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3 June 2013, Gateway House

“Government needs a partnership with our private sector”

The recent crisis at Infosys suggests that corporate governance in India’s IT sector has been slipping. Gateway House talks to T.V. Mohandas Pai, former CFO of the company, about what the Indian IT industry and the government can do to raise global competitiveness and remain recognised as centers of innovation

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The technology scenario in India has undergone a dramatic change in the last three years. From being the blue-ribbon sector and flag-bearer of all that is right about India, the IT industry is saddled with problems: a governance and profit crisis at premier firm Infosys, disappointment that India’s IT sector has failed to spark innovation and lead the country Apple-and-Facebook style into a new era; and the promise of India becoming the knowledge centre of the world remaining unfulfilled. Gateway House’s Executive Director Manjeet Kripalani and CEO Blaise Fernandes asked T.V. Mohandas Pai, former finance and human resources chief at Infosys and now chairman of Manipal Global Education, about the crisis and what is required for Indian IT to realign and recast itself to once again be the leading indicator for India’s potential.

Q: What needs to be done from the institutional side – the human resources ministry, the educational giants like the institutes of technology and management, the world of engineering and skills-building – to support and revive the IT industry? Will large scale public projects like computerizing the courts, which intersect with the lives of ordinary people every day, help?

There is nothing much that the government can do to help, nor has it done anything extraordinary in the past. It put in good policy in 1991 and in 1998 and stayed away. The industry grew with wonderful entrepreneurs, it trained talent, the market opened up and it all worked.

Indian IT services is now an $80 billion industry in exports and around $105 billion in total. So the best thing government can do is not come in the way and perpetuate bad policy. A million jobs have been lost to India in last five years, entire customer contact jobs have gone to the Philippines because our government has procrastinated on policy issues and tax breaks.

Contributing to this are unsubstantiated reports in the media of exploitation, of not enough people speaking English well on the phone, increased costs of private transportation because of inadequate public transport and the failure of government to protect its citizens. This has lead to increased security costs for companies. All that and the silly policy of closing down bars at 11 pm in Bangalore, has lost us those 1 million jobs.

The industry grew at 10% last year, and will grow 12% to 14% next year. A full 50% of the financial services experts newly hired globally in the field of Knowledge Process Outsourcing, are hired in India every year. Bangalore alone has 80,000 chip designers, the most in the world.

The government needs to improve our cities and rapidly expand infrastructure, ensure that metros are built, and stop attacking multinationals and Indian IT companies on the tax front. In the last three years, Rs.1,50,000 crores – or $27 billion – in tax demands are being made on multinationals and Indian companies because of transfer pricing issues. It’s unnecessary and perverse and shows that India is not good for business. It will take 15 to 20 years to right these wrongs done to industry, because even the appeal process is dysfunctional.

And – it is a naive idea that e-governance work will make a big difference in the sector; that work is small for the size of the industry. .

Q: What do the current IT companies need to do to leap frog to India 3.0 – and get their house in order in the immediate and long term?

Indian IT companies are evolving into the 3.0 phase. The large service companies are evolving in the enterprise solutions space, dominated currently by Accenture and IBM. Every year, 50% of the total people hired incrementally in this sector globally are from India. This work takes time, you have to build deep relationships with clients, have to be client and country specific. The off- shore companies have become large centralized institutions, which require a different culture, and requires hiring local people in an environment hurt by the recession.

All of these companies worldwide are working on client solutions, not products. Europe has no product companies barring SAP. Only America has so many, because the ecosystem and size of the economy supports product companies.

What our government can do is to create incubation facilities for young people, build tech parks, and give them seed money. Over a period of time we can have an entrepreneurial culture blossoming all over India.

Q: India’s IT players should be competing neck-to-neck with IBM and Accenture. But those foreign companies now dominate the Indian market, as also the global market. How can our companies get competitive, and get to India 3.5?

As in the global market, in the home market also Indian companies have to compete. IBM has hired people who are working for their export business, so it is the largest player in the Indian market. It is selling hardware also and that adds up the numbers.

It doesn’t matter, because after all they are employing Indians.

Q: Despite a severe recession, U.S. companies like Apple, Google, Facebook, Tumblr, Netflix – have continued to innovate; India’s IT has viewed its job as delivering 20% profits for shareholders, rather than innovating for the future. Is there innovation going on within these companies, or at least in the fertile underground of Bangalore that is invisible – or has the decline of Indian IT given such innovation a setback?

The captive companies of the multinationals are expanding quietly in India without making a noise. They see a lot of innovation. It’s the great untold story of India. There’s a new start-up culture taking place in India and there are 600 start-ups every year, of which 45% are in Bangalore. Every day of every week, a new start-up is born in Bangalore. Of these, 60% to 75% die every year, but others survive. They aren’t like Apple and Facebook because the environment in India does not support that kind of innovation or allow them to scale up. Indian industry is too small, so they have to sell in America. There’s no seed financing here. The eco system needs to develop.

India’s local tech market is $20 billion of which half is software. We need lots of capital. Facebook and Twitter are global companies, their users are around the world. Innovation has multiple layers. IBM has $100 billion in revenues and spends enormously on R&D; they’ve been doing it since the 1960s. You can’t create that culture in five or ten years. Perhaps in the next 10 years India will become a bigger market than it is right now.

Q: US companies like Motorola are bringing IT jobs back home to the U.S. – what does this mean for our HIB-driven IT companies?

Motorola has taken jobs back home for its hardware division. It’s all a part of the process. The HI-B visa problem will drive more jobs away from America. Most companies will reduce their dependence on HI-Bs, and do more work offshore. Already companies are working with just 5% of their staff on-site on a project; having 10% on-site is a lot.

Visa pressure does not create a conducive environment for immigration. That’s why many of the young talented people in America are heading back to their home countries.

Q: There has been talk about a Free Trade Agreement (FTA) in services with the U.S., a proposal put forward by our IT industry years ago – how far along those negotiations are we?

The Indian IT industry requires visas for 6 months to 9 months, not years. They need to do some work and go back home. A services FTA will be useful, but our legal profession will not allow it to happen, they don’t want foreign law firms coming into India.

An FTA will happen perhaps with Japan because it is opening up; it may happen with Germany; the UK does not need it because their need is for different kinds of workers. For the U.S…it will take some time.

Q: Nasscom seems to have become a big boys club – and ignored its primary task of incubating innovation based on IT. What role should Nasscom ideally be playing?

Nasscom is an industry lobby group, and its job is to work with government. Small companies don’t have much of a voice there right now. This will correct itself. Nasscom is reforming itself. The industry has become so large, there will be multiple layers. Ideally, we should have three to four IT associations in India. No industry represents 3 million white collar workers, the way Nasscom does; and we have trained 2 million more. We should be happy we have that. This workforce can work in any part of the world, they are smart, and IT has given them the opportunity.

Q: How can we in India combine our software skills and manufacturing needs to kick start our economy and create Made for India or Made for Emerging Markets products?

Three points:

1. We have to solve the power problem to kick-start manufacturing.

2. We need logistics – roads so we can connect our ports to our factories.

3. Government needs a partnership with our private sector to create skills for manufacturing. We are thoroughly rotten there. In China, they make manufacturing so easy, with good logistics and power, and productive and disciplined labour.

Q: Given the recent crisis at Infosys, it appears that corporate governance in India’s IT sector has been slipping. Its blue-chip companies are taking their cue from political India’s family business model, rather than the other way around. When did this start, and where is it going to lead us?

Rohan Murthy coming to work is okay – people have opposed it and discussed it, so they will make sure there is no abuse of governance. It is a matter of concern but people should not worry. The company is being punished already because of performance issues.

T.V. Mohandas Pai is Chairman of Manipal Universal Learning. He is also a founding member of Gateway House, trustee of the International Accounting Standards Committee Foundation, and a current member of the SEBI Accounting Standards Sub-committee.

Manjeet Kripalani is Executive Director, Gateway House

Blaise Fernandes is Chief Executive Officer, Gateway House

This interview was exclusively conducted for Gateway House: Indian Council on Global Relations. You can read more exclusive content here.

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