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Impact of Recession in IT Sector in India and the divergence of trends to other sectors

Dr D P Sharma Former Vice-Chancellor Bhoj Open University, Bhopal Dr V D Garde NCHSC Bhopal vgarde@bsnl.in Mrs Aarthi Mudaliar Asst Prof in Computer Dept Sri Sathya Sai College, Bhopal art_sanj2006@yahoo.co.in

In the 21 century, the recession has created a havoc and drastic change in the lifestyle of mankind. Especially in India, the fear of recession spread when the American economy weakened. In economics, the term Recession describes the reduction of a country's Gross Domestic Product (GDP) for atleast two quarters. In India, the recession has affected in various sectors during the period 2006-08. The most prominent sector is the Information Technology(IT) sector, encompassing all possible aspects of Information Systems based on computers. The IT industry, in India, offers various services like consulting, outsourcing in hardware and software, offshoring, Business Process Outsourcing, etc., This paper is based on the analysis of services offered in India under the IT sector. It explores the impact of recession on different sectors. The analysis of facts would help in avoiding the factors that contribute to recession as well as the factors that influence Indian economy, in the course of global transactions.


The United States-based National Bureau of Economic Research (NBER) defines economic recession as: "a significant decline in the economic activity spread across the country, lasting more than a few months, normally visible in real GDP growth, real personal income, employment (non-farm payrolls), industrial production, and wholesale-retail sales". Almost universally, academic economists, policy makers, and businesses defer to the determination by the NBER for the precise dating of a recession's onset and end. In macroeconomics, a recession is a decline in a country's gross domestic product (GDP), or negative real economic growth, for two or more successive quarters of a year. Some economists prefer a more robust definition of a 1.5% rise in unemployment within 12 months.


Attributes of Recession

1. Introduction
It would be nave to imagine that a recession in the United States would have no impact on India. The United States accounts for one-fourth of the world GDP and any significant slowdown is bound to have reverberations elsewhere. On the other hand, interdependencies between the US economy and emerging economies like India and China has reduced considerably over the last two decades. The global scenario is changing as the overall economy is slipping into a major slowdown. To overcome the heat of this downturn, there are many trends adopted in various sectors affected. In this paper, the IT sector is focused and a detailed analysis of various features and services offered by the Indian IT sector is explored. The outcome of the analysis would produce different factors that can be contributed to overcome the recession impact in the Indian economy growth.

A recession has many attributes that can occur simultaneously. All these attributes are interrelated and include the following: a. declined activity in investment & corporate profits b. decreased demand for goods & services leading to decrease in production c. rise in unemployment due to decreased economic status and cutting down on outsourcing d. fluctuations in the stock market where investors spend less in stocks e. slash cut in interest rates of the government and recursive government activities to stabilize the fluctuation in the market f. effect of forex (Foreign Exchange) market g. Economic Budget and the taxation policy of the country induced in Income Tax Act (IT Act) Many software companies, to defend their flattish growth in revenue and the decline in hiring and rise in firing, are using the exchange rate fluctuation as an alibi.

4. Information Technology Sector

Information Technology (IT) encompasses all possible aspects of information systems based on computers, namely software development and hardware, right from computer systems to the design, implementation, Research and Development of IT and

2. Concept of Recession

management systems. Use of IT in service sector also improves operational efficiency and adds to transparency. Information Technology consulting (ITC) is a field that focuses on advising businesses on how best to use information technology to meet their business objectives. In addition to providing advice, IT consultancies often implement, deploy, and administer IT systems on businesses' behalf. The ITC industry can be viewed as a three-tier system: Professional services firms which maintain large professional workforces and command high bill rates. These firms are increasingly sourcing their employees from low-cost nations. Staffing firms, which place technologists in businesses on a temporary basis. These firms are known as "body shops". While they are geographically limited by their customers, they can exploit global cost differences by bringing guest workers to their host country. Body Shops are typically distinguished from Consultancies by their commercial practice of pricing service by the day (the input), rather than by the results of their work (the outputs, or deliverables). Independent consultants, who function as contractors, employees of staffing firms (in the U.S, employed on "W-2"), or as subcontractors in their own right. There is a relatively unclear line between management consulting and IT consulting. There are sometimes overlaps between the two fields, but IT consultants often have degrees in computer science, electronics, technology, or management information systems while management consultants often have degrees in accounting, economics, Industrial Engineering, finance, or a generalized MBA (Masters in Business Administration). According to the Institute for Partner Education & Development, IT consultants' revenues come predominantly from design and planning based consulting with a mixture of IT and Business Consulting.

