There have been increasing estimations in the last year or so that the global economy is slowing down. As the world prepares for a recession, a natural phenomenon in a decade-long economic cycle, the global trade wars between the US and China, and the looming Brexit are adding to the uncertainty.
India is in a tumultuous situation as well with a weak economic situation, as indicated by the falling GDP growth rate. High level of non-performing assets (NPAs), NBFC crisis and slow credit growth stand in front of the economy, challenging it to recover stronger in the short term. The flight of over ₹20,500 crore worth of foreign funds from the country’s stock market is also a sign of the bad days for the economy.
If we look at the tech sector, one of the biggest indicators of slowing down is the global semiconductor chip market, which has fallen, plunging 16.8% from June 2018 till June 2019, according to the World Semiconductor Trade Statistics.
What Recession Means For India & Its IT Industry
The global IT services market is predicted to reach $1.031 trillion, with the growth rate slowing to 3.8% in 2019, compared to 6.7% last year. Out of the total IT services market, it is estimated that 30% of that is outsourcing work. Of the total outsourcing market share, Indian companies share is about 60%, converting to more than $180-200 billion in contracts, according to estimates.
As the technology sector has a much larger dependence on global demand, IT-based outsourcing is where the majority of the revenue chunk comes from. If the recession hits the world, the Indian IT services market may take a hit, as outsourcing contracts may see a decline.
The Indian IT Economy Seems Shaky According To Last Quarter Results
The slowing economy is affecting the strong growth seen in the technology sector in the last 5 years. This has been highlighted in the last financial earnings reports as well. Except for Infosys Ltd and HCL Technologies Ltd, revenue growth at leading IT firms have either remained flat or have witnessed a reduction, according to reports.
The mid-cap IT firms have also reported their worst growth numbers in the past few years due to reasons such as cuts in client budgets, deferred projects and increasing expenses of maintaining talent in the US and Europe, analysts say. As a result, revenue in terms of growth on year-on-year for mid-cap IT firms have come down to low teens from high teens earlier.
Analysts also report that mid-tier IT firms have a high operating leverage in terms of costs, and a slowdown in revenue growth makes them more vulnerable to revenue losses when it comes to their technology outsourcing.
Software Market In 2019 May Still Continue Strong
If we look at the hardware and software market, we find opposing trends. Research by Gartner predicts that technology infrastructure hardware sales will fall in 2019, with Data Center Systems or the core infrastructure for servers falling by 3.5% during the year. While the hardware market may face a hard time, the enterprise software market is set to grow by 8.2%.
The Indian tech industry is not a big producer of hardware anyway and here the focus is more on the software side. With rising software demand through software-as-a-service projects, the software market may still be a positive story for India in particular, and a bad one for the likes of China, which is a big chip manufacturer.
Analysts say that increasing shift to cloud will help Indian enterprise software companies to experience strong growth. Worldwide software spending projected to grow to total $466 billion by end of 2020 at an 8% annual growth rate. Therefore, organisations are expected to increase spending on enterprise application software in 2019, with more of the budget shifting to software as a service (SaaS), says research.
It May Not Be As Bad For Indian Tech Industry After All
The contrast between software and hardware growth is indicative of the fact that businesses instead of spending huge sums of money in setting up servers, will rather depend on cloud providers who already have a great reputation in serving their customers for specific business demands. .
The good news for India is that the nation is the leading cost arbitrage for software services, which is the primary reason US-based tech companies are always keen on using India-based teams to complete their software projects. According to experts, global enterprises are not going to stop their digital transformation efforts even during a recession, though they may take a more cautious stance in their budgets related to IT consultancy.
Even if we do see a full-blown global recession, it is expected that we may see tighter control over expenses through a slew of measures, including a slower pace of hiring and restructuring to optimise costs. Halting software spending would harm customer experience in the long run — something which tech spenders are very keen to avoid and this would help Indian IT tremendously.