Forrester Research’s latest survey has mixed signals for India’s information technology firms. On one hand, it says more than 40% of large businesses have cut their IT budgets this year. On the other, demand for IT services—a part of the IT budget for any company—has held steady.
In fact, 43% of the nearly 950 respondents said they are moving more work offshore. If demand for services is holding steady, it means the cuts in IT budgets relate to hardware and staffing.
Does this mean there’s nothing for Indian IT services firms to worry from the survey? It would be a foolish response, because while demand for services has held steady, the overall pie is shrinking. A handful of financial institutions have already shut shop in the US and some analysts expect the list to expand.
IT services firms catering to these institutions may not immediately offset the loss in business by a proportional rise in offshore work of other clients.
The worry is that IT budgets are likely to be cut again in 2009. At a recent Citigroup Inc. conference, the bank said its IT budget is likely to be down to single digit in 2009, compared with a flat trend in 2008 and an average growth of 10% in previous years. The bank also said IT services would be less impacted.
Silicon Dip (Graphic)
But Citi’s IT analysts noted, “Citi CIO’s comments on budgets support our thesis that this budgeting cycle (November-December time frame) will be more difficult than the previous one and pricing could come under pressure as vendors start to struggle for volumes. We maintain our cautious view on demand for the sector.”
The markets have been rather cautious about IT stocks since early July, when the results season began. The National Stock Exchange’s CNX IT index has fallen 2%, while its benchmark Nifty index has risen 9%.
This is despite the continued decline of the rupee, a positive for Indian IT services exporters. If some more financial institutions fold up in the US, the underperformance may widen.
Newsprint prices and the Wholesale Price Index
Stories abound of the inaccuracy of inflation data put out by the government. The weights in the Wholesale Price Index, or WPI, do not reflect current reality and the data is often not updated in time.
A look at the WPI numbers on newsprint prices, for instance, shows the index for newsprint prices was 184.3 on 23 August 2008, while it was 161.1 on 25 August 2007. That’s a relatively tame rise of 14.4%.
People in the newspaper industry, however, say newsprint prices in dollar terms have gone up from around $550 (around Rs24,816) a tonne the year-ago period to about $920 a tonne at present. That’s a rise of 67%, much higher than the rise computed by WPI data.
To be sure, newsprint has a weight of just 0.29% in the index, but the wide discrepancy in the actual price increase and that captured by WPI does make you question whether there’s much point in analysing WPI data.
Inflation is past peak and on a downward path
Inflation is already past its peak and the momentum now seems to be easing, seen from the fact that the year-on-year rise in the Wholesale Price Index (WPI) has declined from a high of 12.63% on 9 August to 12.34% on 23 August. A research note by Lehman Brothers Holdings Inc. points out that the seasonally adjusted three-month-on-three-month annualized growth rate has fallen much more— from 17.3% on 9 August to 15.8% on 23 August. Sonal Varma, an economist with Lehman Brothers, says this number is a leading indicator of inflation. Using the same adjustments for the Consumer Price Index (CPI) shows the decelerating momentum even more sharply.
While the CPI (Industrial Workers) inflation gauge rose from 7.8% in May to 8.3% in July, the three-month-on-three-month annualized seasonally adjusted numbers show a downtrend, from 12.9% to 8.9%.
Incidentally, “core” WPI inflation, or inflation after stripping out food and fuel prices, continues to rise, moving up from 11.88% on 9 August to 12.19% on 23 August. That’s an indication that demand pressures continue to be high. Other indicators have also pointed to heightened demand pressures. Infrastructure output, for instance, rose 4.3% year-on-year in July, compared with 3.4% in June.
Does this mean the Reserve Bank of India may continue to raise rates in spite of lower inflation? That seems unlikely, says Varma, because Lehman Brothers’ estimate of input prices has started to fall and that will remove the pressure on companies to raise output prices.
Data from the ABN Amro Purchasing Managers’ index show that its index of output prices declined from 56.6 in July to 54.8 in August, while the input price index fell from 59.2 in July to 56.1 in August. Small wonder then that the bond market is celebrating, with the 10-year yield down to about 8.3%.
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