Karnataka

Country’s IT sector finds itself on a slippery slope

For financial journalists this is the season of results, when companies release details of their performance during the preceding quarter. This year there is an air of expectancy. There is a general consensus among journalists covering the beat that the IT (information technology) industry, after a prolonged boom, is entering a downturn.

Infosys, which is usually the first off the block when it comes to announcing financial results, released details of its performance in the second quarter on Friday. The imprint of the still-unfolding financial crisis in the U.S. is clearly visible in its results. Revenues have increased by over 30 per cent in the last quarter compared to the same quarter of last year. However, in dollar terms, the increase is only 5.3 per cent. What this means is that the company has found it much harder to charge more from its customers in the last quarter. In business parlance, they would say “margins are under pressure”.

Infosys’ performance looks healthy because of the depreciation of the rupee against most of the major currencies, including the dollar. In the second quarter of 2007, the average value of the dollar (mentioned by Infosys) was Rs. 40.19. By the end of the last quarter (September 30) the dollar had strengthened to Rs. 44.50.

Since then, within a matter of ten days, the rupee has relentlessly lost ground. On Friday it hit its all-time low, touching Rs. 49.30 to a dollar. The point to be emphasised is that things look rosier when stated in rupees now because the same number of dollars earned by companies such as Infosys earns it more rupees simply because the dollar has strengthened.

It has been evident that the Union Government and the Reserve Bank of India (RBI) have decided to let the rupee depreciate, ostensibly to promote exports.

But there are limits to what can be achieved by this ‘jugglery’. More importantly, there are costs to be paid by adopting such a policy course, the most important being stoking inflationary pressures.

While a depreciation of the rupee does make exports competitive, it also makes imports costly. One of the most important consequences would be a much bigger fuel bill because India imports about three-fourths of its crude oil requirements.

The U.S. financial bubble has been deflating for more than a year now. Infosys, like many other IT companies, initially said they would be immune. Outsourcing, these companies said, was here to stay; there was no way that outsourcing as a business would go out of fashion, they claimed.

Later, they said their efforts at diversification in European, Asian and other non-U.S. markets would give them a measure of protection. Still later, as they started to feel the heat because of the appreciation of the rupee, many IT companies started talking the lingo of the financial whiz kids. Hedging, they said, would protect them from adverse currency movements.

It is now well known that several companies — IT as well as in manufacturing — have bet and lost heavily because of the two-way movement of the rupee vis-À-vis most of the major currencies. Clearly, there is nowhere to hide now.

It is estimated that revenues from banking and financial services constitute between 30 and 40 per cent of the revenues earned by the Big Five in the IT business. It is also estimated that a large part of the services provided by IT companies to what is classified as telecom services, is actually tied to banking activity in the form of ATM and other electronic services provided to the finance industry.

Following the unravelling of the financial system in not only the U.S. but across Europe, Japan and other parts of Asia, many of these clients no longer even exist, or have been swallowed by other entities.

Sandhya, an IT professional with one of the Big Five says, “For a long time IT professionals felt they were somehow very different from those working in old-fashioned manufacturing. This crisis, like any other, is going to be a great leveller.”

V. SRIDHAR

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