An improving macroeconomic environment could enable the resumption of long-delayed discretionary programmes by late FY25 or early FY26, analysts suggest. A gradual recovery in discretionary spending, bolstered by new investments in GenAI in FY25, may be accelerated, also leading to the maturation of these GenAI initiatives.
According to a report by domestic brokerage Prabhudas Lilladher, the global tech spending growth moderated in calendar years 2022 and 2023, after a sharp uptick in 2021 attributed to escalating interest rates and unabated inflation, which led enterprises adopting a conservative approach to discretionary spending.
However, “The macro indicators are turning positive and infusing positive sentiment among enterprises to review their budgeted technology spends and resume some high-priority programs. We expect a gradual recovery of discretionary spending with support from new spends through GenAI in FY25, which should accelerate further in FY26 with full-fledged discretionary uptick and maturing GenAI programs,” the report read.
It added that the anticipated macro recovery in H2FY25 or early FY26 might boost discretionary spending by global enterprises and support the overall banking, financial services, and insurance (BFSI) growth in FY25E and FY26E.
Major driver
“After the interest rate cut, there is a general hope the discretionary environment will improve. It will be a major driver for H2FY25 to perform better than H1. Generally, when the macro environment is down, you have large cost optimization deals, but the commentary is still that they drive revenue. Slowly, people are expecting better growth in coming quarters, which will mostly come from discretionary spends,” echoed Pareekh Jain, CEO at Pareekh Consulting and EIIRTrend, adding there is hope of discretionary spending coming back in the next calendar year or the latter half of this fiscal.
He also explained that AI and Gen AI are the biggest drivers of growth. “Companies want to invest in new technologies while also resuming digital spending from where they left off earlier. They had been spending on digital but suddenly macro environments were down so there was little ROI. Many projects that were halted will resume and be driven by Gen AI,”
A larger digital spend may be due to companies being unable to move beyond GenAI POCs because their digital backbone was not aligned without investments in data, cloud, or cybersecurity. GenAI might motivate clients to improve their data and cloud layers and cybersecurity, with investments in said areas.
At a corporate level, new initiatives such as increased 5G rollouts in telecom or opening more factories — things not directly linked to digital, but will get the revenue — may require new IT investments.
A report by Motilal Oswal Financial Services suggested the IT services sector could be on the verge of recovery after facing an extended period of cuts in discretionary spending. It was noted that while the era of spending reductions in the industry seemed to be ending, there was little indication of a resurgence in business flow. However, this perspective has shifted. “As we look ahead to the next 2-4 years, the harsh winter appears to be behind us, and the foundations for a sustained revival in the flow of business and smaller deals are being laid.”
Wipro CEO and MD Srini Pallia, in its Q1 FY’25 earnings conference call, said, “Capco had sequential growth in the last few quarters. It is like the tip of the sphere which is consulting and strategy-led, and the rest of the Wipro engine implements that. We are seeing good traction around that, and greater demand at larger institutional clients across BFSI companies. This gives colour on how discretionary spending is coming back, at least in BFSI, and is also reflected in our BFSI growth.”
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