The Great Indian IT Slowdown

Information technology has come a long way in India. The great slowdown of 2000 was a meteorite hit for Indian IT sending ripples to entire economy. IT has stablised a lot since then. A Boom in the BPO sector pushed it to a higher level but with a shaky factor of dependency on western outsourcing laws and thinking. According to the Centre for Monitoring Indian Economy, the offshore IT and BPO industries accounted for nearly 95 per cent of the absolute growth in foreign exchange inflows associated with services industries between 2000 and 2004. While total services exports grew by 60 per cent from US$16 billion in 2000 to US$25 billion in 2004, offshore IT and BPO exports tripled in the same period. This indicates somehow an exponential growth after 2005. In 2007 we are in a good position and can sense a stability.

The million dollar question is " Are we stable enough to sustain this growth for another 5 years?". I tried to put some facts in front and then answer the question above.

Fact 1 : India's software exports is heavily dependent on the support of STPI [Software technology parks of India] . The IT goods like Desktop PC's and servers are exempted from import duty. The only requirement is that the goods imported have to be in a restricted boundary and has to have a account which is verified by customs in every quarter or even monthly. Another advantage of operating in STPI controlled domain is that the income tax is exempted on overall income of the company.These all facilities were given to the IT industry in order to bring in a stablized and supported growth. These benefits given by the government accounts for a big share in the mammoth growth of IT in India.

At the closing of Financial year 2008-2009, The benefits given by STPI will be stopped. It means that the duty on software exports shall be levied. The import duty on IT goods will be levied. The Income tax exemption on IT export profits shall be removed. It all means a drastic drop in the IT profit margins.

With every problem there comes a solution. Government in order to nullify the effects has come out with a transition plan . It says in order to operate as earlier , companies need to operate out of an SEZ [Special economic zones..remember Nandigram]
so move your infrastructure to and SEZ or die, merge..blah blah. The one who can afford need to shell out 1 million dollar an acre of land and minimum land required for an SEZ is 25 Acres. On top of it you need to rebuild your infrastructure on that land. How many will sustain this zolt....Nevermind.

Fact 2: The rising Rupee may be giving a sense of achievement to we the Indians but at the same time a shiver in the spine as an IT worker. Imagine your current billing for IT services [in Dollars] drops drastically in 4 months because Indian rupee just got stronger. It would have been the case that rupee is getting stronger at a stable rate for past 10 years, IT companies could have managed to bring in some solution to handle it but what if it gets stronger by 7 rupees in just 4 months. Nowhere to go... nowhere to run...except face the losses.

Fact 3: The average attrition rate in Indian BPO is 30-40% where the peak of attrition in a single company going as high as 80 %. and how does it affect the business ....if a company has 100 people doing a certain job paid 25,000 and that turnover or attrition is running at 10%, the cost of attrition is:

(Total staff x attrition rate %) x (annual salary x 80%)

* 100 staff at 10% attrition means 10 people leave and are replaced each year.
* A replacement cost of 80% of a salary of 25,000 means the cost of each replacement is 20,000.
* The cost of turnover is therefore 10 x 20,000 or 200,000 a year.
* The oncost to the overall salary bill is 8%.


Now the above mentioned three facts are clear and fair enough to bring in temporary slowdown in IT till government wakes up and reconsider its decisions.