Not all IT’s cracked up to be

IF the manufacturing sector is down in the dumps today (growth is a fourth of what it was six years ago) and agriculture remains a gamble in the monsoons, what will save the Indian economy? Put the question to your average shopper, your mother, or perhaps even the luminaries at industry lobby body CII (which made a presentation on this a few days ago), and the answer will be the same — the booming services sector.

Probe a bit deeper, and even though the shine’s clearly off the infotech (IT) sector these days, there will be a glowing reference to the global recognition for the work done by the Azim Premjis and Narayana Murthys of Bangalore. (For some reason, IT has come to symbolise the services sector in India). And then there’ll be talk of how India Inc can’t really progress unless it gets ‘wired up’ and uses a lot more IT tools, and that smart governments such as those resident in Cyberabad are getting ahead precisely because of IT.

Well, just log on to www.mckinseyquarterly.com, and get the shock of your life. An exhaustive study by one of the world’s best-reputed consulting organisations shows that, in the case of the US, the role of IT in the rapid productivity gains of the 1995-2000 period was not too significant. Let’s spell that out a bit more. This is the period in which the US showed the highest-ever rise in productivity — at an annual rate of 2.5 per cent, growth in labour productivity was nearly double that of the 1972-95 rate — and it’s also the period during which US firms nearly doubled the pace of their IT investment. Very clear proof, you’d say, that IT works, right?

Wrong. Here’s what McKinsey has to say: ‘‘Our research indicates that IT was only one of several factors at work. Innovation, competition... were the most important causes.’’ Nearly all of the post-1995 productivity growth hike, McKinsey says, can be explained by the performance of just six sectors — retail, wholesale, securities, telecom, semiconductors and computer manufacturing. In fact, in sectors like banking that invested very heavily in IT, productivity levels actually fell.

The biggest increase in productivity, a fourth in fact, is explained by the sharp hike in the efficiency of the retailing sector. And close to half the hike in the retail sector can, in McKinsey’s words, be explained by only two syllables: Wal-Mart. In 1987, Wal-Mart had just 9 per cent of the US retail market, but was 40 per cent more productive than its competitors — by the mid-90s, it had a market share of 27 per cent and its productivity was higher by 48 per cent.

Sure, Wal-Mart did use IT to the extent it used scanners and warehouse-management systems, but this is really basic stuff (essentially pre-1995 solutions) and certainly not the reason for its success. At least half of its productivity edge, McKinsey says, stems from simple managerial innovations that improve store-efficiency — employees who’ve been cross-trained, for instance, can function effectively in more than one department at a time. Similarly, Wal-Mart’s most significant innovation — use of the ‘‘big box’’ format — was independent of IT.

By contrast, the IT intensity of the banking sector grew by 16.8 per cent between 1995-99 as compared to 11.4 in 1987-95 — but its productivity growth fell from 5.5 per cent to 4.1. Basically, thanks to the massive increase in bank mergers and the increase in the number of products offered, banks invested more than $5,000 per employee in IT, or around 12 times what the rest of the private sector did — clearly a lot of computing power got created, and it’s an open question as to whether it’ll ever get used.

While there’s no such study for India Inc’s investments in the IT sector, there’s no reason to suspect the Indian situation would be any different. And as for the government using IT to make itself more efficient, it seems unlikely the efforts in themselves will amount to much. The country’s top stock exchanges, like the BSE and the NSE, for instance, are as computerised as you can get, but did that help the authorities cotton on to the massive price rigging that went on?

Prices of the K-10 stocks (those favoured by Ketan Parekh) routinely rose by 8-10 per cent on a single day, and volumes multiplied manifold almost overnight, but not once did the authorities wake up to the massive price rigging that was going on under their own eyes.

Or take various items of expenditure of the government, another area where e-governance is being talked of. Well, before you get all excited, there’s a sample of what will be available to us finally — last year’s budget speech, for instance, gives details of implementation of budget promises.

So, it talks of how a fund with a corpus of Rs 3,500 crore was to help implement village-level infrastructure projects — the fund, we’re told in the ‘‘status of implementation’’ column, has been set up. Nothing about what kind of infrastructure has been set up, or anything else that gives you even an inkling of how efficiently the money has been spent.

This year’s budget will, it’s certain, be full of similar meaningless details. IT’s great. But it’s not all it’s cracked up to be. And just adding the prefix ‘e’ doesn’t transform non-governance into governance.

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