The government finally placed the draft 12th five year plan before the National Development Council meeting held recently in New Delhi. For all practical purpose, it is the final document and as the Planning Commission points out in its website, the word “draft” only means it is still being copy-edited. So, expect no major change in the document in terms of facts and plans.
While going through the draft document on economic sectors, I naturally stopped at the section on information technology (IT). The specific plans and the language reflect the confidence and comfort that the government has come to find in IT to drive economic growth as well as to help in achieving socio-economic objectives.
While there are lots of plans and initiatives, I thought it is not a bad idea to examine, in particular, the projections that the document provides for achievement by the industry, in a table titled Key Targets for the Twelfth Plan for the Electronics and IT-ITeS Industry on page 268. In this post, I am focusing on just one of the segments listed therein, IT-ITES Exports.
I have picked up IT exports, of course, partly because of my interest and experience in analyzing this segment but it is also because unlike the other major segments, electronics hardware and domestic IT market, the IT exports segment is relatively large and mature and the past experience can give some indication of the future. The other two, being comparatively smaller and nascent, will depend a lot on policy decisions, that will significantly influence how they move.
According to the document, the government expects that Indian IT exports will reach $130 billion by FY 2016-17, from the present (FY 2011-12) $69 billion. That is a CAGR of 13.6%. Is that good? Is that bad? Is that just okay?
Before we examine those questions, let us be very clear about the fact that these numbers are not invented by the planning commission. It has taken those numbers from the respective ministries. And it is safe to assume that IT ministry would have consulted the industry players and industry body, NASSCOM before arriving at this figure.
Back to our original question—is a CAGR of 13.6% between 2012-17 realistic?
Let us start with the past data. Betwwen 2002-07, IT exports in India grew by a CAGR of 32.6%. In the next five years, between 2007-12, the IT exports registered a CAGR of 17.2%. Purely going by those number, a 13.6% growth does not seem too unrealistic for the period 2012-17.
But wait a minute. Before we get into present performance and any other environmental factors for the future, it is important to clarify a technical point. While the government has its own five-year plan periods, and all its numbers are synchronized to those blocks of periods, the industries do not necessarily work that way, least of it an exports industry.
Indian IT services exports industry had its distinctive growth periods. The period between 2003-04 to 2007-08, was the high growth period when, on an average, the exports grew 30% year on year, growing by a whopping 37.2% in 2004-05. Of course, the industry was much smaller.
The growth suddenly fell to 16.6% in 2008-09, when the first impacts of the US sub-prime crisis was felt. This was after a year which saw a 29.9% growth in IT exports. The next year was worse, in the wake of a severe slowdown, and the growth plummeted to 5.6% before bouncing back to 18.7% in the subsequent year, 2010-11. It slowed down a bit in FY 12 to 16.5%.
Going by the IT industry’s growth, a better figure to take as a benchmark for comparison, is hence, the CAGR for the four-year period between 2008-12. This comes out to be 14.2%, thanks to the elimination of the year 2007-8, which, with a 30% growth skewed the entire figure for the five year period between 2007-2012. The year 2007-08, in short, belonged to another era.
The indications so far suggest that the current year too will register a similar growth, as the last four years. The revenue of top five IT services companies have grown by just 9% in the first half of the year (see table). Though both TCS and Wipro’s revenues do include a smaller but significant domestic revenue, this gives an idea of what to expect this year. It is difficult to believe that the growth will top 12-13% in most optimistic case.
|COMPANY||H1 FY 13 (Revnue in $million)||H1 FY 12 (Revnue in $million)||GROWTH (%)|
The Gartner forecasts for the global the IT-BPO outsourcing in the next few years too do not paint a very rosy picture. According to the firm, the IT-BPO outsourcing will grow on an average of 4.3-4.4% between 2012-2015 (Jan-Dec).
If the first year of the block in consideration by the 12th five year plan itself sees a growth of just about 12-13% with no great expectations about a huge turnaround in the next few months, is it realistic to expect that the exports will grow by 13.6%?
However, there are some possibilities.
One, let us not forget that many of these growth figures are only partially due to IT industry’s performance and actually have to do a lot with exchange rate fluctuations. By the way, the growth in rupee terms this year, may be far better, topping the 20s.
So, if the rupee gets really stronger against the dollar, the 12th Plan targets may still look achievable. But will it? That is not my area and I would not like to do any guess work there.
The other possibility is that the IT industry actually breaks new grounds and manages to tap the new opportunities such as products/engineering services and they grow significantly. But even in that case, it is difficult to believe that the growth will be impacted much in the 12th plan period.