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Undertaking any project in life proves to be a milestone in more ways than one. Its
successful completion reifies on a myriad of people & their priceless help.
Project work in never the work of an individual, it is more of a combination
of views, suggestions &contribution of many individuals. Thus one of the most pleasant
parts of doing this project is the opportunity to thank all these who have contributed
towards successful completion of this project.

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This project is an attempt to look into the impact of global recession on Indian financial
market, major initiatives taken up by the Government and Reserve Bank of India in the order to contain it
with special focus on employment, import-export, interest rates, risk management, credit demand and
taxation.
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c To study and analyze the Indian economy during recession.

c To study which factors are influencing the Indian economy while recession is going on.

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Indian companies have major outsourcing deals from the US. India's exports to the US have also
grown substantially over the years. The India economy is likely to lose between 1 to 2 percentage points
in GDP growth in the next fiscal year. Indian companies with big tickets deals in the US would see their
profit margins shrinking. The worries for exporters will grow as rupee strengthens further against the
dollar. But experts note that the long-term prospects for India are stable. A weak dollar could bring more
foreign money to Indian markets. Oil may get cheaper brining down inflation. A recession could bring
down oil prices to $70.

The whole of Asia would be hit by a recession as it depends on the US economy. Even though
domestic demand and diversification of trade in the Asian region will partly counter any drop in the US
demand, one simply can't escape a downturn in the world's largest economy. The US economy accounts
for 30 per cent of the world's GDP. Says Sudip Bandyopadhyay, director and CEO, Reliance Money: "In
the globalised world, complete decoupling is impossible. But India may remain relatively less affected by
adverse global events." In fact, many small and medium companies have already started developing trade
ties with China and European countries to ward off big losses. Manish Sonthalia, head, equity, Motilal
Oswal Securities, says if the US economy contracts much more than anticipated, the whole world's GDP
growth-which is estimated at 3.7 per cent by the IMF-will contract, and India would be no exception.

The only silver lining is that the recession will happen slowly, probably in six months or so. As of
now, IT and IT-enabled services, textiles, jewellery, handicrafts and leather segments will suffer losses
because of their trade link. Certain sections of commodities could face sharp impact due to the volatile
nature of these sectors. C.J. George, managing director, Geojit Financial Services, says profits of lots of
re-export firms may be affected. Countries like China import commodities from India, do some
valueaddition and then export them to the US. The IT sector will be the worst hit as 75 per cent of its
revenues come from the US. Low demand for services may force most Indian Fortune 500 companies to
slash their IT budgets. Zinnov Consulting, a research and offshore advisory, says that besides companies
from ITeS and BPO, automotive components will be affected.

During a full recession, US companies in health care, financial services and all consumers
demand driven firms are likely to cut down on their spending. Among other sectors, manufacturing and
financial institutions are moderately vulnerable. If the service sector takes a serious hit, India may have to
revise its GDP to about 8 to 8.5 per cent or even less.

Over the past couple of months, fears of a slowdown in the United States of America have
increased. The impact of the subprime crisis along with a slowdown in mortgages has led to a significant
lowering of growth estimates. Since the United States dominates the global economy, any slowdown
there would have an impact on most of the global economic variables. For India, it could mean a further
appreciation in the rupee vis--vis the US dollar and a darkening of business outlook for sectors dependent
on US companies. The overall impact of a US slowdown on India would, however, be minimal as the
factors driving growth here are more local in nature. Unlike the rest of Asia, India is a strong domestic
demand story, so any slowing in the US is likely to have a more muted impact on India. Strong growth in
domestic consumption and significant spending on infrastructure are the two pillars of India¶s growth
story. No sector has a dominant influence on earnings growth and risks to our estimate are limited.
Corporate India is also learning to master the art of efficient capital management, reduction in costs and
delivery of value-added services to sustain profit margins. Further, interest rates are expected to be stable
primarily due to control over inflation and proactive measures undertaken by the RBI. c
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The economic slowdown of the advanced countries which started around mid-2007, as a
result of sub-prime crisis in USA, led to the spread of economic crisis across the globe. Many
hegemonic financial institutions like Lehman Brothers or Washington Mutual or General Motors
collapsed and several became bankrupt in this crisis. According to the current available assessment of
the IMF, the global economy is projected to contract by 1.4 per cent in 2009.Even as recently as six
months ago, there was a view that the fallout of the crisis will remain confined only to the financial
sector of advanced economies and at the most there would be a shallow effect on emerging
economies like India. These expectations, as it now turns out, have been belied. The contagion has
traversed from the financial to the real sector; and it now looks like the recession will be deeper and
the recovery longer than earlier anticipated. Many economists are now predicting that this -.)c
$%*/cof 2008-09 will be the worst global recession since the 1930s. )*%*0c c $%*cA
recession is a decline in a country's gross domestic product (GDP) growth for two or more
consecutive quarters of a year. A recession is also preceded by several quarters of slowing down. An
economy, which grows over a period of time, tends to slow down the growth as a part of the normal
economic cycle. An economy typically expands for 6-10 years and tends to go into a recession for
about six months to 2 years. A recession normally takes place when consumers lose confidence in the
growth of the economy and spend less. This leads to a decreased demand for goods and services,
which in turn leads to a decrease in production, lay-offs and a sharp rise in unemployment. Investors
spend less; as they fear stocks values will fall and thus stock markets fall on negative sentiment. Risk
aversion, deleveraging and frozen money markets and reduced investor interest adversely affect
capital and financial flows, import-export and overall GDP of an economy. This is exactly what
happened in US and as a result of contagion effect spread all over the world due to high integration in
the global economy.
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In India, the impact of the crisis has been deeper than what was estimated by our policy makers
although it is less severe than in other emerging market economies. The extent of impact has been
restricted due to several reasons such as-
‡ Indian financial sector particularly our banks have no direct exposure to tainted assets and its
off-balance sheet activities have been limited. The credit derivatives market is in an embryonic stage and
there are restrictions on investments by residents in such products issued abroad.
‡ India¶s growth process has been largely domestic demand driven and its reliance on foreign
savings has remained around 1.5 per cent in recent period.
‡ India¶s comfortable foreign exchange reserves provide confidence in our ability to manage our
balance of payments notwithstanding lower export demand and dampened capital flows.
‡ Headline inflation, as measured by the wholesale price index (WPI), has declined sharply.
Consumer price inflation too has begun to moderate.
‡ Rural demand continues to be robust due to mandated agricultural lending and social safety net
programmes.
‡ India¶s merchandise exports are around 15 per cent of GDP, which is relatively modest. Despite
these mitigating factors, India too has to weather the negative impact of the crisis due to rising two-way
trade in goods and services and financial integration with the rest of the world. Today, India is certainly
more integrated into the world economy than ten years ago at the time of the Asian crisis as the ratio of
total external transactions (gross current account flows plus gross capital flows) to GDP has increased
from 46.8 per cent in 1997-98 to 117.4 per cent in 2007-08. Although Indian banks have very limited
exposure to the US mortgage market, directly or through derivatives, and to the failed and stressed
financial institutions yet Indian economy is experiencing the knock-on effects of the global crisis, through
the monetary, financial and real channels ± all of which are coming on top of the already expected
cyclical moderation in growth.
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The economy and the stock market are closely related as the buoyancy of the
economy gets reflected in the stock market. Due to the impact of global economic
recession, Indian stock market crashed from the high of 20000 to a low of around 8000
points. Corporate performance of most of the companies remained subdued, and the
impact of moderation in demand was visible in the substantial deceleration during the
current fiscal year. Corporate profitability also exhibited negative growth in the last three
successive quarters of the year. Indian stock market has tumbled down mainly because of
'the substitution effect' of:

‡ Drying up of overseas financing for Indian banks and Indian corporates;

‡ Constraints in raising funds in a bearish domestic capital market; and
‡ Decline in the internal accruals of the corporates.

Thus, the combined effect of the reversal of portfolio equity flows, the reduced
availability of international capital both debt and equity and the perceived increase in the price of
equity with lower equity valuations has led to the bearish influence on stock market.
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In India, the current economic crisis was largely insulated by the reversal of
foreign institutional investment (FII), external commercial borrowings (ECB) and trade
credit. Its spillovers became visible in September-October 2008 with overseas investors
pulling out a record USD 13.3 billion and fall in the nominal value of the rupee from Rs.
40.36 per USD in March 2008 to Rs. 51.23 per USD in March 2009, reflecting at 21.2 per
cent depreciation during the fiscal 2008-09. The annual average exchange rate during
2008-09 worked out to Rs. 45.99 per US dollar compared to Rs. 40.26 per USD in 2007-
08 which is the biggest annual loss for the rupee since 1991 crisis. Moreover, there is
reduction in the capital account receipts in 2008-09 with total net capital flows falling
from USD 17.3 billion in April-June 2007 to USD 13.2 billion in April-June 2008.
 Hence, sharp fluctuation in the overnight forex rates and the depreciation of the rupee
reflects the combined impact of the global credit crunch and the deleveraging process
underway in Indian forex market.
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The money market consists of credit market, debt market and government
securities market. All these markets are in some or other way related to the soundness of
banking system as they are regulated by the Reserve Bank of India. According to the
Report submitted by the Committee for Financial Sector Assessment (CFSA), set up
jointly by the Government and the RBI, our financial system is essentially sound and
resilient, and that systemic stability is by and large robust and there are no significant
vulnerabilities in the banking system. Yet, NPAs of banks may indeed rise due to
slowdown as Reserve Bank has pointed out. But given the strength of the banks¶ balance
sheets, that rise is not likely to pose any systemic risks, as it might in many advanced
countries. Nevertheless, the call money rate went over 20 per cent immediately after the
Lehman Brothers¶ collapse and banks¶ borrowing from the RBI under daily liquidity
adjustment facility overshot Rs.50, 000 crore on several occasions during September-
October 2008 under tight liquidity situation.
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In the past 5 years, the economy has grown at an average rate of 8-9 per cent.
Services which contribute more than half of GDP have grown fastest along with
manufacturing which has also done well. But this impressive run of GDP ended in the first
quarter of 2008 and is gradually reduced. Even before the global confidence dived, the
economy was slowing. According to the revised estimates released by the CSO (May 29,
2009) for the overall growth of GDP at factor cost at constant prices in 2008-09 was 6.7 per
cent as against the 7 per cent projection in the midyear review of the Economy presented in
the Parliament on December 23, 2008. The growth of GDP at factor cost (at constant 1999 -
2000 prices) at 6.7 per cent in 2008-09 nevertheless represents a deceleration from high
growth of 9 per cent and 9.7 per cent in 2007-08 and 2006-07 respectively. (Table 1) The
RBI annual policy statement 2009 presented on July 28, 2009 projects GDP growth at 6
percent in 2009-10 in 2009-10.

