India's Information Technology sector, which has played such a major role in the country's economic expansion, is afraid it is going to be hurt by a significant appreciation of the local currency. Anjana Pasricha has a report from New Delhi.
After years of runaway growth, India's famous Information Technology sector is grappling with the realization that its products may be bringing in smaller profits.
In just three months, the rupee has appreciated by nearly nine percent against the dollar. This comes on top of earlier gains, making the rupee worth 13 percent more against the U.S. currency than it was a year ago. That means that the dollars Indian companies earn abroad buy fewer rupees at home.
Indian IT exports added up to 31 billion dollars last year. But an industry that earns much of its revenues from U.S.-based customers says the stronger rupee could trim its profits in the coming year.
P.K. Chaudhury of the Indian Investment and Credit Rating Agency, or ICRA, says a slowdown in the IT industry could affect overall growth in the country.
"Substantial growth is dependent on services…like IT sector, and their invoices are mostly dollar denominated. The U.S. is a major partner in trade of services, and that is a cause of concern," Chaudhury said.
The rupee's appreciation is not the only problem. Wages make up about half an IT company's costs, and an ever-increasing shortage of software engineers has led to spiraling salaries - increases of more than 15 percent a year in recent times. This, too, has added to the cost of doing business, and unless this additional cost is passed on to the buyer, profits will drop further.
The low price of Indian goods and services has been a major factor in the IT industry's growth. The body that represents the industry, the National Association of Software and Service Companies, says a rising rupee and higher wages could blunt the sector's competitive edge.
Analysts say the industry is searching for solutions. The ICRA's Chaudhury says some of the biggest names in the industry, such as Infosys and TCS, are switching their focus to higher-value work like research and data analysis, where profits are greater.
"Now the effort is more in terms of value addition: they want to give better quality, higher quality, more in the high-margin services. In the value chain, they are going up," Chaudhury said.
India's Trade Minister, Kamal Nath, recently said the strengthening rupee would hurt the country's exports, and asked trade bodies to suggest measures to offset the losses.
