ladies and Gentlemen
It may be odd and perhaps obvious to state that given my non-technical background, I may have never had the opportunity to be here as a participant and yet I have the honour of addressing India’s oldest and largest association of IT professionals. Thank you for inviting me. It is indeed my pleasure to be here today.
Technology is no longer a choice or an option - it is a compulsion and a way of life. The current generation shaping the future have perhaps not known life without the internet or a smart phone. What is amazing though is that the new generation takes to technology like a duck to water – it is part of their DNA. Given India’s demographic tilt towards a young population, with 60% of its people being under the age of 30 years, India stands at a natural advantage since it is the young generation that is the savviest of the tech savvy generation. Evidently, ICT is the new order of the world.
I have been requested to talk to you about the challenges of the Indian economy and the role that IT is playing in shaping India’s future. If one looks back at the two decades since economic liberalisation, the IT industry stands out as India’s favourite poster child. The sector became symbolic of the unleashing of the Indian entrepreneurial spirit, gave rise to India’s global aspirations and most importantly, for the first time, the Anglo-Saxon world recognised India’s talent pool was going to be a force to reckon with. But that is the past. Today, global scrutiny on India is so intense that the dynamics have to change if India is to live up to global expectations.
India’s aspirations of attaining double-digit GDP growth rates are fast becoming a reality - it is no longer mere wishful thinking. Ironically, this reality is likely to come at a time when the global economic outlook is uncertain and choppy. Latest forecasts estimate a global growth of 4.8% for 2010, and a further slowdown of 4.2% in 2011.
Three years after the start of the economic crisis, global recovery continues to remain fragile and imbalanced. China, India and a small handful of emerging economies are the growth champions while US, Japan and Euro areas remain sluggish, undermining global recovery. The recent hoopla on the so-called “currency wars, trade frictions and rising protectionism” is more of an outcome of the politicisation of the global crisis. There is of course, no denying that there are acute global imbalances – China with its reluctance to revalue its currency, US swamping the world with its debt and devaluing currency and Europe’s fiscal problems. The key policy challenge for advanced economies is to shift from public to private sector led growth. Emerging economies on the other hand need to stimulate domestic demand rather than rely on exports for growth.
There are other structural problems with the developed economies. So acute has been the problem of unemployment that it is now popularly referred to as the ‘ugly monthly statistic’. With unemployment rates running at close to 10% in the US and some EU countries, economic recovery is likely to remain elusive for some time to come. The problem with a workforce that is unemployed for a long period is that there is a de-skilling of labour and this, further damages the prospects of long-term growth.
Against this global backdrop, India stands on a strong footing with an estimated GDP growth rate of 8.5 to 9% for FY 2011. This growth has been on the back of an above normal monsoon, good industrial growth and a robust services sector that continues to be the bedrock of the Indian economy. Investor confidence in India has never been better. This year so far, foreign institutional investors have pumped in close to US$ 40 billion compared to less than half this amount last year.
While India appears to be in a position of strength, it is important not to get too carried away with this new-found optimism. India faces many challenges, which if not addressed could thwart the country’s growth potential over the long run. In many ways, India is still a bullock-cart economy.
In 2005, in my capacity as a member of the Investment Commission, we had several interactions with Intel who wanted to set up an Assembly and Test facility for semi-conductors in India. The investment they were talking about was not large – approximately US$ 1 billion, but they assured us that their investment would create a 10 time multiplier effect as other ancillary investments would follow. This would have meant the creation of thousands of skilled jobs in high tech manufacturing and export revenues for India. But Intel was a tough bargainer. At that time, India had not even got its act together on its semi-conductor manufacturing policy. If I recall correctly, Intel asked for 100 acres of free land, a 15 year tax holiday, guaranteed power at a concessional rate of 50% and an upfront cash subsidy. The upfront subsidy was what created an impasse between Intel and the Indian government. While there are admittedly two sides to the argument, the point we need to note is that there are many emerging countries that are readily willing to offer these subsidies. Needless to say, this potential investment slipped out of our hands and went to Vietnam, despite the country not having quality labour skills that India has. My key regret was that the government was unable to sit across the table and negotiate other alternate options. India has amply demonstrated its prowess in the software sector, but has not been able to replicate this success on the hardware side. This is becoming all the more significant since countries like China and Taiwan that are strong players on the hardware side are turning their attention to the software sector now and could well become a force to reckon with.
