How Vajpayee laid the groundwork for startups more than a decade in advance
Goutam Das August 16, 2018
Somewhere in the middle of the budget speech, in the spring of 1999, former Finance Minister Yashwant Sinha made a brief, but significant announcement.
The Y2K bug would hit computer systems and databases in 2000 - to save memory space, premium commodity in those days, computer systems often were programmed to use the last two digits of a year - 1999, for instance, would be programmed as '99'. But there was no way to write 2001 as '01' since this could signify 1901 as well. Indian information technology companies saw a boatful of opportunity in debugging the systems of global multinationals. They deployed armies of software engineers to fix the glitch; for the first time many of today's IT giants could break into and win deals from the likes of Bank of America, American Express, Goldman Sachs and Citibank.
But what of domestic Indian companies who would also "spin into a chaos"?
The NDA government had an idea.
"Mr. Speaker, Sir," began Sinha. "We are all conscious of the fact that the Information Technology sector is going to be the sector of the future. The immediate crisis, which is looming over this sector, is connected with the Y2K Problem, which will hit us at the close of the current calendar year. I get the impression that the corporate sector is not adequately seized of the dangers which lie ahead on account of this problem. In these circumstances, to assist the business sector to overcome the Y2K Problem, I propose that all expenditure incurred in making their systems Y2K compliant be allowed as revenue expenditure in the next financial year," he announced.
This was just one in a series of decisions, between 1999 and 2004, that attempted to change the face of, and facilitated the rise of India's nascent information technology sector. The IT industry was tottering at around $6 billion in 1999-2000. It is more than a $150 billion industry now. Atal Bihari Vajpayee, the Prime Minister in these years (1998-2004), would repeatedly emphasise the importance of technology in preparing India for the millennium. Every budget of his government had something to offer to the sector.
The most popular was of course the setting up of Special Economic Zones (SEZs), first announced in the EXIM policy of 2000-2001. SEZs were intended to provide comprehensive facilities at one place for export production, such as procurement of duty free equipment, raw materials, components, etc. This resulted in improving the competitiveness of Indian IT exporters.
The same year, the government proposed to reduce the customs duty on several items, everything from computers (20 per cent at that time to 15 per cent), microprocessors (5 per cent to nil), memory storage devices, mother boards, floppies (big then, obsolete now), CD ROMs (dead again), integrated circuits, and data graphic display tubes for colour monitors.
The next year, the Vajpayee Government extended the concessions given to the IT industry under Sections 10A and 10B of the Income Tax Act. Companies at that time lost these benefits in the case of an acquisition, or a change in ownership. These restrictions were proposed to be removed.
Interestingly, Vajpayee and his ministers understood the importance of venture capital funding - start-ups, as we know it today, weren't around. Technology entrepreneurship was mostly about IT services, and a handful of Dot Com companies. There were no real products, or e-commerce. India's most celebrated start-up, Flipkart, came in 2007. It must have taken quite some foresight for the government to propose a liberalisation of the tax treatment for venture capital funds in the budget of 2000-2001. SEBI were to be the single point nodal agency for registration and regulation of both domestic and overseas venture capital funds from here on.
"The tax laws and SEBI guidelines are being formulated accordingly," the Finance Minister said as he presented the budget. "I should add that this liberalisation will give a strong boost for Non Resident Indians in Silicon Valley and elsewhere to invest some of their capital, knowledge and enterprise in ventures in their motherland."