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Post Budget Note PDF Print
Laveesh Bhandari   
Monday, 10 March 2008 05:30
The election budget has been announced.  The key elements of the overall strategy to woo the rural and the lower middle classes is a combination of money and income transfers as well as lower taxation.   The budget has really not been criticized much in the media, and the vernacular press has been quite supportive of this budget.  All in all, this has been a big victory for the government. The budget also reveals the thinking in the central-left coalition that characterizes Indian polity (Congress, parties subscribing to the imaginary Third Front, Left parties) and the discussion that followed it has also revealed the BJP’s (which also appears to have strong central-left tendencies where economic policies are concerned).  Five points emerge after the budget presentation and the discussion and debate that have followed among the various political conglomerations.   Summary of trendsFirst, education continues to be an important aspect for greater government action – from primary to the tertiary level.  Second, there is finally recognition that employability is a concern, and the movement away from the overarching reliance on the employment exchange has commenced. Third, agriculture needs to be a focus area for economic policy.  Fourth, there is little faith in the IT sector to deliver where equitable progress is concerned.  And Fifth, reduced or simplified taxation is not of much interest, unless there is a direct impact on votes.  What are the ramifications for Microsoft?  Indeed lessons can be drawn, because the budget and ensuing debate has revealed a range of commonalities.  Consider each of the above separately. 

Education

Education issues can broadly be divided into two boxes – primary and secondary/tertiary.  Where primary education is concerned, the problem of quality in delivery is being paid lip service to but is not being addressed at the central level; true many experiments are ongoing at the state level, but there is little possibility of reform at this level.  The reason being school teachers are an integral part of the election process, and any correction in education delivery will affect them adversely.  Whether an election year or not, no one can afford to go against the interest of the primary school schoolteacher as of now.  So the focus remains greater access and greater infrastructure and greater subsidies (the mid day meal is one example).   Microsoft’s window therefore lies in the improving quality through better pedagogy within the current administrative structure.  But the catch is to get the buy-in of the school teacher even before that of the state administrations. Tertiary education has also been more about expansion than of quality, that is natural since the problems of quality have not come to the fore yet.  The acceptance of a widened quota system has further added to the need to expand the tertiary education system.  Also noteworthy is the distrust of the private sector in education, including in the BJP (some in the BJP have called for greater private entry in vocational and tertiary spaces, but these are lone voices). There is a window here as well, but we will tie that to vocational and employability issues and discuss that later. The employability problem is generally accepted as a serious one across the board (though the identification of causal factors does not appear to be of much interest).  The setting up of a special purpose vehicle on the lines of IDFC came up for little attention in the media. This reveals the lack of thought, and consequently, alternative ideas among the polity.  The BJP was also surprisingly quiet on this issue.  Surprisingly because some BJP ruled states are experimenting with quite innovative strategies.  Rajasthan for instance has tied up with a temping firm to overhaul their employment exchanges and conduct job melas.   The combination of the interest in tertiary and vocational education, and employability is a grand opportunity for Microsoft to lead- perhaps leveraging on its experience with Saksham and Jyoti, or coming up with other alternatives. The proposed setting up of new IITs and centers of excellence, and also scholarships to PhD students, are indications of heightened worries on the lack of availability of adequate human capital in the knowledge creation space.  This is a critical worry area, and greater private sector activity in such spaces will be welcomed.  

Agriculture

 Agriculture has always been a focus area, but unlike in the past, it is more or less clear that the current stress towards increasing hard infrastructure and greater and easier credit will not achieve the dual objectives of increased productivity and equity.  There is a great need on three fronts that can supplement the increased government allocations to the sector - improved knowledge, improved training, and improved access to markets and market related information.  The IT sector has not played any significant role in any of these areas though many experiments are on.   The government’s Common Service Centre or the Gyaan Choupal initiatives are not likely to be successes and here is again another opportunity for Microsoft.  The need to is to set up an agri information system that has two elements – (a) information flows and (b) transactions.   On the information front the need is for a one stop shop that can (i) provide the relevant information on mandi level prices, (ii) information on latest inputs and availability (iii) commodity markets and prices and (iv) experiences of other farmers.  On the second front, transactions need to be enabled that are related to (i) input, information, and advisory purchases by the farmer (ii) linked through the banking system, perhaps better utilizing the kisan credit card scheme, and (iii) enable farmer transactions in the commodity exchanges.  Of course none of these would work, if the associated training is not imparted to the farmer in better utilizing these tools.  To put it another way, we would need another ‘extension’ system, but the system would be related to online practices, not just agriculture practices.  Also note that there are a host of experiments ongoing, and only a few have been successful, and their successes and failures need to be better understood before the specifics of such a potential IES (Information extension system) can be thought through.  The green and white revolutions have however taught us an important aspect of enabling large-scale changes.  These are, (a) both the input and the output side constraints need to be addressed simultaneously, and (b) an extension or training system is an integral part of the process of change and has to go hand in hand with the other changes. In other words, a one time training process does not help, it has to be sustained over a period of time. 

