Why the global recession is also an opportunity for India

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Prasanto K. Roy | 21 Oct, 2008
The near recession in the US and the global meltdown will, of course, have its impact on India's high-tech industry, as it is one of the greatest financial crises of our globalised times. But it also presents an opportunity for Indian services vendors to improve their market share, while forcing them to diversify and de-risk across sectors and geography.

Lehman Brothers went bankrupt Sep 15. A day earlier, Merrill Lynch had announced that Bank of America was acquiring it. A week earlier, US mortgage giants Freddie Mac and Fannie Mae went into federal receivership.

And with each news flash, the Indian Sensex swung wildly downward, partly in sympathy, partly with foreign funds pulling out because they needed the cash. And the jitters echoed in the hallways of a host of tech services companies - who were servicing any of these firms, or their US-based suppliers.

This was bad news. The Indian tech and business process outsourcing (BPO) services industry is strongly dependent on North America, and specifically on the sector that we call "BSFI" - banking, financial services, and insurance.

Yes, the US financial services slump has come as a wake-up call for Indian exporters of technology and BPO services. But for them, this is no sudden crash. They have been through a longer crisis, though arguably, one that wasn't as severe, as the result of the weakening dollar in 2007. So, that have had some time to prepare. In 2006-07, the dollar averaged Rs.45.05 to a dollar. In 2007-08, it averaged Rs.40.4, which meant a 10 percent decline in rupee earnings for the same dollar billings.

Accordingly, many of the Indian tech/BPO services exporters looked harder beyond North America, which used to account for most of our services exports three years ago. They went to Europe, and Asia, and an adventurous few Indian companies even "came" to the India market.

India is a tech services market dominated by IBM and HP, with very few Indian services majors - mainly Tata Consultancy Services (TCS) and Wipro - active in this market. Others, such as Infosys and Satyam, have a negligible presence in India.

So here's the impact one sees of the dollar weakening in 2007, followed by the US financial services-led slump in 2008:

- Indian services exporters look harder beyond the US: to Europe, and Asia, including Japan

- They all work out an India market strategy, if they did not have one already

- Financial services drops from nearly 60-40 percent of our entire services exports

- Other areas like telecom and engineering services pick up rapidly

- Overall, there's increased diversification, across geography, sector and type of business

Financial services have been the mainstay of Indian software and BPO services exports. This began to change a few years ago, with telecom and engineering services picking up. That process has now accelerated. Telecom is a huge growth market in Asia, and especially India and China.

Has the slowdown hit Indian tech exporters? Of course, it has, though not dramatically. Here's what, and why:

- A very few large institutions have melted away. They were outsourcing to India, directly as well as through other US-based services majors who had delivery centres in India. This has of course meant some impact on business

- For some time now, new deals have slowed down, and turnaround time for signing contracts has increased

- There is increasing pressure on companies to minimize their "bench" - or the currently idle employees. Recruitments thus slowed, and campus offers stayed pending

However:

- Most of the stars of the Wall Street collapse are not going away. They will continue - after either Chapter 11 filing, or acquisition (Merrill Lynch), or federal receivership (Freddie Mac, Fannie Mae). These will generate new opportunities for low cost high quality services, especially the mergers

- A recession is all the more reason to cut costs and become more competitive on quality. Hence, more need to outsource and offshore. Many companies who were not outsourcing certain processes will increasingly be forced to do so

- The US Congress approved a revised $700 billion package to bail out the US financial sector. This means major opportunity for India-based services companies

India is not de-linked from the world, and the financial meltdown has certainly impacted us. While some of the impact is real and direct - like foreign institutional investors pulling out funds, which they needed back home, and thus causing havoc with the rupee - a lot of it is wild overreaction.

For instance, the day Infosys announced a great quarter and a 30 percent rise in net earnings, the Sensex saw one of its worst crashes ever. The market is not reacting to fundamentals, but is overreacting in panic. It is also reacting to rumours. Take ICICI Bank. Each day I bought ICICI stock, figuring it couldn't go any lower, it would drop 5 percent the next morning.

Yet, Indian services vendors have an opportunity waiting. There are factors in their favour. The dollar has swung very hard in the other direction now. India's brand image and reputation of services expertise in a range of areas, beginning with financial services but now extending to telecom, engineering services and medicine and more is on the rise. And then there is this large untapped market - a long tail of companies and processes that do not outsource that may be forced to open up to reduce costs.

An economic downturn is like a mild ice age, with the survival of the fittest. Take the airlines industry shakeout today: the fittest will survive. The outlook for IT and BPO services is a lot brighter than it is for the airlines, and brighter than it was post the dot.com bust.

Even so, it will mean belt tightening, and more focus on efficiency. Just as the fuel crisis and cost is forcing us toward more efficient transport. The global financial meltdown will mean some tough times for its suppliers, but the fittest will survive - and emerge stronger. And many will find opportunity in the crisis.