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2001: The Year That Was

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DQI Bureau
New Update

While some may choose to call it ‘a year best forgotten’, 2001 had its

share of highs and lows. And while it shattered the myth that the IT industry

was indestructible, 2001 helped lay out the ground rules that will see the

sector emerge stronger in the long run. We present together some of the year’s

top events from our archives…

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Nishan:

No bull’s eye here…
Creating a database of a billion people and keeping it up and running does

not involve rocket fuel or nuclear science, but it sure requires political will

and action. But inaction has been the only word that describes what the home

ministry did on this front in 2001. Incidentally, this was also the year when

terrorists managed to breach the security and launch an attack on Parliament

House itself. And while the country debated on hi-tech security gizmos, the

lowest form of citizen identification–a physical ID card with a citizen number

that would have helped in authenticating the identity of any Indian–got no

closer to becoming a reality. A feasibility report submitted by Tata Consultancy

Services (TCS) to the Union home ministry in March 2000 advised that the

government enact legislation through a Bill in Parliament towards creating a

national database of all citizens. A second step was to create a national

registration authority to implement and sustain the system. The report suggested

a five-layer network for a National Identity System Home Affairs Network (Nishan),

to be further sub-divided on the basis of functionality. According to the

proposal, 15,000 franchisees would form the base of this pyramid network. Data

captured by these franchisees would be transferred to 462 distribution centers

located in each district having good optic fiber connectivity. Data from these

distribution nodes would be forwarded to 43 access nodes, all of which would be

located at major urban centers on the DoT’s STM rings. Finally, data from the

backbone layer would be transferred to a central database for the purpose of

verification, PIN and card issuance and storage. The result–zilch. The project

gathered dust for well over a year before being shelved unceremoniously.
Death of an icon

One of India’s best-known software lobbyists, Dewang

Mehta, who was the

head of the National Association of Software and Service Companies (Nasscom)

died of heart attack on April 12 in a Sydney hotel. He was 38. Dewang was part

of a high-profile delegation of experts from the field of information technology

led by Pramod Mahajan, minister of information technology and

telecommunications, to Australia. He was slated to catch the morning flight for

home but was found dead by hotel staff when they went to look for him in his

room after being told that he had missed the flight. A qualified chartered

accountant and cost and management accountant, Dewang joined Nasscom in 1991 and

went on to lead the organization to change the face of the Indian IT industry.

Under his guidance, Nasscom hired global management audit firm McKinsey & Co

to draw out a roadmap for the Indian software and services sector for the next

decade. In May 1998, Dewang was appointed member and spokesman of the

high-powered National IT Task Force set up by the Prime Minister to draft the

National Informatics Policy. In 1997, Dewang was awarded the ‘IT Man of the

Year’ Award by Dataquest. He was also awarded the ‘Entrepreneur of the Year

2000’ award by Ernst & Young and selected as one of the 100 Global Leaders

of Tomorrow by the Geneva-based World Economic Forum in October 2000.

Slowdown blues

The party is long over, and good news seems distant. In fact, it seems that

heads are still rolling thanks to continued pressure from the slowdown. Even

towards its fag end, Year 2001 showed no signs of respite from the hangover…the

slowdown was the common theme for Y2K1. For software exporters, over-dependence

on the US market took a heavy toll. According to DQ estimates for 2000-01, 63%

of overall software exports came from services undertaken for US companies. And

this story is the same for all software exporters in the country–even today, a

major chunk of their business comes from the US market. With the US slowdown–worsened

further by the attacks on the World Trade Center and the Pentagon–showing

little signs of immediate turnaround, happy days are far away. One contrary view

running through market circles is that Indian software companies will benefit in

terms of the US slowdown, thanks to increased outsourcing by US companies. Till

the end of 2001, though, that didn’t really happen. The latter part of the

year, therefore, was spent in scouring the horizons for new markets, with a view

to expand the "egg" base. The frontrunners in the new market segment

are the European and APAC markets. If tapped right, Indian software companies

can sing away their slowdown blues in Y2K2.

Dot-coms and last gasps...

