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Indian Information Technology Services Sector and the Domestic User Industry - An Uneasy Partnership?

Indian Information Technology Services Sector and the Domestic User Industry - An Uneasy Partnership?

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Published by Sachin Garg
India has grown to be a powerhouse in providing Information Technology (IT) Services to myriad clients all over the world. This sector has shown that it has what it takes to move beyond pure cost arbitrage and up the value chain. Despite the successes of this sector and its prowess in providing world-class solutions, there is empirical evidence which suggests that the domestic user industry remains woefully underserved for its IT requirements. This study theorises that this is due to the tax-break based incentives provided to the Information Technology Service providers, which have resulted in an environment where servicing the domestic IT users, especially the Micro and Small Scale Enterprises, becomes non-remunerative.

Therefore, domestic industry's use of Information Technology happens without any government aid or incentive. On the contrary, current government policies result in a number of missed opportunities, rendering Indian businesses uncompetitive.

In this paper, we analyse the impact of export oriented tax incentives on the domestic sector and attempt to identify a few policy mechanisms that could obviate their negative effect.

Presentation available at: http://www.slideshare.net/sgarg/indian-information-technology-services-sector-and-the-domestic-user-industry-an-uneasy-partnership
India has grown to be a powerhouse in providing Information Technology (IT) Services to myriad clients all over the world. This sector has shown that it has what it takes to move beyond pure cost arbitrage and up the value chain. Despite the successes of this sector and its prowess in providing world-class solutions, there is empirical evidence which suggests that the domestic user industry remains woefully underserved for its IT requirements. This study theorises that this is due to the tax-break based incentives provided to the Information Technology Service providers, which have resulted in an environment where servicing the domestic IT users, especially the Micro and Small Scale Enterprises, becomes non-remunerative.

Therefore, domestic industry's use of Information Technology happens without any government aid or incentive. On the contrary, current government policies result in a number of missed opportunities, rendering Indian businesses uncompetitive.

In this paper, we analyse the impact of export oriented tax incentives on the domestic sector and attempt to identify a few policy mechanisms that could obviate their negative effect.

Presentation available at: http://www.slideshare.net/sgarg/indian-information-technology-services-sector-and-the-domestic-user-industry-an-uneasy-partnership

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Published by: Sachin Garg on Nov 29, 2009
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Indian Information Technology Services Sector and theDomestic User Industry – An Uneasy Partnership?
Sachin GargNavankurRashmi SaritaFICCILokesh V.Larsen & Toubro7th October 2009
Abstract
India has grown to be a powerhouse in providing Information Technology(IT) Servicesto myriad clients all over the world. This sector has shown that it has what it takes tomove beyond pure cost arbitrage and up the value chain. Despite the successes of this sec-tor and its prowess in providing world-class solutions, there is empirical evidence whichsuggests that the domestic user industry remains woefully underserved for its IT require-ments. This study theorises that this is due to the tax-break based incentives provided to theInformation Technology Service providers, which have resulted in an environment whereservicing the domestic IT users, especially the Micro and Small Scale Enterprises, becomesnon-remunerative.Therefore, domestic industry’s use of Information Technology happens without any gov-ernment aid or incentive. On the contrary, current government policies result in a number of missed opportunities, rendering Indian businesses uncompetitive.In this paper, we analyse the impact of export oriented tax incentives on the domesticsector and attempt to identify a few policy mechanisms that could obviate their negativeeffect.
1 Introduction
Over the last three decades and more, the Indian IT industry has matured to be a major worldplayer. The sector has grown by leaps and bounds in the last two decades. Current estimates [1]put the IT–BPO services sector to account for almost USD 60 billion in revenues for FY ’09. Asa proportion of national GDP, the sector revenues have grown from 1.2 per cent in FY1998 to anestimated 5.8 per cent in FY2009. Net value-added by this sector, to the economy, is estimatedat 3.5-4.1 per cent for FY2009. The sector’s share of total Indian exports (merchandise plusservices) has increased from less than 4 per cent in 1998 to almost 16 per cent in 2008.These figures could be on the higher side, partly because they also account for the BusinessProcess Outsourcing(BPO) industry estimates. It is difficult to find standalone figures that tellonly the Information Technology story. Also, as Ms. Jayati Ghosh points out with regards to1
 
