Curtains down for STPI?

In the beginning, there was nothing.

And then came Software Technology Parks of India, popularly known as STPI, in 1991. ?There shall be a vibrant IT industry in India,? it said. And within a few years the country emerged as a leader in the global outsourcing business.

If a historian were to record the STPI's contribution to the Indian IT industry, he would naturally classify life as being before and after STPI.

But first things first: did you know that the Indian IT industry's dream run with zero tax under the STPI regime could trace its root back to our Partition days? In a way, that is! Apparently, the loss of Karachi as a deep sea port led to work on Kandla as India's own deep sea port. When it was declared open in 1969, a solution had to be found for the workers who had helped build the port. So, India declared the Kandla port a Free Trade Zone, the first by any country ever! The free trade concept caught on and by the 1980s, the concept of Export Oriented Units (EOUs) being granted tax exemption was in vogue. And then came the STPI scheme, says N. Vittal who was Secretary, Department of Electronics between 1990 and 1996.

Twenty years later, the IT industry has made the country proud. Unfortunately, the glorious organisation that made this happen has lost its sheen, with the Government deciding to allow the 10A, 10B clauses of the I-T Act (that allow for tax sops on exports) die a natural death by not extending it any longer.

Early days

It is well known that Texas Instruments was the first to set up a software unit in Bangalore in 1987, to service its US requirements. But, what wasn't known was that even if TI could set up the earth station (for satellite connectivity) and other telecommunication equipment, the Government of India, as per the 1885 Telegraph Act, had monopoly over communications, save for the Railways and the Defence departments, says Vittal. And, neither did the government have the money to install such equipment.

To top this all, the government asked TI to pay an atrocious amount, at the time, to be allowed to set up such machinery! Vittal says, ?This was like making an image of Lord Ganesh out of jaggery and offering the same jaggery as Prasad! Coming from the Gujarat cadre of IAS officers, I understood that industry has to be given a leg up if the country were to prosper.? So, he routed money, Rs 12 crore, meant for the Semiconductor Complex in Mohali, to STPI to set up base stations in six cities.

J A Chowdary, who was the first director for any STPI in the country, was deputed by the Department of Electronics (DoE) to oversee the Texas Instruments effort to set up an Offshore Development Centre.

Perhaps not many know what actually went behind the development of the IT industry in the country from a few millions of dollars 20 years ago to $60 billion at present, employing 2.5 million people. As a proportion of national income, its contributions went up to 5.8 per cent in 2009 as against a negligible 1.2 per cent in 1998. This rags-to-riches story happened because of STPI, which played the ?lead' role in the saga.

Also, IT companies had to prove that they have enough space for storing floppy disks in order to get permission to import them. People like N R Narayana Murthy had to spend months just to secure permission for importing IBM machines.

For people who now work with smart phones and iPads that allow movement of information in a jiffy, it might look strange that information put out or consumed by companies initially was monitored for a few minutes daily by an engineer appointed for this very purpose! Vittal says, ?I asked for a ban on this, citing that even Western countries didn't do such things!?

For getting a 100 per cent EoU tag, one had to employ a full-fledged lobby team and precious management time in Delhi. It was not easy setting up an IT company in the late 80s and early 90s, forget about establishing an ODC.

?The STPI's initial mandate was to clear TI's application acting as a single window. The biggest challenge was to get the company a satellite link. With VSNL having a monopoly over international communications, STPI had to argue in favour of putting in place a dedicated channel for the purpose,? Chowdary recalls.

The other important hurdle was the speed of connectivity, its cost and bureaucracy that inordinately delayed allotment of bandwidth. ?For 64 kbps, they used to take months and charge Rs 40 lakhs annually,? he says.

Besides offering EoU tags under the already in-vogue EoU scheme, STPI had to hand-hold companies both multi-national and domestic ones in establishing their roots firmly as they deployed electronic and physical infrastructure.

One thing led to another. The success of Texas Instruments forced other MNCs to look at India for their ODCs. And, Bangalore emerged as the obvious choice. A flurry of activity followed with STPI soon juggling multiple tasks.

With technocrats such as Chowdary and B.V. Naidu at the helm, STPI could rise to the occasion.

