A PROJECT REPORT

ON

“THE IMPACT OF GLOBAL RECESSION ON INFORMATION

TECHNOLOGY SECTOR IN INDIA”

Submitted in partial fulfillment o f the requirement

for the award of the degree

MASTER OF BUSINESS ADMINISTRATION

(FINANCE)
2011-2012

OF
SIKKIM MANIPAL UNIVERSITY OF HEALTH, MEDICAL AND TECHNOLOGICAL
SCIENCE DISTANCE EDUCATION WING
SYNDICATE HOUSE MANIPAL-576 104

GUIDED BY :- SUBMITTED BY:-

Mr.VITENDRA SIR Mr.SUMEET DOLHE

_____________________________________________________________

LEARNING CENTER -02961

MAHOBIA CAMPUS OF INFORMATION TECHNOLOGY

VIDHYA NIKETAN 19/140, SAHDEV NAGAR RAJNANDGAON C.G 491441

1
2
 DECLARATION

I, Sumeet Dolhe student of MBA 4th semester in department of

management studies, Mahobio Campus of Information And Technology hereby
declare that the project report entitled “THE IMPACT OF GLOBAL
RECESSION ON INFORMATION TECHNOLOGY SECTOR IN INDIA” is my
own work and the matter enclosed has not been submitted for the award of any
other degree or diploma in the university.

I hereby declare that all the data and information which this project
contains is true as per my knowledge.

During preparation of the project I was honest about the rules and
regulation of Organisation and Business ethics. And I think no data of my
project harms any reader of my project directly or indirectly.

DATE: SUMEET DOLHE

PLACE: RAJNANDGAON MBA 4TH SEMESTER
Roll No. 520947398

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 Acknowledgement

If words are considered to be sign of gratitude then let

these words convey the very same.

I am highly indebted to lecturer Vitendra sir, who has

provide me with the necessary information and also for the
support and her valuable suggestions and comments on
bringing out this report in the best way possible.

I feel great pleasure to cordial thanks to all faculty

members of management who sincerely supported me with
the valuable insights into the completion of this project and
I am thankful to that power that always inspire me to take
right step in the journey of success in my life.

MCI SUMEET DOLHE

RAJNANDGAON Roll No. 520947398

4
 BONAFIDE CERTIFICATE

Certified that this project report titled “THE IMPACT OF GLOBAL

RECESSION ON INFORMATION TECHNOLOGY SECTOR IN INDIA”
SUBMITTED is Submitted to MCI RAJNANDGAON in partial fulfillment o f
the requirement for the award of (MBA) MASTER OF BUSINESS
ADMINISTRATION is the bonafide work of “SUMEET DOLHE” who carried out
the project work under my supervision.

SIGNATURE SIGNATURE

HEAD OF THE DEPARTMENT FACULTY IN CHARGE

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Some guide lines for the body of the report
• Normal body text
Font size: Times New Roman, Size-14.
Paragraphs Heading Font Size: Times New Roman, Bold
Sub para headings: Times New Roman, Bold
Chapter name: Times New Roman, Bold
Page numbering: centered
• Chapter
Chapter are to be numbered as chapter 1, chapter 2…… as follows. The
headings/title of the chapter are to be appear just right the chapter number and
follows.

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 CONTENTS

CHAPTER 1

INTRODUCTION OF RECESSION……………………………………………………………….7

CHAPTER 2

DEFINITION OF RECESSION…………………………………………………………………….9

CHAPTER 3

IDENTIFYING………………………………………………………………………………………11

CHAPTER 4

STOCK MARKET AND RECESSIONS………………………………………………………….13

CHAPTER 5

RECESSION AND POLITICS…………………………………………………………………….14

CHAPTER 6

HISTORY OF RECESSIONS……………………………………………………………………..15

CHAPTER 7

CURRENT CRISIS IN US…………………………………………………………………………19

CHAPTER 8

Indian industries to do well during recession……………………………………………25

CHAPTER 9

Global economic slowdown and its impact on the Indian

IT industry………………………………………………………………………………………….31

CHAPTER 10

Structure of the global IT industry Growth of global IT economy …………………………….33

CHAPTER 11

RECESSION……………………………………………………………………………………….42

CONCLUSION…………………………………………………………………………………….46

BIBLIOGRAPHY………………………………………………………………………………….47

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CHAPTER 1

INTRODUCTION OF RECESSION

RECESSIONS ARE the result of reduction in the demand of products in the

global market. Recession can also be associated with falling prices known as
deflation due to lack of demand of products. Again, it could be the result of inflation
or a combination of increasing prices and stagnant economic growth in the west.

Recession in the West, especially the United States, is a very bad news for our
country. Our companies in India have most outsourcing deals from the US. Even our
exports to US have increased over the years. Exports for January have declined by
22 per cent. There is a decline in the employment market due to the recession in the
West. There has been a significant drop in the new hiring which is a cause of great
concern for us. Some companies have laid off their employees and there have been
cut in promotions, compensation and perks of the employees. Companies in the
private sector and government sector are hesitant to take up new projects. And they
are working on existing projects only. Projections indicate that up to one crore
persons could lose their jobs in the correct fiscal ending March. The one crore figure
has been compiled by Federation of Indian Export Organizations (FIEO), which says
that it has carried out an intensive survey. The textile, garment and handicraft
industry are worse affected. Together, they are going to lose four million jobs by
April 2009, according to the FIEO survey. There has also been a decline in the
tourist inflow lately. The real estate has also a problem of tight liquidity situations,
where the developers are finding it hard to raise finances.

