After exuding optimism about resilient demand and deal wins just a couple of months ago, India’s top-tier software companies have reported weak numbers in Q4 FY23 and sharply scaled down their guidance for FY24. Their stocks have thus received a serious battering on the bourses.

Infosys reported a 2.2 per cent sequential decline in revenues for Q4, which resulted in its full-year revenue growth of 15.4 per cent (in constant currency) falling short of its 16-17 per cent guidance. HCL Technologies has reported a 0.4 per cent decline in sequential revenues while TCS has delivered low growth of 1.6 per cent. Both Infosys and HCL also reported a sequential fall in operating margins while TCS held on. Sector leaders are now guiding for 6 to 8 per cent topline growth in FY24, after managing 16-18 per cent last fiscal.  Though the firms have tried to downplay fears about an extended slump, current demand weakness looks likely to last a while.

For one, Indian IT firms received a big boost during the Covid years from digital transformation deals, as global enterprises invested heavily in digital interfaces to get over physical constraints to business. But such deals seem to be petering out post-pandemic. Two, the North American market and the BFSI (Banking Financial Services and Insurance) vertical have always been the bread-and-butter segments for Indian IT, but the US Fed’s drastic rate hikes and subsequent US banking turmoil seem to be hurting precisely these segments. Though players have attributed lower deal wins to deferred decision-making, there’s a very real risk of the US slipping into recession in the coming months. In such an event, spending cuts could materialise not just in the BFSI or telecom sectors which were already hit in Q4, but also in other large verticals such as retail and manufacturing. Three, during past periods of global turmoil such as the financial crisis or taper tantrum, realisations for Indian software exporters received a boost from rupee depreciation. Today, a sharp bout of rupee depreciation against the dollar appears unlikely as the Indian economy and fisc are in far better shape. Without an exchange rate cushion to their billing rates, IT firms may be forced to cede margins to woo clients. But the one silver lining for the IT giants is that this slowdown promises to cool the hiring frenzy that had escalated both their wage bills and attrition rates. They must use this phase to bolster their talent pool and reskill their workforce, to prepare it for looming AI-driven disruptions.

While the IT industry may weather this bout of cyclical turbulence as they’ve done in the past, the prospect of software exports slowing to the single digits poses two tough challenges for policymakers. White-collar job creation could take a material hit if IT firms cut back on hiring; the top four have already reduced net additions to 2.8 lakh in FY23 from 3.8 lakh in FY22. The 25 per cent growth in services exports played a big role in narrowing India’s current account deficit in FY23, by making the merchandise export slowdown easier to digest. Should services exports also falter this year, bridging the trade gap could pose a problem.