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The slowdown in growth of GDP is more clearly visible from the growth rates over
successive quarters of 2008- 09. In the first two quarters of 2008-09, the growth in GDP was 7.8 and
7.7 respectively which fell to 5.8 per cent in the third and fourth quarters of 2008-09. The third
quarter witnessed a sharp fall in the growth of manufacturing, construction, trade, hotels and
restaurants. The last quarter was an added deterioration in manufacturing due to the deepening
impact of the global crisis and a slowdown in domestic demand.

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 Hence, the slowdown in Indian economy is evident from the low GDP growth with
deceleration in the industrial activity, particularly in the manufacturing and infrastructure sectors and
moderation in the services sector mainly in the construction, transport and communication, trade,
hotels and restaurants.

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The overall balance of payments (BoP) situation remained resilient in 2008-09 despite signs
of strain in the capital and current accounts, due to the global crisis. During the first three quarters of
2008- 09 (April-December 2008), the current account deficit (CAD) was US $ 36.5 billion as against
US $ 15.5 billion for the corresponding period in 2007-08.
The capital account balance declined significantly to US $ 16.09 billion in 2008-09 as
compared to US $ 82.68 billion during the corresponding period in 2007-08. As at end-March 2009
the foreign exchange reserves stood at US $ 252 billion.
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During 2008-09, the growth in exports was robust till August 2008. However, in September
2008, export growth evinced a sharp dip and turned negative in October 2008 and remained negative
till the end of the financial year. For the first time in seven years, exports have declined in absolute
terms in October 2008.

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The above chart show that the exports have declined since October 2008 due to
contraction in global demand due to the synchronised global recession. Similarly, imports
growth also witnessed a deceleration during October-November 2008, before turning
negative thereafter.
The merchandise trade deficit declined during 2009-10 (April-May) over the
corresponding period of the previous year, reflecting the sharper decline in the imports in
relation to exports.
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Employment is worst affected during any financial crisis. So is true with the current
global meltdown. This recession has adversely affected the service industry of India mainly
the BPO, KPO, IT companies etc. According to a sample survey by the commerce ministry
109,513 people lost their jobs between August and October 2008, in exportrelated companies in
several sectors, primarily textiles, leather, engineering, gems and jewelry, handicraft and food
processing. Economic Survey of India gives alarming bell about the on-going effects of the global
slowdown on employment and has pressed upon the government the urgency of the major response,
especially in the unorganized sector.

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Source: Economic Survey 2009, Government of India
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The economic slowdown has severely dented the Centre¶s tax collections with
indirect taxes bearing the brunt. The tax- GDP ratio registered a steady increase from 8.97
per cent to 12.56 per cent between 2000-01 and 2007-08. But this trend has been reversed as
the tax-GDP ratio has fallen to 10.95 per cent during current fiscal year mainly on account of
reduction in Customs and Excise Tax due to effect of economic slowdown.

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The future trajectory of the economic meltdown is not yet clear. However, the Government
and the Reserve Bank responded to the challenge strongly and promptly to infuse liquidity and
restore confidence in Indian financial markets.
The Government introduced stimulus package while the Reserve Bank shifted its policy
stance from monetary tightening in response to the elevated inflationary pressures in the first half of
2008-09 to monetary easing in response to easing inflationary pressures and moderation of growth
engendered by the crisis. The fiscal and monetary response to the crisis has been discussed in the
following points-
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The Government launched three fiscal stimulus packages between December 2008
and February 2009. These stimulus packages came on top of an already announced expanded
safety-net programme for the rural poor, the farm loan waiver package and payout following
the Sixth Pay Commission report, all of which added to stimulating demand. The challenge
or fiscal policy is to balance immediate support for the economy with the need to get back on
track on the medium term fiscal consolidation process. The fiscal stimulus packages and
other measures have led to sharp increase in the revenue and fiscal deficits which, in the face
of slowing private investment, have cushioned the pace of economic activity. The borrowing
 programme of the government has already expanded rapidly in an orderly manner by the
Reserve Bank of India which would spur investment demand in the domestic market. So
while the government will continue to support liquidity in the economy, it will have to ensure
that as economic growth gathers momentum, the excess liquidity is rolled back in an orderly
manner. In India monetary transmission has had a differential impact across different
segments of the financial market. While the transmission has been faster in the money and
bond markets, it has been relatively muted in the credit market on account of several
structural rigidities. In order to address these issues, the government has to effectively and
carefully take up the following steps ±

cEnhance coordination and harmonization of the regulatory apparatus internationally,

given the global scope of the recent crises with increased cross border financial integration;
cIntroduction of countercyclical prudential regulatory policy;
c Design regulation and supervision of financial companies for non-deposit taking
financial entities having the potential to cause systematic instability, as evident in the current
crisis;
c Supervision and management of liquidity risk and greater transparency in the
financial sector to improve better risk assessment by the customers and investors;
cImprovement in transparency in the structured credit instruments.

The rise in macroeconomic uncertainty and the financial dislocation of the year 2008 have
raised a problem of adjustment in market interest rates in response to changes in policy rates gets
reflected with some lag. The Union Budget for 2009-10, presented against the backdrop of persistent
global economic slowdown and the associated dampened domestic demand, has placed the fiscal
deficit at 6.8 per cent of GDP in 2009-10 with a view to providing the necessary boost to demand and
thereby support a faster recovery.
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The RBI has taken several measures aimed at infusing rupee as well as foreign exchange
liquidity and to maintain credit flow to productive sectors of the economy such as infusing liquidity
through interest rate management, risk management and credit management which is described in
detail under the following heads:-

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In order to deal with the liquidity crunch and the virtual freezing of international
credit, RBI took steps for monetary expansion which gave a cue to the banks to reduce their
deposit and lending rates. The major changes in the interest rate policy of RBI are given
below-
cReduction in the cash reserve ratio (CRR) by 400 basis points from 9.0 per cent in
August 2008 to 5 per cent in January 2009.

cReduction in the repo rate (rate at which RBI lends to the banks) by 425 basis points
from 9.0 per cent as on October 19 to 4.75 per cent by July 2009 (the lowest in past 9 years)
in order to improve the flow of credit to productive sectors at viable costs so as to sustain the
growth momentum.
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cIn order to make parking of funds with RBI unattractive for banks, the reverse repo
rate (RBI¶s borrowing rate) was reduced by 275 points which currently stands at 3.25 per
cent.

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 The above said policy changes since mid-September 2008, enabled Reserve Bank of India to
infuse Rs.5,61,700 crore (excluding Rs.40,000 crore under SLR reduction) in market in order to
ensure ample liquidity in the banking system.
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There has been a sustained demand from various quarters for exercising regulatory
forbearance in regard to extant prudential regulations applicable to the banking sector. As a
part of counter-cyclical package, RBI has already made several changes to the current
prudential norms for robust risk disclosures, transparency in restructured products and
standard assets such as-
cImplementation of Basel II w.e.f. March 2009 by all Scheduled Commercial Banks
except RRBs which would promote closer cooperation, information sharing and coordination
of policies among sector wise regulators, especially in the context of financial conglomerates.
cFurther guidance to strengthen disclosure requirements under Pillar 3 of Basel II.
cCounter-cyclical adjustment of provisioning norms for all types of standard assets
(except in case of direct advances to agriculture and small and medium enterprises which
continue to be at 0.25 per cent)
cReduction in the risk weights for claims on unrated corporate and commercial real
estate to 100 per cent;
cReduction in the provisioning requirement for all standard assets to 0.40 per cent;
cImprove and converge financial reporting standards for offbalance sheet vehicles;
cDevelop guidance on valuations when markets are no longer active, establishing an
expert advisory panel in 2008.
cMarket participants and securities regulators will expand the information provided
about securitised products and their underlying assets.
c Permitting housing loans to be restructured even if the revised payment period
exceeds ten years;
c Making the restructured commercial real estate exposures eligible for special
treatment if restructured before June 30, 2009.
Hence, RBI has ensured perseverance of prudential policies which prevent institutions from
excessive risk taking, and financial markets from becoming extremely volatile and turbulent.
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There was a noticeable decline in the credit demand during 2008-09 which is
indicative of slowing economic activity- a major challenge for the banks to ensure healthy
flow of credit to the productive sectors of the economy. The reduced funding demand on the
banks should enable them to reduce the interest rates on deposit and thereby reduce the
overall cost of funds. Although deposit rates are declining and effective lending rates are
falling, there is clearly more space to cut rates given declining inflation. In order to facilitate
demand for credit in the economy the Reserve Bank has taken certain steps such as-

cOpening a special repo window under the liquidity adjustment facility for banks for
on-lending to the non-banking financial companies, housing finance companies and mutual
funds.
c Extending a special refinance facility, which banks can access without any
collateral
cUnwinding the Market Stabilization Scheme (MSS) securities, in order to manage
liquidity
cAccelerating Government¶s borrowing programme
cUpward adjustment of the interest rate ceilings on the foreign currency non-resident
(banks) and non-resident (external) rupee account deposits
cRelaxing the external commercial borrowings (ECB) regime
cAllowing the NBFCs and HFCs access to foreign borrowing
c Allowing corporates to buy back foreign currency convertible bonds (FCCBs) to
take advantage of the discount in the prevailing depressed global markets
c Instituting a rupee-dollar swap facility for banks with overseas branches to give
them comfort in managing their short-term funding requirements
c Extending flow of credit to sectors which are coming under pressure include
extending the period of pre-shipment and postshipment credit for exports
cExpanding the refinance facility for exports
c Expanding the lendable resources available to the Small Industries Development
Bank of India, the National Housing Bank and the Export-Import Bank of India

