The IT story: reasons to celebrate, lessons to remember

The just-presented Budget had referred to stock options for IT firms linked to the issue of capital abroad.

Written by Shaji Vikraman | Updated: April 5, 2017 6:08:15 pm

In May 1998, soon after the NDA came to power, Atal Bihari Vajpayee’s PMO notified the constitution of a National Task Force on Information Technology and Software Development headed by the Deputy Chairman of the Planning Commission, Jaswant Singh.

There was much excitement then about India’s IT industry and software services firms. Some of these firms were promoted by first-generation engineers and entrepreneurs who had, with their skill, abilities and outlook, cracked overseas markets. Their earnings, much of which was in foreign exchange, were boosting the national income and creating jobs for young people. Recognising the potential, the PMO asked the committee to draw up a blueprint to help India emerge as an IT superpower over the next 10 years.

Work had by then started on the government’s first Budget, which Finance Minister Yashwant Sinha presented on June 1. During the break after the Budget and before the Finance Bill was approved, the Task Force — which had big IT names such as Narayana Murthy of Infosys, Ashok Soota of Wipro, and Nasscom president Dewang Mehta, and the go-getting Chief Minister of Andhra Pradesh, Chandrababu Naidu — recommended a 108-point programme.

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The just-presented Budget had referred to stock options for IT firms linked to the issue of capital abroad. In the final amendments to the Finance Bill, tax incentives for the industry — recommended by the Task Force — were incorporated, an unusual occurrence that reflected the government’s perception of, and policy support to, the potential of the Indian IT industry. A major kicker then was a 10-year tax holiday for Software Technology Parks of India (STPI), which were first promoted in 1991 by the P V Narasimha Rao government.

India’s manufacturing sector had not yet recovered from the overhang of the huge capacity expansion drive of a few years earlier, and was weighed down by high interest rates. The after-effects of the Asian currency crisis were still being felt, and global economic growth had not picked up. It helped that opportunities came in the form of orders for Indian firms because of the Y2K challenge in 1999-00. India’s top software services firms were wooed by overseas investors keen on buying into the new age success stories. Rules framed for brick and mortar firms in India didn’t suit these new companies, whose markets and investors were predominantly overseas.

When the question of seeking approvals from the RBI and government for buying firms overseas arose, Infosys CFO T V Mohandas Pai went to meet Governor Bimal Jalan in the central bank’s office in Mumbai in 1999-2000. At a time when securing an approval for even $ 500 million was tough, Pai told Jalan that his company wanted an approval to acquire overseas companies of up to $ 10 billion. Jalan laughed and told Pai, “Mohan, if you jump from this floor, you will fly to Bangalore, but I have to look after the interests of UP, Bihar and other states.”

Of course, Pai, along with colleague V Balakrishnan, who later became Infosys CFO, tried to convince him — and officials in the Ministry of Finance — of the need for a change in policy. It did work ultimately — and the government and RBI soon afterward backed the raising of the acquisition limit to 10 times the net worth of the company.

As the industry notched up impressive successes, changes in policy became easier — and were helped along by the presence of industry leaders such as Murthy, Nandan Nilekani and Azim Premji. Tax breaks — including lower import duties — and funds for innovation followed in subsequent Budgets. Pramod Mahajan, Vajpayee’s IT and Communications Minister between 2001 and 2003, was an energetic believer in the potential of IT — it seemed, indeed, that the industry couldn’t put a step wrong.

In January 2001, Vajpayee was persuaded by his senior colleague and Deputy Prime Minister, L K Advani, to visit the Infosys campus. The PM, always the big-picture man, told his audience that earlier, overseas visitors wouldn’t return satisfied without going to the Taj Mahal — these days, they weren’t satisfied without visiting the wonder of modern India, the IT centres of Bangalore. He added, in classic Vajpayee style, that the IT wonder represented the happy confluence of Saraswati, Lakshmi and Shakti — referring to the knowledge economy that had the potential to create millions of jobs, and to the first-generation entrepreneurs who had created wealth, unleashed a new energy among young middle-class Indians, and earned global acknowledgment of India’s software capabilities.

The fuss about IT did get to the big boys in the manufacturing sector. One of India’s top industrialists, long used to influencing policy, was miffed enough to tell a junior official on a trip to the Finance Ministry that compared to the size of some of the IT firms, the boundary wall of his production unit was more valuable! The image transformation and wealth creation by the IT firms had been followed by improvements in corporate governance, which helped attract foreign fund flows — and what got this industrialist and others in the manufacturing sector hot under the collar were the subtle hints from overseas exchanges and investors to clean up their books and improve governance.

What is happening now with policy and state support for start-ups has parallels in the IT industry from a decade and a half ago. Indian IT is now a $ 160 billion industry, with $ 100 billion worth of exports and employing 4 million individuals directly. Last year, 5,000 start-ups rolled, and the segment is now valued at $ 75 billion. For the IT industry, policymakers had a 10-year vision; it would be interesting to see if a similar sucesss story unfolds with today’s start-ups. If that does happen, it could then generate $ 500 billion of value and hundreds of jobs, and herald the emergence of a new generation of young entrepreneurs.

shaji.vikraman@expressindia.com

For earlier articles in this series, visit the author’s microsite on The Indian Express web site, https://indianexpress.com/profile/author/shaji-vikraman/

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