Indian Regulator SEBI meets Software Product Startups.

How often has this happened? An entire team from Securities and Exchange Board of India (SEBI) with its Chairman Mr. U.K. Sinha meeting with Software Product startups in Bangalore to understand their challenges and also provide useful advice by participating in interactive sessions for more than 5 hours.

On 19th December, Mr. U.K. Sinha, Chairman of SEBI and his management team, heard the stories of 8 Indian software product startups. The idea was to understand both the Capital Markets Challenges (like raising capital from FIIs, listing for IPOs, and other book building challenges) as well new developing landscape of Consumer Market Challenges (like changing landscape of payments, pre-payments, recurring payments, etc.)

Mr. U.K. Sinha, was very forthcoming with his admission that new age companies require a completely new paradigm of evaluation and approvals. The new paradigm is needed not just for listing purposes, but also for market regulation and growth purposes. He assured full commitment from SEBI’s end to the budding entrepreneurs that SEBI is very keen, and will do everything within its capacity to help develop the markets keeping in mind INDIA’s growth needs.

More than 90 minutes of conversation and showcasing of New Software Product Startups from Bangalore took place. Mohandas Pai chaired the sessions on iSPIRT’s side. Not all elements of the sessions can be reproduced here; below are some of the key highlights.

2014-12-19 17.20.42

Home grown Startups share their Stories with SEBI

About 8 Indian Startups which started in INDIA, and which have global operations today, presented their stories not just from a valuation and growth standpoint, but from an emotional and proud-to-be an Indian startup viewpoint. To sum it up, almost every story was about Entrepreneurs who dared to dream something not only for them, but for INDIA, and today want the Indian System (Regulators, Government and Institutions) to reciprocate to their needs. They highlighted their list of issues which include the following:

  • 8 companies from various sectors (InMobi’s Manish Dugar, Ezetap’s Byas, Exotel’s Shiv Ku, HotelLogix’s Aditya, iViz’s Bikash, Paytm’s Pratyush, QuickHeal’s Rajesh and Deck.in‘s Sumanth) all presenting the journey of their startups.
  • A common hardship that resonated from most of them, was the unwarranted need of setting up subsidiaries or parent companies abroad, just to attract the right Investors and raise capital for growth.
  • Exemplary companies like InMobi, which raised initial money from Angel Investors today has a reach of about 1 billion people. Ezetap which raised initial money from AngelPrime, today has global operations, however it has its manufacturing, done entirely from Electronic city in Bangalore. Both urged that it should be made easy for Indian companies to raise money from Global Investors.
  • The existing regulations and guidelines make it very difficult for companies to get the right people (investors and advisors) on their Board.
  • Exotel, Hotelogix, Paytm and iViz, all stressed the need for modifying the SEBI/RBI guidelines on ESCROW, where Indian shareholders should have similar opportunities like Global Investors.
  • QuickHeal’s Rajesh highlighted how Kailash Katkar, a college drop-out had built one the most successful product companies out of INDIA over the past 25 years. Today QuickHeal is thinking of its IPO and needs to decide where to list.
  • Requirement for the Regulator to understand all stake-holders and their motivations, and provide for fast and timely intervention for Exits (IPO listings, etc.).
  • Need for new models to evaluate the new paradigm of Tech/Internet Product startups in INDIA.

At the end of this open session, Shekhar Kirani (iSPIRT Fellow; Accel) highlighted the fact that the Indian software product markets were entering an era of hyper growth. It is a new paradigm where not just startups, but all Institutional bodies within India, need to now collaborate and commit, for supporting each other’s need. In this context, he appreciated the interest shown by SEBI.

Policy Expert Team Interacts with SEBI

Following this open session, the visiting SEBI team met with iSPIRT’s “List in India” Policy Expert Team for an intense three hour closed door conversation about specific issues and their resolution. This iSPIRT Policy Expert Team is led by Sudhir Sethi of IDG and has Rajiv Khaitan (Khaitan & Co.), Sanjay Khan (Khaitan & Co.), R Natarajan (Helion), Rajesh Ghonasgi (Quick Heal CFO), Manish Dugar (InMobi CFO) and Harish HV (Grant Thornton) as its members. While specific details of this meeting are not available, Mohandas Pai told me that the session had been very productive.

