What Enabled The Software Revolution

The most revolutionary change in India has been the rise of computer software as a world-beater. India is not a miracle economy, but software is a miracle sector. Growing at 40 per cent annually for a decade, it earned $ 8 billion in exports last year. Mckinsey estimates  that it could earn up to $ 58 billion by 2008, more than India’s entire merchandise exports today.

At a seminar on the Indian economy at Cornell University last week, Infosys Chairman Narayana Murthy addressed a critical question: could software have taken off without The economic reforms of the 1990s? Absolutely not, was his conclusion.

Infosys started in 1981, but faced heavy weather for a decade. Getting even a telephone was a Herculean task. During the licence-permit raj, a retired government officer had higher priority for getting a telephone than any software firm!

To import one computer costing $ 15,000, Narayana Murthy had to make 25 visits spread over 18 months to the bureaucracy in New Delhi. The cost of travel and hotels became as almost as high as that of the computer! This idiocy ended only in 1991, when the abolition of industrial licensing unshackle Narayana Murthy and others of his ilk.

In the bad old days, a, RBI clerk took five days to decide if Narayana Murthy could travel abroad for one day. One software CEO got RBI permission to spend two days in Paris and one in Frankfurt to meet clients. But the clients changed their plans, so the CEO had to spend one day in Paris and two in Frankfurt. He immediately received a show-cause notice threatening him with prosecution!

In this manner, controls imposed in the holy name of socialism were used to strangle all business initiative. The mind-set of the bureaucracy changed only when the whole licence-permit raj was dismantled.Tinkering would not have sufficed. The reforms of the 1990s blew away an entire jungle of controls on production, imports and foreign exchange. Current account convertibility made it possible for software companies to hire consultants and undertake global branding without case-by-case clearance.

The old system had a Controller of Capital Issues who decided at what price companies could issue shares, if at all. The Controller invariably set prices below market rates. He looked at the track record of a company, not future prospects. But share prices are supposed to reflect future prospects, not history. The ossified rules of the Controller’s office would have made it impossible for software companies to access the equity market. Fortunately, the reforms abolished the post of Controller. Liberated entrepreneurs could not only float shares but offer stock options to employees. They could even list on stock markets abroad, and so raise billions in equity New York. But for this, Infosys could not have scaled such heights.

Another vital policy change, says Narayana Murthy, was permission given to the biggest software companies in the world to invest in India with 100 percent equity. This was opposed by vested interests and ideologues. In fact the entry of giants like Microsoft and Oracle enhanced the competitive environment, and enabled Indian companies like Infosys and Wipro to learn how to keep pace with the best in the world.

In the early 1990s, some people said MNCs must be kept out to allow the fledgling Indian software industry to develop. A second, pessimistic school of thought felt that companies like Infosys should wind up or sell out to foreigners, as Parle had done. A third option, regarded as fantasy by the old left, was to compete with the MNCs and prove Indians were just as good. That is what Infosys and dozens of other Indian software companies succeeded in doing. Far from losing their staff to foreign firms, as predicted by pessimists, Infosys achieved higher staff retention rates than the MNCs.

The neta-babu raj assumed that Indian companies were inherently inferior and needed to be shielded from international competition. Software exploded this myth. Open competition led not to the devastation but the flowering of Indian companies. Standards and skills rose as they never would have in a protected environment.

At Cornell, I expanded Murthy’s list of the blessings of liberalisation. Indian politicians and trade unions were anti-computerisation for decades, fearing job losses. They regarded computerisation as suitable for defence and nuclear research, but not for promoting consumer convenience or efficiency. So they gave no priority to software. Had there been a Ministry for Software with a large plan allocation, a stifling bureaucratic jungle would have been created. Luckily no Ministry or Minister existed, and so software was able to take off unshackled by well-meaning socialists.

Traditional exports were crippled by the vagaries and inefficiency of unionised ports, railways and road transport. Software exports, however, went over the air-waves and cables, and so were invisible to trade unions and bureaucrats. They were invisible even to bureaucrats in the West, and so escaped any protectionist backlash.

The software revolution brought good governance and shareholder value to Indian stock markets. The key here was a little-noticed reform, Manmohan Singh’s abolition of wealth tax on shares. In the bad old days, no businessman wanted his share price to rise much, because it invited an extortionate wealth tax. In such circumstances, creating shareholder value was hara-kiri, so entrepreneurs kept profits black and off the books.

The abolition of wealth tax on shares made it possible, for the first time, for entrepreneurs to aim at a ten-fold or hundred-fold increase in share prices without committing tax suicide.

When Manmohan Singh introduced this reform, he had no idea he was making possible the software revolution. That reveals the real case for liberalization. The aim is not to promote this or that sector, but to expand the universe of the possible. The aim is empower people to dream of things that never were, ask why not, and then just do it. That is how reforms made the software revolution possible.

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