Advertisement

So the oracle was right, after all. Former US Federal Reserve chairman Alan Greenspan had triggered worldwide panic, and a global meltdown in stock prices, after he predicted that the US economy, which still continues to be the major engine of global growth, might slip into recession by the end of the year. He later moderated his forecast to a ‘probable slowdown’, but by then, the damage had been done.

It would be unfair to blame the former Fed chief for the bloodbath which followed though. Greenspan has a record of being uncannily on the mark where the US economy was concerned.

And because the statement came from him, it made companies, investors and fund managers around the world face up to certain uncomfortable developments, which the euphoria of an unprecedented era of sustained global growth, and rising stock markets, had managed to push to the back burner.

US growth and consumer spends were slowing, profit margins of US companies had flattened out, which, as Greenspan pointed out, indicated that the world’s biggest economy was approaching the end of a cycle. And the boom in US housing growth had started to look alarmingly like a bubble.

But, as the saying goes, it is an ill wind that blows no one any good. Bottomline pressures usually act as a major incentive to look for cost savings through outsourcing and offshoring activity.

Not surprisingly, a majority of US Chief Information Officers (CIOs) polled in a Citigroup Research survey this month said they expect their IT spends to grow this year, though the growth rate itself could drop into the ‘low single digit’ bracket.

That’s good news for Indian IT, since the US continues to be not only its key market, but a key influencer in other markets. A big account win in the US tends burnish an Indian outsource provider’s bid in other developed markets as well.

China’s manufacturing exports to the US may be hit by any drop in US consumer spending, but India’s IT exports should, by the same logic, actually increase.
However, the billion dollar question (actually $14 billion, which is the projected revenue from outsourcing for this year) remains: can India cash in?

For that to happen, three big challenges have to be addressed. The first is the availability of adequately skilled labour to meet Indian IT’s needs. Millions of engineers are still being churned out every year.

But as Indian IT firms go up the value chain, the availability of a pool of ‘employable’ labour is creating supply-side bottlenecks. This impacts Indian IT firms in two ways. One is a shortage of skills in critical areas. This puts a squeeze on margins, as companies have to increase their spends on training and skill enhancement. The second is a high rate of employee attrition, as competition forces companies to look for quick fixes by poaching talent.

Rising labour costs

This leads to the second big challenge: rising labour costs. India is still some way off from being in the same league as the US or western Europe on the labour cost front, but a relentless rise in costs has begun to impact many firms, especially those lower in the food chain.

The average per hour billing cost of a Java programmer, for instance, has doubled over the last two years.

The last is the challenge from newer, and hungrier entrants. At its annual outsourcing conference last week, research firm Gartner identified as many as 60 new countries who are taking active steps to enter this market.

The list is worth analysing. Countries like Algeria, Bahrain, Malta, Madagascar, Moldova, Saudi Arabia and even Uganda make the cut. Indian IT is still in pole position. But it will have to watch the rear-view mirror.

Email author: ravi.srinivasan@hindustantimes.com