Insights from SEBI

Mr. U.K Sinha, Chairman of SEBI, has an unbeatable track-record. In his past life, he was the chairman of UTI, and was instrumental in transforming UTI from a 1.2k crore institution to 12k crore institution. Many insights were shared by Mr. Sinha with all the participating Startup Entrepreneurs. Some of the key ones are:

  • Mr. Sinha and his team gracefully acknowledged that they were not just a Controller or Monitor of Capital issues, but they were equally keen to Develop Markets for businesses to thrive.
  • Further, Mr. Sinha highlighted the introduction of SME-ITP platform to facilitate capital raising by SMEs including start-ups which are in their early stages of growth and to provide for easier exit options for informed investors like angel investors, VCFs and PEs etc.
  • He also indicated that SEBI is exploring putting in place a framework for crowd-funding which will provide a much needed new mode of financing for start-ups and SME sector and increase flow of credit to SMEs and other users in the real economy. In this mode, SMEs and start-ups will be able to raise funds at a lower cost of capital without going through rigorous procedures.
  • It was indicated that SEBI is keen to facilitate capital raising by such companies to help them achieve their full potential.

2014-12-19 16.56.19
New Wind is Blowing

I saw a collaborative approach to problem solving that I haven’t seen before. iSPIRT’s policy approach is refreshing different from the traditional lobbying mindset that one sees in trade bodies. And SEBI is clearly open to listening and learning. It was amazing to see how SEBI as a regulator and iSPIRT as a think tank were both focused on the same national goal. I came away from the meeting with optimism and a spring in my step.

Tax challenges being faced by the(SPI)Software Product Industry and Budget Recommendations made by iSPIRT.

With the budget closing in on the industry there are hectic conversations to represent the Software Product Industry in the right manner in the Ministry of Finance. The tax issues both on the Indirect Tax and Direct Tax have been plaguing the Industry for a long time and this hangout addresses the things which need to be done very well. The Indepth Knowledge of  Bharat Goenka (Tally Solutions) and the  moderation done by Sumeet Kapur(Employwise) leads to an in-depth conversation on the Tax issues.

Bharat divides the two issues into, First, the Direct Tax about TDS the why and when it should be applied along with Industry perspective, the second issue was Indirect Tax – the confusion around excise and service tax relating to products and its definition and applicability of VAT .

It becomes important to introduce the Constitutional Framework under Indirect taxes which broadly talks about Manufacturing and Services being taxed by the centre and anything that is traded is taxed by state.

Confusion arises around “Service” and “Right to Service”. Whereas “service” is not tradable a “Right to Service” when sold is a tradable e.g. a Mobile phone service being provided by a Telco is a service where as when a vendor sells a recharge coupon he is selling “Right to Service” that actually will be provided by the said Telco.

Hence, under this concept of “Right to Service” tends to be tradable until the service is rendered and not after it is consumed, because the title to right to service is nor more existing after consumption. Service is therefore treated as tradable commodity thus qualifying for VAT in states and the Center charging service tax, this leads to invoicing for both VAT and Service tax on a software product.

What is needed is clarity on the issue of tradability of service as “goods” and “service delivery” as “service”.

GST will bring in changes but the taxes will be shared between states and center. GST it self may not fully solve the problem of duality of tax on software products. The problem of duality on VAT and service shall be sorted out only when there is clarity on “Right to Service” as a tradable commodity and “service” is achieved.

We as an Industry need to help Government formulate a distinction between “Service” and “Right to Service” as a tradable, so as to do away the duplicity of VAT and Service Tax so that service tax is charged only on part of service and VAT only on tradable value added portion if and when a service is traded further by channel partners of the service provider.

Direct Taxes (TDS)

Sumeet introduced an issue on TDS. Primarily a TDS made by payers to software company leaves less cash on the money collected. This is mainly for software product which sold leaves the product company with 10% less cash on the money collected.

Bharat mentioned that Software despite being a tradable product is the only product that is subject to TDS. This creates a bigger problem for the young companies and growing industry as early years do not allow you the sufficiency of profits.

