Financial meltdown: Threats & opportunities for Indian I T Sector

April 27, 2009 India has emerged as the fastest growing IT market in the world, driven on the increased IT adoption by the domestic market along with the increased exports. While the economic slump has had an impact on IT spends globally, India has so far been fortunate enough to stay away from the influence of the slow down. Despite all odds, Indian IT-BPO industry fortunately knows how to beat recession and stay afloat amidst crisis. For, at a time when countries are reeling under the pressure of global recession, India has managed to emerge as the highest exporter of information communication technology (ICT) services in the world, reports the World Bank on 22nd April, 2009 in its latest study, 'World Development Indicators 2009'. Being the torch bearer of countrys exp ort-driven growth, the sector accounts for almost 25 per cent of Indias total exports and notched up US$ 40.4 billion in 2007 -08. At a time, when millions of people are being laid off across the world, Indian software industry takes the pride of directly employing more than two million individuals, with around eight million more jobs created downstream. NASSCOM (National Association of Software and Services Companies), the premier trade body and the chamber of commerce of the IT-BPO sectors in India, forecasted that the overall IT-BPO sector in India, including the hardware segment, is to generate aggregate revenues worth US$ 7.1 billion for the financial year, ended 31st March, accounting for 5.8 per cent of Indias gross domestic product.

The shadows of the unprecedented global financial meltdown have, however, been casting shadows on the fortunes of IT industry in the past one year. For many the FY2008-09 is the worst in a generation both in terms of its severity and geographic spread, which saw the battering of global financial sector, loss of confidence among investors, reduced consumer spending, topped with nosediving corporate profitability. The current economic scenario is truly challenging for a sector like Indian IT, which is habituated to grow at a staggering rate of 30 per cent per annum or more, as it readies to trade into unchartered territory, while holding strongly its past and present glory. Over the years, the industry and its proponents have invested in human and non-human capital to make it the vibrant face of new India. Growing from strength to strength, the Indian IT-BPO industry has continued to widen its base globally by means of introducing new product portfolio and creating new business verticals. The growth comes from the stupendous performance of Indian service providers as well as their multinational counterparts and global giants who leveraged on Indias fundamental strength of low cost-high quality performance, which KPMGs global partner in charge of IT Advisory, Egidio Zarrella, describes as the two big punches. Today the industry serves customers in more than 80 countries and its next-generation professionals generate significant amount of intellectual property to deliver new solutions and products. Having said that, the insiders in the Indian IT-ITes industry also believe that in the wake of current crisis, the coming few quarters would be extremely challenging for the companies in the IT sector in India. Major challenges: NASSCOM in its latest report has noted that India at present is faced with four major challenges in terms of infrastructure, employability, competition from other low-cost nations and lack of favourable policy. Even in this age of recession, the industry is expected to bear the burden of producing its own power, provide public services for its employees in terms of security and transport and incur huge expenditures to offer training for the new entrants in order to ensure employability. To make matter worse, there is lack of equitable distribution of financial assistance and planned growth across the country. For example, infrastructural development in the IT sector is largely confined to nine major cities which have emerged as the hubs of Indias IT-BPO sector, contributing over 95 per cent Indias exports. This has left Indias tier-I and tier-II cities with little scope of growth, despite their tremendous potential, for, the infrastructural development has not taken shape in a planned manner.

The low employability factor is also a serious cause of concern as according to official estimates, only 26 per cent of employable engineers are found in the technology services, whereas the number of employable graduates in the business services is as low as 10 to 15 per cent. Competition from other cost-effective countries, including those from Eastern Europe, Philippines and China has started to cast its shadow on Indias IT sector in terms of lost business opportunities, as over the years, the operational cost of IT and ITes companies in the country has witnessed stiff rise, which reflect in higher product/service prices. As companies across the world is cutting down heavily on their IT expenditures to remain alive amidst the ongoing recession, cost-effectiveness of product and services play a pivotal role in retaining existing business ventures. Moreover, the lack of definitive roadmap for the sector from government quarters and absence of supportive fiscal measures have also eroded, to some extent, the edge of Indian IT-ITes industry.

Sectoral initiatives: Being an export-intensive sector, the current economic downturn is bound to hurt the performance and profitability of Indian IT-BPO sector. However, the companies involved in the business and associated trade bodies

are doing their best to come out of the situation with least possible damage. In this direction, Indias apex trade body for the sector, NASSCOM has come up with its report 'Perspective 2020: Transform Business, Transform India' in fourth week of April, 2009 to outline the roadmap for Indian technology and services industry.

Road ahead: As every downturn is followed by a certain upturn, the current economic crisis also follows this simple logic and brings with it, definitive opportunities for the Indian IT-ITes sector. Faced with moderate growth rate this year, companies are set to bring more focus on developing domain expertise, improving efficiency and productivity and customising their product to enhance client satisfaction. With slowdown affecting its major export destinations, including the US and Europe, IT companies have started to consider the domestic market with sincerity. To perform better in the domestic sector, IT companies are needed to acknowledge and understand the requirements of Indian enterprises, evolve India-centric pricing models and demonstrate greater flexibility.

According to a study, Indian IT budgets are expected to increase by 5.5 percent in 2009, whereas globally the IT spends re anticipated to see a decline by 4 percent. Further more, the research estimates points to the fact that in the coming times, growth momentum in the domestic market will be led by the significant growth in the packaged software and service business and this in turn will exert tremendous pressure on Indian companies to adopt and implement better and faster IT applications.

The current recession, which has marked a pause in the baffling growth of Indian IT industry, can be a blessing in disguise as it offers the scope to think, prioritise, re-evaluate and re-align its policies and work patterns. Never mind the slowdown, the IT sector in India has all the ingredients to come out stronger and better. Way to go