VCs zipped up their wallets and investors began losing faith in fledging

investments… As dot-com dreams got shattered and reality set in, the euphoria

was taken over by a struggle to survive. Though it is difficult to put an exact

number to the dot-coms that crashed, worldwide estimates indicate that dot-com

layoffs in the second half of 2000 increased by 600% in comparison to the first

half. Dot-coms, a.k.a. ‘the shortest route to success’, were replaced by an

urgency to sustain. It was time to go back to business basics. No room for

short-cuts, please. Plush hi-tech offices, slick managers paid astronomical

salaries, and not to mention ESOPs… everything seemed in place. But no one was

quite sure where the revenues would flow in from. So, the inadvertent, the

inevitable had to happen. After all, how long could you endlessly spend

investors’ funds over extravagant ad campaigns and those so-called creative

pursuits? Money that was spent less on value creation and more on keeping pace

with the hype had to run out some day. As most dot-coms realized the

significance of profitability to sustain their businesses, their focus began

shifting towards a ‘strong revenue model.’ However, there were some sites

that managed to buck the slowdown trend and last out the storm, at least for the

moment. Among them were rediff.com, which utlized its first-mover advantage to

the full, as also leveraged on branding to attract funds. Another was

indiamart.com, which, pegging its strategy on service partnerships, prudent

financial management and revenue strategy, stayed away from extensive

advertising and media hype. It is still around and going strong. A third was

apnaloan.com, which focussed on a niche service with a clear advantage on offer.

The prior experience of its promoters in financial services helped create an

offline presence that supplemented business well and ensured longevity. And then

we have naukri.com, which also used its first-mover advantage to the full, apart

from a brand image with mass appeal and sold its large database of Indian jobs

well. And who can forget the tehelka.com episodes–match-fixing and murky

defence deals–that brought in funds for Tarun Tejpal’s company even as other

sites found little in the way of VC funding. Finally, clickforsteel.com and

bazee.com, the first backed by three steel majors–Essar, Mukand and Uttam

Steel–and the other capitalizing on strong management that managed to attract

funds through the year.

The ISP shakeout

Accustomed to growing at a rate of more than 200% since their introduction in

1995, Internet services have had to witness a major setback this year. During

the April—June (AMJ) quarter, the Internet subscriber base grew by only about

400,000 in spite of free accounts and discounts. This means the growth reduced

by less than half compared to the previous year. Although the overall Internet

subscriber base has crossed the 3-million mark, the declining health of

operators and the slackening subscriber growth has dampened the spirits. VSNL no

longer remains the largest ISP in the country. Satyam Infoway and Caltiger

romped home with the honors in the paid and free ISP categories respectively. As

on 30 June 2001, Satyam Infoway had an enviable subscriber base of 500,894 while

Caltiger had an even bigger subscriber base of 682,565. VSNL, the largest ISP

till 31 March 2001, saw a decline in subscriber base, from 630,970 then to

485,730 by June-end, thus getting relegated to the third spot. With falling

bandwidth prices and diminishing margins from dial-ups, ISPs have begun looking

at value-added services as alternate sources of revenues. This includes services

such as VPN, Web hosting, Web designing, ASP, and network integration and

management.

Stock markets

It might have been a topsy-turvy year for most of us, but for the stock

market, this is a year that would best be forgotten in its entirety, and never

mind the late-December rush. Through the year, there’s been one setback after

another, leaving scrips frothing at the mouth and pulling them back just when

they appeared to be on the verge of pulling back. If it was Ketan Parekh and his

chosen stocks that led the slide in the initial period of the year, taking down

UTI and killing its US 64 scheme once again, it was the worldwide tech-led

slowdown made the going horrible for IT scrips, once the market darlings. And

when that showed some signs of relenting, we had the 9.11 shocker in New York,

which sent the world and the stock market, the barometer of international

economies and business, into a tailspin. And when that showed some signs of

pulling through, we had the US demanding Osama Bin Laden’s head, and taking

punitive military action against an uncooperative Taliban. And when that showed

some signs of rolling over, we have had the December 13 attack on the Indian

Parliament and the subsequent souring of relationships between India and

Pakistan. And the more the talk of war gathers heat, the more markets are losing

steam… But the one saving grace amid all the gloom–things are beginning to

look up. Importantly, business, stricken by sagging sentiment for long, seems to

have finally decided that enough’s enough, and is moving ahead regardless of

extraneous forces. Amen.

