Indian IT blooms as the recession looms
Ever since the US media started talking about the possibility of a recession, the Indian IT sector has been grappling with uncertainty. Last week, we made a case for Indian IT companies on why they would win in case of a recession (read ' Indian IT loves a good recession), where we talked about how the companies would not just survive but thrive in the times of crisis.
Recession is coming…
According to Goldman Sachs, there was a 30 per cent probability that the US economy would tip into recession over the next two years because of aggressive interest rate hikes by the US federal reserve. The Deutsche Bank also warned the recession might hit the US in late 2023, largely due to the federal reserve's steps to contain inflation.
Between 40-78 per cent of the revenues of Indian IT companies come from the US. TCS, Infosys, Wipro, Tech Mahindra and HCL Technologies have more than 50 per cent exposure. Moreover, Indian IT accounts for about 55 per cent of the global IT services industry market share.
Every recession is followed by a high period of growth in the Indian IT outsourcing business – be it 2000 or 2008 – as pointed out by IT analyst Pareek Jain.
For instance, during the global financial crisis (2008), Indian IT companies witnessed a rise in the number of contracts; the total value and the annualised contract values exceeded that of the previous year.
The worldwide IT/ITES grew by 12 per cent, the highest among all technology-related segments. Hardware spending grew by 4 per cent from USD 570 billion to USD 594 billion in 2008.
Impact of recession:
In the short term, there might be a few cutbacks in spending, which will likely impact a few digital projects in a few enterprises.
In the medium term, there would be high growth in outsourcing to India.
Plus, the depreciating rupee is working in Indian IT's favour, as a weaker rupee should theoretically boost exports and offshore activities.
Macquarie bets big
Post global financial crisis, India tier-I has become a strategic partner and is not likely to be as impacted by minor cuts in IT budgets that are likely to fall first on smaller firms.
Indian IT companies are likely to reduce travel costs, limit the extensions granted to highly experimental projects, and are most likely to shrink budgets by ~1 per cent ,
Meanwhile, JP Morgan and Nomura have downgraded major Indian IT firms over margin, revenue concerns, surging inflation, and supply chain issues in the wake of the Russia-Ukraine war.
The recession is just one side of the story. What about the growing attrition rate in the Indian IT sector? – it stands at an all-time high, averaging around 25 per cent , according to a few market experts.
That explains why most Indian IT firms are now setting up bases in tier II and III cities. Infosys recently said it is setting up four new offices in tier-II cities.
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