Indian IT Industry faces double-edged sword
In the face of a global economic slowdown marked by recession, trade wars, and geopolitical tensions, the Indian IT industry is facing an uncertain demand environment, which is also visible with the changes in headcount numbers of leading IT companies. However, while the cutback in discretionary spending in client sectors presents challenges, it also points to more outsourcing opportunities that the industry can tap.
IBT analyses the areas of opportunity for the Indian IT sector, even as it addresses its own weaknesses in an increasingly competitive environment.
Image source: Pixabay
Global IT spending is anticipated to reach a total of US$ 4.6 trillion in 2023, an increase of 5.5%, and is expected to reach US$ 5.04 trillion by 8.6% in 2024. According to Gartner, the size of the global IT industry market will reach US$ 1.36 trillion in 2023, up 9.1% from 2022. All regions worldwide are anticipated to experience positive IT spending growth in 2023, despite ongoing global economic turbulence.
India’s IT industry is expected to generate US$ 245 billion in revenue in FY23 at 8.4% y-o-y growth and is expected to reach US$ 500 billion by 2025, according to the Strategic Review 2023 published by NASSCOM. With US$ 194 billion in exports, growth is anticipated to reach 9.4% in reported currency terms and 11.4% in constant currency terms, led by IT modernization, including application modernization, cloud migration, and platformization. India’s IT spending is also anticipated to reach US$ 112.4 billion by 2.6% in 2023, which is slightly higher than last year, according to the recent forecast by Gartner, Inc.
|Global and Indian IT spending forecast (2023)
|Global growth (%)
|India’s growth (%)
|Data Centre systems
Source: Gartner (Values in US$ million, unless otherwise specified)
According to projections, demand for devices will experience a decline in 2023 as device upgrades stabilise. Spending on data centre systems will also experience a decline as businesses opt for public cloud services. However, all other segments of IT spending will experience growth in India in 2023.
While the leading IT firms have seen double-digit/high single-digit growth in numbers, they admit to an uncertain demand environment. India’s largest IT firm TCS reported y-o-y increase in net profits by 16.8%. It experienced the slowest sequential growth in the previous 12 quarters, growing by 0.4%. Wipro’s net profit on the other hand increased by 12% yoy. In order to create a more agile organisation, the company is investing in people and technology. HCL Tech’s profit also increased by nearly 8% y-o-y. However, its net profit fell by 11% sequentially. The company’s revenue and personnel strength have sequentially moderated in line with the demand environment, with headcount falling by 2,506.
Infosys reported an 11% increase in net profit yoy, even as it cut its annual revenue guidance to 1-3.5%from 4-7%. Clients, particularly those in the financial services, telecommunications, and retail sectors, are cutting back on discretionary spending. Its headcount also declined by 6,940, the second consecutive decline in sequential terms. TCS added 523 employees in the quarter as compared to 14,126 additions over the same quarter last year. Wipro also saw a fall in headcount additions by 8.812 employees.
Neerav Dalal, Research Analyst at MIB Securities India Pvt. Ltd., highlighted in an interaction with IBT, “Recent IT results have been a mixed bag, with some outperforming and others underperforming. The challenges faced by Indian IT services companies stem from the cutting of IT spending towards new technologies and new initiatives (which is termed discretionary spending). However, they also have opportunity from cost rationalisation and cost cutting, which will drive higher outsourcing by clients.”
He further added that this is clearly visible from diverse commentaries from Infosys (which is heavy on discretionary spending) and TCS (which has a fair share of both discretionary and outsourcing). Employee addition will also be under check as companies look at optimising employee utilisation to manage their costs. This is important as outsourcing contract margins are lower than margins in discretionary contracts.
Challenges faced by the IT Industry
IT industry challenges are complex and will require innovative solutions. Organizations that are able to overcome these challenges will be well-positioned for success in the years to come. challenges include:
- Skills Gap: There is a shortage of skilled IT workers, which is making it difficult for organisations to find the talent they need. This is especially true for certain specialised skills, such as cloud computing and cybersecurity.
- Cybersecurity: The number and sophistication of cyber attacks are increasing, and organisations are struggling to keep up. Cyberattacks can have a devastating impact on organisations, including financial losses, reputational damage, and regulatory fines.
- Remote Workplace: Working remotely can present unique challenges due to the lack of a manager or teammates to consult or to provide immediate responses or sources.
