ICT SERVICES AND PRICE-RESPONSIVENESS OF INDIAN INDUSTRY: SIMULATION USING A VIO MODEL
Abstract
ICT is considered as a general purpose technology and as an important element of factor input that has great implications not only for advanced economies but also for developing countries in their industrial development. There is a vast body of literature that provides discussion and empirical evidence on the role ICT as a technology has played in the case of advanced countries. However, empirical studies highlighting the effect of adoption of ICT services are scarce. In case of India, ICT services industry is considered to be a key industry and a catalyst of growth and development of other domestic industries. Nonetheless, the adoption and dissemination of these services among domestic industries remain restricted mainly due to higher prices of IT services. As the previous literature has pointed out, technological developments and innovations in ICT producing industries worldwide led to a fall in relative prices of these goods and services while the quality of the same improved. The falling prices of ICT capital, for instance, are supposed to benefit the ICT services industry by reducing its cost structure, since ICT capital is assumed to consist of a larger share of the ICT services industry’s capital structure. This paper analyzes the potential benefits of a decrease in relative prices of ICT services to other industries of the economy. A variable input output (VIO) model, which evaluates price-responsiveness of the economy, is utilized for this purpose. The dataset consists of Indian Input Output Transaction Table (IOTT) for 2003-04 and 2006-07. Simulation results based on hypothetical scenarios indicate increase in production of the Indian economy as a result of 1 percent and 10 percent reduction in capital cost of the Indian ICT services. The results, in particular the comparison between 2003-04 and 2006-07, also shed light on the structural change that the Indian economy faced during the period. While the study emphasizes larger implications of ICT services as an intermediate input, it recommends broader rationalization of the duty structure and deregulation of ICT related goods and services as a part of competition policy.
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