Will Software Pay for Doing Well?

As the day nears for new finance minister Jaswant Singh to present his maiden

Budget, one of the main concerns of the software industry is the Damocles’

Sword that again hangs over tax paid. The industry has barely recovered its

poise after the reduction of the period of tax incentives for units operating in

software technology parks (STPs) when the recommendations of the Kelkar Task

Force again threatens to u    pset the applecart–with proposals

to introduce a uniform tax regime and withdraw all incentives.

"The very credibility of the govt will come under question if it periodically revisits its commitments made to the industry" Ganesh Natarajan

There are many "holier than thou" individuals largely outside–and

some within–the industry who argue that software exporters must also pay their

share of the tax burden and the worthy economists who have developed the

recommendations have excellent logic for their proposals. The point that is

missed, however, is that the credibility of any government would come under

question if it periodically revisits the commitments it makes to industry.

Imagine the plight of the young Bill Gates wannabe who has built a business plan

with a small unit in an STP, based on the tax incentive plans currently in

force, only to have the carpet pulled out under all his financial assumptions

one fine Budget morning. And it’s not just new entrepreneurs, even

multinationals are today flocking to Bangalore, Hyderabad, Chennai and Pune to

set up software and BPO units–they would all begin to have second thoughts if

the powers that be adopt a "now you have it, now you don’t"

approach...

Having said that, the current state of the Indian economy, which forms the

backdrop for any Budget, makes for interesting analysis. After six straight

years of decline in industrial output, the economy has been on the upswing since

April 2002–even with a flat agricultural sector, an 8% growth in services and

over 6% growth in industrial output, the country should record near-5.5% GDP

growth. Other positive signs are tight control on inflation and rapid progress

in the core infrastructure areas of telecom and road construction. On the

negative side are continuing high interest rates, relatively high one-year yield

rates, and the resultant large-scale interest rate arbitrage, leading to an

unnaturally high inflow of foreign exchange. The eventual impact is exchange

rate appreciation, which is creating export uncompetitiveness.

On the overall macroeconomic front, the fiscal deficit situation is cause for

concern and the abysmal state of finances of most state governments is leading

to a decline in many forms of infrastructure so crucial to move the country from

a perpetual Third World image to true Developed Nation status. These

shortcomings affect both the manufacturing and service sectors. As the

manufacturing sector attempts to "do a software" and get export

contracts in key sectors like automotive and pharma, weak post-production

infrastructure make Indian competitiveness pale in comparison to China.

What this means is that the government sould avoid any retrograde step that

kills the goose laying golden eggs. While it is a matter of concern to all of us

that amongst all Asian countries, India has the worst skewed distribution

against industry with just over 25% of GDP, it is apparent that even

double-digit growth in the manufacturing sector will only result a rectification

of imbalances and still see us lag behind China, Korea, Malaysia, Thailand and

Vietnam in share of industrial output. It is IT (read software exports) that has

placed India firmly on the global map and this fledgling industry needs a few

more years of nurturing to ensure that Indian heads continue to be held high in

the global marketplace.

The author is the global CEO of Zensar Technologies ganesh@dqindia.com