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Major constituents of the Indian financial sector are banks, financial institutions, and
markets, which mobilize the resources from the surplus sector and channelize the same to the
different needy sectors in the economy. In fact, the Indian financial system is characterized by its
two major segments - an organized sector and a traditional sector that is also known as informal
credit market. Financial intermediation in the organized sector is conducted by a large number of
banks and financial institutions. Financial institutions are further classified based on their
mandate and activities, which may be term lending, specialized, and investment institutions.
Banks are further classified into public and private sector banks, cooperative banks, and regional
rural banks. Non-bank financial institutions include hire purchase and leasing companies, and
investment institutions include LIC, GIC, and UTI. The banking system is, by far, the most
dominant segment of the financial sector, accounting for over 60% of the funds flowing through
the financial sector. The Government has also set up two separate regulatory bodies, viz.,
Insurance Regulatory Development Authority (IRDA) of India for the insurance sector, and the
Securities and Exchange Board of India (SEBI) for the capital market.
The Indian financial sector today is significantly different from what it used to be in the 1970s
and 1980s. The financial sector prior to the 1990s was characterized by segmented and
underdeveloped financial markets coupled with paucity of instruments. For maintaining spreads
of banking sector, regulation of both deposit and lending rates resulted not only in distorting the
interest rate mechanism, but also adversely affected the viability and profitability of banks. The
low level of recognition of the importance of transparency, accountability and prudential norms
in the operations of the banking system also led to a rising burden of non-performing assets.
6

Post 1991, the financial sector liberalization was calibrated on cautious and appropriate
sequencing of reform measures and was marked by a gradual opening up of the economy. This
gradualist strategy seemed to have served the country well, in terms of aiding growth, avoiding
crises, enhancing efficiency and imparting resilience to the system. From the vantage point of
2010, one of the successes of the Indian financial sector reform has been the maintenance of
financial stability and avoidance of any major financial crisis (caused due to domestic reasons)
since early 1990s - a period that has been turbulent for the financial sector in most emerging
market countries.
The process of financial liberalization has resulted in innovations in instruments and processes,
technological sophistication and growing capital flows. In order to fulfill the broad objectives of
the financial liberalization in India, a multi-pronged approach is being adopted. This includes:
removing the constraints faced by the financial system through the creation of an enabling policy
environment; improving the functioning of the financial institutions, and through the pursuit of
financial stability as an essential ingredient of macroeconomic stability.
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Players in Banking Industry

As per the Reserve Bank of India Act, 1934, banks in India are classified into scheduled and
non-scheduled banks. Scheduled banks are those which are entered into the second schedule of
the RBI Act, 1934. It includes those banks which have a paid-up capital and reserves of an
aggregate value of not less than Rs.5 lakhs and which satisfy RBI that their affairs are being
carried out in the interests of the depositors. While, non-scheduled banks are those which have
not been included in the second schedule of the Act. The scheduled banks comprise scheduled
commercial banks and scheduled cooperative banks. Further, the scheduled commercial banks in
India are categorised into five different groups according to their ownership and/or nature of
operation:- (i) Nationalised Banks; (ii) State Bank of India and its associates; (iii) Regional Rural
Banks (RRBs); (iv) Foreign banks; and (v) Other Indian private sector banks. Scheduled Co-
operative Banks consist of Scheduled State Co-operative Banks and Schedule Commercial
Banks.

At present, there are 170 scheduled commercial banks in the country, which includes 91 regional
rural banks (RRBs), 19 nationalised banks, 8 banks in State Bank of India group and the
Industrial Development Bank of India (IDBI Ltd). Besides, there are only four non-scheduled
commercial banks in the country.
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Allahabad Bank Indian Bank

Andhra Bank Indian Overseas Bank
Bank of Baroda Oriental Bank of Commerce
Bank of India Punjab & Sind Bank
Bank of Maharshtra Punjab National Bank
Canara Bank Syndicate Bank
Central Bank of India UCO Bank
Corporation Bank Union Bank of India
Dena Bank United Bank of India
Vijaya Bank

Regional Rural Banks (RRBs) have been set up in the country on the sponsorship of
individual nationalised commercial banks. These banks aim at taking the banking facilities to the
doorsteps of rural masses especially in the remote areas. The objective was to provide credit to
small and marginal farmers, agricultural labourers, artisans and small entrepreneurs so as to
develop productive activities in the rural areas. They have been conceived as institutions that
combine the features of both the co-operatives and commercial banks. c

Initially, five RRBs were set up in 1975, at Moradabad and Gorakhpur in Uttar Pradesh; Bhiwani
in Haryana; Jaipur in Rajasthan and Malda in West Bengal. But gradually the spread of these
banks has increased and the Government has taken several policy measures for their growth and
expansion.

Foreign banks like Citibank, HSBC, Standard Chartered Bank, etc. are the branches of those
banks which are incorporated in foreign countries. Most of them perform essentially the same
range of services as local banks, except that their focus in terms of product and customers may
be different due to their limited branch network. They bring in new technology and facilitate in
the introduction as well as assimilation of international products into the domestic markets. They
help the local banking industry keep pace with developments in the financial centres abroad.
They also help provide Indian corporations access to foreign capital markets. In keeping with the
general trend towards liberalisation, the Government has introduced several measures for
widening the scope for foreign banks to enter and operate in India.

Given this set up, with liberalisation, banks in India are venturing into non-traditional and
diversified areas other than the core banking activities. They are facing increased competition
both domestically and abroad. Hence, in order to make a benchmark in the changed environment,
they need to tackle issues like profitability, efficiency, technological upgradation, customer
satisfaction, etc in an effective manner.

Players in Insurance Industry

The insurance industry is largely categorized into public and private players. In the life insurance
segment the only Government-held entity is the Life Insurance Corporation of India. Both the
life and non-life insurance firms are listed below:-

Private Life Insurance Players

1. Bajaj Allianz Life Insurance Co. Ltd.

2. Birla Sun Life Insurance Co. Ltd. (BSLI)
3. HDFC Standard Life Insurance Co. Ltd. (HDFC STD LIFE)
4. ICICI Prudential Life Insurance Co. Ltd. (ICICI PRU)
5. ING Vysya Life Insurance Co. Ltd. (ING VYSYA)
6. Max New York Life Insurance Co. Ltd. (MNYL)
7. MetLife India Insurance Co. Pvt. Ltd. (METLIFE)
8. Kotak Mahindra Old Mutual Life Insurance Co. Ltd.
9. SBI Life Insurance Co. Ltd. (SBI LIFE)
10. TATA AIG Life Insurance Co. Ltd. (TATA AIG)
11. Reliance Life Insurance Company Ltd.
12. Aviva Life Insurance Co. Pvt. Ltd. (AVIVA)
13. Sahara India Life Insurance Co. Ltd. (SAHARA LIFE)
14. Shriram Life Insurance Co. Ltd (SHRIRAM LIFE)
 15. Bharti AXA Life Insurance Co. Ltd. (BHARTI AXA)
16. Future Generali India Life Insurance Co. Ltd.
17. IDBI Fortis Life Insurance Co. Ltd.
18. Canara HSBC Oriental Bank of Commerce Life Insurance
19. Aegon Religare Life Insurance Company Limited.
20. DLF Pramerica Life Insurance Co. Ltd.

Government Non - Life Insurance Players

1. New India Assurance Co. Ltd. (NEW INDIA)
2. National Insurance Co. Ltd. (NATIONAL) .
3. The Oriental Insurance Co. Ltd. (ORIENTAL)
4. United India Insurance Co. Ltd. (UNITED)
5. Export Credit Guarantee Corporation Ltd. (ECGC)
6. Agriculture Insurance Company of India Ltd. (AIC)

Private Non - Life Insurance Players

1. Bajaj Allianz General Insurance Co. Ltd.

2. ICICI Lombard General Insurance Co. Ltd.
3. IFFCO Tokio General Insurance Co. Ltd.
4. Reliance General Insurance Co. Ltd. (RELIANCE)
5. Royal Sundaram Alliance Insurance Co. Ltd.
6. TATA AIG General Insurance Co. Ltd. (TATA AIG)
7. Cholamandalam MS General Insurance Co. Ltd.
8. HDFC General Insurance Co. Ltd. (HDFC CHUBB)
9. Star Health and Allied Insurance Company Limited
10. Apollo DKV Insurance Co. Ltd. (APOLLO DKV)
11. Future Generali India Insurance Co. Ltd.
12. Universal Sompo General Insurance Co. Ltd.
13. Shriram General Insurance Co. Ltd.
14. Bharti AXA General Insurance Co. Ltd.
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Financial sector is the backbone of any economy and plays a crucial role in the
mobilization and allocation of resources. Though India was not hit as badly by the financial
contagion of 2008-09, as has been in the West, where it emerged, it becomes imperative for India
to have an inherently strong and functionally diverse financial system displaying efficiency and
flexibility, which are quintessential for creating a market-driven, productive and competitive
economy. A mature financial system seeks to support higher levels of investment and promote
growth in the economy with its depth and coverage.
The Indian financial system has been relatively in good health as compared to its
counterparts in the other parts of the globe. Balance sheets of the banks appear healthy and were
little affected by the unsettled conditions in financial markets. Despite not being part of the
financial sector challenges, India has been affected by the crisis through the feedback loops
between external shocks and domestic vulnerabilities by way of the financial, real and
confidence channels. In this context it is important to remember that although the origins of the
crisis are common around the world, the crisis has impacted different economies differently.
Importantly, in advanced economies where it originated, the crisis spread from the financial
sector to the real sector. In emerging economies, the transmission of external shocks to domestic
vulnerabilities has typically been from the real sector to the financial sector. Countries have
accordingly responded to the crisis depending on their specific country circumstances. Thus,
even as policy responses across countries are broadly similar, their precise design, quantum,
sequencing and timing have varied. In particular, while policy responses in advanced economies
have had to contend with both the unfolding financial crisis and deepening recession, in India,
the policy response has been predominantly driven by the need to arrest moderation in economic
growth.

