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Budget’s impact on the IT and ITES Industry – a quick overview by Bala J Raman at the “Post Budget Analysis 2013” organized by FICCI and “Ernst & Young”

It gives me great pleasure to be in this forum on behalf of the IT and ITES industry. Over the last two decades, this industry has grown to be the poster child of the Indian economy, and in spite of not being one of the largest contributors to the Indian GDP, this industry has been extremely high profile in terms of the image that it has created for itself. And, it has been deservedly so. The IT industry is the one that has created tremendous brand equity for ‘India Inc.’ The foundational platform for the world to respect the Indian intellectual capability was laid by the IT industry with NASSCOM’s help.

For people on the outside of the industry, there is this lurking feeling that the IT industry in India is pampered by the Government and that too many sops are extended to the industry, albeit the fact that the industry is doing very well on its own. For such people, I would like to present an insider’s view. Yes, the tax exemptions given by the Government through STPI were extremely useful to the industry and helped all of us plough more and more into developing ourselves into a more mature and process oriented lot, but we also became the industry with the highest people costs.

I can say with pride that the exemptions given by the Government have helped companies like ours allocate budgets for some strategic initiatives such as research, product development etc. which would otherwise have been impossible for SME players. I am certain that these measures will help both the organizations as well as the economy in the long run.

Thus, continuation of this assistance – especially for the mid-tier and SME segment, is almost required as a lifeline. Why? Because that segment’s cost structure is very similar to the larger companies without the larger margins associated with the large companies through their mega deals. So, it is with some expectation, coupled with trepidation, that we are all awaiting the Rangachary Committee’s recommendations on the GAAR and Safe harbor provisions etc., and this is expected by March 31, 2013. Given that, this budget did not really address any tax related issues for the IT/ ITES sector very significantly.

One of the initiatives in this budget is the provision of Rs. 1000 Cr. for the National Skill Development Corporation (NSDC). I believe this is a great move and augurs well for the IT industry because while we have thousands of engineers available for employment, a majority of these also need to acquire a lot of specific technology skills as well as soft skills before they are eligible for employment. We, in the IT industry, also tend to spend a lot of our monetary resources on training in areas which should normally be taken for granted in college graduates.

The other significant initiative is the allowance of pass through benefits to Venture Capital Funds for tax purposes which is great news for start-ups and SMEs in the technology sector, but the limit of Rs 5 Crores may perhaps need to be re-visited. This will spur angel investments, which are one of the key constituents of the technology start-up ecosystem.

One other aspect of promoting start-ups and SMEs has been the provision for investment into incubators run by academic institutions to be allowed as expenses under the CSR umbrella. Now, the popular perspective is that since a lot of the start-ups in these incubators are technology companies, this provision will help the IT industry.

This is a valid point, but, to me, there is a larger characteristic of the Indian entrepreneurial environment that can be influenced positively by this provision. And that has to do with two interlinked factors

(a)Innovation, and (b) University – Industry Collaboration on R&D.

It may come as a shock to many of us that while we tell to ourselves and the rest of the world about our rich intellectual capabilities, India is ranked a lowly # 64 in the Global Innovation Index (GII) in 2012 according to a joint report published by the InstitutEuropeend’Administration des Affairest (INSEAD) and World Intellectual Property Organization (WIPO). We have scored very poorly in terms of institutional support, human capital and research, infrastructure and business sophistication for innovation. And we are # 51 in terms of University – Industry collaboration on R&D.

Just step back and look at the innovation canvas – innovation is fuelled by research, and the research hubs are invariably the academic institutions and because of the lack of industry – university collaboration, a lot of these innovations rarely see the light of the day.

These university-based incubators have the propensity to change this fundamental vacuum in our system. This provision of allowing CSR status to investments in such incubators may be the first step in increasing the collaboration between the industry and the hubspots of innovation in the Universities.

Maybe I am being naïve, but could this be the small first step taken by the Union Finance Minister which could lead to a giant leap for the innovation DNA in our country. One fondly hopes so!

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