Tough Times for the Indian IT Sector

The Indian IT sector is going through tough times. Once considered the Sunshine sector and a sector whose firms always reported double-digit growth rates, it is now staring at the growth rates being in single digits.

For instance, both TCS (Tata Consultancy Services) and Infosys, considered as the Bellwethers for the Indian IT sector have reported single digit growth for the last quarter and when taken together with the results for all the big firms, some commentators have pointed to the worst quarter in almost eight years for the Indian IT sector.

Slowing West, Brexit, and Trump

So, why did this happen and why did a sector that was always beating market expectations is now being degraded by analysts and equity researchers from buy to sell recommendations. There are many reasons for this and the first and foremost reason is the slowing down of the Western economies such as the United States and the United Kingdom as well as other European economies.

Indeed, given the fact that these markets represent nearly 80% of the total revenues for the Indian IT Sector, it is no wonder that slow growth in these economies is contributing to the slowdown in the former.

Further, after Brexit (which was the referendum in the UK where people voted to leave the European Union), businesses based in the UK are reluctant to commit themselves to longer-term investments in IT and allied projects mainly due to the uncertainties surrounding the exact terms of the exit from the EU.

In addition, the firms in the United States are also putting on hold investments in IT due to the uncertainty over the election which is due to take place in November 2016. Considering the fact that one of the candidates, Donald Trump, has promised to cut down on outsourcing, this is another reason for the slow pace of investments into IT.

Structural Reasons: More Bang for the Buck

While these are economic reasons to do with macroeconomic and microeconomic aspects, there are some fundamental aspects that are structural in nature and which seem to be affecting the growth prospects of the Indian IT sector.

Among these is the main aspect of how the Indian IT firms perform low value adding work when compared to IT firms in the US and UK that are more productive as well as derive greater value from their work.

For instance, Accenture which is a respected global IT major realizes as much as 40% more revenue per employee than Infosys or TCS mainly because its employees do not spend their time on routine, tedious, and time-consuming tasks and instead, focus on consulting and analytics work due to which they are more productive and deliver what the Americans say as “more bang for the buck”.

Indeed, it is high time that the Indian IT sector evolved from being a coding machine to one that does sophisticated and advanced work for its clients. Towards this end, it can also venture into automation, AI or Artificial Intelligence, and Analytics so that its employees are better placed to earn more revenue. Of course, there would be some job losses and the firms have to manage the transition in a smooth manner without too much disruption.

Conclusion

Lastly, it is also the case that the Indian IT sector is being hit by competition from cheaper-wage countries such as the Philippines. Indeed, the Indian IT sector which came into prominence precisely because of this advantage now seems to be losing the edge mainly because wages have gone up and hence, such countries are more attractive to Western firms when compared to India. To conclude, the Indian IT sector is indeed in for some tough times and it remains to be seen whether it would recover its Mojo.


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