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Wall St Blues: India’s IT Woes
The global crisis in banking has hit India’s IT sector hard, but the long-term prospects are not so bleak, writes Siddharth Srivastava.
The global crisis in BFSI — banking, financial services and insurance — is hitting India’s export oriented software and outsourcing sector hard.
International BFSI firms account for over 40 percent revenues for some of India’s top information technology companies that provide the back end support and implementation services.
IT sector analysts say firms should be prepared for “flat to negative growth for some of the top software players,” as businesses dry out. It could also result in a minimum loss of up to 50, 000 jobs in the near future.
Recruitment consultants say that 1 in 8 people employed in India’s banking and financial services and the IT sector risk a job loss due to the global financial meltdown. At least three top recruitment firms operating in India have said that many of their IT clients have asked them to stop hiring altogether.
The IT industry employs about 350,000 people in the BFSI space alone, with top six players accounting for almost three quarters of the jobs.
The recent depreciation of the rupee against the dollar due to Foreign Institutional Investors withdrawing their stock portfolio has come in as a relief and has been reflected in better second quarter results.
But, the medium- to long-term effects of Merrill Lynch’s desperate sale to Bank of America, Lehman Brothers filing for bankruptcy and AIG suffering huge losses are being felt.
Indian IT companies have already been feeling the pinch of the American sub-prime crisis for some time now.
The U.S. and the U.K. account for over 85 percent of India’s software and outsourcing business, with bulk of the revenue coming from the U.S. TCS, Infosys, Wipro, Satyam, Cognizant, HCL, Satyam, Patni, MindTree are among the top IT companies of India.
The top four IT exporters, Satyam, Wipro, TCS and Infosys have imposed a freeze on hiring of experienced professionals and deferred joining dates for many newcomers.
Industry sources say TCS, which earns nearly 45 percent of its revenue from financial services solutions and is India’s number one software exporter, has sent out letters to postpone joining dates up to a year.
In a step that sent shock waves and first highlighted that all was not well due to a faltering U.S. economy, TCS announced an unprecedented employee salary cut by 1.5 percent in the fourth quarter (January-March) this year. TCS has pruned the number of hires projected for the year from 35,000 to 30,000.
Earlier this year, Infosys Technologies, another big player, announced that it plans to hire about 25,000 people in the current fiscal, which is nearly 30 percent less than total recruitments in the last financial year, when 35,000 were recruited.
IBM India has reportedly asked 1,000 employees to leave.
Satyam and Wipro have said that they will not fire employees but have identified 4-5 percent of staff for performance improvement. This could translate into lower increments, bonuses, etc.
There may be more bad news as U.S. technology giant Hewlett-Packard has announced that it would cut 24,600 jobs globally over the next three years as part of its integration with computer services firm Electronic Data Systems.
The streamlining could impact the over 30,000 HP work force in India.
Entry-level hiring has also been impacted. According to a survey conducted by brokerage firm CLSA in 45 colleges, the class of 2009 has received nearly 17.5 percent fewer job offers compared to the previous year’s figures for IT hires.
Last year, top software firms collectively recruited nearly 7,500 employees from campuses in eight Indian cities. This year, the figure is close to 5,500.
Accenture emerged as the only large firm to have shown an increase in hiring numbers. Offers from Satyam and Wipro are 30-50 percent lower, while those of TCS and Infosys are lower by 15-20 percent.
A Satyam spokesman said, “We haven’t changed our 12,000-15,000 guidance for new hires — we will honor our commitments. We are in our silent period, and as of now, not commenting on specifics like joining dates.”
Infosys campus visits dropped nearly half from over a thousand last year, while Wipro visits were scaled down a third from 300.
Another indicator of uncertain times is declining attrition rates, as employees continue to be unsure about job prospects and firms hire less frequently, which is also reflected in lower overall salary pay outs.
According to the Associated Chambers of Commerce and Industry of India, overall salary payouts of top IT firms have thus only grown 25 percent in 2007, a big drop from a 65 percent rise in 2006.
The study closely looked at Wipro, TCS, Satyam and Infosys that account for more than 70 percent of the sector’s revenue.
However the Assocham study added: “Indian IT industry may be passing through a rough patch because of a slowdown in the U.S. economy and high inflation rates, but this stage will pass,” says the study
IT Industry observers say that the attrition rate in the sector is down to 20-25 percent from the highs of over 50 percent a couple of years back.
According to S.V. Krishnan, Satyam global head of HR, “For the last nine quarters, we have declining attrition rates.”
However, he also added: “The slowdown is not as bad as it is made out to be. We are still talking about double-digit growth. We will be hiring around 15,000 people this year against 16,000 last year.”
Wipro HR vice-president Pratik Kumar has said attrition rates had dropped from nearly 20 percent to 16 percent.
Accenture outsourcing lead executive P.G. Raghuraman has said that the company has had a 25-30 percent lower attrition rate than the usual. “We have been able to successfully tide over the attrition wave because of greater engagement with employees and expansion of our supply chain.”
Though the Wall Street crisis has had its trickle-down effects, analysts see a silver lining. Companies are looking at a period of lower attrition rates and stable salaries to keep costs under check.
And, the long-term prospects of India’s IT sector continue to be bullish as many IT firms try to tap new geographical locations, moving to the higher end of the business or even mull about entirely new areas of business such as retail or hospitality that has shown brisk growth in India.
A recent estimate by software industry body Nasscom has predicted that India’s outsourcing industry will face a shortage of over 200,000 professionals by 2012, due to high growth of the sector.
According to Nasscom: “By 2015-2016, the number of professionals working in the IT industry will grow tenfold (from 2001-2002) and the total revenue will grow 22 times.” This means, the IT industry is likely to employ nearly 4 million professionals and record almost $200 billion in revenue by 2015-16.
“India will create the second largest IT services labor pool after the U.S. within the next seven to eight years. That’s not all, domestic IT industry’s contribution to our GDP is likely to rise from 0.8 percent in 2006-07 to 2.65 percent by 2015-16,” Nasscom added.
The bargaining power, however, will rest with the employers, at least for some time to come.
Analysts say that the long-term outlook for India’s IT industry continues to be good; however, given its high dependence on the West in general and the U.S. in particular the immediate future promises a bumpy ride.
Siddharth Srivastava is India correspondent for Siliconeer. He lives in New Delhi.