The Hindu Business Line : Aggressive growth pace likely to continue

The Finance Manager adopted an upbeat tone for his Budget speech. He talked about supporting innovation and the recommendation of knowledge commission in creating a national knowledge network. We need to examine his Budget proposals in the light of these exhortations. I have examined his proposals in the light of its impact on the information technology industry.

It is undeniable that the IT industry has contributed significantly to the Indian economy. We exported over $30 billion of IT services in the year ending March 31, 2007. The domestic use of IT has also been showing a phenomenal increase. This industry, it is widely acknowledged, has enhanced the prestige of India on the global stage. This aggressive pace of growth for the IT industry is expected to continue.

There are a few issues which needed to be addressed – some of which have appeared on the horizon only recently. These relate to (a) appreciation of rupee impacting a highly export oriented industry; (b) potential shortage of qualified people to enter this industry; (c) expansion in the availability of infrastructure including office space; (d) spreading the economic activity into smaller cities; (e) utilising the power of IT within India and (f) diversifying into product market.

Domestic market

The Budget needs to be examined against these needs. On the domestic market, Budget has highlighted the big opportunity for IT with the decision to allocate additional funds towards the Smart Card System for PDS, State wide area networks, common service centres and data centres at the State level as well as initiatives like the Central plan monitoring system for outlays for the Planning Commission. The expected increase in the use of technology in government operations, both at the Central and State levels, is in a sense a continuation of the e-governance initiatives of the present Government as is the move from an outlay approach to one focused on end outcomes.

The move to provide greater connectivity throughout the country also has major implications for leveraging electronically-enabled benefit management systems which can provide a whole new set of services for citizens. Indeed, the Finance Minister acknowledged that the buoyancy in tax revenues and the fact that tax collections were surpassing Budget estimates indicate how well information systems and technology have helped in this effort. The tax incentives for stepping up expenditure on research and development are also welcome as is the continuing investment at education to help build a knowledge society.

STPI - disappointment

The biggest disappointment for the IT sector has been the non-extension of the STPI scheme, especially if one analyses the huge boom in the IT sector that has taken ever since these incentives were introduced in 1994. Limiting the tax incentive only to a 10-year window has also meant that many STPI units have not been able to avail of incentives for the full 10-year term as many have been commissioned after 1999. Substantial increase in STPI capacity has taken place only in the last four years or so and, therefore, many units will get into the taxable position in the early stages of their operations.

domestic customised software

For domestic customised software there have been small changes with the sector being brought under the service tax net, which will increase the cost of technology for users and push up the cost of automation not just in the private sector but also in public sector and Government departments. Another factor that could push up costs for deploying technology is that customs duty for importing packaged software has been increased from 8 to 12 per cent. This would increase the input cost in all industries, not just the software industry.

What also bodes well for the export-oriented IT industry is the focus on the speed of the currency’s appreciation in the light of continuing foreign exchange inflows. The impact of capital inflows, has been identified as a key threat in the coming year and the FM has put in place various mechanisms including more than a two-fold increase in the market stabilisation to help the RBI manage forex inflows in a calibrated manner.

Education

The announcement of three new IITs, IIScs and 6,000 high calibre schools shows our commitment to quality education which augurs well for our supply chain and human capital. Another great initiative is the 100-crore national knowledge network linking knowledge institutions, and the proposed electronic digital broadband, rural networks, State data centres, the employment pool for KPOs etc.

The move towards knowledge society is one of today’s top imperatives.

Infrastructure

Infrastructure development is another area that needs serious addressing and it is a welcome relief to see the Budget devoting attention to it. The rural infrastructure development fund, emphasis on rural roads etc. would not only strengthen the much needed tertiary backbone of the economy and create greater confidence in global business that looks forward to partnering India, it would also go a long way in ensuring inclusive growth to spread the benefits of prosperity to wider sections of the society.

From an overall perspective and following on from a “cautiously optimistic” economic survey, Budget ’08 has been crafted to protect the economy from global headwinds so that the growth momentum can continue.

Significant increase in social sector outlays, especially in education (up 20 per cent) and healthcare has once again highlighted the inclusive nature of the Government’s reform programme.