Global Meltdown: Impact on Indian

Abstract:

With the advent of globalization in the 1990s, the IT / ITeS industry in India entered its boom phase and has seen considerable growth since then. The sector has grown manifold in size and has matured in terms of service delivery capability and geographical locations over the past decade. It currently employs more than 2 million individuals. However, recent developments in the US financial markets has had an impact on industries the world over. Though countries like India are slightly more insulated than others owing to tight regulatory environments, the IT / ITeS industry which are globally integrated industries have been impacted.

The paper seeks to analyze and understand the trend and impact of the global meltdown on the Indian IT / ITeS industry. Can this trend of increased globalization be reversed? If not, what stance should the workforce engaged in the IT / ITeS sector maintain in these difficult times. It is these uncertain times which determine and salute the resilient Management and Employees who are able to strategize and emerge as winners.

Objectives of the Paper:

The paper aims to study:

  • Meaning of Globalization
  • Indian industry and impact of Global Meltdown
  • Can the Economic Meltdown result in reversing of Globalization
  • Recommended stance to be adopted by the Management and Employees of the industry

Introduction:

The objective of this research paper is to understand the impact of the global recession on the Indian IT / ITeS industry. The industry took off in India in the 1990s and has contributed to India being the front runner amongst other countries as far as information technology is concerned. As per an AT Kearney Report, with regards to financial attractiveness (on an index scale of 1 to 4) of top five global services locations, India ranks the highest with a score of 3.22 while China is ranked second with a score of 2.93. India's value proposition is complemented by the key infrastructure availability in the country. With initiatives like Software Technology Parks of India (STPI) and Special Economic Zones (SEZs) offered for cost-effective real estate availability, the Government is progressively working towards other capacity building measures. Rather, IT/ ITeS sector accounts for about 5.8 Per Cent of India's Gross Domestic Product (GDP).

Meaning of Globalization:

Globalization of the Indian economy has entailed rapid intensification of cross border trade, services and capital flows; to and fro movement of human capital; enhanced welfare through efficiency gains; greater equity and higher growth within nations. India is said to be witnessing the ripple effect of the crisis that has dawned upon other countries of the world.

India had entered the era of globalization in the 1990s. Globalization is very often used to refer to economic globalization, which is integration of national economies into the international economy through trade, foreign direct investment, capital flows, migration, and the spread of technology. Globalization did largely fuel the growth story of India with the GDP attaining levels of 8.5% and slated to go higher. However, in the meanwhile, the global economy has been hit by recession which has had a ripple effect on the Indian story.

Indian IT / ITeS industry and impact of Global Meltdown:

The Indian Information Technology ('IT') and IT enabled Services ('ITeS') sector has matured considerably with its expansion into different service verticals and offerings, and increasing geographic penetration. The success of the sector has led to India firmly finding its position in the sourcing strategy of large corporations across the globe. India topped A.T. Kearney Global Services Location Index, ranking ahead of 49 other countries, emerging to be the destination of choice as an off-shoring location for multinational corporations across the globe. The industry players in India have endured pressures on their margins, in the form of rising wage costs and rising rupee valuation and have managed to carve a distinct identity in the industry.

It is the banking, financial services and insurance ("BFSI") vertical which accounts for the largest share of the Indian IT / ITeS exports. The telecom vertical accounts for the second largest share of the pie at 20 per cent. Together, both verticals account for close to 60 per cent of the Indian IT-ITeS exports. The other significant verticals include manufacturing, retail, media and healthcare. The India value proposition has evolved considerably and demand is driven by key comparative advantages offered by India vis--vis other emerging outsourcing destinations.

Value Proposition offered by India:

  • Breadth of Service offering
  • Cost advantage
  • Ease of scalability
  • Quality and maturity of process
  • Global and 24/7 delivery capacity

However, recent developments in the US financial markets has also had an impact on the IT / ITeS industry. Though countries like India are slightly more insulated than others owing to tight regulatory environments, the IT and BPO industry which are globally integrated industries have been impacted. As per Mr. Som Mittal, President, NASSCOM "We will still see growth, even though it maybe slightly lower than the 30 percent plus we have seen in the past. This industry's foundation is human resources and growth, - linear or lateral, would necessarily mean more hiring. The impact of the slowdown may remain for a few quarters and the growth will be back. 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"

As per NASSCOM, the aggregate revenues of the sector are expected to reach USD 60 billion (including domestic revenues, excluding hardware) by FY 09. Export revenues for the Indian IT-BPO industry (excluding domestic market and hardware exports) is expected to record growth of 16-17% in FY09 and clock revenues of USD 47 billion in 2008-09, lower than earlier estimates of $50 billion as the global economic slowdown had dampened demand. It's the Banking and Financial services projects that have witnessed a fall in demand while the telecom and infrastructure verticals have been least impacted. Companies are in a phase of minimizing of costs and revaluating resources required.

