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'Government must aim for full convertibility'

Madras-based SSI Limited, which reported a
net profit of Rs 250.83 million in the quarter ended December 31, is rated as one of India's top software firms. It provides information technology training, consulting and development services. Its products and services are used by many internationally known institutions like the Nasdaq, Clearstream, etc.

Kalpathi S Suresh, Chairman and CEO of the company, in an interview with Shobha Warrier talks about the new economy and old economy, and also his expectations from the forthcoming Union Budget.

The general complaint of those belonging to the old economy is that the government is pampering the new economy? Your comments.

I don't think that the new economy is being pampered at the expense of the old economy. If you really look at it from a neutral perspective, the Indian economy -- like most other economies -- is acquiring a capitalist tinge.

It will foray into areas where it can reap rich benefits. There are minor aberrations that happen from time to time for various reasons. But most often, the guiding principle is the question, is there a benefit? This could be short, medium and long-term in nature.

Then, you will find the governments indulging or pampering, if you want to put it that way, or encouraging. It is because we are growing that we are getting more attention.

How comfortable are you with the labels 'old economy' and 'new economy'?

To me, there is nothing called an old economy or a new economy. The difference is not in somebody doing an industrial manufacturing type of business or somebody doing a cutting-edge service-related business. It has more to do with the line of thinking. Today, IT-related services account for 80 per cent of the revenue coming from the US.

Most of the industries in India are managed by families and the business is passed on from generation to generation, but those who constitute the new economy are first-generation entrepreneurs. What differentiates the first generation entrepreneurs from the family run business houses?

I would call ours the new generation of thought process, which is very aggressive, taking on global competition head on rather than being concerned and anxious about some of the global competition that is coming in. We have been able to imbibe changes.

You realise that it is not difficult to compete with global players. This confidence has encouraged a lot of people and India has a strong advantage over other countries now.

So far as we are concerned, there is no global player who can snatch away our turf. In fact, we are going out and invading their turfs. The sense of protection is never there in this field.

It is always a sense of challenging and being challenged. This is a necessary input to thrive and survive. You want to be challenged everyday to remain on your toes. This is the optimism of the new generation. The difference, thus, lies in the thought process and not in the line of business.

The new entrepreneurs are very professional about what they are doing. Their endeavour is to create an institution rather than trying to create something where you sit on top of it. You ensure that you promote the best. To this end you adopt global standards and challenge yourself by setting impossible targets and end up achieving that.

Is it because of the protected mindset that those belonging to old economy are scared of globalisation and MNCs coming to India?

Yes, it has got a lot to do with the mindset. You can take the example of what the Birla group went through after Kumaramangalam Birla. It is a classic example of how an old economy changed.

Considering the inertia that was there in the group and its size, he has achieved quite a few things. One example is the Kumaramangalam Birla committee on corporate governance.

The early generation grew up in an environment where there was protection and licensing and obviously the environment influences you and your thought process.

Suddenly when the rules of the game change, it is very difficult to get a foothold. But for those who have just entered the field, there are no pre-set rules.

The dot-com bubble has burst in the US and its economy is showing signs of slowing down. Some of the economists now say that the undue importance given to the new economy may be detrimental to the Indian economy. What is your opinion?

Irrespective of whether it is brick-and-mortar or click economy, or a combination of both, if you look at the B2C companies, you will find that all of them have gone bust. That was because the consumer was not ready.

The consumer did not go and click. He did not buy. So, the B2C companies died.

Do you think that something is wrong with the B2C idea itself?

No. The concept is right. It depends on the consumer going and embracing things. Such things have happened in the past.

It is the gold rush of California. All of them left a lasting impression, in the sense that they left behind a few players who would be there for a long, long time.

If you take the car companies in the US, there were hundreds of them once. But today, you see only three major players. You don't even talk about the others. If that had not happened, you would not have got those three best companies emerging.

Whenever there is a market opportunity, lots of players will enter. Then it is up to the consumer and in turn, the market to decide who will remain and who will not.

Whether it is a click type of business or a brick-and-mortar type of business, the market, will have the final say. If consumers go for online buying then the click type of business will do well. But if we go into a shop to purchase things then brick-and-mortar firms will survive.

Who do you foresee as the survivor; the click or the brick-and-mortar business?

The Internet is a small part of the services market. It is the brick and the mortar companies who are financing the IT revolution that is happening.

If you look at the software companies in India today, and ask them who are their biggest customers, you will find at least 60-70 per cent of the companies out of the top 50 are brick and mortar companies.

They may be in financial services or manufacturing or retail businesses but they are the companies who are funding the IT revolution.

It is the likes of General Motors, General Electric, Siemens and Bank of America who are their big customers.

You will not see click and brick companies existing separately as two islands. They will co-exist. You will find IT as an integral part of manufacturing environment. IT will be one more input that they require. Like you need the turbines, furnaces and machines, you also need the software. It is already happening and it will continue to happen.

On the other side, software along with hardware will allow you to do simulation exercises. They will allow you to do your research and arrive at results very quickly.

Because IT provides speed, you will find newer and newer applications coming everyday. This is what is powering the revolution and not the supply chain systems.

That's just one part. It came because of the Internet and became powerful because Internet suddenly created a seamless distribution mechanism.

