February 01, 2008

 

Will slowdown in IT sector affect economy?

Six months ago, in a post titled Pause On Dream Run, I wrote,
But in last few quarters, the INR vs USD equation has changed. INR is at 9-year high against USD. And if the results of latest quarter clearly indicate that it is hurting the profitability of the IT companies. They have reduced their INR profit guidance. What does all this translate for the employees in tech industry? Obviously, the I-want-only-30-per-cent-hike days are summarily over.
Looks like the time has come where IT companies are taking a not-so-benign look at the salaries with TCS making a tiny cut in variable pay. While the salary cut is more of tokenism than shoring up the bottomline, it shows the willingness of the companies to stop chasing the bus. According to this article, while Infosys sees no cut in the recent salary raises, TCS and Wipro look more conservative. The larger point is companies will politely say no if candidates demand huge raises over their current salary which already has a 3-month old raise built into it.

Clearly, the days ahead are not very rosy for IT employees. But, what does it mean for rest of the economy? To consider why IT is important to rest of the economy we need to understand how much money is channeled in the economy by IT industry. The employee cost for the IT industry is approximately 35% of the total revenue, which, probably, is the highest across industries and ahead by wide margin. If IT industry's total revenue is $40 bn in 2007-08, that means $13 bn was the employee cost. Add to this the employees of MNCs like IBM, Accenture, EDS, we are probably looking at a figure of $20 bn. And much of this $20 bn (and rising) is returning to the economy in the form of consumption - housing, automotive, leisure expenditure, etc. This is real money flowing in the economy and not some idle cash lying in high-interest treasury bills. It is unquestionable that the IT spillover effect has happened in past and been one of the key drivers of growth of economy. Now, when the IT industry hits the rough patch, economy will have some impact.

While tech sector may contribute a single digit percentage of GDP, it probably has much more than its fare share of impact of the economy.

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