Figure 1. Various Functions of IT sector Today, IT has ballooned to encompass many aspects of computing and technology, and the term has become very recognizable. The information technology umbrella can be quite large, covering many fields. IT professionals perform a variety of duties that range from installing applications to designing complex computer networks and information databases. A few of the duties that IT professionals perform may include data management, networking, engineering computer hardware, database and software design, as well as the management and administration of entire systems. At the outset, the IT sector can be categorized as Hardware and Software. Figure 1 gives an outline of various functions of IT sector used in outsourcing. Outsourcing is subcontracting a process, such as product design or manufacturing, to a third-party company. The decision to outsource is often made in the interest of lowering cost or making better use of time and energy costs, to make more efficient use of land, labor, capital, (information) technology & resources. Outsourcing became part of the business lexicon during the 1980s. It is essentially a division of labour.

5. Outsourcing in IT Sector
The combination of computer hardware and software elements constitute what is termed Information Technology (IT), wherein without one element, the definition of IT is incomplete, as shown in Fig.1.

5.1. Hardware Outsourcing:

The fact that hardware technology changes more rapidly than software makes hardware development the riskiest part of a new product development. Constant market pressure forces modern hardware to become more and more integrated, but unfortunately this trend also implies that if you choose the wrong technology, you are not only making a single mistake, but possibly generating a number of technological dead-ends in the future. Application Domains Table 1 display various hardware domains focused in the engineering field and the IT field. Table 1. Hardware Domains

Real-time embedded systems Process Control Industrial electronics GPS Applications Simulators System Design Prototyping Real-Time OS Software/Firmw are Languages Target Processor

Electro-mechanical systems Measuring Equipment Image Processing Radar Data Processing Communications System upgrades Testing Electrical Circuit Design Digital Signal Processing Documentation Support

5.2. Software Outsourcing:

In the market trend, many enterprise software companies, such as SAP and Oracle, employ their own consultants for services related to their own products. The following is a list of the largest IT consulting firms in the world, along with their corporate headquarters location and the total number of consultants they have. Many of these serve primarily as third-party consultants. Among the corporations listed below, the number of consultants listed is less than their total number of employees. Table 2. Consultants and their employees Name Headquarters Tata Consultancy Services Mumbai, India Infosys Bangalore, India Wipro Technologies Bangalore, India HCL Technologies Noida, India Satyam Computer Hyderabad, India Services Larsen & Toubro Infotech Mumbai, India
Sources from Economic Times

Consultants 116,000 103,000 68,000 50,000 52,000 24,000

The Big Three -- TCS, Infosys and Wipro led the way for Indian IT sector during the last quarter by posting net profits growth of over 50% and hiring more than 14,000 people, giving indications that the software sector is going through one of its most successful phases in recent times.

Despite the depressed economic conditions and a marked slowdown in the growth rate of the industry, the long-term potential of the industry is robust. The historical growth rate of the software industry has been higher. Furthermore, India has achieved the familiarity and experience with offshoring and this is dramatically increasing the breadth of service lines. Significant underpenetrated segments exist at both country and industry levels and there is pressure on global majors to move a significant portion of their work to India. Today India is surpassing all other competitors in terms of employment, number of companies sourcing ITES and the spectrum of verticals and services lines they offer. The IT Enabled Services sector in India has steadily increased its share in the overall IT software and services industry, from a low of 6.5% in 1998-99 to almost 20% in 2001-02. The Indian ITES Industry is also expected to account for 37% of the total IT software and Services export market in India by 2008. Table 3 shows variuos segments of services offered in ITES sector since 2008. Offshoring opportunities for Indian ITES players exist both across a wide range of processes as well as across multiple verticals. Banking and insurance are likely to provide the maximum opportunity driven by the high cost base and high extent of offshorable processes in these verticals. In addition, six other verticals - telecom, retailing, utilities, automotive, computer and pharmaceuticals, also offer immense growth potential. Table 3. ITES opportunities in 2008
HR ($billion) Customer Care Payment services Content development and others Administration Finance Total (Sources from Economic Times) 3.5 - 4 8 - 8.5 3 - 3.5 2.5 - 3 1.5 - 2 2.5 - 3 21 - 24

