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OECD sees turbulent times ahead for IT industry
D Ravi Kanth in Geneva
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December 23, 2008 11:17 IST

India's IT industry may face a 'turbulent' period with weak growth next year as the worsening economic downturn will cause a big dent to the internet economy, according to economists at the Paris-based Organisation for Economic Cooperation and Development.

In its latest report, IT Outlook 2008, the OECD has painted a bleak picture saying the likely growth could be below zero. 'Over the next 18 months, ICT (information and communication technology) growth is likely to be below zero for the OECD as the financial services sector restructures and the real economy experiences a deep economic downturn,' it said.

A general upturn could be expected before the end of 2009 in parallel with renewed GDP growth, it said.

The only silver lining for the IT sector, which generates about $50 billion for Indian IT services companies, is the likely growth in the services and software sectors. 'IT services and software will generally grow, along with new internet and communications-related products and infrastructure, as they are an essential part of spending and partly recession-proof,' the report said.

Though the report did not contain country-specific assessments, it merely suggested broad trends in the global IT industry following the pronounced recession in industrialised countries. The OECD, which caters to the policy needs of its 30 members, has already declared pronounced recession in the rich countries.

Unlike China, which is heavily dependent on the IT hardware industry, Indian IT services companies will experience adjustment problems on a smaller scale, according to an OECD official. He suggested that the picture was somewhat 'mixed' on the likely impact of 'outsourcing' activities from companies abroad.

"With the financial industry, especially banking and insurance companies, caught in the worst crisis, it is safe to expect that there will be a considerable adverse impact on IT services," said the official. "But Indian companies are placed on a stronger footing despite the turbulence in the industry," he added.

In the worst-case scenario, there would be a squeeze on hiring new IT professionals in India as companies would defer recruitment till a marked change in the global prospects, the official said, noting that he was 'guardedly optimistic' about a turnaround in the overall performance of the Indian companies next year.

But the semiconductor industry is set to fall nearly 6 per cent in 2009, after posting only 2.2 per cent growth in 2008. And semiconductor manufacturing equipment sales -- a leading indicator for the sector and for ICT goods -- have plunged. Many other IT sectors will also struggle, having invested heavily in growing their business in emerging markets and in new goods and services to boost margins in weakening OECD markets, says the report.

Major corporate customers in sectors hard hit by the downturn such as banking, insurance and retail are also cutting back spending plans in 2009, it adds.

'Longer-term prospects for the ICT sector depend on whether businesses and consumers continue investing in new ICT goods and services at a relatively high rate, and whether non-OECD economies maintain growth paths that, while slowing, in part compensate for recession and uncertainties in the OECD economies,' the report argued.

At present, non-OECD economies make up over 20 per cent of the global ICT market, with ICT spending in Brazil, China, India, Indonesia and Russia all growing in 2003-07 at more than 20 per cent annually in current terms. Around 50 per cent ICT goods now come from non-OECD countries, and these countries, notably China and India, are increasingly becoming the home of top ICT firms, the report says.

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