Global Economic Crisis Impact on It Industry

“Global Economic crisis: Impact on IT Industry in India. ” Abstract: Globalization has ensured that none of the economies of the world stays insulated from the global economic crisis.

But there was a general belief that the emerging economies could remain largely apart from the global economic meltdown and provide an alternative engine of growth to the world economy. The effect of the crisis on the Indian economy was not significant in the beginning. The argument soon proved unfounded as the global crisis intensified and spread to the emerging economies.This had a knock-on effect initially on the IT sector all over the world and Indian IT industry could not insulate itself from the adverse developments in the international financial markets. This paper interrogates the implications of the global economic meltdown on the Indian Economy within the framework of a consolidated IT Industry.

It also examines measures of global economic crisis which leads to crisis in IT industry. It also provides an overview for tackling the Problems faced by IT Sector.Key words: Economic development, Economic meltdown, global economic crisis and globalization. Introduction: The late-2000s financial crisis (often called the global recession, global financial crisis or the credit crunch) is considered by many economists to be the worst financial crisis since the Great Depression of the 1930s. It resulted in the collapse of large financial institutions, the bailout of banks by national governments and downturns in stock markets around the world.The global financial crisis, brewing for a while, really started to show its effects in the middle of 2007 and into 2008.

Around the world stock markets have fallen, large financial institutions have collapsed or been bought out, and governments in even the wealthiest nations have had to come up with rescue packages to bail out their financial systems. A collapse of the US sub-prime mortgage market and the reversal of the housing boom in other industrialized economies have had a ripple effect around the world. Furthermore, other weaknesses in the global financial system have surfaced.For the developing world, the rise in food prices as well as the knock-on effects from the financial instability and uncertainty in industrialized nations are having a compounding effect.

High fuel costs, soaring commodity prices together with fears of global recession are worrying many developing country analysts. Almost all the industries of the world economy faced the challenges of global economic crisis but the most hampered was the IT industry, because of the recession as a result of financial crisis. Indian IT sector’s derives approximately 61% revenues from the US based clients.The revenue contribution from US clients to the top five Indian IT companies (who account for 46% of the IT industry’s revenues) is approximately 58%. Hence, the impact of the slowdown in the US is likely to have a deep impact on the prospects of the Indian IT sector. Moreover, about 41% of the IT industry revenues in India are estimated to be from financial services.

Since this sector has been affected most severely in the current climate, the impact on Indian companies catering to this sector has been (and will continue to be) more acute.The margins are prone to be challenged on account of the slowing growth in the US and European Banking and Financial Services Industry (BFSI) sectors. Objectives : 1) To study and understand the origin of the global economic crisis. 2) To find out the measures of global economic crisis which lead to crisis in It industry. 3) To study the effect of global economic crisis in It industry in India.

Significance: This research will help to understand and analyse the causes of global economic crisis and its effect on the It Industry. It will also help to introspect the effect of economic crisis on world economy and various sectors.Limitation: As the research is based empirical study the findings of the research may limited and based on the observation of the earlier research. Also this study is focused on IT industry only and may not applicable to all the sectors having the impact of economic crisis.

Research approach: The research is based on empirical studies. The empirical approach relies on of direct and indirect observation or experience. Data collection: The data was collected by Secondary data sources. Origin of Global Economic Crisis: Genesis and causes.The global financial meltdown began in August 2007 when the growing payment mortgage deficit, put million of debt obligation in danger of which was guaranteed and sold to investment banks.

The crisis has it root in a banking practice called sub-prime lending or sub-prime mortgage lending in the United States. Sub-prime mortgage is granted to borrowers whose credit history is not sufficient to get conventional mortgages lending or who do not qualify for market interest rate, owing to various risk factors such as income level, size of the down payment made, credit history and employment status.This Subprime mortgage lending is designed to make these categories of individuals own a house at an affordable rate. These two government institutions in turn repackage the loans and sell them to individual investors, financial institutions like banks, pension funds, hedge funds, around the world. Between 1994-2004, the US housing market experienced boom, of which Sub-prime borrowing was a major contributor to an increase in home ownership rates and demand for housing.

