It is true that that if the US sneezes, India catches a cold. Our IT sector—be it the giants like Infosys, TCS or Wipro—are dependent on the US market since a dominant share of revenue is still from the US customers. Now, even in the GCCs that have been setup in India, many of the companies are from the US. So, whether we like it or not, the dependence of our IT sector on the US is significant. In this context, there is a chance that the US companies may reduce their IT budgets during a recession, affecting the number of projects outsourced to Indian IT firms. Many US based IT companies might postpone IT projects to save money, which could hurt the income of Indian IT service providers.
“Recessionary fears in the US could lead to caution in IT spending, but the Indian IT sector's resilience comes from its ability to adapt and innovate. While some slowdown in projects might be expected, the demand for digital transformation, cloud services, and AI solutions remains steadfast. Indian IT companies have diversified their portfolios, and this flexibility could help mitigate potential impacts. For the long-term, the focus on cost efficiency and value-driven solutions will keep the sector relevant and competitive,” pointed out Aditya Narayan Mishra, MD and CEO CIEL HR.
However, experts point out that as concerns about a recession in the US grows, the Indian IT sector faces serious challenges. Several factors contribute to this situation, including ongoing inflation, rising interest rates, and geopolitical tensions. These issues have led to fears of an economic slowdown, prompting companies to reconsider their spending.
“With clients looking to cut costs due to a possible recession the Indian IT companies may have to lower their prices, squeezing their profit margins. Inflation and wage increases in India could add further strain on profits, making it difficult for these companies to stay profitable. In this context, IT services employees may hesitate to change jobs during uncertain times, leading to a decrease in turnover rates. IT companies may also reduce hiring to match the lower demand from US clients,” remarked aeropsace and space expert Girish Linganna.
He says that the banking and the financial services companies in the US comprise of the major client for Indian IT sector. These companies could cut budgets, reducing revenue from this area. “The companies in the BFSI segment may also scale back their IT expenditures, affecting a wide range of services. In order to cope with these challenges, Indian IT companies might expand their client base into other regions, such as Europe and Asia, to lessen their reliance on the US market and may also implementing measures to save costs and improve efficiency to protect their profit margins. They may also emphasize on high-value services like digital transformation and cybersecurity to provide more value to clients, which can help justify higher prices,” added Linganna.
Experts say that the recessionary fears in the US are indeed true and it may not be easy to just brush it off. “The very indication of interest rate cuts are pointing towards recession. The question is how large a recession would it be. I see it as a positive and negative. Negative because the companies can pull back from the contracts leading to a large impact for us in India. Positive because companies which want to manage costs may start looking at India as a destination where work can be done at an arbitrage. A lot depends on how things play out around the rate cut time frame but it will give the IT companies sleepless nights as they will not be able to plan right,” remarked Sathya Pramod, CEO, Kayess Square Consulting Private Limited.
Though a slowdown in the US economy could reduce demand for outsourced IT projects and slow new contracts, potentially leading to financial pressures and impacting growth projections IT companies may be able to deal with the different challenges. "Despite these challenges, the Indian IT sector is projected to grow at 8-10 percent for the FY 2024-25, driven by strong demand for digital transformation, cloud computing, and artificial intelligence. Major firms like Tata Consultancy Services, Infosys, and Microsoft are expanding globally and investing heavily in emerging technologies. Microsoft’s significant investments in AI and Generative AI further support revenue growth and innovation. These efforts, along with diversification into other markets, help buffer against the potential negative impacts of a US economic downturn, aiding in the sector’s resilience amidst economic uncertainties," observed Bhavesh Goswami, Founder and CEO, CloudThat