Current economic scenario and implications for the Indian IT industry

Abstract

During the first quarter of 2007, the rising inflation led some economists to believe that the Indian economy was overheating. Subsequently the government and central bank took countermeasures to reign in the inflation. By the second quarter of 2007 the inflation had come down and was nearing the level that the policy makers deem acceptable. It is expected that these countermeasures will have an impact on the growth of the Indian economy. The objective of this study is to understand the implications of current economic scenario on the Indian IT industry and forecast how the macroeconomic factors affect the Indian IT industry. For instance, what affects will inflation have on the competitiveness of the industry, how will the rupee appreciation change the industry structure? The study will also recommend possible strategies that the industry could take to retain its competitive advantage given the macroeconomic factors. The study starts with a background of the IT industry; it then portrays the recent trends in the IT industry. Following that the macro-economic conditions prevailing during the period of study (early 2007) are charted. After this the outlook for the rest of the year are elaborated. Finally the implications of the macro-economic conditions for the IT industry are postulated. The IT industry comprises of the software and hardware sectors. The scope of the study is limited to the software sector. The study shows that the set of macroeconomic factors most relevant to the IT industry are: a) Exchange rate b) Inflation Interestingly, the study shows that the interest rates prevailing, and thus the cost of capital, do not seem to have any major implications for the industry.