An Industry Friendly India:

The 2010-11 Union Budget is significant for India in many ways. A fast-emerging economy, India is one of the countries that showed the first signs of economic recovery from the global recession that struck in 2008. This year, India is hosting several international sports events, so it is preparing to get the infrastructure and resources ready to showcase these extravaganzas. However, India is facing an increasing number of challenges like population, security issues, price increases and carbon emissions. The 2010-11 budget has special significance because it should strike a balance between the country’s growth targets and the livelihood of the common man.

“Finance Minister Pranab Mukherjee has done a fine balancing act” was the immediate reaction from industry organizations. The 2010 budget underscores the focus on development, especially on infrastructure, rural development, urbanization and social welfare, aiding India’s development and further stimulating the vital industrial sectors, say experts from the ICT industry.

Anil Chanana, CFO of HCL Technologies, said, “The budget has been successful in reigning in the fiscal deficit while at the same time focusing on inclusive growth. With the enhanced spending on infrastructure, this budget will help stimulate domestic demand for IT products and services.”

However, the industry expressed disappointment at the hike in the Minimum Alternative Tax (MAT ) and excise duties. This year, the government has increased the MAT from 15 percent to 18 percent, while the industry was demanding a cut down to 10 percent. According to industry experts, the MAT will be a burden on small and medium businesses that are still struggling with the impact of the global recession.

Surjeet Singh, CFO of Patni, a leading BPO company, said, “An increase in the MAT from 15 percent to 18 percent on book profits would result in a higher outflow of cash in the short term and would affect Indian corporations adversely.” However, Singh says, this impact has been cushioned to a large extent by the lowering of the corporate surcharge from 10.0 percent to 7.5 percent.

Singh also appreciated the support offered for inhouse R&D. “We welcome a higher percentage of weighted deduction on in-house R&D, which has been increased to 200 percent from 150 percent, as it will incentivize IT companies’ innovation focus,” Singh added.

The measures adopted by the government to boost skill development will help nurture a workforce of a high caliber. It will have a positive impact on the BPO industry, which is people intensive. “Overall, the budget was well balanced and responsible,” said Ajai Chowdhry, CEO and chairman of HCL Infosystems Limited. “Various projects and schemes announced by the government will see an increased role for Information Technology as an enabler towards more inclusive growth.”

The National Association of Software and Service Companies (NASS - COM) termed the 2010-11 budget proposals as progressive, long-term and providing the right thrust on social sector development, education, infrastructure, managing the fiscal deficit, the simplification of policies and convergence towards GST and Direct Tax Code.

Pramod Bhasin, chairman of NASS COM, said, “The announcement of the Technology Advisory Group under Nandan Nilekani, the automation of central excise, GST and commercial taxes will enable the vision of citizen-centric governance. Our industry will partner with the government to drive inclusive growth within India, while continuing to be the leader around the world in IT and business process solutions.”

The removal of the anomaly in Section 10AA of the SEZ Act and the Finance Minister’s reaffirmation on the importance of SEZ s will help the industry move forward with its SEZ plans across the country, NASS COM officials said.

“While overall the budget is positive, we are disappointed with the increase in the MAT , which will be a burden on small and medium-sized businesses that are still struggling with the impact of the global recession,” said Som Mittal, NASS COM president, in a statement.

“There was also no move towards announcing parity of incentives between the STPI and the SEZ scheme, which is again necessary for small companies and the development of tier-2 and tier-3 cities. In line with our recommendation, the IT taskforce formed by the Department of Technology (DIT ) had also strongly recommended that the STPI s be brought to par with the SEZ s.” The reduction in personal income tax is good news to the industry, as employees in the industry will benefit from the extra savings on their earnings amidst price increases. However, the decision to increase the excise and customs duty on petroleum products will result in a sharp rise in petrol and diesel prices, further aggravating the situation. The stimulus announced by the government has helped the manufacturing sector perform well. With continued support from the government on stimulating the economic recovery, the industry will be able to strengthen itself further, says Andrew Horne, managing director of Xerox India.

“The reduction of customs duty, central excise duty and special additional duty on certain goods and commodities critical to SMEs and SMBs will be beneficial to the Indian household,” Horne added. “The tax slab for personal income and investment will also give a boost to the average mid-level income group.”

Banking and e-initiatives

This year, the Finance Minister has acted promptly to offer appropriate banking facilities to habitations having a population in excess of 2,000. It is also proposed to extend insurance and other services to the targeted beneficiaries. These services will be provided using the Business Correspondent and other models with appropriate technology back up. By this arrangement, it is proposed to cover 60,000 habitations.