As I have already mentioned, click, and brick-and-mortar companies will be able to exist as separate identities. You saw pure portal companies, which wanted to live only in the click world fading away. It goes against our way of working.

Similarly, if the brick-and-mortar companies do not embrace click, they also will suffer. Ideally what you need is a combination of click and brick companies like Cisco, which is like an industry with significant brick and mortar interfaces doing businesses of billion of dollars.

SSI is one of the top ranked institutions imparting computer education to many students, and there are several institutions in India like yours that are involved in this. All the institutions promise placements, but most students do not get any jobs.

What you are seeing is a big opportunity that attracts a lot of players. In the education market also, slowly, you will see some amount of consolidation.

Definitely, there needs to be some mechanism in managing quality because probably not all institutions have been able to put out their own quality plan.

Maybe, some of them are not 'infrastructured' enough. The idea of providing the training is to create a large pool of people who have the skill. And, it is not necessary that all of them get jobs.

What it means is, that all of them have the opportunity to get a job. It is like, going through a formal educational qualification, which might not automatically mean there is a placement.

Are institutions like yours exploiting the mad rush to learn computer languages?

All businesses are run like this. You need to build infrastructure to build service. That is how businesses are structured. One company does an exercise, and a set of companies follows. Production surpasses requirements.

Let's assume that somebody perceives that there is a big need for cars in India.

He is followed by a few more manufacturers. All of them produce 25,000 cars per year, and suddenly they find that together they are producing close to one million cars, and the Indian market is not big enough to absorb so many cars. Everybody will cut cost, production and some will wind up.

Over a period of time, you will find that demand and supply are tracking. The market will automatically meet that.

Today, you would find a mad rush for IT courses. The moment they find that the market does not absorb all of them; the possibility is that not so many people will yearn for such courses.

What you are seeing is a passing phase, and this is there in all businesses.

According to the NASSCOM chairman Dewang Mehta, every day in the IT industry is significantly important and you cannot wait for the Budget for a decision. Do you agree with him?

I feel most importantly, you should not mess around with the environment much because it makes it difficult for companies to compete.

Most of the new economies and old economies compete in the global market. So, the Indian budgetary system has to be in sync with the global budgetary system. If they change once a year, you change once a year.

But if you change twice a year, the competitor who is sitting there, enjoying an environment, which is predictable, is at an advantage and I am at a disadvantage. It will show in my business planning as well as in my interactions with my customers.

Were you affected adversely?

There was this 2 per cent service tax for the service industry. We have an understanding with our franchisees. Suddenly the revenues that are to be returned to our franchisees, for the services they provide us, is coming under the purview of tax, which was not there one year ago.

Now, that has to be factored in, and I still have to achieve my bottom line. Otherwise, I cannot compete with somebody who is sitting in the US or Europe. That 2-3 per cent has to be absorbed somewhere. And, it just happened midway. I have to change suddenly.

Otherwise, my profit will go down by 2-3 per cent. We don't want anything of that sorts because a lot of planning takes place not in the Indian context but in the global context.

So, it becomes difficult to adjust when you are operating globally. What we want is a predictable environment.

We do not have any problem with a budget every twelve months nor are we averse to paying tax, but you cannot have changes in between.

What are your expectations from the coming budget?

I think there is going to be some tax on the industry. It may be in the form of a service charge. We don't see it affecting us seriously because we are one of the highest tax paying companies in the IT sector.

We pay 25-30 per cent tax on our profits. So, whatever they propose, it is likely to be well below what we are paying. But some more companies may be brought into the tax bracket.

It would be good if they allow some more flexibility and ease of using money for moving them across the border. Sometimes, you have to spend money abroad for marketing to bring in the results. As you have to go through a lot of filing, etc, it tends to slow you down in terms of putting things in place operationally.

For instance, we have been acquiring companies and some of them created a problem. If you really want to be in a dynamic environment where you can absorb three companies, and probably put them together the next day into a single company, you are at an advantage.

But here, you have to go through the RBI approval, etc. and that tends to hold you back. But in other countries, a merger takes place in 24 hours. When it takes only 24 hours for my competitor, why should it take me two months?

To an extent, it wouldn't matter, if the dollar gets taxed in India. If the rupee and dollar can be converted freely, it is okay.

You mean, you want full convertibility?

To an extent. They should start making the plan. Otherwise, it affects the normal running of businesses.

To you, the currency doesn't matter. What you do is, get an order from a customer and get the work done in a place that is the cheapest, and then realise the maximum profits. That is what most of the software companies are driven by.

Giving benefits for dollar income makes a lot of sense in the Indian context but from the companies context, to me, it doesn't matter whether the dollar gets taxed or not.

As far as full convertibility is concerned, it allows you to function that much more effectively. Your business becomes borderless then. It will be good if something on this line is announced. They can at least tell us, that in the next ten years, the export benefits will go away.

You are at least aware what the situation will be ten years hence and can plan your business accordingly. I feel the government should have some plan for full convertibility.

How has the slowing down of the US economy affected you?

It has not yet showed in our business. But there are signs that it is definitely happening. We are likely to get affected because of the size of our operations. It looks like it is not going to recover in two or three months. It may take at least 6-9 months.

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