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 IT industries, financial sectors, real estate owners, car industry, investment
banking and other industries as well are confronting heavy loss due to the fall down
of global economy. Federation of Indian chambers of Commerce and Industry
(FICCI) found that faced with the global recession, inventories industries like
garment, gems, textiles, chemicals and jewellery had cut production by 10 per cent
to 50 per cent.

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CHAPTER 2

DEFINITION OF RECESSION

Recession is not to be confused with depression. Recession means a slow

down or slump or temporary collapse of a business activity. In its early stage it can
be controlled in a methodical manner. Experience helps to avert total collapse.
Unchecked, it leads to severe depression. Depression is a dead end. It is time to
close shop completely. It is a total state of irrevocable economic failure. When a
country is doing well all round its Gross Domestic Product (GDP) is on the rise.

Overall economy is bullish; it is not only the stock exchanges that tell riches
to rags stories but even small businesses. It all adds to the national exchequer. An
economist is likely to give a detailed, comprehensive definition of recession. But for
the layman who has been affected knows it only one way-when he loses his job and
has no money to pay his credit and loans. Recession is when the consumer faces
foreclosure and the banker comes knocking for his pound (or dollar) of flesh. Many
companies and whole countries go bankrupt for want of liquid funds and cash flow
for even daily requirements.

If you look at it from the point of view of a businessman, recession is a

transitory phase. The Business Cycle Dating Committee of the National Bureau of
Economic Research has another definition. It profiles the businesses that have
peaked with their activity in one season and it falls naturally in the next season. It
regains its original position with new products or sales and continues to expand.

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This revival makes the recession a mild phase that large companies tolerate. As the
fiscal position rises, there is no reason to worry. Recession can last up to a year.
When it happens year after year then it is serious.

Are we facing a recession or not? Yes, for the simple reason that not only our
neighbors but our friends are unemployed. There is less of business talk and more
billing worries. Transitory recessions are good for the economy, as it tends to
stabilize the prices. It allows run away bullish companies to slow down and take
stock. There is a saying, ‘when it’s tough the tough get going’. The weaker
companies will not survive the brief recession also. Stronger companies will pull
through its resources. So when is it time to worry? When you are facing a
foreclosure, when the chips are down and out and creditors file cases for recovery.

Firms face closures when they go through recession and are not able to
recover from losses. If, at this time, they are not able to sustain their prices and
stocks then there is more trouble. Even when the recession period gets over, they
will not be able to do well. If a business survives a recession period they should be
able to survive a depression. But how many recession proof businesses are there?
Who will eventually survive the recession?

1. Those that have been able to save their funds.

2. Those who have not invested in fly-by-night companies.
3. Those who remain clam till the storm passes.
4. Those that take stock immediately and decide to reinvest in a recession
proof business.

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CHAPTER 3

IDENTIFYING

In a 1975 New York Times article, economic statistician Julius Shiskin

suggested several rules of thumb to identify a recession; these included the rule of
'two successive quarterly declines in GDP. Over time, the other rules have been
largely forgotten, and a recession is now often identified as the reduction of a
country's GDP (or negative real economic growth) for at least two quarters. Some
economists prefer a more robust definition of a 1.5% rise in unemployment within
12 months.

In the United States the Business Cycle Dating Committee of the National
Bureau of Economic Research (NBER) is generally seen as the authority for dating
US recessions. The NBER defines an 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.

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Attributes

A recession has many attributes that can occur simultaneously and can include
declines in coincident measures of activity such as employment, investment, and
corporate profits.

A severe (GDP down by 10%) or prolonged (three or four years) recession is

referred to as an economic depression, although some argue that their causes and
cures can be different.

Causes of recessions

• Currency crisis
• Energy crisis
• War
• Under consumption
• Overproduction
• Financial crisis
• Price of Fuels

Effects of recessions

• Bankruptcies
• Credit crunches
• Deflation (or disinflation)
• Foreclosures
• Unemployment

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CHAPTER 4

STOCK MARKET AND RECESSIONS

Some recessions have been anticipated by stock market declines. In Stocks for
the Long Run, Siegel mentions that since 1948, ten recessions were preceded by a
stock market decline, by a lead time of 0 to 13 months (average 5.7 months), while
ten stock market declines of greater than 10% in the DJIA were not followed by a
recession.

The real-estate market also usually weakens before a recession. However real-
estate declines can last much longer than recessions.

Since the business cycle is very hard to predict, Siegel argues that it is not possible
to take advantage of economic cycles for timing investments. Even the National
Bureau of Economic Research (NBER) takes a few months to determine if a peak or
trough has occurred in the US.

During an economic decline, high yield stocks such as fast moving consumer
goods, pharmaceuticals, and tobacco tend to hold up better. However when the
economy starts to recover and the bottom of the market has passed (sometimes
identified on charts as a MACD), growth stocks tend to recover faster. There is
significant disagreement about how health care and utilities tend to recover.
Diversifying one's portfolio into international stocks may provide some safety;
however, economies that are closely correlated with that of the U.S. may also be
affected by a recession in the U.S.

