Will Indian IT escape the US 'double-dip'?

BANGALORE, INDIA: Fears of another possible global downturn are slowly but surely gripping many in the country, especially those in the IT industry, with Standard and Poor's (S&P) downgrading credit rating of the United States and the sovereign debt crisis in European markets.

"This has led to a number of projections from analysts and economists indicating the possibility of a double dip recession in the US economy," said a statement from the National Association of Software and Services Companies (Nasscom).

The big surprise, according to Andrew Bartels, vice-president and principal analyst, Forrester Research, was S&P's downgrade of US securities from AAA to AA+.

"While that downgrade was not copied by the other rating agencies and in fact, had no impact on the prices of US treasury securities, it had a big psychological impact," he explained.

The impact on US and global tech markets would be slower though still positive growth in 2011 — "since half a year of good growth in 2011 is already in the books" — and even slower growth in 2012, added Bartels.

"Sad to say, though, the risks of a US recession that spreads to Europe, Canada, Latin America, and parts of Asia have increased, to around a 30 per cent probability."

Impact on Indian IT sector might be minimal

The impact on the Indian IT sector might be minimal in the short term, especially for large companies that work on multi-year long-term engagements, said Glen Serrao, engagement manager, Zinnov Management Consulting.

"Any impact due to IT spending slowdown could be reflected in the results of the Indian IT companies later this year or early next year. The biggest impact could be if USD is devalued and RBI chooses to allow INR to appreciate in comparison. This will definitely hit the Indian export sector as a whole and IT services in particular as almost 70 per cent of the revenue composition of this sector is exports," he contended.

The downgrade could impact the US financial system, explained Serrao, and hence, result in tightening of the IT spending by the BFSI sector that brought in almost 40 per cent of the revenue for the entire sector.

But, TK Kurien, chief executive officer, IT Business and executive director of Wipro Limited, dismisses the predictions of a possible slowdown.

"It is too early to make an assessment on the actual implication of the S&P downgrade of the United States. We need to see if this downgrade, along with the prevailing macroeconomic conditions, has any further impact on the real economy, which is primarily driven by consumer and business confidence."

He added that the structural weakness in the economy offered opportunities to IT services companies, as they helped global corporations variabalize their IT, thus making them fundamentally more adept to compete.

"Also from an industry perspective, we feel that the industry is far more prepared for any change in the negative macroeconomic environment now than we were in 2008."

Nasscom, too, sounds positive on the possibility of the IT sector getting affected by the global scenario. "The economic crisis in the US, unfolding over the last few days, does not have any major bearing on the country’s private sector. Although the global economic environment is a cause for concern, it is not likely to impact the Indian IT industry, in the near-term future," it said.

The US was, and would continue to be, one of the largest markets for India. In case of an economic slump, the Indian IT industry could actually strengthen its partnership with the US customers to build in greater business efficiencies, added Nasscom.

In this background, financial advisory Goldman Sachs has upgraded India's equity markets, as it saw a turnaround in the medium-to-long term with lower commodity prices, better valuations of stocks and promise of pushing reforms.

"Given the recent developments in the macro landscape, we are moving India to a market weight neutral stance from underweight, which we have held for over a year," said an analysts' report.

"We believe enough progress has been made to warrant a relatively more optimistic view."

Reflecting the belief, Kris S Gopalakrishnan, chief executive officer and managing director of IT major Infosys Limited, said, "We were able to react very quickly in the past (2008) when the recession happened. These responses are still fresh in our memory and I believe that the industry may be able to withstand another global downturn."

And, despite the economic concerns, the Indian share markets recovered on Wednesday, giving rise to the hopes that India has the power to withstand all the financial tsunamis in the global front.