We need to bring in front of Industry that no trading activity should attract TDS. Also that by doing away TDS the Government is allowing the profitability and business growth thereby allowing more business to happen and widening the tax base eventually.

Sumeet was of the view that, if software product companies are being subject to a TDS there should be Tax credits available on service tax so that the cash availability to businesses can be balanced.

Bharat added yes we can represent to the Government on this that either give me an input credit or refund TDS on day I file my return. Sumeet added that refund must be done even if there is a scrutiny.

Pramod from Nucleus Software added that in an event the question of Duplicity of VAT and service tax was raised to the Revenue Secretary, who showed his inability to do away with duplicity on tax as VAT is a state subject.

Conclusion

Many of the changes in law have come in past few decades and there was a lack in taking the cause to Government or lack of sufficient clarity in helping Government to clearly define distinction between Goods and Services and to separate out Right to Service being traded verses Services.

Bharat Concluded by saying, in the present efforts done to represent to government, we are looking at adequacy of clarity and this clarity is much needed even if the GST is coming to solve the issues and problem in this regard.

The detailed budget recommendations can be seen here.

With Inputs from Sudhir Singh, ExcelICT

The A-B-Cs of the RBI Circular on Software Exports

Ok, so I am seeing a lot of posts / news item with headlines that make it look like the RBI / Government wants to wipe all export based startups off the face of the planet. Folks, please calm down. Here’s the A-B-Cs of what that really means:

1) You’ve got to understand that if the RBI / Government wanted to wipe you out, they would’ve done it already.

2) Wiping out export based startups is like shooting your best striker in the foot. Why would India, a country with trade deficit want to make life harder for the people who are helping reduce the trade deficit?

3) The circular was issued in September 2013. It’s a year old already. Please factor that in too.

Now down to some specifics: 

1) Firstly, it’s a myth that everyone has to get STPI certification. Only those companies that are registered with STPI have to get STPI certification. STPI is already in it’s sun-set era. The 10 year exemption is over and it has no jurisdiction over companies not registered with it.

2) The intention is to gather information on foreign exchange inflow into the country. Not to control it.

3) The reason it hasn’t been actively enforced yet is that this foreign exchange inflow related information is already supplied by banks to RBI monthly so whatever information you will be supplying is only corroborative.

4) What needs to be done is that you must download a form called “SOFTEX” from the RBI website, fill it up with basic information, sign it and then either submit it to your banker or upload on RBI website. There isn’t too much clarity on this.

Just to clarify, this is to the best of my knowledge. To be 99% sure, I have confirmed this with three other seasoned RBI / Tax practitioners.

So folks, please relax. There’s no need to arrive at massive conclusions based on the media reports!

Guest Post by Jaydeep Halbe, Halbe Innovations

Join us in hosting the Minister for IT – Bengaluru, 1st July

At the forefront of progress is change. iSPIRT continues to drive the process of change to Transform India as a Product Nation, using the engines of private initiative, policy and programs like Playbook Round Table and PNCamp. iSPIRT’s policy initiatives involve active dialogue with Government.

Conclave for India as the Product Nation

As part of this initiative, iSPIRT is hosting  the “Conclave for India as Product Nation #1″, an open dialogue between the Product industry and our Ministry for IT.

Welcome Sh. Ravi Shanker Prasad

iSPIRT lives and breathes (software) Products and Products only. It’s think-tank has passionately engaged with the Ministry of IT to advocate recognition of the Software Product industry in its own right. We welcome the Hon’ble Minister for IT Shri Ravi Shankar Prasad, to meet the Industry folks and experience our Industry in person, first hand.

 

You already know iSPIRT is an open-source movement. This means everyone can contribute, and each contribution is recognized. It is each such contribution that makes the open-source movement go from strength to strength. In keeping with this philosophy, you are warmly invited to participate in the Conclave with the Minister. iSPIRT Founder Circle members, Product Circle members, Fellows, Mavens and Saarthis are all welcome to attend. It’s your industry, our industry, so be there!

Prior confirmation is required… so do RSVP here to help us make adequate arrangements.

Agenda:

    • Introduction
    • Showcase of Disruptive product initiatives in India
    • Interaction session with the Product industry

Venue:

Hotel Le Meridien, 3pm – 6pm
Sankey Road, Bengaluru
Registration : 2.00pm

Do come in early. Doors close at 2.45pm.

