Mr FM, packaged software is NOT booming!

Prasanto K Roy

Despite being an investor in the 'markets', I tend to view them and their final arbiter, the sensex, with much suspicion and cynicism. So whether it's a big drop at the beginning of B-day, or the big rally to yet another historic level nearer the end, it's often more herd effect than any serious appreciation of reality.

So I'd ignore the rush of 'market' optimism and look at what the budget really meant for Indian infotech.

For a start, I think any effect of this Budget on the IT industry, positive or negative, is largely incidental-rather than planned. There doesn't seem to have been a focus on IT. Status quo is the flavor, and it extends to IT...but for the tweaks here and there.

The one tweak industry people (and I) view with dismay is the 8 percent tax added on to packaged software. The finance minister kindly goes on to specifically exempt software downloaded from the Internet (as if he could do anything about that). His economic advisors explain that the infant industry protection needs no longer apply to software, “which is booming”, and is surely able to support a “tiny tax of this sort”.

Neither the finance minister nor his advisors appear to know what packaged software is and how well or how badly it really is doing. They're mixing it up with software and services exports. You'd think they'd ask someone from the industry if they didn't know the difference. Here's a reality check, Mr FM: packaged software is not booming. It's dying. Indians don't buy packaged software. They largely pirate it. A price increase there will not help that cause in the least: it can only help push up piracy. You've just knocked it on the head again, hard.

More to the point from the FM's view would be the fact that this is an irrelevant sliver of the market, and 8 percent of that sliver would bring in a negligible Rs 300 crore to the pie next year. And this price rise will stifle the market further, overall hurting not just Microsoft & Co, but also smaller Indian companies trying to develop packages. The damage it will do is much more than what the exchequer will gain.

The hike in excise duty for PCs will probably translate to a marginal rise in prices (the jury's still out) except for imports, which will go up more. Again, the focus has been on protecting domestic industry, which of course, delights the domestic players no end. There's been some excitement about the manufacturing focus, but let's go easy on that. A few sops does not a manufacturing giant make, and India and her government and IT industry would find far better “return on investment” focusing on the area where we really have the core competence: services. In giving all the support needed to travel up and dominate the value chain.

The biggest support/gap area is education. Yes, there's general enhancement for the education budgets, but IT will need specific steps and support to get the lakhs of people it needs to keep up its services growth-from areas such as chip design (where India produces a few dozen graduates a year) to software to English speaking graduates (and no, there aren't millions of those going around).

Instead, the unspoken GoI dream is: become a manufacturer. Beat China. But as our high-profile Yankee visitor this week might say: Fuhgeddaboutit.

It's not just the FM. Our IT Minister has a manufacturing bee in his bonnet. Whenever he meets Intel or any company of the ilk, he says: Set up manufacturing here. But those companies will take an overall view of competencies and environment, and invest accordingly. That's also why Intel chose Vietnam, not India, for its chip test manufacturing facility in February. That's why MNCs are putting in so much investment and hiring tens of thousands of people for a range of complex services.

Overall, the Status Quo Budget of 2006 has had its pluses and minuses for IT, but here's the bottom line. The government still views IT as one of two things: an exporter, bringing in dollars, and a domestic market, generating some taxes. It does not see it as catalyst to economic growth, the big force that will drive us to the 10% growth that the FM is targeting. Maybe he can do it without Catalyst IT, but it won't be easy. For one thing, he might have to break out of Status Quo Budgets.

(The author is the Chief Editor, Business Magazines Group, CyberMedia Publications)