The media’s bleeding too…

While the slowdown has been bad for the IT industry, it has been dramatic for

the IT publishing segment. When the IT industry was going boom in Y2K, the party

played host to a plethora of new IT publications hitting the stands–Computer

Gaming World, Smart Computing and the like. As the slowdown set in, cost-cutting

and austerity measures adopted by vendors set the problem ball rolling for the

IT media houses. The first one to go in early 2001 was Media TransAsia Group’s

IT department, taking Computer World, Communications World and PC World out of

circulation. The stage was set for others to follow, and by the end of the year,

a total of nine IT magazines were sapped of life. These included Jasubhai

Digital Media publications like Chip (later re-launched as Digit), Tele.com and

Computer Gaming World. Also, the much-awaited Information Week was shelved

before it was launched. And finally, Living Media’s Computer Today decreased

frequency from fortnightly to monthly. The same scenario was witnessed by

various IT portals and the players in this segment, who had been calling the

shots barely a year back players– IT Space, IT Nation, Net Pilgrim–cut short

their IT vision. The only IT that has managed to keep all its publications

intact is Cyber Media, the publishers of Dataquest. Even CMIL, though, has had

to tighten belts and rues the loss of the competition that has goaded it to

newer heights…

IT

training: Feeling the heat

The

slowdown has made life dull life for IT training institutes. The impact is

evident from the sharp drop in the number of inquires and registrations.

Obviously, when the IT sector as an employment destination takes a beating,

training facilities for those same jobs would find few takers. And that’s

ensured that in May and September–usually peak season for IT training

institutes–the half-yearly figures of most of the players show flat growth.

The training business took its toll on the bottomline of the top player–NIIT–which

closed its books with total training revenues of Rs 509 crore, a drop of 18.6%

from the previous year. Aptech’s training revenues too suffered a 39% drop in

the April-June quarter, compared to the JFM period, while SSI saw a fall in Q1

revenues. And while the giants worked hard to notch up numbers, 2001 saw smaller

players downing shutters.

VCs target late-stage funding

The perception of VCs has changed, sure, but their funding capability remains

undiminished. The ability to execute and deliver in the longer run is the key

factor that venture capitalists are looking at now. From being portrayed as

evangelists to being touted as hawks now, the perception of VCs has undergone a

sea-change through the year gone by. The dot-com bust, coupled with the

slowdown, led to many a start-up struggle for its next round of funding,

especially as revenue streams dried up and VCs started demanding proof of P2P–path

to profitability. Gone are the days when announcements about a dozen new

start-ups were being funded every week were commonplace. The mood has been

replaced by one of caution, but the availability of funds is strong as ever. VCs

still have bulging pockets but the catchword now is viability. Funding saw a

definite shift from first round to later-stage funding. While VCs earlier sought

the quick exit option, cashing in on the hype over unreasonable valuation,

market conditions have forced a change of thinking. With the stock market down,

the quick exit option has vanished, and so have non-serious players. Venture

capitalists have a new middle-name now–‘long term players’. And the reason

for that is that safety’s more important now that quick returns.

Virus attacks on the rise

2001 was a year that system administrators will never forget. Viruses, worms

and insects (!) of every caste and creed played their nasty games with computers

if every kind, size and nationality. Whether it be blamed on shoddy coding, or

whether on basic unpreparedness, or on simple ‘taken by surprise’, 2001 was

the Year of the Worm. Nimda, Code Red, Badtrans, Anna Kournikova, the list was

long and endless, alongside the list of millions of infected systems. Most of

the year’s early worms were mail-based, exploiting settings in Microsoft’s

Outlook e-mail program, which made it the preferred propagation tool for virus

writers worldwide. Later though, most of the new worms turned to the Web, taking

advantage of software security breaches to break into Web servers and launch

attacks. Firewalls and catchwords were little protection from them, and across

the world, billions were lost through the year in damaged/destroyed data,

projects delays and the like. On the other side, increased security measures and

patches saw many more billions being spent. Microsoft software was at

centerstage when the bugs struck, with Nimda and Code Red attacking the megalith’s

IIS Web server. As the year wound to a close, a future in which worms would

spread through multiple methods–such as e-mail, the Web and chat applications–was

beginning to come into sharp focus, much as virus researchers had said it would.

