and BPO services.<sup>11</sup> The U.K., also affected by the crisis, accounts for a further 21 percent of India’s OECD exports. Second, from a sectoral point of view, financial services and insurance remain the biggest of all markets which Indian services exporters serve.

However, even though the financial turmoil is clearly hurting the industry, Indian exporters have weathered the crisis (much) better than companies engaged in merchandise trade. Growth rates of sales and employment are expected to be cut in half, but this still leaves the sector with growth rates that would be considered buoyant in many manufacturing sectors. Instead of slashing jobs, the industry continues to remain a net hirer. In absolute terms, around 100-110,000 new jobs will be created in 2009, as compared to 223,000 in 2008. Since a counterfactual 160,000 jobs would conceivably have been added in the absence of the current crises, the employment dent left by the financial crisis amounts to about one-third of new job additions lost.

The muted impact at the industry level does hide considerable heterogeneity at the firm level, in terms of size as well as business field (IT versus BPO). Moreover, uncertainty about the consequences for outsourcing providers of growing demand for protectionism in the US and elsewhere further cloud Indian exporters’ prospects.

# **III.1 Impact on Demand for Services Exports**

India’s IT and ITES sector is heavily geared towards foreign markets. In fiscal year 2008, roughly three-quarters (or $40bn) of the sector’s output was destined for exports.<sup>12</sup> The industry’s increasing diversification in terms of geographic base, industries served, and the portfolio of services offered, has to some extent cushioned against the negative demand shock that originated mainly from the US economy. Industry sources expect that domestic sales, which are currently level about $11bn and account for only a quarter of total sales, may compensate for the loss in export demand only to a limited extent.

Nevertheless, as far as the IT export market is concerned, the slump in demand clearly shows up in export figures: while sales grew by some 24% during the first half of the fiscal year 2008 (Apr-Sep), growth slowed down to 12% in the second half (Oct-Mar), so that overall growth is expected to be 16-17%. In the ITES sector, growth in 2008 fiscal year is widely expected to be somewhat higher at 20-22%. No significant growth is expected in 2009, and average growth over the next two years is likely to fall to around 15% - which is one-half of last decade’s annual average growth rate of 30%.

> 11 Even though India’s share in US services imports has more than doubled since 1999, it still accounts for less than 2 percent of US services imports.

> 12 Estimates in this section are based on interviews with Indian industry and industry association sources and are not comparable with the estimates presented in Section II based on US import data.  There are significant differences between Indian and US estimates of India’s exports, particularly of the key category, business, professional and technical services (see e.g. US Government Accountability Office, 2005).  Among the reasons is that for this category of services the Indian data, unlike the US data, includes earnings of temporary Indian workers resident in the United States, exports between affiliated firms, as well as sales made to US-owned affiliates located outside the US.

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