Wednesday, July 18, 2007

The Rise of the Rupee and What It Means to Us

The Indian Rupee has been going up against the US Dollar for a couple of months now and the Reserve Bank is following a laissez faire policy in administering this rise. This is in keeping with its goal of letting market forces dictate the fate of the Rupee and let India ease into the global economy naturally. Unlike in China where their fiscal policy is hidebound to keep the currency low vis-a-vis the dollar, we are following the IMF guideline to let it be.

How does this play out in terms of our economy? As an employee of a Big Three IT export organization in India I can say that this has very quickly percolated down to every level, especially the roles based in the US. Spending in dollars has been cut, several bureaucratic hoops now need to be jumped for travel to India for accompanying a client on a site visit, there is a drive to increase billing rates and shorten bills outstanding. Add to this the 2009 deadline for the tax holiday we have been enjoying thus far, and you see the IT industry preparing for lower margins and perhaps a slightly less competitive situation due to increasing billing rates.

Factoring in all of this as well as the perceived threat of competition (more on this in the next paragraph) the industry should still earn net margins above 20 percent of the revenue. Besides the market is already shifting significantly away from traditional outsourcing to selective outsourcing, meaning it is moving from the model of 'we do our core business best, you do the IT' to 'we retain the strategic applications and infrastructure, you do the selected other services'. Thus the big bang approach of infrastructure hosting, rebadging employees and outsourcing entire departments is now outdated and with many such previous engagements coming to an end, $100 billion worth of business locked up in those large deals is now being reconsidered as to what can be outsourced and what retained.

This is the reason why IBM is confident enough to commit $6billion to investment in India and 100,000 net employees in India in the next 3 years. They need to retain most of their large deals to remain competitive and they are eager to get in the game. This brings us to the next question: what is India's competition? Let's skip the perfunctory look at Russia, Eastern Europe, Northern Africa, the Phillipines and so on. The perceived threat to the head that wears the crown is China. It's too early to comment, but since 2000 I've seen doomsday predictions for India's IT industry because of Chinese advancements. In 2000 we were given until 2002. In 2002 we were given until 2006. Today we are given until 2010. I don't know if they will catch up that soon. Regardless of that, we need to be careful because some companies are ramping up services out of China- HP for instance published a report to the effect that it expects to gain from China what it may lose from India due to attrition, increased salaries and so on. This remains to be seen.

Our company has operations in China and we have until now seen it as a supporting location for India-based services and not as a credible competitive business unit. We have also found it tough to hire local professionals for our projects. The Chinese government is trying to remedy things on a grand scale at a rapid pace as they are wont to do. Training a staggering mass of people in the English language, flying out people to our Bangalore campuses, et al. It took us over 20 years to get our processes and quality assurance in order, to build infrastructure and develop a rich hinterland of people who are qualified enough. AMR reports on the other hand that China needs to be at least 20 percent cheaper than India to even be a competitor at all, despite all the flaws India has and any further infrastructure build-up China may make. As I said we need to wait and watch. It will be an interesting fight.

Aside from this, I'm bothered about our currency rise. This is because the IT industry, telecom and certain other sectors are doing well. But this is not a uniform development for all sectors of the economy. While the star performers drive up the currency the laggards find themselves unable to export competitively or compete against imports in the light of the stronger Rupee. The predictions by independent agencies peg the Rupee at Rs. 36 to a dollar by the end of the year. Wonder, if the RBI will still let it be.


Wayfaring Stranger said...
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Wayfaring Stranger said...

The first among expected 'casualties' in IT:

According to Indian GAAP, their Q1 results showed a 27 percent increase in reveue, net margins up by 7 percent; markets reacted favourably to this. They had a 10 percent QoQ growth.

According to the US GAAP, this is a 40 percent increase in revenue.

See link: