Pre Budget Sector Analysis

The Indian IT industry is an integral part of the India growth story and over the years it has attained a status as one of the core components of our economic growth. As on date the Indian software industry is around USD 29.5bn of which nearly USD 23.4bn revenues (79 per cent) are from exports. These exports contribute around 20 per cent to the total export revenues of India. According to NASSCOM the revenues of Indian IT/ITES for FY07 are expected to exceed USD 47.8bn, thus increasing its estimated GDP contribution to 5.4 per cent compared to 4.8 per cent in the previous year.

There are a few reasons that make this above mentioned numbers look easily achievable. Firstly, we have a very broad based industry structure, which include not only the large IT companies, but also the well established mid size players and the BPO/KPO outfits. Secondly, Indian companies are now capable of grabbing bigger and complex deals, which could be seen from the share of contracts worth more than USD 50mn increase to 7 per cent in 2006 from meagre 1 per cent in 2002. What gives us an edge over is not only the cost advantage due to the high offshore component but also superior quality work. Thirdly, though the growth in the IT is more driven by the front runners, the share of the better performing mid size and smaller IT companies would also increase going forward.

While these reasons would form a part of the export market, one also needs to consider the growing domestic market, which is currently estimated to cross USD 15.9bn by FY07. The domestic market is witnessing a shift towards solution oriented approach from a hardware driven previously. This could viewed from the two major sectors such as Banking and Telecom, which has been more receptive to these services accounting for around 40 per cent of the total funds spend on the domestic IT services. Apart from that the e-governance initiatives of the government would also provide a much needed feeder to the IT companies, thereby increasing more demand from the domestic front. According to industry estimates domestic spending on IT services is estimated to increase to around Rs 23800 crore by 2009.

So all in all with opportunities available on both the fronts namely internationally and domestically, the future for IT industry looks quite good. And as far as budget is concerned we believe that the government would not disturb this momentum by any major negative surprises and would try to maintain this environment conducive for future growth.

We expect the overall budget impact to be neutral on the IT sector. We believe that the budget focus would be more on building better infrastructure facilities, as these haven't kept pace with the rapid growth in the industry. Secondly, we also expect the government to continue its thrust on its e-governance initiatives through its National E-Governance Plan (NEGP) in this budget as well. Thirdly, we can expect some kind of relief on the 8 per cent excise duty on the packaged software sold over the counter, which the government imposed in the last budget. This duty not only made the software costly, but also increased software piracy to lot more extent in India. Finally, the industry's urge for extension of the tax benefits US 10A/10B by 10 years, effective from April 2010, might not be entertained. According to finance ministry estimates, it has foregone more than Rs 10000 crore of revenues due to these tax benefits in FY05. If these exemptions are removed it would significantly increase revenue collection for the government. The tax exemptions to Indian IT companies under the said sections are expected to end by March 2009. In nutshell budget would be neither negative nor positive.