Expert Answers: IT cos will benefit from STPI extension

Expert Answers: IT cos will benefit from STPI extension

S L Narayanan, CFO, Symphony Services answers Budget-related queries on IT and outsourcing.

  • ibnlive.com
  • Last Updated: February 28, 2008, 5:07 PM IST
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With just a couple of hours left for P Chidambaram's seventh Budget, all eyes are set on the Finance Minister. What will it have for the outsourcing sector?

Can the IT/IteS sector expect any sops? Will there be any extension in the STPI scheme?

IBNLive organised an online chat with S L Narayanan, CFO, Symphony Services in order to throw some light on the above questions and more.

Tarun: Do you think that with elections in mind, the Finance Minister will even address a non-political entity of IT or BPO business and just focus on the agriculture sector?

S L Narayanan: I don't think the FM or his Government is unmindful of the contributions made by the IT/ITES sector on employment generation and forex earnings. The ecosystem that we have created can bring in several thousand more jobs from the US and the Western world, if we persevered with the right policy initiatives.

Anurag: Do you think the FM will table a pro-agricultural Budget? How does industry stand to benefit? Can the IT/ITeS sector expect any special treatment?

S L Narayanan: Agriculture is our mainstay and deserves to get a big push. Farmers that prosper will in turn constitute the markets for our industry, ranging from tractors to toothpaste. With regards to IT/ITES, it is our fervent plea that the FM extends the STPI scheme for atleast five years. It is a fact that the prospects for IT/BPO industries have been indifferent in recent months, with the current situation in the US, i.e., the credit crises and a rapidly decelerating global economy. It would be an inopportune time to make the fiscal environment for our companies even more challenging. More importantly several locations in neighboring region - most notably China, Philippines and Sri Lanka present increasingly viable alternatives that could undermine the India value proposition.

WW: Obama has declared that he will give tax benefits to companies who are not sending jobs overseas. Do you think this can be a threat if tax benefits etc make it cheaper to get the work done within the US?

S L Narayanan: Unless we see the proposals in fine print, I think it will be premature to comment.

K Mukundan: How does one manage the war for talent in outsourcing industry? When we are now seeing scarcity, could this lead to some opportunities being lost in the outsourcing sector? What is your opinion on how India needs to bridge the supply of skilled manpower gap?

S L Narayanan: I expect the FM will do something in this Budget to incentivise corporate-led investments in training and HR development.

Mebvric: Is India losing its low-cost outsourcing image as the country grows? With other countries coming up with low outsourcing models, what do you think of the future of this industry? What are the growth areas – bulk work or in expertise work?

S L Narayanan: I think India will continue to be an attractive destination, simply because of the ecosystem that has been created. The numbers that graduate annually offers a scalability advantage that the very few other nations can match; the English language skills are another plus point.

AJ1: How do you see rupee appreciation against dollar -- opportunity or threat to Indian IT industry?


S L Narayanan: The dollar was at Rs 36 in 1996, at Rs 48 when we had the Kargil War in 2002 and recently at about Rs 46 in beginning of 2007. Today we are at Rs 39. But the Indian IT & ITES firms have carried on, with a CAGR of 30% ~ for the past decade or so. During this period we have seen salaries go up, real estate and rental values go up. The answer therefore is that currency rate per se does not influence our collective destiny. The industry has delivered consistent value to customers and innovated to manage costs.

Narayanan: As a model, don’t you think software companies need to factor significant risk components such as tax, exchange rate, utilisation etc? This being the case I am not sure why there is so much of a looking up in the heaven for the Budget!

S L Narayanan: I agree. The Budget ought to become a non-event over time. Indeed, it has become less of a disruptive factor as compared to the earlier decades, when several sectors were dependent on a policy prescription that could be rewritten twelve months later. I think we have come a long way and the general direction is more towards a moderate tax rate, a wider tax base, less of licensing and more of regulation.

Prashant: Do you think India will be able to sustain the growth rate of 9 pc?

S L Narayanan: I think yes.

Venkat: Shall we change the US$ ratings to euros or pounds to ensure that fluctuation in dollar will not affect our IT sectors?

S L Narayanan: I suppose you mean that the dollar denominated billings should be changed to a different currency. The challenge is in convincing the client to carry the exchange risk, which can be a tough thing to negotiate. A better way would be to reduce dependence on the USA and build a stronger revenue stream from UK/Europe/Japan/ANZ/SE Asia.

Aditya: Do you see any changes/innovations in the way the outsourcing companies are structured to take advantage of slowdown in the West? In some case the cost arbitrage advantage is slowly narrowing down. Will the government give any incentive to outsourcing companies to help maintain their competitive advantage?

S L Narayanan: I agree that the cost arbitrage is coming down. At senior levels, I might say that it has almost gone. Fortunately, we still have sufficient headroom at the mid level and entry levels that make the India option still a viable value proposition. I think Indian companies are very good at squeezing out efficiencies. I do not think that a subsidy model can work in the long run.

Ranjan: Amidst the speculations and apprehensions about the slowdown in the USA and world economies, what would be your forecast about the Indian IT industry? Would the Indian outsourcing companies be able to sustain themselves during the slow down period?

S L Narayanan: We have been here before. Some of us may recall the very tough environment that persisted post-9/11 and through all of 2002 till mid-2003. Even in those years, the Indian IT services companies grew significantly as the price:performance ratios offered by us ensured continued top-line traction. I do believe that a similar situation may be emerging, with hopefully a similar consequential push towards greater offshoring by US/OECD companies.


Komal: How do you see rupee movement post-Budget? It has become quite a challenge for all exporters. What should the government do to keep this under check?

S L Narayanan: To be utterly honest, I really don't know where the rupee will go post-Budget. There were many who thought the dollar will breach the Rs 39 level just a few months back and what we saw after the stock market sell-off was a dollar rally all the way to Rs 40-plus in the last week. The truth is it is very difficult to predict short-term rates. I am sure the Finance Minister is more than aware of the hardship faced by exporters, including the IT and ITES sector. One of the relief measures that we seek is the extension of the STPI scheme, which will expire in March 2009. The withdrawal of the tax holiday scheme at a time when the industry is facing challenging conditions will be most undesirable.

Malay Kumar Tripathy: Will the impact of the US dollar on ITeS industries will be reduced after the Budget?

S L Narayanan: I don't think so. The dependence on the United States continues to be high for several IT and ITES companies in India. It is unlikely that this will change in a hurry. I expect companies in India to seek a geo-diversification to reduce this dependence. UK/Europe and Japan should offer some scope in this regard and we will see more companies trying to establish beach heads in these regions. The Indian market is perhaps a dark horse. It is good to see big ticket spends being planned by the Indian Railways in this year's Budget for upgrade of their IT systems to serve customers better. From what I read it seems that the Railways' contracts could be anywhere between US $250 million to US $ 500 million. In the long-term, we ought to see the Indian market becoming more attractive as investment outlays are increased by several other sectors of our economy like commercial banking, insurance, utilities etc.

Surajit Mandal: With Obama almost certain to win the US Presidential election, how do you think it will affect the outsourcing industry in India?

S L Narayanan: As President Calvin Coolidge said many decades ago," the business of America is business". Much of corporate USA will continue to do what is best for their shareholders and firms will keep looking for cost effective solutions to stay competitive. I do not believe that there will be any impact on the outsourcing industry in India as a result of a new President.

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