Even as the Iraq war enters a decisive phase, the Confederation of Indian Industry has projected a grim picture for the Indian IT industry if the war protracted and the dollar weakened further.

Giving an account of the Indian economic scenario during the fiscal year gone by (2002-03) and current fiscal (2003-04), CII president Ashok Soota admitted in Bangalore on Friday that irrespective of a short or long war, there would be a significant increase in terrorist threat perception impacting IT operations, including travel by clients and business deals.

"Though the markets and the media had earlier projected a short war expecting Iraqi President Saddam Hussein to abdicate the throne at the 11th hour, it did not happen.

"On the contrary, the war is now into its third week. Should the war terminate by next week with a regime change in Baghdad soon after, then the global economy has a chance to bounce back by the second half of this year, leading to revival of IT spends in the US and Europe," Soota stated.

With the US economy still muted in the wake of 9/11 and global recession during the last couple of years, Soota said further delay in its revival could have an adverse impact on IT spending in that country.

"As most of the Indian IT and ITES firms continue to depend on the US market for their greater share of the business, lower IT budgets will intensify price pressure on billing rates during the first two quarters of the new fiscal year, Soota declared.

"A study by the CII on the economic fallout of the Iraq war on India's economy, especially the robust IT sector reveals that if the battle for Baghdad drags beyond 45-60 days, then the situation will worsen with the world economy slipping into recession once again," Soota pointed out.

Disclosing that the CII was skeptical about the short war scenario, Soota said the US campaign against Iraq could continue in one form or another for more than two months, resulting in disruptions all along.

"As the war drags on and the US defence spending multiplies, a run on the dollar will weaken its value vis-à-vis the euro and the Indian rupee.

"At the same time, if higher oil prices force a sharp rise in forward premiums on the US dollar, the exchange rate in India will head southward and the rupee may weaken to Rs 50 per dollar, forcing the Reserve Bank of India to intervene," Soota asserted.

Protracted operations will shut down the Persian Gulf for the next 45-60 days and jack up insurance premium on tankers sailing through the war zone.

Further rise in crude prices will have a cascading effect on the import bill as well as the subsidy bill, with a cumulative impact on the fiscal deficit of the government in the current year (2003-04).

Fearing that repatriation-driven surge in forex reserves would be negated by higher oil price, Soota said a depreciating dollar and higher import bill may neutralise the advantage of building up huge foreign exchange reserves.

Though software services grew by 20 per cent and the IT-enabled services by 75 per cent during the fiscal 2003-03, Soota lamented that rupee appreciation by 5 per cent during the last 6 months would result in a lower price realisation by the year-end.

"In the post-war scenario, if the reconstruction of Iraq revives the US and the global economy, stimulating growth in core sectors, the Indian IT sector can hope for increased spending by all the stakeholders," Soota affirmed.

Soota also expressed concern over the fallout of the Severe Acute Respiratory Syndrome on the tourism and hospitality industry.