The bottom line is that we need to keep our FDI policies simple, transparent and be able to make timely decisions. In terms of foreign capital flows, FDI is more important since it represents stable, long term funds and is preferable to FII money which often tends to be short-term and skittish.
I would now like to focus on a few key areas which I believe are crucial for development of the Indian economy and where IT has a significant role to play.
The first area is that of financial inclusion. Fortunately, the government recognises the importance of all segments of society needing to participate in India’s growth process. The extent of financial exclusion is startling – only 5% of India’s 6 lac villages have a bank branch. In FY 2009, it is estimated that only 9% of total bank deposits were mobilised from rural branches and the share of rural credit to total bank credit was a mere 7%. The government has asked banks to provide basic banking services to all unbanked villages with a population of more than 2,000 by March 2012. But looking at the scale of the problem, it is unlikely that banks will be able to achieve this target using the brick and mortar mode. The RBI has done well by allowing ‘for profit’ firms to operate as business correspondents. Speeding up financial inclusion, however, can only be done by leveraging on technology.
Today, India adds almost 15 to 20 million mobile subscribers each month, taking the total subscriber base to 700 million. Though what is fascinating about the telecom growth story is that over the last five years, rural teledensity has increased from 1.7% to over 27%. Clearly, financial empowerment through mobile phones is going to be the next “big thing”. There are close to 1,40,000 post offices in rural India alone. The government now needs to ensure that these post offices get fully automated in an integrated manner, thereby facilitating greater financial access through the post network. Kiosks, microcredit ATMs and e-financial literacy drives are going to change the face of rural India. But this will work only if technology is customised to suit local requirements.
The second crucial area for India is infrastructure. There are huge investments taking place in infrastructure – be it power, roads, airports or telecom. By the end of this financial year, infrastructure investment is expected to touch 8% of GDP, up from 4.4% in FY 2003. In the 12th Five Year Plan, spanning the period 2012 to 2017, it is estimated that a total of US $ 1 trillion of infrastructure investments are needed, of which close to half is estimated to come from the private sector. Much still needs to be done in the infrastructure sector. One cannot talk about technology enabled financial inclusion as long as the peak power deficit remains at 13% and where many villages still lack electrification. I do not think I need to talk to this audience about India’s creaky infrastructure. Instead let me take this opportunity to focus on the huge opportunity that smart technology can play in the infrastructure sector.
Just like the internet wave that took off in the 1990s, smart infrastructure is fast becoming the new technological leap. Smart infrastructure entails a more environmentally friendly and efficient system of managing and monitoring various infrastructure – be it roads, electric grids, water pipes, food supply chains etc. through the use of wireless sensors and software analytics. Smart infrastructure is being hailed as an era where computers integrate with the physical world. For instance, smart infrastructure uses sensors and electronic devices that could be built into a bridge to monitor the quality of concrete for any weaknesses or structural damage. So the sensors keep track of any maintenance work required. Smart infrastructure may also stop the endless digging since underground infrastructure like pipes, cables or grids can be monitored through sensors. While the western world is looking to re-build their aging infrastructure using smart infrastructure, for India it may well be the opportunity to leapfrog technology.
The third crucial issue where I see IT playing a key role is education. India has the second largest pool of skilled labour. Each year, India produces 2 million graduates, 650,000 engineers and over 9,000 PhDs. While these numbers may be impressive, the worrying issue is that over two-thirds of the graduates are not readily employable and need to be re-skilled and re-trained before they can enter the job market. It is here that initiatives such as e-learning and on-line vocational training can help fill the void. It is estimated that the e-learning market will grow to Rs. 11 billion by 2012 from the current Rs. 1.5 billion.
India’s public spend on education at 3% of GDP still remains woefully low though the government is committed to doubling it to 6% of GDP. The number of students that drop off the education ladder is alarming. India has a gross enrolment ratio of only 12% compared to 82% in the US. If India needs to fulfil its goal of a 30% gross enrolment ratio by 2020, India would need an estimated 800 more universities and over 35,000 colleges. IT can play a big role through e-education. The quality of education will see a huge leap when lectures in say Harvard are electronically beamed to a classroom in Hastinapur – and the technology for this is readily available.