Innovation in India: Where do we stand at the end of 2013?

As the new year approaches, its customary to review the year that has passed. Here is my take on where we stand on innovation at the end of 2013.

Positive Highlights of the Indian Innovation scenario in 2013

Innovation in the public/strategic sectors took two important strides. The first was the successful launch of the mission to Mars (Mangalyaan) which demonstrated India’s ability to undertake complex scientific and technological projects at low cost. The second was the initial operational clearance for the Tejas Light Combat Aircraft by the Indian Air Force.

The emergence of a new generation of Indian technology companies like Vigyanlabs, winner of the Nasscom Innovation Award in the Technological Innovation category for 2013 was another positive development. Vigyanlabs solves an important problem (high consumption of power by data centres) with a system solution that is backed by a US patent.

VigyanlabsSome of the most important innovations took place in the political sphere. Two new entities demonstrated the potential for such innovation. The success of a young political party, the Aam Aadmi party, in the Delhi elections demonstrated the value of a grassroots approach to politics backed by creative use of the social media. In Bangalore, the Bangalore Political Action Committee B.PAC seeks to be a catalyst for “good politics” by supporting candidates with a clean record. B.PAC also trains aspiring politicians.

Another timely organizational innovation was the launch of the Indian Software Product Industry Round Table (iSPIRT), a think tank devoted to the promotion of India as a power in the software product industry. Two initiatives of iSPIRT – one to connect Indian product companies with the requirements of India’s large small and medium enterprise (SME) sector, and the other to create a vibrant market for acquisition of software product companies (“M&A Connect”) have shown the potential of efforts to close the gaps that hinder the emergence of a vibrant product ecosystem [Disclosure: I am associated with iSPIRT as a member of its Founders’ Circle.]

iSPIRTMarket-driven innovation efforts by large multinational companies such as Renault (with the Duster) and Gillette (with the Guard) showed that some MNCs are coming to grips with what it takes to innovate for the Indian market. Yet, the overall MNC innovation scenario in India was mixed with some companies scaling down their efforts to use India as a base for emerging market innovation.

The Indian Industrial Innovation Scenario

2013 was a decidedly mixed year for industrial innovation in India. One of the mainstays of Indian industrial innovation, the transportation sector, had a poor year. Despite several efforts, Tata Motors was unable to revive the fortunes of the Nano, and sales remained muted. Mahindra’s earlier success in the SUV market with products like the Scorpio and XUV 500 was eclipsed by determined efforts by MNC automotive companies (Renault with the Duster, and Ford with Ecosport). By all reports, the initial results of Mahindra’s acquisition of Reva (India’s pioneering electric vehicle company) have not been great either with their first post-acquisition product, the E20 seeing only moderate success. Neither Tata nor Mahindra had successful launches during the year. In contrast, MNCs had several successful launches including Honda’s Amaze and the SUVs mentioned above.

Zydus Cadila successfully completed trials for what may become India’s first new chemical entity to reach the market. But the Indian pharmaceutical industry faced several setbacks as prominent companies came under the scanner of American and European regulators, and big names including Ranbaxy and Wockhardt faced regulatory action. Since, their ongoing operations in the bulk drugs (APIs) and generics space provide the cash to fund their innovation efforts, any setback to these businesses could have a long-term negative impact on the Indian pharmaceutical industry.

Traditional Indian business groups have begun to realize the importance of a more structured approach to innovation, but are struggling to evolve appropriate processes to do so. My co-author, Vinay Dabholkar and I received enquiries from such companies in different sectors, but few of them translated into specific assignments.

The Innovation Ecosystem

Reflecting India’s overall struggles with enhancing innovation output, India slipped two positions on the Insead/WIPO Global Innovation Index in 2013. India’s biggest weaknesses are in the institutional environment, and in higher education and R&D.

Where does India standThe latest available R&D statistics (pertaining to 2009-10, released on September 2013) show that India’s R&D expenditure as a proportion of GDP is static at around 0.88% since 2005-06. But, there are two important changes to note. The sectors accounting for the largest proportion of industrial R&D spending – pharma and transportation – continue to be the largest, but their share has come down to 27.7% and 14% respectively from 45% and 17% respectively earlier. This is a positive development as it shows other sectors increasing their R&D spend faster. The other interesting development is that private sector industry now accounts for 28.9% of all R&D expenditure and the entire industrial sector (private + public sector) for more than 34%.

