What is the knowledge economy? What are its characteristics and how does it affect India’s growth? These are the basic questions to be asked when one attempts to assess India’s economic growth today and tomorrow. The knowledge economy has three fundamental characteristics: knowledge capital, competitive efficiency and open trade based on comparative advantage theory. Knowledge capital may take several forms, e.g. (a) software development, (b) blueprints and designs, (c) R&D knowledge as innovations and (d) human capital and skill in adopting new technology from abroad and improving it. Competitive efficiency refers to the market process by which entrepreneurs compete to exploit knowledge capital to improve their profitability. The profit incentives and open competition activate the output and market enhancing effects through cost efficiency due to economies of scale and of scope. Openness in trade involves competition to improve domestic efficiency, the adoption of leading edge technology and the exploitation of human capital and knowledge spillover from the international field. The outward orientation of an open economy allows India to exploit the benefits of the comparative advantage principle, where the IT (information technology) and ICT (information and communication technology) sectors play a dominant role. The dynamic comparative advantage principle suggests that India has to restructure its export trade in the IT sector so that it can act as a catalyst, improving the productivity of other domestic sectors through diffusion and market expansion. In China and Taiwan this force has played a dominant role in raising national growth rates and revitalizing rural and agricultural sectors.
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