the IT sector in [2], “data on its performance remains extremely limited and inadequate. In fact,while the rapid growth of the industry cannot be denied, there is increasing evidence that the sizeof the industry’s revenues and contribution to GDP is exaggerated, because there is no propereffort being made to independently evaluate the industry’s performance.” The fact remains thattill now the industry has had a phenomenal run and been responsible in no small measure forIndia’s current growth.Keeping all this in mind, we also note that the country has
not 
made great strides wherethe use of IT by the
domestic users
(especially where the Micro, Small and Medium Enter-prises(MSMEs) are concerned). According to the 2008-09 Global Information Technology Re-port (GITR), brought out by INSEAD in collaboration with the World Economic Forum, variousmeasures, India ranks #30 on the Business Usage Index metric (just below Ireland but aboveChile and Brazil) [3].In this paper we argue that this dismal situation is because of the skewed incentive structureof the Information technology sector which subsidises IT users abroad at the expense of theIndian users. The paper starts off with a brief analysis of the sector—its growth patterns, delvinginto some of the growth factors and a brief look at the incentives provided to the sector. Next,we broadly look at the subject of tax incentives while paying particular attention to the IT sector.We then propose our hypothesis that tax incentives in the current form push up IT costs fordomestic users, while subsidising them for foreigners. We conclude with some recommendationsto improve on the status quo and ensure accessibility to IT solutions for all classes of domesticusers.
2 Indian IT Sector
Over the course of its history, the Indian IT industry has been through a number of phases (seeFigure1), starting with extremely low value-add body-shopping work to doing high-end consult-ing today. Currently, the industry is characterised by the presence of a few very large companieswith a couple of billion dollars in turnover, each employing in excess of 50,000 people. The ma- jority of these companies provide outsourced services to their overseas clients. These servicesinclude maintenance of existing software, development of new software, remote infrastructuremanagement, product design and development and increasing amounts of IT and business con-sulting.The Indian IT sector has been the subject of many studies that have attempted to identifysome of the several factors responsible for the incredible growth of this sector. Rafiq Dossani[4]has traced the origins and growth of the industry. The most comprehensive treatise of the sec-tor’s growth, aptly titled “The Long Revolution” has been chronicled by journalist Dinesh C.Sharma[5]. Some of the key factors that many of these studies have listed out are:
Demographic factors.
India is possesses a demographic advantage over other nations by virtueof its
very large pool of English speakers,2
 
Time
     V    a     l    u    e     A     d     d     i     t     i    o    n
Body ShoppingOnsiteOffshoreProjectsConsultingIP Focused DevelopmentFigure 1: Phases in the Indian IT Sector
large pool of scientists and engineers,
young populace entering the job market,
cost benefits
Government Policy Reforms
Despite many assertions to the contrary, the sector has receivedsubstantial help from the government both by easing-up on regulations as well as othermeasures (tax-exemptions) which have gone a long way.
Economic Liberalisation
The sector has also benefited from the larger opening up of the In-dian economy, for example, de-regulation of the telecom industry, easing of FDI norms,reduction of duties on computers and electronic devices etc.
2.1 Sector Analysis
To better understand the industry at this juncture, we present a “Strengths, Weaknesses, Oppor-tunities and Threats (SWOT) Analysis” of the industry in Figure2. We note from this SWOTanalysis, that the newer opportunities that could come business’s ways are in areas where thecompanies could leapfrog the competition and try to sell their products and services to the “Bot-tom of the Pyramid” consumers in the emerging economies. As pointed out by one of the authorsin [6], it is imperative that the Indian Software Services move out of doing business convention-ally and start investing resources to build solutions for the next 1 billion consumers therebycreating real value. As shown in Figure1,though the industry has slowly but steadily been mov- ing up the value chain, we feel that it is still concentrating too much on either process innovationsor incremental innovations, and refusing to take a greater leap of faith.3

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