5.3. Key benefits of Outsourcing

Availability of highly skilled experienced developers Acquiring specific expertise when needed and as long as needed Filling of the gaps in your engineering staff Rapid Development and Cost Effectiveness Quick time to market for your products

6. Sector-wise areas affected due to recession

Citing three global factors, Satyam's fraud case, the terrorist attacks in Mumbai and supply chain & shipping cost issues in China are causing US technology companies to pull back from the two traditional outsourcing locations, India & China. Satyam's fraud case and the terrorist attacks in Mumbai are causing a lot of companies to reconsider operating in India. And supply chain and shipping cost issues in China are negatively impacting the attractiveness of outsourcing technology operations to the Far East. Table 4. Indian Software Industry
(in terms of US $ billion)

6. Growth in IT sector

The Growth in the IT sector has increased in the past decade, with the outsourcing of different countries from India. The prospects of India's IT industry have not been adversely affected due to global recession following the September eleven terrorist attacks. Instead the incident has opened up more possibilities for the sector as a decline in air travel has increased the demand for communication and has had a positive impact. The global recession is driving the IT industry to become more efficient. It is indeed forcing the industry to diversify markets and to look at costs. One-fourth of Fortune 500 companies outsource their software needs from Indian companies. IT industry will play a major role in enabling wireless technologies besides opening new avenues in biotechnology, pharmaceuticals, electronic manufacturing, media and entertainment.

Domestic software Market Software Exports Indian Software Industry

1995 -96 490 734 1224

1996 -97 670 1085 1755

1997 -98 920 1750 2670

1998 -99 1250 2650 3900

19992000 1700 4000 5700

2000 -01 2450 6300 8750

Sources from NASSCOM

Table 5. Progress of Indian IT Industry

(in terms of US $ billion)

Year/Sector IT S/W & Service Exports ITE-BPO Exports Domestic Market Total

200304 9.2 3.6 3.9 16.7

200405 12.6 5.2 4.8 22.0

200506 15.2 7.3 6.0 28.5

Source: Ministry of Communications and IT

Table 6. Potential for Indian Software and Service Industry by 2008 (figures in $ billion) IT Services Exports ITES Exports Product and Technology Services Domestic Market Total
Sources from NASSCOM

28-30 21-24 8-11 13-15 70-80

The Indian outsourcing company Satyam was struggling to determine the extent of a financial fraud that left it fighting for survival as investors began to search for ways to recoup their losses. When looking to outsource tech and research-and-development support, the turmoil affecting India's fourth-largest IT services company, in which the longtime chairman admitted to fraud that artificially inflated profits, will lead U.S. and other Western clients to think twice about relying too much on Indian companies. There is a very strong sentiment in the marketplace about mitigating risk relative to being overexposed to India. The Satyam scandal, following the November terrorist attacks in Mumbai, is prompting companies to think about the riskmitigation strategy.

7. Areas of focus to cut down recession impact

The Business Process Outsourcing industry in India refers to the Services Outsourcing Industry in India, catering mainly to Western operations of MNCs (Multinational Corporations).

