India’s IT Sector Enjoying Positive Growth

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Oct. 18 – India’s information technology (IT) sector will enjoy positive results due to a 10 percent fall of the rupee against the dollar from July to September of this year. Depreciation of the rupee has increased the operating margins of export-oriented industries such as the IT sector, which derives the majority of its profits building and maintaining complex software systems for multinational companies. Top Indian IT firms expect quarter-on-quarter revenue growth of 2.5-5.0 percent in dollar terms, led by Tata Consultancy Services (TCS).

Between the weakened rupee and the revival of growth in the United States, investors and analysts are bullish on what is seen as a robust sector with sustainable growth. Most recently, the Bombay Stock Exchange’s IT index has been outperforming its SENSEX index, with large companies such as Infosys enjoying a 3.5 percent share-price increase. Foreign institutional investors who dominate the Indian stock market generally concentrate on large-cap stocks such as Tech Mahindra, HCL Tech, and TCS, but as the IT sector flourishes investment has been trickling down to mid-cap stocks.

India’s bilateral strategic relationship with the U.S. will also benefit the IT sector. Current trade amounts to over US$100 billion and the two countries aim to increase this amount five-fold in the coming years through a bilateral investment treaty. After their meeting on September 27, Indian Prime Minister Manmohan Singh and U.S. President Barack Obama reinforced their commitment to remove trade and investment policy issues to foster economic growth and employment.

The IT industry, however, does face challenges to continued growth. Though the software development sector grew by 10.5 percent and reached US$100 billion in revenue for the first time this past financial year, it fell short of industry projections.

The numbers sound encouraging, yet the growth rate was around 21 percent in 2011 and 33 percent in 2007. This decrease in growth is largely due to the IT sector’s reliance on the U.S. and European markets, which were weakened significantly by the financial crisis. Though the economies are recovering, many Western companies have had to cut back on their IT spending. IT companies are struggling to counteract this by expanding into other markets such as Brazil and China. Companies have experienced some success in developing more advanced offerings such as mobile computing or data analytics, but lag behind in combining IT with other services.

Though the business environments are changing, India’s comparative advantage remains the same. Its cheap and plentiful pool of engineers continues to provide necessary services for multinational corporations.

“Companies around the globe, in many different industries, are being driven by adoption of technology on the one side and the need for efficiencies on the other,” said Natarajan Chandrasekaran, Tata’s chief executive.

India’s IT sector is ultimately doing well at present, but it must adapt to changing realities in order to succeed in the long term.

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