In 2007-08 the government set up a Financial Inclusion Fund and a Financial Inclusion Technology Fund in NABARD , to bring banking services to the underserved areas. To give momentum to the pace of financial inclusion, the government proposed an augmentation of Rs.100 crore for each of these funds, which shall be contributed by the Government of India, RBI and NABARD .

This move, according to Comviva CEO Manoranjan Mohapatra, a leading provider of value added services for mobile operators, is highly welcome as it would enhance banking facilities in rural areas so as to provide financial services to the unbanked. Companies like Comviva see great potential in the emerging mobile banking market in India.

“With over 500 million mobile phones in the country and growing rapidly, the mobile phone offers the ideal platform to deliver banking and financial services to the underserved sections of society,” Mohapatra said. In this scenario, Comviva urges the government to adopt further measures to extend the reach of mobile commerce in the country in order to realize the goal of financial inclusion of the masses in the shortest timeframe.

Infrastructural Boost

This year, the government has given great focus on infrastructural development – both rural and urban. The IT industry has welcomed the allocation of 1.73 lakh crore for infrastructure development, as it will expand their business in tier-2 and tier-3 cities.

Social welfare has been on the priority list. The industry views this as a positive move towards achieving India’s goal to become a world power in the coming years. A significant move that is well appreciated is the ‘National Clean Energy Fund,’ which sponsors research and innovative projects in clean energy technology. The fund will be financed by coal. Both Indian and imported coal will be taxed at the rate of Rs. 50 per ton.

President and Country Manager of Cisco India and SAAR C Naresh Wadhwa said, “The National Clean Energy Fund will position India as a leading force in finding ways to combat the imminent energy crisis. It will also simultaneously encourage research and technology projects in the clean energy space.”

Wadhwa also said the proposed provision to simplify the foreign direct investment model in India is also a welcome measure.

“With the noble intention of spurring R&D across sectors, this budget paves the way for tax reforms on in-house R&D expenses, and also on contributions made towards scientific research to associations, colleges, universities and other institutions,” Wadhwa said. “While research and development gets a leg-up, higher education and corporate tax reform waits for its turn. The UIDA took the lead among e-infrastructure initiatives, and broadband roll-out and major e-governance projects still needs to be addressed.”

Amar Babu, managing director of Lenovo India, shares a similar view. He thinks the budget concentrates on the sustained growth and momentum in the industry, so it is welcoming to the industry.

“The attention on egovernance with the UID project and the Technology Advisory Group indicates the government’s continued move to leverage information technology in critical projects,” Babu said. “It is also setting an example by generating thrust in the renewable energy sector. Funds allocation in the SME sector is welcome, as that will allow for the sector to invest in IT for productivity and competency. Assigning GST will help clarify pricing norms and duty structures across the board.”

The heavy stimulus package provided to the agricultural, infrastructure and energy sectors clearly indicates that development is a priority to the government. However, these goals can be achieved only if the government is able to tackle bottlenecks like infrastructure, government systems and corruption. According to S. Mahalingam, CFO of TCS, an increased thrust in key areas like primary education, health, infrastructure, rural development and financial inclusion would fuel broad-based growth and development. “An enhanced focus on SEZ s to drive growth and employment and clarity on the tax regime is welcome,” Mahalingam said. “This would aid the recovery for the IT industry. Social transformation and technology-enabled governance will gain momentum and this is good news for the country.”

Ganesh Guruswamy, vice president and country manager of Freescale Semiconductor India, said, “India’s broad-based counter- cyclic policy package to respond to the negative fallout of the global slowdown has worked wonders in controlling the falling GDP . Today, sectors like automotive and manufacturing have already shown double digit growth, which should propel other allied industries to grow as well. Liberalization of the pricing and payment of the technology transfer fee and trademark will boost the foreign investment environment.”

Overall, the 2010-11 Union Budget is a pragmatic, forward-looking budget that provides clarity to business. In the words of Mukesh Aghi, chariman & CEO of Steria India, a European IT -enabled business services provider, “It is a progressive budget, with focus on urban and rural infrastructure development, education and healthcare, to help create a climate for balanced growth. Initiatives for leveraging technology as a tool for accountability and better governance are commendable.”

The budget reflects the strong flavor of social inclusion signaled by the focus on development funding and the allocation for the education segment. With greater focus on infrastructure spending, this budget would help stimulate domestic demand for IT products and services. It also increases disposable income in the hands of the employees, which is beneficial to the IT industry in view of its high humancapital intensity.