The Hindu Business Line : Focus on domestic IT market

Indian IT and ITES industry has been going through an export boom over the last few years. IT services exports are projected to grow at a healthy 30 per cent. However, the growth rate in the domestic market is only around 15 - 20 per cent for sectors such as application development, IT consulting, IT education and training.

Also over the last few years, the domestic IT market has witnessed a gradual shift from being predominantly hardware oriented to a greater service and solution orientation. We feel this Budget needs to focus on the domestic market in terms of increasing the profitability of the service provider as well as giving incentive to the industry for investing in IT.

With the growth in the domestic market expected to stagnate as shown in the diagram below, this industry needs fiscal measures in order to make it more profitable. That would not only reduce the high reliance on the export revenues but also help in retaining the best resources for working in the domestic market that are now mostly deployed on the more profitable foreign assignments.

Also the Nasscom Strategic Review 2007 has shown that the share of domestic IT services in the overall IT services revenue is steadily declining from around 30 per cent in 2004 to only around 23.6 per cent by 2007-end.

E-governance should be another thrust area for this year's Budget. E-Governance fund allocation across the different departments such as health, municipality, education, transport and the subsequent monitoring of those funds through third party sources would help make the true benefits reach the citizens.

Skill development and infrastructure are two other areas, which would need careful planning for them to contribute to the growth of domestic IT business. The Nasscom-McKinsey study had projected a shortfall of 5 lakh knowledge workers by 2010. The situation is far graver once you also consider the quality of the resources who are graduating in huge numbers to meet this shortfall.

India's infrastructure has not kept pace with the explosive growth of IT specially in terms of developing satellite townships, airports, roads, telecom and networking. The development of integrated townships will take the pressure off the large cities that are increasingly unable to cope with the growing infrastructure demands. Funds from taxes like FBT should be channelled towards infrastructure growth and urban renewal and provide incentives to organisations for creation of such facilities.

There has been a lot of inorganic growth in IT industry over the last year and large players of India have a lot of financial leverage. India needs to carefully look at merger and takeover norms so that large IT service providers can acquire smaller firms across the globe if there are synergistic gains to be realised.

Finally, India is also witnessing a lot of incoming foreign direct investment in IT and ITES sector. Our Budget wish list would be to carefully analyse the benefits of export obligation requirements on incoming FDI for increasing exports apart from the tax benefits being offered now.

The author is principal consultant, PricewaterhouseCoopers.