India's IT sector faces tough times

In its mid-year review, the software association Nasscom has revised its forecast for software and services exports (IT & ITeS) for the current fiscal year of 2012-13 to 11 per cent, from the 11-14 per cent range indicated at the beginning of the year.

While this is, strictly speaking, not a downward revision, the implication is clear: any hope at the start of the financial year that things may get better further down the line has been belied.

At the lower end of the projected figure, $75 billion, exports will grow at nine per cent over last year's $68.7 billion. In 2011-12, exports grew by 16.4 per cent.

The compounded annual growth rate over the five-year period, from $31.3 billion in 2006-07 to $68.7 billion in 2011-12, works out to 17 per cent.

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So the software and services sector is clearly underperforming in relation to its recent record.

The current year is a tough one for the global economy, but the five years encompass the entire period of global economic turmoil beginning with US housing prices collapsing in 2007.

It will not be enough for Nasscom to derive satisfaction from the fact that this year the industry will achieve at least 10 per cent growth and the prospects for next year are "good".

Software exports are not doing as well as they used to and there should be a discussion on solutions.

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Export growth rates have decelerated for several reasons.

US economic recovery is neither confirmed nor robust; Europe remains in the doldrums; West Asia's strength as a growth driver has been curbed by the turmoil in the region; and the domestic market, whose growth can spread out overheads for the entire sector, is not performing to expectations.

The US banking and financial sector, the major customer of Indian IT, is still trying to find its feet, with investment banks not knowing what the future holds for them.

Compliance-related IT spending is not taking off since the regulatory scenario is still unclear.

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The promising healthcare sector is also partly in limbo as the extent of US states' adoption of President Obama's healthcare plan is still open.

Customer acquisition is progressing, but IT firms are relying on getting more purchase out of existing clients than new ones.

India can pray for US economic recovery to become thoroughgoing so that firms can resume their discretionary spending, which an increasingly maturing Indian industry is getting to rely on.

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But it needs to do more, like pay attention to the bottom end of the value ladder. Indian business process outsourcing, or BPO, is losing voice business to the Philippines. Such jobs are a boon to the educated unemployed.

The future is likely to get tougher. Indian firms will have to recruit more onshore to get closer to their clients and this will affect margins.

With the high margins enjoyed by the industry unlikely to endure, there is a great need to chase volumes.