Rising Rupee vs. Dollar: It means a great challenge for the Indian IT Firms

Written on 10:26 AM by nitesh

Debate contest was held in my company's Toastmasters club and I won the second runners up prize :)

Background

The rupee’s appreciation against the US dollar is the latest economic challenge for India Inc.Normally currencies appreciate when economies are doing well and a rise in their value is a cause for celebration. It is an indicator of a booming economy with increasing international business.


Dollar is depreciating for various reasons and I don’t want to discuss the reasons, reality is it is depreciating and it is expected to depreciate further. This is not a new phenomena Japan dealt with it in 60’s when 1$ = 400 yen and it has tanked to 1$ = 100 yen so is the East Asian economies in 80’s and we have to tackle it now.



This phenomenon has mixed affects, some sectors are gaining and some are loosing. Textiles and the IT sector are the two sectors which are getting adversely affected.
IT firms are facing challenges because more than 70% of the revenues comes from US and wage costs are also increasing due to shortage of skilled and talented manpower
The situation has bring in new challenges for the IT companies, expected profit targets of almost all the companies have decreased in last quarter.

We are facing increasing competition from countries like china, Vietnam, Philippines, east European nations as they are providing options for cheaper outsourcing destinations. But still we are 10-15 years ahead of them and have advantage in terms of talented English speaking manpower.


There are fears that if recession really comes in US economy than the outsourcing work will lessen. Despite of all this factors still the Indian IT industry is gaining new heights, our exports touched 40$ billion dollar mark this year and we are expected to cross the 60$ billion dollar mark set for 2010 much earlier.

We cant sit on laurels and wait for things to happen itself, it is a challenging situation and we have to tackle it


Lets discuss some of the solutions

I have categorized solutions under three categories


Macro Level Solutions

These basically deal with what new things industry can do.

In my opinion we should follow the Explore – Innovate-Disseminate Approach

In explore

Look for new markets like European nations, Australia, South American nations which will lessen the dependency on USA. Companies are doing that already for TCS revenue from US is 52% for Satyam its 56%.We need to become truly multinational now.
We should also look for the Indian market which is expected to touch the 25 billion dollar mark by 2010.

Innovate

Time is now ripe to move up the value chain, we should now not work as mere vendors but as partners of companies. If Indians as a part of Silicon Valley make world beating products there why can’t we develop products here and earn a few dollars more by selling licenses.We should go for consulting, systems integration and other high end work.

Disseminate

We should market ourselves in first as a Cheap outsourcing destination in whole and also as separate companies stressing on our specializations their by making a brand. E.g. Satyam Fifa 2010 and 2014 sponsors and around 10-15% of its revenues is coming from Sports outsourcing work



Micro Level Solutions
What should be done internally in the company?

Reducing Costs but how some will say bring in more fresher’s sorry I don’t totally agree with it, if you plan to run the company with fresher’s than go for those projects which are not highly technical and don’t require in depth knowledge and experience otherwise it will in long run lead to losses.

• Stressing on code reusability,
• Trainings of employees be it technical or non technical
• Decentralizing the way of working which will make every employee feel honored about the company they are working in
• Employee should be always kept motivated and his proper care should be taken so that he is always charger up in his work.
• To cut the operating costs the companies need to move the low end work to tier-2 cities like Gandhi agar, Pune etc
• Hedging is a short term measure

Governmental Measures

What can be expected from government?

This is the sector which put India on the global map and in 2009 tax benefits are to end so now the companies NASCOMM in particular should lobby with the government to remove the MAT ( minimum alternative tax)

There are lot of issues in making our currency either fixed like China or making it fully convertible like dollar so that is not an easy option.


Finally

The Indian IT sector is expected to show robust growth in 2008.

However the dollar will continue to depreciating because of recession fears in US and also fears of countries like China, Korea moving a chunk of their forex reserves from US to other economies like Europe and Japan. Indian IT companies will be able to come out of this challenge and will remain the most preferred destination for IT-ITes work.

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