Indian IT sector sees limited impact of US meltdown

By Fakir Balaji, Bangalore, Sep 24 : The global financial meltdown following the collapse of US investment banks will have limited impact on the Indian IT sector in the short and medium terms, but poses a challenge in the long term, says Som Mittal, president of IT-BPO industry body Nasscom (National Association of Software and Service Companies).

"It is a cause for concern, not panic. The Indian IT sector is resilient to bear the impact of the turmoil. We need to wait and watch to find out how deep is the crisis. There will be some downside in the short and medium terms, which will be two-to-four quarters," Mittal told IANS in an interview.

In the long term, the export-driven software sector has to become risk-protected from such uncertainties by penetrating other geographies and expanding its service offerings to diverse verticals so as to retain its competitive edge and sustain the growth momentum.

Discounting apprehensions over meeting the revenue forecast for the current fiscal (2008-09), Mittal said though the growth rate would be lower than in the previous fiscal, there was no cause for alarm, as the base would be wider and in line with the long-term projection made by the McKinsey report in 2005.

"Growth will happen but at 22-23 percent it will be lower than in the last two-three years when the booming IT industry posted a CGPA (cumulative growth per annum) of 31 percent. When the base changes (widens), it will be difficult to grow at the same rate over a period," Mittal pointed out.

As per the Nasscom forecast in June-July, software exports are projected to grow by USD 9 billion to USD 50 billion in fiscal 2008-09 from USD 41 billion in fiscal 2007-08 and USD 32 billion in fiscal 2006-07. As per the McKinsey report, exports are set to touch USD 60 billion by fiscal 2009-10 even if the growth rate remains lower at 23-25 percent.

"We will re-visit our annual forecast in December though we do a dip-stick all the time. As we are part of the global world, we are bound to be affected by such events. Being an integral part of the delivery chain, we are vulnerable to things that happen the world over," Mittal admitted.

Though the US market accounts for about 60 percent of the export revenue of Indian IT bellwethers such as TCS, Infosys, Wipro and Satyam, with the BFSI (banking, financial services and insurance) segment contributing more, other verticals such as manufacturing, retail, transport, utility and so on continue to keep traction.

"I believe we will get some indication over the next four-five weeks about the impact of the Wall Street turmoil on servicing the financial sector, especially in the US. In IT budgets, non-discretionary spend, which is about 70 percent, will continue to happen. In a downturn, discretionary spend on new projects, innovation or upgradation gets affected. The impact, if any, will be on the latter," Mittal explained.

In the IT-enabled services (ITES) such as business process outsourcing (BPO) comprising voice and data, captives may get affected while third-party vendors have to be prudent to minimise the impact in case of business disruption, especially in transactional or analytic outsourcing.

As part of non-discretionary spend (time and material cost), firms will continue to outsource ITES/BPO services in areas such as accounting, HR and logistics.

"The industry has matured to live with one or other crisis such as currency volatility, global economic slowdown, attrition and higher wage arbitrage because the fundamentals remain strong and the value proposition continues to be high.

"This is the time for IT firms to de-risk their marketing strategy from being US-centric and foray aggressively into other geographies - EMEA (Europe, Middle East and Africa) APAC (Asia-Pacific) and Latin America," Mittal said.

"For instance, our penetration into the Japanese market is a mere two percent though Japan is the second largest economy. Socio-cultural and language issues can no longer be barriers in a competitive and global environment."

Admitting that business sentiment turned negative at a time when the industry thought the worst was over, the former HP executive said the Indian IT sector had built in certain provisions based on sub-prime crisis that surfaced last year to neturalise the impact.

"In the next two-three quarters, clients in the financial sector will be conservative, withhold spending on new projects and delay expansion. On the contrary, they will try to leverage the vendors' expertise to rationalise operational costs," Mittal noted.

Nasscom is assessing the downstream impact and the possible fallout if the sub-prime crisis shifts from the US to other geographies, especially Europe and Asia.

"We don't have evidence of the change. A clearer picture will emerge when regulators unravel the systemic failures behind the collapse of the US banking sector," he added.