When the United States sneezes, the world catches a cold

India most affected by US economic slowdown

news analysis When the United States sneezes, the world catches a cold--so the adage goes. That could prove particularly true for India's IT and IT-enabled services (IT-ITES) industry, where the United States accounts for the largest share--at over 50 percent--of the Indian software and outsourcing market.
"The U.S. slowdown will impact the smaller IT-ITES firms more," Hari Rajagopalachari, executive director at PricewaterhouseCoopers India, told ZDNet Asia in an e-mail interview. In fact, he added, it may lead to increased consolidation in the small and midsize industry segment.
According to Milan Sheth, Ernst & Young India's partner of business advisory services and leader of technology and telecom verticals, the economic slowdown will most affect midsize IT-ITES companies.
"Most small firms have very strong niches. It's the midsize firms that will be badly hit in the event of a portfolio rationalization by the American clients," Sheth told ZDNetAsia in a phone interview.
The economic slowdown in the United States has already had some impact on the Indian market. The rupee has been strengthening against the dollar for over a year now, causing worries for Indian exporters.
The Indian stock markets also crashed due to the downturn, with the BSE Sensex dipping by nearly 13 per cent in just two trading sessions in January this year. It bounced back after the U.S. Federal Reserve cut interest rates. The BSE Sensex, or Bombay Stock Exchange Sensitive Index, comprises 30 of BSE's largest and most actively traded stocks.
"The U.S. slowdown is a long and protracted one," Rajagopalachari said. He explained that the U.S. slowdown is due to structural readjustments in the country, while the global economic scenario is caused by changing fundamentals in the currency, energy and financial markets.
"The implications for all of India's externally linked sectors are significant," he said. "The strongest and most immediate impact will be on the IT-ITES sector."
The weak will fall
Sheth noted that while the budgets of the U.S.-based companies will undoubtedly be cut, the services of Indian companies that are adding value will be retained.
"Those companies that haven't performed may lose out," he said. "For instance, if an American telecom company today has 18 vendors, out of which 12 are in India, it may want to reduce that number to 14 or 16. So, the less efficient ones may be weeded out first."
And while the economic slowdown implies added pressure to cut costs through further offshoring, which brings good news for Indian service providers, this sweetener would take some time to materialize.
Rajagopalachari said: "In the long term, low-cost offshoring trend will increase. But in the short term, between 12 and 18 months, there will be a demand contraction due to management changes and a paralysis in decision-making in the U.S. corporate sector."
During a recent media briefing, Kemal Dervis, administrator at the United Nations Development Program (UNDP), said the U.S. slowdown might make it difficult for India to sustain its economic growth rate of 8 percent.

Rajagopalachari concurred: "The U.S. economic crisis is structural and hence long-term. It is not a cyclical phenomenon alone. India will be impacted significantly," he said. "About 50 percent of India's economic growth is structural and the rest is affected by cyclical factors."
"Over the next three to five years, it is difficult to see Indian growth rates outside the 5- to 8 percent range. The U.S. contraction in consumption will hit exports across sectors, not just in the IT-ITES sectors," he said.
India's way out of the downturn cycle, Rajagopalachari said, is to step up domestic consumption in the face of rising inflation.
According to Sheth, the challenge Indian companies face is to demonstrate their ability to value-add.
Over the last 12 months, Indian companies have been diversifying their risks by increasing their focus on the non-US markets, such as Europe.
However, Rajagopalachari said, given the preponderance of U.S. revenues in the portfolios of India's IT-ITES sector, the positive impact on revenues and margins as a result of revenue diversification away from the US markets, is "marginal".
Indian IT-ITES companies have also undertaken labor-cost rationalization by getting rid of non-performing workforce and by tightening recruitment policies. There has been a sharper focus on increasing offshore leverage in projects to improve profitability.
Companies have also reduced the average age of the workforce in order to reduce cost and improve overall profitability. Sheth said: "Companies may not be adding the kind of people that they were last year, but they are definitely getting better yield from existing employees."
There is, however, silver lining amid the gloom. For instance, the pressure on American companies to increase offshoring activities in order to combat cost pressure, will increase in due course.
Reports also highlight that despite the U.S. slowdown, the number of acquisitions by Indian IT-ITES companies in the United States during the first two months of 2008, increased by nearly 75 percent.
Sheth added: "One must not forget that India's domestic demand is booming."
In addition, the slowdown has accelerated the desire of India-born professionals based in the United States to return to their home soil. While such IT professionals previously returned in hopes of being part of the India growth story, today, the sub-prime crisis, slowing economy and fear of layoffs in the United States are prompting these workers to look for opportunities in India.
As a result, India's talent pool is getting richer and it could only be a matter of time before the Indian IT-ITES industry overcomes the U.S. slowdown hiccup.
arun sunny.