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The balance sheets of Scheduled Commercial Banks in India remained robust against the
backdrop of global crisis and its effects on Indian economy through various transmission
channels. However, the Indian banking sector was not completely insulated from the effects of
the slowdown of the Indian economy as evident from the financial performance of Scheduled
Commercial Banks. The growth rates of income as well as the expenditure of Scheduled
Commercial Banks decelerated, leading to deceleration in growth of net profits. This
deceleration in growth of profit was due to the rising cost of deposits and borrowing but
declining return on investments. The efficiency parameters like RoA (Return on Assets) and RoE
(Return on Equities), however, increased during the year.
According to Committee on Financial Sector Assessment - CFSA (2009), financial position of
commercial banks shows that the global financial meltdown has led to a crisis of confidence in
the global markets and is not without its echo in the Indian financial system. In contrast to the
trend observed till 2007-08, there has been a reversal in capital flows to India during 2008-09.
This has led to some disturbance in the Indian financial markets, particularly in the equity and
foreign exchange markets. Against this background, the CFSA assessed the financial soundness
of commercial banks and found that the banking sector has withstood the shocks of the global
meltdown well and none of the key financial parameters, namely capital ratio, asset quality,
earning and profitability pointed to any discernable vulnerability.
The consolidated balance sheets of Scheduled Commercial Banks, expanded by 21.2%, as at
end-March 2009, as compared with 25% growth witnessed in the previous year. The assets of
SCBs, however, continued to grow at a higher rate than the nominal Gross Domestic Product
(GDP) (at current market prices) resulting in a higher ratio of assets of SCBs to GDP. This ratio
increased to 98.5% at end-March 2009, from 91.6% at end-March 2008.
It is noteworthy that contrary to the trend in some advanced countries, the leverage ratio in India
has remained high reflecting the strength of the Indian banking system. For instance, as observed
by the World Bank (2009)1, the leverage ratio2 of banks in the UK witnessed a decline
throughout 1990s, which was accentuated after 2000 to reach a level of about 3% by 2008, from
around 5% in the 1990s. On the other hand, the leverage ratio for Indian banks has risen from
about 4.1% in March 2001 to reach a level of 6.3% by March 2009.
While the balance sheet of public sector banks maintained their growth momentum, the private
sector banks and foreign banks registered a deceleration in growth rate. During 2008-09, the
growth rate of banks¶ lending to industries, personal loans and services sector witnessed a
deceleration, while growth rate of banks¶ lending to agriculture and allied activities increased
substantially.
Provisional data on sectoral deployment of credit available till July 17, 2009 indicate that
on year-on-year basis bank credit growth to industry, services and personal loans decelerated to
20.8%, 13.8% and 3.4%, respectively, from a level of 30.7%, 36.9% and 17.0% respective
growth rates. Growth of credit to agriculture accelerated to 29.1% from 14.9% in the same period
of the previous year. Credit to real estate and non-banking financial companies (NBFCs)
remained high at 46.7% (43.9% in July 2008) and 31.4% (53.9% in July 2008).
Overall, the incremental Credit±Deposit (C-D) ratio declined sharply reflecting the
slowdown in credit growth, as corporates deferred their investments against the backdrop of
widespread uncertainty. Growth rate of investments by banks decelerated marginally but the
proportion of Statutory Liquidity Ratio (SLR) investment in Net Demand and Time Liabilities
(NDTL) increased, reflecting a large Government market borrowing programme. The growth
rate of income as well as that of expenditure of SCBs decelerated, leading to deceleration in
growth rate of net profits. The Capital to Risk-Weighted Assets Ratio (CRAR) of SCBs
improved to 13.2 % at end-March 2009 from 13.0 % a year ago, thus, remaining significantly
above the stipulated minimum of 9.0 %.
The international liabilities of Indian banks (in Rs.terms) declined by 1.1 % as at end
March 2009 as against an increase of 8.4 % during 2007-08. The decline of international
liabilities was mainly due to decline in µother liabilities¶ like ADRs/GDRs reflecting the drying
up of overseas lines of credit for banks and corporates. On the other hand, in a reversal of trend,
the share of foreign currency deposits in total international liabilities, which had witnessed a
continuous fall during the period 2005-08, registered a sharp rise during 2008-09. This was
mainly on account of the encouraging policy initiatives by Reserve Bank like upward adjustment
of the interest rate ceiling on the foreign currency deposits by non-resident Indians, as also
continuing confidence of depositors in Indian economy against the backdrop of international
uncertainty.
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The Insurance industry in India has been progressing at a rapid pace since opening up of
the industry in 2000. The US$ 41-billion Indian insurance industry is the fifth largest life
insurance market in the emerging insurance economies globally, growing at 32-34% annually.
With the increasing popularity of insurance plans that are linked to the stock market, insurance
companies are emerging as a major force on the bourses. According to data made available by
the Life Council of India and the Life Insurance Corporation, currently, the insurance industry
manages equity assets to the tune of US$ 58.01 billion.

The momentum in equity investments by insurers picked up from 2004 when private insurance
companies began marketing ULIPs (market-linked products) to investors. With collections
increasing under such plans, insurance companies have raised their investments in the Indian
stock market to US$ 10.96 billion in 2008-09.

The assets held by the insurance industry currently stand higher than the US$ 44.05 billion
managed by mutual funds till the end of November 2009 and are one- third of that managed by
foreign institutional investors, which stands at US$ 162.23 billion. In the insurance sector, LIC
alone manages US$ 34.8 billion worth of equity assets, while private players manage US$ 23.2
billion worth of equity assets.

Currently, there are 22 life insurance firms operating in India and as per industry estimates, the
life insurance business constitutes about 4% of the total GDP in the country; the contribution by
non-life business has been at 0.6%. The investment (FDI) limit in the insurance space for foreign
players is capped at 26%²permissible under the automatic route subject to obtaining a licence
from the regulator, Insurance Regulatory and Development Authority (IRDA). c

According to the Investment Commission of India, the Indian insurance market is expected to be
around US$ 52 billion by 2010. The total investment opportunity is estimated to be US$ 14
billion-US$ 15 billion. Further, according to a report 'Booming Insurance Market in India (2008-
2011)¶ by Research and Markets, total life insurance premium in India is projected to grow to
US$ 253.2 billion by 2010-11. Total non-life insurance premium is expected to increase at a
CAGR of 25 per cent for the period spanning from 2008-09 to 2010-11. In fact, considering the
world¶s largest population and an annual growth rate of nearly 7%, India offers great
opportunities for insurers.
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Capital market is one of the most important segments of the Indian financial system. It is the
market available to the companies for meeting their requirements of the long-term funds. It refers
to all the facilities and the institutional arrangements for borrowing and lending funds. In other
words, it is concerned with the raising of money for purposes of making long-term investments.
The market consists of a number of individuals and institutions (including the Government) that
canalize the supply and demand for long -term capital and claims on it. The demand for long
term capital comes predominantly from private sector manufacturing industries, agriculture
sector, trade and the Government agencies. The supply of funds for the capital market comes
largely from individual and corporate savings, banks, insurance companies, specialized financing
agencies and the surplus of Governments.

The Indian Market is more popularly known as the Indian Stock Market. India¶s market
capitalisation positions the country as ninth largest in the world. India¶s share in the total world
M-Cap has risen to 2.79% currently. In fact, the Indian market has become the third biggest after
China and Hong Kong in the Asian region. As of March 2009, the market capitalization was
around US$ 598.3 billion, which is one-tenth of the combined valuation of the Asia region. The
market was slow since early 2008 and continued till the first quarter of 2009. The Indian stock
market has currently responded to the optimism of reforms by the stable government and its
continuity in policies.

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Financial sector reforms have long been regarded as an integral part of the overall policy reforms
in India. India has recognized that these reforms are imperative for increasing the efficiency of
resource mobilization and allocation in the real economy and for the overall macroeconomic
stability. The reforms have been driven by a thrust towards liberalization and several initiatives
such as liberalization in the interest rate and reserve requirements have been taken on these
fronts. During the last fifteen years, the Indian financial system has been incrementally
deregulated and exposed to international financial markets along with the introduction of new
instruments and products. At the same time, the Government has also been emphasizing stronger
regulation aimed at strengthening prudential norms, transparency and supervision to mitigate the
prospects of systemic risks. Due to such measures, the Indian financial structure is increasingly
becoming strong, functionally diverse, efficient and globally competitive.
The success of stronger regulations and prudential norms became evident when the impact of
global financial crisis, which showed repercussions on many financial sector markets across the
world, on this sector was minimal. In fact, in the last 15 years, India has not faced significant
repercussions of financial crisis which hit regional economies, including several Asian
economies.
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To aid the financial recovery, the RBI has introduced a substantial reduction in policy rates since
October 2008: the repo rate by 425 basis points, and the reverse repo rate by 275 basis points.
The CRR was also reduced by 400 basis points. Banks used the ample liquidity available with
them to make large investments in Government securities and also fairly sizeable investments (of
the order of US$ 19.59 billion. During In the Second Quarter Review of Monetary Policy for
2009-10, RBI observed that the global economy was showing incipient signs of recovery and the
prospects for the domestic economy were improving. the current financial year April ±
September 2009) in units of mutual funds.

According to the RBI, the stance of monetary policy for the remaining period of 2009-10 will be
to:

c ‡ Keep a vigil on the trends in inflation and be prepared to respond swiftly and effectively

through policy adjustments to stabilise inflation expectations.

c ‡ Monitor the liquidity situation closely and manage it actively to ensure that credit

demands of productive sectors are adequately met while also securing price stability and
financial stability.

c ‡ Maintain a monetary and interest rate regime consistent with price stability and financial

stability, and supportive of the growth process.

Meanwhile, the RBI has restored the Statutory Liquidity Ratio (SLR) back to 25 % on October
27, 2009, which was reduced to 24 % in November 2008.

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To improve returns under the unit-linked insurance plans (ULIPS), the IRDA has capped the
amount insurance companies can charge the fund. IRDA, also tightened the guidelines by asking
the insurance companies to ensure that no policies are issued to persons with fictitious names.
From June 2009, non-life insurance companies can neither reject the renewal of existing health
insurance policies on the premise that claims had been made in the previous years, nor arbitrarily
increase the premium while renewing cover. The grounds for such rejection have been made rare
and exceptional, according to an IRDA circular.

Apart from this, the concern for customer value through intermediaries has continued to be a
matter of importance for the Regulator, and a number of Committees were formed and guidelines
issued to address various issues. These include:

c ‡ A.C.Mukherjee Committee Report 2003, to examine the remuneration system for

Insurance Brokers, Agents etc. in general insurance business.
c ‡ IRDA Guidelines on Licensing of Corporate Agents, 14th July 2005.
c ‡ G.K.Raman Committee Report, November, 2006 on Brokers and Broker related issues.
th
c ‡ Guidelines on Insurance and Reinsurance of General Insurance Risks dated 15
September 2006 to set rules of conduct for both insurers and brokers.
c ‡ N.M.Govardhan Committee Report on Distribution Channels.
c ‡ Report of the IRDA Committee to Evaluate the Performance of Third Party
Administrators (Health Services), April 2009.

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International Competitiveness
As the globalization in Indian economy progresses, it is inevitable that the global players in the
financial sector would also enter Indian market and thereby the domestic players would get
exposed to competition on a global scale. With FDI norms set to relax for both banking and
insurance sectors in the near future, major global players are expected to set up base in India.
This is all the more so because foreign banks are widely expected to be given more operational
freedom sooner than later, and it may be a challenge for the Indian banks, especially the smaller
ones to compete operational economies of scale that are envisaged. It, therefore, becomes
important that the Indian financial sector prepares itself to compete in the international arena. In
an industry, where size is equated with financial soundness, consolidation is likely to happen
among the players of the industry to combat the global competition.