With regards to the workforce engaged in the Indian IT-BPO industry, it currently employs 2 million individuals directly, an increase of about 389,000 professionals over FY2007 and indirect job creation is estimated at about 8-9 million. Of these, almost 700,000 are working in the BPO sector alone and domestic IT industry provides direct employment to 860,000, and 450,000 professionals respectively. However, there has been a lot of skepticism around new hires and laying off of current employees. The global slowdown has pushed brands to retrench its manpower. The fear is that the new middle class in India is witnessing its first financial meltdown and a possible deep recession. Some say that the information technology - business process outsourcing (IT-BPO) myth might soon be blown. The possible BPO gains could hardly make up for the IT sector losses inflicted by recessionary economies in the developed world. To top it further, Post-Satyam fiasco, the issue of corporate governance is being raised and it could become tough for smaller IT companies

Does this mean that the good story of Globalization and the boost that it gave to the Indidan IT / ITeS industry has come to an end? No, not necessarily. The good news is that it has also resulted in lowering of attrition levels by 6-7%; broadening of the manpower base - over the past five years the industry has grown from employing 430,114 in 2000-2001 to 2 million in 2007-08, thereby the percentage of new additions is tapering; and increase in productivity and utilisation levels - hires are now being made closer to deals. Though the US market accounts for about 60 percent of the export revenue of Indian IT companies 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. The global meltdown has of course, taken its effect on the Indian IT-BPO sector as well. However, companies are seeing an opportunity in these adverse times. Industry players believe that the ability to grow up the value chain - and also the emergence of some new businesses - will see Indian companies emerging stronger in 2009, despite uncertainties in the markets that bring most of their revenues. The IT / ITeS domestic market across hardware; IT services, Software BPO products is estimated to grow by 20%. Also, the industry is forecasted to remain a net hirer with direct employment reaching nearly 2.23 million up from 2 million in the previous year. NASSCOM has taken a two year view to factor in the volatile environment and estimates the Indian IT / ITeS industry to achieve exports revenues of USD 60-60 billion by FY 11.

Can the Economic Meltdown result in reversing of Globalisation:

As we are all aware, President Obama, in his address to American people a few days ago said that he would stop tax breaks to companies that ship jobs overseas. Many people believe that this could be a direct hit to Indian IT industry. However, as per senior political leaders of India, the globalization trend cannot be reversed and the same could be taken up with the WTO. As per Pranab Mukherjee, "We are opposing protectionism, any form of protectionism. We are not only raising it but opposing it in every forum."

As per Dr. Ganesh Natarajan, Chairman, NASSCOM and Global CEO, Zensar Technologies "2008-09 has been challenging for economies across the globe, however the Indian IT-BPO industry has exhibited a balanced growth. The Indian IT-BPO industry is a major contributor to the economy and has a multiplier effect in terms of export earnings, investment, employment and overall economic and social development. We are hopeful that the government will continue to recognize the contribution of this sector and will stimulate investor confidence and growth by extending fiscal incentives to this industry and boosting domestic IT spend through the allocated IT budgets."

Recommended stance to be adopted by the Management and Employees of the IT / ITeS industry:

Companies should view this time as an opportunity to acquire new clients and tap fresh business. Companies like Tata Consultancy Services and Infosys Technologies have already made inroads into the Chinese and Japanese markets. Expansion of client database amongst various international markets would only serve to insulate the companies against impact of downturn in respective economies. NASSCOM, has released a report titled: 'Opportunities For Indian IT Industry: Japan' . As per Mr. Som Mittal, President, NASSCOM, said, "The Indian IT-BPO companies are fast diversifying into near territories and opening up new opportunities for growth. Currently, 90 percent of the exports happen to United States (US) and Europe with rest of the world contributing just 10 percent. These markets are investing in Information Technology (IT) offering huge opportunity. To facilitate this NASSCOM has launched the 'emerging market series'. Japan as a second largest country economy and highly dependent on technology currently constitutes only 2 percent of our exports. With shortage of technical skills in Japan, and urgent need for business transformation, Japan would be a large market. While Indian companies have been targeting this market, a new concerted approach needs to be taken by both sides."

