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The only thing that is certainespecially at a time like thisis uncertainty. Just a year back, in FY 08, Indias domestic IT industry pleasantly surprised everyone by registering a 34% growth and in the process boasting of a higher growth figure than the more celebrated and well-known IT exports industry, for the first time in a decade.

This figure, tracked so comprehensively, only by Dataquest, was picked up by many as a proof of what was becoming a major hypothesis globally: that India and China are the solution to the global economic crisis, whatever that means.

On the other hand, with the US financial crisis getting worse, it was a natural assumption that the exports firms, so focused on the US in general and the financial services industry in particular, would be badly hit. After all, all the firms that made news because of wrong reasonsLehman, Citi, and AIGhave been prolific outsourcers to Indian firms. What added to the fears towards the end of the year was the scam that broke out at Indias #4 exports firm, Satyam and the populist anti-offshoring stance that was being taken by the US then president-elect and later president, Barack Obama.

CyberMedia Research   DQ Estimates	CyberMedia Research  DQ Estimates
After one year of trend reversal, exports was back in control, increasing its share from 65% to 69%	Hardware pulled down the growth despite modest growth in software and services

Numbers at the end of the year tell a very, very different story. In FY 09, the domestic IT industry growth dropped sharplyfrom 34% to 12%even as exports growth slowed down marginally, from 27% to 23%.

Numbers do not lie. But truth often lies in the details.

*Includes semiconductor design services and engineering services The contrast between rupee growth and dollar growth is too much to make sense of a definite trend. That was the major highlight of the year

There are a few reasons why export companies seem so isolated from the global slowdown. First and foremost, they are not. While they may have grown 23%, that was more to do with weakening of the Rupee. When translated to dollar terms, the growth was only 9%. Secondly, much of the revenue for IT service providers is annuity based and, hence, a slowdown in a few quarters would not drastically impact their overall revenues. But all these do not negate the fact that they have managed to grow, even at the face of all adversity. Part of that is attributable to their being able to sell the idea that offshoring makes even better sense at the time of a slowdown. Today, most customers in developed markets, buy that logic. If that has not resulted in as much contracts getting signed, it was because of severe delays in decision makingwhich happened primarily due to the massive restructuring that many companies went through following the slowdown, in which many executives moved from their previous roles; some even lost their jobs. The impact of this phenomenon on IT services was limited, but the same on BPO and engineering services was far higher.

More interesting, though not exactly exciting, is the story of the domestic market. While the overall growth at 12% seems bad, it was almost pulled down by the sluggish 6% growth in hardware, whose share in the overall pie came down to 45% from 48% last year. That also is a little misleading, as it includesfor the first timethe smartphones market that registered impressive growth of 78%. Without that, the traditional IT hardware market growth was zero. What is worse, the growth of systems, the most visible face of IT hardware, witnessed a negative growth, perhaps for the first time in the history of Indian IT.

The slowdown did not stop the trend that we have been witnessing for the last few years: the steady increase in the share of software and services in the overall IT spend pie. If anything, it only accelerated the trend.

Indias services story is interesting. In a clear case of practice-what-you-preach, India has taken to total outsourcing, quite early in its IT adoption curve. No other emerging market has seen this kind of trend. However, there is a difference. Unlike most developed market outsourcing, where efficiency is the prime driver for outsourcing, Indian enterprises have taken to outsourcing for driving growth. Many companies have taken to outsourcing early in their evolution phase, so that they focus on their core business. However, last year saw variabilization of resources as a prime driver of outsourcing, resulting in managed infrastructure services emerging as the hottest phrase among CIOs. This is expected to continue this year as well. As expected, hardware-based services such as network integration were impacted negatively, but the overall services market fared far better.

However, what should be an alarming factor is the southward growth of PCs. At less than 3% penetration, PCs are nowhere near saturation. A drop in shipment is not a very normal thing to happen, in a market widely believed to be by and large isolated from the slowdown. Most of the other drops can be directly attributed to cautious spending by businesses. PCs are today being marketed as a consumer product and some companies like market leader HP sell almost 50% of their PCs to the consumer segments. In fact, what added to the trouble of many firms is that they had hoped the normal festive season of OND (Dussehra-Diwali-Christmas) would compensate for some of the slowdown in the business segment. They were terribly wrong. That upset many calculations.

To add insult to injury, smartphones grew 78% last year. So, that nullifies any claim that consumers have not spent on tech products. The truth is: consumers have spent on what they think is useful. They think smartphones are useful and they do not think PCs are. And they are quite aware and mature. The PC makers have to realize this and act on it.

Shyamanuja Das
shyamanujad@cybermedia.co.in

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