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CHAPTER 5

RECESSION AND POLITICS

Generally an administration gets credit or blame for the state of economy

during its time. This has caused disagreements about when a recession actually
started. In an economic cycle, a downturn can be considered a consequence of an
expansion reaching an unsustainable state, and is corrected by a brief decline. Thus
it is not easy to isolate the causes of specific phases of the cycle.

The 1981 recession is thought to have been caused by the tight-money policy
adopted by Paul Volcker, chairman of the Federal Reserve Board, before Ronald
Reagan took office. Reagan supported that policy. Economist Walter Heller,
chairman of the Council of Economic Advisers in the 1960s, said that "I call it a
Reagan-Volcker-Carter recession. The resulting taming of inflation did, however, set
the stage for a robust growth period during Reagan's administration.

It is generally assumed that government activity has some influence over the
presence or degree of a recession. Economists usually teach that to some degree
recession is unavoidable, and its causes are not well understood. Consequently,
modern government administrations attempt to take steps, also not agreed upon, to
soften a recession. They are often unsuccessful, at least at preventing a recession,
and it is difficult to establish whether they actually made it less severe or longer
lasting.

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CHAPTER 6

HISTORY OF RECESSIONS

Global recessions

There is no commonly accepted definition of a global recession, IMF regards

periods when global growth is less than 3% to be global recessions. The IMF
estimates that global recessions seem to occur over a cycle lasting between 8 and 10
years. During what the IMF terms the past three global recessions of the last three
decades, global per capita output growth was zero or negative.

Economists at the International Monetary Fund (IMF) state that a global

recession would take a slowdown in global growth to three percent or less. By this
measure, three periods since 1985 qualify: 1990-1993, 1998 and 2001-2002.

According to economists, since 1854, the U.S. has encountered 32 cycles of

expansions and contractions, with an average of 17 months of contraction and 38
months of expansion. However, since 1980 there have been only eight periods of
negative economic growth over one fiscal quarter or more, and four periods
considered recessions:

• January-July 1980 and July 1981-November 1982: 2 years total

• July 1990-March 1991: 8 months
• March 2001-November 2001: 8 months
• December 2007-current: 15 months as of March 2009

From 1991 to 2000, the U.S. experienced 37 quarters of economic expansion,

the longest period of expansion on record.

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 For the past three recessions, the NBER decision has approximately
conformed to the definition involving two consecutive quarters of decline. However
the 2001 recession did not involve two consecutive quarters of decline, it was
preceded by two quarters of alternating decline and weak growth.

Current recession in some countries

Official economic data shows that a substantial number of nations are in

recession as of early 2009. The US entered a recession at the end of 2007, and
2008 saw many other nations follow suit. United States

The United States housing market correction (a consequence of United States

housing bubbles) and sub prime mortgage crisis has significantly contributed to a
recession.

The 2008/2009 recession is seeing private consumption fall for the first time
in nearly 20 years. This indicates the depth and severity of the current recession.
With consumer confidence so low, recovery will take a long time. Consumers in the
U.S. have been hard hit by the current recession, with the value of their houses
dropping and their pension savings decimated on the stock market. Not only have
consumers watched their wealth being eroded – they are now fearing for their jobs
as unemployment rises.

U.S. employers shed 63,000 jobs in February 2008, the most in five years.
Former Federal Reserve chairman Alan Greenspan said on April 6, 2008 that "There
is more than a 50 percent chance the United States could go into recession.". On
October 1, the Bureau of Economic Analysis reported that an additional 156,000

17
jobs had been lost in September. On April 29, 2008, nine US states were declared by
Moody's to be in a recession. In November 2008 Employers eliminated 533,000
jobs, the largest single month loss in 34 years. For 2008, an estimated 2.6 million
U.S. jobs were eliminated.

Although the US Economy grew in the first quarter by 1%, by June 2008
some analysts stated that due to a protracted credit crisis and "rampant inflation in
commodities such as oil, food and steel", the country was nonetheless in a recession.
The third quarter of 2008 brought on a GDP retraction of 0.5% the biggest decline
since 2001. The 6.4% decline in spending during Q3 on non-durable goods, like
clothing and food, was the largest since 1950. A Nov 17, 2008 report from the
Federal Reserve Bank of Philadelphia based on the survey of 51 forecasters
suggested that the recession started in April 2008 and will last 14 months. They
project real GDP declining at an annual rate of 2.9% in the fourth quarter and 1.1%
in the first quarter of 2009. These forecasts represent significant downward revisions
from the forecasts of three months ago.

A December 1, 2008, report from the National Bureau of Economic Research

stated that the U.S. has been in a recession since December 2007 (when economic
activity peaked), based on a number of measures including job losses, declines in
personal income, and declines in real GDP.

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Other countries

A few other countries have seen the rate of growth of GDP decrease,
generally attributed to reduced liquidity, sector price inflation in food and energy,
and the U.S. slowdown. These include the United Kingdom, Canada, Japan,
Australia, China, India, New Zealand and the Euro zone. In some, the recession has
already been confirmed by experts, while others are still waiting for the fourth
quarter GDP growth data to show two consecutive quarters of negative growth. India
along with China is experiencing an economic slowdown but not a recession.

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CHAPTER 7

CURRENT CRISIS IN US

The defaults on sub-prime mortgages (home loan defaults) have led to a major
crisis in the US. Sub-prime is a high risk debt offered to people with poor credit
worthiness or unstable incomes. Major Banks have landed in trouble after people
could not pay back loans.

