Lifeline for IT

The information technology (IT) sector is witnessing a revival at a time when policymakers are scraping the bottom of the barrel for fresh ideas to shore up the economy. An improving economic trajectory in the US and Europe, higher global technology spending and sustained rupee depreciation have helped the top five software companies defy broader trends to deliver a 14 per cent growth, in dollar terms, in the latest June quarter. The Government should do everything possible to ensure this growth is sustained and also make sure it percolates to mid-sized and smaller companies in the sector.

Very few export-oriented industries in India are capable of converting the rupee’s 17 per cent depreciation into a significant competitive advantage. But the IT sector, if it puts its mind to it, can do so. For one, IT service providers, with their skill-intensive business models, aren’t hamstrung by poor economies of scale, high costs of credit or infrastructural bottlenecks. Two, having earned a global reputation for quality and reliability, Indian software vendors are well-placed to negotiate mutually beneficial prices with their global clients, unlike smaller and more vulnerable manufacturer exporters. Here, the rupee’s status as one of the worst performing global currencies offers a good opportunity for Indian vendors to wean clients away from emerging off-shoring hubs such as the Philippines and Latin America. It may also help them steal a march over multinational giants such as Accenture and IBM in bagging large contracts that are coming up for renewal this year. Reduced hedges against the dollar, in recognition of the structural weakness in the rupee, will also allow depreciation benefits to be reflected in their numbers in the coming quarters. Finally, with the revival in discretionary spending, top-tier players will hopefully revive their efforts to move up the value chain by offering high-margin services such as consulting and other models that generate non-linear growth (growth that isn’t linked directly to headcount).

Under the circumstances, the only looming risk for Indian IT vendors is the US Immigration Bill, which proposes to cap the number of H1 B and L1 visa holders employed onsite. If implemented in its original form, this would have posed a serious threat to the off-shoring business model. The Bill may well be watered down, something the Indian Government must lobby for. If it goes through in its original form though, India must consider reinstating incentives such as the Minimum Alternate Tax exemption or tax waivers for units located in SEZs, so that the Indian IT sector doesn’t lose its hard-won competitive edge.

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