Union Budget 2023: Expectations from the technology sector

The Union Budget 2023 will soon be announced by the Government of India, which will be extremely pertinent for the technology industry. To set some context, the global technology industry is entering a new phase in 2023. After years of exuberance, especially in the last 2 years in the immediate aftermath of Covid, technology industry is going through a period of consolidation. The year 2022 witnessed corrections across segments, as high inflation and interest rate hikes in western economies deferred client budgets. As investors closely scrutinize the growth plans and profitability measures, technology companies scaled back on riskier investments and focused on corporate level reorganizations, workforce rationalization with increased focus towards maximizing near-term operational efficiencies. In the private markets, this shift is frequently termed as the ‘funding winter’ especially for late-stage startups, which are following a similar focus towards profitability.

In the Indian context, 2021-22 witnessed one of the best performances of the industry in recent times. As per industry estimates, India’s IT-ITeS industry recorded 15.5% growth in FY2022 to reach $227 Bn in revenue and around 5 million direct employees. However, the broader sentiments on the macro-economic situation in western markets is likely to impact the industry in the short term, with a positive outlook in the medium – long term

On the domestic market, there was an increasing adoption of digital services across the board. India also successfully concluded the auction of 5G spectrum, and major telecom operators have announced plans to launch 5G services within the current year. With reliable and efficient connection speeds, 5G is expected to usher in the next phase of digital revolution in India, and accelerate the digital transformation at an unprecedented scale 

On the manufacturing side, after the successful response to the Production Linked Incentive (PLI) scheme for Electronics Manufacturing Services, India announced PLI scheme of US$ 10 billion for the semiconductor and display board manufacturing industries. The initial response from the industry has been very positive, with domestic business houses and global semiconductor companies evaluating business opportunities in this emerging industry 

It is in this context that we look forward to the Union Budget in 2023.  Opportunities like Semiconductors, Electronics Manufacturing, etc. will be potential growth segments as the sector is buoyed by supply chain realignments in the regional markets. It presents an opportune moment for India to redouble the policy thrust and create strategic capacity.

• Focus on sunrise sectors aswe build the domestic semiconductor ecosystem, it may be prudent to target sunrise sectors where India has an opportunity to create the new ecosystem. Unlike segments like consumer electronics with established value chains and regional leadership, sectors like Electric Vehicles, Renewable Energy, etc. provide an opportunity for India to be an early adapter and create regional and global value chains from India. 
• Unlocking long term funding options greenfield Semiconductor projects require high capex and have long gestation periods. While PLI scheme and various state level incentives provide significant subsidies on the capex, it will also be useful to provide flexible financing solutions through development finance institutions and/or infrastructure funds at attractive rates. Especially in the current context of increasing interest rates, this will be an important enabler to kickstart and sustain the investments.
• Ease of doing business nowadays,with advancement in technology, various products get imported with advanced specifications. Due to these technologically advanced products, customs officers frequently raise queries about classification, availment of concessional benefits, etc. This leads to delay in clearances and importers are forced to get the goods provisionally assessed under Section 18 of the Customs Act and get it cleared upon submission of a bank guarantee along with Bond. It is expected that the government come forth with suitable amendments to Section 18, facilitating clearance of goods upon submission of Bond, improving the ease of doing business.

• Clarity on duty concessions for Telecom products there are various ambiguities with respect to exemption from custom duties on telecom products. Telecom products, such as Voice Over Internet Protocol products (phones, Multi Input Multi Output), Long Term Evaluation (LTE) products, have been made a part of the exclusion list under Sr. No. 20 and are attracting Basic Customs Duty (BCD) by 20 percent. As per the industry view, these products are covered under Information Technology Agreement. Such exclusions based on the technical specifications of the product is resulting in ambiguities, and it is expected that the government come forward with requisite clarifications and amendments to provide clarity
• Startup ecosystem development as private market investors reassess their priorities, public funding can be stepped up in strategic technology areas such as artificial intelligence, robotics, cyber security, space technologies, etc. While we have previously utilized the fund-of-funds approach to startup financing, we can also explore direct funding of strategic technology areas through the incubators / accelerates in institutes of higher learning such as Indian Institutes of Technology and Indian Institute of Science. Along with increasing allocation for funds tied to specific research and development objectives. 

As the global economy and the technology industry settles in the new equilibrium, India has a unique opportunity to capitalize on the strategic shifts and supply chain realignments and create domestic capacity in both manufacturing side and in emerging technologies. We should expect the Union Budget 2023 to build on the policy successes in recent years and enable the industry to achieve scale and growth in technologies of future.  

The article has been written by PN Sudarshan, Partner and TMT Industry Leader, Deloitte India