Global slowdown and doing IT/ITES in India : an analysis

During February of this year my brother Kusha Basavapatna asked me about how the global slowdown would impact the IT industry in India. Remember, it was in February. Then the BSE sensex was still at 18,000+ level, Indian inflation was lower than 5% and crude oil was below $100 a barrel. However, the sub-prime crisis had begun to show its ill effects on both US and global economies. The exchange rate between INR and USD was at approximately Rs.40 to a dollar.

The following was my answer/analysis provided to Kusha in Feb. Reproducing it here with updates as the analysis has largely turned out be correct. Updates are at the end of each line item inserted within parentheses.

1. Yes, it certainly could. I expect the following happening in general, in Bangalore, during the next 2 quarters (March-Aug 08).
2. Quantum of pay increment during focal will be less, compared to last year. Days of 20%, 40% raises are gone. Even without factoring the global slowdown aspect, the cost of doing IT in India has been growing steadily both in USD and INR terms. The ratio was something like 1:5 in late nineties, and after 10 years it is now 1:2.5 (in general, across the board). So, if the rate of cost escalation were to be left alone, there wouldn't be any cost advantage for companies in US and UK to outsource their work to India. (TOI reported recently that the avg pay increase among IT companies in Bangalore was at 12% during the last focal)
3. Companies will do stringent "performance management" this year, than previous years. Although companies have always had a model performance management system consisting of doing annual appraisals and doing performance improvement plans (PIP) for the bottom 10% of low performing employees, given the hardship of hiring enough numbers the low performers were "allowed to sail thru". However, the compared to last years the companies could use the annual focal/appraisal times to identify and walk out the bottom 10%. Bad performers will have it tougher now. (We see that companies like TCS, and others have shown the door to poor performers during the last 2 quarters)
4. People going to the USA on H1B work visas will have even tougher times. People who applied for a fresh H1B in April 2007, got their Visa stamped sometime in Nov/Dec 2007. They will start arriving in the US during this quarter (Q1). Now, the US is going slow and the hiring is not very hot in the SFO bay area (silicon valley). As a result there would be less number of contractual positions created. This might discourage people from applying for new H1B when the season for fresh H1 begins on April 1, 2008. On the positive side, the 65,000 quota might last longer as during last year the quota was consumed within a few hours on the day of opening! (This year, we saw less number of people leaving their stable jobs in India to chase their US dreams. Those who resigned to reach the US - or even the UK - on a work visa did that without having firm job offers in hand. I know of a couple of people who are still searching for a stable job after some 3 months after landing in the US. So there is data to show that H1B visas caused less attrition in Bangalore this year compared to yesteryear's.)
5. If all of the above factors work out be insufficient, and if the large companies, especially the top5 : TCS, Satyam, Infosys, Wipro and HCL, were to report even one bad quarter with a small loss instead of a huge profit then all hell will break lose! (This too has begun to happen. INFY, TCS and others have reported "challenging" quarters, and have lowered their projects on revenue and hiring for the rest of the year and beyond.)
6. Lastly, the start-up and small/niche companies will find it very hard get continued funding. Companies that are on VC money now will need to watch out; and, their employees too!
   

The macro economic factors have dramatically changed since February '08. The sensex has lost 40% of its valuation during the last 6 months. The inflation is at 12%, and the oil is at $135+ today. People are being subject to rice rationing in the US as the country is not getting enough rice to import! Sub-prime crisis is not over either with some of the largest financial institutions writing off huge quantum of money as bad debt. And, there are elections round the corner both in the US and in India during the next 2-3 quarters. Sum it all, and the picture that emerges is not rosy!

Now the natural sequel is, how to use all these macro economic clues in making decisions at the micro level? Should one demand a higher hike, or change job to get that promotion? Or, buy that new flat? Well, as outlined above I expect the situation to remain "bearish", to use an investor's lingo, for some time to come. In a bearish market individual investors are advised to stay invested for a longer term benefit. There is no point going short. The same principle should apply to the bearish job market too! Shouldn't it? So, isn't staying invested in the current job a wiser decision? I guess so.

Let me know your comments.