Effect of Global Economic Crisis on the Indian IT and BPO Sector

The ongoing global economic crisis has affected the Indian IT and BPO sector in multiple ways. For starters, it needs to be mentioned that the Indian IT and BPO sector has been a net gainer because of the crisis since companies in the West are looking at ways to cut costs and hence they have increased the pace of outsourcing. This has resulted in more business coming the way of the Indian IT and BPO companies because of the humungous cost advantage that these companies give to the clients in the West.

Next, the fact that the budgets for the IT companies in the US have not been slashed since the global economic crisis affected real estate, manufacturing and financial services more than the software services industry has meant that the pipeline of orders for the Indian IT and BPO companies has not dried up. Further, even the big banks and other financial institutions have been bailed out by the governments in the west meaning that their spend on IT has not changed drastically.

However, this rosy scenario is likely to change in the coming months since the next phase of the economic crisis threatens to engulf the software services market. This is because until now, the central banks in the west have been pumping money into the economy because of which the pressure on companies to survive has been staved off. Moreover, since outsourcing cuts costs, the clients in the west were not thinking of trimming their IT budgets. This is set to change with no further monetary stimulus coming the way of the economy in the months to come which means that companies in the west would be facing top-line as well as bottom-line pressures. Further, with the overall economy slowing down and the anti-outsourcing rhetoric heating up in the United States, the prospects for the IT and BPO sector looks bleak.

With the growing concerns over the Eurozone debt crisis and the ability of the global economy to withstand further shocks to the system, there are mounting pressures on the IT and BPO sector to attract new clients and retain existing ones. This means that the unknowns in the form of the impact that the sovereign crisis would have on the global economy is yet to be quantified and factored into the calculations of the IT and BPO companies. A positive aspect though is the fact that the falling rupee versus the dollar has meant that the Indian outsourcing companies are reaping the effect of the depreciation in terms of higher rupee revenues. This also increases the competitiveness of these companies since their services cost less in dollar terms.

Overall, the outlook for the Indian IT and BPO sector can be said to be in a wait and watch mode with the headwinds from the converging crises likely to make a difference to their prospects. Hence, without being bearish or overly gloomy, the best bet would be to assess the impact through financial modeling and then take necessary steps to mitigate the possible impact. This would be discussed in detail in the subsequent articles.

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