Need start-ups to reboot IT

With The export sector looking at a resumption of 20 per cent-plus growth, the surge in domestic spending on information technology (IT) by the government and the corporate sector, the accelerating demand for IT hardware and software, the IT sector in India is witnessing a resurgence in fortunes.

The sector has a few expectations from Budget 2011-2012, begins with an increased focus on infrastructure development — an aspect that can propel India towards a new level of accelerated growth. Over the last decade, much of the growth of the IT and the business process outsourcing (BPO) sector was focused on a set of seven to 10 locations, owing to various factors like infrastructure, access to a large talent pool, developed policies, et cetera. However, with the industry maturing day by day, it is important for the IT-BPO sector to expand across more locations. Already around 50 cities have the basic infrastructure and human resource to support global sourcing, domestic technology and business services industry. Development of Tier 2 and Tier 3 cities will offer a significant cost advantage and employment of opportunities. This is vital for balanced development of the country. Some centres could emerge as regional hubs to support domestic companies. However, expectations of improved infrastructure are not just references to readily available physical structures and direct capital investment requirement but include focus on enhancing the social infrastructure as well.
While India has ample amount of talent, it is largely not employable. This leads to incremental training costs and increased downtime for the industry. This is challenging keeping in mind the availability of quality talent in competing countries. On a broader scale, tax incentives and investment benefits given to infrastructure providers and skills development companies would be welcome. For the IT sector this would ensure that input costs, which are burgeoning, are brought under control and the competitiveness of India as the “office of the world” is reinforced.
There is also hope that some anomalies that continue to exist in taxes and duties, particularly for product companies, will be removed in this Budget. The industry is laying strong emphasis on developing software products along with the services. The Indian software product industry has been delivering world-class software products in various domains. Disruptive technologies such as virtualisation, service-oriented architecture (SOA) and delivery model innovations such as Web services have helped several new entrants overcome barriers-to-entry and successfully compete with incumbents to build million-dollar businesses in existing as well as new markets. These developments have also helped expand the addressable opportunities for Indian software product businesses in the export as well as domestic markets. India offers a good combination of talent and economic factors to nurture businesses to early profitability. Cost savings from a favourable cost structure — in talent, infrastructure and development costs — may be redeployed to increase the reach and scale of the business.
Rationalising the tax and duty structures applicable to the sale of software or allowing rebates for specific user segment focused pricing will help address the challenge of high cost of software being a hindrance to more widespread usage. The government should encourage the setting up of alternate, hybrid (public-private) investment vehicles to channel funding towards software product technology start-ups and streamline access to available public funds.
The Software Technology Park (STP) scheme has played a dominant role in the emergence and development of the industry. Currently, over 94 per cent of total IT exports are accounted for by STP units.
While for this industry to grow it certainly needs the large companies and medium-sized ones, what is really important for us to understand is that it also needs entrepreneurial start ups. The entry barriers are low under the STP scheme, creating a level-playing field for both large as well as small enterprises. Over the years this has propelled growth of several small and medium enterprises (SME) that contribute significantly to the industry. It provides a conducive environment for the sustained growth of the SME segment and needs to be continued.

Dr Ganesh Natarajan is vice-chairman and MD of Zensar Technologies Ltd