If predictions for such so-called "blended threats" came true in 2001,

many were left wondering whether 2002 would see the advent of another prediction–of

newer worms, ones that can update themselves automatically to avoid detection by

anti-virus software. And that would be a tall order to meet for most of the

bug-busters.

Nasscom’s new face

All that the dapper and unassuming Kiran Karnik wanted to do when he was

young was to grow up and become an engine driver. He past two decades tell us,

of course, that he has already achieved far more–guiding DD and Discovery to

newer heights, working with the Atomic Energy Commission, and creating a special

place for himself in the world of communications. The year 2001 saw Karnik face

perhaps his toughest challenge yet–that of filling up the slot vacated by

Dewang Mehta, the man synonymous with Indian IT. On September 15, Karnik took

over as Nasscom president, and his immediate charter is to maintain the

organization’s position as the software and services segment’s guiding force

and soothsayer. And much as the doubters have had a field day, Karnik has let

his actions do all the talking. Nasscom successfully organized the Asocio meet

in December, with IT and telecom minister Pramod Mahajan walking away with the

honors–the Asocio IT Award for 2001. Next in line for Karnik is a dream to

take IT to the masses–he wants Nasscom to lead the way in the emergence of

NGOs as a strong force in propagating the use of information technology. As he

says, "What is IT but what it can do to improve the common man’s

life?" How true…



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DQ CIO series
With enterprises across industries embracing IT, the scope of the IT industry

has widened to encompass issues related to other fields as well. On this front,

Dataquest, while retaining its position as the country’s leading magazine on

the IT industry, got IT-enabled businesses into its fold. As rapid IT enablement

had led to the emergence of the new corporate entity–the CIO–DQ took upon

itself the task of identifying what drove the CIO, and how his needs could be

addressed better. A step towards this–the launch of the DQ CIO Series in March

2001. Renewed focus on SCM, worries about info-storage or the transformation of

the CIO’s role itself, and rumblings on the enterprise front were reflected in

the CIO meets every month. CIOs from top enterprises across top Indian cities

were brought together. And partnering Dataquest in this unique venture was

Citrix. The meets comprised an hour-long discussion by prominent CIOs on

pre-decided topics. The discussion would be followed by an interactive session,

subsequently covered in issues of DQ. The final tally–10 meets in the first

year. The final result–a new niche created by DQ, with top CIOs and the

magazine working hand in hand.
Cellular boom

The Indian PC industry took all of 20 years to cross the 5-million mark, but

it’s taken the cellular base only six years to breach that figure. In October

2001, the country’s user base crossed the 5-million mark. Right from June

onwards, just half of the calendar year, each month has been a record in itself.

According to figures made available by the COAI (Cellular Operators’

Association of India), the month of August saw a record 2.5 lakh users being

added. This preceded other record-making months–June and July, which saw 2.11

lakh and 2.06 lakh users being added, respectively. The cellular base stood at

4.5 million at the end of August. The 5-million mark was breached in October

2001 and was indeed a significant milestone. Considering that the PC base

reached this mark barely a year ago, in December 2000, the mobile market has

been far faster in lapping up the miles. And despite the slowdown and fears of a

recession, there seems to be no speed-breakers ahead for the mobile user

industry. In fact, with Bharti leading the way and announcing NLD plans, mobile

operators have already announced sharp cuts in mobile-to-mobile STD rates,

effective from January 26, 2002–this can only fuel demand further. Also,

factors such as falling airtime rates and cheaper handsets are fanning the

go-mobile fire. Indian mobile shipments overtook PC shipments in fiscal 2001 (at

2.5 million, compared to 2 million PC shipments). At current rates, the cellular

base should overtake PC numbers by April 2002.