- Infrastructure Costs: Large investments are made in acquiring assets that can support, govern, and handle heavy data loads. However, there are threats to these arrangements too; hacking and preventing the theft of data requires powerful firewalls and software. This is an added cost to the IT industry.
- Risks of Outsourcing: As more companies opt for outsourcing due to a talent shortage or cost reduction, outsourcing has created some challenges, including security threats, legal complications, cultural issues, and time zone issues.
Industries that will account for a greater share of IT spending
According to recent reports from IDC, industries like healthcare, finance, and retail will increase their spending on IT services over the next few years. Here are a few which are relying on IT solutions for their operations:
- Finance & Banking: Fintech solutions in areas such as payments, insurance, personal finance, crowdfunding, and blockchain technology are becoming increasingly important. Mobile banking, digital wallets, and cryptocurrency are all indicators of a digital financial future.
- Healthcare: The Covid-19 pandemic has emphasised the importance of a strong IT infrastructure in healthcare. Telemedicine, AI-enabled diagnostic tools, electronic health records, and personalised medicine are just a few of the digital innovations transforming this industry.
- Retail & E-commerce: As more people shop online, retailers must continue to invest in technologies such as AI, ML, AR/VR, and IoT to provide personalised, seamless, and engaging customer experiences.
- Education: The ed-tech industry is booming, changing education through online learning, AI tutors, virtual reality classrooms, and digital textbooks. With the pandemic forcing remote learning on a global scale, this has increased demand for advanced IT solutions in education.
- Logistics and supply chain: Companies are utilising technologies like AI, machine learning, IoT, and blockchain to increase efficiency, transparency, and dependability. These technologies are helping manage complex supply chains, optimise logistics, and improve forecasting accuracy.
- Agriculture: Ag-tech is a growing industry in agriculture. Farming practices are optimised to increase yield and reduce environmental impact using technologies like big data, AI, drones, and IoT.
- Manufacturing: The sector is going through a significant transformation known as Industry 4.0, which involves the automation and optimisation of manufacturing processes through the integration of IoT, AI, robotics, cloud computing, and data analytics.
These industries are going through significant digital transformation right now, so it is expected that they will require more and more IT services and solutions to get through the changes. It will be crucial for IT service providers in the upcoming years to be aware of these industry-specific needs.
A strategic roadmap for IT industry growth
As the world becomes more connected, cybersecurity is now more important than ever for the protection of digital assets. IT companies should use cutting-edge tools and techniques to safeguard sensitive data, systems, and networks in order to defend against malicious attacks.
The IT industry is constantly changing, so it’s important to stay up-to-date on the latest trends. By investing strategically in emerging technologies like data and AI, cyber security, and engineering.
Companies should attract and nurture top talent with diverse backgrounds and skills and invest in building qualified talent in advanced technologies such as AI, data sciences, cybersecurity, engineering, and niche areas such as Web3, 5G, and quantum computing, as well as upskilling and reskilling the existing workforce.
In today’s competitive marketplace, businesses need to focus on providing a superior customer experience. This means providing excellent customer service, easy-to-use products and services, and a seamless user experience.
IT firms must prioritise specific sectors in the chosen markets and accelerate efforts to drive market leadership in those areas to strengthen the client relationship.
While diversification is a key growth driver, our journey toward business resilience should also embrace consolidation. Our unique value proposition lies in the industry-specific expertise that we’ve cultivated over the years. By focusing on these specialised sectors, we can offer tailored solutions that cater to the nuanced needs of our clients, thereby cementing our competitive standing in the market.
The Indian IT industry will continue to do well over the long term, as any new technological advancement will have its fair share of IT services. The growth rates will differ from year to year, but the trend will remain upward. Skill enhancement and adaptation will remain the keys to the success and growth of the Indian IT services industry.
Recently, the IT sector in India has shifted in favour of more advanced technologies like cloud computing, AI, and the IoT. The government has launched several initiatives to promote the development of these technologies in the country, including the NeGP (National e-Governance Plan), the Digital India initiative and the National Cyber Security Policy.
Overall, favourable government initiatives, a sizable pool of qualified workers, and rising demand for digital technology are projected to fuel the Indian IT sector’s continued strong growth in the years to come. Yet, the industry may encounter difficulties, including skill gap, rapidly evolving technologies, increased manpower prices, and heightened international competition.