THE GLOBAL ECONOMIC CRISIS AND ITS IMPACT ON INDIA

Abstract

The current global economic slowdown has its epicenter in the United States (US) but the contagion is being witnessed in all major economies of the world. Several countries are experiencing rapid contraction in their Global Domestic Product, rising unemployment levels and an overall slowdown in the pace of investment activity. What started as a shock in the financial markets has spread to all sectors of the world economy and the exact depth and breadth of the impact is still unclear. India’s economy has been fuelled by the growth in the technology sector in the recent past. A large part of this growth is dependent on the “outsourcing” or “off shoring” of key business processes and software development activity (and related services) by large global corporations and other organizations. Hence, the global slowdown has also affected the business climate within India and the growth rate of the Information Technology (IT) and Information Technology Enabled Services (ITES) sector is also experiencing the tremors of the global recession. The Indian IT software and services industry which has seen a Compounded Annual Growth Rate (CAGR) of around 30% over the last three or four years is now projected to grow at 20%. Indian IT sector’s derives approximately 61% revenues from the US based clients. The revenue contribution from US clients to the top five Indian IT companies (who account for 46% of the IT industry’s revenues) is approximately 58%. Hence, the impact of the slowdown in the US is likely to have a deep impact on the prospects of the Indian IT sector. Moreover, about 41% of the IT industry revenues in India are estimated to be from financial services. Since this sector has been affected most severely in the current climate, the impact on Indian companies catering to this sector has been (and will continue to be) more acute. The margins are prone to be challenged on account of the slowing growth in the US and European Banking and Financial Services Industry (BFSI) sectors. Interestingly, the Indian IT / ITES sector has so far been resilient in spite of the global slowdown. Part of this is due to the segmentation in the Indian IT / ITES sector whereby some of the firms are the back office support service centers of large global multinationals while the other is the indigenous IT service companies of Indian origin. While the current slowdown has impacted the indigenous IT companies business in India, a part of this has been offset by a greater amount of business flowing to the captive units of foreign companies operating in India owing to the pricing and margin pressure in their local markets. The indications are also that the next decade will be very different from the last one, with structural shifts in demographics that will reflect more prominently in international trade and economics. Technology evolution and adoption is expected to witness some disruptive changes as the Internet generation takes over the workforce. Experts suggest that the performance of the Indian IT software and services and ITES industry, while impacted by US economic slowdown, will be catalyzed by a revival in technology spending during the first half of 2009. There are some offsetting factors softening the revenue slowdown - favorable Rupee-Dollar exchange rate expected to lead to higher INR revenue growth figures during the year, growth de-risking through other emerging markets, growth in non-financial verticals, and growth through countercyclical new business initiatives.