A STUDY ON EFFECT OF MELTING DOWN OF ECONOMIES ON INDIAN ECONOMY Done for Financial markets and IT Industry

PROJECT REPORT Submitted in partial fulfillment of the requirements for the award of the Degree of

MASTER OF BUSINESS ADMINISTATION By

Under The Guidance Of

OSMANIA UNIVERSITY HYDERABAD ACADEMIC YEAR 2008-2010

ACKNOWLEDGEMENT

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.

DECLARATION

I here by declare that the project report entitled ³A STUDY ON EFFECT OF MELTING DOWN OF ECONOMIES IN INDIAN ECONOMY´ Under taken for the Financial markets and IT Industry, submitted by me in partial fulfillment for the requirement of ³Master Of Business Administration´ degree from Osmaniya University, Hyderabad and it has not been submitted previously in part of any university or institution.

Place: Date: (-----------------------)

EXECUTIVE SYNOPSIS Need for the study: 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.

Objectives of the study: ‡ ‡ To study and analyze the Indian economy during recession. To study which factors are influencing the Indian economy while recession is going on.

Impact of an American Recession on India:
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.

CONTENT
Chapter 1 CONCEPTUAL FRAME WORK Chapter 2 RECESSION EFFECT ON INDIAN FINANCIAL MARKET Chapter 3 RECESSION EFFECT ON INDIAN IT INDUSTRY Chapter 4 FUTURE OUT LOOK ON INDIAN ECONOMY Annexure
Bibliography

CONCEPTUAL FRAME WORK

Introduction 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 µGreat Recession¶ of 2008-09 will be the worst global recession since the 1930s. Meaning Of Recession A 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.

Impact on Indian Economy:
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.

I.

Stock Market:

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.
II. Forex Market:

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 200708 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.
III. Money Market

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 SeptemberOctober 2008 under tight liquidity situation.
IV. Slowing GDP: 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.

Table 1: Rate of Growth at Factor Cost at 1999-2000 Prices (per cent)

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.

Table 2: Rate of Growth at Factor Cost at 1999-2000 Prices (per cent)

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.

V. Strain on Balance Of Payments 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.

VI. Reduction In Import-Export 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.

Chart 1: Export Growth Year Wise

Chart 2: Quarterly Export Growth in 2008-09

Source: Economic Survey 2009, Government of India

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. VII. Reduction In Employment 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.

Chart 3: Growth in Employment Rate

Source: Economic Survey 2009, Government of India

VIII. Taxation 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.

Chart 4: Reduction in Tax-GDP ratio

Source: Central Statistical Organisation

Response to the Crisis
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 pointsI. Fiscal Response 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 ±

‡ Enhance coordination and harmonization of the regulatory apparatus internationally, given the global scope of the recent crises with increased cross border financial integration; ‡ Introduction of countercyclical prudential regulatory policy; ‡ 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; ‡ Supervision and management of liquidity risk and greater transparency in the financial sector to improve better risk assessment by the customers and investors; ‡ Improvement 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.

II. Monetary Response 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:-

1. Interest Rate Management 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‡ Reduction 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.

‡ Reduction 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.

‡ In 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. Table 3: Changes in Regulatory Rates during 2008-2009

Source: www.rbi.org.in

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.

2. Risk Management 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‡ Implementation 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. ‡ Further guidance to strengthen disclosure requirements under Pillar 3 of Basel II. ‡ Counter-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) ‡ Reduction in the risk weights for claims on unrated corporate and commercial real estate to 100 per cent; ‡ Reduction in the provisioning requirement for all standard assets to 0.40 per cent; ‡ Improve and converge financial reporting standards for offbalance sheet vehicles; ‡ Develop guidance on valuations when markets are no longer active, establishing an expert advisory panel in 2008. ‡ Market participants and securities regulators will expand the information provided about securitised products and their underlying assets. ‡ Permitting housing loans to be restructured even if the revised payment period exceeds ten years; ‡ 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.

3. Credit Management 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-

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

INDIAN FINANCIAL SYSTEM ± OVERVIEW

Background 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.

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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.

Major Market Players

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 Cooperative 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.

Public Sector Banks in India
Allahabad Bank Andhra Bank Bank of Baroda Bank of India Bank of Maharshtra Canara Bank Indian Bank Indian Overseas Bank Oriental Bank of Commerce Punjab & Sind Bank Punjab National Bank Syndicate Bank

Central Bank of India UCO Bank Corporation Bank Dena Bank Vijaya Bank Union Bank of India United Bank of India

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. 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.

Current Status in India 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.

Scheduled Commercial Banks ± Current Scenario 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.

Insurance ± Current Scenario
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). 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 (20082011)¶ 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.

Capital Market ± Current Scenario 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. Government Policies 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. Policies in the Banking Industry 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:
‡ Keep a vigil on the trends in inflation and be prepared to respond swiftly and effectively

through policy adjustments to stabilise inflation expectations.
‡ 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.
‡ 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.