The housing market soared on the back of easy availability of loans. The
realty sector boomed but could not sustain the momentum for long, and it collapsed
under the gargantuan weight of crippling loan defaults. Foreclosures spread like
wildfire putting the US economy on shaky ground. This, coupled with rising oil
prices at $100 a barrel, slowed down the growth of the economy.

Past recessions in the US

The US economy has suffered 10 recessions since the end of World War II.
The Great Depression in the United was an economic slowdown, from 1930 to 1939.
It was a decade of high unemployment, low profits, low prices of goods, and high
poverty.

The trade market was brought to a standstill, which consequently affected the
world markets in the 1930s. Industries that suffered the most included agriculture,
mining, and logging.

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 In 1937, the American economy unexpectedly fell, lasting through most of
1938. Production declined sharply, as did profits and employment. Unemployment
jumped from 14.3 per cent in 1937 to 19.0 per cent in 1938.

The US saw a recession during 1982-83 due to a tight monetary policy to

control inflation and sharp correction to overproduction of the previous decade. This
was followed by Black Monday in October 1987, when a stock market collapse saw
the Dow Jones Industrial Average plunge by 22.6 per cent affecting the lives of
millions of Americans.

The early 1990s saw a collapse of junk bonds and a financial crisis.

The US saw one of its biggest recessions in 2001, ending ten years of growth,
the longest expansion on record.

From March to November 2001, employment dropped by almost 1.7 million.

In the 1990-91 recessions, the GDP fell 1.5 per cent from its peak in the second
quarter of 1990. The 2001 recession saw a 0.6 per cent decline from the peak in the
fourth quarter of 2000.

The dot-com burst hit the US economy and many developing countries as
well. The economy also suffered after the 9/11 attacks. In 2001, investors' wealth
dwindled as technology stock prices crashed.

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Impact of an American Recession on India

Indian companies have major outsourcing deals from the US. India's exports
to the US have also grown substantially over the years. The India economy is likely
to lose between 1 to 2 percentage points in GDP growth in the next fiscal year.
Indian companies with big tickets deals in the US would see their profit margins
shrinking.

The worries for exporters will grow as rupee strengthens further against the
dollar. But experts note that the long-term prospects for India are stable. A weak
dollar could bring more foreign money to Indian markets. Oil may get cheaper
brining down inflation. A recession could bring down oil prices to $70.

The whole of Asia would be hit by a recession as it depends on the US

economy. Even though domestic demand and diversification of trade in the Asian
region will partly counter any drop in the US demand, one simply can't escape a
downturn in the world's largest economy. The US economy accounts for 30 per cent
of the world's GDP.

Says Sudip Bandyopadhyay, director and CEO, Reliance Money: "In the
globalised world, complete decoupling is impossible. But India may remain
relatively less affected by adverse global events." In fact, many small and medium

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companies have already started developing trade ties with China and European
countries to ward off big losses.

Manish Sonthalia, head, equity, Motilal Oswal Securities, says if the US

economy contracts much more than anticipated, the whole world's GDP growth-
which is estimated at 3.7 per cent by the IMF-will contract, and India would be no
exception.

The only silver lining is that the recession will happen slowly, probably in six
months or so. As of now, IT and IT-enabled services, textiles, jewellery, handicrafts
and leather segments will suffer losses because of their trade link. Certain sections
of commodities could face sharp impact due to the volatile nature of these sectors.
C.J. George, managing director, Geojit Financial Services, says profits of lots of re-
export firms may be affected. Countries like China import commodities from India
do some value-addition and then export them to the US.

The IT sector will be the worst hit as 75 per cent of its revenues come from
the US. Low demand for services may force most Indian Fortune 500 companies to
slash their IT budgets. Zinnov Consulting, a research and offshore advisory, says
that besides companies from ITeS and BPO, automotive components will be
affected.

During a full recession, US companies in health care, financial services and

all consumers demand driven firms are likely to cut down on their spending. Among
other sectors, manufacturing and financial institutions are moderately vulnerable. If
the service sector takes a serious hit, India may have to revise its GDP to about 8 to
8.5 per cent or even less.

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 Lokendra Tomar, senior vice-president, Integreon, a BPO firm, says the US
recession is likely to have a dual impact on the outsourcing industry. Appreciating
rupee along with poor performance of US companies (law firms, investment banks
and media houses) will affect the bottom line of the outsourcing industry. Small
BPOs, which are operating at a net margin of 7-8 per cent, will find it difficult to
survive.

According to Dharmakirti Joshi, director and principal economist of CRISIL,

along and severe recession will seriously affect the portfolio and fixed investment
flows. Corporates will also suffer from volatility in foreign exchange rates. The
export sector will have to devise new strategies to enhance productivity.

Consequences of US recession on India job market

Worst affected because of US recession will be the service industry of India.

Under service industries come BPO, KPO, IT, ITeS etc. Service industry contributes
about 52% to India's GDP growth. Now if that is going to get hurt then it will also
hurt India's overall growth but very slightly. India is not going to face a major
impact due to US recession. People may say that there is going to be a huge job loss
due to recession. and will cite the example of TCS firing about 500 employees but
these were employees who didn’t perform and for cost cutting one have to reduce
Non performing asset and that exactly what has been done. There is no threat to the
skilled people. According to NASSCOM India will have a shortage of about 5
million skilled people in IT/ITeS. So there are lots of opportunities.

