Global

Financial
Meltdown and
the IT Sector
in India
e-Monograph Series- Web-India Books
2008

K.M.SEETHI
[November 2008]

WIB e-Monograph Series 2008/11

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Global Financial Meltdown and the IT Sector in India

K.M.Seethi

There is hardly any doubt that the financial meltdown currently sweeping across the
world is the worst after the Great Depression of 1929-30. It foreshadows its most awful
effect on the world economy, and the worst impact of it will be felt, sooner or later, in
the developing countries. The hub of the global capital—the United States, Europe
and Japan—witnessed unprecedented recession, takeovers, and state intervention.
What accounts for the train of events that eventually led to the collapse of the ‘big
capital’? Many attribute this to the sub-prime crisis in the US and the reluctance of
both the institutions involved and the regulators to correctly estimate the
consequences of that crisis on their financial sustainability. It is true that many of these
institutions have, all these years, been tenaciously engaged in concealing those
impacts. But the crisis is much more than mere ‘miscalculation,’ ‘poor estimates’ and,
eventfully, manipulation. It is deeper and systemic, raising questions of sustainability
of speculative capital, within and across nations, and the unbridled/unregulated
market. Whether the governments can always positively intervene to control the
damage and trim down its aftereffects is yet be seen. Admittedly, neoliberal state has
currently little choice but to step in when major financial institutions, at the core of
the capitalist world, are on the verge of collapse. However, to get on with this
package of state intervention would generate a new set of contradictions as the crisis
is deeper and systemic. The State intervention cannot be justified to rescue the ‘casino
capitalism’ as the tax payers’ money is being diverted to cover the costs of gambling,
malpractice and all kinds of financial skullduggery.

The impact of the global meltdown on the economies of the developing countries has
already been felt. Those countries which have been dependent on the US, EU and
other global market are under stress as their export opportunities are considerably
curtailed. For instance, the financial meltdown in the global markets has had an
impact on the IT and BPO sector, which has targeted to achieve an export revenue of
60 billion US dollars. According to National Association of Software and Service
Companies (NASSCOM), the United States is one of the largest contributors to the
revenues of BPO companies, as much as 60 per cent. The US financial sector, in turn,
is one of the largest customers and the liquidity crunch that has hit these companies
will directly cause them to start rethinking. But it says that the future hiring rate of
BPOs will be far worse off. The BPO employment rate is projected to decline by 60
per cent within a span of one year.

According to a report released by NASSCOM, the BPO and KPO industry together
generated Rs 1,160 crore revenue and provided employment to 7 lakh people in
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2007-08. The share of the US in the Indian BPO-KPO export market was 61 per cent
making it the largest contributor to exports in the segment in 2007. Information
Technology: Annual Report 2007-08 of the Ministry of Communications and
Information Technology, Government of India says that the Indian software and
services exports including ITES-BPO were estimated at US$ 40.3 billion in 2007-08, as
compared to US$ 31.4 billion in 2006-07, an increase of 28.3 per cent. The IT services
exports were estimated to be US$ 23.1 billion in 2007- 08 as compared to US$ 18.0
billion in 2006-07, showing a growth of 28.7 per cent in 2007-08. Export revenues
from ITES-BPO were estimated to grow from US$ 8.4 billion in 2006-07 to US$ 10.9
billion in 2007-08, a year-on-year growth of over 29.8 per cent. The US and the UK
remained the key markets for Indian IT-BPO exports (excluding hardware),
accounting for nearly 80 per cent of the total exports. It may be noted that these two
markets account for the largest share of worldwide technology spends. The high
market share of the US and the UK, in Indian IT-BPO exports, eclipsed the growth
achieved in other markets – across Continental Europe and the Asia Pacific, some of
which were also witnessing significant year-on-year growth. The total IT Software and
Services employment was expected to reach 2.0 million mark in 2007-08 (excluding
employment in Hardware sector), as against 1.63 million in 2006-07, a growth of 22.7
per cent. This constituted a net addition of 375,000 professionals to the industry
employee base last year. The indirect employment attributed by the sector was
estimated to about 8.0 million in year 2007-08.

Notwithstanding such high projections, experts say that the setbacks in the global
economy will adversely affect India’s exports, especially its exports of software and IT-
enabled services, more than 60 per cent of which are directed to the United States.
International banks and financial institutions in the US and EU are important sources
of demand for such services, and the difficulties they face will result in some
curtailment of their demand. Further, the nationalization of many of these banks is
likely to increase the pressure to reduce outsourcing in order to keep jobs in the
developed countries. The debacle in the US would, no doubt, create a lot of
uncertainties regarding the continuity of current financial services contracts and also
raise doubts as to how the future contracts are signed with the US financial
companies.
The employment scenario in the KPO-BPO industry projected so far is going through
an extremely uncertain phase and this, in turn, might have an impact on the growth
in this industry. India's outsourcing business is growing very fast and expected to
touch $40.4 billion. It gives millions of job to India's large pool of English-speaking IT
workforce. India's cheaper wages have kept it ahead in the race against strong rivals
like China, Philippines and Vietnam, and helped attract business from western firms,
yet, global financial turmoil and economic slowdown in the US is bound to take their
toll on India's IT-BPO sector.

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With the global financial meltdown, it would seem that India has a lot to worry
about. The country's annual revenues from outsourcing exceed $40 billion, and a
downturn in the U.S. economy could damage India's outsourcing industry. Much has
been written about US President-elect Obama's stance on outsourcing. During the
presidential election campaign, Obama said, "We have to stop providing tax breaks
for companies that are shipping jobs overseas and give those tax breaks to companies
that are investing here in the United States." However, there are optimists in India
who say that Obama's plans to cut down on outsourcing will not pose a threat to the
Indian IT-BPO. They are hopeful that India’s expertise in several areas of outsourcing
will always attract new projects from the US. Though optimistic they are, the IT
experts in the country must engage in a reality-check and look forward to have new
ventures in other parts of the world where others have very little comparative
advantage. This is, perhaps, the greatest challenge that the IT sector in India is to
grapple with in the immediate future.
The author is Director, School of International Relations and Politics (SIRP), Mahatma Gandhi University. He is also Chairman,
Centre for Cross-National Communication in South Asia, SIRP, Mahatma Gandhi University, Kottayam, Kerala, India.