IT in politics: UPA Govt and IT: Passing muster

NEW DELHI, INDIA: When the Congress led-UPA assumed power in the year 2004, it was clear that the government had little clue about what working on India as a 'Knowledge Economy' meant. If one is to look back at the National Common Minimum Program of the government, interestingly there is mention of almost everything but any plans to enable strong growth of the IT industry.

Though e-governance, which ultimately has given a big push to the domestic market, even though it might not have been done with that intention and broadband do find reference, it seems that taking steps to make India a real IT destination never really was on the agenda. That probably does reflect somewhere in the progress made in the various facets, if taken on an individual basis.

Having said that, when we talk about the UPA's performance, a special mention has to be made of the former minister of Communications & IT, Dayanidhi Maran, who did a lot of hard selling of India to global players and boosted off investor confidence in a big way.

It is unfortunate that at a time when the country had set double digit GDP growth targets, even at the cost of appearing too ambitious, the government somehow did not realize that IT would have acted only as a catalyst for meeting that target. And it is actually surprising that the Congress minus the allies still doesn't have a focus on IT in its current manifesto in 2009. It only needs to be seen if the present government gets lucky to get another chance.

Raja vs Maran: Politically Correct?

At a time when the country needed a young, dynamic leader in the Communications & IT Ministry who could make sure the investor interest in the industry continues to grow, the appointment of A Raja in place of Dayanidhi Maran came as a dampener.

It might have been a politically correct move for the Congress-led UPA coalition, but for the IT and telecom industry, the decision, as it now appears, was not the best one.

During Maran's three-year term, special mention has to be made of the year 2006 - the year that marked the coming in of investments of not just the big league but even the mid-tier companies. The foreign investment ranged from a few billion dollars to a few million. Critics would say that would have come anyway, but Maran's intervention with promises to support manufacturing plants to providing other facilities did help in substantial reassurance.

A long list of global CEOs came calling: Samuel Palmisano, IBM; John Chambers, Cisco; Joe Tucci, EMC; Edward Zander, Motorola; Henning Kagermann, SAP, and they brought with them purses of greenbucks for India.

Manufacturing was another interesting story. Quite a few players, especially from telecom, announced investments in India. Nokia was a big one, followed by Sony Ericsson and Motorola. Cisco too announced plans to set up an IP Phone manufacturing facility in Tamil Nadu. Dell, Flextronics, LG, Foxcon were some other big names.

While a lot of this investment went into Maran's native state Tamil Nadu, for which he had an obvious soft spot and electoral compulsions too, it cannot be denied that overall the country did benefit in a big way. Chennai after all is in India, once you set aside all parochial notions.

Infosys and TCS too committed investments around the same time. So overall 2006 was a great year for the IT industry. But did the country run at the same pace in the following years, especially with Raja at the helm? Unfortunately, the answer is a big no.

Maran also undertook some other crucial initiatives: lowest-ever telecom tariffs, initiating the fab policy, driving the hardware manufacturing agenda, and strengthening e-Governance.

The resignation of Maran in May 2007, did throw open grounds for a lot of speculation on whether the industry would be able to sustain the growth momentum.

Though it might be difficult to draw a comparison between the performance of Raja and Maran, one thing which is absolutely clear is the fact that the momentum somewhere has slowed down in the last two years. Raja, industry observers feel, has not been able to hard sell India to the global IT and telecom companies, and instill investor confidence the way Maran was able to.

Of the unfinished tasks that Raja took over, the work on 3G spectrum policy, semiconductor policy and e-governance still remains unfinished. Though there has been some progress on the spectrum issue, there is little to boast of. Many feel that Raja probably has not been able to come out of the protected shell of M Karunanidhi, as a leader who could take India to the next level of investments.