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Risk assessment is a continuous process and the stress tests need to be conducted taking into
account the macroeconomic linkages as also the contagion risks. With the increase in the size of
the Indian financial sector and the gamut of services being provided by this sector, it becomes
imperative for the organizations to understand the various dimensions of risks and their potential
systemic impact. It is important to analyze the aggregation of exposures across the entire
organization and avoid merely managing risks individually in respect of each exposure. One of
the most critical issues in risk management is of liquidity risk management in the banks,
especially in the wake of the global financial crisis. In recent times, increase in the banks¶
dependence on bulk deposits to fund credit growth has assumed significance as this could have
liquidity and profitability implications. There is a need to strengthen liquidity management in
this context as also to shore up the core deposit base and to keep an adequate cushion of liquid
assets to meet unforeseen contingencies.

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The increase in the level of NPAs has a number of negative consequences. From the banking
system¶s point of view, high loan loss provisions reduce net profits and tend to put pressure on
the lending rates. High real lending rates discourage new and credit worthy borrowers from
seeking loans from banks, with negative consequences for real economic activity. From a
macroeconomic policy point of view, rigidities in lending rates that result from the large stock of
NPAs dampen the effectiveness of monetary policy. In addition, to the extent that the public
sector banks have to be recapitalized by the Government, because of Basel II compliance, the
NPAs represent a source of quasi-fiscal liabilities. Though there has been a consistent decline in
NPAs in the last couple of years in the Indian banking system, given the recent downturn in the
economy, an increase in NPA may not come as a surprise. In order to safeguard from such a
mishap it is advisable to maintain a healthy net worth which can act as a cushion.
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Basel II aims to encourage the use of modern risk management techniques, and to encourage
banks to ensure that their risk management capabilities are commensurate with the risks of their
business. Basel II takes a sophisticated approach to credit risk, in the sense that it allows banks to
make use of internal ratings based Approach - or 'IRB Approach' as they have become known -
to calculate their capital requirement for credit risk. It also introduces, in addition to the market
risk capital charge, an explicit capital charge for operational risk.
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. Approach The earliest date of Likely date of

making application by approval by
banks to the RBI the RBI
No.
a. Internal Models Approach (IMA) 01-Apr-10 31-Mar-11
for Market Risk
b. The Standardised Approach 01-Apr-10 30-Sep-10
(TSA) for Operational Risk
c. Advanced Measurement 01-Apr-12 31-Mar-14
Approach (AMA) for Operational
Risk
d. Internal Ratings-Based (IRB) 01-Apr-12 31-Mar-14
Approaches for Credit Risk
(Foundation- as well as Advanced
IRB)
 Having regarded the necessary for up-gradation of risk management framework, as also
increasing capital efficiency in the banks by adoption of the advanced approaches, envisaged
under the Basel II Framework, and the emerging international trend in this regard, it is
considered desirable to lay down a timeframe for implementation of the advanced approaches in
India. This would enable the banks to plan and prepare for their migration to the advanced
approaches for credit risk and operational risk, as also for the Internal Models Approach (IMA)
for market risk. RBI has drawn up the following schedule for implementation of BASEL II in
India.

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Technological progress across the globe can act as a catalyst to the entire financial sector. The
last decade has seen tremendous growth in the financial sector at the behest of the technology
infusion. However, given the growth opportunity available in the financial sector in India,
technology can play a much greater role in facilitating better services across the board. Better
technological infrastructure will also further Government¶s endeavour in consolidation of banks
in India. Apart from technology, a proper manpower planning with a strong skill set, adept to
address the challenges of the financial sector, is also a must.
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Unequivocal consensus exists on the need to foster financial deepening ± in effect, inclusive
growth. Indian financial sector has been growing and has been sound and strong. However,
going ahead, the challenge of the industry is to reach out to the various layers of the socio ±
economic pyramid to ensure sustainable economic growth. The world over, financial institutions
have developed various products and strategies to serve the lower income group. For example, in
Brazil several banks have adopted a correspondent banking model that distributes credit, savings
and insurance products through grocery stores, retailers and local centres. Financial inclusion in
India can only be achieved, when the poor and the downtrodden, who have been excluded from
the benefits of the financial services in the formal sector, are able to access basic banking and
financial services at a affordable cost.
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With a chunk of the Indian population being below the age of 35 years, the demands from the
financial sector is expected to be huge. At the same time, it is to be noted that this generation is
having a huge propensity to consume with an ever increasing purchasing power. This will
provide the entire financial sector with a gamut of opportunities. Banking is expected to flourish
and insurance penetration is expected to increase by leaps and bounds. With cash at their
disposal the number of people investing in the stock market is expected to grow. However, with
the growth in the financial sector a new range of risks may also unfold. Boundaries between
traditional risk coverage, asset management, and investment banking expertise will blur, and new
players with tacit knowledge will emerge to handle new generation requirements to capitalize
upon the opportunity.

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The technology revolution across the globe is poised to change the entire financial sector.
Technology per se does not drive innovation, but it does enable it. Aggressive innovation is
expected to address customers¶ requirements better and quicker. Retail banking distribution in
India is also expected to see unprecedented growth. Technology will enable to cut the costs of
accessing information by customers. For traditional branch based banks, both the increased use
of online banking and their own back-office improvements will allow branch formats to become
less like transaction centers and more oriented towards customer needs. Another prospective area
is the growth of electronic payments that has occurred over the past few years and may be
accelerated by the combination of customers¶ increasing acceptance of alternative payment
systems and digitalization of micro-payments. The insurance industry would also be able to use
technology to lower their transaction costs and increase the penetration of insurance; besides
making it affordable to the vast sections of the society who are still out of the insurance ambit.
Increase in the usage of mobile based platform would increase the accessibility for the
consumers with premium payment reminder alerts, and other policy transactions would become
much simpler in the days to come.
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In a globalizing market, the scale and the reach of financial institutions will often be a key factor
in the years to come. With the advent of aggressive private sector banking in the country, it may
seem imperative for the smaller banks present in the country to change their existing structure to
stay µalive¶. The Raghuram Rajan Committee, 2008, recognizes the fact that these small banks
have not been able to distinguish themselves in India, often due to poor Governance structures,
excessive Government and political will or interference, and the unwillingness / inability of the
regulator to undertake prompt corrective action. As time changes, the challenge of managing
smaller organizations will also become enormous. With the number of banks in the country
increasing, profit margins are expected to decline. In such a case consolidation, can take place
through strategic alliances or partnerships. Mergers and alliances will be helping in capitalizing
upon the synergies of each other and thereby bringing in economies of scale. Prospects in such
consolidations are going to reap healthy benefits and making the financial sector in the country
more robust and in tandem with the global standards.
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Low levels of financial literacy have hampered the adoption of financial savings in the past. The
insurance industry has played a stellar role in improving awareness of long term financial
planning amongst potential customers. This has taken place through innovative use of various
media, internet and on the ground initiatives. The need to plan for various life stage events ±
education, marriage, housing, retirement ± and the role that life insurance can play in meeting
that eventuality, is certainly far better than what was the case ten years ago. The ³age dividend´
that India benefits from should be tapped in order to ensure a secure financial future for its
citizens.
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Today, financial markets are turbulent, globally. Traditional business models, when businesses
were clearly differentiated (Banks conducted banking, insurance companies offered risk covers
and securities companies offered investment opportunities), are slowly becoming blurred. Today,
insurance companies are exploring values in the banking and investment products and vice versa.
It is no more a bank competing with another bank and insurance company competing with
another insurance company, but an insurance company competing with banks. Hence, there is a
³convergence´ of opportunity in financial markets where every entity is prepared to undertake
enter a new territory, if it senses profits.
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Another possibility is a greater coordination amongst the existing network of banks. It is a matter
of fact that the Banking system in India is spread wide and far with a concrete network and this
is made even stronger by the presence of a number of Regional Rural Banks in the interiors of
the country. A paradigm shift will be the creating of a platform wherein the unique services
offered by select banks is utilized at select branches through an exchange-sharing basis. The
intent is to bring local knowledge to bear on the products that are needed locally, and to have the
locus of decision-making close to the banker who is in touch with the client, so that decisions can
be taken immediately. It would also offer an entry point into the banking system, which some
Banks can use to eventually grow into large firms. This will also augment the Banks¶ businesses
without incurring operational costs.

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The growth of the Indian economy will bring in new requirements which may be quite contrary
to the traditional ones. Seed capital may become the need of the hour. In such a scenario the
progress and the growth of venture capitalism in the country is quite eminent. In developed
countries like USA, venture funding is an integral part of the financial sector and plays a very
critical role in the growth of the economy. With India aspiring for a double digit growth, India
will become a prime target for venture capital and private equity, owing to various factors such
as fast growing knowledge based industries, favourable investment opportunities, cost
competitive workforce, booming stock markets and supportive regulatory environment among
others.

