Present ‘tense’, future positive? The state of India’s IT sector

The Indian IT industry, amidst ongoing global economic uncertainties marked by recession, trade wars, and geopolitical tensions, is expecting revenue generation of US$ 254 billion in FY24, driven by exports reaching US$ 200 billion and a domestic revenue exceeding US$ 54 billion. However, the muted revenue growth and temporary pull back on fresh hiring are currently impacting investor confidence.

Looking ahead, the Indian IT industry anticipates sustained growth, driven by digital technology adoption. With GenAI and emerging technologies poised to fuel growth, the industry remains well-positioned to capitalise on evolving market dynamics, driving innovation and sustainable growth in the years to come.

Source: Pixabay

India’s IT industry (including hardware) is expected to generate US$ 254 billion in revenue in FY24 at 3.8% y-o-y growth, according to the Strategic Review 2024 published by Nasscom. With US$ 200 billion in exports, growth is anticipated to reach 3.3% y-o-y. The domestic technology sector is expected to exceed $54 billion, growing at a rate of 5.9% y-o-y.

Despite challenging market conditions, the industry remains a net hirer, adding 60K employees and bringing the total employee base to 5.43 million (1.1% y-o-y growth). Manufacturing, retail, and healthcare emerge as key growth markets for the sector.

However, all is certainly not rosy. While stable profitability margins are positive, they come at the cost of reduced growth and a potential dampener on innovation. The sector is going through its second consecutive year of muted revenue growth due to modest increase in tech spends in Europe and the US, according to Crisil Ratings.

Due to this subdued growth, IT service companies pulled back on the addition of fresh talent, thereby leading to headcount reductions by 4% in 2023 by the top 12 companies. The muted revenue growth and cautious hiring strategy could stifle the ability of IT companies to invest in new technologies and upskill their workforce, hindering their long-term competitiveness, as per the rating agency.

Furthermore, the potential impact of an appreciating rupee and geopolitical tensions. These factors could significantly impact profitability, especially for companies with high exposure to these markets.

Source: Nasscom

Global IT spending is anticipated to reach a total of US$ 5.1 trillion in 2024, an increase of 8% YoY, according to a recent forecast by Gartner, Inc. This is an increase over the previous quarter’s forecast of 6.8% growth, putting global IT spending on track to surpass US$ 8 trillion well before the end of the decade. All regions worldwide are anticipated to experience positive IT spending growth in 2023, despite ongoing global economic uncertainty. India’s IT spending is anticipated to reach US$ 124.6 billion in 2024, growing at a rate of 11% yoy.

The rise of generative AI (GenAI) is expected to play a significant role in increasing Indian IT spending. GenAI remains a key priority for over 95% of organisations over the next 6-12 months. This indicates that Indian IT companies will need to invest heavily in developing and integrating GenAI capabilities to meet the growing demand from their clients.

Abhinav Chetan, founder of Digital for Nonprofits and Digicated, comments, “In India, with robust economic growth, a young demographic, and advanced digital infrastructure, the stage is set for significant innovation. Generative AI could revolutionise sectors like finance, healthcare, education, and media, potentially adding trillions to the economy by the decade’s end. However, ensuring privacy, security, and regulatory frameworks will be crucial for sustainable growth. With the right support, GenAI could drive India into a century of prosperity.”

In India, spending on software and IT services is anticipated to grow at the fastest rates ever in 2024, with software spending expected to rise by 18.5% and IT services expected to continue growing. Device spending in India is expected to see a robust rebound in 2024, growing 10.1% year over year, despite experiencing a slow period in 2022 and 2023, mostly as a result of inflationary pressures.

Source: Gartner, Inc.

According to Naveen Mishra, VP & Team Manager at Gartner, “While investments in artificial intelligence (AI) and generative AI (GenAI) will contribute to IT spending growth in India, their impacts on IT spending levels will not be evident until 2025. GenAI will account for a small portion of IT spending through 2024.”

Industry’s expected to drive IT spending

According to recent IDC reports, industries such as healthcare, finance, and retail will increase spending on IT services in the coming years. Here are a few that depend on IT solutions for their operations:

• BFSI: The BFSI sector is known for being a significant spender on IT due to the technology-intensive nature of their operations and the need for robust security measures. 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.
• 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.
• 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.
• 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.
• 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.
• 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.
• 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.

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.

Future outlook

According to Neerav Dalal, Research Analyst at MIB Securities India Pvt Ltd, “The Indian IT industry will continue to do well over the long term as any new technological advancement/change will have its fair share of IT services. The growth rates will differ from year to year, but the trend will remain upward. Skill upgradation and adaptation will remain the keys to the success and growth.”

India is expected to see a significant increase in the adoption of digital technologies such as cloud computing, data analytics, and artificial intelligence (AI), including generative AI (GenAI). This digital transformation is driving demand for IT services and creating new growth opportunities.

GenAI is a key priority for over 95% of organisations in India over the next 6-12 months, indicating that IT companies will need to invest heavily in developing and integrating these capabilities. The rise of GenAI and other emerging technologies like 5G and industry cloud are expected to be key drivers of the industry’s growth.

“The adoption of GenAI remains in its nascent stage, primarily propelled by startups and companies addressing automation-driven challenges. Small and medium-sized enterprises face the immediate hurdle of achieving full digital transformation before integrating AI into operations, which is essential for the economic backbone. AI adoption, largely confined to service sectors, presents growth opportunities in manufacturing and emerging sectors, bolstered by government initiatives for localization and industrial modernization. Government service delivery stands to benefit significantly from GenAI, fostering transformative changes across sectors, enhancing customer experiences, automating processes, and fostering innovation,” says Shaan Rizvi, founder and CEO at Plaxonic.

He further adds, “AI strategy and governance will be key areas in which organisations will spend money. The focus will be on achieving innovation and efficiency in processes across sectors. Be it healthcare/pharma, services, education, automobiles, or energy. Everyone will incorporate AI into their systems to leverage the potential of AI technologies to be more innovative and enhance efficiencies.”

Overall, the future outlook for the Indian IT industry remains positive, with the industry poised to capitalise on the growing demand for digital technologies, emerging trends like GenAI, and strategic priorities aimed at driving sustainable growth and innovation. Favourable government initiatives, a sizable pool of qualified workers, and rising demand for digital technology are projected to fuel the Indian IT industry’s continued strong growth in the years to come.