Sector wise R&DOne piece of good news is that the proposed Inclusive Innovation Fund has taken a step forward with an in-principle approval of the first tranche of funding. But the operational details still seem some distance away. It looks unlikely that the Fund will be put in place before the next general elections, and it remains to be seen whether the next government will see it through to fruition.

During the year, the Department of Scientific & Industrial Research re-jigged its schemes for supporting R&D by industry. New schemes include “Patent Acquisition and Collaborative Research and Technology Development” (PACE) and “Promoting Innovation in Individuals, Start-ups and MSMEs” (PRISM). As far as I can make out, the PRISM scheme is not too different from the TePP programme that was quite popular earlier. The PACE programme provides loans for companies to acquire patented technologies and then work on them further. In the past, the common problems of government support schemes included processing time, centralization in Delhi and inadequate scale. Let’s hope the government is able to address such issues this time.

Another useful development is the incorporation of innovation into the Results Framework with which the Performance Management Division of the Government of India measures the performance of government ministries and departments. This will hopefully result in a greater focus on innovation in the government.

Conclusion

2013 wasn’t a great year for innovation in India. Industrial innovation, in particular, seems to be at the crossroads. I hope that a focus on innovation will return once we have a new government in place later this year.

Design and its New Role in Innovation – A Round Table led by Eskild Hansen (Nov 26th, New Delhi)

DesignRoundTable with Eskild Hansen in New Delhi

Eskild Hansen will lead a discussion with prominent design thinker in the NCR on ‘Design and its New Role in Innovation.’

Eskild Hansen is one of the most talented Danish Designers on the Scandinavian landscape. Just turned 40, he has already been in leaderships positions at Cisco and Coloplast among others after having worked with other leading global design firms. At CISCO Eskild was responsible for establishing their first European Design Centre in Copenhagen and during this period helped bring a breathe of fresh air to the previously ‘boring and bulky’ Wireless Routers. He even won a Red dot in 2011 for one of his designs. You can read more about his work at www.eskildhasen.com.

Eskild is also a part of the Danish government strategic think tank that is developing and strategizing the ‘Danish Design Society.’ Invest in Denmark, a part of the Ministry of Foreign Affairs is bringing him to India on their 2nd Design Tour between 25th and 30th of November, 2013 and are offering the members of iSpirit and opportunity to engage with Eskild on common areas of interest. A new development has been the opening of a Danish Innovation Centre in New Delhi and Bangalore (www.icdk.um.dk).

Eskild is also very excited and eager to work with Indian companies for his private design consulting company.

Economists revise GDP estimates with investment in intangibles

The US economy will officially become 3 per cent bigger in July as part of a shake-up that will see government statistics take into account 21st century components such as film royalties and spending on research and development. Billions of dollars of intangible assets will enter the gross domestic product of the world’s largest economy in a revision aimed at capturing the changing nature of US output. A brief look at the emerging scenario.

Gross domestic product (GDP) is the market value of all officially recognized final goods and services produced within a country in a given period of time. GDP can be determined in three ways, all of which should, in principle, give the same result. They are the product (or output) approach, the income approach, and the expenditure approach. The most direct of the three is the product approach, which sums the outputs of every class of enterprise to arrive at the total. The production approach is also called Net Product or Value added method. This method consists of three stages:

  1. Estimating the Gross Value of domestic Output out of the many various economic activities
  2. Determining the intermediate consumption, i.e., the cost of material, supplies and services used to produce final goods or services; and finally
  3. Deducting intermediate consumption from Gross Value to obtain the Net Value of Domestic Output.

Both firm-level and national income accounting practice have historically treated expenditure on intangible inputs such as software and R&D as an intermediate expense and not as an investment that is part of GDP.  Now, this exclusion of intangibles is increasingly questioned. Economists in USA pointed that business investment in intangibles is a vital aspect of business activity, and the investments shown below represent a large and growing portion of the overall economy.