Home ownership rate increased from 64% in 1994 to a peak of 69. 2% in 2004.Global scenario and the uncertainties of Global Financial Crises: As 2008 ended, predictions of where the world economy is heading turned dire. The World Bank projected world output to grow by a mere 0. 9% in 2009 (as compared with 2. 5% in 2008 and a high of 4% in 2006) and world trade to contract by a significant 2.

1% (compared to positive rates of growth of 6. 2% in 2008 and a high of 9. 8% in 2006). Asia Pac is likely to witness a sharper fall in the growth rate, i. e.

from 13. 4% in 2007 to 5. 5% in 2010E in comparison to the world growth estimated at 6. % in 2010E from the 2007 figures of 9. 7%.

The overall impact of the global financial crisis has been felt in Asia / Pacific in terms of the local stock exchanges and currency exchange rates and lower GDP growth forecasts for 2009. Impact on stock market • The year 2008 saw the credit crisis push several major economies, with banks particularly being badly hit- many requiring government bail-outs. Shanghai which had soared more than 300% in 2006 and 2007 had its share values wiped nearly by $3 trillion (? 2. trillion) • Japanese shares also suffered their biggest yearly decline, with the Nikkei dropping 42% as world’s second-largest economy slid into recession • India’s main index sensex plunged nearly 50% during the year. All global markets saw record falls in 2008 as the financial turmoil and economic slowdown ended the stock market boom • All stock exchanges across Asia / Pacific have been directly impacted in a significant way, with an average loss of 45% from November 2007 through October 2008.

Impact on exchange rates • Currency exchange rates have been affected, but on a more-isolated basis.Australia, China, New Zealand and Singapore are experiencing drops in their currency against the U. S. dollar • In addition, India has seen its currency increase substantially and later fall against the U.

S. dollar • As a result, there is an assumption that there will be some impact on IT spending across Asia / Pacific due to the increase in the cost tied to the technology spending. Scenario of Global IT Industry. Growth of global IT economy The global IT industry has matured over the years and has emerged to be a chief contributor to the global economic growth.

The global IT sector, constituted by the software and services, Information Technology Enabled Services (ITES) and the hardware segments, has been on a gradual growth trajectory with a steady rise in revenues as witnessed in the past few years. 2008 was a strong year as the number of contracts; the total value and the annualized contract values exceeded that of the preceding year. Among all users above average growth was witnessed in the government, healthcare and the manufacturing segments. The global software and services industry touched USD 967 billion, recording an above average growth of 6. % over the past year.

Worldwide ITES grew by 12%, the highest among all technology related segments. Hardware spend is estimated to have grown by 4% from USD 570 billion to nearly USD 594 billion in 2008. Currently, the global IT industry is experiencing a slump with the recessions in the US and many industrial countries with the level of impact varying by country / market and industry. Forrester in its recent report has predicted that the US IT market will dip to 1.

6% in 2009, down from 4. 1% growth in 2008 (see figure below). The Asia Pacific region, using a weighted average1 of local urrencies, will do a bit better in 2009, with 3. 1% growth. Global scenario - IT purchases As it stands, the US market accounts for majority of the global purchases of IT goods and services.

The US market which represented 37% of the global market for IT goods and services in 2005 had shrunk to 33% share in 2008. Western and Central Europe would see its share of global IT purchases fluctuate between 26% and 28% between 2008 to 2010; Eastern Europe, the Middle East, and Africa and Asia Pacific are expected to hold their share positions. Total IT purchase (by value) 2008* [pic]The British pound was 23% lower in Q4 2008 from the year-ago level, the Indian rupee is down 20%, the Canadian dollar is 19% weaker, and the euro is down 9%. Only the Japanese yen and the Chinese yuan renminbi have gained in value against the US dollar. While these currency swings are likely to reverse in 2009 as the financial crisis fades, the dollar is still likely to remain above 2008 levels for most of the year.

That will dampen global IT market growth measured in dollars and hurt the reported revenues of US vendors like Accenture, Hewlett-Packard (HP), and IBM with large overseas operations.With global tech market in US dollars likely to shrink, Global Financial Crises: Impact on Indian Economy India could not insulate itself from the adverse developments in the international financial markets, despite having a banking and financial system that had little to do with investments in structured financial instruments carved out of subprime mortgages, whose failure had set off the chain of events culminating in a global crisis. Economic growth decelerated in 2008-09 to 6. 7 percent.

