The budget could spur the innovation and talent needed to lead the world’s digital transformation
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The strong third-quarter results announced by India’s technology companies in an otherwise seasonally-weak quarter reinforces the reading that global demand for technology remains buoyant and the industry is emerging as the partner of choice for enterprise digital transformation.
Sustained industry growth will require strong capabilities in advanced digital applications, including automation, cloud, cybersecurity, big data analytics, etc. It will require a partnership with the government on developing the tech ecosystem and reinforcing Digital India’s innovation capability in existing and newer markets. Also needed is a talent-development strategy, as nations that can build digital talent at scale will be the melting pots for innovation.
For the tech industry, with its ambitious plans, our asks from the Union budget include some big ideas and policy shifts that can drive growth.
Innovation superclusters: Over the last decade, India has emerged as a global powerhouse for engineering research and development (R&D) and is helping spur growth and innovation among global enterprises. However, India spends less than 0.7% of its gross domestic product on R&D. This needs to be raised to about 2% over the next few years to catalyse investments in R&D and help the country create a strong base for innovation-led growth.
To bring together emerging telecom technologies, such as artificial intelligence, internet of things, etc, with a sectoral focus on “solve for India and build for the world", we need to build on the success of special economic zones (SEZs). One way to go about it is to think of geographically-agnostic ‘super innovation clusters’ that are based on technological themes. This approach, together with a matching R&D grant scheme for industry-led consortiums comprising lead industry partners, academic institutions and startups, can be effective. This should catalyse joint R&D projects that involve cutting-edge technologies. Such a scheme could be funded through the National Research Foundation being set up by the government, as its mandate includes inter- disciplinary and multi-nation projects.
Talent nation: India’s tech industry has added on a large number of jobs through the current covid pandemic. The unprecedented pace of technology adoption has propelled a transformation in the way we work. It is an opportune time for the government to review polices so as to encourage hybrid work, especially by companies set up in SEZs.
This will enable the scaling up of talent from tier 2 and 3 cities and also encourage the industry to invest in smaller cities to operate on a hub-and-spoke model. Given the SEZ tax holiday’s sunset, the government and real estate industry should view this as a step to make SEZs relevant to the industry.
The government must also fast-track the implementation of the National Education Policy 2020 to help enhance India’s capabilities as a talent nation.
Innovation hub: India has nurtured a robust startup ecosystem and is home to more than 25,000 tech startups. More than 40 of these have turned unicorns since January 2021, fuelling overall economic growth. To build on this, the ability to raise funds and attract talent needs further enablement.
However, domestic investors are being taxed at a higher rate of 20% on their long-term gains in unlisted companies vis-à-vis foreign investors, thus making it less attractive for domestic money to flow into startups. Likewise, for dividend income, non-residents are taxed at 20%, while for resident shareholders the tax can go up to 30% if not availing of the lower corporate tax regime and 22% for taxpayers opting for the lower tax rate option. These anomalies should be corrected.
Lastly, employee stock option plans (ESOPs) can play a vital role in the compensation strategy of startups. Currently, 99% of startups recognized by the Department for Promotion of Industry and Internal Trade (DPIIT) cannot escape the requirement for employees to pay tax on ESOPs on notional gains, even before these are encashed. This dampens the utility of ESOPs as a tool to attract talent. Tax deferment on ESOPs, therefore, should be allowed to all unlisted companies or at least to DPIIT-recognized startups, so that they are taxed only when shares are sold.
We are mindful that this is the second time India’s finance minister has the challenging task of balancing the books in a pandemic-hit economy. The technology and startup sectors have a multiplier effect on the economy, given their potential to create jobs, increase exports earnings, enable efficiency gains from technology adoption by the domestic market and government, and give a push to growth in the next set of cities and towns. A quick resolution of these issues and a long-term policy on R&D through super innovation clusters should provide a growth-fillip to India’s economy.
As technology disruption becomes the new norm, nations are looking at regulation from an enabling mindset. India’s ambitions for this ‘techade’ will require us to imagine the design principle of our regulatory framework from not just a prevention-of-misuse perspective, but as an enabler of increased trust and responsible growth. I hope the next budget will help further this.