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In the four years as Prime Minister of India, there have been few reasons for Dr Manmohan Singh to lose sleep. In spite of all the predictions made by naysayers, Dr Singh has been able to trudge along with his divergent, and often conflicting, coalition government. There were quite a few challenges that he had to face through these yearsbe it the US nuclear deal or the domestic economic slump at the onset of his premiership. In fact, this being Singhs final year before his government goes for polls, a lot of benefits were doled out for all and sundry, farm loans waived for the rural poor, personal tax relief for urban middleclass, etc. Dr Singh has managed to somehow wade through the difficult waters, proving that his politics is as good as his economics.

Yet, even as the Indian economy continues to grow at a healthy rate, Singh has reasons to be concerned, and possibly lose sleep. For the economist Dr Singh, the worrying thing is an economic phenomenon itself, namely, inflation. Over the past few months, inflation has become an obsession in India. With the inflation rate hovering around the 8% mark, indicating a constant increase in prices of commodities from steel to food products, everyone seems to be discussing its implications and repercussions. The single largest factor for the escalation in prices has been the spiralling cost of oil, touching an all time high of $135 per barrelthe price has more than doubled in the past year. This surge in oil prices has driven the inflation by a few notches.

While any Keynesian economist would tell you that a little inflation is always preferable to none at all; it goes without saying that constantly increasing prices are bound to have an impact, direct or indirect, on all sectors of the economyincluding the IT sector.

Wage Pressure
Consider this simple analogy; if you spent Rs 60 out of your Rs 100 salary on food and purchases on a monthly basis, and suddenly the bill swarms to Rs 75 due to price increases, what would you do? Since price rise is not in our hands, the only option is to find a higher-paid job. Thus, inflation could have a negative impact on the corporate sector by increasing attrition rates. Hence, to retain the same person, the companies would have to raise the salaries. This is the biggest worry for the IT industry.

Saddled with rising costs (namely wages) and a depreciating dollar (though there has been an upward trend of late), many companies have been talking of wage corrections, ie, lower pay hikes from this year. But thanks to prices going up, employees would be seeking bigger hikes leading to higher attrition. Meanwhile, the companies to curtail their costs would look at hiring more freshers and let go peak performers, resulting in a rather assiduous work culture.

Inflation in India will mean pressure on expenditure. Professionals in India would seek out to greener pastures resulting in higher turnover. At the same time performance culture will reign supreme. Companies would be forced to adopt a hire and fire philosophy, says LC Singh, CEO, Nihilent Technologies, and a veteran of the IT industry.

The wage pressure would be felt even more by the IT industry, since among all the different sectors in India, the IT workforce has been best paid, enjoying 15-20% wage hikes. The number gains greater significance when you factor in the amount of people directly employed by the IT-BPO sector, which stands close to 2 mn, according to Nasscom. Thus, in a way, inflation increases the burden on HR managersfirst to retain at lower hikes, and secondly to recruit at lower wages.

Capital Conundrum
Inflation has often been described as too much money, chasing fewer goods. In economic terms, it is merely a case of demand and supply disequilibrium. To control this, the government employs a slew of monetary and fiscal measures to mop the extra capital, thus curbing the demand. One of the ways is by increasing the interest rates, making capital dearer. Thus a company going in for investment or an acquisition would find that the cost of capital has risen.

In a bid to control inflation, the interest rates are hiked by RBI, leading to a slowdown in investment. But as the IT sector is not a big borrower of capital unlike other sectors like manufacturing and telecom, there would not be much impact of increase in interest rates says DK Joshi, principal economist, CRISIL.

Nonetheless, there is indeed an impact, if not macro but surely micro, as summed up by Ganesh Natarajan, MD and CEO, Zensar Technologies, and chairman of Nasscom. Higher inflation leads to tighter monetary control by RBI which leads to drop in economic growth, and increase in interest rates. This increases the burden on employees (who have taken loans) as well as the company. Higher interest affects the profitability of companies and reduces disposable incomes in the hands of employees, he says.

But even as higher prices reduce disposable income, Natarajan points at the silver lining. Specifically in terms of IT, there would be a negative impact due to higher expectations of wage increases, post inflation. One positive move, however, was the reduction in the personal income taxes in the budget, which means more disposable income for people, he adds.

Not in Isolation
Looking at inflation in isolation would be quite silly, as there are multitudes of factors that play a role. While higher inflation raises the consumable/infrastructure costs of a company by its direct impact on sectors like steel, cement, etc; the cost of creating infrastructure sky-rockets. Constant hike in global oil prices, have resulted in the strengthening of the dollar, while the rupee has fallen by 6%, and is currently trading at Rs 42.82 for every dollar, from a high of Rs 39. This appreciation in currency provides a cushion to the IT sector that has been much under pressure of late. More than the domestic inflation, external factors like the US slowdown have greater impact on the IT industry, says Joshi.

Even so, TR Madan Mohan, managing partner, Browne and Mohan, makes a cautious assessment of the future. In sum, inflation with subprime and slowdown, saps the dynamism of the industry, and increases the scale of working capital required, thereby reducing profit. Another area of concern is that the employment levels have not stood as on the projected lines (in fact the IT biggies have reduced the bench force), wage increases in the senior management has been around 12-20% in the last quarter for some of the medium firms. Given the low productivity levels in some IT firms, this could be a double whammy, he says.

Little wonder then that Dr Singh is a worried man, renowned the world over as the architect of global India (due to his liberalization in 1991), his legacy is in danger of being overshadowed by transient economic occurrence. Life is never free of contradictions, he had said earlier, so this must not be all that surprising, after all.

Shashwat DC
shashwatc@cybermedia.co.in

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