3G: Right decision or a goof up???

Today got an opportunity to hear two interesting perspectives on the state of telecom sector in the country. Although the two perspectives were from fundamentally different sides, one from a MNC telecom equipment developer side and the another from VAS side, they did resonate on the point of utterly pathetic situation of service providers in the country. I have talked in the past about dwindling ARPUs, wafer thin margins, voice still being the primary bread and butter, but with rising inflation, increase in opex after a major jolt of capex in the form of 3G has left the service providers in tatters. One cannot underplay the importance of service providers in the telecom ecosystem, but the fact that higher uptake of smartphones has actually not made much difference to their business is an indication of inequitable roles in the telecom ecosystem. Why should the service providers alone invest in the network? More often than not a technology is pushed through by large telecom manufacturers, driven more by getting a return on their high R&D expenses, rather than understanding the needs of the region,or any consideration for the shelf life of an existing technology. In the Indian scenario 3G auction was the only way MNCs could get the service providers to buy a technology which was to be weeded out in a matter of 1-2 years. With a windfall gain for the Government it was a win win for all but the service providers and the ordinary subscribers of this country. The 3G auction was at best a pyrrhic victory for the service provides as they fought against each other for lucrative deals. What was forgotten was the fact that irrespective of winners the technology would actually be bought from a handful of companies with huge cross holding of patents, thereby ensuring a good earning for the manufacturers. If the above was not bad enough, to debar the Chinese companies from getting business Government bodies expressed security concerns. Now it is anyone's guess how much of it was security risk and how much ensued from lobbying by the likes of western MNCs eyeing business from Indian service providers. Undoubtedly the large MNCs still toe the standard line of 3G being a necessity before 4G which has no rhyme or reason. Fact of the matter is that even after huge outlays in network infra and subsequently in marketing campaigns, it will still take at least 3-4 years for the firms to reach a decent subscriber base out of metros.

In my opinion, auctions should be conducted by combinations of equipment manufacturers and service providers, this will ensure that the equipment developers are not mere spectators immune to a service providers situation but in case of servcie not being picked up by subscribers have a financial liability. This would push the telecom equipment developers to remove information asymmetry inherent in the market and offer the best solutions keeping in mind the fact that they would need to spend again in the auction if the shelf life of technology is not appropriate.

The next step for Indian IT industry

Indian IT industry has made rapid strides and in the last 10-15 years, has reached a status wherein IT contributes a whopping 11% to the Indian GDP with revenues of around US$ 70 Billion for the financial year 2010-11 (NASSCOM). Several well known and well understood factors have contributed to this growth such as availability of a large pool of technically trained humanpower (manpower sounds too gender specific!!!) that could converse in English, labour wage rate vis-a-vis west, currency conversion factor, low capital expenditure involved in setting up a small IT company (therefore high returns could be expected), lack of interest in manufacturing related jobs among the graduates etc. Year after year Indian IT companies played to this strength of labour arbitrage, favourable Government policies and not much of a competition on a global front especially in terms of the scale that Indian companies could offer. No doubt Indian companies have established themselves as credible players in the global delivery related models. Top 3-5 Indian IT companies boast of size and scale that is second to none in their respective fields. Today more than 80% of revenues generated by IT firms comprise customized software development and maintenance (NASSCOM). However, they have reached a critical point and since last 3-4 years there has been consistent debate on moving to the next level on the ladder of evolution.

Question is what are the next layers and how does one make a transition to the more evolved layers? Answer to the first question is strongly context specific. A well diversified IT company like the big three in India have many options to look forward to. For example, they could make a transition from services to software product development in a much greater way than what they do today (less than 10 % of revenue is through software products). These firms could start with India specific products and then move to more customized ones through various development centers that these firms have created across the globe. When I say India specific products, possibilities are infinite, for example we hardly have a product that can help us plan a balanced Indian diet. Indian population is at greater risk of suffering from diseases like diabetes, cardio-vascular diseases as well as other life style related diseases. A product with loads of data about calorie related information about Indian food products could help people plan a wholesome diet on a daily basis. If this could be integrated to existing desktop/laptop/smartphone applications this would go a long way in promoting healthy lifestyle. Similarly there could be applications related to readymade analytics packages, e-governance and m-governance packages that could be potentially market winning. As I said earlier possibilities in this sphere are infinite.

