Encouraging Entrepreneurs in IndiaPosted: January 19, 2006
I ought to be watching the NASSCOM newsline page more closely. India has it’s own set of incentives for entrepreneurs in IT. While I cannot think of a reason why the incentives would change in the near future, I would still watch it closely.
No prior permission of Government of India is required to set up IT/ Software units in India. Moreover, to encourage units in this sector, Government of India has announced many schemes:
* Domestic Tariff Area: When the primary focus is to sell in the domestic market in India. This unit can be set up anywhere in India. All normal laws apply. No concession is available on import duties. Exports are permitted. A special Export Promotion Capital Goods (EPCG) scheme of Ministry of Commerce can be availed. This scheme allows import of capital goods against export obligations at a concessional duty rate of 5 percent.
* Special Economic Zones (SEZs): SEZs are areas where export production can take place free from plethora of rules and regulations governing imports and exports. Units operating in these zones have full flexibility of operations and can import duty free capital goods and raw material. The movement of goods to and fro between ports and SEZ are unrestricted. The units in SEZ have to export the entire production. The first two SEZs are being set up at Positra in Gujarat and Nangunery in Tamil Nadu. At the same time, Santacruz Electronic Export Promotion Zone, Kandla Export Promotion Zone, Vizag Export Promotion Zone and Cochin Export Promotion Zones have been converted to SEZs.
* 100 Percent Export Oriented Unit (EOU): This is similar to SEZ scheme. But in this scheme, there is no need to be physically located at SEZ. All other incentives are same as provided to SEZ units.
* Software Technology Park (STP): This is a very special scheme under the Ministry of Information Technology. STPs are located at Noida, Navi Mumbai, Pune, Gandhinagar, Hyderabad, Bangalore, Chennai, Bhubaneshwar, Jaipur, Mohali and Thiruvanathapuram. This scheme offers zero import duty on import of all capital goods, special 10 years income tax rebate, availability of infrastructure facilities like high-speed data communication links, etc.
I do wish the government would identify software for Indian markets for special incentives. The outlook for software development for the Indian market is upbeat as this story suggests [“The Indian Software Products Sector: a Slow, Yet Steady Rise To Prominence”].
From the story, according to Professor Madanmohan’s study, there are at least 346 indigenous companies involved with product development. While I am unable to locate the study itself, the article optimistically suggests that the market potential is around US $7bn. Phew! The article goes on to identify key challenges to indigenous product development and what incentives would be nice to have. I am just going to paste that down here.
Facing The Challenges
While the product software segment in India is currently constrained by multiple factors and challenges, it is the young start-ups within the industry that face the toughest hurdles. For these companies, internationalisation and developing new revenue streams are the biggest roadblocks. Funding and access to capital is the other constraint these young organisations face, reflecting the fragile nature of their cash flows and nascent stage of venture capital. Being small in size and not so well known, these companies also had problems in attracting key personnel (especially developers with product orientation).
For software product firms in their expansion phase, the key challenging is managing growth and retaining leadership.
Organisations operating within the product domain are also challenged by the lack of industry-institution linkages, the absence of a consortium approach to R&D and the paucity of global-class talent.
Some of the other challenges facing product companies include the following:
* Access to capital and key technologies
* Lack of a domestic market to experiment and develop product capabilities
* An acute shortage of equity (risk) capital, to support the development of the industry (both large and small) and infrastructure outside of the government
* High entry barriers, including relatively larger investment and resources, a gestation period, technological complexity and endmarket and marketing knowledge
* Lack of resources for brand building
Providing The Growth Drivers
Clearly, the industry and the government have to work closely to provide a fillip to the product software segment.
A host of initiatives can be jointly undertaken to catalyse the growth of this emerging industry. These include the following:
* Improve the level of seed funding and encourage networking between the
* seekers and givers
* Increase the talent pool of target areas and initiate higher degree programmes at the IITs, IISc and institutions of higher learning
* Increase the access to test and development facilities at Defense and other national scientific organisations
* Increase tax and other incentives to develop and market ‘Made in India’ software products and standards
* Introduce policies that foster a balance between innovation and facilitate technology diffusion
* Encourage innovation to ensure global competitiveness
* Make investments in frontier technologies such as nanotechnology, SOA, Seamless mobility, bio-informatics and others.
Clearly, a lot can be done to place the Indian product software companies on the global map. By overcoming challenges related to funding, brand building and talent availability, the government and industry can ensure that the software product business become a viable growth opportunity for Indian companies.