Though both Maran and Raja have been ministers of Communications & IT, the IT part has been mostly ignored, especially in the case of Raja. Maybe we need two separate ministries. Also, Shakeel Ahmed and Jyotiraditya Scindia have been deputies to Maran and Raja respectively, but their roles in IT and telecom have been nondescript to say the least. Maybe this ministry needs one dedicated minister only, along with strong bureaucrats.

e-Gov: Not Extraordinary

This was clearly one area where there was a lot of traction. One mother of all project, which covered almost all facets of e-governance, was the National e-Governance Plan (NeGP). It did have a clear vision. It aimed to make all government services accessible to the common man in his locality. The states too got something to clearly work on.

Not many doubt that NeGP was the single most important project that at least talked about binding together all the individual e-governance initiatives under one roof to ensure availability of government services right up to the grassroots.

Of the various schemes under the NeGP, the promise of one lakh common service delivery outlets for six lakh villages at affordable costs was the most crucial. The government did try hard to turn it into a reality, but the project missed quite a few deadlines.

The project, which was one of the largest IT public-private partnerships in the country, intended to reach out to the rural have-nots in a big way. The government clearly had a great opportunity to completely transform the rural interface, but how much remained on paper, and what really took off on ground is a debatable issue.

On paper, a number of states have initiated the process, but they are still struggling to deliver services. The government had been consistently raising budget allocation for e-governance every year, but that too does not seem to have helped much.

Other than CSC, the State Wide Area Network (SWAN) and the State Data Center (SDC) were the two other major schemes under NeGP that the states were trying to focus on.

SWAN, which was the first scheme to get approval, was meant to be the backbone on which all applications and services would run. Till date only a handful of states have officially launched SWAN, among which Himachal Pradesh, Haryana, and Jharkhand were the first. SDCs too have not taken off in a big way.

Clearly, the UPA Government had talked about effecting a sea change but what took place was anything but extraordinary.

STPI: To Be or Not to Be

The export-driven IT sector was hoping that the interim budget will extend the Software Technology Park of India (STPI) scheme. However, the absence of any policy statement over STPI in this year's Union Budget left many in the IT industry jittery over their own future.

The scheme is set to expire on March 31, 2010, and the UPA has left this in the hands of the next government that comes to power. The only saving grace STPI got from Chidambaram and Co were the two annual extensions it received in the last two years; originally the scheme was supposed to get over in 2008. There have been issues concerning revenue implications that the Finance Ministry has raised, but the government has not been able to to sort them out.

It was expected that the government might consider replacing the existing STPI scheme with the new SEZ policy, which is likely to have its own set of incentives, but remain heavy on the pockets of smaller IT players like startup entrepreneurs who have played a major role in shaping the images of cities like Bangalore and Hyderabad as IT hot spots. The failure to extend the STPI scheme would specifically spell trouble for small and medium IT entrepreneurs.

Government: Domestic Outsourcings Poster Boy

This was a period when public-private partnership projects and government outsourcing took off in a big way. The credit definitely goes to the government for pushing the private partnership model in various facets of governance quite well.

The entire common service center scheme under NeGP was to be implemented on the basis of a PPP model. Who would have imagined five years back that the big fillip to domestic services would come from the government sector itself.

The MCA-21, a Ministry of Company Affairs project, was completely outsourced to TCS and has been hailed as a successful project. Last year the Passport Project of the Ministry of External Affairs was again outsourced to TCS.

Satyam: Handling of a Crisis

The year opened with a big bang as news of the Rs 7,000 crore Satyam fraud rocked the country on January 7, 2009. On the same day, the company's chairman, B Ramalinga Raju, owned up to years of fraudulent and inflated accounting within the company.

It could easily qualify as one of the toughest situations emanating from the corporate world; not only because it was one of the biggest corporate scams the country ever had to deal with, but also because it was threatening to become a big credibility crisis for India's emerging IT Industry. There is little doubt that the crisis had to be handled with great swiftness, extra sensitivity and caution.

