The rupee has appreciated to near nine-year high levels, well beyond expectations of analysts, as the Reserve Bank of India has not intervened in an effort to stem inflation.

While the rupee may weaken against the dollar over the next few months, the rupee average in FY08 is expected to be stronger than what most analysts have estimated, leading to some pressure on earnings of software firms.

The rupee appreciation of 5.4 per cent since the start of the fiscal year, according to Merrill Lynch analysts, would be negative for overall earnings (a 5 per cent appreciation in the rupee hits earnings by around 330 basis points).

Given that exports are priced in foreign currency, the software sector stands to be a big loser, especially since around 60 per cent of their business still comes from the US.

However, analysts expect strong volume growth to lead to steady earnings increase. The 2006-07 financial year was good for the information technology and business process outsourcing (IT-ITeS, BPO) sector.

Riding atop a booming economy and bullish IT outsourcing environment, the sector is well on its way to touch the $60 billion mark by 2010.

However, in 2007-08 financial year, most of the companies face issues like wage inflation (since both onsite and offshore salaries have been hiked by 3-5 per cent and 10-15 per cent, respectively); growing competition from global IT systems integrators like Accenture, IBM and EDS; industry-wide risks of a slowdown in the US; minimum alternate tax on firms enjoying software technology parks of India benefits and fringe benefit tax on employee stock options.

On the other hand, the companies (including mid- and small-caps) have increased pricing in their existing and old deals, shifted more work offshore, hired more freshers (thus reducing wage costs) and expanded to geographies other than the US to UK, Canada, Latin American countries like Chile and Brazil, and China. Effectively, the global delivery model will help them stave off competition.

Hardware & hi-tech sector: The budget proposal to levy excise duty on minimum retail prices of desktops, laptops and peripherals, including monitors, liquid crystal displays, printers and scanners, did perturb the hardware sector.

While the overall prices of these goods expected to go up by around 2-3 per cent, it remains to be seen whether the manufacturers can pass these hikes to customers in a highly competitive market.

However, the government first has to announce the date from which this will be effective. Besides, the abatement percentage has not been declared. Currently, the excise duty is levied on the factory price.

Another thorn in the side of the hardware sector is the service tax that the computer hardware engineering services will be subject to.

Earlier, it was exempted under the head of consulting engineering services. A few positives in the budget include the clarification that DVD drivers and DVD writers fall under the 'Flash memory' category and hence are exempt from excise duty.

Semiconductors: As more assembly, test, mark and pack facilities are being set up in the country, inadequate infrastructure, including lack of uninterrupted power supply and quality water, could slacken the pace of the government's determination of putting India on the world map of semiconductor (wafer fab) manufacturing.

But the government's tax incentives now work out to around 30-35 per cent (if incentives of state governments are added), which are almost on par with the tax benefits provided by other countries. State governments, too, could do their bit in furthering the progress of the semiconductor industry.

The government intends to have 2-3 units with a total investment of $6-10 billion by 2010. The $3 billion SemIndia, so far, is the only project that is seriously racing ahead. The $4 billion Infineon-HSMC is yet to get government approval.