Indian Outsourcers Hit by Global Economic Worry

A downturn in Western economies is a double-edged sword for Indian outsourcers as some companies looking to cut costs will turn to India, while other will just spend less on IT.

Shares in India's biggest IT outsourcing firms sank on Oct. 18 on concerns that rising global economic uncertainty in key markets will hit future growth of the country's flagship sector. India's largest software exporter Tata Consultancy Services closed down 7.7% -- the company's sharpest single-day fall in a year a day after its latest quarterly growth data lagged estimates.

HCL Technologies slumped 8.5%, despite a 50% jump in quarterly net profit reported on Tuesday. Its chief executive, Vineet Nayar, said macro-economic conditions were "troublesome."

India's IT and software services sector derives over 90% of its revenues from providing technology services to foreign customers, particularly in the United States and Europe. Analysts forecast that IT spending budgets from large global companies will shrink in coming months, as the eurozone debt crisis and concerns over the U.S. economy persist.

Indian majors Infosys, TCS and HCL have all shown growth in quarterly profits, helped by a depreciating Indian rupee against the U.S. dollar.

But bosses at all three companies have each warned that the state of the global economy will be challenging in the months ahead. Infosys chief executive S.D. Shibulal said last week that "we remain very cautious on worries arising out of the prevailing situation in Europe and the U.S."

Jagannadham Thunuguntla, head of research with SMC Global Securities in New Delhi, said initial excitement over a 9.7% increase in Infosys net profit last week had soon died down."Concerns that overseas clients may not be able to spend more is increasing," he said.

The National Association of Software and Services Companies (NASSCOM) has forecast the sector will grow by 16% to 18% this year, but some private sector analysts see expansion of as little as 2% -4%.

A downturn in Western economies is a double-edged sword for Indian outsourcers. Some companies will look to cut costs by offshoring some services to emerging countries like India to save money. Others will look to spend less on IT, meaning less work is available for groups like Infosys.

Copyright Agence France-Presse, 2011

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