The fourth aspect where IT can catapult the Indian economy is in terms of managing and improving public information infrastructure. Aadhaar is one such commendable initiative of connecting over one billion people. Much still needs to be done on digitisation of land records, which would lead to clearer land titles, reduced disputes and increased transparency. While a few states have initiated computerised land records, most still lag behind. Similarly, there is a need to create a national information utility for judicial cases. Currently there are 53,000 cases pending in the Supreme Court, 40 lac in High Courts and 2.7 crore cases with lower courts. While IT per se cannot change the fact that India is a particularly litigious society, what it can do is reduce unnecessary paperwork and allow citizens to know where and what level their cases are pending at. It is also important for each government department and each state to have a Chief Information Officer who can ensure that IT systems are being developed in a standardised and integrated manner.
The fifth aspect is e-governance. The faster the government gets its e-governance initiative going, the better. This is imperative to stem the rot of corruption. An on-line system in which citizens have to request for all government services on-line through the internet may perhaps be the best way to reduce bureaucracy and force government processes to be more hassle-free. Once citizens have access to information on what decisions are being made by the government, where their money is being spent and who it is being spent on, automatically the quality of public services will improve. A strong IT network bridging the government and its citizens will therefore be key in improving the overall governance framework.
However, while reaping the benefits of technology, it is equally important to recognise that the growing use of technology brings with it a host of security concerns. The risk posture has increased. New risks keep emerging. The risk exposure to a nation, the corporate sector and even people like you and me is increasing day by day. Are we now moving from a culture of trust to a culture of suspicion? A sense of fear or unease is spreading fast.
If we think for a moment, we recognise that the risks are now much more due to:
• Unstable and hostile neighbours;
• Cross border and global terrorism;
• Rise of organised crime;
• Fierce global competition; and
• Global economic uncertainties.
Today, risks to a corporate and a nation are from unknown sources and the impact is often beyond one’s imagination. Let me site a few examples:
(a) Today, it is possible for a new breed of cyber terrorists to break into a plane’s sophisticated computer system and force it to crash without even boarding the plane.
(b) In 2007, attacks on national websites in Estonia caused a huge problem on the country’s infrastructure, leading the incident to be described as the ‘first war in cyberspace’.
(c) Critical infrastructure, such as nuclear power stations or electric supplies can be targets of cyber terrorism.
(d) Companies today are losing more through electronic theft of data than from physical stealing of assets.
(e) Cyber attacks against Google’s operation in China earlier this year highlights China’s history of malicious computer activities.
(f) Nearly 15% of the world’s internet traffic, including data from the US Department of Defence and other government and commercial websites were briefly redirected through networks in China this year. It is alleged that China Telecom hijacked massive volumes of internet traffic during this 18 minute incident that occurred on April 18, 2010.
These incidents demonstrate inherent vulnerabilities in the internet architecture. Information security initiatives are at a nascent stage and user awareness is low. Even in establishments that have taken initiatives in this area, the focus is often on merely adding technology controls. Most organisations do not have a holistic approach to integrating critical aspects like detection, containment, processes and people in their security initiatives.
To conclude, technology induction brings along with it a plethora of risks which can be easily exploited by people across the globe, resulting in business losses and even disrupting economies. The only solution to address this problem is to move away from the classical way of risk assessment, where we tend to look at issues in a standalone manner. We now need to look at risks from even the remotest of possibilities and design mitigation measures by integrating processes, people and technology rather than just deploying more technology controls. Often, people are the weakest link in a security infrastructure. Educating users on security awareness is a great way to build a security conscious environment. Security is a pervasive, ongoing process of reviewing and revising processes, based on changes in the environment. If we are not ready to do this, we will lose more than we earn - whether it is our brand, reputation or money.
This apart, the Indian IT industry today stands at the cusp of some significant changes. Whether the US$ 10 laptop will see the light of day may be debatable, but clearly affordable innovation will be the driving force. The catapulting of the Indian economy and the IT industry is inevitable and there is sufficient reason to believe that India’s best times are still to come.
Thank you.