Hard-nosed Sentiments

Businessmen are supposed to be hard-nosed. With sentiments playing little or
no part in their decisions. Yet one of the most oft-heard phrases these days in
business circles is negative sentiment. Therefore, even as DQ takes stock of the
last financial year for the IT industry, a sense of contradiction emerges. The
year in revenue terms posted the highest growth rates ever reported–a whopping
50.3%–and actual revenues of almost Rs 50,000 crore ($10.6 billion). In the
past years, that would have been reason to celebrate and uncork the champagne.
This year, though, the sentiment is extremely negative and the cheapest whisky
is replacing the champagne–if at all. The mantra is cost cutting, and more
cost cutting. Money supply has dried up, credit lines stretched to the limit.

The fact that this downtrend has come in the space of a mere six months is
indicative that the old cycles of measurement are untenable. Quarterly trend
changes–or even shorter than that–are the rule. Export-oriented companies
have been used to these tight cycles for some time now, but the domestic market
is yet to find its bearings and move in this mode. Even though data and
quarterly trends are visible, the reaction times and system supports required to
make rapid corrections are still not quite there. Business realities are making
it imperative for organizations to shorten their reaction time and be able to
take business decisions with shorter decision cycles. The ups and downs will
continue to occur–perhaps even with higher frequency.

Another factor is that stock markets are playing a larger-than-life role in
the building of positive or negative sentiment. Just as they ignored the basics
in times of irrational optimism, the present dip is being seen in all its
irrational pessimism. A comma has become a full stop. Somewhere along the line,
the growth rates of the past 2-3 years had raise expectations to unrealistic
levels. The minds now have to adapt themselves to a slower pace of growth.

The simple fact is that the infotech industry rode two huge waves, one after
the other–we had the Y2K blitz and then the Internet wave. Two such phases in
quick succession happen rarely. And even as they recede, the Indian economy–which
is of greater concern to domestic players–has also chosen to slow down. This
adds to the sense of gloom. As far as stock markets go, what is of concern is
the tendency of key players to take positions that will shore up stock prices at
the individual organization level. Since over-achievement of targets is the
keyword in the stocks, there is a practice of making low forecasts, which can be
surpassed later. This approach has its positives, but, in times of a downtrend,
this can lead to greater gloom.

And if mercurial markets influence more and more
long-term business decisions or statements, it is obviously a problem.

The question that then comes–how does this change? A sense of mid-term
optimism in the Indian and international economy has to emerge for the downtrend
of sentiments to reverse. That will partly happen when stability comes in–which
it will as soon as markets and industry reconcile and adapt to the new
realities. Money supply will then increase and investments start cascading in
again. And it will be another rendition of the classical chicken-or-egg-first
problem–also needing confidence-building measures and statements from
economic, political and industry leaders, all of whom will have to underline
long-term inherent strengths, rather than focus on short-term problems.

The when part of the problem is more contentious. It is unlikely that the
heady growth rate and rash of investments will return anytime soon. At the same
time, the very healthy and sustainable growth rate of the mid-nineties should
remain. There is no reason to think that IT will become irrelevant and the
growth rate slow down to single-digit levels. That would be a tragedy. The
timing, therefore, has to do more with the creation of positive sentiment than
with anything else. The second half of this year should see that happening–if
there are no major aftershocks. The current year should also see a healthy
growth rate for all segments of the IT industry. The expense belts, however,
will be considerably tighter.

The party is over. There is no reason, however, to stop preparing for the
next one. I would plan for it over Christmas and New Year.

Shyam Malhotra is
Editor-in-chief of CMIL, the publishers of Dataquest