Apart from this India's travel, tourism and power industry is going to grow at
a better rate. This is again a good sign. India has a huge population so a huge

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consumer base so we don’t have to always depend on US for our growth. India's
GDP is expected to grow at the rate of 8.5-8.9 % which is again way above the
growth rate of US and only second highest in the world after China.

This recession gives us opportunity to be innovative and to think out of box so

that the US directly doesn’t affect our robust growth. Due to increasing Rupee
exporters are having a hard time but it has been noted that our exporters are not that
efficient and in past they got the benefit of depreciating rupee. So now its time to be
innovative and more effective and increase the over all efficiency and go for
systematic cost cutting to balance the rupee effect. Infact there are lots of scope for
improvement. In West Africa goods at departmental stores are sold at the rate 5
times than Indian price and Indian goods are not exported to several countries in
West Africa. It’s an excellent opportunity for our exporters.

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CHAPTER 8

Indian industries to do well during recession

In the current global economic slowdown, every sector of business is being

affected and is witnessing a hard time. But IKON Marketing Consultants reports that
in India there are few sectors which will grow in this adverse situation.

AS EVERY business sector is affected by present global crisis and everybody

is talking of slow down in business, still in India there are few sectors which will
grow in this adverse situation. Let’s have a look.

1. Food

No one can survive without basic food material like milk, vegetables and
drinking water. Food processing companies will not be affected much and rather will
earn profits by increasing the prices. These are the basic needs which we as a
common man can not produce by our self.

According to Ministry of Food Processing Industry (MFPI), the food

processing industry in India was seeing growth even as the world was facing
economic recession. According to the minister, the industry is presently growing at
14 per cent against six to seven per cent growth in 2003–04.The Indian food market
is estimated at over US$ 182 billion and accounts for about two thirds of the total
Indian retail market. Further, the retail food sector in India is likely to grow from
around US$ 70 billion in 2008 to US$ 150 billion by 2025.

26
2. Railway

As the aviation sector has been affect much badly and resulting in sharp rise
in the air ticket rates the frequent travelers’ will prefer railways to cut the cost of
traveling and this will result in increased traffic in railways and long queues at
railway booking counters. The freight traffic of Indian Railways has continued to
grow in the last few months, albeit at slow pace, indicating only marginal impact of
the global recession on the Indian economy.

The railways registered 13.87 per cent growth in revenue to Rs 57,863.90

crore in the first nine months ended December 31, 2008. While total earnings from
freight increased by 14.53 per cent at Rs 39,085.22 crore during the period,
passenger revenue earnings were up 11.81 per cent at Rs 16,242.44 crore. The
railways have enhanced freight revenue by increasing its axle loading, improving
customer services and adopting an innovative pricing strategy.

3. PSU Banks

As seen in the private sector much of the job cuts due to global slowdown, it’s
the public sector undertaking (PSU) banks which gained much confidence due to job
safety and security. More and more people are likely to turn towards government
institutions, particularly banks in the quest for safety and security.

A report "Opportunities in Indian Banking Sector", by market research

company, RNCOS, forecasts that the Indian banking sector will grow at a healthy
compound annual growth rate (CAGR) of around 23.3 per cent till 2011.

27
4. Education

As education is considered as the basic necessity and in India it is seen as a

long term investment by parents and with respect to the demand still there is a huge
supply gap. The craze to study in foreign university among the Indian youth still
alive which will prompt foreign education institute to target India provided vast
young population willing to join. We will see more and more foreign educational
institutions coming up in India in recent coming years.

Huge government as well as private investment is likely to flow into the

Indian educational system. D E Shaw, a US$ 36 billion, global private equity firm is
planning to invest around US$ 200 million in the Indian education sector.

5. Telecom

People will not stop to communicate with each other due to global crises
rather it has been seen that it will increase much particularly with mobile
communication. With cheap cell phones available in the Indian market and cheaper
call rates, the sector has become the necessity and primary need of everyday life.

Telecom sector, according to industry estimates, year 2008 started with a

subscriber base of 228 million and will likely to end with a subscriber base of 332
million – a full century. The telecom industry expects to add at least another 90
million subscribers in 2009 despite of recession. The Indian telecommunications
industry is one of the fastest growing in the world and India is projected to become
the second largest telecom market globally by 2010.

28
6. IT

Recent news shown that Indian IT sector will grow 30 to 40 per cent next
year. And on the other side to survive in current slowdown, industries have to
decrease the cost and for that they will resort to customised IT solutions which will
further boost up the software solution demand.

India is fast becoming a hot destination for outsourced e-publishing work. As

per a Confederation of Indian Industry (CII) report, the industry is growing at an
annual rate of 35 per cent and India’s outsourcing opportunities in the value-added
and core services such as copy editing, project management, indexing, media
services and content deployment will help make the publishing BPO industry worth
US$ 1.46 billion by 2010.

7. Health care

India in case of health care facilities still lakes the adequate supply. In health
care sector also there is huge gap between demand and supply at all the levels of
society. Still there are so many urban areas were you could hardly find any multi
specialty hospital. And in case of metros the market sentiments itself created a need
of psychological consultation.

Healthcare, which is a US$ 35 billion industry in India, is expected to reach

over US$ 75 billion by 2012 and US$ 150 billion by 2017. The healthcare industry
is interestingly poised as it strives to emerge as a global hub due to the distinct
advantages it enjoys in clinical excellence and low costs.