Irrelevance  of  the IT sector?

It is evident that the honeymoon with the IT sector is over, and perhaps rightly so.  The past was characterized by the need to be self reliant, need for foreign exchange, the thirst for international recognition.  But that generation is steadily getting edged out.  The new India has confidence over its ability – a confidence built on the back of the export oriented IT sector.  But the new India has other overriding concerns – that of sustainability.  That is, unless a much larger proportion of people can gain from technological advances and economic opportunities, the successes of the recent past cannot be sustained.  And the IT sector has failed miserably where these objectives are concerned. The large masses of Indians might know a few words of English, but they are comfortable only in their mother tongue.  Whether it is the internet, or desktop software, Indian languages just have not taken off in cyberspace.  Many say there is little demand.  This author argues that there is a large demand, but it has remained latent.  This latency of demand is because of the poor quality of options that the user can chose from.   There are some hardware and some software issues.  But the key issue is the lack of interest of the IT sector companies on the domestic sector.  First consider the Internet.  Among the larger players, either Indian or international, Google is attempting to put together a bottom up approach towards its vernacular services.  And these attempts have only started recently.  Of course, Microsoft Bhasha was an early entrant into this space, but it never captured the imagination of the people, and little attempt was made after its introduction on making it more attractive and useful.  On the e-governance front, again, most government departments believe that e-governance is about having a website; few can even imagine the power of an Internet based interactive governance system, leave alone design one.  Governments are rarely known for innovativeness, but few of the larger companies have backed experiments that can easily be integrated into conventional system of governance.  Desktop software in local languages is quite messy.  Even the words on the menu are a literal translation of English to sanskritized Hindi (in the case of Hindi).  Of course these can easily be changed, but the point is, the large IT companies, were never really interested in the space, and their claims on their interest in inclusive-ness and inclusive growth are rightly perceived to be quite hollow. The Indian polity has given up on the IT sector, that is quite evident from this budget. There is a lot that Microsoft can do on these fronts, though to get larger share of mind in the public sphere is going to be more difficult now.    But it is only a matter of time, before attention will shift once again – the potential benefits of the IT and ITES are many in the domestic sector.  And it is only a matter of time before PR savvy IT companies find the right message for them to ride upon. 

Tax Instruments for the IT sector

 The rumors of extension of the STPI scheme were belied; and finally, customized software is in the tax net.  It had held out for long, but the long tax holiday just did not yield the kinds of returns that were initially promised or envisaged.  These are both instances of the honeymoon being over.  The excise duties on packaged software were increased from 8% to 12%, to bring it in-line with excise duties on custom software. This is one of the items in the budget that should be supported by the industry.  One, it is in line with the simplification and having standardized rates that will help in the smooth introduction of the GST.  Two, there was a lot of leverage for companies to categorize custom software as packaged; this will ensure that unethical practices will reduce. And three, perhaps the most important, significant taxation will also ensure that the government will be more answerable on piracy issues.  The industry could present estimates to the government on the great revenue loss due to piracy in this context. Note however, that 12% is not the only rate that the FM would have considered.  The example of convergence products being down to 8% only underscores the point that software is not being identified with the masses and inclusive-ity.  But cash cards and mobiles are.  The broadband revolution is about to happen in the next two years, software as a service models are on the anvil.  The opportunity is still there for Microsoft.  

The middle classes finally rule

 The tax reductions are for the largely urban middle classes.  The loan waivers, are for the relatively better-off farmers.  The education related sops are now towards the middle school and vocational and higher levels.  The point is that, finally, the politician is recognizing the middle class as a significant vote bank.  This budget is the first of many similar ones in the future, and it explicitly lays the direction of many future budgets.  Education, tax breaks, jobs opportunities for the educated, tax waivers, access to inputs, railway fares reduction for AC coaches…the list is much longer.  They all have one thing in common.  The middle class has finally taken over from the poor, and it will henceforth be the key driver of Indian politics.  That is the biggest success of economic reforms.
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