B.V Naidu, who was also instrumental in the evolution of STPI, pointed out that the organisation was born on the realisation that the issues relating to a sunrise industry could not be handled by a typical commerce ministry set-up. ?This was part of liberalisation and, incidentally, was the first sector-specific scheme,? he observes.

?IT industry needed high-speed links quickly and cost effectively. N Vittal got special approval for this that actually had a cascading effect,? he recalls.

The cost factor was a major hindrance for domestic companies to aspire for connectivity with clients elsewhere. Again, it was the STPI that came to their rescue and introduced competition, thereby reducing connectivity costs.

As STPI began to clear the ground for IT, ITES industry to take roots, some State governments woke up from slumber. Again, it was the STPI that ?incubated' IT Departments as States had no experience in these aspects.

?Before STPI, no state government had an IT Department. We lobbied to create IT Departments. We incubated the department in STPI in Karnataka and we were instrumental in providing a single point of contact to the industry,? Naidu says.

The glitter and glamour soon caught the imagination of not just the youth. Politicians such as S.M. Krishna of Karnataka and N Chandrababu Naidu of Andhra Pradesh became strong votaries of the industry and went all out in giving approvals. IT Secretaries such as Sanjay Dasgupta and Vivek Kulkarni too added flavour to the tech recipe.

Sheen lost

But now, it is the silence of Pranab Mukherjee, Union Finance Minister, on the sunset clause that has baffled the industry. It was this clause that had helped companies like Infosys to start off from a Jayanagar office to become a globally known IT services firm.

Most of the IT entrepreneurs hoped against hope that there could be some relief. Nasscom and State-level industry bodies had called for expansion of the relief to at least small and medium enterprises. Some wanted the Government to extend it to companies that set up shop in tier-ii and tier-iii cities.

Hopes belied

It is end of the game for SMEs in the services sector. You cannot expect another Infosys come out of an SME, says Ravi S Rao, Managing Director of Value Momentum and President of SME Forum of ITsAP (the IT industry association of Andhra Pradesh).

IT, he argues, is a wealth creator as much of its revenues goes in the form of salaries. ?No other industry offers this kind of salary levels. Though the Government may lose tax receipts from companies directly, the wealth it created in society compensates for this indirectly,? he points out.

He says SMEs cannot compete with biggies. ?They cannot move to SEZs where the minimum space available is 30,000 sq.ft. They do not get multi-year contracts. Majority of them live on single company contracts. They cannot take costly space in anticipation of projects,? he says. Chowdary supports this view. ?Big companies can build their own SEZs in the huge, spare land they were allotted and take up new businesses. Tax sops helped as a cushion for small companies and helped them survive in extremely competitive environment. With weak balance sheets, they cannot compete with biggies even for bagging domestic companies,? he says.

P Venugopal, Director of STPI (Hyderabad), says everything else (meaning, without tax sops) remains the same. ?Only the sunset clause will go. We are going to continue to help the industry and all the EoU benefits such as custom and excise duty exemptions will remain the same,? he assures.

But a senior IT executive says it is meaningless. ?Tax sop is the heart of STPI. We do not import computer hardware every year. They should have extended this to at least small companies. Soon, you will see extinction of SME services companies,? he warns.

The STPI, experts argue, should transform itself to cater to the newer and tougher challenges the industry faces. ?They used to train people in Lotus Notes in the early 90s when they found that human resources in that category was inadequate. They used to offer furnished office space for IT start-ups (the names included Infotech, Capital IQ, Capgemini) at just Rs 4 a sq.ft,? Chowdary points out.

STPIs would lobby with States to allot huge chunks of land for IT firms. The Governments did not know how an IT company functioned. STPIs went on international trade expos to promote the fledgling IT industry in India.

In the SEZ era, where intimidating biggies are on the prowl, STPI should find a way to handhold start-ups and SMEs to take roots. With 95 per cent of the $60-billion industry confined to the seven top cities, the IT story has a lopsided growth. Nasscom hopes to focus on 43 new locations in the next few years.

The moot question, however, is, can we see an Infosys happening out of a start-up or an SME in the post-STPI era, forget about expanding to smaller cities?

It is to be seen whether it is curtains down for STPI or its metamorphosis into a new avatar that can help out the IT industry, particularly the SMEs.

(with Moumita Bakshi Chatterjee in New Delhi, Balaji Narasimhan in Bangalore and K Bharat Kumar in Chennai)

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