Dutch Disease infecting Bangalore?

When an economy suffers because of the prosperity of one dominant industry , it is called “The Dutch Disease” as it was first felt in the Netherlands soon after the discovery of their giant Groningen gas field in the 60s. Although their export earnings increased and the currency became strong, the productivity in other sectors did not keep pace with such a strong currency and their exports suffered resulting in unemployment, social unrest etc…

Since then , the phenomenon where prosperity of one sector hurts the rest of the economy has been termed “The Dutch Disease.”

Bhamy V Shenoy’s has written an excellent article in the Vijay Times which highlights how Bangalore may be suffering from a similar disease because of the dominance of IT skill based industries. For a while now we have been hearing this concern expressed from different quarters – politicians, social critics and journalists.and of course those employed in non-IT sectors.

Shenoy points out a few important problems that are have resulted from the IT boom in the city:
– “the ability to generate huge earnings to a few lucky ones”
– “Because of the ability to pay huge salaries, IT has been able to attract all the best talent available. As a result, all other sectors will suffer not immediately but in the course of time”
-Real estate prices which have become out of reach for most salary levels other than IT sector
-“increased demand for luxury goods and services which again can have a devastating impact on the cultural and social values of Bangalore.”
-There are definite linkages between the private cars owned by those employed in IT sector and the increased traffic problems in Bangalore.

He also warns how “history has shown that extreme unequal distribution of wealth where islands of prosperity are surrounded by an ocean of poverty will give rise to social unrest.”

The solution is not to criticize or penalize the IT sector which is prospering but to distribute it across the state rather than concentrating it in one city.

He suggests: “Instead of inviting all IT sector companies only to Bangalore, Karnataka should seriously think of dispersing all over the state and even to rural areas by providing what the President A P J Kalam often calls PURA ( Providing Urban amenities to Rural Areas)”

He also adds a scary warning that “Unlike Dutch disease, solving Bangalore Disease will not be easy.” And: “The first step is to diagnose the Bangalore Disease. Have we done that?”

Have we, in an objective way, without feeling upset and unappreciated?

(The article is titled “Beware the Dutch Disease, Bangalore” by Bhamy V Shenoy and was published in Vijay Times Bangalore dated April 2, 2006.)

8 Comments so far

  1. Agent Pal (unregistered) on April 5th, 2006 @ 11:20 pm

    The IT industry is not developing in isolation. The IT industry is fuelling the growth of various other industries. It has created job opportunities (semi skilled and unskilled labour) for millions.

    Some of the industries that have seen rapid growth are automobiles, food catering, travel – the arrival of private aircraft carriers has triggered a price war which has forced the railways to also review the prices, telecom – ever imagined buying a mobile for Rs.1500 and calling someone in Kashmir for Re.1/min???, construction – look at the rate of construction at the Infy bangalore campus, and lots more.

    Also it is upto the government to fully utilize the IT power of India to develop its infrastructure and attract investments in manufacturing and agriculture industries also.

    India has had great hidden potential all through. The IT industry has helped us to realize our own talents and has revealed our potential to the whole world.

    Hoping to realize APJ Abdul Kalam’s India 2020 vision.

  2. BangaloreGuy (unregistered) on April 5th, 2006 @ 11:32 pm

    He’s half correct when he says most people are moving towards IT – the disregard IT (services cos) has for the degrees themselves and the higher salaries help, of course.

    Here’s the crucial point – most growth apart, from service industry has been jobless – especially manufacturing which generally absorbs the most workforce, means that the service industry which has generated tremendous growth, and contributes 51% to the economy, attracts enough and more people.

    He also ignores the large campuses in Mysore that Infosys has, and Wipro is proposing to build (apart from other IT companies that are already present) – even as he argues for that, he contradicts himself on the point of concentration on IT.

    Here’s one example to prove why the Indian, Banglorean boom even, is not just because of IT – the average growth of cellphone industry is about 1 million a month for past 36 months or so. And what is the total strength of IT/ITES in India – 2 million (a higher approximation). This has happened not just because the IT sector is growing but because manufacturing is growing in double digits, agriculture is growing as well – except for the drought of ’02.

  3. Abi (unregistered) on April 5th, 2006 @ 11:56 pm

    Reuben Abraham recently blogged about a recent paper by Raghuram Rajan and Arvind Subramanian in which they talk about the Dutch disease and its Bangalore variant. Reuben’s post is here.