In order to beat the downturn companies could also look at innovative ways to reduce costs. Today's mantra is rightly cost optimization in all industries be it the manufacturing sector, retail sector and not to miss the IT / ITeS sector. Multitasking and devising of innovative solutions is the need of the hour. Costs could be minimized by increasing productivity of existing staff, devising cost efficient methods and improvements of doing the same job, employing the use of six sigma tools in improvising the current processes etc. Rather, the NASSCOM - BCG Innovation Report 2007, addresses three aspects of the innovation strategy :

  • "Imperative for innovation: The challenges in front of the Indian IT-ITES firms and the need for the firms to look at innovation as a 'must-have'.
  • Firm level agenda and approach for firms to spur innovation; A diagnostic tool-kit through which a firm can evaluate its current innovation maturity and the processes and mechanisms for a firm to develop a practical innovation strategy.
  • Recommendations to expand the innovation ecosystem in India: Benchmarking the Indian innovation ecosystem with global innovation ecosystems and actionable recommendations to develop India's innovation ecosystem".

At such times, management could also look at improving efficiencies in the information technology sector. Uptime, availability and performance management of infrastructure and applications is at the core of innovation. One could explore ways to fuel the underlying shifts in the managed services delivery model and move to a more efficient model of operation. In today's competitive business environment especially considering that countries like United States of America, Europe etc are facing recession, the enterprises need to operate at peak efficiency even as the complexity of operations grows. As this occurs, managements are realizing that technology fundamentally underpins most, if not all, of its business processes, and uptime and management is a key concern as they strive to get more out of less.

Not to forget while Product and Processes are important, People are the key to this industry. In these uncertain times, employees are nervous and are living in fear of pink slips being handed over to them anytime. While this could act as a forced motivator for some to deliver their best, for others it could also impact and hamper their productivity. Thus, employers should find ways and means to bolster the confidence of the workforce in these difficult times. The key solution could be regularly engaging with the employees and ensuring rapid dissemination of information to employees. While riding the boom phase all companies can do well from a shareholder, employee and customer perspective. It is these difficult times which determine the best places to work. Dissemination and sharing of information has several advantages - making the employees feel valued and confident, helping them take ownership of decisions taken by the management, generation of ideas and innovative solutions to problems in hand etc. As per Mr. Pramod Bhasin, Vice Chairman NASSCOM and President & CEO, Genpact said "At an employee level, the industry continues to focus on training and building higher end skills and capabilities that enable employees to gain domain expertise. Performance benchmarking and skill upgradation will be strong measurement parameters for the industry as customer expectations of Indian companies will be higher. Overall, the industry will remain a net hirer. From an employee perspective, with lower attrition, industry workforce will stabilize and this trend will extend into wage moderation in the coming year. NASSCOM continues to focus on its long term initiatives including talent and skill building, security and infrastructure in addition to its focus areas for the year including Green IT and Corporate Governance", he added.

The call of the day is skill upgradation. The global recession has also impacted the hiring of workforce. Considering that hiring is at its minimal, what is it that the company looks for in new hires. The recommendation is that instead of pressing the panic button, freshers should use this time to acquire new skills and uptrain themselves in being technically competent. The task in hand is to be able to differentiate oneself in comparison to others and be able to convince employers in how they could add value to the organization.

Conclusion:

The foremost question in all our minds is: Can this trend of Globalization be reversed and would economies trend towards protectionism? As per economists and politicians, considering that specialization in economies has set in and with the world now being one flat economy and corporates utilizing efficient skills and resources at minimal cost, reversal of the trend is next to impossible. Thus, instead of hitting the panic button at this time, one should look at ways to invest in oneself and deepen the human capital and expand and diversify amongst businesses and countries in order to insulate oneself as much as possible. It is the time to improvise and innovate and be the leaders in this crisis situation. A recent study by NASSCOM and Everest India on the Indian BPO sector, 'Roadmap 2012 - Capitalizing on the Expanding BPO Landscape' evaluates the country's current standing in this sector and its roadmap until 2012 states that India, is at the forefront of the rapidly evolving BPO market, having established itself as a "destination of choice."

References:

  • http://www.nasscom.in/ Nasscom - BCG Innovation Report 2007
  • ML International Newsletter, November-December 2008
  • www.ibeg.org (India Brand Equity Foundation)
  • http://itvoir.com/portal/boxx/knowledgebase
  • Indian IT Software and Services - FY09 Performance and Future Trends
  • http://ibnlive.in.com
  • http://news.outlookindia.com
  • Asst. Professor, Birla Institute of Management Technology, Plot No. 5, Knowledge Park - II, Greater NOIDA, UP - 201306

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