Policies in the Insurance Industry 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: ‡ A.C.Mukherjee Committee Report 2003, to examine the remuneration system for Insurance Brokers, Agents etc. in general insurance business. ‡ IRDA Guidelines on Licensing of Corporate Agents, 14th July 2005. ‡ G.K.Raman Committee Report, November, 2006 on Brokers and Broker related issues.
th

‡ Guidelines on Insurance and Reinsurance of General Insurance Risks dated 15 September 2006 to set rules of conduct for both insurers and brokers. ‡ N.M.Govardhan Committee Report on Distribution Channels. ‡ Report of the IRDA Committee to Evaluate the Performance of Third Party Administrators (Health Services), April 2009.

Select Issues 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.

Risk Management in the Financial Sector 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.

Management of NPAs 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.

Basel ± II Norms 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.

RBI Deadlines for Implementing Basel -II

.

Approach

The earliest date of Likely date of making application by approval banks to the RBI the RBI by

No. a. Internal Models Approach (IMA) 01-Apr-10 for Market Risk b. The Standardised Approach 01-Apr-10 30-Sep-10 31-Mar-11

(TSA) for Operational Risk c. Advanced Measurement 01-Apr-12 31-Mar-14

Approach (AMA) for Operational Risk d. Internal Ratings-Based for Credit (IRB) 01-Apr-12 Risk 31-Mar-14

Approaches

(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.

Structural Changes 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. Promoting Financial Inclusion 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.

Future Prospects
Demographic Shifts will Transform Financial Sector 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. Technology will Enable New Products and Delivery Models 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.

Consolidation in Indian Banking 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.

Increase in Insurance Penetration 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. Blurring Distinction between Banks and Insurance 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. Exchange of Financial Services through a Common Platform 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. Venture Capital may become an Integral Part of the Financial Sector 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.

A Matured Capital Market 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.

INDUSTRY ANALYSIS- Indian IT industry

Global economic slowdown and its impact on the Indian IT industry
Executive summary
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.

1. Current global scenario and the uncertainties involved
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.

Impact on stock market ‡ 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 Impact on exchange rates ‡ 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.

2. Structure of the global IT industry
Growth of global IT economy 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.

³The 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´

Global scenario - IT purchases 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.

The global IT purchases are expected to plummet as strong dollar would hurt dollardenominated 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.

³Asia / 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´
United State 33% %

3.

Structure of Indian IT industry
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. Value proposition 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. ‡ Breadth of service offering and innovation Service offerings have evolved from low-end application development to high-end integrated IT solutions ‡ 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 ‡ 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

Performance of the Indian IT-ITES industry 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.

Some of the key highlights of the Indian IT / ITES industry for FY 2009 is enumerated below: ‡ 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 exports Global IT and Indian IT offshore 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.

³India has become a target destination for multinationals to back end their IT operations in India owing to its strong value proposition´

4. Impact of the recession on IT sector in the Indian economy
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.

A recent study by Forrester reveals that
‡ 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.

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.

Verticals
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.

‡ Infosys ± 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

‡ Wipro ± 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, Cognizant 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)

‡ Tata Consultancy Services, for example, earned 42% of its revenue in the second quarter of CY 2008 from the BFSI

Impact of exchange rate on revenues 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.

Pricing poised for decline in favour of volumes
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 for customers.

³The US financial sector has driven bulk volumes through lower onsite pricing, higher off shoring and aggressive volume discounts´

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.

Hiring trends
The Indian IT industry witnessed plunge in all the three segments ± IT Services, ITES and domestic market, as depicted below:

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.

Future outlook
Fogged out
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 space

Signposts to a revival
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 expectations

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.

Few emerging trends
‡ 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 option

Looking Ahead
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 nonleader 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.

³Indian economy further opens up, other verticals including manufacturing, travel and tourism, healthcare and entertainment will increasingly look towards IT to increase competitiveness´

Future Outlook for Indian economy

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, ³As the monetary and fiscal stimuli work their way through, and if calm and confidence are restored in the global markets, we can see economic turnaround later this year. Once calm and confidence are restored in the global markets, economic activity in India will recover sharply. Yet there will be a period of painful adjustment which is inevitable.´

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.

As per Indian Economic Survey 2009-10:

State of the Economy and Prospects y 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. y y Per Capita income grew by 5.3 percent in 2009-10. 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. y 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.

Fiscal Developments and Public Finance y 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. y 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). y In 2009-10, Fiscal, Revenue and Primary deficits placed at 6.5 percent, 4.6 percent and 2.8 percent of GDP respectively. y Direct taxes grew by 14.3 percent with personal Income-tax rising by 20.8 percent and corporate Income- tax by 10.8 percent.

y

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.

y

External debt is as a percent of GDP is on the rise and is placed at 4.5 percent in 2009-10.

Bibliography www.google.com Economic Survey, Government of India www.rbi.org.in Annual Report 2008-09, Reserve Bank of India
NASSCOM factsheet updated Feb 2009

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