Does Indian IT Sector Face An Existential Crisis?

The Indian IT sector was among the best performing sectors after the Covid pandemic, with clients accelerating IT spends significantly.

However, the sector is currently facing headwinds as large corporations in the USA and Europe cut non-essential information technology (IT) spends.

With such non-essential IT spends which make up 25 to 30 per cent of the total budget allocated to IT being cut, Indian IT companies are feeling the heat.

Consequently, nearly all IT behemoths have seen a decline in the employee count over the last three quarters. New hires from the fresher category appear to have slowed down, with just one IT company, among the top five IT companies, explicitly saying that they will hire freshers in FY24.

Freshers who were supposed to be hired last year saw their hirings being postponed, or were forced to take salary cuts when they were onboarded

The sharp cuts in IT spend is visible from Infosys’ recent downgrade to FY24 growth guidance. The company, which had previously guided for a revenue growth of 6-7 per cent, has now cut it to 1 to 3.5 per cent.

Indian IT companies are largely dependent on the banking, financial services and insurance (BFSI) sector, which make up 40 per cent of revenues. Job cuts too, are expected to be significant in this category, and Indian IT players are expected to cut nearly 6 to 7 per cent of jobs in this segment.

The BFSI space is going through a tough phase with bank collapses in US and Europe, weakened finances, slow growth, and rising interest rates. However, these problems are likely to be temporary and as the economy recovers, spends will return.

The financial markets, which are often leading indicators, appear to be quite positive on the global economy’s recovery.

However, the Indian IT sector’s troubles could be facing more structural threats — the rise of global capability centres (GCC) and artificial intelligence (AI).

Some of the clients of Indian IT companies have reached a critical mass in terms of off-shoring. This allows them to start off-shore development centres and GCCs in India rather than outsource it to IT companies.

These GCCs are attractive for companies that have a large and predictable IT spend, making it profitable for them to hire employees directly in India, rather than outsourcing work to external third-parties.

Analysts believe that some of these GCCs might even be ready to pay higher salaries to their employees than IT companies, and still generate cost savings when compared to complete outsourcing. Some estimates even suggest that GCC hiring will outpace hiring by IT companies themselves.

The larger IT companies are likely to be the worst affected, since their client base consists of clients who have the budgets and the critical mass required to set up these GCCs.

The number of GCCs has more than tripled over the last decade to 1,700, and the growth rate is expected to only accelerate further. While the establishment of GCCs is appreciated by employees, IT companies might have a tougher time ahead.

Another perceived threat is the one from generative artificial intelligence since it is expected to take away low-end IT jobs. Low-end jobs that do not require higher order thinking, can be allocated to AI programs, which could improve efficiency, lower costs, and increase productivity.

While the impact of AI on Indian IT companies has been often discussed in the past, powerful generative AI is a reality now and tens of billions of dollars and top talent are being funneled into the sector.

Some AI models can already write rudimentary code, and are likely to get better at it over time.

So far, it’s difficult to understand the exact route that AI development will take and how Indian IT companies would fit in that environment.

So far, large Indian companies have used their older strategy of mastering the use of an existing third-party AI platform, and then offering solutions based on it to users.

If IT companies can carve a space for themselves in such offerings like they did for SAP, Oracle, Salesforce, and other platforms, they could survive the AI onslaught.

The use of AI could also result in lower-end jobs being replaced, and the increase need for well-trained workforce at these companies. Replacement of lower-end jobs could mean that Indian IT wouldn’t retain the mass-recruiter mentality anymore, and shift to more specialised hiring.

Some critics have argued that Indian IT companies should use their talent pool and strong financial position to create models from scratch, rather than depending on third-party models. However, Indian IT companies’ core competence lies in mastering existing platforms and offering these services to their clients.

As highlighted earlier, the global IT budget cuts is a cyclical problem, but the emergence of GCCs and AI could have more structural impacts on the IT sector.

Whether Indian IT companies can find new revenue sources as older ones get replaced by GCCs and AI, would be key to their survival.