To everyone's surprise the government did move swiftly even in an area it had hitherto remained deliberately away from by forming a three-member board. The immediate task at hand for the board and government was to focus on enabling the company to pull through, and secondly to make sure the image of the industry is not tarnished.

The government got eminent people on the board like Deepak Parekh, chairman HDFC; Kiran Karnik, former president of Nasscom; and C Achuthan, former member of Sebi, so that no aspersions on their integrities could be cast later.

The intention was clear, that the government did not want Satyam to go under. This was because of various reasons which had to do with not just a huge issue of job loss (which could have become a major election issue at a sensitive time) but more importantly, because the government was also thinking of the wrong signal it would send to investors.

There was talk of a bailout package too, which again could have been pointed out as an issue directly connected to swindling off the taxpayers' money. But the government handled the situation very smartly, by putting eminent people on the board.

Though clearly the government was sleeping on the wheel, as there were regulation issues that had to be dealt with much before the scam came out in the open, it successfully managed not to give the opposition a chance to point fingers despite allegations of the Congress CM's proximity to Raju. The CBI is now investigating the Satyam case.

The fact that the BJP has not been able to use the Satyam crisis as a major election issue, is a thumbs up for the government.

Hardware Manufacturing: Countervailing Hiccups

The hardware sector, which for long has been treated as a poor cousin of the high-profile software sector, didn't do any great shakes. The government has been very conveniently ignoring the industry's long standing demand for bringing down the countervailing duty (CVD).

In order to push the growth of the hardware manufacturing components, there has been a dire need to reduce the CVD in a big way, which the government failed to do. The government did toy with the idea but now it stands at a very high 14 per cent.

IT Act: Never on the Radar

Even though it has been close to a decade when India embarked on its cyber journey by introducing the IT Act 2000, it was only recently in 2005 when the loopholes in the Act became glaringly apparent.

The not-so innocent peccadilloes of two DPS students in Delhi and by now their infamous romp recorded for posterity via an MMS threatened to destroy the very fabric of nascent e-commerce in the country but shaking up the IT Act amendments in the process.

The immediate fallout of the steamy MMS was the equally notorious Bazee episode. With the arrest of Baazee.com's CEO, Avnish Bajaj, the country got its first serious case of cyber crime where the law was invoked.

Unfortunately, this was one where the alleged Bajaj was little responsible for any misdemeanor. Bazee was booked for running a website that contained objectionable third-party content. ie, as someone tried selling the MMS through the site.

In this case the IT Act has been used for booking a website, for allegedly obscene electronic information posted on it and making it liable for the same. After a lot of hue and cry, sense prevailed as Bajaj was released and plans made for necessary amendments in the Act.

Ever since the IT Act came into existence it has already been amended twice, the second time being as recently as last year. Interestingly, it wasn't even notified the first time it was amended in 2006, passed by the Parliament, and approved by the President.

Experts feel that at both occasions, the amendments have been a complete eyewash. In fact, the first amendment diluted the serious act of hacking to just a petty criminal offense, with no strong punishments.

Most of the crimes that now come up are mainly to do with obscene MMS, morphed pictures on the Net, etc. This might be demeaning or constitute harassment, but not serious enough in the bigger picture. Unfortunately, serious crimes which directly involve securing transactions have not come up in a big way.

What is alarming is the fact that at this point, there is a complete lack of awareness about the crimes and the Act, even at the government level.

Interestingly, recently there was a major goof-up that rocked the PMO office, when the Microsoft Outlook that they were using was repeatedly hacked for four months. All the emails were compromised with virus. The case was not given much importance though. The media too did not take it up. It probably reflects on how much the government and the media actually care about cyber threats. No wonder, the Act too remains toothless.

MNC/BPO Double Taxation: Double Whammy

In January 2004, the Central Board of Direct Taxes (CBDT) had come up with a circular on taxation of IT-enabled business process outsourcing (BPO) units in India.