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With a strong and resilient banking and insurance industries, the Indian capital market is poised
to become more mature and be counted among the other renowned financial markets. The
leading stock exchanges of India, the Bombay Stock Exchange, as also the National Stock
Exchange, have extended their work-time in tandem with the other major financial markets of
the world.
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The current global economic slowdown has its epicenter in the United States (US) but the
contagion is being witnessed in all major economies of the world. Several countries are
experiencing rapid contraction in their Global Domestic Product, rising unemployment levels
and an overall slowdown in the pace of investment activity. What started as a shock in the
financial markets has spread to all sectors of the world economy and the exact depth and breadth
of the impact is still unclear. India¶s economy has been fuelled by the growth in the technology
sector in the recent past. A large part of this growth is dependent on the ³outsourcing´ or ³off
shoring´ of key business processes and software development activity (and related services) by
large global corporations and other organizations. Hence, the global slowdown has also affected
the business climate within India and the growth rate of the Information Technology (IT) and
Information Technology Enabled Services (ITES) sector is also experiencing the tremors of the
global recession. The Indian IT software and services industry which has seen a Compounded
Annual Growth Rate (CAGR) of around 30% over the last three or four years is now projected to
grow at 20%. Indian IT sector¶s derives approximately 61% revenues from the US based clients.
The revenue contribution from US clients to the top five Indian IT companies (who account for
46% of the IT industry¶s revenues) is approximately 58%. Hence, the impact of the slowdown in
the US is likely to have a deep impact on the prospects of the Indian IT sector. Moreover, about
41% of the IT industry revenues in India are estimated to be from financial services. Since this
sector has been affected most severely in the current climate, the impact on Indian companies
catering to this sector has been (and will continue to be) more acute. The margins are prone to be
challenged on account of the slowing growth in the US and European Banking and Financial
Services Industry (BFSI) sectors. Interestingly, the Indian IT / ITES sector has so far been
resilient in spite of the global slowdown. Part of this is due to the segmentation in the Indian IT /
ITES sector whereby some of the firms are the back office support service centers of large global
multinationals while the other is the indigenous IT service companies of Indian origin. While the
current slowdown has impacted the indigenous IT companies business in India, a part of this has
been offset by a greater amount of business flowing to the captive units of foreign companies
operating in India owing to the pricing and margin pressure in their local markets. The
indications are also that the next decade will be very different from the last one, with structural
shifts in demographics that will reflect more prominently in international trade and economics.
Technology evolution and adoption is expected to witness some disruptive changes as the
Internet generation take over the workforce. Experts suggest that the performance of the Indian
IT software and services and ITES industry, while impacted by US economic slowdown, will be
catalyzed by a revival in technology spending during the first half of 2009. There are some
offsetting factors softening the revenue slowdown - favorable Rupee-Dollar exchange rate
expected to lead to higher INR revenue growth figures during the year, growth de-risking
through other emerging markets, growth in non-financial verticals, and growth through
countercyclical new business initiatives.

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As 2008 ended, predictions of where the world economy is heading turned dire. The
World Bank projected world output to grow by a mere 0.9% in 2009 (as compared with 2.5% in
2008 and a high of 4% in 2006) and world trade to contract by a significant 2.1% (compared to
positive rates of growth of 6.2% in 2008 and a high of 9.8% in 2006). Asia Pac is likely to
witness a sharper fall in the growth rate, i.e. from 13.4% in 2007 to 5.5% in 2010E in
comparison to the world growth estimated at 6.3% in 2010E from the 2007 figures of 9.7%. The
overall impact of the global financial crisis has been felt in Asia / Pacific in terms of the local
stock exchanges and currency exchange rates and lower GDP growth forecasts for 2009.
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‡ The year 2008 saw the credit crisis push several major economies, with banks particularly
being badly hit - many requiring government bail-outs. Shanghai which had soared more than
300% in 2006 and 2007 had its share values wiped nearly by $3 trillion (£2.1 trillion)

‡ Japanese shares also suffered their biggest yearly decline, with the Nikkei dropping 42% as
world¶s second-largest economy slid into recession ‡ India¶s main index sensex plunged nearly
50% during the year. All global markets saw record falls in 2008 as the financial turmoil and
economic slowdown ended the stock market boom

‡ All stock exchanges across Asia / Pacific have been directly impacted in a significant way, with
an average loss of 45% from November 2007 through October 2008
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‡ Currency exchange rates have been affected, but on a more-isolated basis. Australia, China,
New Zealand and Singapore are experiencing drops in their currency against the U.S. dollar ‡ In
addition, India has seen its currency increase substantially and later fall against the U.S. dollar

‡ As a result, there is an assumption that there will be some impact on IT spending across Asia /
Pacific due to the increase in the cost tied to the technology spending. The global outlook is
bleak and recovery is still far.

The current global financial turmoil has hit almost all the economies around the world
deeper than anticipated. Industries globally are impacted by the slowdown. The turmoil is taking
a toll on the global IT industry ± one of the leading contributors to the global GDP, led by
uncertainties in the demand environment in both new and existing businesses. Hence, there
appears to be a reason to fear that the crisis will swamp emerging markets and other developing
countries, cutting into the considerable economic progress of recent years.c

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The global IT industry has matured over the years and has emerged to be a chief
contributor to the global economic growth. The global IT sector, constituted by the software and
services, Information Technology Enabled Services (ITES) and the hardware segments, has been
on a gradual growth trajectory with a steady rise in revenues as witnessed in the past few years.
2008 was a strong year as the number of contracts; the total value and the annualized contract
values exceeded that of the preceding year. Among all users above average growth was
witnessed in the government, healthcare and the manufacturing segments.
The global software and services industry touched USD 967 billion, recording an above
average growth of 6.3% over the past year. Worldwide ITES grew by 12%, the highest among all
technology related segments. Hardware spend is estimated to have grown by 4% from USD 570
billion to nearly USD 594 billion in 2008. Currently, the global IT industry is experiencing a
slump with the recessions in the US and many industrial countries with the level of impact
varying by country/market and industry.
Forrester in its recent report has predicted that the US IT market will dip to 1.6% in 2009,
down from 4.1% growth in 2008 (see figure below). The Asia Pacific region, using a weighted
average1 of local currencies, will do a bit better in 2009, with 3.1% growth.
The Western and Central Europe markets will have growth in local currency that is closer
to 1%. By 2010, the US market will shift to 7.3% growth, not far behind the 9.5% growth in the
other Americas, well ahead of the 5.5% growth in Asia Pacific and 5.3% growth in Western and
Central Europe.c

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As it stands, the US market accounts for majority of the global purchases of IT goods and
services. The US market which represented 37% of the global market for IT goods and services
in 2005 had shrunk to 33% share in 2008. Western and Central Europe would see its share of
global IT purchases fluctuate between 26% and 28% between 2008 to 2010; Eastern Europe, the
Middle East, and Africa and Asia Pacific are expected to hold their share positions.

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 The global IT purchases are expected to plummet as strong dollar would hurt dollar-
denominated growth rates for IT purchases going ahead. The British pound was 23% lower in Q4
2008 from the year-ago level, the Indian rupee is down 20%, the Canadian dollar is 19% weaker,
and the euro is down 9%. Only the Japanese yen and the Chinese yuan renminbi have gained in
value against the US dollar. While these currency swings are likely to reverse in 2009 as the
financial crisis fades, the dollar is still likely to remain above 2008 levels for most of the year.
That will dampen global IT market growth measured in dollars and hurt the reported revenues of
US vendors like Accenture, Hewlett-Packard (HP), and IBM with large overseas operations.
With global tech market in US dollars likely to shrink, global IT vendors¶ revenues is
expected to equal $1.66 trillion in 2009, declining by 3% after an 8% rise in 2008. The Asia
Pacific region has been a major growth engine for the tech industry. Its total purchases of IT
goods and services of $448 billion in 2008 were almost as large as Western and Central
Europe¶s. Countries like Hong Kong, India, Malaysia, Singapore, South Korea, and Taiwan,
have seen growth slow as exports to the US and Europe slowed.
Asia / Pacific would experience a delayed impact of the global financial crisis. Gross
Domestic Product (GDP) growth is expected to slow in most countries / markets in 2009, which
will affect IT spending. Asia / Pacific is still growing more aggressively than other regions in
GDP and in IT. As a result, vendors would be looking to this region for growth and stability.c

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IT-ITES industry in India has today become a growth engine for the economy,
contributing substantially to increases in the GDP, urban employment and exports, to achieve the
vision of a powerful and resilient India. While the Indian economy has been impacted by the
global slowdown, the IT-ITES industry has displayed resilience and tenacity in countering the
unpredictable conditions and reiterating the viability of India¶s fundamental value proposition.
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The main reasons for the successful establishment of software companies in India and its
strong performance can be attributed to the following:

‡ Cost advantage
Given the labor market conditions in India, there exists substantial scope of cost arbitrage
for performing services from India. This, along with a large pool of talented and English people
labor force, was the genesis of the IT sector¶s dominance in the world IT services industry.
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‡ Breadth of service offering and innovation

Service offerings have evolved from low-end application development to high-end
integrated IT solutions
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‡ Quality / maturity of process

Having made its mark as a center of low-cost and wide range of service offerings, the
Indian IT / ITES sector has also proved its mettle in the quality of the service offerings, as
demonstrated by the fact that it hosts more than 55% of SEI CMM level five firms and the
highest number of ISO certified companies
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‡ Ease of scalability
The vast and trained labor pool of technically competent, English speaking people has
made it easy for the Indian companies to enter and exit this industry. Moreover, the ease with
which a company can scale its operations (up or down) has been a great value driver for the
success of the Indian IT / ITES service sectors growth story
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The information technology sector has been playing a key role in fuelling the Indian
economic performance which has been stellar with robust GDP growth. India¶s total IT
industry¶s (including hardware) share in the global market stands at 7%; in the IT segment the
share is 4% while in the ITES space the share is 2%.
The industry is dominated by large integrated players consisting of both Indian and
international service providers. During the year, the share of Indian providers went up to 65-70%
due to the emerging trend of monetisation of captives. MNCs however, continued to make
deeper inroads into the industry and strengthened their Indian delivery centres during 2008.
The continuing contribution of this sector to the Indian economy is evident from the fact
that revenue generated from this sector has grown from 1.2% in FY 1998 to an estimated 5.8% in
the FY 2009. The net value added by this sector to the economy is estimated at 3.5-4.1% for FY
2009.
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‡ The export revenues are estimated to gross USD 47.3 billion in FY 2009, accounting for
66% of the total IT-ITES industry revenues

‡ IT services exports grew substantially on account of increasing traction of the industry

in emerging markets such as remote infrastructure management and traditional segments such as
application management

‡ Domestic market continued to gain momentum, growing at 26% in INR terms on

account of the overall positive economic climate, increased adoption of technology and
outsourcing

‡ Engineering services and software product exports increased by 29% (USD)

 ‡ Direct employment reached nearly 2 million ± with 1.5 million in the exports segment, a
YoY increase of 26% in 2008. The indirect employment multiplier suggested that the industry
created between 6-8 million additional jobs

‡ US and UK together constituted 79% of the global exports in FY 2008 thereby

dominating the export markets

‡ BFSI remained the largest market followed by Hitech / Telecom which together
accounted for more than 60% of exportsc
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Today¶s escalating, competitive and demanding environments have forced companies to
be more efficient, operate leaner and continuously create new procedures to keep ahead of
competitors - adding final consumer value to a product or service in the form of lower prices,
quality and better service has become an essential requirement in the global marketplace.
Corporations are trying to adapt with increasing competitors¶ innovations to find global
opportunities and resources, focusing on core competencies and mutually beneficial
relationships, and finally, outsourcing those activities which can be performed more quickly and
at lower costs by subcontractors. In a globally integrated economy, outsourcing is leading to
overall benefits for the source economies, providing significant monetary and employment
benefits. India has become a target destination for multinationals to back end their IT operations
in India owing to its strong value proposition.

