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Although it is too early to gauge whether this slowdown will have a net positive or negative impact, the following industry-wise analysis will focus on possible trends in the demand of IT services in specific industries directly or indirectly impacted by the sub-prime crisis.

The current crisis parallels the 2001-2002 bust especially for India's IT (export) sector. Approximately 61% of the Indian IT sector's revenues are from US clients. If you just take the top five India players who account for 46% of the IT industry's revenues, the revenue contribution from US clients is approximately 58%. About 30% of the industry revenues are estimated to be from financial services. In addition, from a qualitative stand-point, the tentacles of the financial sector business are quite well-entrenched and have significant structural impact as well.

A recent study by Forrester reveals that 43% of Western companies are cutting back their IT spend and nearly 30 percent are scrutinizing IT projects for better returns. Some of this can lead to off-shoring, but the impact of overall reduction in discretionary IT spends, including offshore work, cannot be denied. The slowing US economy has seen 70 percent of firms negotiating lower rates with suppliers and nearly 60 percent are cutting back on contractors. With budgets squeezed, just over 40 percent of companies plan to increase their use of offshore vendors.

The US financial crisis puts a question mark on growth for Indian IT in the short-to-medium term. At the time of Q1 results, we saw growth numbers that were revised down by 2-3% after sentiments started building up against the US financial sector. A worse downward revision is expected this quarter as well, though some larger players like TCS and Satyam have officially denied any possible impact on growth. Going by Infy numbers, a gloomy forecast can be expected.

Impact on Banking & Financial Services

The real losses incurred by most financial institutions from the exposure to mortgage business are yet to be confirmed. Such uncertainties on overall projected earnings will call for stricter budgetary controls and the overall demand for IT services will go through a slump in the first two quarters of 2008. However, most financial institutions will introduce new controls to their credit risk management processes. These initiatives will not only be voluntary in nature but also be made mandatory as the regulators will demand more transparency. Regulatory and process improvement initiatives would become the primary sponsors of new IT initiatives within these organizations.

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* Contributed by: -
Sunil Kumar Panda,
PGDBM, 1st Semester,
Fortune Institute of International Business, New Delhi.
Article posted on Fenruary 14, 2009.