It was declared that a considerable portion of the profits derived by foreign entities from outsourcing of their core revenue generating business activities to India would be taxable under the Income-Tax Act if the Indian entity were to constitute a Permanent Establishment (PE) of the non-resident or foreign company in India. The issue became serious as the BPO industry's growth was at stake.

The revised circular which came out in August of the same year (amidst a lot of opposition) was better, but was also not completely able to sort out things. It was now said that the profits of the Indian entity would be determined on the basis of arm's length principle.

Unfortunately even though an effort was made to solve the problem, there still was a lot of gray area that remained, as it wasn't clarified what arms length really meant.

There was another subsequent tax-related development that significantly put a lot of MNCs in troubled waters for long, when software major Microsoft's Indian arm along with a lot of other MNCs came under the tax scanner. A tax demand and penalty of Rs 128 crore was slapped on the company for alleged evasion.

It was alleged that Microsoft India's Gurgaon unit carried out certain marketing activities for the India operations and not for the Singapore arm as it had claimed. In Chidambaram's evangelical mission to widen the tax net, would Indian IT industry become a sacrificial lamb.

Semiconductor Policy: Much Ado about Nothing

The government, in March 2007, came out with the much-awaited semiconductor policy providing capital subsidy to investors setting up chip manufacturing in India. The government, as a result, expected to attract an investment of Rs 24,000 crore by 2010.

However, much harm had been done already due to the government's dilly-dallying over the semiconductor policy. Intel had already selected Vietnam as its manufacturing hub. The SemIndia consortium was also threatening to pull out its $3 billion investment to set up the semiconductor fab for Hyderabad. Though things are looking up a bit now with AMD's announcement to invest about $500 million in SemIndia's proposed chip manufacturing facility near Hyderabad.

On the other hand, Apple too closed its development center in Bangalore reportedly due to high costs of operations. The company had started operations in May 2007 and closed shop a month or two later.

In fact, the much-touted semiconductor policy has received a lukewarm response so far. And the problem lies with the marketing of the policy or the lack of it. The DIT has been able to attract only handful of proposals till date. And now with global recession hitting the semiconductor industry in as big way, the situation has got even tougher. Semiconductor seems to have unfortunately passed India by.

Packaged Software: Throttling the Infant

It goes without saying that these five years were extremely crucial for the IT industry. More so from the point of view of taxation. At a time when there was a need to go out of its way to enable growth, the government stuck to its heavy duty stand on the packaged software front.

The UPA kept tweaking around with the duty only making it worse by keeping and raising it in the range of 8-12%. The explanation: Software doesn't need infant industry protection. It's booming, and can surely support a tiny tax. Some South Bloc babu, in his wisdom, confused IT services with India's fledgling packaged software industry.

The packaged software market in India is virtually comatose, thanks to the terminal affliction called piracy, and with this one act the government ensured that the oxygen mask gets pulled off.

Packaged software taxation has seriously impacted SMBs and even hampered the government's cherished dream of bridging the digital divide, given the backdrop of India being a price-sensitive nation. Both consumers and price-conscious SMBs were forced to rethink their software purchase decisions.

Since even operating systems come under the ambit of packaged software, this is expected to further push up prices of PCs with bundled software affecting PC penetration.

Fringe Benefit Tax: Another Liability

Interestingly, where 2004-05 was a year the software industry needed a strong push to go into the next level, it was slapped with an extra tax liability in the form of a fringe benefit tax. It was a tax which was to be calculated in the case of an employer engaging in the business of manufacture or production of computer software; in which case the value of FBT for conveyance, tour and travel (including foreign travel), use of hotel, boarding and lodging facilities was to be computed on a base of 5 per cent.

The industry was clear that the concept itself was worrisome as work couldn't be a fringe benefit. There was a huge impact on the software industry specifically, as it was the one which undertook maximum number of overseas onsite projects.

©Dataquest