Mother merger

The mother of all mergers is facing birth pangs. A couple of months after

Hewlett-Packard chairman and CEO Carly Fiorina sent shock waves around the world

by announcing her company’s intention to buy out Compaq Computers in a

$25-billion deal, the merger continues to be shrouded in controversy. What’s

more, the Hewlett and Packard families, each holding between 5% and 7% of the

equity, have been openly vocal in their criticism of the deal, and by extension,

of Fiorina. And while the industry debates the pluses and minuses of the merger,

Fiorina herself faces tough times ahead, for quite surely, in the merger now

rests her own future at Hewlett-Packard. Clearly, one of the main reasons behind

the merger is that the acquisition would, in a shot, catapult the merged entity

close to the world’s number one IT company–IBM. Size would definitely help

the new company in negotiating better rates with suppliers but is the increase

in size alone sufficient is the question that everyone’s been asking? Also,

complimentary strengths have been hard to identify, one of the failings that

have seen most stake-holders rubbishing the proposal. One view has been that the

new entity lacks both the depth and the width of IBM, which is far strongly

positioned be it technology, software or services. For the moment, therefore, it’s

a nervous Christmas and a worrisome New Year for backers of the new HP, but at

the end of the day, Fiorina’s would have been a bold step, regardless of the

outcome. Creating a giant of the magnitude of the new HP is no small task or

endeavor, and has taken a lot of doing in just its thinking.



Of 9.11 and 12.13

As if the tech-led slowdown that was making the IT industry bleed was not bad

enough, the terrorist attacks on 9.11 were another slap across the face. The

picture of hijacked passenger aircraft slamming into the Pentagon and the twin

towers of the World Trade Center in Manhattan horrified the world and crippled

any hopes of revival for some time. And with the explosions of the crashing

aircraft also came the realization that terrorism in its worst form had finally

reached the United States as well. 9.11 caused stock markets to crash and the

NYSE and Nasdaq suspended operations for five days. The attacks highlighted the

need for disaster recovery and business contingency planning. The businesses

that had such plans in place were able to bounce back into action soon after the

attack. But even apart from 9.11, terror and strife were in the news throughout

the last quarter of 2001. The war on Afghanistan resulted from the attacks on

the US, leading finally to a sketchy conclusion–with the Taliban being ousted

and a makeshift regime being put in place. A failed peace process in West Asia

and rising tensions between the Israelis and the Palestinians added to the

climate of uncertainity. More recently, the attacks on the Indian Parliament on

December 13 reaffirmed the terrorist threats that India has been facing. With

India now taking stern measures against what it believes is the "Pakistani

hand" in the attack, there is talk of war. Is the worst still to come?

Tata-CMC marriage

On October 5, exactly a month after HP and Compaq declared their merger

plans, India’s disinvestment minister Arun Shourie announced the government’s

decision to sell off 51% of its stake in computer software and maintenance firm

CMC and that Tata Sons was the chosen suitor. The acquisition of CMC is

considered a key business decision by the Tata Group to consolidate its

leadership in the IT services business in India. Its strategy–to leverage CMC’s

inherent technological and domain expertise. While the deal was sealed at Rs 152

crore–with Tata Sons purchasing 77,26,500 equity shares of the company at Rs

197 per share–it also announced an open offer to acquire an additional 16.69%

stake at Rs 281.26 per share. The total value of the open offer–Rs 72 crore.

According to a shareholders’ agreement on October 16, 2001, the CMC board was

also reconstituted, with S Ramadorai being elected chairman, and S S Ghosh the

managing director and CEO. The new board of directors will now consist of ten

members–four Tata Sons’ nominee directors, four independent directors and

two government nominee directors. R Ramanan, who heads TCS’ operations in

Bangalore, also finds a place on the CMC board.

The new hot cakes

Y2K1 saw the strong emergence of the IT-enabled services dream unabated, and

the glamour boy in this business was the call center business. In today’s days

of pink slips and downsizing, call centers are among the only companies still

recruiting. Apart from generating employment, they are also topping the charts

for venture capitalist funding and in creating new revenue avenues for Indian

software companies. Wipro pumped in about $10 million in Spectramind to hold 17%

of the equity capital, while HCL Technologies picked up a hefty stake in Apollo.

Contact centers are also becoming an important component for the software

companies. While the likes of Wipro and HCL Technologies bought into contact

centers, other IT majors were busy setting up the same. TCS, for instance,

signed up with HDFC to set up Intelenet, while iFlex set up a subsidiary–iServ

International–and Mphasis put up MSourcE. Also entering the fray were

international call center majors like Conversys, Sitel and West, all of which

rapidly expanded their base in India. So while other segments of the ITES are

growing at healthy rates, it is the call centers that are hogging the limelight

and newsprint, keeping the great Indian ITES dream alive.

