Obama cannot stop IT outsourcing

iGATE had a revenue of $250 million and about 7,000 employees in 2010 before it acquired Patni Computer Systems. After the acquisition, iGATE's revenues crossed $1 billion (Patni at that time had revenues of over $700 million) and its employee strength grew to over 27,000.

In an exclusive chat with Shobha Warrier, Phaneesh Murthy, CEO, iGATE, talks about the prevailing weak world economy, the US presidential elections, and outsourcing.

Do you feel the world economy is going back to what it was in 2008?

If you look around, it is evident that the world is in the cusp of a recession. Be it Europe, the US or Asia, and nothing is likely to change in the next one year.

In the US itself, at least 50 per cent of the economy, which is made up of banking and financial services, is under pressure.

Manufacturing, temporarily is doing well in the US but consumer sentiment overall is poor. So even those who have enough money to spend, are not in a mood to go on a buying spree.

Why do you think sentiments are poor? Why everybody is expecting a gloom period soon?

It IS a gloom period in the US with high rate of unemployment. It will take a long time for people to adjust to the new unemployment rate of 6-7 per cent. They are used to the 4 per cent rate. Due to the increased unemployment rate people feel depressed.

If (Barack) Obama comes back to power, taxes will go up. Thus the sentiment tends to be negative.

But Obama is talking about taxing the rich...

The truth is the rich are the ones who spend more money and they are the ones who create the most jobs. Small entrepreneurs and medium businesses are not hiring due to uncertainty on taxes and high health care costs.

Also, the return on investment is extremely low. You will see that the corporate deposit rate is mere 0.5-0.75 per cent. Therefore, negative sentiment prevails.

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Time once wrote that if US sneezes, the whole world catches cold. Does this hold true even today?

Yes, very much. For countries like India and China, US is an important market. Since the slowdown has been very sharp, there has been a clear impact on the Indian growth rate. Chinese growth rate also has come down.

Though India has a good 5-6 per cent growth rate, it too feels there is going to be a recession. Actually, when you come off a 9 per cent growth rate, 5 per cent honestly seems like a recession.

How big is the US market for iGATE?

For iGATE, 80 per cent of its business comes from North America and hence it is a huge market.

Do you think the economic situation will play a major role in the US presidential elections?

As far as foreign policy is concerned, both (candidates) have almost similar views. The difference boils down to how they handle it.

If you are a Romney fan, you may say that those who voted for Obama in the last election, will have a change of heart this time.

Because of unemployment?

Partly due to unemployment, and also because people had high expectations. They voted for history at that time. Sadly, Obama disappointed them.

As an Indian who does business in the US, are you also disappointed with Obama?

I expected this (Obama's policies). I am concerned with Obama's (views). He believes all CEOs are public enemies. I worked hard all my life to become a CEO and he thinks CEOs are only money sucking and greedy people. We work very hard for our employees, investors and shareholders, and we create jobs. He is also against outsourcing.

I feel Obama will win a second term and unfortunately we will continue to be under pressure - both as a country and also as an industry.

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In the last four years, how much has Obama's policies affected a company like yours, whose 80 per cent of the market is in the US?

He had many big and pressing problems in his current term. He, therefore, did not go after outsourcing with a vengeance. There are many companies close to the President, which have started in-sourcing many things. While there has not been regulatory support, clearly the mood has moved in a few companies.

Slowdown in the IT industry has more to do with market conditions than with Obama's policies.

When the country is reeling under high unemployment, is it not expected that the Head of the State will oppose outsourcing?

In my mind, anti-outsourcing is cheap talk. Indian IT industry has played a big role in making US companies more competitive and has created more jobs. IT outsourcing is a net job creator in the US. Rather than taking jobs away, outsourcing has contributed immensely to the US economy.

If Obama comes back to power and takes up outsourcing as a serious issue, what kind of impact will it have on the IT Industry in India?

At the end of the day, he cannot interfere too much because most of our businesses, about 98-99 per cent, is with private companies in the US. Each company in the US will have to do what is best for its shareholders. I think outsourcing companies like ours are good for shareholders.

His policies may slowdown the pace but I don't think his policies will be able to kill the pipeline completely.

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It was reported recently that Indian companies plan to hire more people in the US. Does that mean there will be a shift in the way you and other Indian companies hire in the US?

Yes, both iGATE and other companies are hiring more in the US. But the shift is because of the visa problems and also new regulations, especially in the banking sector, it require us to do more work within the US.

What kind of impact will it have on the revenue of the company?

It will negatively impact the margins. Compared to India, US based work tends to have lower margins.

The US is the biggest market for most Indian companies. With the kind of slowdown that is happening, will companies look at other markets?

There is nothing happening in most of Europe and hence it is difficult to expand there. Yes, many companies are looking to expand outside the US. For example, iGATE started the India operations recently.

After the US, which is the major market for the IT industry?

UK is the number two market. However, visas are difficult to organise in Europe. France is socialist and they don't like outsiders. Germany is a good market but there are cultural and language barriers. They get a lot of work done in the Eastern European countries.

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What is the mood in the Silicon Valley now?

Silicon Valley itself is doing much better. From a technology perspective, right now, it is humming there because of social analytic companies. Plenty of venture funding is also available.

Unfortunately, California, as an economy is doing badly. That is a cause for concern. California unemployment rate is over 10 per cent and it has a $16 billion budget deficit.

California as a state is probably more bankrupt than some European countries.

What kind of a growth do you target for iGATE in the next 3 years?

Our present revenues are just over $1 billion. Our mission is $3 billion by 2017.

Hiring has been on hold for many Indian companies. Will this scenario change soon?

Hiring will be dependent on growth of the industry. Since growth has come down, hiring has slowed down, too. Also, there is increased hiring in the US. That is the double impact.

You spoke earlier about single digit growth for the IT industry this year. Nascom, on the other hand, has stuck to its target of double-digit growth. Your comments...

Yes, I still stick by my prediction of IT industry's single digit growth this year. I see signs that lead me to believe it.

Many deals that companies won this year were against an existing player, unlike in the past where we used to win deals against customer's internal work. It may still be growth for individual companies but not for the industry.

In addition, the overall market still presents a big challenge, especially in the banking, financial services and insurance (BFSI) space, which is still about 50 per cent of the business.

Third, European market is not growing and I don't see an immediate recovery there.

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Where is the Indian IT industry placed globally?

Globally, Indian IT industry is number one and will continue to be so. But my criticism of Indian IT is its lack of innovation. We are a very strong services market but 20 years from now we will need IP (intellectual property). This is not happening.

Ten years ago, I had written an article where I had suggested that the first industry which will start generating world-class products from India would be the telecom industry because the country has a large domestic telecom market. We could build some products, try it out in the home market and use them across the world because phones are the same everywhere. Unfortunately, even that has not happened.

Whom do you blame?

I would blame our education system and lack of strong leadership. While the education system has helped the IT services business, the same system has gone against the products business because it does not encourage creativity and innovation.

It is the obligation of leaders to change these things. I don't think we have done enough of that.

When do you see the world coming out of the current recession?

I am an eternal optimist. I actually continue to believe that we are operating in a $1.5-2 trillion space. The Indian IT industry is only $100 billion. Hence, I think there are plenty of growth opportunities.

Regarding global economic recession, I would say it would take at least one more year for the recovery to happen. By the end of 2013 and early 2014, spending will start picking up.