Indian IT industry: Combating the pandemic and beyond

While the Indian IT sector is showing robust growth prospects despite the COVID-19 pandemic, it needs to invest more in digital skills and improve its share in markets beyond the US and the UK.

• While the pandemic has been devastating for a number of industries, the Indian IT industry is on a stronger footing.
• According to a report by NASSCOM, the Indian IT services are set to reach US$ 194 billion in FY 2021 i.e., recording a 2.3% increase yoy.
• This is attributed to favourable government policies, FDI inflows, digital transformation, increased IT spending, etc. 
• However, the industry faces significant challenges in the face of the H-1B visa amendments and lack of required skill base to leverage the trend of digital transformation.

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The IT sector is undergoing rapid evolution and is now thriving worldwide. A poster child of India’s liberation in the 1990s, the sector has grown tremendously, with an export value of nearly US$ 100 million & having around 5,000 employees then, to an export value of US$ 150 billion for the financial year 2021 and livelihood support to around 4.4 million people in India. Being homeland to 75% of the global digital talent and 17,000 companies, the Indian IT sector has emerged as a major player in the global IT industry.

While the harsh winds of COVID-19 have taken the world by storm, the Indian IT industry stood firm. According to a report by the National Association of Software and Services Companies (NASSCOM), Indian IT services revenue is set to reach US$ 194 billion by the end of the financial year 2020-21 i.e., registering a 2.3% increase from the previous year.  This has been a product of favourable government initiatives and policies, FDI inflows, robust digital transformation, increased IT spending, etc. Moreover, three client industries have been particularly positive for IT companies – BFSI, telecom and healthcare.

Sowing the seeds of growth

While the sector has traditionally been export-driven, there are positive signs of an uptick in domestic demand. As per a recent report by Gartner, Indian IT spending is estimated to be US$ 93 billion in 2021, which accounts for a 7.3% increase from 2020.

Government initiatives like Digital India and JAM Trinity have played a major role in this regard. There is a continued focus on projects that keep India in-step with fast-evolving technologies.

For example, the Department of Telecom signed an MoU with the Ministry of Communications & Government of Japan to enhance cooperation in 5G technologies, telecom security, submarine optical fibre cable system. In Budget 2021, Rs 53,108 crores (US$ 7.3 billion) were allocated to IT and telecom sector. Policies like 100% FDI in data processing, software development, computer consultancy services have further accelerated the IT industry.

India’s IT spending forecast (US$ million)

Source: Gartner (April 2021)

Naveen Mishra, Senior Research Director at Gartner, opined, that growth will be primarily driven by enterprises lifting the spending restrictions on software and IT services in 2021.

Cloud is expected to be a US$ 10 billion market by 2025, while registering an estimated CAGR of 25% or more. Areas such as CRM, Business Intelligence/analytics, AI/ML. WFH/Hybrid workforce, collaboration, automation, digital engagement will attract increased investment during this pandemic. As enterprises accelerate their digital transformation, they will invest in services partners who can support these solution areas.

According to a report by NASSCOM, the global impact of COVID-19 has led to two major shifts- spurring the pace of digital transformation and evolving the workplace into a hybrid work model. There seems to be a surge in the demand for IT services since the last financial year as per the Fitch Ratings.

The pandemic has ramped up technology adoption by industries as well as customers. Even the industries that were not IT-driven have shifted from physical to digital mode. Lifting spending restrictions on IT services and software, CRM, collaboration, cloud, artificial intelligence, automation, etc. shall be the drivers of investments during the pandemic that can accelerate growth in the Indian IT industry.

Cloud has become the need of the hour as it makes the access and maintenance of the data quicker and easier from remote workplaces. Preventing the breach of customer confidentiality by protecting their sensitive information has become imperative. Companies are expected to formulate proper WFH policies to prevent the leakage of information. 

To meet this rising demand, IT services companies are making efforts to offer enhanced online services and online working platforms to stay relevant in the market. Offshoring trends are also expected to grow during the pandemic because people shall continue to work from home from anywhere, which is considered the new normal.

This in turn would lead to savings from travel and other office-related expenses. The healthy business momentum has also catalyzed the hiring of more employees. Top-tier companies have added about 9% employees, on average, in the financial year 2021. HCL Technologies Limited added the most staff, accounting for 12%  of additional employees.

Investments by the top-tier companies (with annual revenue of at least US$ 10 billion) in technology are expected to rise as compared to the previous year due to the increasing need for digital transformation. Indian companies are well-positioned to capture digital-related growth due to the well-defined mode 1-2-3 strategy for digital transformation. In fact, companies like TCS, Infosys, Wipro, and HCL are expected to record double-digit revenue growth in the financial year 2022.

Though the Indian IT sector is showing signs of growth despite the pandemic, it still needs to overcome some uncertainties. Amidst the second wave of COVID, IT companies have also witnessed an adverse impact on their operational capabilities and business continuity due to infections hitting their workforce. This necessitates urgent hiring of people to augment capacity, and immediate provisions of necessary infrastructure, medical equipment, medicines, etc for affected employees before the situation worsens.

Further, with the pandemic restrictions, slow adoption of digital transformation has led to a shortage of skilled labour, which leads to wage hikes. Mishra states that with increased digitization, finding/developing digital skills is an area of challenge for every Indian enterprise as well as IT services provider. Due to the short supply of digital skills,  early indicators of wage hike and increased attrition across services providers can be seen.

As mentioned earlier, exports account for over 81% of the revenue. The Biden Administration has brought some relief by removing the amendment on H-1B visas made by the erstwhile Trump regime, which sought to narrow the definition of specialty occupation. It had also imposed new restrictions on placement of H-1B workers at third-party work sites, reinstated contract and itinerary requirements and restructured the prevailing wage system for H-1B.

The industry must focus on further developing the domestic IT market and less reliance on traditional markets like the US (the biggest importer of Indian IT exports) and the UK. It needs to follow a similar approach towards APAC, Latin America and Middle East Asia regions.