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Indian IT: Where to go? - Views on News from Equitymaster
 
 
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  • Apr 3, 2007

    Indian IT: Where to go?

    The US economy is said to be heading towards a slowdown. The US GDP, which grew at a rate of 3.5% in 2006, is expected to grow only at about 2% in 2007 (Source: CIA and Market Watch). That should sound alarming bells for Indian IT companies, who have been largely dependent on the US markets for growth. Large Indian IT companies, for instance, derive around 60% to 70% of their revenues from US corporations. While managements of most of the IT companies are still no suspecting any slowdown in IT budgets from the US, we take a brief look as to what could be done to remain prepared from any eventuality.

    Exports to US

    India's goods exports to the US are only 2.4% of the GDP. But what is worth noting is that after taking into account service exports, including software or business process outsourcing exports, this figure increases by about 1.5 %. For India, service exports are also a key driver of growth and form a major part of balance of payments.

    Where to go now?
    Notwithstanding the fact that technology officers of major global corporations in the US have indicated of a likely growth in their company's IT budgets, and their counterparts in Europe expect the spend to be flat, we believe that the increase in IT budget of some US companies will be in low single digits. While there may not be an absolute increase in their overall budgets, companies are expected to scale up in favour of outsourcing to offshore locations like India. Nevertheless, Indian IT companies have to look into different geographies to hedge their overall risk.

    We are of the opinion that the Indian IT companies, irrespective of their sizes, should extensively focus on its domestic operations. There are also vast opportunities opening up in new markets in the Middle East, Africa, South and Southeast Asia and Eastern Europe. The European market is expected to be worth US$ 210 bn by 2010 but here also the Indian giants could face competition from Nordic technology companies. India's supremacy in the IT and software sector and its growing reputation as one of the world's best outsourcing destinations have created a good basis for further expanding and diversifying exports to these regions. Indian companies will, however, have to make further inroads in the domestic market to avoid seeing domestic deals like those from Idea and Bharti Airtel going away to global competitors like IBM.

     

     

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