Changed paradigm

Prima facie, the stock market reaction to Tata Consultancy Services’ (TCS) profit warning last week, which eroded nearly ₹34,000 crore in market capitalisation for the listed IT majors, may appear overdone. But then TCS’ statement that the outlook was marked by “abundant caution” only served to confirm the market’s niggling fears that the growth outlook for domestic IT exporters is now on a slippery slope. From the beginning of 2016, the significant deceleration in US economic growth (1 per cent in the first half), turmoil in Europe, and Brexit have had Indian IT majors steadily trimming their growth projections. And despite Nasscom holding on to its growth forecast of 10 to 12 per cent for FY17, many industry watchers now expect the year to end with single-digit growth.

To be sure, it is not just unexpected global headwinds that have resulted in the software export juggernaut slowing from a 30 per cent growth ten years ago, to barely double digits now. The industry has been criticised for long for being over-reliant on one geography — the US (62 per cent of Indian exports) — and one vertical, BFSI (over 40 per cent), offering basic back-end services that thrive mainly on labour cost arbitrage. Now, as these segments hit a wall, players are scrambling to reorient their service offerings to SMAC (social media, mobile, analytics and cloud) and automate their low-end services. While some of the players will certainly fight their way out of this challenging phase, the downturn in IT fortunes comes at an inopportune time for the Indian economy. One, IT services represent one of the few bright spots in India’s bleak export picture and growth outlook today. In FY16, while the country’s merchandise exports shrank by over 15 per cent, IT services exports expanded by 10 per cent. This is also one of the rare export sectors in which Indian industry has gained a notable share of the global market. Two, a workforce of 3.7 million also makes it the largest private sector, organised employer and a key driver of consumer spends. As the shift in business model forces a cutback on fresh hires (2 lakh in FY16), the already anaemic pace of job creation in the economy may flag further.

The slowdown in IT services therefore cries out for urgent policy attention, even though this sector has grown largely without policy sops in the past (tax incentives extended in the initial years have been gradually withdrawn). One large opportunity that the Centre and the IT majors must explore is how players can make a greater contribution to the technological transformation of the domestic economy — be it through the Digital India and e-governance initiatives, or equipping private enterprises with better data capture and analytics capabilities. Yes, this will not bring in easy dollar revenues or entail labour cost arbitrage. But managing this shift may prove the true test of Indian IT industry’s celebrated mettle.

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