The other more technical option is moving into high end research and development related to new paradigms in computing and networking, computer and network security, hardware design and manufacturing, especially customized embedded systems. Robotics and artificial intelligence related work could offer great prospects. However our technical workforce is ill equipped to deal with this kind of development work and only a few companies have the wherewithal to move ahead in this direction. There is requirement of substantial investment as well if a company wants to really make a difference on this front. However, a success on this front could have potentially high gains. This direction essentially leads to where several IT/technology companies of west stand today. Filing of patents forms an integral part of work accomplished by such firms. A logical step to make transition in this direction might include strategic acquisitions abroad, essentially niche firms focusing on high end technology.

A third direction is moving to the more conventional side of business consulting. With wide experience of having worked on a plethora of projects with different industries, most IT companies have gathered knowledge and skills that could be utilized for business strategy consulting. This in house skills could be a goldmine that could turn these companies to potential competitors for larger consulting companies.

However, to make this transition companies need to look beyond their existing business models. Companies should no longer be satisfied by getting newer and larger outsourcing projects . Today they are a staple but in the coming future labour arbitrage will not work and might lead to serious social consequences given the size of large Indian IT companies. Before market forces you to change by leaving no option at all it will be much better to start self evaluating various options including the ones mentioned above for a long term strategic fit. Up coming companies across Latin America, Ireland, Eastern Europe, Russia, Israel have the potential of disrupting the business of Indian companies, similar in many ways to what Indian companies did to some of their western counterparts. Like succession planning is so integral to businesses, similarly transition planning to move to the next level should be thought through by careful planning.

In their path to the next level firms would have to be patient and realise that such initiatives would be cost centers to begin with. IT industry in general has been looking at quick gains without much capex or time delays and this will be a fundamental shift in their operating model. Initially say around 10-15 % of funds need to be allocated to new initiatives and these initiatives may take 3-5 years to reach a level of maturity wherein they will start earning revenues. All in all complacency of Indian IT companies by over persistence with their existing business models might lead to their decline and now is the time to act to prevent this from happening. Although some comapnies have taken small steps in this direction, this needs to accelerated to maintain the competitive edge of Indian IT companies.

A First-cut Look at Salient Features of Union Budget 2011

A First-cut Look at Salient Features of Union Budget 2011

By Prageet Aeron

Union budget is always an event of interest for every section of society owing to its importance in both planning and developing expectations for the coming year. Union Budget 2011 presents several interesting issues before us. Some of them will be discussed here with the aim of trying to unravel their impact on various stakeholders.

a) Exemption of tax for senior citizens above the age of 80 years up to an income of 5 lakhs: A very positive step, at a stage of life where you tend to spend more on health related and other issues, this would give the senior citizens some relief. Also viewed from a more philosophical point of view, citizens of this age group need to be looked after as there is hardly any systemic arrangement in our country for looking after the elderly.

b) Senior citizen benefits to begin from age of 60 instead of 65, again a welcome effort to help the elderly.

c) Exemption raised to 1.8 lakhs for male taxpayers and 1.9 lakhs fro female taxpayers. This seems more like lip service rather than any concrete step. Raising the limit to 2 lakhs for both might have been better. With inflation at almost 20% for certain products, this increase of barely 12% will hardly bring any relief. On the other hand in the long run this discrepancy between male and female taxpayers is discriminative without much logic and should be eliminated.