We have witnessed an increased use of off shoring by global and European outsourcers,
and the emphasis on productivity and delivering value by select Indian players. The Indian IT /
ITES sector can be viewed from two perspectives - Indian global IT and Indian IT offshore. The
globally IT companies are increasingly looking inwards and focusing on process benchmarking,
enhanced utilization of infrastructure and talent, increasing productivity and greater customer
engagement. Global companies with roots in India are increasingly µoffshoring¶ work in order to
cut cost, as a result of which India is witnessing a revenue growth. On the other hand, as the
offshore market is getting tighter, the Indian IT offshorers are facing hard times in getting
contracts or replenishing their orders. The crisis in the U.S. financial services sector will have an
impact
in the short term on Indian outsourcers, as new projects may get delayed. This has impacted the
revenue flows and would need a substantial increase in SG&A to ramp up their volumes. In spite
of the negative effect of the outsourcing business, there has been relatively lesser impact on the
Indian IT growth due to the offsetting effect of the favorable revenues on account of the global
IT offshorers.
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The current global economic slowdown has made it a roller coaster ride for the world economies.
Asia / Pacific is experiencing a deferred impact due to the ³domino effect´ of the current crisis. With the
expectations of a sluggish GDP growth and consequent reduction in IT spending, countries / markets
which have a higher dependency on the export markets are expected to be affected more than other
countries / markets with stronger domestic demand. India being one of the world¶s fastest-growing tech
markets, thriving mainly on exports is also experiencing the tremors of the global economic crisis. IT
spending as a percentage of revenue normally varies from 3.5% in manufacturing companies, 5-6% in
global retail chains to about 9.5% in the banking industry. These could see marginal decline as companies
will tend to hold spends on new IT deployments.
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‡ 43% of Western companies are cutting back their IT spend and nearly 30% are scrutinizing IT
projects for better returns. Some of this can lead to offshoring, but the impact of overall reduction
in discretionary IT spends, including offshore work, cannot be denied
‡ The slowing U.S. economy has seen 70% of firms negotiating lower rates with suppliers and
nearly 60% cutting back on contractors. With budgets squeezed, just over 40% of companies plan
to increase their use of offshore vendors
‡ The IT services and outsourcing market is currently undergoing a structural transformation that
will have a profound effect on how IT service providers will have to conduct their business
Customers have started to reduce project scope and / or postpone new development. However,
they are also trying to move more work to lower cost offsite locations, which could increase IT
budgets towards tangible cost saving measures.
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The impact is likely to be higher for discretionary outsourcing expenditures rather than for
critical, ongoing Application Development and Maintenance (ADM) services. Indian IT companies3
which are focused more on providing basic ADM services, and with long term outsourcing contracts,
could exhibit more stable earnings in this environment. Furthermore, whilst discretionary expenditures are
being reduced, ongoing projects will likely continue, at least in the near term, especially those which are
in the more advanced stages of progress. Fitch expects IT services companies to report marginally
positive revenue growth (in dollar terms) over 2009.
 With decisions on IT budgets being deferred and sales cycles having elongated from 3-6 months
to 6-9 months, companies are seeing a significant drop in client additions. Moreover, the number of
targeted large deals has more or less dried up. According to TPI4, mega deals have fallen to levels lower
than those seen in 2001.c
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The current US-led crisis parallels the 2001-2002 Dotcom Bubble burst especially for India¶s IT
(export) sector. Approximately 61%5 of the Indian IT export¶s revenues are from US clients. If we
consider the top five India players who account for 46% of the IT industry¶s revenues, the revenue
contribution from US clients is approximately 58%.
This clearly indicates the adverse effect that the US recession is likely to have on the Indian IT sector.
The industry has been constantly seeking to diversify its markets to offset its reliance on the US, which
remains the largest outlet for India¶s software sector.
The impact has been more severe in the case of the Banking, Financial Services and Insurance
(BFSI), which accounts for around 40% of the industry¶s export revenues, and in retail and certain
manufacturing sectors. Other verticals like telecom and automobile are also likely to have a delayed
budget process and budget cuts. However, the industry focus is likely to shift to areas such as
manufacturing, healthcare, retail and utilities. Healthcare industry is likely to witness increased IT
investments due to increased focus on public health.
Other industries that will see growth include telecom, retail and utilities. Some vendors who have
a greater exposure to BFSI segment will be more impacted when compared to their counterparts with less
significant exposure (table on next page). The effect of this crisis would be more evident in the coming
quarters.
The overall revenue impact on the IT and ITES industry, as a result of the BFSI meltdown, could
be anywhere between $750 million and $1 billion.c
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The revenues from BFSI that were at 37% in June 2003 have stayed more or less unchanged as a
percentage of total revenues. In the December 2007 quarter, Infosys got close to 37% of its revenues from
BFSI. This slipped to 34% of revenues in the March 2008 quarter. In the quarter ending December 2008,
BFSI showed a sequential growth of 4% in volume
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India¶s third-biggest software exporter, and Cognizant, ranked sixth, have seen revenue from the
key Banking, Financial Services and Insurance (BFSI) vertical rise by about a fifth between Oct-Dec
2007 and July-Sept 2008
‡ April-June 2008, 0*%?)* recorded the highest growth from financial services vertical among the
offshore peers. This was mainly due to the type of financial services clients in the portfolio and the
multiple operating levels (table above)

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In IT sector, the margins are likely to be challenged on account of the slowing growth in the US.
Rupee depreciation seems to be the only tailwind that the sector enjoys. This can be evident from the fact
that the out of the increase in the IT export revenues for FY 2008 over FY 2007, almost half of the
increase could be attributed to the rupee depreciation during the same period.
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Pricing has been difficult in this sector compared to other sectors: On an average, the US
financial sector has driven bulk volumes through lower onsite pricing, higher offshoring and aggressive
volume discounts. It is safe to infer that BFSI application business margins especially in the top
companies are a few percentage points below the higher margin verticals like, say, energy. Hence, a
replacement of financial services business with business from other verticals is likely to positively impact
the bottom line. A speedy replacement is however, easier said than done.
Volumes are expected to remain weak over the next three quarters for most players forcing
further price cuts. The reduction in pricing is expected to be lower in magnitude compared to FY 02-FY
03. This is because the current pricing has not touched the FY 02-FY 03 bubble proportions. Infosys has
already reported 1.8% decline in blended pricing (constant currency) in Q3 FY 09 while HCL Tech
announced free transitioning for deals amounting to $1billion bagged during the quarter as a strategy to
garner volumes. TCS and Wipro too have acknowledged pricing pressures and the impact would be more
visible in the coming quarters.
Fitch Rating expects the sector to face margin pressures over 2009 and 2010 due to the intensified
competition for new contracts, thereby putting pressure on billing rates. Competition even for smaller
contracts has increased, as companies try to maintain utilization levels. Customer cost pressures could
also result in renegotiations of maturing contracts at lower terms. There could also be an increased shift
from traditional hourly billings towards a new return on capita based price contracts providing tangible
savings, while variable time / material contracts could be renegotiated at lower levels. Vendor
consolidation will be the order of the day in the current environment, as this would result in cost savings
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Fitch believes that the large Indian IT players will gain market share. However, these risks to
operating margins are partly offset by the fact that an Indian IT service retains some flexibility in terms of
their cost model.

As the impact of the slowdown becomes more severe, companies will increasingly look at cutting
costs in the form of overheads and reduction in variable pay / annual increments. The industry has also
been reducing its hiring, as well as changing the hiring profile to ensure that operating costs are in control.c
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The Indian IT industry witnessed plunge in all the three segments ± IT Services, ITES and
domestic market, as depicted below:

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The above graph depicts the decline in the employee numbers over the years in all the three
sectors viz. IT services exports, ITES exports and the domestic market. The ITES segment witnessed the
greatest plunge from 69.81% in FY 2003 to 12.83% in FY 2009. The high attrition rate coupled with the
current gloomy economic scenario can be the reasons attributed to the massive fall in the numbers.
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2008 was a transformational year for the Indian Information Technology-Information Technology
Enabled Services (IT-ITES) sector, as it began to re-engineer itself to face the challenges presented by a
macroeconomic environment which witnessed substantial volatility in commodity prices, inflation, and
decline in GDP rates, cross-currency movement, finally culminating in the economic downturn. In an
increasingly globalised world, significant complexity and uncertainty is getting attached to this
unprecedented economic crisis. The Indian economy has also been impacted by the recessionary trends,
with a slowdown in GDP growth to 5%. The focus and exponential growth in the domestic market &
presence of global IT offshorers has partially offset this fall, resulting in net overall momentum. The
slowdown is expected to persist, as lead indicators of US economic health (the US accounts for 40% of
global IT spend) continue to be extremely negative. That being said, India may be better positioned for a
quick recovery and for future growth than many of the other developing economies. There is a sense that
the international institutions will be remade to reflect the current balance of power, and that India may be
able to turn this crisis into ³a permanent place at a new high table´.

