After getting a huge electoral mandate for a second five-year term, NDA government led by Prime Minister Narendra Modi has a unique opportunity to embrace economic reforms without populist hues. The 2019 poll outcome not only reflects the return of optimism but has also created a road map for political stability that is needed for the economic reforms. Post elections, government’s focus will now shift to growth, it is expected that RBI would be more accommodative and corporate earnings could be heading into a new cycle. India’s growth outlook for the next couple of years will essentially have domestic drivers such as private consumption and investment. With a weak global environment, India will have to lean on domestic demand; Indian IT companies would, therefore, witness expansion in domestic business in comparison to exports.
Industry Performance & Developments-
In FY 2019, the global market for software and services is estimated to have grown to $1.4 trillion. IT Services is estimated to have grown by 3.2% YoY, driven by strong growth in digital engagements, particularly cloud adoption. Business Process Management grew by 4.5% over the prior year, on account of a greater focus on automation, while packaged software grew 7.4% YoY, driven by the rapid adoption of SaaS, and security and privacy solutions. Despite a moderate global IT industry growth, the Indian IT sector in recent months has been struggling with low growth, depleting margins and other operational challenges such as US visa issues.
In line with the changing global IT industry, currently, the Indian IT industry is also going through a transition phase from traditional to digital transformations such as cloud computing, analytics, artificial intelligence, and IoT. India is the leading sourcing destination across the world, with about 55 percent market share of the $200 billion global services sourcing business in 2017-18. India is continuing to grow at a faster pace in terms of global IT sourcing companies. Indian IT & ITeS companies have set up over 1,000 global delivery centers in about 80 countries across the world. India has become the digital capabilities hub of the world with around 75 percent of global digital talent present in the country. Going forward following key factors will become the key drivers of the Indian IT sector.
In order to create differentiated offerings Indian IT companies mostly the industry leaders such as TCS, Infosys, Wipro, and Tech Mahindra are diversifying offerings and showcasing leading ideas in cloud computing and artificial intelligence to clients using innovation hubs and research & development centers across the country and globally. The government of India is also taking initiatives to boost the sector for example it has identified IT as one of 12 champion service sectors for which an action plan is being developed. Also, it has set up a Rs 5,000 crore fund for realising the potential of these champion service sectors. As a part of Union Budget 2018-19, Niti Aayog is going to set up a national-level program that will enable efforts in artificial intelligence and will help leverage AI technology for development works in the country.
While demand remains robust, H1-B visa issuance may delay project deliverables. The US visa rejection rate has also gone up by 6 percent to 22 percent in FY18 and also there was no relief seen in 2019 and thus increase in local hiring may increase the operating cost further. As the Indian IT Industry is primarily an export-oriented sector, with major business coming in from North America and Europe, Rupee fluctuation is also a key element of IT sector profitability. If the Indian Rupee strengthens Indian IT exports suffer and vice versa, going forward this dynamic is going to remain important, until a point where domestic demand reaches higher proportions. The outlook for the Indian economy continues to be bright which could lead to the strengthening of the Indian currency vis-à-vis the US dollar and the Euro, therefore the margins of IT companies could be under stress going forward.
In the short-term IT, firms may see some signs of macro concerns and headwinds in certain pockets – US financial services, Europe manufacturing, and healthcare & life sciences segments globally. Digital demand remains strong across regions and client segments, especially in segments such as telecommunications, energy, utilities, retail, and insurance. Industries, such as BFSI and retail, are witnessing consolidation. In communication, investments in the deployment of 5G will drive growth. Customer acquisition, digital banking, cybersecurity, and lending are expected to be key areas of focus and spending in the current year.
India is the topmost offshoring destination for IT companies across the world. Having proven its capabilities in delivering both on-shore and off-shore services to global clients, emerging technologies now offer an entire new gamut of opportunities to top IT firms in India.
Strong demand from different geographies will revive IT exports in the coming future. However, fluctuations in the INR and slowdown in the global economy especially in the US may impact the profitability of Indian IT Companies. It is expected that the IT sector will have a moderate growth of around 8-12 percent in FY20 and can see a 13-15 percent growth in FY21. The industry leaders such as TCS, Infosys will be able to capture the growth more as they are able to transform themselves ahead of the other smaller industry peers.
Summary- We are cautiously optimistic about the prospects of the Indian IT industry, the sector is witnessing a paradigm shift in terms of technological advancement and Indian companies are well positioned to benefit from them. However, the Industry is highly intertwined with the Global economic developments and such any adverse geopolitical developments would impact the Industry great deal. For long-term sustainable growth for the Industry, it is imperative that the domestic revenues of IT companies become a more meaningful component of the overall revenues.
This article has been contributed by Rahul Agarwal, Director, Wealth Discovery/ EZ Wealth