The Indian Economy Blog

February 23, 2007

The Multipliers. At Last.

Filed under: Basic Questions,Business,Science and Technology — Reuben Abraham @ 9:00 pm

It always intrigued me that noone, especially in academia, had bothered to do robust research on the downstream multiplier effects of the IT-ITES industry. Anyone who has looked at the industry in any seriousness knows there have to be serious multipliers involved. All of those cab drivers, construction workers, caterers etc are the multiplier at work, after all. Given the subsidies the industry enjoys, it would seem that the multipliers are probably the best public policy justification one could come up with.

Everyone has speculated about the multiplier effect, including me. This week, however, NASSCOM released the results of the first ever comprehensive study that I know of on the multipliers associated with the IT industry in India. The research itself was conducted by CRISIL and the main highlights are:

* For 1 job created in IT-ITES, 4 jobs are created in rest of the economy
* In 2005-06, maximum additional employment generated through consumption spending (2.49 million) followed by Operating expenses (2.1 million) and Capital expenditure(0.63 million)
* Re 1 spent on OPEX generates additional output of Rs 0.9 (Multiplier 1.9x). Re 1 spent on CAPEX generated additional output Re 1 (Multiplier 2x)
* Re 1 spent by IT-ITES professionals generates additional output of Rs 1.1 (Multiplier 2.1x)
* In terms of potential impact on the economy by 2010, total economic output could be as high as $120 billion, while jobs created (direct+indirect) could cross 115 million

I had a look at the methodology and it looks fairly robust as well. It includes a combination of I-O, surveys and financial statement analyses. The study, however, does not look at forward linkages (use of IT as input by others), but only backward linkages, so that leaves space for more research on multipliers.

In the meanwhile, comments?

1 Comment »

  1. [...] The Multipliers. At Last.For 1 job created in IT-ITES, 4 jobs are created in rest of the economy … In terms of potential impact on the economy by 2010, total economic output could be as high as $120 billion, while jobs created (direct+indirect) could cross … [...]

    Pingback by Great Cash Ideas » US economy leaving record numbers in severe poverty — February 24, 2007 @ 3:30 am

  2. Definitely Multiplier.Atlast the IT people spending created the housing
    boom and that lead to construction jobs for many people indirectly.
    Once US economy shrinks both IT and constuction will cause job losses.
    Precious foreign exchange is lost and indian rupee could tumble.who
    will pay for oil imports

    Comment by Satish — February 25, 2007 @ 5:15 pm

  3. Wow, that means a direct GDP share of almost 10% (assuming GDP hits a trillion dollars by 2010).

    Comment by Ram Medury — February 25, 2007 @ 10:01 pm

  4. I wonder what would be the reverse multiplier numbers i.e. if IT revenue shrinks down the road, will it take back the numbers from construction, retail industries in the same proportion. For every job loss in IT, should we expect to lose 4 jobs in rest of the economy?

    Comment by Ashutosh — February 26, 2007 @ 11:49 am

  5. The housing boom was because of loose credit. There is a credit glut all over the world. I wouldn’t be surprised if many of those “housing loans” were outright frauds. Others were taken for purely speculative purposes.

    I do not know the ground situation but it must be exactly like or even worse than in the US.

    The stock market boom was the product of influx of foreign funds through FIIs. Their investment decisions depend of how the US economy works rather than the Indian economy (which is still very much closed to foreign trade.) So the performance of the stock market will directly depend on the performance of the US economy.

    As for the multiplier effect, I haven’t seen the methodology and hence cannot comment but the low-hanging fruits of economic reforms have already been picked.

    Comment by yum yum — February 27, 2007 @ 8:54 am

  6. We tried to do this at the Centre for Civil Society about a couple of years back. The problem: companies were not willing to share data. But you are right. There is room for research on forward linkages.

    Comment by Naveen Mandava — March 13, 2007 @ 5:15 am

  7. What about the negative effects.I mean if all the smart engineers in India work only in the low cost labour IT industry ,what will happen to innovation,research and development in other fields.

    This also need to studied.India is targeting to become a developed nation in next 15-20 years.Will IT help it achieve this target or will have a negative effect.This also needs to be studied.

    Comment by Brijesh Joshi — April 7, 2007 @ 5:15 am

  8. [...] Those who talk of or question social contribution of the IT industry might do well to remember this – and this, without the multiplier effect of the industry in India and the economy. Where the industry is today is a matter of pride, reached after overcoming a fair share of obstacles and there is no easy money here. And we all know the multiplier effect of the gulf boom in India – except for large houses for those who went there, we have precious little to show. [...]

    Pingback by The Indian Economy Blog » Indian IT Industry — April 21, 2007 @ 7:44 pm

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