The Hindu Business Line : Banking on foreign markets

It could be economically sustainable for the IT industry to bank on the overseas market for revenues but the question that should be asked is if it is wise. The IT industry in India has largely been built and continues to thrive on the cost-arbitrage model. That is, IT industries will get the job done more cheaply in India than they would in countries such as the US and the UK.

While a lot of IT companies may like to argue that foreigners come to India "for the price, but stay for the quality" it is an indisputable fact that price is still the main draw. But as costs in India rise as they have been rising, the cost arbitrage advantage of India reduces. This is not to say that this arbitrage is about to disappear anytime soon but it will at some point of time. When it does, chances of Indian IT companies being able to compete with companies from other low-cost countries would drop. It is absolutely true that Indian IT companies have enormous advantages over IT companies from other low-cost countries but it is also a fact that the latter are catching up. China is case in point.

It is always said that a country has a better chance of being successful if it depends on its own population for faster growth rather than through an export model. East Asian countries grew big and fast on the export model but if one looks at their GDP components now, the domestic component is increasingly becoming larger. Countries such as China have realised that for a sustained long-term growth, they have to depend on their own population rather than the Americans. Besides, it also protects them far better if the US goes through an economic slowdown.

Ditto for IT companies. Having more dependence on the domestic market shields them from the vagaries of distant markets. One only needs to look at the IT meltdown at the dawn of the new Millennium to know what over-dependence on a foreign market can and will do.

(The author is Group Economist, Murugappa Group. The views expressed are personal. Send in your queries on economics to Whackonomics@gmail.com)

Sunil Rongala

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