ARE WE HEADING FOR AN INDIAN IT RECESSION?

What began as a by-product of Y2K crisis in the late 90’s in US and across the world had done very well for India, for we are now rated as an IT superpower of the world. IT & ITES is providing tremendous level of employment opportunities to people of the country. Close to 35+ % of India’s export is IT. The beauty of IT is the high levels of remuneration that is drawn by the employees in the industry. And this is impacting highly in the growth of India’s BFSI, Construction, Automobile and Retail industries. To the Indian economy that has been on a roll for the last decade (growing at a good 8.7% average), the IT industry had contributed significantly. In essence, IT industry has become an unavoidable part of India’s success and anything that impacts it, will also affect Indian economy.

Some developments that had already happened and certain other forthcoming events are going to bring some gloom to India’s IT sector. Let me list them out as under:

. Rupee appreciating against US Dollar

Over the last six months Rupee had appreciated considerably against dollar and it has exceeded 10%. While the impact of this was very highly felt in extremely competitive export verticals such as textiles, apparels, coir, brass products etc, IT segment is also getting affected slowly. As a sunrise industry, the margin in India’s IT export is considerable, but it is slowly coming down, as the industry matures and as more competitive nations are joining the fray. Expenditure in Indian IT companies are very high, particularly the compensation part and major Indian IT companies have started feeling the pinch already.

. The ongoing US recession

Most of you are reading about it. Yes, US is undergoing one of the severe recessions in its history. Among many other reasons, the main causes of the recession are the busting of housing bubble and the catastrophe that the ‘sub prime’ lending has brought. In a way, both are interrelated. What began as a bubble in housing in US plateaued in 2005 and started reversing by 2006. The housing prices fell and the demand started to dry down. By the year 2000, seeing the growth of housing Industry, banks and other lending institutions had started giving loans (of all type) based on house collateral, to sub premium customers belonging to middle class and the lower strata of society. As the price of the housing was appreciating, the lending process became very casual, careless and rapid. When the housing bubble bust, many of the borrowers were not able to repay the loans and started defaulting. As per accredited sources, the losses would amount to US Dollar 200 Billion (Rs.800,000 crores) . This is now affecting all the other avenues of US economy such as stock market, forex, manufacturing, Service and the like. In a flat world as we see today, the ripple effect of this is very fast. You would have noticed the Indian Sensex and Nifty falling rapidly. This has more to do with the US recession than anything else. As already said, the recessionary effect on US service industry will be very high and it is expected to stay for a couple of years. This would easily hit on Indian IT and ITES industries immediately.

. The US election

This year is election year in the US. There is Obama and Hillary on one side and on the other, John McCain. It is still not clear as to who will be victorious in the democrat camp. Many eyes are now focused on Obama. If you go by the trend of last 3 decades, Republicans and democrats alternated the election wins and as per the same, it is the chance of the Democrats to come to power in USA.

We Indians need to understand that historically, India grew when Republicans came to power as they took more pro India decisions than the Democrats. The recent Patriotic Employer act that is co-sponsored by Barack Obama is anything to go by, India would suffer heavily if he comes to power. Even if it is Hilary Clinton, the chances of India getting favours out of America will be limited.

The patriotic Employer act, if it comes to power, will stop outsourcing activities and curtail employing non Americans in American corporations. The first hit of this act will be India. It could be so bad that we won’t be able to get out of the fall.

Now that you had seen the impact of all the above causes, you will agree with me that there is sufficient reason for Indian IT industry to be concerned. New recruitments will come to cease (as per NASSCOM, another 1.5 million employment will get generated in the coming 5 years) and sumptuous increment in salary will become a thing of past. (Already I hear about the retrenchments happening at the middle management level in TCS, Infosys, Wipro, HCL etc).

Is there a remedy? How can we minimize the impact of this impending recession?

On a lighter side, all of the Indian IT industry should combine to do a ‘homam’ to pray for McCain to come to power. If that happens, to an extent, the rot can be stemmed.

The first thing is spread the risk evenly. Our IT industry will have took up at Europe, Australia, Latina America, Middle East Asia etc for spreading its wings. This will take away Indian IT industry’s absolute dependence on US for survival and growth. Not easy to implement this but efforts must begin at the earliest.

The second is to concentrate on the burgeoning domestic IT market (currently estimated to be at about 16 Billion US dollar, including hardware). One cursory look on our trade and commerce will give us the input that scope for computerizing is tremendous in Indian government, corporate and SME segments.

Another important aspect of getting out of the IT recession by the companies would be cut the cost drastically. The obscene levels of salaries that are doled out to employees must stop. Salaries must get rationalized at par with other industries such as manufacturing, banking etc. With that, the sign of Indian IT industry maturing will come to the fore. I am sure IT employees (including their parents) will take the suggestion with a pinch of salt.