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Indian outsourcing feels credit-crunch squeeze

An Indian trade body warns continuing "turmoil" in U.S. financial markets will have a negative effect on Indian outsourcing firms.

Indian outsourcing companies are likely to be affected by the economic downturn in the U.S., an Indian trade body has warned.

The National Association of Software and Service Companies (Nasscom) said on Tuesday that the continuing "turmoil" in the U.S. financial markets would be likely to have a negative effect on Indian business process outsourcing (BPO) contracts, in the short term.

"The Indian IT-BPO sector is an integral part of the global ecosystem and is likely to be impacted in the short-term (two to three quarters), as clients become cautious in their discretionary spending and decision-making cycles get extended," Nasscom said in a statement.

The trade body added that events such as the $85 billion bailout of AIG by the Federal Reserve had already had an impact on spending in the U.S. financial services industry.

"The U.S. financial market has been in unprecedented turmoil in the past few days witnessing bankruptcy, mega-takeover, and U.S. government bail-out of an insurance company," said Nasscom. "This turmoil has directly impacted spending in the U.S. financial sector and is likely to create a downstream impact on other sectors of the U.S. economy and worldwide markets."

Nasscom did not comment on what it was expecting from Europe, apart from saying that the effects on Indian BPO clients in the rest of the world remained to be seen.

"Over the next few weeks/months we will get a better assessment of the impact on sectors other than financial and also their influence in geographies other than (the) U.S.," the trade body said.

However, there are mitigating factors to the situation, Nasscom said. The subprime lending debacle has forced the financial services industry to put measures in place to try to limit economic damage, said the trade body.

"Since the subprime crisis began, last year, the industry has focused extensively on improved utilization, enhanced productivity, and business transformation," said Nasscom, which predicted that the Indian BPO industry would "tread the period ahead with caution and take measured steps."

By contrast, the nascent black IT economy, where criminals use business models similar to the legitimate economy, is increasing in the region, security company Symantec has warned. Speaking to The Hindu Business Line on Thursday, Shantanu Ghosh, vice president of India product operations for Symantec, said that criminal outsourcing activity was becoming more "mature."

"Phishers and spammers have supply chain managements too, and there are clear prices for the services that each one provides and all these are beginning to show up now," Ghosh was quoted as saying. "This has made the underground economy more mature with flexible models and for a new person entering this area he no longer needs to (be) a specialist, but can buy the services."

Tom Espiner of ZDNet UK reported from London.