The Great Software Bubble

The government’s love affair with the software industry is costing the country dear. Even after five years, software exporters are, in the main, mere body-shoppers. There is, therefore, no logical explanation why such a highly profitable and essentially a labour subcontracting industry should get so heavily subsidised. In spite of being extremely profitable, it contributes absolutely nothing towards bridging the fiscal deficit. The entire subsidy it gets merely augments the wealth of the already wealthy software houses. Except scrapping irrelevant laws and reducing the communication tariffs to international levels, the government has no need to specifically waste its time and resources for this sector.

The software industry’s subsidisation is a classic case of the government enriching the rich Peter by robbing the poor Paul of his subsidy. Not satisfied with the 100 per cent exemption from the income tax under Section 80 hhe, the Centre has also given these body-shoppers special import licenses at 15 per cent of the fob value of their ‘export’. Various glamour-struck state governments have also joined in by announcing 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 a focused attention! IT dream merchants have indeed sold the ‘superpower’ dream very well.

Classically, government subsidies-if dispensed at all to industries-have to go to those sectors that are today in a desperate condition. A lot of jobs are being lost and a helping hand would help many get over the hump and in the process save these jobs. Even if the IT export income was taxed at 15 per cent, the government could have earned much needed revenue of over Rs 1,600 crore to Rs 1,800 crore last year! The income tax rate at 15 per cent would still be the lowest in the world and therefore would not have been a disincentive to operate from India.

Most of software companies in India, even the larger ones, are in reality hawa mahals. None of them is 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 could be claimed as their own. All the ‘knowledge capital’ of these companies is in the brainpower, accumulated knowledge and experience of their employees. The firms are earning well and getting excellent returns on the manpower deployed. They are creating phenomenal monetary wealth and giving highly-paid jobs for a very large number of young men and women. Despite all these encouraging and desirable features, as corporations they are merely subcontractors, service providers carrying out white-collar, labour-intensive jobs. They are almost like the companies in the mid-’60s, supplying menial labour to West Asian 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 clients. That’s why there is this great proliferation of new start-ups. All this leads one to call them hawa mahals-corporations with attractive faces but no bodies. Just a great facade. They are companies without any foundation, without any core strength and no real business asset apart from the current contracts and the accumulated profits.

These cash cows have recently become the darlings of the bulls on the stockmarkets. IT stocks are going through the roof. Analysts have been fuelling the situation by valuing companies merely on the basis of potential, not their intrinsic strengths and their ability to survive bad times. It is in line with the emerging lifestyle, when one lives for the day with no thought for the future. Even 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 or ideas. It is selling dreams and cashing in on that sentiment. We are lured to spend on products that promise but not necessarily deliver and also buy 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 tailormade for bulls in the market and they seem to encash well on these sentiments. It is helping new IT start-ups 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 the software masks. Overnight, these companies are becoming software developers and exporters! The lack of close monitoring is very convenient. Not only the investor but the government too is already intoxicated with the lethal potion delivered through IT dreams. Watchdogs also are unconscious. This is a dangerous situation, to say the least.

Policy-makers at the Centre shouldn’t forget that they have to garner resources out of the wealth being created in the country and not depend on borrowing from people or from world lending institutions. The government has social obligations to subsidise the weak and the underprivileged by mopping resources from the wealth-creating institutions. Strangely, instead, it is subsidising the rich, making them even richer! Is it sensible for the country to count and pride itself with the number of billionaires created or should we work towards giving a bearable life to our billion poor?

(The writer is a former chairman, Electronics Commission)