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Does election fallout bode ill for India tech?

A stock market plunge is a short-term reaction, some say, to the uncertainty created by the change in government, not an indication of the viability of India's burgeoning tech centers.

A change of governments in India rattled financial markets there, but analysts said it will do little to stem the tide of technology jobs being outsourced to the populous nation.

"The trend toward offshoring in (information technology) is so powerful and has such momentum that I don't think there is going to be any immediate impact," said Marc Hebert, executive vice president at Sierra Atlantic, a company that helps large businesses manage enterprise applications from software makers such as PeopleSoft and SAP.


What's new:
Shares in two Indian stock exchanges fell more than 15 percent after the Congress Party swept into power in a parliamentary shift that could give more leverage to leftist parties.

Bottom line:
The change in government has caused some concern about economic policy and reforms. But some say no government is likely to turn its back on the tech industry, which has been the brightest spot in the Indian economy.

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Shares in two Indian stock exchanges fell more than 15 percent Monday after the Congress Party swept into power in a parliamentary shift that could give more leverage to leftist parties. The stock markets rebounded slightly Tuesday.

As the uproar over the elections continued, Sonia Gandhi, the leader of the Congress Party who had been expected to become prime minister, late Tuesday said she would decline the leadership post.

Hebert and others said the stock market fluctuations were a short-term reaction to the uncertainty created by the upheaval and were not an indication of the viability of India as a site for offshore outsourcing. India has become a hotbed for many areas of technology, from software development to technical support to business process outsourcing. Companies like General Electric, Dell and Hewlett-Packard have all turned to the country for its highly educated, less costly work force.

Hebert said no government is likely to turn its back on the software industry, which has been the brightest spot in the Indian economy. "I would imagine politicians would be very wary to mess with it at this point," he said.

There are now an estimated 5,000 IT software and services companies doing work in India, according to the National Association of Software and Service Companies, or Nasscom, an Indian trade organization. About 60 percent of the companies are domestic players, while 40 percent are multinational corporations with operations in India.

Much of Monday's stock drop was attributable to the fact that hedge funds that make up as much as 20 percent of the foreign investment in India's capital markets, said George Gilbert, a principal at Tech Strategy Partners.

"There are other, longer-term investors that are seeing that this is an overreaction and are buying," Gilbert said.

The governmental change in India comes as a new Forrester Research study reaffirmed an earlier forecast by the company that as many as 3.4 million U.S. jobs could be headed overseas during the next decade.

The question of privatization
Forrester Vice President John McCarthy said Monday that he doubts the change of government will affect those dynamics. Most of the concern in the financial markets, McCarthy said, has to do with what position the new government will take in regard to state-owned businesses and privatization.

McCarthy said the leadership shift was a surprise but shouldn't have a dramatic impact on the way business gets done in India. "It's not like India suddenly turned into a dictatorship," he said.

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McCarthy and Gilbert both noted that it was the Congress Party--which has needed the backing of leftist parties to hold its leadership in parliament--that started the move toward privatization in the early 1990s.

"The reality is the (official expected to become) finance minister is the same guy who was responsible for the economic liberalization in 1991, and he was part of the same party (then)," Gilbert said.

Sonia Gandhi's late husband, Rajiv Gandhi, who was the prime minister from 1984 to 1989, pushed the IT industry in its early years. He appointed a U.S.-based technocrat, Sam Pitroda, as his technology advisor, and under Pitroda's leadership, India developed a digital telephone exchange. In the recent election campaign, Pitroda returned to India to help the Congress Party, and he's expected to serve as an adviser to the incoming prime minister as well.

A spokesman for the Nasscom said that both the Congress Party and a communist-led government in West Bengal state had voiced strong support for the software and outsourced business-process industries.

"There have been concerns about economic policy and reforms, given that the new government in Delhi is perceived as being 'left-of-center' and is likely to have (the) participation or outside support of the communist parties," Nasscom President Kiran Karnik said in a statement.

"We are certain that the new Central government in Delhi will continue the excellent support to this sector that we have received in the past, both in terms of infrastructure and favorable policies," Karnik said. "Our foreign partners need have no cause for concern. If anything, the new government is likely to make all efforts to ensure a more industry-friendly, competitive and growth-oriented environment, and will welcome foreign investment to ensure this."

That said, the election did oust some of India's most vocal tech industry proponents. The defeat of Chandrababu Naidu, chief minister of the southern state of Andhra Pradesh, was particularly shocking for the industry, as he was perceived as the country's most IT-savvy chief minister. He set up an exclusive tech enclave called Cyberabad and attracted Microsoft and leading Indian companies such as Wipro and Infosys to set up development centers there.

Despite the prominent role of IT in India's economy, some say the ousted leaders gave technology too much attention. Political commentators have attributed Naidu's rout to his singular attention to the tech industry at the expense of the development of rural areas.

While the software industry is definitely seen as a plus, its benefits may not have been broad enough to affect a significant number of the 300 million or more Indians who voted in last week's elections, said Sridar Iyengar, president of the Silicon Valley chapter of TIE (formerly The Indus Entrepreneurs but now called Talent, Ideas and Enterprise), a nonprofit entrepreneurship organization started a decade ago by local tech workers of Indian origin.

"I think the election has more to do with the distribution of the riches generated by the tech industry...rather than any effort to curtail the tech sector itself," Iyengar said.

Several thousand TIE members were in Santa Clara, Calif., last week for a conference when the election results came in. While there was surprise, Iyengar said, there was not much consternation that the tech industry would be hampered.

"Technology is the golden goose at the moment," Iyengar said.

Deepak Gupta, marketing co-chair for last week's TIE conference, agreed. "The tech industry (in India) has reached critical mass. When something reaches critical mass, you can't slow that down."

The election aside, Indian politicians and business leaders have also had to deftly try to avoid a backlash from workers and others in the countries whose jobs they are inheriting. But that too will run its course, business leaders said.

"If you recollect, there was a negative sentiment about Japanese goods during the '80s. Today, brands like Toyota, Sony, Honda and Mitsubishi are as much a part of modern America as Ford," Manoj Kunkalienkar, president of Indian IT company ICICI Infotech, said earlier this month. "Backlash is a passing phase, and ultimately, corporations as well as people will realize the greater business benefits."

CNET News.com's Ina Fried reported from San Francisco and Dinesh C. Sharma from New Delhi.