Budget: Watershed moment for Indian IT

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Budget: Watershed moment for Indian IT

The government should not only increase outlay on computerization in each department but should introduce more initiatives, say Hari Rajagopalachari and Pradyumna Sahu

Friday, July 03, 2009

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BANGALORE, INDIA: The Indian Information Technology (IT) / Information Technology enabled Services (ITeS) industry has been one of the greatest success stories of modern India. An industry which was non-existent 20 years back contributes over five per cent of the GDP and employs over two million people directly today.

And all this would not have been possible without the proactive support of the Government of India. However, the global downturn and competition from other countries has put the industry at a point where additional fillip is required to keep the Indian IT/ITES flag flying high.

Country competitiveness

The India IT/ITeS industry has demonstrated the potential to link offshoring and outsourcing to the services sector which makes up over 60 per cent of the GDP of advanced Western economies.

Given the low headroom for growth in manufacturing outsourcing and offshoring, countries like Brazil and China are looking very strategically at this sector to continue their export led growth stories.

The effective corporate tax rate for China is 25 per cent but as a special case they have reduced it to 15 per cent for this sector. India will need to do more to ensure that such sovereign moves do not reduce country competitiveness.

The second factor that holds the sector back from a macro-economic perspective is speed and effectiveness of the judicial system.

In a study done in 1992, Raghuram Rajan and Zingales found that the two most important factors that determine firm size (size of a company) are the size of the market it serves and the judicial efficiency of the country it is in.

In the former, India is well placed since the IT/ITeS industry is predominantly linked to the largest economic market in the world (USA). However, country-specific judicial efficiency continues to be a factor.

In spite of its obvious advantages, when it comes to the really large outsourcing contracts struck all over the world, the largest Indian IT company is still considered a Tier-2 player vis-à-vis the IBMs and Accentures of the world.

While not much can be done in an annual fiscal budget to address this much larger issue, the country-specific disadvantages must be factored in while determining the taxation potential for a sector in the budget.

Increase domestic adoption of IT

The government should not only increase outlay on computerization in each department but should introduce more initiatives like ePassport, Project 'Arrow' for postal or the Unique Identification Project. These projects not only benefit the hardware and software industry directly but also have a cascading effect on the fortunes of industries like education, coaching, transport, etc since 1 IT job creates 3.6 additional jobs.

Small IT companies

The downturn has affected them the most – reduced margins, vendor consolidation, inability to bid for large projects on their own has led to the demise of many.

One way of reviving them is to give preference to them for government projects. If they do not qualify for large projects, preference should be given to vendors who will subcontract a part of their work to small tier companies.

Employability

As the Indian offshoring story evolves, clients would look beyond labour arbitrage but we believe that low salaries and a large pool of talented people would continue to keep India the favoured destination.

To sustain this advantage, there has to be increased allocation for engineering colleges. More importantly since only 25 per cent of our engineers are employable, government-funded and industry-designed employability courses should be introduced.

Infrastructure

To sustain our cost advantage, companies have to increasingly move to Tier 2/3 cities. The government has a big role to play in enabling this. While the telecom push has made many of these cities connected to the global highway, a lot needs to be done in terms of other infrastructure – roads, public transport, power, etc.

The government should identify such towns and make them IT/ITES able by incentivising the state governments who take this up. To push companies to adopt small towns, rural BPOs should be offered financial incentives.

Even in the Tier-1 cities, the fact that power and transportation are still handled by the companies themselves puts them at a cost disadvantage of 5-8 per cent over delivery centers in cities with better infrastructure in the West, Brazil, Eastern Europe and China

Moving up the value chain

While India dominates the software services sector, it still has a long way to go in software products. When the industry is transforming itself and trying to move up the value chain, products and R&D based offerings should be encouraged.

To promote investment in these areas the government could increase deduction benefits on such expenditure. Another way could be to provide price preference for software products of Indian companies by government owned entities.

Internet to the common man

While the telecom push has enabled Internet reaching many remote places, the cost of PC is still a prohibiting factor.

One way is to bring down duties on computers. Another way could be on the lines of the People PC project in Thailand where government subsidized local models were launched which got additional boost with Microsoft also joining in with reduced prices.

Since we are drawing up a wish list, over and above this we would request the government to accede to the long-standing demands of the industry – continue the tax holiday for STPI beyond 2010, remove disparity between STPI and SEZ and bring about more clarity on FBT, remove SAD and also further bring down duties on hardware.

We are confident that all this will not only strengthen the 'Made in India' IT/ITES brand but would also lead to more inclusive growth which is a priority of the government.

(Hari Rajagopalachari is the executive director and Pradyumna Sahu associate director, PricewaterhouseCoopers. The views expressed in this article are the views of the author and do not necessarily reflect the views or policies of CIOL)

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