The U.S. market accounts for 62 percent of India's software exports, and the impact of hard times in the United States has become painfully clear here. Profits at Hughes Software, for example, plummeted 52 percent during the quarter ended Sept. 30 versus the same period last year. Similarly, Aztec Software has announced plans to cut its staff by 10 percent and Sasken Communications recently cut salaries across the board by 20 percent.

Billing rates, a key indicator of the industry's health, are also under increasing pressure: Rates commonly as high as $45 per hour have dropped to $8/hour or less.

"There is a lot of surplus capacity. Pricing pressures are going to continue," said Phaneesh Murthy, head of global sales at Infosys Technologies, India's best-known software company. So far Infosys has been one of the few Indian companies to grow, adding 607 engineers during the July-September quarter.

With a half dozen companies announcing layoffs, the mood in the job market is one of unease. "There is a discernible slowdown in hiring across all levels, with some companies implementing a postponement of hiring at this stage," said N. Muralidharan, managing director and vice president of Jobstreet India, a recruitment firm.

Uncommon decline

For the first time, the job market for Indian software engineers in India is declining. "There is more of an uneasy feeling in the job market, which becomes more severe as we talk to the younger [software] professionals," the recruiter said. Recruitment at most companies has been frozen, with openings only for "highly skilled software engineers, project managers, business development managers with overseas experience," Muralidharan said. Hiring by PC vendors, which at one time accounted for about 60 percent of all Jobstreet's placements, is now down to about 45 percent.

Few here doubt that unless the U.S. slowdown eases soon, India's software exports will stagnate. The association of software firms, Nasscom, has revised its earlier annual export forecast from a 52 percent increase down to a 37 percent rise.

"Given that the U.S. is the largest market for Indian software companies, and [given] the weak sentiments existing across industries following the terrorist attacks, India will definitely feel a short-term impact," said Nasscom president Kiran Karnik. "But it is still early to assess the exact extent of the impact."

The terror attacks in New York and Washington have heightened fears among software developers here. Prior to Sept. 11, the sector was only beginning to feel the effects of the U.S. slowdown.

Hardware vendors, meanwhile, are also facing harder times. "We have seen a definite slowdown in the market since April," said Pallab Talukdar, director of enterprise products at Compaq Computer India. "Companies are deferring their purchase decisions, resulting in longer purchase cycles." Only in niche areas such as storage and mission-critical, high-end hardware is there much demand, Talukdar said.

Market researchers are endorsing that view. "Unlike the impressive 56 percent growth seen in the [Indian] PC market in 2000-01, the current year is likely to witness slow growth," said research firm IDC.

"The only way to counter that would be by reviving the local economy through government spending or by targeting non-traditional markets" other than PCs, said Vinay Deshpande, chairman of the Indian hardware association Mait.

Longer view

The Sept. 11 attacks have also lengthened the time needed to complete new software-development contracts because of delays in decision making and cuts in air travel. But industry executives said they view the delays and the export slowdown as temporary.

"In the long run, [the] outsourcing industry will not be affected much, as companies will see the economic benefits of outsourcing in terms of no insurance or cross-border transaction costs," said a report from Nasscom, the software trade group.

Venture capitalists like Sanjay Anandaram of Jumpstartup Fund Advisors see a potential silver lining. "In times such as these, all parties involved have realistic points of view — valuations are realistic, expectations on business are realistic," he said. "Most importantly, only genuine entrepreneurs will step out in such times to start companies, not the get-rich-quick types. So such times are beneficial."

The number of proposals that venture capitalists are receiving has dropped as Indian dot-coms crash, although the quality of proposals is sounder, Anandaram said.

One of India's hottest startups, Ittiam, is backed by Srini Rajam, the former head of Texas Instruments' Indian operations. Ittiam, a designer of digital signal processors, finds that "customer decision times are longer and the number of new-product developments is smaller," Rajam said. The startup has targeted high-end work such as research and development for new DSP products. This "is typically at the leading edge of the economic recovery progress," he added.

Application software development — which in better times accounted for about 90 percent of all software developed in India — appears to be the hardest-hit category. Elsewhere, companies specializing in design, like Synopsys India, said they have not frozen hiring. "We continue to add people based on specific skills," said Pradip Dutta, the subsidiary's managing director.

Synopsys has not been "impacted by the slowdown as it is engaged in the design end of the semiconductor industry," Dutta said. "Although the service sector and the delivery end of this industry are seeing some difficult times, the R&D sector still remains strong."

Big recruitment drives announced earlier by companies such as Hewlett-Packard Co. have been put on the back burner for now, but not canceled, company executives said. Instead, companies are trying to find ways to hang on to current staff and hire again if and when a turnaround comes.

Texas Instruments India, which planned to hire more than 100 new engineers, said it would postpone its expansion. Company executives declined to say whether they have canceled or just delayed plans to hire more engineers.

One hard-hit engineering category is those hired to work in the United States on H-1B high-tech visas. For many, this was a career boost unavailable to most Indian engineers. Layoffs in the United States have cut off the supply of jobs available to Indian workers.

The fallout from the terror attacks is also expected to make it harder for engineers and others to obtain U.S. work visas. As a result, the profitable on-site projects that brought in higher profit margins for Indian companies are expected to dwindle.

Nasscom's Karnik said tightened U.S. security means "we do foresee a stricter visa regime. This might bring down the [number of] information technology professionals traveling to the United States." But Karnik believes this will "not have a long-term impact on companies. Employees sponsored by their companies would not have problems getting visas."

Dozens of small companies, known as "body shops," that specialize in placing Indian engineers in U.S.-based jobs have nearly gone out of business. Industry sources said engineers sponsored by large Indian companies or with good references in the United States should still be able to get H-1B visas in the future.

The slowdown has also affected the number of applicants to engineering schools — at many institutions, by half. Moreover, students are looking beyond software and considering hardware design, although observers said it is too early too know whether software's loss will be hardware's gain. One who thinks it will is Himanshu Singh of Cadence India, who said the de-emphasis on software could eventually benefit India's hardware development skills.

The shift away from applications software could also lead Indian companies to change their focus. "Areas such as security-related information technology products and services, back-office outsourcing areas like medical transcription, call centers, insurance claims, medical billing and human resource consulting [could] be tapped by Indian companies," said Nasscom's Karnik.