29
8. Luxury products

The high and affluent class of society will not be affected much by this global
crises even if their worth is reduced significantly. They will not change their
lifestyle and will not stop spending on luxurious goods. So luxurious product market
will not be affected and in fact to maintain the lifestyle those affluent will spend
more for it. Luxury car makers are pouring in to woo the nouveau riche (Audi,
BMW are the most recent entrants).

9. M&A & Marketing Consultants

As in the current business slow down survival will be the main focus, the
marketing and management consultants will be called for to reduce the costs and to
show the ways to survive and stay in market. Others may join hands to fight with
this situation together will call for the Marketing & M&A consultants. In a booming
market there are growth strategies and M&A opportunities to advise on. When
businesses are cutting back, consultancies will be right there to help clients decide
where to wield the axe.

According to Ministry of Commerce and Industry’s estimation, the current

size of consulting industry in India is about Rs 10000 crores including exports and is
expected to grow further at a CAGR of aproximately 25 per cent in next few years.

10. Media and Entertainment

30
 In current bad times, where people are losing jobs and getting enough time to
watch TV, they will seek entertainment at home and hence advertising revenues will
increase for the commercial channels. Also businesses like production of religious
texts and religious materials, religious channels will do well. The TRP of religious
channels will increase compare to the other entertaining/commercial channels.

According to a report published by the Federation of Indian Chambers of

Commerce and Industry (FICCI), the Indian M&E industry is expected to grow at a
compound annual growth rate (CAGR) of 18 per cent to reach US$ 23.81 billion by
2012. According to the PWC report, the television industry was worth US$ 5. 48
billion in 2007, recording a growth of 18 per cent over 2006. It is further likely to
grow by 22 per cent over the next five years and be worth US$ 12. 34 billion by
2012.

31
CHAPTER 9

Global economic slowdown and its impact on the Indian

IT industry

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.

32
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.

33
CHAPTER 10

Structure of the global IT industry Growth of global IT economy

The global IT industry has matured over the years and has emerged to be a
chief contributor to the global economic growth. The global IT sector, constituted by
the software and services, Information Technology Enabled Services (ITES) and the
hardware segments, has been on a gradual growth trajectory with a steady rise in
revenues as witnessed in the past few years. 2008 was a strong year as the number of
contracts; the total value and the annualized contract values exceeded that of the
preceding year. Among all users above average growth was witnessed in the
government, healthcare and the manufacturing segments.

The global software and services industry touched USD 967 billion, recording
an above average growth of 6.3% over the past year. Worldwide ITES grew by 12%,
the highest among all technology related segments.
Hardware spend is estimated to have grown by 4% from USD 570 billion to nearly
USD 594 billion in 2008. Currently, the global IT industry is experiencing a slump
with the recessions in the US and many industrial
countries with the level of impact varying by country / market and industry.

Forrester in its recent report has predicted that the US IT market will dip to
1.6% in 2009, down from 4.1% growth in 2008 (see figure below). The Asia Pacific
region, using a weighted average1 of local currencies, will do a bit better in 2009,
with 3.1% growth.

16.0%
14.0%
12.0%

34
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%

The Western and Central Europe markets will have growth in local currency
that is closer to 1%. By 2010, the US market will shift to 7.3% growth, not far
behind the 9.5% growth in the other Americas, well ahead of the 5.5% growth in
Asia Pacific and 5.3% growth in Western and Central Europe.

The global IT sector, constituted by the software and services, Information

Technology Enabled Services (ITES) and the hardware segments, has been on a
gradual growth trajectory with a steady rise in revenues as witnessed in
the past few years

8.0%
5.3%
4.8%
7.3%
5.5%
5.3%

2005

2006 2007 2008* 2009* 2010*

35
Structure of Indian IT industry

The IT-ITES industry in India has today become a growth engine for the
economy, contributing substantially to in the GDP, urban employment and exports,
to achieve the vision of a powerful and resilient India. While the Indian economy
has been impacted by the global slowdown, the IT-ITES industry has displayed
resilience and tenacity in countering the unpredictable conditions and reiterating the
viability of India’s fundamental value proposition.

Value proposition

The main reasons for the successful establishment of software companies in

India and its strong performance can be attributed to the following:

• Cost advantage

Given the labor market conditions in India, there exists substantial scope of
cost arbitrage for performing services from India. This, along with a large pool of
talented and English people labor force, was the genesis of the IT sector’s
dominance in the world IT services industry

• Breadth of service offering and innovation

Service offerings have evolved from low-end application development to

high-end integrated IT solutions

36
• Quality / maturity of process

Having made its mark as a center of low-cost and wide range of service
offerings, the Indian IT / ITES sector has also proved its mettle in the quality of the
service offerings, as demonstrated by the fact that it hosts more than 55% of SEI
CMM level five firms and the highest number of ISO certified companies

• Ease of scalability
The vast and trained labor pool of technically competent, English speaking
people has made it easy for the Indian companies to enter and exit this industry.
Moreover, the ease with which a company can scale its operations (up or down) has
been a great value driver for the success of the Indian IT / ITES service sectors
growth story

37
Global IT and Indian IT offshore

Today’s escalating, competitive and demanding environments have forced

companies to be more efficient, operate leaner and continuously create new
procedures to keep ahead of competitors - adding final consumer value to a product
or service in the form of lower prices, quality and better service has become an
essential requirement in the global marketplace. Corporations are trying to adapt
with increasing competitors’ innovations to find global opportunities and resources,
focusing on core competencies and mutually beneficial relationships, and finally,
outsourcing those activities which can be performed more quickly and at lower costs
by subcontractors. In a globally economy, outsourcing is leading to overall benefits
for the source economies, providing significant monetary and employment benefits.
India has become a target destination for multinationals to back end their IT
operations in India owing to its strong value proposition. We have witnessed an
increased use of offshoring by global and European outsourcers, and the emphasis
on productivity and delivering value by select Indian players.