What will happen to India when American economy collapses due to fiscal mismanagement

India may suffer unnecessarily if and when American economy collapses. The downward spiral may have started with nasty stagflation. The stagnation in America comes from lack of pricing power, excessive borrowing, sky rocketing fiscal deficit, war expenses and Federal Reserve Bank’s mismanagement of fiscal affairs.

How will that impact India? When you finish reading this article, you will feel bad. India had an underdeveloped but self-sustaining economy with very little borrowing from the ordinary citizens. Something went wrong in early 1990s. In the name of liberalization, India imported all the bad stuff from American economy. The freely available credit, ballooning budget deficit, trade deficit accompanied imported outsourced jobs. Americans are eager to use Indian brains but wants to pay only five cents for dollar worth of job. India’s local Governments opened the doors thinking several Bill Gates will make them rich over night. In the process India bought billions of dollars from these Americans and hardware is useless anyway by this time. Buildings and cities have been built with overcapacity looming everywhere. Young kids have been told to learn only computers because Americans are going to sell oil from Iraq, make a lot of money and bring truckload of jobs into India. If American economy is ok, there is no problem.

Problem is that the American economy is tailing spinning into a major depression and that is going to drag India down to the mud. The overcapacity in India with young generation ready to work for TCSs, IBMs and Microsofts will never be used due to depression in US economy. US fiscal mismanagement actually started in mid eighties. Ronald Reagan did win the cold war but at the cost of sacrificing the best thing US had – Social Security. Things changed in Clinton days due to Internet boom and Year 2000 Computer scare which never really materialized. In the mean time, Bush Jr. came to power, 9/11 terrorism happened and US economy started moving downwards. At this stage, Bush and Federal Reserves Green Span converted America into a welfare country. When Air lines could not run their business, Bush gave them billions to survive and move on. Interest rates were lowered to almost zero. Cars were offered to public with no interest installment loans. People could buy homes with interest only loans. Income tax was reduced so that rich can spend more and pay less tax. Every American company today depends primarily on Government contracts to pay their bills. America went into Iraq so that American companies can make a lot of money from Iraqi oil money contracts. But nothing finally is working. Americans borrowed in billions from their home equities and now does not know how to pay them off. People are making less money, losing good jobs and taking low quality jobs with one third pay and no benefits.
People are still ecstatic about America and the economy. These are signs of a major topping of an economy for a long run scenario. This depression may go on for as long as thirty years with dow reaching as low as 1000 or even less.
India has positioned itself to shoot in the foot as American economy collapses. Two thins are going to happen. First, American companies will not have money to pay Indians. Secondly, America will change and outsourcing and free trade as we know it today will come to a halt. Inter country bartering system will eventually start that will eliminate all trade deficits and trade surpluses. America will enforce patent laws and India will have to follow the same. This will cause a lot of problem for those Indians dancing today thinking heaven is waiting for them in the planet of outsourcing.

Outsourcing is good for US economy: Microsoft CEO

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	November 09, 2006 Favouring large-scale outsourcing of software services and R&D works to countries such as India, Steve Ballmer, chief executive officer of Microsoft said the US stands to benefit out of this. "We will have to increasingly bank on India for scaling up our operations to rise on the next wave of innovation. So, outsourcing is here to stay. I have always stated that the so-called outsourcing is good for the US economy," he said while delivering the Fifth Madhav Rao Scindia Memorial lecture on Wednesday. "With the US government making it more difficult for people to come into the US from outside, it puts pressure on companies like ours to relatively grow our talent pool in India even faster. About 18 per cent of our engineers in Seattle are Indians," he said. Ballmer, however, felt the attitude (against outsourcing) has improved over the last year. Based on a Global Delivery Centre model, the $23-billion Indian software services industry thrives on the offshore business. But this has led to a backlash in many countries, including the US, as a result of local job loss. Ballmer also stressed on Indian engineering talent to redefine the software industry. "Thirty per cent of all computer science graduates in the world are passing out of Indian universities. That puts a special responsibility on this country. The world is counting on the talent of this country to lead the next wave of innovation," he said, adding harnessing that talent, required companies to work with a big bold goal. The Redmond-based software giant also wants to ramp up its operations in India but said newly graduated IT engineers from Indian universities need more practical training. Ballmer said to ensure IT engineers are employable upon graduation 'requires a little bit of training' they don't receive while in school. Between 25 per cent and 30 per cent of engineers graduate from colleges and universities in India. Microsoft, Ballmer said, is working to boost engineer graduates' real-life experience through its training program at its New Delhi facility. The company said it hopes hands-on experience will help increase the number of readily employable and trained engineers worldwide. Microsoft`s research and development facility in India is the company's second largest R&D plant after its Redmond R&D centre. In 2006, Microsoft announced plans to invest $1.7 billion and increase the headcount to more than 7,000 in its Indian operations over the next several years. President A P J Abdul Kalam (R) talks to N R Narayana Murthy, chairman Infosys Technologies [Get Quote] as chief executive officer of Microsoft, Steve Ballmer, looks on during a Microsoft conference in New Delhi. Microsoft hosted a conference titled 'Bridging the two Indias' which was inaugurated by Kalam.

