Part-5: End Notes

Thus there is some lack of clarity on what the government’s stance is on boosting green technology industry.

On these analyses, I would say this is a confused budget. Quite a few matters are undertaken for ‘appeasement’ of certain quarters. In the initial 2-3 years of a new regime, governments have the flexibility to announce tough measures with a long-term vision. So this budget is a lost opportunity of sorts in that respect. However, to put it in perspective, union budget preparation is a extensive activity undertaken over a 4month period. Time was of an essence here and was short on hand. The Finance Minister also hinted, fiscal planning is no longer a once-a-year activity, so we may see some of these issues addressed during the course of this year.

On the mix of politics with an economic activity, I would say that this is the reality of a democratic country and the price we pay for enjoying the benefits of a vibrant democracy. Harsh measures are a luxury which authoritarian regimes can afford. I believe that our freedom is too high a price to pay for the benefits of a purely economic activity.

Part-4: Measures for Green technologies

The budget also contains following measures to boost adoption of Green Technologies:

1. Lowering of customs duty on biodiesel from 7.5% to 2.5%
2. Reduction of duty on permanent magnets – a critical component of wind-operated electricity generators – to 5%, down from 7.5%

However, some of the following measures also needed urgent attention and have been over-looked:

1. Uncertainty surrounding India’s draft plan to invest $22bn in solar energy over the next 30 years. It was not mentioned in the budget.
2. The budget has done little to bolster India’s position in the emerging global carbon credit market. The global Carbon credit market spins bigger money than the carbon reduction program implementations. India has a significant portion of Carbon Reduction Technology implementation, but the big bucks on carbon credit estimation and generation are going to foreign companies. Government would have done Greentech industry lot of good by setting up an institution to drive the carbon credit business in India.
3. National Action Plan on Climate Change, announced last year, is intended to set out strategies for increasing investment in areas such as solar power, energy efficiency, sustainable agriculture and climate change adaptation. However, it will be covered under the budget only later as an exact figure would not be decided until the end of the year.

Part-3: Impact on IT industry’s competitive capability

These sops are closely tied with the very real threat perception from China vis-a-vis taking over IT/ITES jobs from India. This has the potential to adversely impact the Indian economy in multiple ways given the new demographics of our cities, spending culture and Retail potential. Indian IT/ITES industry can be largely classified into 2 components.

The low differentiation services like ITES/back-office processing, which are easier to migrate out. Here China is at a temporary disadvantage, “linguistically”. However, they have embarked on an ambitious program to have their next generation trained in conversational skills in English language by year 2020. However, some early transitions of services have already started due to lowering of the cost differential India provides to this line of business. I am not sure how much of this activity can actually be influenced by budget. Maybe some measures to enable development of infrastructure in TIER-II and Tier-III cities where the operating costs are lower will help. But, consequences of lowering cost differential is a reality which Indian companies need to factor-in and take remedial measures.

On the higher end of technical services, our vast and trained engineering work force gives us an edge. Here the most important activity for Indian companies would be to grow up the value chain. This is possible only when we transition ourselves from being IT producers to becoming IT consumers. Our IT consumption is still limited compared to developed nations.

The big ticket spending projects to boost IT consumption will be valuable in this regard. More than developing IT as part of governance infrastructure, they will also help Indian IT companies in multiple ways. Firstly, it will be a good exercise in implementation challenges faced within Indian context. Our IT majors have enough experience in implementing major projects around the globe. Indian context will bring unique challenges in approach towards training the workforce, maintenance models, sustainability of solutions and process of constant improvement. Secondly, it will allow our IT majors to explore new markets in developing countries. Finally, this will also allow them to demonstrate their skills in providing complete set of solutions. Starting from concept, through design and implementation to deployment and maintenance.

Very few organizations around the world can boast of demonstrated success in managing the complete life-cycle of a solution at this scale. Successful completion of this project will propel Indian companies into a niche league of selected few companies providing high-end consulting services.

Part-2: Long-term projects with eye towards future

Following two measures of the government are appreciable for spurring big ticket spending:

1. Undertaking Big-ticket infrastructure and e-governance projects that will boost the domestic IT market. These include ambitious projects like biometric smart card system for Below Poverty Line families and unique identity cards for all countrymen. The latter is also the project which most recently, eminent technologist Mr. Nandan Nilekani has chosen to lead. The government will spend Rs 120 crores this year on the Unique ID project, which will be implemented within 12-18 months.
2. Increasing the outlay for institutions of higher learning such as IITs and National Institutes of Technology (NITs) to Rs 2,000 crore will help increase availability of skilled talent and boost innovation and research & development. Hopefully, increased funding will help bridge the gap between the skill set of engineering graduates coming out of our institutes and that required by the industry.

