The growth of India's IT outsourcing sector, which contributes to about 25 per cent of the country's total exports, is expected to slow down sharply this year following a drop in demand due to the global financial crisis, India's software industry lobby predicted.

National Association of Software Services Companies (Nasscom) said export revenues are expected to grow about 17 per cent, compared to the previously estimated 21 per cent, generating $47bn in revenues in the year ending March 2009.

India's domestic market is expected to grow nearly 20 per cent with revenues exceeding $23bn, according to the industry body that represents about 1,100 IT groups � including Infosys [Get Quote], Tata Consultancy Services [Get Quote] and Wipro [Get Quote].

The revised growth outlook highlights the difficulties facing a sector whose reputation has been tarnished recently by news of an alleged $1bn fraud at Satyam Computer Services [Get Quote]. The IT outsourcing industry contributed about 5.8 per cent to India's gross domestic product and has been recording 30 per cent growth year-on-year during the last decade.

"In the second half [of 2008] we have seen a rapid decline," Ganesh Natarajan, Nasscom chairman, said. "We are hopeful that the government � will stimulate investor confidence and growth by extending fiscal incentives to this industry."

However, some analysts said that the growth slowdown could be more severe than Nasscom predicts, as many western economies enter a period of recession and companies are forced to cut costs.

"Nasscom's growth figures are a little too optimistic," Diptarup Chakraborti, a research analyst at Gartner, said.

"The IT services sector is heavily dependent on demand from the US and Europe, which are currently going through a deep recession. This is going to have a strong negative impact on Indian IT groups," he added.

In spite of lowering the industry's growth outlook, Nasscom said it was optimistic that the sector would continue to expand at a sustainable rate, with foreign companies predicted to continue to outsource in an attempt to cut costs.

Sudin Apte, an analyst at Forrester Research, said that he expected growth in the IT outsourcing sector to pick up again in the second half of 2009.

Analysts said that the problems surrounding Satyam are unlikely to have an impact on the overall growth of the industry, with most clients expected to keep their outsourcing operations in India.

Copyright: The Financial Times Limited 2009