    I don’t know if the Vijay Times’ columnist alluded to the paper by Rajan and Subramanian; it’s possible that Shenoy’s thoughts were triggered by this paper.

    In any case, the main thrust of the paper is that the huge salaries commanded by engineers has already made them too expensive for the other (manufacturing? other services?) industries; Shenoy seems to think that this bug hasn’t started to bite, yet.

    The rest of Shenoy’s analysis seems (to me, at least) an exercise in scare mongering.

  4. Orchid (unregistered) on April 6th, 2006 @ 8:08 am

    What remains undisputed at the end of the discussion is that good old Blore is not what it used to be anymore and there seems to be no fix in sight at least not around the corner!

  5. Hari (unregistered) on April 6th, 2006 @ 4:32 pm

    Hi Usha,

    You have given a very timely warning indeed. We have not yet reached the stage of “Dutch Disease”, but if our governments choose to dance to software industrialists tunes, then soon we would be there and beyond.

    And yes, the “Bangalore Disease” will be more deadly than the “Dutch Disease” due to the simple fact that Software industry cannot flourish on its own if it does not have any manufacturing or other service sector to cater to. India is seen as the world biggest consumer for most of the commodities on account of its economic surge supported by a huge population. So most manufacturing giants in the world are either setting up base in India or atleast producing for India. So if we do not adequately support manufacturing sector, our status as the world biggest consumer will dwindle, resulting in a major market loss for many manufacturers and in-turn affect the business of our own software company. This will trigger a vicious cycle of deceleration of economic growth which will be hard to stop.

    The cure as you said, does not lie in decentralising software Industry, but only in pushing manufacturing industry to perform and earn at par with the Software sector. A growth in manufacturing sector would automatically propel software sector. An economy can never be based on the Software Industry because this Industry does not have a stable consistent tangible asset. For example a Car manufacturer can produce car forever irrespective of its employee turnover, a fertile land can forever yield crops, but will Infosys be the same if the top five heads leave the show. A Software Industry can be a catalyst to economic growth, but a catalyst can never be a main product. So in that sense “Bangalore Disease” is indeed much more deadlier than the “Dutch Disease”.

  6. Agent Pal (unregistered) on April 7th, 2006 @ 6:08 pm

    Check out this link to see how IT is changing the face of rural india…


  7. Libran Lover (unregistered) on April 11th, 2006 @ 7:12 am

    Let us be clear on a few things here:

    1. There is NO evidence that Bangalore’s IT industry has caused other industries or businesses to go down. The opposite is true. Lots of other businesses – big and small – are growing, in the shade of the prosperity brought by the IT industry.

    2. Bangalore’s problems are not that any particular industries or segments are going down. It’s problems are more that the cost and quality of life – especially the quality of life that is influenced/affected by public infrastructure – is going down.

    3. Root cause for Bangalore’s problems as mentioned in point no. 2 above is NOT the IT industry. The root cause is that the city was not planned and administered to handle the large number of immigrant population brought in by the IT industry. The IT industry is being made a scape-goat by vested interests.

    4. An analogy to explain point no. 3 above: Suppose you live in a small house. Suppose you get a new job, and become very popular in office. Suppose all your office friends/colleagues land in your house on your birthday for a surprise party. Suppose your house is not able to handle so many people. Will you find fault with your new-found friends/colleagues? Will you find fault with your new job or with yourself? No, the root cause of the problem is simply the size of your house. It is not productive to blame anyone for the size of your house. The solution for the problem is either that you move to a bigger house or restrict your friends circle or stop having big parties at your house.

    5. Yes, part of the solution could be to spread the IT industries to the rest of the state. For that to happen, the rest of the state must develop in infrastructure and people resources. One cannot just keep shouting at the IT companies to go to Belgaum or go to Hubli. Hubli and Belgaum should turn into the kind of cities which can attract and sustain the modern technology industries. There is no use in just shouting at people to become your friends, to become your relatives. You should turn yourself into the kind of nice person with whom everyone likes to socialize.

    I hope this clarifies the matter a little bit.

    More on Bangalore’s issues: Operation Hijack Bangalore.

  8. randramble (unregistered) on April 12th, 2006 @ 1:42 am

    Agree with Libran Lover mostly. The basic problem is due to government’s lack of foresight while welcoming IT companies to setup shop and real estate companies to churn out apartments. If house rent has gone up, that reflects on the greed of the resident owners, isn’t it?

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