Indian IT sector may take a heavy hit as Covid batters US and Europe

When America sneezes, India catches a cold. When Europe too sneezes, India gets a fever, quipped an official of a large software company.

It is feared that Covid-19 will significantly impact the $180-billion Indian IT sector, and the impact may be worse than that of the 2008 global financial crisis (GFC).

The fear is justified, considering the US and Europe, which together account for more than two-thirds of India’s IT exports, are among the worst affected geographies by the pandemic. Clients could significantly reduce their IT spending this year.

The early indicators confirm the fears. Accenture, which started the March quarter earnings season, has slashed its FY20 guidance by almost half to 3-6 per cent in local currency. The company has a robust pipeline and strong relationship with many of its clients, a trend shared by many of its IT services peers.

Covid vs 2008 crisis

The impact of the pandemic on the IT industry is expected to be worse than the GFC’s, as the total direct GDP impact can be nearly $8 trillion, with all the major sectors hit hard. This was not the case during the GFC, when the economic correction almost exclusively impacted only the rich.

The economic loss due to Covid-19 will in turn affect spending on IT by clients, said Arun Jain, Chairman, Intellect Design Arena. It is too early to predict the likely loss to the industry now, he added.

Most companies will know where they stand only by June or July, said Nagaraj V Mylanda, Managing Director of FSS Ltd. “We completed the budget exercise for FY21 in February 2020, just before Covid hit China. We will look into our budget in June again and readjust for the Covid effect,” he added.

The Indian IT industry is part of a global supply chain; any disruption in the latter will have a ripple effect here. The tech industry will see business impacted by demand side shifts as opposed to supply side challenges, said industry body Nasscom. “We will have to assess the long-term impact once the present crisis is averted. We will continue to assess the impact from demand side issues over the next few weeks,” it added.

Analysts tracking the global $4-trillion IT sector share a grim outlook.

“Data points indicate that it is definitely as severe as the GFC 2008 meltdown. However, we have to wait for some time to assess the actual severity of Covid-19, as it is still unfolding,” said Naveen Mishra, Senior Director Analyst of Gartner.

Decline in IT spend

In the short term, it is a challenge as IT spend is expected to decline in 2020. Over time, though, companies will consider revisiting their IT spend portfolio and consumption models, which will bring in more automation, remote working and collaboration, he added.

IT spending will reduce for North America and Western Europe. Indian IT services will be negatively impacted as companies in these markets will renegotiate existing contracts and put on hold growth initiatives and discretionary IT initiatives, said Mishra.

Abhishek Singh, Vice-President at Everest Group, concurred. The impact of Covid-19 will be worse than GFC as the former has dented both demand and supply, whereas the latter had affected only demand, he said.

For the quarter ended March, year-on-year (YoY) growth is estimated at 1.5-2 per cent. However, for the quarter ending June, a contraction of at least 2 per cent is predicted YoY, he added.

The contraction will be thanks to industries that are highly impacted by the pandemic — such as travel and hospitality — putting projects on hold. Projects from other industries are also likely to be stalled. However, on the positive side, business-critical IT — such as core banking, call centres and e-commerce — will continue to operate and may witness a surge in short-term demand, Singh said.

Volatile sectors

Boz Hristov, Professional Services Senior Analyst, Technology Business Research, Inc, said IT vendors — especially those exposed to the most volatile sectors such as industrials/manufacturing, retail and travel — will see a challenging period. The financial services sector will face headwinds, especially banking and capital markets, and less so insurance. This will further pressure Indian vendors that are significantly dependent on that sector, he added.

However, Indian companies can certainly leverage their core value proposition and put out price competitive service offerings. “India’s advantage is its strong manpower. The longevity and magnitude of Covid-19 will dictate the pace of change. I do not believe India as a core outsourcing hub is going to change anywhere anytime soon,” Hristov said.

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