The independent mechanism to deal with taxation of captive units of multinational companies is good for the country. This will enable the revenue generated by the services in India (almost 40% of the current IT workforce) to also generate significant additional revenue for the govt. Till date the entire tax benefit of these operations were going to the country where the parent company was selling these services. The captive centers in India being cost centers do not have revenue associated with them and are thus not tax liable (their revenues are recognized in geographies where their customers contracts exist). Initiatives by government to establish double-tax avoidance treaties with other nations will benefit other areas where bilateral tax sharing policies can aid. This is another one of our government’s initiatives that demonstrate a vision for long-term competitiveness. The key here however, is delivery.

Part-1: Basic Tax sops and their Term Impacts

This is my analysis of some of the provisions in the budget for Hi-Tech industry and possible effects based on my understanding of its working.

The finance minister has extended tax sops for IT exporters by one year under Sections 10A and 10B of the IT Act. This is a temporary measure at the best as it does not encourage new companies to set shop given the 1-yr time-frame only. This will only aid existing companies to weather the global downturn without having to worry about the tax overload on their margins. So this maneuver lacks a strategic vision.

By correcting an anomaly in Section 10AA that affected the tax benefits of companies in Special Economic Zones (SEZs), FM has enabled current companies to extract benefits of expanding operations. Most of the initial SEZs were setup with limited expansion capacities. With the growth in IT sector, companies were forced to grow outside the physical bounds of SEZ. Unfortunately, they were not able to take full benefit of expansion as their operations outside SEZ were taxable. Current measure can help them by making them more cost effective to gather more business and also expand further.

Currently, there are more than 6,000 software units under the Software Technology Parks of India (STPI) scheme. They account for about 85-90 per cent of India’s $47 Billion software exports, making them nearly $42 Billion in FY09. The current downturn has brought them down to about $37 Billion (estimated).

By removing multiple taxation on packaged software government is taking some steps towards checking piracy by bringing down the cost of s/w products. Indian IT companies need to move towards s/w product offerings from highly service oriented entities. More products for Indian businesses will improve the software consumption and open up avenues for innovation targeted towards benefiting the Indian consumers. This will enable Indian IT industry to move up the value chain and help preserve high-tech jobs within the country.

The measure to relieve employers from paying fringe benefit tax transfers this entire burden from the employer to the employees. So, for the government it earns them a few brownie points from the organizations while at the same time earning them higher returns. This is because employees will be taxed at a much higher rate than the corporate tax was being levied at. This measure, thus dampens the Income Tax benefits from removal of 10% surcharge on individual taxpayers. Is this government’s way of Corporate appeasement at the cost of individual employees?

Globalization and Indian IT industry – Part 1

Initial growth phase

In the ’80s and early ’90s the Indian IT industry used to find it tough to compete with their western counterparts in bidding for projects. Though Indian companies possessed the process and technical knowledge to deliver quality services, the perception of “made in India” brand in western world was still low-quality. The Indian IT industry benefitted from the first wave of globalization necessitated in part by the Y2K crisis. For a while we rode the path laid by this anomaly, between the then existing 2-characters (YY) date fields in the systems vs. the desired 4-characters (YYYY). What it enabled for us was the rapid development of IT infrastructure and provide finances for rapidly training our man-power for IT services. Consider for a moment, the rapid infusion of many engineering talents from non-IT backgrounds of premier engineering institutes that have made it big in IT industry.

With the IT bubble bursting in 2001 came the next round of funding. The world suddenly looking to reduce its costs, found the newly developing mass of Indian IT infrastructure alluring enough to ‘out-source’ their work here. Thus, rose the Indian BPO industry which fueled the second wave of growth in Indian ITES sector.

From mid-90s, the Indian IT majors had built enough in-roads into US and EU markets to start moving up the value chain. They had now moved beyond the maintenance and migration projects of ’90s to undertake major turnkey development projects in 2000s. Several new services related to infrastructure development and maintenance, testing, ERP/CRM were also started and many Indian companies made their forays into product development.

In my next post, I’ll be commenting on some factors that have fuelled the growth of Indian IT industry.