Close on the heels of the appreciation of the Indian rupee against the dollar, Indian outsourcing companies are grappling with a new problem -- uncertainty among U.S. companies about a recession has made these companies delay finalizing their IT budgets.
As a result, many large deals between U.S. clients and Indian outsourcers will not be finalized in the first half of this year, said Sudin Apte, senior analyst and country head for India at Forrester Research.
Business will however pick up for Indian outsourcers by the fourth quarter, particularly if the U.S. economy is in mild recession, Apte said.
"Our experience is that if the IT budgets of U.S. customers are marginally impacted in a recession, then there is an increase in business offshore, to cut costs," Apte said. If the cuts are too large, whole projects can however get canned, he warned.
The United States is the largest market for Indian outsourcers.
"We believe that the recessionary nature of today's economic climate will promote the adoption of increased outsourcing," said Siddharth Pai, a partner at outsourcing consultancy firm, Technology Partners International (TPI) in Houston, Texas.
TPI does not as yet see a cut in either discretionary or non-discretionary spending on IT by companies.
Forrester said Monday that the IT services and outsourcing market will increase by 4 percent this year to $162 billion from a growth rate of 6 percent a year earlier. The research firm forecast slowing growth this year for purchases of IT products and services in the United States.
The National Association of Software and Service Companies (Nasscom), a trade organization in Delhi, however remains optimistic about the growth of India's outsourcing industry. The industry is optimistic of achieving its target of $60 billion in software and services exports by March 2010, the association said Monday.
In the fiscal year to March 31, the industry expects export revenues of $40.3 billion, up by 29 percent from export revenue in the previous year.
Problems for India's outsourcing industry could get compounded, however, as its customers abroad have seen a drop in overall satisfaction and a drop in value for money from offshore outsourcing to India, according to a Forrester survey. India is still preferred as an offshore destination because it is the only country where foreign companies can hire staff in the thousands, Apte said.