Friday, February 20, 2015

Policy Changes to Encourage Software Product Development in India

Skilled human capital remains the most crucial factor for software innovation

As software becomes the heart and lifeblood of the modern economy, Software is becoming the driver, an enabler, and a diffuser of innovation across all sectors and industries. For example, look at Uber or Flipkart or BigBasket - which is transforming retail in India and Taxi services.  Software  delivered via mobile devices can transform all aspects of economy - and this is an ABSOLUTE TRUTH!  

India has established as a leader in software services. With millions of engineers, India can emerge as a world leader in software technology.

Unfortunately, India has been a nonexistent player in developing any new software technologies. In areas of core technology development, India has fallen short in a BIG way!

Other countries such as Israel, Taiwan, Korea & China have emerged as product leaders, while India - despite its enormous manpower talent pool has failed to develop world class products and has been playing a secondary role of software services.

Unlike most countries, India does not suffer from scarcity of skilled human capital. India produces lots (quantity) of engineers with adequate skills (quality). Indian engineers have immigrated abroad and have created several product companies. So the problem is not with talent or skills.

The main problem is with the government policy towards product development.

Over the years, Indian government policy has tilted heavily towards software services by offering liberal tax rebates, exception from rigid labor laws, while product developers are penalized with higher taxes, bureaucratic red tape and crippling labor laws.

As a result Indian software companies have largely stayed away from product development. Even
industry majors that set ambitious targets for product revenues have given up their targets over time.

For example, Infosys Technologies, had about 4% revenues from software products in 2001-02, though at one time they hoped to achieve a target of 40% revenues from products by 2000.

Major hindrances in developing products from policy perspective are:

1. Lack of involvement of Indian Private sector in developing key technologies. 

Government run organizations such as DRDO, BARC, CDAC, ISRO work in total isolation during development and only after development, government agencies plan to license new technologies to private sector.

In the USA & Israel, defense development and private sector involvement go hand-in-hand. For example Google got its initial funding from DARPA for a web indexing project.

2. Weak protection of Intellectual Property Rights and rampant piracy. 

When a fledging startup develops a new product and wants to sell to potential customers - mostly large organizations, they are under the risk of piracy. Startups cannot afford to sue bigger companies for piracy as they lack financial resources to fight a long winding legal battle. Laws regarding protecting IPR in India is really strong - but the legal process and bureaucracy causes the hindrance.

3. High cost of Internet & Electricity

Internet speeds in India is very slow and is expensive. The government licensing policy towards allowing private sector to create Internet connectivity from India to abroad has led to acute paucity of bandwidth for International connectivity. In addition, laying cable inside the country is regulated by various state & City government laws - which has made Internet connectivity very expensive.

High cost of 3G & 4G spectrum has also not helped - which has resulted in one of the highest Internet costs among BRIC countries.

In addition, chronic power shortage has forced companies to setup data centers outside India - thus making everyone choke on the slow-speed Internet. For example, it is a lot cheaper to set up data centers in Washington state or in Iceland or Carolina - than in Karnataka or Maharashtra.

For example, If I were to send an email to my wife - both of us residing in the same location, the email is routed via US!

Lack of Internet speed, has put software product developers at a BIG disadvantage. It has prevented Indian entrepreneurs to set up data centers or cloud/Web based or gaming products in India.

4. Lack of Tax incentives for Software Product Companies

Indian Software Services sector has/had several incentives. For a long time, software services were exempt from several taxes! Companies paid no income tax, no import duty, no exercise duty etc. However, product companies have to pay their taxes on day one!

This skew in tax regime has led to Indian entrepreneurs opting to invest in software services, which minimizes risks and maximizes profits. With services, entrepreneurs can expect to break even or even make profits in the first year of operations.

Providing Tax incentives to software product companies will help make India become a product powerhouse.

5. Lack of incubation centers and investment in early state startups

Early stage startup in India have to overcome several challenges: Lack of office space and investments for product development. In recent times, Venture Capital firms have been active in India, but they do not provide funds for an early stage startups. There is a need to create an 'Angel Funds' - which must be provided by a Government agency. In the US, Government releases funds to early stage startup via DARPA, DoD and  other organizations.


Prime Minister Modi's "Make-in-India" pep-talk must be backed by policy changes to help Indian companies and entrepreneurs develop software technology products in India - for the world.

Changing the existing Tax regime and Internet policies will help in a BIG way to develop software products in India!

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