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

The South Asian country's industry depends heavily on clients based in North America and Europe

India has long been a vital market for IT services solutions for global corporations. Bloomberg

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

Still, businesses in the sector remain confident that they can weather the storm, as companies worldwide continue to plough investment into digital transformation efforts.

“We expect some corrections and slowness [later in the year], due to a volatile global environment and businesses slowing down a bit,” says Kapil Sharma, chief executive of FiveS Digital, a technology-led business process management company based in Rajasthan.

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

The sector has been enjoying stellar growth, as companies ranging from financial services to telecom invest heavily in digital products and services.

India’s IT industry reaped $227 billion in revenue in the last financial year on the back of a rise in global technology spending, including by clients within the domestic market, according to a report by the National Association of Software and Services Companies (Nasscom).

“Tech spending continues to be a vital area of focus as banks and financial services firms are in the early stages or in the midst of a tech upgrade journey,” according to a research note on India’s IT services sector by Kotak Institutional Equities. “Benefits are visible, spurring further investments in new products and services as well as cloud migration and modernisation of legacy stack,” Kotak analysts said.

“A weak economic prognosis has led to a re-look on costs, both tech and non-tech related, and can lead to a slowdown in spending.”

However, India’s IT sector depends heavily on clients based in North America and Europe. Those markets would be affected if the global economy slides into a recession as the International Monetary Fund has warned.

There are already signs that there may be cracks appearing for the sector.

Last month, India’s Tata Consultancy Services (TCS), one of the country's biggest IT services companies, based in Mumbai, missed analysts’ expectations for its second-quarter earnings.

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

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

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IT companies are becoming increasingly concerned about the employee churn rate in India amid high demand for tech professionals in the sector, which employs about five million.

TCS shares have slumped more than 10 per cent since the start of the year. Another IT titan, Infosys, has seen its stock price fall more than 15 per cent during the same period.

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

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“Growth continues to be strong on the back of 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 remained hopeful that a global recession might not be as deep or as widespread as some fear.

While many sectors were battered by the impact of the Covid-19 pandemic and some are still on the path to recovery, India's IT sector proved to be relatively resilient. It gained from companies increasingly adopting digital strategies amid remote working and consumers' greater dependence on technology.

IT companies are becoming increasingly concerned about employee churn rate in a sector that employs about five million. Alamy

“One such industry which has only seen growth is the IT industry, with digital transformation being the key driver for its growth,” says Radha Basu, founder and chief executive of iMerit, an artificial intelligence data solutions company.

“The ongoing trends in the Indian IT ecosystem in areas like the metaverse, 5G, artificial intelligence, drone and satellite imagery capabilities to collect data … are shaping the future of technology and present a wider scope for the growth in the industry in the coming years,” she said.

Analysts say that while there are clear risks for the sector, spending on technology continues.

“Banks and financial services firms continue to maintain spending on cloud and new technologies as a strategic priority, even in the face of a deteriorating macro environment and increasing recession possibilities in the US and Europe,” according to Kotak’s research.

“Technology spending is viewed as an investment for future growth and will not be cut drastically even in case of a recessionary environment,” Kotak analysts say, adding that an increase in online usage provides an impetus for companies to maintain tech spends.

Tech solutions can also offer an opportunity for companies to reduce costs by potentially reducing their workforce and improving efficiency.

With some banks considering lower-cost outsourcing, it could provide opportunities for the Indian IT sector, according to Kotak.

Sumana Iyengar, chief executive and co-founder of Bengaluru-based Goavega Software, which offers cloud solutions and product engineering services, said her company saw enormous growth last year.

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

“With the remote work culture, more applications in health care and EdTech have been digitised. In fact, every industry has been digitising applications to support remote operations. Also, we saw significant work in banking, financial services and insurance.”

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

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

“We think enterprises' willingness to spend on digital transformation will continue but growth rates on spends are likely to decelerate, constrained by revenue and earnings volatility,” Nomura said.

It cited “fast-changing macroeconomic conditions, hawkish Fed stance to tame inflation through continued interest rates hikes and profit warnings by corporates across the globe”.

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

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

“Talent supply still remains the biggest bottleneck, with an ongoing talent war to meet this demand,” he said.

Others in the sector echo Mr Mony’s view.

“Yes, it is definitely challenging to find the right talent for a job opening,” said Ms Iyengar.

The IT sector's costs have been increasing as employers try to attract and retain skilled staff.

Daya Prakash, founder of TalentOnLease, which works with IT clients to help them find skilled employees, said numerous factors were leading to staffing issues in the sector, as companies globally increase their adoption of technology, fuelling 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 opportunities abroad, lack of trained personnel in skills in demand, including artificial intelligence and machine learning, virtual reality, IoT, robotics, data analytics, cloud and security, to name a few,” said Mr Prakash.

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

As companies gear up for further growth in the years to come, despite concerns that a recession may be ahead, Mr Prakash and many IT leaders see staffing as a growing obstacle.