The Indian IT / ITES sector can be viewed from two - Indian global IT and
Indian IT offshorer. globally IT companies are increasingly looking inwards and
focusing on process benchmarking, enhanced utilisation of infrastructure and talent,
increasing productivity and greater customer engagement. global companies with
roots in India are increasingly ‘offshoring’ work in order to cut cost, as a result of
which India is witnessing a revenue growth.

On the other hand, as the offshore market is getting tighter, the Indian IT offshorers
are facing hard times in getting contracts or replenishing their orders. The crisis in
the U.S. financial services sector will have an impact

38
in the short term on Indian outsourcers, as new projects may get delayed. This has
impacted the revenue flows and would need a substantial increase in SG&A to ramp
up their volumes. In spite of the negative effect of the outsourcing business, there
has been relatively lesser impact on the Indian IT growth due to the offsetting effect
of the favorable revenues on account of the global IT offshorers.

India has become a target destination for multinationals to back end their IT
operations in India owing to its strong value proposition

39
Impact of the recession on IT sector in the Indian economy

The current global economic slowdown has made it a roller coaster ride for
the world economies. Asia / Pacific is experiencing a deferred impact due to the
“domino effect” of the current crisis. With the expectations of a sluggish GDP
growth and consequent reduction in IT spending, countries / markets which have a
higher dependency on the export markets are expected to be affected more than
other countries / markets with stronger domestic demand.

India being one of the world’s fastest-growing tech markets, thriving mainly
on exports is also experiencing the tremors of the global economic crisis. IT
spending as a percentage of revenue normally varies from 3.5% in manufacturing
companies, 5-6% in global retail chains to about 9.5% in the banking industry.
These could see marginal decline as companies will tend to hold spends on new IT
deployments.

Future outlook

Fogged out

2008 was a transformational year for the Indian Information Technology-

Information Technology Enabled Services (IT-ITES) sector, as it began to re-
engineer itself to face the challenges presented by a macroeconomic environment
which witnessed substantial volatility in commodity prices, inflation, and decline in
GDP rates, cross-currency movement, finally culminating in the economic
downturn. In an increasingly globalised world, significant complexity and
uncertainty is getting attached to this unprecedented economic crisis. The Indian
economy has also been impacted by the recessionary trends, with a slowdown n
GDP growth to 5%. The focus and exponential growth in the domestic market &

40
presence of global IT offshorers has partially offset this fall, resulting in net overall
momentum. The slowdown is expected persist, as lead indicators of US economic
health (the US accounts for 40% of global IT spend) continue to be extremely
negative. That being said, India may be better positioned for a quick recovery and
for future growth than many of the other developing economies. There is a sense that
the international institutions will be remade to reflect the current balance of power,
and that India may be able to turn this crisis into “a permanent place at a new high
table”.

The current situation however looks fogged out, with no clear visibility. Some
hitches faced by the IT industry are;

• Uncertainties high: Churn in client base, elongated sales cycles and headwinds
from a harsh currency environment render high uncertainties for IT companies

• Signs of revival in the US appear bleak, at least in the near future: Conference
board’s 10 Leading Economic Indicators (LEI) continue to be negative,
showing no signs of near term revival

• Price cuts to hit margins: With volumes drying up,companies are expected to
cut pricing in favour of volumes

• Revenue visibility fogged out: IT companies normally have a one year

revenue visibility of >60%. However, with an already stressed client base,
given the prevailing tough environment, revenue visibility appears fogged

41
• Uncertainties weigh on valuations: Current valuations factor in the rapidly
deteriorating environment and the same is expected to remain depressed until
companies improve revenue and

• Powerful forces are driving change in the IT services market, including:

• The current tough economic condition is driving many companies to look to

outsourcing as primarily a cost-cutting initiative. To meet their needs the
providers are now investing in delivery centers around the world beyond
India, although it remains as the leading offshore services destination

• The current economic condition spares no vendor. Even the growth of the
once highflying Indian providers has moderated considerably, driving many to
further their efforts and focus on the European market

• Cloud computing and SaaS paradigms are redefining how computing

resources can be accessed and paid for

• The boundary between software and IT services business models are blurring,
leading to each encroaching on the other’s space

42
CHAPTER 11

RECESSION

• India is also fast becoming a hot destination for outsourced e-publishing work.
As per a Confederation of Indian Industry (CII) report, the industry is growing
at an annual rate of 35% and India’s outsourcing opportunities will help make
the publishing ITES industry worth US$ 1.46 billion by 2010

• With growing interest in utility type models, software and IT services

business models are converging with software companies, incorporating IT
services and software as a service (SaaS), while IT services providers are
architecting and selling asset-based offerings that do not rely solely on
leveraging labor as the underlying ingredient for revenue and profit margins.

