India's IT industry faced rough times when the global financial crisis deepened in the US and Europe. Since the US GDP contracted and liquidity dried up, many companies resorted to cutting costs and laying off employees. Unemployment reached new heights. Since there was so much of uncertainty all around, companies in the US were wary of outsourcing to India. This is despite the undeniable fact that outsourcing was the best solution for companies to pare costs. The issue of outsourcing became a big political issue in the US given that unemployment showed no signs of cooling off. And so there were concerns on how this changed landscape would impact Indian IT companies.
Most Indian IT companies have reported stronger results for the past few quarters. But there are many issues which continue to pose problems for the industry. The first is the fact that visa fees have been hiked for professionals working in the US. This is bound to jack up the overall costs of companies.
The second is labour itself. India so far has prided itself on its low cost labour advantage. But this labour may now not be so cheap after all. Companies are competing for staff and paying substantial premiums for employees. High inflation rates too mean workers are demanding higher wages. That's not all. Attrition rates in India's IT sector are also rising. For instance, as reported in the Wall Street Journal, at the end of June, Infosys's attrition rate for the prior 12 months had spiked to 15.8%. That's higher than what it has been in the past five years.
Volatility in the currency is also another issue that IT companies will have to grapple with. Foreign money has surged in India as investors look for greener pastures on the back of the ongoing recession in the US and Europe. This has led to the rupee appreciating with little intervention from the central bank. A one percentage point rise in the rupee against the dollar hurts earnings of the top three IT companies by 1.2% to 1.5%.
However, the top three IT companies in India have displayed great management skills and strong financial performance in the past. And so, there is no reason not to assume likewise going forward.