Indian Outsourcing and the Dollar Dip

Outsourcing strengthening economies, improving infrastructure and upgrading quality of life…We've heard it all. So doesn't the sunshine industry ever face any glitches? It surely does, what with global equations and the economic realities of various countries and people coming into play. And what better example than how the outsourcing capital of the world, India, is facing a backlash because of the flux surrounding its economy and that of the dollar.

The sharp fall in the dollar is sparking waves throughout the global financial communities. The International Monetary Fund in their latest report on the U.S. economy has stated that a plummeting dollar remains a risk to the global economy, partly because financial markets react adversely to a downshift in the currency. The dollar, which had lost about 5% against the pound and the euro this year, is again facing a devaluation.

The Writing on the Wall

So how has dollar depreciation against the rupee (or rupee appreciation if you put it in another way) affected the Indian outsourcing scene? According to the chairman of a leading Indian IT company, depreciation of the dollar is emerging as the biggest risk for the Indian software and IT-enabled companies as their exposure in the US currency is more than 80%. Infosys Technologies, India's premier IT giant, lost $21.6 million during the first quarter (April-June) for fiscal year 2003-04 on account of the rupee's appreciation against the US dollar. A majority of IT companies and BPOs in India cater to American clients and measure revenue in dollars. As a study puts it, "Indian software firms get 60 per cent of their revenues from the US and a one per cent appreciation of the rupee against the dollar can impact earnings before interest and tax margins by between 30 and 50 basis points. Irrespective of the fact whether the company is big or small, all of them have been hit. The margins may be impacted by as much as 4 per cent."

The operating margins in the BPO industry are usually around 12% and the rupee rise is expected to have a 9% impact on BPO margins. The expenses for BPOs incurred in rupees also add to this situation. The labor cost arbitrage, a major driving force of the Indian outsourcing equation, is definitely suffering and profit margins - already taking a drubbing because of wage revisions and increasing visa costs - are bound to recede. India's own booming economy and expanding foreign reserves are, ironically, contributing to this crunch.

Tackling Head on!

So how has Indian IT and BPO companies coped as the dollar lost more than 7% in rupee terms? Many Indian IT companies are trying to bank on efficiency in operations apart from managing foreign exchange exposure wisely. Increasing work output to balance returns is a common strategy being adopted. Many BPOs have increased shift duration by an hour, giving employees the choice to work late or start early. BPO workers typically work 40 hours weekly, but with these modified timings they will have to work for 50 hours in a week. Another tactic being put in place is extending working days to Saturday, resulting in a 6-day working week.

A broader perspective emerges from industry forerunners. According to T. V. Mohandas Pai of Infosys, the big challenge for India in the dollar depreciation is the opening of the external commercial borrowing (ECB) window. He adds, "Do not allow ECBs to be converted into rupees. But allow ECBs only for imports or for acquisitions overseas. Don't allow the use of ECBs for the next one year for local assets or working capital. It is just a small stop-gap arrangement. Then I think the situation will improve."

Rupee appreciation and wage inflation has also prompted the ITES-BPO industry to make a strong pitch to the Indian Government for the continuation of tax concessions under the Software Technology Parks of India (STPI) scheme beyond 2009. Extension of tax incentives can help the industry counteract losses being caused by the dollar dip.

The Silver Lining

So will the rupee-dollar equations have an enduring negative impact on India's premier position as an outsourcing destination? NASSCOM (National Association of Software & Services Companies) is optimistic on this count, with Kiran Karnik, the President of NASSCOM, saying, "The impact would be minuscule and to the tune of 2-3 percent; we do not think it will have an adverse impact on the competitiveness of Indian software firms." In fact, many experts point out that the steady rise of the rupee actually warrant good times. The infrastructure needs of the Indian economy requires huge investments, a major chunk of which needs to come from overseas. The host country's currency, appreciation will go a long way in instilling confidence in overseas investors. The overall well being of the Indian economy - curbed inflation, rising stock indices, controlled trade deficits - can also only mean good times ahead in the long term. So chins up one and all!

Vidhu Panicker
Outsourcenews.com network