Having enjoyed strong growth over the past few years, India's IT industry spurred primarily by the bustling services and software markets now faces the danger of slowing to a halt if the country does not resolve challenges brought about by an appreciating currency, upcoming taxes, severe manpower crunch, and visa restrictions.
1. Appreciating currency
The main reason for the rupee's appreciation since late 2006 has been a flood of foreign-exchange inflows, especially US dollars. The surge of capital and other inflows into India has taken a variety of forms, ranging from foreign direct investment (FDI) to remittances sent home by Indian expatriates. In each case, the flow seems unlikely to slacken. The rise of the rupee against the dollar has Indian outsourcing companies worried, as two-thirds of their business comes from the United States. A rising rupee has pushed down exporters' rupee revenue, even as their costs locally go up. To counter this challenge NASSCOM had asked the Indian government to restore some of the export incentives that were earlier provided to Indian outsourcers.
2. Upcoming taxes deterrents
The budget introduced a fresh set of deterrents such as minimum alternative tax (MAT), service tax on lease rentals and "fringe benefit tax" on ESOPs (employee stock ownership plan), adding to the industry's existing list of woes. A large number of the operations of Indian outsourcing companies were set up under an export-promotion plan called the Software Technology Parks of India (STPI), which entitled them to tax breaks. But the STPI plan ends next year. Companies seeking tax benefits now have to move their operations to special economic zones, something that's not feasible for outsourcing firms, which have operations in multiple locations close to where staff are available.
3. Severe manpower crunch
According to a Forrester Research report released earlier this month, over 300 North American and European companies have set up their own offshore centers in India over the last two years to lower costs in product development and backoffice operations. But, the reported noted, more than 60 percent of these companies were now struggling to cope "due to spiraling costs, skyrocketing attrition, and lack of integration and management support". Most Indian IT companies are on a recruitment overdrive. For instance, TCS plans to hire 32,000 employees this year, while Infosys intends to hire some 24,500 and Wipro around 14,000 people. Corporate India would undergo severe manpower shortage in the next five years due to gap in the demand and supply of skilled human capital, says a PHDCCI report. To reduce costs, many companies are also setting up centers in India's smaller cities. For instance, a leading BPO service provider FirstSource, opened five new facilities in cities such as Hubli, Vishakapatnam, Cochin and Pondicherry.
4. Visa restrictions
the biggest challenge India's IT industry currently faces is the H1-B visa restriction imposed by the United States. "While the big companies [in India] have a bank of employees with H1-B visas, smaller firms in both India and the United States are suffering. Microsoft Chairman Bill Gates slammed the federal government's strict limits on temporary visas for technology workers, saying that if he had his way, the system would be scrapped entirely. Many in the industy are optimistic that the 65,000 cap on H1-B visas will be lifted soon.
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