This represented a decline of 2. 1 percent from the average growth rate of 8. percent in the previous five years (2003-04 to 2007-08). Per capita GDP growth grew by an estimated 4.

6 percent in 2008-09. Though this represents a substantial slowdown from the average growth of 7. 3 percent per annum during the previous five years, it is still significantly higher than the average 3. 3 percent per annum income growth during 1998-99 to 2002-03. Performance of the Indian IT- industry The information technology sector has been playing a key role in fuelling the Indian economic performance which has been stellar with robust GDP growth.India’s total IT industry’s (including hardware) share in the global market stands at 7%; in the IT segment the share is 4% while in the ITES space the share is 2%.

The industry is dominated by large integrated players consisting of both Indian and international service providers. During the year, the share of Indian providers went up to 65-70% due to the emerging trend of monetisation of captives. MNCs however, continued to make deeper inroads into the industry and strengthened their Indian delivery centres during 2008.The continuing contribution of this sector to the Indian economy is evident from the fact that revenue generated from this sector has grown from 1. 2% in FY 1998 to an estimated 5.

8% in the FY 2009. The net value added by this sector to the economy is estimated at 3. 5-4. 1% for FY 2009.

Impact of the recession on IT sector in the Indian economy The current global economic slowdown has made it a roller coaster ride for the world economies. Asia / Pacific is experiencing a deferred impact due to the “domino effect” of the current crisis.India being one of the world’s fastest-growing tech markets, thriving mainly on exports is also experiencing the tremors of the global economic crisis. IT spending as a percentage of revenue normally varies from 3.

5% in manufacturing companies, 5-6% in global retail chains to about 9. 5% in the banking industry. These could see marginal decline as companies will tend to hold spends on new IT deployments. • A recent study by Forrester reveals that 43% of Western companies are cutting back their IT spend and nearly 30% are scrutinizing IT projects for better returns.

The IT services and outsourcing market is currently undergoing a structural transformation that will have a profound effect on how IT service providers will have to conduct their business. • Approximately 61%5 of the Indian IT export’s revenues are from US clients. If we consider the top five India players who account for 46% of the IT industry’s revenues, the revenue contribution from US clients is approximately 58% which has reduced drastically. • The risks of operating margins are partly offset by the fact that Indian IT services retains some flexibility in terms of their cost model.As the impact of the slowdown becomes more severe, companies will increasingly look at cutting costs in the form of overheads and reduction in variable pay / annual increments.

The industry has also been reducing its hiring, as well as changing the hiring profile to ensure that operating costs are in control. This clearly indicates the adverse effect that the US recession is likely to have on the Indian IT sector. The industry has been constantly seeking to diversify its markets to offset its reliance on the US, which remains the largest outlet for India’s software sector.Conclusions : • The IT industry faced high Uncertainties in Churned client base, elongated sales cycles and headwinds from a harsh currency environment just because the US economy’s crash down. • The companies have to cut price to hit margins for favoring high turnover.

• Revenue visibility fogged out: IT companies normally have a one year revenue visibility of greater than 60%. However, with an already stressed client base, given the prevailing tough environment, revenue visibility appears fogged. When the economic growth slows down, a country also becomes unattractive for investment. No wonder the foreign direct investment (FDI) in the country has dropped significantly.

References: 1) http://www. newstrackindia. com/newsdetails/29681 2) Global Issues Social, Political, Economic and Environmental Issues 2010. 3) October 9, 2008, Rakesh Mohan, Global Financial Crisis and Key Risks: Impact on India and Asia. 4) April 2009, Deloitte India, Global economic slowdown and its impact on the Indian IT industry. ) www.

wikipedia. com 6) 2009, Financial Crises: A Cascading Effect on India, Madhuri Malhotra. 7) April 2010,Global Financial Crisis, its Impact on India and the Policy Response, Nirupam Bajpai ----------------------- “Global Economic crisis : Impact on IT Industry in India” Name of Author’s: Prof. Shweta Gupta Prof. Sapna Trivedi Institute: G. H.

Raisoni School of Management Studies Contact Details:gupta. sg@rediffmail. com (9422619397) sapna_trivedi22@yahoo. com (9890095891)