Kiran Karnik, my friend and co-refugee from TV land, is not going to like this. Carrying on in the fine tradition of Dewang Mehta, his Nasscom team has been evangelising the virtues of the Indian software services industry. This is our stairway to heaven-our redemption lies in it services I am told, and in its sadly-named cousin, it-enabled services. A mantra chanted in the pink pages, and in every other business plan I come across.

My reaction? I feel like the boy who hesitantly suggests that maybe, perhaps, just possibly the emperor has no clothes.

There, I said it. I really believe that our focus on it services and it-enabled services will be the downfall of India. Not only will it not take us up to those giddy heights where we're supposed to belong, it will have a terrible fall and leave behind a swathe of destruction, despair, and gloom deeper than that of the last six months.

First, let's understand what terms like it services, it-enabled services and business process outsourcing really mean. Just this: "We'll do it cheaper because we have cheaper people." Oh, there's a fancy term for this too: labour arbitrage.

The business looks great on a spreadsheet. But work at one, and you'll know life is nothing like what MS Excel suggests. I did, for four years, at a US consulting firm that went the commodity it services route. I joined when it had 80 people, and left when it had 800 and a decent listing on Nasdaq, only to see it crash and burn to bankruptcy at 9,000-plus people in a couple of years.

The issue is this: there's really nothing to an IT services firm. Go abroad and say you can do asp, c++, com, CORBA, DCOK, EJB... going alphabetically all the way to XML. Some client says okay, but my current guy quotes me $20 an hour-how low can you go? You want the business, and say $15.

You get the business. Do a project. Go back to bid, find there's even more competition. Your brother-in-law's new firm is quoting $10 an hour. So you now quote $7.50 for high-end work-about what a burger-flipper at McDonalds makes in Podunk, USA. And you stretch at the seams, wondering when that glory, that Nasdaq listing, those millions of dollars will come your way.

Could I save you the bother and say it won't? Because, in any commodity business only volume leaders survive, that too by cutting cost of production and retail price lower than everybody else. What's true of potatoes is also true of projects. Every single large Indian it services company-and you know who I am talking of-is now quoting south of $15 an hour for work compared to north of $100 an hour a year ago. And they are still not getting enough to keep their people busy.

So what happens to their numbers? If I had 100 people, hired them out at $50 an hour, and was at 100 per cent capacity, I'd make $12 million a year, almost half being profits. I'd be public. Now my investors want me to do $18 million next year. But the rate's fallen to $15. And I can only utilise 75 per cent of capacity. What do I need to do? Find enough work and hire 600 people to do it. And my margins? Deep in the gutter. Stock price? Well, if the Indian market worked on fundamentals, and thankfully it doesn't yet, no it company would even be in three figures today.

Ever wondered why virtually all public it services firms in US have collapsed? Will we be any different? Investors look at a simple number: revenue per employee-and only companies with products or intellectual property can see that measure heading upwards.

What's the way out? Either stay a small, private firm specialising in high-priced work and forget about going public. Or move now, into products. The rest of us are condemned to lower margins, competition from China with an arguably better record at mass production of commodities, and a future down in the dumps.

Mahesh Murthy, an angel investor, heads Passionfund. He earlier ran Channel V and, before that, helped launch Yahoo and Amazon at a Valley-based interactive marketing firm. Reach him at Mahesh@passionfund.com.