    •    Computerized information (mainly computer software)
      • Scientific R&D
      • No-Scientific R&D
        • Cost of development of new motion pictures, films and other forms of entertainment.
        • Investment in new designs
        • Estimation of product development by financial services and insurance firms.
        • Investment in Economic Competencies
          • Spending on strategic planning
          • Spending on redesigning or reconfiguring existing products in existing markets,
          • Investment to retaining market share
          • Investment in brand names
          • Employee training.

 

The rapid expansion and application of technological knowledge in its many forms (research and development, capital-embodied technical change, human competency, and the associated firm-specific co-investments) are key features of recent U.S. economic growth. Accounting practice traditionally excludes the intangibles component of this knowledge capital and, according estimates exclude approximately $1 trillion from conventionally measured non-farm business sector output by the late 1990s and understates the business capital stock by $3.6 trillion.

Can we expect our GDP estimates to be revised likewise?

It’s time to open the gates wider

There is a growing nervousness among foreign investors putting their money in India. The Global Entrepreneurship and Development Index 2012 revealed that India, Asia’s third-largest economy, ranked 74th out of 79 countries, making it an unviable country to start a business. There is a growing nervousness among foreign investors putting their money in India.

Fewer than 150 start-ups are promoted by venture capital or angel investors annually in India compared to over 60,000 angel investments in the US. In 2011, Indian angels, constrained by regulations that make both investing and exits cumbersome, invested only about Rs.100 crore in around 50 deals compared with Rs.2,000 crore angels invested in Canada.

These figures don’t surprise Indian product software start-ups. India has produced few of the world’s leading software products, has 3,400 software product start-ups, and adds 400 every year. But it needs the right environment and incentives to build a world-leading industry.

For several decades, the Indian ownership laws and the investment and business environment have not allowed a conducive setting for the brightest of minds, many of whom have migrated to California. The new Indian entrepreneurs spend significant time on product development to build patentable products with a global market. However, as soon as the product gains traction, venture investors and professionals advise entrepreneurs to move the holding structure, if not the entire business, outside India. The main reasons are as follows:

Financing:

In today’s world talent and ideas are mobile. Singapore, Hong Kong, Chile and the UK are offering attractive financing (debt and equity) to Indian companies to relocate their business. They are also offering tax benefits. This is starting to result in real migration of promising companies out of India.

Maze of rules:

In India, we have foreign direct investment, VCI (venture capital investment), foreign institutional investors, Reserve Bank of India, fair valuations and draconian consequences for inadvertent slip-ups, while in most major economies there are no restrictions.

Taxation:

Capital gains (20%) as well as dividends (dividend distribution tax of 12.5%) even for foreign investors. In most major economies, foreign investors are not taxed on their capital gains and dividend income on their investments and owned businesses. India’s tax policy does not help a product business to attract the right kind of investors and acquirers, and is a hurdle for those interested in foreign acquisition in a stock deal as Indian paper is not an attractive currency. In the UK, for example, investors can write off any investment losses against income, and this significantly reduces their cost of failures.

Open economy:

India does not treat foreign investors on par with local investors, unlike the US, the UK, Europe, Singapore and Hong Kong, which have no restriction on ownership and company structures, and for the most part, regulatory filings (except some strategic and security related issues).

India needs to build an attractive regime to retain the software products business and its intellectual property, which is highly mobile. Incentives and special regimes for businesses that create IP and file for patents will give the industry a big boost. Among the solutions are the liberalized ownership rules with exemptions from regulatory filings and specific regimes (FDI/VCI/FII, etc.), specific exemptions from capital gains and dividend taxes for investors and tax exemption on foreign income of Indian software product companies. Why not go even further and build a fully liberalized virtual special economic zone for ownership and operation of software product companies, with India signing an iron-clad double-taxation avoidance agreement the virtual SEZ.

India needs to proactively grab opportunities, or risk driving the whole industry abroad. We have the potential to create multi-billion dollar global product companies every year, and the benefits could run into trillions of dollars over a decade or two.

This article first appeared in the LiveMint

An iSPIRT’ed Budget

One of the pillars of iSPIRT’s mission statement is a focus on converting the needs of the product ecosystem to policy direction.