As of 2008, around 0.7 million people work in outsourcing sector (less than 0.1% of Indians). Annual revenues are around $11 billion, around 1% of GDP. Around 2.5 million people graduate in India every year, but only about 15 percent are suitable for employment in this sector. Wages are rising by 10-15 percent as a result of skill shortage. As of 20 May 2008 all Indian on-shore workers in the UK and EU are now entitled to the full wage and benefits packages enjoyed by their European counterparts. Based on the industry's experience over the last three years and the changing nature of the customer needs, we believe that the mix of these services will be slightly different from the mix projected in the earlier study. The BPO and KPO sectors in India have been showing some positive signs with demands from western countries increasing manifold due to the availability of costeffective labor in India, which is highly skilled and also fluent in English. The BPOs in India are focused on increasing the growth through change in pricing techniques. Pricing in a BPO is supposed to be based on the value added to the business. So a remarkable change is in store as the BPOs in India work towards their full potential. Indian BPO sector is facing competition from countries like Philippines, Mexico, Malaysia, China, and Canada. The expected growth of this sector in 2003 was 25%. Nations like the United States and Europe are showing great interest in increasing their investments in the Indian BPO sector. The trends in growth of the BPO sector in India are: 2003 - USD 2.8 billion 2004 - USD 3.9 billion 2005 - USD 5.7 billion The Third Party Consultancy has boomed over years which serve ITC and Management Consultancy. As companies want to focus in their core areas and do not want the burden of one more department, Renting and maintaining computer systems is a new concept in India and big IT players are involved in it. On the other hans, small outfits prefer renting gadgets like computers, printers, laptops and projectors due to uncertainty in the business as well as lack of funds to setup the entire office at a time.companies also prefer to hire computers in case of emergency as formal procedure to buy computers usually takes a long time. According to the survey results in international outsourcing in 2009, 22% says Unites States is the outsourcing destination, compared to 16% for China and 13% for India. Another 19% reports no interest in additional outsourcing. The survey conducted in January 2009 examines the opinions of 100 Chief Financial Officers (CFO) at leading technology companies located throughout the US. Other major findings: Currently the most common non-US locations for outsourcing are India (50%), Southeast Asia, including Philippines (31%, down from 50% in 2008), China (19%, down from 46% in 2008) and

Western Europe (6%), Canada (5%) and Eastern Europe (3%). Of those outsourcing, the most common fucntions being off-shored currently are: Manufacturing (54%), IT services and programming (46%), Research and Development (35%) and Call Centres (35%). The growth in outsourcing or offshoring likely will lead to an increase in measured productivity in manufacturing. India can try and fit into all the economic stimulus plans across the world by developing worldclass technology solutions and safeguarding itself in all ways. India has an edge over other countries as we consider the following: Tech savvy professionals Cost effectiveness Superior competency Business risk mitigation 24 hour service Economy of scale

could deteriorate the situation further', FICCI said in a statement. However, citing a study by the US Chamber of Commerce, FICCI said that it were American companies that gained maximum from outsourcing. At the last, changing the word Recession to Recovery to give an optimistic meaning for IT industry would be the right path. With openings far wide, the globally affected industry should probe and find a solution and way out of the maze of Recession.

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Robert E. Hall, The Importance of Lifetime Jobs in the U.S. Economy, Published in The American Economic Review, Vol. 72, No. 4 (Sep., 1982), pp. 716724.

8. Factors of direct impact on outsourcing during recession

Budget cuts are always the bane of IT shops, but the current global recession has so intensified cost pressures that many management teams are now making cuts in IT that threaten the ongoing business itself. Cutting IT budgets hampers IT organizations ability to respond effectively to changing business needs. This leads to the proliferation of self-funded, unstructured IT purchases within separate lines of business and even within separate back-office or administrative functions. The former US President Bush had suggested that the possibility of a "hard landing" only strengthens his campaign pledge for a broad-based tax cut. The main objections to the president's proposal are that monetary policy alone should be able to prevent a hard landing, that fiscal policy operates with long lags, and that tax cuts imperil the budget, which posted a surplus only after a long struggle to impose fiscal discipline. President Bush's tax cut plan and conclude that it is too small to stimulate the economy enough to prevent a recession and maintain fiscal discipline. The IT industry could sustain the growth momentum by expanding into the domestic market and driving the growth rate with innovation and product development. The Federation of Indian Chamber of Commerce and Industry expressed concern over US President Barack Obama's statement on ending tax breaks for outsourcing companies, saying 'protectionist measures could deteriorate the situation further'. To restore a sense of fairness and balance to the tax code, the tax breaks for corporations that ship our jobs overseas was closed. Coming at a time when the global economy is going through a phase of slowdown and when countries need to work collectively, protectionist measures of any kind


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