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N Vittal

Where's the cash?

Software is one of the most successful sectors of the Indian economy. Computer software exports have grown at least 12 times in the last 6 years from $100 million to $1.2 billion and are still growing.

Yet, the industry needs to grow faster. Especially when you look at global

T O D A Y

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time-bound opportunities like the Y2K projects.

Finance is the key to the success and growth of any business. Even the business of software which is essentially a technology-intensive, brain-oriented activity.

Financial institutions have played a significant role in the development of industry and economy. A classic example is that of Japan's banks. They were crucial in the development of the nation's industry after the Second World War. Then, the digital revolution of Silicon Valley wouldn't have been possible if not for venture capital funds.

I wonder whether India's financial institutions have the imagination to play a similar role in the electronics and software businesses.

The issue of financing software can be studied from two angles. First, from the perspective of the industry itself and then from the point of view of the banks and financial institutions.

Let's get on to the first case. The software industry wants money for three reasons: one, investment and working capital; two, resources for training employees or assistance in getting them and three, launching products.

Most of India's software companies have grown from the body-shopping and sub-contracting business. However, to secure the future they must now look at developing the domestic market along with continuing gains on the export front.

The National Association of Software and Service Companies had had their annual convention at Bangalore recently. The convention brochure remarked that just as the Gulf nations have crude oil and South Africa diamonds, India has human capital ready for software. But in the software game there are the three 'R's to contend with: recruiting, retaining and retraining.

Recruiting, retaining and retraining software professionals will be the key to developing a massive domestic market without which India cannot hope to be a significant player in the global software market. But the three 'R's are an expensive proposition.

The financial institutions and the software industry will have to work out the funds for creating the massive domestic market, so crucial to the nation's global aspirations.

Unless there is a major hardware presence and greater application of information technology, how is the software market going to grow?

It is, therefore, necessary, that when we talk about the financial dimension of the software industry, we take investments into account. The financial policies and strategies needed to substantially and rapidly increase the presence of computers and other information technology systems will become very important.

I have been pleading repeatedly that the finance ministry give 100 per cent depreciation in the first year itself for any investment made in information technology. This will help the leasing industry. Let us not forget that in the era of the mainframe, the computer industry grew through the leasing route. In a poor country like India leasing becomes a strategy even in the age of PCs and network computers.

The banking sector should, along with the industry, think of imaginative methods to catalyse software growth.

Money will also be required to churn out enough technical human resource to fuel the industry's growth. People are the most important asset in this industry. And there seems to be a growing scarcity of qualified people. Besides, the attrition rate in the industry today is 20 per cent. We therefore have to think of a system to quickly produce a large number of professionals.

Human resources are generally produced by three streams of education. The first is the traditional education system of colleges and universities. The second is the set of private-sector institutions. And the third is the company training programme.

I suggest a fourth stream of education. This can be started with the industry setting up training institutions. The high quality of training in such institutions may be expensive but the banks could move in and provide affordable loans to students. Bright students could get good quality training and be immediately employed by the industry. They could then return their loans promptly.

I know that some bank loan programmes are already there but this effort is not adequate and we need to take a great leap forward.

This brings us to the perspective of banks and financial institutions toward financing software.

One major problem financial institutions face while dealing with the finances of the software industry is their lack of expertise in assessing the special nature of the business. The banking sector needs to make a systematic effort to understand the software industry. Banks must develop their own expertise in assessing software projects.

Perhaps, equally important is the need for banking and financial institutions to become more aware of the use of software and apply information technology extensively in their own work.

These measures will create a conducive atmosphere for a more intelligent appreciation of the needs of the software industry. Bottlenecks in advancing funds to the industry could then be studied and removed.

Unlike traditional industries, the technology content in software is high. An ingot is 90 per cent material like iron and cobalt and 10 per cent steel technology. Computer software is 90 per cent technology and 10 per cent material.

For traditional bankers, the problem arises in assessing the financial worth of a genuine software technology. We will have to take up the matter with the Reserve Bank of India and the government. Software has grown well in the last six years and there is now all the more need for moving faster. This can only happen by adoption of imaginative financial strategies to realise the full potential of the software industry.

There is a common complaint that India has not yet come up with very successful software products. But developing software products calls for extensive application of information technology throughout the country.

For achieving this, as suggested earlier, we must have two policy initiatives. The first is to encourage leasing, declaring under the Income Tax Act that any investment made in computer software or hardware systems will be eligible for 100 per cent depreciation in the first year itself. Then, we should be able to massively improve the computer hardware presence in the country. The second initiative is to declare that all items liable for excise or sales tax must be bar coded. This will encourage the use of computers in all areas of management and distribution.

The Silicon Valley's explosive success was triggered by venture capital funds. India too has venture capital funds but these are far from venturesome.

I wonder whether we should invite foreign venture capital funds to operate on our shores, at least in the information technology business. This may also provide Indian banks and financial institutions an opportunity for some hands-on learning.

Previous columns: Critical mass | T.R.a.I | Santa Clause 11(2) | The Broadcasting Bill | The death of distance | S.O.S, getting the message out of the bottle | Force 7 from FICCI | Of railroads and info highways | Techno Politics | Cheating death: Ways to resurrect ITI | The HAM-handed miracle | Electronic governance | Which came first? | The four-engine design | Learning to learn | Heads 'n hands | Post-mortem

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