US slowdown hits India’s IT sector

The US slowdown has battered India’s software giants, with companies freezing wages and cutting increments, slowing hiring and even handing out pink slips, putting the brakes on – although not stopping – a heretofore seemingly unstoppable upward trend in the country’s most glamorous industry.

“There is a fair amount of pain in the US,” said Azim Premji, the chairman of Wipro Technologies, one of India’s most successful IT process solutions providers. Despite first quarter 2008 revenues of US$1.39 billion, a 43 percent year-on-year increase, Wipro warned that the next quarter is going to be “difficult.”

The US and the United Kingdom account for more than 85 percent of India’s software and outsourcing business, with the bulk of revenues coming from the US, whose economy has nearly stalled, with gross domestic product increasing a lackluster 1.9 percent annual rate for the latest quarter.

TCS, Infosys, Wipro, Satyam, Cognizant, HCL, Satyam, Patni, MindTree are among India’s top IT companies. The largest, and the sector’s biggest exporter, Tata Consultancy Services (TCS) has reportedly added only 35 clients in the last quarter, its lowest in the past four quarters. In a step that sent shock waves through the industry and was the first indicator that all was not well, TCS had announced an unprecedented employee salary cut by 1.5 percent in the fourth quarter (January-March) this year.

Earlier this month, Infosys Technologies, another major IT company, announced that it is cutting its hiring plans by about 30 percent to about 25,000 from the last fiscal year, when 35,000 were recruited. Like others keen to cut costs, Wipro’s net employee addition in the last quarter has also been lower compared to previous quarters. The head count in its global IT services segment reportedly fell by 725 employees while in the June quarter a year ago the company had added 2,734 employees. Wipro has also postponed some of its campus hiring to the September quarter.

The impact on employees is a direct result of declining sales, with a depreciating dollar – or appreciating rupee – contributing to reduced margins. The rupee had appreciated almost 12 percent against the dollar in the last year before the dollar suddenly started appreciating over the past week, directly impacting turnover of Indian software firms, although the latest round of global oil price increases is putting the Indian currency under pressure.

Given the rising rupee, sales growth for the top IT firms has declined from an average 45 percent in the first two quarters in 2006 to 27 percent in 2007, per a report by industry body, the Associated Chambers of Commerce and Industry of India (Assocham). According to Assocham, overall salary payouts of top IT firms have thus only grown 25 percent in 2007, a big drop from the 65 percent rise in 2006.

The study closely looked at top software companies Wipro, TCS, Satyam and Infosys that account for more than 70 percent of the sector's revenue.

According to Assocham president, Venugopal N Dhoot: ``A-12 percent appreciation in the rupee against the US dollar and heavy losses in the sub-prime segment have played spoilsport.’’

Another indicator of uncertain times is declining attrition rates. Employees who could job-jump with impunity are now sticking with their current positions amid uncertainty over job prospects and as firms hire less. IT Industry observers say that attrition in the sector is down to 20-25 percent annually from the highs of over 50 percent a couple of years back.

Pratik Kumar, vice-president (HR), Wipro, told local media that attrition rates had dropped from 18.3 percent to 16.6 percent. Accenture outsourcing lead executive, PG Raghuraman, also told reporters that the company has had a 25-30 percent lower attrition rate than the usual.

“We have been able to successfully tide over the attrition wave because of greater engagement with employees and expansion of our supply chain.”

Future Optimism

However, most industry analysts believe the problems are short-term. A recent estimate by software industry body Nasscom has predicted that the industry be short more than 200,000 professionals by 2012. Another recent white paper ``India's Role in the Globalization of the IT Industry’’ by Evalueserve, a Knowledge Process Outsourcing firm, has said: ``by 2015-2016, the number of professionals working in the IT industry will grow tenfold (from 2001-2002) and the total revenue will grow 22 times.’’

This means the IT industry is likely to employ 3.75 million professionals and record almost US$200 billion in revenue by 2015-16.

``The Indian IT industry may be passing through a rough patch because of a slowdown in the US economy and high inflation rates, but this stage will pass,” says the study. ``India will create the second largest IT services labor pool after the US within the next seven to eight years. That's not all, domestic IT industry's contribution to our GDP is likely to rise from 0.8 percent in 2006-07 to 2.65 percent by 2015-16.’’

Siddharth Srivastava is a New Delhi-based journalist. He can be reached at sidsri@yahoo.com