Will India’s tech sector beat the odds of recession with its digital strategy?


Looming fears of a global recession threaten the growth of India’s IT industry.

Yet companies in the industry remain confident they can weather the storm, as businesses around the world continue to invest in digital transformation efforts.

“We expect corrections and delays [later in the year]due to unstable global environment and slight business slowdown,” says Kapil Sharma, Managing Director of FiveS Digital, a technology-focused business process management company based in Rajasthan.

India has long been a vital market for IT services solutions for global enterprises. The IT and business process management sector accounts for 9% of the South Asian country’s gross domestic product and 56% of the global outsourcing market, according to the India Brand Equity Foundation.

The sector has seen tremendous growth as companies ranging from financial services to telecommunications are investing heavily in digital products and services.

According to a report by the National Association of Software and Services Companies (Nasscom), the Indian IT industry earned $227 billion in revenue in the last financial year thanks to an increase in global technology spending. , including by customers in the domestic market.

“Technology spending continues to be an area of ​​vital focus as banks and financial services firms are in the early or mid-stages of a technology upgrade journey,” according to a research note on the IT services sector in India by Kotak Institutional Equities. “The benefits are visible, spurring further investment in new products and services as well as migration to the cloud and modernization of the legacy stack,” Kotak analysts said.

“A weak economic outlook has led to cost reviews, both tech and non-tech, and may lead to a slowdown in spending.”

However, the Indian IT sector is highly dependent on customers based in North America and Europe. These markets would be affected if the global economy slips into a recession, as the International Monetary Fund has warned.

There are already signs that cracks could appear for the sector.

Last month, India’s Tata Consultancy Services (TCS), one of the country’s largest IT services companies, based in Mumbai, failed to meet analysts’ expectations for its second-quarter results.

It reported net profit of 94.78 billion rupees ($1.18 billion) in the three months to the end of June, down from around 90 billion rupees in the same period in 2021, but down from compared to the 99 billion rupees projected in a Bloomberg survey.

The company cited “macro-level uncertainties” amid global recession risks and rising labor costs.

IT companies are increasingly concerned about India’s employee turnover rate amid high demand for tech professionals in the industry, which employs around five million people.

Shares of TCS have fallen more than 10% since the start of the year. Another IT titan, Infosys, saw its stock price drop more than 15% over the same period.

However, despite all the challenges, many industry players are hopeful that the sector will continue its growth trajectory.

.

“Growth continues to be strong driven by macro trends of digital acceleration and cloud adoption,” said Vinay Mony, vice president of analytics and technology services business Ugam, a Merkle company.

He said he remains hopeful that a global recession will not be as deep or as widespread as some fear.

While many sectors have been hit by the impact of the Covid-19 pandemic and some are still on the road to recovery, India’s IT sector has proven relatively resilient. He has benefited from the fact that companies are increasingly adopting digital strategies in the context of remote working and increased consumer reliance on technology.

AGTFE1 Worker setting up ultra scanner machine at General Electric Wipro in Bangalore India

“The IT industry is one such industry that has seen nothing but growth, with digital transformation being the main driver of its growth,” says Radha Basu, Founder and CEO of iMerit, a solutions company artificial intelligence data.

“Ongoing trends in the Indian IT ecosystem in areas such as metaverse, 5G, artificial intelligence, drone and satellite imaging capabilities to collect data… are shaping the future of technology and present a broader scope for industry growth in the coming years,” she said.

Analysts say that while there are obvious risks to the sector, spending on technology continues.

“Banks and financial services firms continue to keep cloud spending and new technologies a strategic priority, even in the face of a deteriorating macroeconomic environment and growing recessionary possibilities in the United States and Europe” , according to research by Kotak.

“Technology spending is seen as an investment for future growth and will not be drastically reduced even in a recession,” Kotak analysts say, adding that an increase in online usage is prompting companies to maintain their technology spending.

Technology solutions can also offer businesses the opportunity to reduce costs by potentially reducing headcount and improving efficiency.

According to Kotak, with some banks considering lower-cost outsourcing, this could provide opportunities for India’s IT sector.

Sumana Iyengar, managing director and co-founder of Bengaluru-based Goavega Software, which offers cloud solutions and product engineering services, said her business had seen tremendous growth in the past year.

“We were able to get more product development work in the EdTech and healthcare sectors,” she said.

“With the culture of remote working, more applications in healthcare and EdTech have been digitized. In fact, every industry has digitized applications to support remote operations. In addition, we have seen significant work in the banking, financial services and insurance sectors. »

The company’s main markets are North America, Singapore and India.

Meanwhile, Japanese investment bank Nomura warned of “tough days for tech spending,” in a May report.

“We believe the willingness of businesses to spend on digital transformation will continue, but spending growth rates are expected to slow, constrained by revenue and earnings volatility,” Nomura said.

He cited “rapidly changing macroeconomic conditions, a hawkish stance by the Fed to rein in inflation through continued interest rate hikes, and corporate earnings warnings around the world.”

Employees working in the library at the Tata Consultancy Services campus in the Siruseri district of Chennai, India.  Bloomberg

Mr Mony said one of his main concerns was the battle for staff in the sector.

“Talent supply remains the biggest bottleneck, with a talent war underway to meet that demand,” he said.

Others in the sector echo Mr. Mony’s view.

“Yeah, it’s really hard to find the right talent for a job opening,” Ms. Iyengar said.

IT industry costs have risen as employers attempt to attract and retain qualified personnel.

Daya Prakash, founder of TalentOnLease, which works with IT clients to help them find qualified employees, said many factors are driving staffing issues across the industry as companies increase their adoption of technology overall, fueling demand for technology and software professionals in India.

“Among the factors that make it difficult to recruit new employees are international employment giving local candidates access to overseas opportunities, lack of staff trained in in-demand skills, including artificial intelligence and learning automation, virtual reality, IoT, robotics, data analytics, cloud, and security, to name a few,” said Prakash.

The rapid growth of India’s start-up sector, which is attracting high levels of funding, only adds to the fierce competition for skilled IT workers, he said.

As companies prepare for continued growth in the years to come, despite fears of a recession, Prakash and many IT managers see staffing as a growing obstacle.

Updated: August 15, 2022, 08:31

Previous TutAR - SuperchARging India's Schools and Teachers with Augmented Reality
Next What to expect from India's tech industry over the next 25 years