One of the first undertakings of the iSPIRT community will be to formulate suggestions on how to improve Finance and Investment related policies to yield better results for this industry. And what better time to do this than in the run-up to the Budget presentation on 28 th February?

We plan to host and facilitate open and transparent online discussion around the key topics where current policies should be revisited. The discussions will be seeded with the release of a series of Blue Papers –short discussion documents identifying the key pain points, what is at stake, and how we should proceed as country.

Over the coming four days, we will release a new Blue Paper each day on the following topics:

We encourage everyone to help us collaboratively build on these initial viewpoint documents. We will close the discussions as we approach Budget Day, and after the release of the Budget will then create a set of assimilated viewpoints stemming from the Blue Papers, the discussions that have transpired online, and reflecting on the actual Budget.

These viewpoints will then be shared back with the Government as inputs reflecting the views of hundreds, or hopefully thousands, of product entrepreneurs and ecosystem participants.

Keep checking back here over the coming days, and we hope to hear your voice, too!

Sustaining India’s IT Exports Growth: Why Products are the Way?

Going by its 12th five year plan projections, the Indian government expects that the IT/ITES exports from the country would reach $130 billion by FY 2016-17, up from $69 billion in FY 2011-12. That is a CAGR of 13.6%.

How realistic is it?
The Planning Commission’s (it  has got those figures from IT ministry which in turn would have consulted with the industry before suggesting it) projection is obviously based on the past trends. Between 2002-07, IT exports from India grew by a CAGR of 32.6%. In the next five years, between 2007-12, the IT exports registered a CAGR of 17.2%. Purely going by those number, a 13.6% growth does not seem too unrealistic for the period 2012-17.

But that does not give the real picture. While the government has its own five-year plan periods, and all its numbers are synchronized to those blocks of periods, the industries do not necessarily work that way, least of it, an exports industry.

Indian IT services exports industry had its distinctive growth periods. The period between 2003-04 to 2007-08, was the high growth period when, on an average, the exports grew 30% year on year, growing by a whopping 37.2% in 2004-05. Of course, the industry was much smaller.

The new phase began in 2008-09. From that year onwards, the industry has grown between 5-19%. In short, the growth of FY 2007-08, which belonged to another era, skews the figure for the five year period that the government has taken—2007-08 to  2011-12. A better idea, hence, would be to compare with the CAGR of the four year period 2008-09, which was 14.2%.

On a much bigger scale, is is possible to replicate that kind of growth, with business as usual. The current year growth is not likely to be more than 10-11%, considering that the top companies have grown by 9% in the first nine months. If the first year of the block shows a growth of 10%, it will be panglossian to believe that the exports will grow by 13.6% in the five year period.

That is, if we go on doing business as usual. The 12th Plan document also does not mention any new initiatives in this area that would make one hopeful, unlike in case of semiconductor and electronic design segments, where a lot of new initiatives are listed.

So, how do we sustain the growth? It is difficult to believe that changing a tax structure here or duty structure there for IT/ITES exports would help the industry grow. We need to look at comppletely new areas/new dynamics to make the industry growth accelerate.

I believe engineering services and software products are two such areas which have potential to drive the next phase of growth for Indian IT. Here are the reasons why I bet on these two

  1. Both these areas are not really completely new areas for Indian IT. There are some leve of action already and the world has noticed the ability of Indians in both these areas
  2. The opportunity and scope available to expand is immense. Hence, the growth will be sustainable for some time
  3. There are passionate people and organizations trying to furher the cause of both these segments.

With a little help from government in terms of incentives and promotion, these two segments, I believe, can drive the growth for the industry in the medium term.

This year’s budget could be a great beginning. The government could well begin by announcing some concrete incentives for encouraging creation of software products from India. Here are some of the ideas that are worth exploring (in the area of software products).

  • Creating direct tax incentives for companies engaged in creating software products
  • Incentivizing government department, agencies and private companies in India to buy made-in-India products through a mix of fiscal and non-fiscal incentives
  • Creating product-only SEZs
  • Instituting awards and honors for software products made in India
  • Encouraging software companies to create products for solving e-governnce problems in the country
  • Creating a comprehensive policy statement to encourage creation of Intellectual Property in computing/information sciences in India