CEO survival trick
10-point CEO mantra
  • Focus
  • Adventure planning
  • The customer is still king
  • De-risking business strategies
  • Alternate geographies
  • Ready to implement software solutions
  • Cost cutters
  • Stay lean for the long run
  • Try Outsourcing
  • Take care of your people

Unfortunately for the IT industry, the night of struggle is not over. Dawn,

some predict, is just a spasm away and it’s been a while since we saw the

worst. Others say it’s far from over. When DQ asked for a cure earlier this

year–with top CEOs being urged to list out their tricks to last out the storm–a

best practices list emerged. We list some of those wise words here: "Focus

on your core strengths, do not lose out on other opportunities that raise their

heads in the market." "If this means making sizeable investments in

uncharted territory, do an accurate cost-benefit analysis before you make

it." "Earmark some funds and resources for diversification and

decisions–but such ventures should be backed by a proper study. Beat back the

competition by reaching out to the customer." "Cost-cutting makes

business sense, but not when it comes to the customer. If better customer care

means implementing a more effective CRM solution that you’d rather avoid, bite

your lip and take the plunge. If, in fact, it means additional expenses that

will wash away the pain points at the customer end, do not hesitate–this will

pay off in the long run." And finally, the global view–"We are

dealing with the world the way it is, not the way we wish it were." And so

on...



Megaspenders
Enterprise IT Spend*
  This

Year
Next

Year
Overall Industry 23%t 56%s
Auto Industry 1%t 69%s
Manufacturing 12%t 66%s
IT Companies 30%t 14%t
Finance 3%s 42%s
Services 28%s 189%s
Insurance 73%t 161%s
*Sample of 97 from Top 1,000 Indian Enterprises

The billion dollar question and the answer to the do mestic IT industry’s

growth–"Are enterprises and their CIOs still spending on IT?" The

answer came from the DQ-IDC India survey of top Indian enterprises, aimed at

putting a finger on actual investments today and getting a feel of IT spend in

the coming year. The chief trend–some disappointment over today, and the

proverbial light at the end of the tunnel, thanks to projections of stronger IT

spend next year. Year 2001-02 witnessed a downtrend, with a fall in IT spend of

23% over the same period in the previous year (with three months of the FY still

to go). But there was a silver lining–enterprises projected IT spend to grow

by 56% in the next fiscal, 2002-03. And the key growth areas–finance,

including banking and insurance, services, auto and manufacturing. The only

disappointment, and this trend continuing well into the next fiscal–IT

companies themselves. Admittedly, even in the current slowdown, CIOs are really

not worried about lower IT budgets, thanks to cut-throat vendor pricing. Despite

budget cuts, therefore, CIOs have been rolling out projects and meeting their IT

needs with limited outlays. Also, most investments now are directed at hardware,

but DQ expects services and software to move up the requirement chain in the

coming year. In segments like finance, such a trend is already discernible, with

services spend estimated to move up from 19% of the total IT spend to 35% next

year.

Back to business

The war is over. Stocks are up. Consumers are buying again. IT spend is back on track Finally, by the end of December 2001,

B2B spelt "Back to Business", world over and in India as well. And the

indicators were aplenty. The bond market caught up with stocks in terms of

anticipated economic recovery. Most sectors also bet on growth, but utilities,

energy, and consumer staples continued to lag. Recent economic data showed signs

of stabilization and suggested that major stock indices should be able to move

higher. There was news of fresh orders for the software majors in recent days,

strengthening the belief of a V-shaped recovery for the sector. There were other

indicators too. One, the thrust on short- and long-term investment, rather than

random spending by customers. Second, the mature percentages of topline growth,

coupled with a stable bottomline revision. Third, a continuous shift towards

making technology and its other elements an enabler, not an economy by itself.

Fourth, the increasing trend of merging the divide between Old Economy and New

Economy in terms of demonstrable results, profits on actual growth rather than

P/Es and focus on customer needs, rather than shareholder growth. What’s more,

Zenith Optimedia Group predicted single-digit positive growth by next year. The

report forecast that the trend would level off in Q2 2002 and move towards

complete recovery Q3 onwards. Last but not the least, the US-led war on

terrorism reached its fag end, with a new government in place in Afghanistan.

Not to miss the fact that despite the war, oil prices touched a two-year low.

Things, clearly, began to look up...

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