P S Deodhar - Pampering the Software Havamahals

PAMPERING THE SOFTWARE HAVAMAHALS

The Government of India's love affair with the software industry is costing the country dearly. Even after five years, most of these companies have remained mere body shoppers. The software industry in India is essentially a labour-contracting industry. There is, therefore, no logical explanation why such a highly profitable industry should get so heavily subsidised and pampered when it contributes absolutely nothing towards the fiscal deficit. The entire subsidy goes to augment the wealth of the wealthy software houses. This industry is demand driven and has been growing effortlessly through private initiative. Except for scrapping irrelevant laws and reducing communication tariffs to international levels, the government has no need to specifically waste its time and resources for this sector. If it merely adds to its own efficiency through meaningful use of IT, it would help the industry by creating a large domestic market.

The software industry's subsidisation is a classic case of the government enriching rich Peter, by robbing poor Paul of his subsidy. Not being satisfied with the 100% exemption from the income tax under 80 HHE, the Central Government has also given these body shoppers Special Import Licenses at 15% of the FOB value of their 'export'. Besides this, they enjoy drastic reduction in import duties as the government readily gave in to the WTO's pressure and agreed to ultimately drop them to zero. Various glamour-struck State Governments have also joined in by announcing the sales tax and several other concessions. As if all this was not enough, the PMO itself found it necessary to appoint not one but four high level committees to find what more can be done for this most favoured sector of the Indian economy! What focussed attention! IT dream merchants have indeed sold the 'Super Power' dream very well.

Classically, government subsidies, if dispensed at all to industries, have to go to those industrial sectors that are today in a desperate condition, especially those in the rural and the small-scale sectors. A lot of jobs are being lost and a helping hand would help many to get over the hump and in the process save these jobs. Even if the IT export income was taxed at 15%; the government could have earned a much needed revenue of over Rs.1600 to 1800 crores! The Income tax rate at15% is still the lowest in the world and therefore would not have been a disincentive to operate from India. Recovery of tax would also help regulatory aspects and more importantly reliable data capture on the complexion of export areas in technological terms.

Most of the software companies in India, even the larger ones, are in reality Havamahals. None of them are even a shadow of the global software giants like Oracle or Microsoft. They have no brand equity; no product and no stand-alone solution. These companies also have no protected Intellectual Property that they could claim as their own. All the 'Knowledge Capital' of these companies is in the brainpower and accumulated knowledge and experience of their employees. They are earning well, getting excellent returns on the manpower deployed, creating phenomenal monetary wealth and highly paid jobs for a large number of youngsters. Despite all these encouraging and desirable features, as corporates they are merely subcontractors, service providers carrying out white-collar labour intensive jobs. They are almost like the companies of the mid-sixties, supplying menial labour to the Middle Eastern countries. Their primary asset remains very volatile in spite of the lure of employee stock options etc. Overnight key employees could walk away not only with their programmed brains but also with the clients. That's why there is this great proliferation of new start-ups. That's why they could be called Havamahals - corporations with attractive faces but no bodies. They are just great facades. These rich companies are without any firm foundation, without any core strength or real business asset of their own besides the current contracts and the accumulated profits.

These cash cows have now become the darlings of the bulls on the stock markets! IT stocks are going through the roof. Analysts have been fuelling this situation by valuing companies merely on the basis of their potential, not their intrinsic strengths and their ability to survive bad times. This is in line with the emerging lifestyle where one lives for the day with no thought for the future. Even the governments, with their uncertain future, seem to merely drift with the times and struggle to deal with daily crises.

The global IT industry, in the meantime, continues to mesmerise the world, aided by modern technologies, delivering or promising to deliver awe inspiring intelligent products and ideas. It is selling dreams and cashing in on that sentiment. We are lured to spend to buy products that promise but do not always deliver and also products that become obsolete by the time we acquire them. Societies and governments are finding it difficult to assimilate these changes and deal with the consequential problems. This situation is ideal for the bulls in the market and they seem to encash well on these sentiments. It is helping new IT startups to mop up funds merely on the basis of a promise. One needs no product. Just an idea is enough. Strangely, finance has become the core rather than the technology or the product. That explains non-banking financial institutions joining the gold rush wearing software masks. Overnight these companies are becoming software developers and exporters! No one is there to monitor the situation. Not only the investor but the government too is intoxicated with the lethal potion delivered through IT dreams. No watchdogs are conscious. This is dangerous, to say the least.

The Government shouldn't forget that it has to garner resources out of the wealth being created in the country and not depend on the borrowing from the people or from the world lending institutions. It has social obligations to subsidise the weak and the under-privileged by mopping resources from the wealth creating institutions. Strangely, instead, it is subsidising the rich, making the rich richer! Is it sensible for the country to count and pride itself on the number of new paper billionaires created or work towards giving a bearable life to her billion poor?