India’s Information Technology Industry

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The Indian software industry has grown from a mere US $ 150 million in 1991-92 to a staggering US $ 5.7 billion (including over $4 billion worth of software exports) in 1999-2000. No other Indian industry has performed so well against the global competition.
The annual growth rate of India’s software exports has been consistently over 50 percent since 1991. As per the projections made by the National Association of Software and Services Companies (NASSCOM) for 2000-2001 (April 1, 2000 - March 31, 2001), India’s software exports would be around $ 6.3 billion, in addition to $ 2.5 billion in domestic sale.
Indian Software Industry 1995-2000
(US $ million)

Type	1995-96	1996-97	1997-98	1998-99	1999-2000	2000-01*
Domestic software Market	490	670	920	1250	1700	2450
Software Exports	734	1085	1750	2650	4000	6300
Indian Software Industry	1224	1755	2670	3900	5700	8750

(* Source: NASSCOM Report)

Today, India exports software and services to nearly 95 countries around the world. The share of North America (U.S. & Canada) in India’s software exports is about 61 per cent. In 1999-2000, more than a third of Fortune 500 companies outsourced their software requirements to India.
NASSCOM’s survey during 1999-2000 indicates a reversal in the mode of services offered by India. In 1991-92, offshore services accounted 5 per cent and on-site services 95 % of the total exports. However, during 1999-2000 offshore services contributed over 40 percent of the total exports.

The NASSCOM - McKinsey report on India's IT industry

According to a NASSCOM-McKinsey report, annual revenue projections for India’s IT industry in 2008 are US $ 87 billion and market openings are emerging across four broad sectors, IT services, software products, IT enabled services, and e-businesses thus creating a number of opportunities for Indian companies. In addition to the export market, all of these segments have a domestic market component as well.

Other key findings of this report are:

• Software & Services will contribute over 7.5 % of the overall GDP growth of India
• IT Exports will account for 35% of the total exports from India
• Potential for 2.2 million jobs in IT by 2008
• IT industry will attract Foreign Direct Investment (FDI) of U.S. $ 4-5 billion
• Market capitalization of IT shares will be around U.S. $ 225 billion

Projected Revenues - 2008
($ US billion)

	India Based	India Centric	Sub total (International)	Domestic	Total	1998
IT Services	23	7*	30	8.5	38.5	2.1
Software Products	8	2	10	9.5**	19.5	0.6
IT-enabled Service	15	2	17	2	19	0.4
E-business	4	1	5	5	10	0.2
Total	50	12	62	25	87	3.3

Exports of $50 billion in 2008

* Legacy/client server, ERP and package work and Internet all have different proportions of work outside India where revenues are not export revenues.
** Resale of imported products included.

Promotion of IT - governmental incentives:

With the formation of a new ministry for IT, Government of India (GOI) has taken a major step towards promoting the domestic industry and achieving the full potential of the Indian IT entrepreneurs. Constraints have been comprehensively identified and steps taken to overcome them and also to provide incentives. Thus for example, venture capital has been the main source of finance for software industry around the world. However, majority of the software units in India is in the small and medium enterprise sector and there is a critical shortage of venture capital kind of support. In order to alleviate this situation and to promote Indian IT industry, the Government of India has set up a National Task Force on IT and Software Development to examine the feasibility of strengthening the industry. The Task Force has already submitted its recommendations, which are under active consideration. Norms for the operations of venture capital funds have also been liberalized to boost the industry. The Government of India is also actively providing fiscal incentives and liberalizing norms for FDI and raising capital abroad.
Recently, an IT committee was set up by the Ministry of Information Technology, Government of India, comprising Non Resident Indian (NRI) professionals from the United States to seek expertise and advice and also to step up U.S. investments in India's IT sector. The committee is chaired by Minister of Information Technology, Government of India, and the members include Secretary, Ministry of Information Technology and a large number of important Indian American IT entrepreneurs.
The group will:

• Monitor global IT developments and refine Indian IT policy to meet global requirements. Specifically, this will help angel investors, venture creators and incubation;

• Promote the growth of human resource development in the IT sector with the aim of creating quality-based education;

• Promote R&D in the sector by identifying thrust areas and drawing up a blueprint for action.

India’s most prized resource in in today’s knowledge economy is its readily available technical work force. India has the second largest English-speaking scientific professionals in the world, second only to the U.S. It is estimated that India has over 4 million technical workers, over 1,832 educational institutions and polytechnics, which train more than 67,785 computer software professionals every year. Government of India is stepping up the number and quality of training facilities in the country to capitalize on this extraordinary human resource. It is the knowledge industry that will help take the Indian economy to a sustained higher rate of growth and the policy makers are fully aware of this.