Published Editorial

Vote on Account 2014: Changing facets of Indian technology sector

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ET Online

by

Rajiv Chugh
Tax Partner, EY

Incessant R&D, rampant competition, insatiable customer expectations and myriad of policy changes - this is what defines the current status of technology sector in India. In spite of these torrents of changes, the technology sector continues to flourish.

How a sector that is riddled with constant challenges continues to contribute nearly 8% to the total GDP of India is nothing short of a marvel. The industry's share of total Indian exports (merchandise plus services) increased from less than 4% in 1998 to about 25% in 2012.

To understand the growth story of technology sector, one has to look at the various stages through which the sector has metamorphosed to eventually break from its cocoon.

Looking back - Growth contributors to the then nascent sector

The growth of technology sector in India has been the result of a rare symbiotic relationship between policy reforms and will of the private sector. Based on data available in public domain, this sector has seen an exponential growth from 8.2 billion $ in 2000 to 88.1 billion $ in 2011 and is now targeting 300 billion $ by 2020.

The history of the IT sector is marked with various policy changes over different phases of the sector over the years as indicated below:

1960s & 1970s - Indigenization and Self Sufficiency

Status of the sector: In 1970s, India was motivated to try to develop self-sufficiency in computers and electronics largely by national security concerns related to border conflicts with China and Pakistan.

Policy measures: The government created an Electronics Committee which devised a strategy for achieving self-sufficiency in electronics within ten years by "leapfrogging" ahead to absorb the most advanced products and technologies available.

Few steps taken during the said period were - establishment of the Santa Cruz Electronics Export Processing Zone, the creation of the state-owned ECIL (Electronics Corporation of India Ltd.) and attempt to regulate the position of multinationals in India.

Impact: Owing to FERA regulations, IBM was required to dilute their equity to 40% in their Indian operations. As a consequence, IBM made an exit from the Indian market. One effect of IBM's departure was to open up the market to a number of competitors.

The 1970s and 1980s - Software Exports

Status of the sector: India exported its first software services and products in the mid-1970s. Although India was among the first developing nations to recognize the importance of software, the key driver behind exporting software was foreign exchange.

Policy measures: The Indian Government lowered import duties on all IT equipment but with a pre-condition that the exporters would recover twice the value of the foreign exchange spent on importing computers within five years - a clause that was modified in the 1980s.

Impact: In spite of the cost advantages and a relatively good proficiency in English, the Indian software industry continued to face the following challenges in 1970s and 1980s:

- Lack of availability of hardware: Import of hardware - especially mainframe computers was very tedious and expensive. - Shortfall in trained manpower

The 1990s - The Emergence of Offshore Outsourcing

Status of the sector: Owing to US immigration laws, US companies had less incentive to hire software engineers from India. This led a few IT companies in India to gradually move to a mixed model, wherein some software programmers would work at the Client's premises (in the US) whereas others would continue to work in the IT company's back-office in India.

Policy measures: The following measures were initiated: (a) the removal of entry barriers against foreign companies (b) the removal of restrictions on foreign technology transfers (c) the participation of the private sector in policy making (d) provisions to finance software development through equity and venture capital (e) measures to make available faster and cheaper data communication facilities and (f) the reduction and rationalization of taxes, duties and tariffs.

Impact: The Indian technology sector witnessed tremendous boom during this period with the advent of outsourced services and cost effective measures provided by Indian industry.

2000 and beyond - The Uncluttered Growth

Status of the sector: Sector continues to grow despite fierce competition and other variables

Policy measures: Ministry of Information Technology formed to integrate a number of different government agencies that were concerned with IT. A number of major tax policy changes introduced including Software Technology Parks, Special Economic Zones etc. to provide the much needed boost to the sector.

Impact: Indian technology sector has responded favorably to the above policy reforms and has continued to grow strong over the years.