JP Morgan has projected FY24 as a “washout year” for India’s $245 billion IT industry, which represents over 7.5% of the country’s GDP. This isn’t merely a reflection of earlier industry apprehensions, but a dire alert for the sector to address systemic challenges before it is too late.
“We remain negative on the sector as we haven’t seen a meaningful uptick in demand in our recent checks. We think the overall setup is not as positive as last quarter,” analysts at JP Morgan said in their latest research note.
Based on their interactions with industry executives, the analysts felt that while there were a few “green shoots” here and there, overall, there was little indication of new deals and client signings in the pipeline.
Major IT firms, heavyweights in the Nifty50 and BSE Sensex indices, have warned of a decline in earnings this year, attributing it to global companies recalibrating digital budgets post the pandemic-induced surge.
As a precursor to this, global IT services and consulting major Accenture’s consulting revenues in the fiscal fourth quarter grew merely 2% year-on-year, in constant currency terms, with its bookings, an indicator of future growth, inching up just 1%. Accenture’s numbers are considered a bellwether for the Indian IT industry.
Following Accenture’s results, Kotak Institutional Equities predicts a flat to negative Q2 for top-tier IT firms.
One could argue that one bad quarter or two doesn’t spell disaster for the sector, which has managed to survive major crises in the past, from the 2008 global financial meltdown to the coronavirus pandemic.
This time around, though, things may be different for India’s IT majors. There are huge changes taking place in the marketplace – changes which India’s IT sector has been slow to adapt and respond to.
The industry’s sluggish response to rapid advancements in machine learning, artificial intelligence (AI), and workplace automation poses concerns. Globally, IT spends are slowing, not just because companies overspent during the pandemic, but also because they are recalibrating their businesses for the “new normal” of AI, automation and robotisation.
Although there’s a surge in global high-end IT service demands, Indian IT’s readiness to capitalize remains questionable.
Despite India producing the largest number of science and engineering graduates worldwide, a mere 1.7% have the skills required for advanced tech roles, per an Aspiring Minds study. The same study estimated that 80% of recent engineering graduates are actually unemployable in the new knowledge economy.
The industry has known this for a while now, and its response has been to plug the skill gap by hiring lots of freshers, and investing heavily in training. In FY22, for instance, TCS invested over 60 million hours in training to bridge this skill gap. This also meant the creation of vast campuses with tens of thousands of employees in each centre.
That worked well during the “business as usual” years but the pandemic has changed all that. The lead time in taking virtually unemployable talent and converting them into globally competitive professionals is now too long, especially as technologies are changing at light speed. The huge infrastructure investments are a drain on resources, forcing many IT majors to re-impose “work-from-office” rules even as the rest of the world’s tech sector appears to have permanently shifted toa hybrid mode.
India’s IT sector needs to undergo a paradigm shift in its business models, if FY24 is not to turn out to be the first of a long run of declines. Our IT majors need to work faster on productization – rather than depend only on services outsourcing. They need to work quicker on filling the skill gaps to meet needs of tomorrow. There is also a pressing need to diversify markets and reduce dependence on the US and EU markets. Perhaps it is time to turn serious focus on the domestic market, which, thanks to high growth, is providing a cushion for most other sectors.