d) Thankfully exemption of additional Rs 20,000 on infrastructure bonds remains (possibly for one last year!!!). Would have been great if this would have been enhanced to Rs 40,000. A missed opportunity in my opinion.

e) A big positive is the removal of indirect subsidy on LPG and kerosene (cash subsidy to given directly). Given that Government was bleeding the oil companies with a subsidy of around Rs 350 on gas cylinders and a subsidy of around Rs 20-22 on kerosene. This will reduce the burden on the oil companies. Increase in price to its actual value (possibly) will also lead to better utilization of LPG by the customers by curbing wasteful practices. However on the down side there is still no mechanism for the delivery of direct cash subsidy. In the past nations that tried these forms of subsidy have failed on the execution front.

f) With LPG, diesel, petrol, ATF all increasing in price, cascading effects on other sectors are a natural outcome. Will certainly add to increasing inflationary phenomenon. However, increase in service tax on aviation industry seems unjustified. India needs a strong aviation industry, with business and other forms of travel having undergone a sharp increase it can no longer be seen as a luxury and Indian Government should move out of this mindset. Besides aviation industry also employs a large number of people, and an in the near future, development of manufacturing related to aircrafts is sure to increase this further.

g) Fertilizer industry has been given an infrastructure tag and now urea too would be given a nutrient based subsidy. This will be good for reducing deficit and also have appositive impact on the environment especially curbing excessive use of urea.

h) There seems to be a little movement towards GST but will surely take a lot more time may be 2 years to be implemented.

i) With medical infrastructure in tatters bringing the private hospital under service tax net is sure to hurt the middle class. This is a completely unnecessary burden which could have been avoided in the interest of welfare.

j) Allowing FIIs to invest in MFs in India might backfire in the short term by making the market more volatile. It could have been restricted to only infrastructure related mutual funds for the time being. However, on the positive side it will bring more funds into India.

k) Rural India has been showered with several gifts including 500 crores for the regional rural banks; special corpus for women self help groups as well as SIDBI controlled microfinance fund. Another 18000 crore have been allocated to develop rural infrastructure but again delivery mechanisms need to be strengthened.

l) A subsidy of 1% on housing loans till 15 lakhs for houses worth 25 lakhs vis a vis market rate will be useful for the tier 2 cities but will have little impact on metros where most housing schemes are way beyond 25 lakh mark.

m) Agriculture has been given a boost especially the eastern region of the country has been chosen as target for increased productivity. Generous allocations have been made to poultry, livestock and fodder development initiatives. Also agricultural credit has been increased to 475,000 crores (almost 16% increase Year on year). Lack of production has been rightly identified as the cause for inflation among the food items however, without adequate supply chain infrastructure related to cold storages etc any increase in productivity is of little value. The amount of investment required for developing supply chain infrastructure cannot be provided by Government alone and seeking private sector participation should have been a priority in this sector. This is where an increase in FDI in the retail sector could have come in handy with certain riders such as minimum investment guidelines for setting up cold storages and agri-processing units in far way regions. This is surely a missed opportunity.

n) Increase of duties on laptops and desktops does not look like a very positive step. However decrease of duty on hybrid vehicles is a good sign. Hopefully, hybrid vehicles will become the vehicle of choice among the super rich rather than the fuel guzzling environmental menace like SUVs.

o) MAT to be imposed on SEZs and equipment for UMPP (Ultra Mega Power Projects) to be exempted from duty. Latter is a tad late, should have been put up a year ago (better late than never).

Finance Minister has not tinkered much with most sectors of the economy and so there is not much element of surprise in the budget. This should transform into no shocks in stock market in near term. With expected growth of 9% in the future, optimism seems to be the mantra. Overall a budget that possibly focuses on social welfare of the lowest segment of the society but does not offer much to the tax paying middle class. Government has also promised to curb the menace of black money through a five point programme but with the political leaders across the board themselves undergoing scam investigations any quick output does not seem likely.

(Views expressed by the author are personal)