How much will India's tech sector be hit by the US recession?

Posted by: Manjeet Krpalani on January 8, 2008

India’s tech stocks have lost their sex appeal these days. Stock prices are in the doldrums, the industry has been off the headlines for months. There’s a reason why. For one, India has other, more exciting growth industries like retail, auto, real estate, infrastructure as also the evergreen and growing financial services sector. But also, the outsourcers are likely to take a hit with the onset of the recession in the United States, their main market.

Infosys Technologies is coming out with their quarterly results by the end of the week. Guaranteed the management will say they won’t be hurt, that in times of recession, companies outsource more, not less, to save costs.

But many tech executives in India are skeptical about projecting such a cheerful outlook. The more cautious ones say that sure, in the medium term, India will do okay. But in the short term, it will be hit. In the first year of a recession, US companies typically freeze IT and other budgets, and spend money on severance packages and incentives to let people go. After that, they’ll think about how to cut costs further.

So the short term picture won’t be that great. The recession is coming on top of a strengthening rupee which is already hurting the outsourcers - not many are sophisticated hedgers. The gloom will not be so visible in the industry - thanks to high attrition rates, Indian employees won’t have to be laid off as fewer new contracts come through.

It may not be such a bad thing. With lower attrition levels and fewer new hires, the industry will get a much-needed breather from its break neck speed growth.

Reader Comments

Purnendu

January 10, 2008 1:44 AM

Now Comes the WAR.... Get Set Go

Sankar

January 10, 2008 3:46 AM

The Top 5 Indian IT may firm may not grow 30% this year. However I don't see them reporting losses as well. They will continue to get new projects however the billing rates will be under pressure since the US customer will start negotiating more.

The Top 5 guys will continue to recruit fresh college grads and I don't think there will be major pay rises for the existing employees

manbearpig

January 11, 2008 11:03 PM

Are we now really saying the US is in a recession?
Manjeet, when the Indian IT firms were growing at "break-neck" 50%, the US economy was not. In fact, much of the breakneck growth happened when the US was in the dot-com bust phase.
What does a major corporation do when it has to cut costs because of a "recession"? It cannot cut off customers surely. It will probably offshore more.
The Indians are in for the ride. Get your popcorn and enjoy the show. Put some money on one of those Indian tech ADRs while you're at it.

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