Budget: Booster dose for IT

The Union Budget deserves two or maybe two-and-a-half cheers for what it has on offer for the Indian information technology (IT). More than the numbers, it is the change in attitude towards the industry, implicit in the announcements, that is significant.

From being a star export performer, important as that is, the industry is being repositioned and mainstreamed as a key enabler of better governance.

Thus, the old allegation that ICT (information and communications technologies) represents one more divide rather than an enabler of development, is being put to rest.

A substantial Rs 1,900 crore has been earmarked for the unique identification (UID) project, indicating it will pick up steam during the year. This one innovation will go a long way in delivering benefits to the poor with greater efficiency and less scope for corruption.

Further, Nandan Nilekani, who already heads the UID project, will also head a technology advisory group for automation of major tax administrations at both the Centre and the states (excise and commercial tax) as also that of the future (GST).

This should take the taxation effort to a new plane in terms of cost and efficiency. In developed economies, the government is a major buyer of IT and, in fact, the robustness of a country's domestic IT sector, as also its general adoption are proxies for its level of development and competitiveness.

Unsurprisingly, China's software industry, powered mainly by domestic demand, is far larger than that of India. With the government emerging as a major driver of IT demand, the slack in global demand, which is still present, will be partly taken up by domestic demand.

Numbers tell a fascinating tale of the changing dynamics between export and domestic demand for IT. During 1998-09, export of software and IT-enabled services grew at a compound annual growth rate (CAGR) of 33 per cent, whereas domestic sales grew by 26 per cent.

But an inflection point may have been reached in the current year when exports are, according to Nasscom, slated to grow by 5.5 per cent, as against domestic sales growth of 12.2 per cent.

In the coming year, domestic sales are projected to grow by 15-17 per cent, ahead of exports growth of 13-15 per cent. What is more, as these numbers were worked out before the Budget, a stronger push through greater government adoption can lead to higher domestic growth. The government's IT spending is projected to grow by a CAGR of 29 per cent during 2009-11.

The one reason why the government does not get an unqualified third cheer is its unwillingness to establish parity between software technology parks (STPIs) and special economic zones (SEZs).

It can be nobody's case that the software industry, which has now matured, should enjoy special tax benefits. But the STPI was a unique regulatory product that eliminated the proverbial Indian regulatory overload and enabled the Indian software revolution.

Startups can find it difficult to migrate to an SEZ or even find one in a tier two and three city where skills cost less. The STPI package, remarkable in its simplicity, created a bonded warehouse out of every little software exporting shop. This window must be kept open for some more time.