Indians ride tech wave by staying close to home

Arvind Thiagarajan is excited. He's been accepted into a PhD program at the Massachusetts Institute of Technology in Cambridge. But Mr. Thiagarajan, an engineering student who'll graduate this July in the top 10 of his class at the prestigious Indian Institute of Technology (IIT), may not attend classes in the United States.

"Five to 10 years ago, most of the opportunities were in the US," says Thiagarajan, who plans to return to India to work if he does attend MIT. "There are lots of opportunities here now. Naturally, who wouldn't prefer jobs at home?"

More Indian engineers like Thiagarajan are opting to stay at home - an early indication that India is making good on its long-term economic vision: With global trade shifting to Asia, India is proclaiming itself a knowledge economy to compete on a different track from China, the world's manufacturing giant.

"Clearly, it's a success story. India has established new industries - software services, back offices - and it's bringing in a sizable amount of foreign currency and using that to create jobs," says John Daly, a technology consultant based in Maryland who worked for the US Agency for International Development for 20 years. "It seems quite clear that India will continue to grow."

"Brain drain" used to represent a $2 billion annual loss to India, but a 2002 study by the Public Policy Institute of California suggests that the combined effect of the slowdown in the US economy and the growth of the tech industry in India will help bring home as many as 45 percent of the Indian high-technology workers abroad. Such engineering schools as IIT are also claiming a 50 percent decline in the number of students leaving the country.

"Students are finding interesting and challenging jobs in India," says V. Kalyanaraman, dean of the center for industrial consultancy and sponsored research at IIT in Madras. "The pay is also better than it used to be, and they find that they can have a good quality of life."

The higher pay comes from foreign investment, which leaped 78 percent, to $5 billion last year, up from $2.8 billion in 2003. Software and services exports contributed $12.5 billion in 2004, jumping 30.5 percent from the previous year.

According to a Merrill Lynch analysis, the dotcom meltdown and slump in the American economy after Sept. 11, 2001, accelerated rather than caused a trend in the US to outsource jobs to India. Microsoft, for example, recently set up a lab in Bangalore to tap the highly skilled and cheap workforce available in India, particularly in the southern states, which graduate more engineers than the north and have more liberal economic policies.

India on the whole is "liberalizing in all the sectors," says Umakant Dash, assistant professor of economics at IIT.

Nevertheless, frequent changes in India's government and policies have upset economic stability in the past. Mr. Dash sees this as a crucial difference from China, which, while communist, has been politically stable for many years. He's also not very confident about the quality of Indian manufactured goods.

He does say, however, that Indians have an advantage over the Chinese in speaking English, and that India has a superior educational system.

Still, Joshua Aizenman, a professor at the University of California, Santa Cruz, who specializes in international economics and development, says even that could change. "China learned very fast how to make reasonably good-quality products. It may learn very fast how to produce reasonably good-quality engineers," he says.

Other stumbling blocks loom on India's path to becoming a knowledge powerhouse. The highly educated are a drop in an ocean of illiteracy and semiliteracy: Only 65 percent of Indians are literate, according to the government; and an estimated 40 percent of children enrolled in primary schools drop out by age 10, according to reports. On top of that, only 20 to 25 percent of Indian college graduates meet standards required in information services, according to McKinsey & Co., an international consultancy.

"Colleges are being set up left and right, but issues of quality - finding teaching staff and all that - are still there," says Bhaskar Ramamurthy, professor of electrical engineering at IIT.

And China isn't sitting still, diligently taking lessons from the competition: India's leading software-training institute, NIIT, has opened centers in China. "Some Chinese technology companies are growing at 40 to 50 percent," says Mr. Ramamurthy.