The Indian IT services industry has been a major driver of economic growth in recent years. However, the industry is facing a number of challenges in the present global landscape, including the need to adapt to new technologies, rising competition from other countries and slowdown in IT services growth.
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The global IT services market size was valued at US$ 870.05 billion in 2023 and is expected to reach US$ 1,598.41 billion by 2030. However, this year, the market seems to be stepping on the brakes. International Data Corporation (IDC) predicts that the market will grow by 4.4% in 2023, down from 6.7% in 2022, thereby marking the 5th successive month of downward adjustment.
According to IDC, the downtrend is largely owing to the fact that rising interest rates are impacting capital spending, further exacerbated by the ongoing slowdown. It noted, however, that cloud spending remains resilient despite the general subdued market trend.
Being largely export driven, India’s IT services sector is also expected to witness revenue growth decline by 700-900 basis points (bps) to 10-12% in FY 2023-24, according to CRISIL. In comparison, the sector had seen a strong 18-20% growth in fiscal 2023, lead by a sharp depreciation of 7-8% in the rupee, and ~19% in fiscal 2022 (the highest in eight years up till then).
According to Anuj Sethi, Senior Director, CRISIL Ratings, “Headwinds in key markets, especially the BFSI segment in the US and Europe, will affect the revenue growth of domestic IT services companies. While BFSI segment revenue growth is expected to halve to mid-single digits, it would be marginally offset by 12-14% growth in the manufacturing segment and 9-11% growth in other segments. Net-net, there would be moderation in overall revenue growth.” Furthermore, higher employee costs (which account for around 70% of the total cost) are also expected to take operating profits to a decadal low of 22-22.5%.
Source: Nasscom
Key challenges confronting India’s IT services sector
India’s IT services industry accounts for a significant share of its services exports, which reached US$ 245 billion in 2022-23. Software services segment alone contributed around US$ 150 billion, making it the primary driver of export revenues. With technology upgrades and the cessation of the interest rate increase cycle, global IT spending and growth is expected to revive in the coming months. However, the sector needs to be wary of the following challenges in the coming years:
- Slow global economic growth: The global economy has been growing at a slower pace in recent years. This has led to a decline in IT spending by businesses around the world.
- Rise of protectionism: The rise of protectionism has led to increased tariffs and other barriers to trade. This has made it more difficult for IT companies to export their services.
- High skilled labour mobility issues: Labour mobility has been the key challenge across geographies. In the US for instance, the previous Trump administration imposed certain restrictions targeting high-skilled workforce from foreign countries, including India to save jobs in America, which were removed under the current regime. India’s demand for enhancing Mode 4 services trade was considered a major issue in RCEP negotiations.
- Emerging technologies: Emerging technologies such as AI, Cloud computing and Robotics have led to a decline in demand for traditional IT services, such as software development and maintenance.
- The rise of GCCs in India: Global Capabilities Centres (GCCs) have become an important market for Indian IT services companies. With massive investments in GCCs by MNCs, IT services firms are facing a rising threat as they have to compete with these centres for business.
- Centralized export destination: Major exports of Indian IT services are destined to the US, the UK, Japan, Australia and Canada. These countries face some kind of recessionary pressures or economic downturns that will have an impact on the industry. So India needs to actively scout for other export destinations.
According to Neerav Dalal, Research Analyst at MIB Securities India Pvt Ltd, “The weak economic growth outlook for the US and Europe, coupled with cost-cutting initiatives and reduced demand for high-priced services, are driving the slowdown in global IT services exports in FY24. Banking & financial services, accounting for 30-40% of IT exports share, are facing turmoil in these regions, while the retail industry is impacted by a recessionary outlook in the US. Slowing demand and high employee costs pose challenges for Indian IT companies, necessitating cost balancing and exploring new client opportunities.”
“The IT industry faces the challenge of over-dependence on limited export destinations, primarily focusing on the United States, Canada, and a few European countries. To ensure a resilient IT market, it is imperative to diversify software exports across a broader range of countries. By reducing reliance on specific markets, India can mitigate the risks associated with economic downturns or recessions in those regions.,” said Mr. Matloob Hasan, Director at Azoth Analytics Pvt. Ltd.
Market diversification, however, will not be easy, as language is a major issue in a lot of markets. Other destinations in the East like Japan, South Korea and Philippines have strong IT markets with well established indigenous forms. In a country like China, experts say that a product-service combination works best.
He further adds, “The emergence of Global Capability Centers (GCCs) in India has further strengthened the country’s position in software exports. With approximately 1,500 GCCs, India now hosts half of the global GCCs, signifying a robust talent pool and software development capabilities. This expansion beyond traditional software exports showcases the industry’s adaptability and potential for growth in various sectors.”
Future Outlook
The services sector is an important pillar of growth for the Indian economy. IT services has 57% shares in overall service export of Indian economy. To benefited from the ever-growing demand for IT services in the global economy, it would be imperative to focus on strengthen competencies in emerging technologies and diversify our export destinations. For this, focus could be placed on India’s competitive ability and potential for export growth.
The industry continues to be the net employer with a workforce of over 5.4 million, creating 290,000 new jobs in FY2023. With a 36% digitally skilled workforce, the industry remains on the top in terms of AI skills penetration, the 2nd largest in terms of AI/ML BDA talent pool, globally and 3rd largest in terms of supply of cloud professionals.
Indian IT industry is currently preparing to adopt advanced technologies such as 5G, AI, blockchain, quantum computing, IoT augmented reality, virtual reality, machine learning, deep learning, robots, and natural language processing. These technologies will play a crucial role in government and industry sectors.
The Government of India has launched the National Artificial Intelligence (AI) Strategy, which aims to make India a global leader in AI by 2030. The strategy includes initiatives to promote research and development in AI, to create a skilled workforce in AI, and to use AI to solve some of India’s most pressing problems.
To foster the growth of Indian IT companies India can also include engaging in comprehensive trade agreements, diversifying “ask lists” in negotiations, being open to bilateral treaties, addressing taxation and government procurement issues, investing in language and cultural training, collaborating with industry bodies, focusing on value arbitrage and niche products, and leveraging market knowledge and government support. These measures aim to enhance competitiveness and expand global market presence.
Dr Arpita Mukherjee, Professor at ICRIER, opines, “Indian IT companies need to work on product + service offerings to develop IT into all aspects like fintech, healthtech, agritech, etc. The government needs to encourage foreign IT startups as well as promote collaboration with Indian IT startups as well.” She adds that a number of countries are offering startup visas nowadays like Canada and Singapore. This is a temporary conditional residence permit for entrepreneurs who have raised outside funding, and converts to a permanent residency visa if certain conditions are met. It could be a viable route that India can explore for attracting foreign startups in order to bring desired dynamism and collaboration in the IT sector.