• Virtualization will tend to be a growth catalyst in the software market and

open source software a possible alternative to the proprietary software which
is still perceived as the more-expensive option Looking Ahead As we look
ahead India would recognize need for transformation and change. Indian IT
services industry landscape has graduated from being a low value long term
services provider offering cost and labour arbitrage to provider of high value
one time / long time services such as discrete and end to end outsources
facilitated by its scalability.

43
 Expansion into tier 2 / 3 cities can reduce pressure. Currently there are seven
centres that account for over 95% of exports. By 2018, it is forecasted that 40% of
IT / ITES exports will originate from non-leader locations. The potential of near
shoring needs to be tapped fully, as customers are on the lookout for the
geographically close and culturally similar centres.

Key global sourcing drivers will continue to be cost, access to talent, business
improvements, increasing speed-to-market and access to emerging markets. The
Future outlook for all these drivers is positive, leading to
increased momentum for global sourcing.

Productivity Interest rate spreads show a bull steeping Improving consumer

Improving data on new orders for consumer goods, capital goods and vendor
performance

Source: Centrum research

03 FY 08 03 FY 09 02-03 FY 10 Time

Few emerging trends

• Verticalisation of IT services is a definitive emerging trend and users are

demanding services tailored to their needs. Mature IT customers are today
looking total solutions that can solve their business challenges rather than at
IT hardware, software, and services as discrete elements

• The sector is also eyeing remote infrastructure management services “as the
next big opportunity” after the success of ITES. India is “well positioned to
capture a disproportionate share of this growth by 2013 that is about $ 13 to $
15 billion out of the total potential annual revenue of $ 524 billion, from the

44
 current share of $ 6 to $ 7 billion”, a report by Nasscom and McKinsey said
India’s exports have been hit due to the global financial crisis. India has a
large domestic market that can help to offset the export business. Gartner
expects some impact on IT services providers that rely on offshore discrete
projects coming in from the U.S. and Western Europe where projects are
being scaled back or cut. To counterbalance the offshore work, these IT
services providers will most likely focus on India.

India’s burgeoning domestic market, fuelled by the economic growth will be a

one of the focal points For the IT sector in the coming days. As the Indian economy
further opens up, other verticals including manufacturing, travel and tourism,
healthcare and entertainment will increasingly look towards IT to increase
competitiveness. For both new and existing verticals, the Small and Medium
Business (SMB) segment will represent an important source of growth for the
domestic IT services market.

While the 2009 outlook for global technology related spending is affected by
the recessionary environment, a rebound is expected from 2010 onwards. The
opportunity for India is tremendous since currently it accounts for just over 4 % of
worldwide technology related spend. Additionally, growth in global sourcing is
estimated to be almost four times that of technology related spend. India currently
generates the bulk of its IT-ITES revenues from the US, and the BFSI sector, while
accounting for a miniscule part of technology spend in other geographies and
verticals.

The BFSI sector one of the largest spenders on IT and one of the worst hit in
the current economic slump. With the trouble brewing in the BFSI sector, the

45
industry focus is likely to shift to areas such as manufacturing, healthcare, retail and
utilities.

Indian service providers are increasingly engaging in M&A activity as they

seek to expand their customer base into new geographies. India-based providers
demonstrated in H1 2008 an appetite for making acquisitions, particularly in
geographies or countries where they wanted to grow their customer base. Companies
like Wipro, TCS, and Infosys were all near the top of the list of most actively
partnering service providers; between them, they account for 41% of all the
partnerships.

Sustained demand, robust fundamentals and a supportive business

environment will help realise the significant potential the IT-ITES industry offers,
both for exports and the domestic market. The Indian IT-ITES industry is now at a
critical point in its evolution. Behind it stands a decade of stellar performance which
has left a deep imprint on the Indian economic and social landscape. Moving
forward, it faces a transforming macroeconomic environment, rapidly changing
customers and needs, evolving services and business models, and rising stakeholder
(employees, investors) aspirations. These forces are expected to redefine the nature
of demand and supply for the industry, and also redefine the strategic imperatives
for businesses in 2009.

Indian economy further opens up, other verticals including manufacturing,

travel and tourism, healthcare and entertainment will increasingly look towards IT to
increase competitiveness

46
 Conclusion

Over the past couple of months, fears of a slowdown in the United States of
America have increased. The impact of the sub prime crisis along with a slowdown
in mortgages has led to a significant lowering of growth estimates. Since the United
States dominates the global economy, any slowdown there would have an impact on
most of the global economic variables.

For India, it could mean a further appreciation in the rupee Vis--Vis the US
dollar and a darkening of business outlook for sectors dependent on US companies.
The overall impact of a US slowdown on India would, however, be minimal as the
factors driving growth here are more local in nature. Unlike the rest of Asia, India is
a strong domestic demand story, so any slowing in the US is likely to have a more
muted impact on India. Strong growth in domestic consumption and significant
spending on infrastructure are the two pillars of India’s growth story. No sector has a
dominant influence on earnings growth and risks to our estimate are limited.
Corporate India is also learning to master the art of efficient capital management,
reduction in costs and delivery of value-added services to sustain profit margins.
Further, interest rates are expected to be stable primarily due to control over
inflation and proactive measures undertaken by the RBI.

47
 Bibliography

1. www.google.com

2. www.harvard.org

3. Wikipedia

4. IT & Recession Blog

48