The current situation however looks fogged out, with no clear visibility. Some hitches faced by
the IT industry
are;
‡ Uncertainties high: Churn in client base, elongated sales cycles and headwinds from a harsh
currency environment render high uncertainties for IT companies
‡ Signs of revival in the US appear bleak, at least in the near future: Conference board¶s 10
Leading Economic Indicators (LEI) continue to be negative, showing no signs of near term revival
‡ Price cuts to hit margins: With volumes drying up, companies are expected to cut pricing in
favour of volumes
‡ Revenue visibility fogged out: IT companies normally have a one year revenue visibility of
>60%. However, with an already stressed client base, given the prevailing tough environment, revenue
visibility appears fogged
‡ Uncertainties weigh on valuations: Current valuations factor in the rapidly deteriorating
environment and the same is expected to remain depressed until companies improve revenue and volume
growth
 ‡ Powerful forces are driving change in the IT services market, including:
‡ The current tough economic condition is driving many companies to look to outsourcing as
primarily a cost-cutting initiative. To meet their needs the providers are now investing in delivery centers
around the world beyond India, although it remains as the leading offshore services destination
‡ The current economic condition spares no vendor. Even the growth of the once highflying
Indian providers has moderated considerably, driving many to further their efforts and focus on the
European market
‡ Cloud computing and SaaS paradigms are redefining how computing resources can be accessed
and paid for
‡ The boundary between software and IT services business models are blurring, leading to each
encroaching on the other¶s spacec
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The IT market is currently undergoing a structural transformation that will have a profound effect
on how IT service providers will have to conduct their business. Market forces of commoditization,
miniaturization, industrialization, and globalization, along with changing buyer sentiments, would
accelerate a shift in the dominant form of IT delivery in the coming years ± from buyers self-integrating
technology to outside providers assembling and managing it for them. As service providers prepare for
these changes, they are looking to redesign their solutions portfolio.
The belief is that there is a strong correlation between India IT sector revenue growth and US
GDP growth, which implies that a revival in revenue growth would coincide with an uptick in US
economic growth. The 10 possible indicators in this sector to track are:
1) Working hours
2) Jobless claims
3) New orders for consumer goods
4) Vendor performance
5) New orders for capital goods
6) Building permits
7) S&P 500
8) Money supply
9) Interest rate spread
10) Consumer expectationsc
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 An economic downturn / recession places high stress on the business and the IT organization.
There are different stages to a downturn, and there are ways to foresee them and manage them. The first
stage experiences decline in economic output numbers like GDP, corporate earnings, asset values and
diminishing return on investments, as markets start to slow. In the second stage although the signals are
marked by denial, fear and pessimism, the regulators of the economy try to pump in measures to tide over
the negative sentiment and manage the crisis, with the result of gradual improvement in customer
expectations, increase in demand and resultant rise in employment levels. The following stage is
characterized by the increased confidence and growth in customer orders, increase in consumption and
rate of earnings which provides breathing room to invest in growth projects.
The major changes organizations must make between stages are a focal point of risk and
opportunity for the business. Figure below illustrates the recovery cycle with productivity on the y-axis
and time on the x-axis. Productivity decreases during a full blown recovery as companies start piling up
their work force and capacities in anticipation of demand. The chart shows a recovery after Q2-Q3 FY 10.c
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‡ Verticalisation of IT services is a definitive emerging trend and users are demanding services
tailored to their needs. Mature IT customers are today looking for total solutions that can solve their
business challenges rather than at IT hardware, software, and services as discrete elements
‡ The sector is also eyeing remote infrastructure management services ³as the next big
opportunity´ after the success of ITES. India is ³well positioned to capture a disproportionate share of this
growth by 2013 that is about $ 13 to $ 15 billion out of the total potential annual revenue of $ 524 billion,
from the current share of $ 6 to $ 7 billion´, a report by Nasscom and McKinsey said
‡ India is also fast becoming a hot destination for outsourced e-publishing work. As per a
Confederation of Indian Industry (CII) report, the industry is growing at an annual rate of 35% and India¶s
outsourcing opportunities will help make the publishing ITES industry worth US$ 1.46 billion by 2010
‡ With growing interest in utility type models, software and IT services business models are
converging with software companies, incorporating IT services and software as a service (SaaS), while IT
services providers are architecting and selling asset-based offerings that do not rely solely on leveraging
labor as the underlying ingredient for revenue and profit margins
‡ Virtualization will tend to be a growth catalyst in the software market and open source software
a possible alternative to the proprietary software which is still perceived as the more-expensive optionc
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As we look ahead India would recognize need for transformation and change. Indian IT services
industry landscape has graduated from being a low value long term services provider offering cost and
labour arbitrage to provider of high value one time / long time services such as discrete and end to end
outsources facilitated by its scalability.
Expansion into tier 2 / 3 cities can reduce pressure. Currently there are seven centres that account
for over 95% of exports. By 2018, it is forecasted that 40% of IT / ITES exports will originate from non-
leader locations. The potential of near shoring needs to be tapped fully, as customers are on the lookout
for the geographically close and culturally similar centres.
Key global sourcing drivers will continue to be cost, access to talent, business improvements, increasing
speed-to-market and access to emerging markets. The future outlook for all these drivers is positive,
leading to increased momentum for global sourcing.
India¶s exports have been hit due to the global financial crisis. India has a large domestic market
that can help to offset the export business. Gartner expects some impact on IT services providers that rely
on offshore discrete projects coming in from the U.S. and Western Europe where projects are being scaled
back or cut.
To counterbalance the offshore work, these IT services providers will most likely focus on India.
India¶s burgeoning domestic market, fuelled by the economic growth will be a one of the focal points for
the IT sector in the coming days. As the Indian economy further opens up, other verticals including
manufacturing, travel and tourism, healthcare and entertainment will increasingly look towards IT to
increase competitiveness. For both new and existing verticals, the Small and Medium Business (SMB)
segment will represent an important source of growth for the domestic IT services market.
While the 2009 outlook for global technology related spending is affected by the recessionary
environment, a rebound is expected from 2010 onwards. The opportunity for India is tremendous since
currently it accounts for just over 4 % of worldwide technology related spend. Additionally, growth in
global sourcing is estimated to be almost four times that of technology related spend. India currently
generates the bulk of its IT-ITES revenues from the US, and the BFSI sector, while accounting for a
miniscule part of technology spend in other geographies and verticals.
The BFSI sector one of the largest spenders on IT and one of the worst hit in the current
economic slump. With the trouble brewing in the BFSI sector, the industry focus is likely to shift to areas
such as manufacturing, healthcare, retail and utilities. Indian service providers are increasingly engaging
in M&A activity as they seek to expand their customer base into new geographies. India-based providers
demonstrated in H1 2008 an appetite for making acquisitions, particularly in geographies or countries
where they wanted to grow their customer base.
Companies like Wipro, TCS, and Infosys were all near the top of the list of most actively
partnering service providers; between them, they account for 41% of all the partnerships. Sustained
demand, robust fundamentals and a supportive business environment will help realise the significant
potential the IT-ITES industry offers, both for exports and the domestic market. The Indian IT-ITES
industry is now at a critical point in its evolution. Behind it stands a decade of stellar performance which
has left a deep imprint on the Indian economic and social landscape. Moving forward, it faces a
transforming macroeconomic environment, rapidly changing customers and needs, evolving services and
business models, and rising stakeholder (employees, investors) aspirations. These forces are expected to
redefine the nature of demand and supply for the industry, and also redefine the strategic imperatives for
businesses in 2009.c

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 To sum up we can say that the global financial recession which started off as a sub-prime
crisis of USA has brought all nations including India into its fold. The GDP growth rate which was
around nine per cent over the last four years has slowed since the last quarter of 2008 owing to
deceleration in employment, export-import, tax-GDP ratio, reduction in capital inflows and
significant outflows due to economic slowdown.
The demand for bank credit is also slackening despite comfortable liquidity in the system.
Higher input costs and dampened demand have dented corporate margins while the uncertainty
surrounding the crisis has affected business confidence leading to the crash of Indian stock market
and volatility in forex market. Nevertheless, a sound and resilient banking sector, well-functioning
financial markets, robust liquidity management and payment and settlement infrastructure, buoyancy
of foreign exchange reserves have helped Indian economy to remain largely immune from the
contagious effect of global meltdown.
Indian financial markets are capable of withstanding the global shock, perhaps somewhat
bruised but definitely not battered. India, with its strong internal drivers for growth, may escape the
worst consequences of the global financial crisis. In other words, the fundamentals of our economy
continue to be strong and robust. The global economic environment continues to remain uncertain,
although the rate of contraction in economic activities and the extent of pressures on financial
systems eased in the first quarter of 2009-10. Yet, it is not possible to clearly see the path of the crisis
and its resolution over the coming months. In this sense, India is not unique as almost every country,
whether or not directly affected, has to manage the current economic crisis under uncertainty. I
would like to conclude the paper in the words of Dr. Rakesh Mohan, former Deputy Governor of
RBI, [cc'*) c)*c%$)5c%'5%c62c%c6) c0@c)*c%c$)5'c)*c$*%*$c
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While there are growth-related challenges in the short to medium term, there seem to be
some opportunities for managing the bottom line for the rest of the year. The macroeconomic
environment is depressing and has impacted the overall confidence in the sector from a market
perspective. A US recession, in all probability, will last through 2009 and more, in making this
period a challenging one for growth. Despite the foreboding financial crisis, the opportunities are
massive. Making the growth vs. profitability trade-off early on during the slowdown is just one
of them. Profitability levers are still available if growth is sacrificed where required, and
managed well. All in all, the environment looks weakest in a long while, and yet there remain
pockets of opportunity. These areas, if tapped intelligently, would enable the IT firms to ease the
blow of this financial crisis and help them tide through the tough times. The crisis has now
spread globally, and further reduces room to maneuver. To conclude, we are tempted to use a
popular aphorism; the Chinese character for ³Crisis´ represents two symbols ³Danger´ and
³Opportunity³. The choice is ours.

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˜c After a significant slowdown in GDP growth rate in the second half of 2008-09 and despite
decline in agricultural output, in 2009-10 the economy is expected to grow at 7.2 percent in as
compared to 6.7 percent in 2008-09, with the industrial and the service sectors growing at 8.2 and
8.7 percent respectively.
˜c Per Capita income grew by 5.3 percent in 2009-10.
˜c GDP growth is expected to be at around 8.5 percent (+/- 0.25 percent) in 2010-11 with a full
recovery, and in excess of 9 percent in 2011-12.

˜c For the fiscal year from March to December 2009, Wholesale Price Index inflation is estimated at
8 percent however inflation in food products is significantly higher at 19.8 percent.

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˜c With growth in nominal GDP at only 10.6 percent, fiscal deficit was as a proportion of GDP was
higher. The higher estimated levels of fiscal deficit in 2009-10 are largely due to the fuller impact
of the tax cuts announced as a part of the fiscal stimulus packages in the second half of fiscal
2008-09.
˜c The gross Tax-GDP ratio is expected to decline to 10.4 percent in 2009-10 (direct tax being 6 per
cent and indirect tax being 4.4 percent) from 12.9 percent in 2008-09 (direct tax being 6.9 percent
and indirect tax being 6 percent).
˜c In 2009-10, Fiscal, Revenue and Primary deficits placed at 6.5 percent, 4.6 percent and 2.8
percent of GDP respectively.
˜c Direct taxes grew by 14.3 percent with personal Income-tax rising by 20.8 percent and corporate
Income- tax by 10.8 percent.
 ˜c Indirect taxes declined marginally by 3.4 percent with revenue from Excise Duties declining by
11.9 percent and Customs Duties by 4.1 percent. However, revenue from Service tax has
increased by 18.6 percent.
˜c External debt is as a percent of GDP is on the rise and is placed at 4.5 percent in 2009-10.

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