Rupee and the IT sector

The hardening rupee has been one of the major focal points of the IT industry of late. A 10% appreciation in the last one year has made a serious dent on the global competitiveness of the Indian IT sector.

Apprehensions that some segments of the IT/BPO business may be flying out of India has made the industry bigwigs somewhat nervous.

In a bid to combat their growing concerns about the rupee appreciation, some of the industry leaders have even called for slowing down the rate of salary hike in the sector, and of course as expected, others have reiterated their right to peg the salaries wherever they wish. Free market, etc. Thus increasingly, there is a tacit expectation, if not a strident demand, from the sector that the government should manage the appreciation of the rupee better. Never mind its impact on inflation and interest rates.

Well, no harm in having one’s expectations and hopes and sending some gentle signals along those lines. But even as those gentle signals are finding their audience, there are certain aspects of the issue everybody connected should take note of.

From a mere 5% of a $33 billion total Indian exports in 1996-97, today (2006-07) the IT sector accounts for a hefty 25% of the $120 billion total exports from India. This represents a compounded annual growth of 35% for the IT sector over a 10-year period, making IT the fastest growing and the biggest export-oriented sector in the country. Clearly then, if the rupee is getting steadily stronger, the Indian IT sector has had a strong hand in making it so! In short, the IT sector has become a victim of its own success.

After all, if the IT exports rode on a historically weak rupee, it is only natural that in due course, the forces of international markets will bring about a correction. That’s international territory in the financial markets.

That is how industries and nations grow up and learn to cope, as well as find, develop or invent other strengths to stay afloat in a competitive market. And the Indian IT sector can be no exception to this standard rule. It only stands to reason that after decades of reigning strong, the hardest currencies of yesteryears like the US dollar, the Deutsche mark, the pound sterling, the yen or the French franc give way to currencies of the emerging economies.

There was a time when the Japanese automakers faced the same problem as the Indian IT sector today, only much worse — namely that of a super hard yen. Their companies would struggle to spend millions in R&D for devising a superior carburettor design that would bring the cost of a car down by $85, only to see a strong yen push the car price up by $300 the next morning. But the Japanese auto industry learnt to cope. That’s when they unleashed their Lexuses, Accuras and Infinities into the western world.

Clearly, our IT sector needs to find similar market solutions, rather than seriously expect or hope for a government handholding. You either have a free market or you do not. The sector will have to reduce its dependence on conventional export markets; tap hitherto untapped markets, say, among the rapidly emerging east European countries; negotiate their contracts in rupee rather than dollars; get a lot more India-centric; move up the value chain; draw in work-force from the fringe states to bring about superior wage arbitrage and do a whole lot of other things so that the sector is driven more by quality and value than by the softness of the rupee.

To illustrate one of the above points, let us see how our IT sector can become more India-centric. Take Cambodia. For tourists visiting Cambodia, the visa is on arrival. And the software and the system installed at the beautiful Siem Reap airport is so advanced that visas for an entire plane load of tourists is cleared in 15 minutes flat. IT is on its best display here, including the computers on the immigration desk taking your picture on the spot. The same is true of the passes issued as you enter Angkor Vat. The column of vehicles at the entry gate moves faster than our vehicles do at most of our Toll Gates.

During the few seconds a car stops at the entry to Angkor Vat, the tourist’s picture is taken and the laminated pass issued for one or three days as required, complete with his or her picture and other details, such as, name, date, time, etc. Don’t we have enough and more scope in our own country for our IT sector to address, without worrying excessively about exports? We are a big enough country to do much of our ‘exports’ out of Bangalore and Hyderabad to a couple of dozen of states within the country.