The US President Donald Trump administration's reciprocal tariffs will further delay the Indian IT services and software exporters’ expectations for demand recovery and growth revival in FY26, after over two years of muted business environment.
This has already started reflecting on the tanking of stocks of IT majors including Tata Consultancy Services, Infosys, HCLTech, Wipro and others, on the Indian bourses on April 4. Infosys shares tumbled nearly 3 percent while Wipro and HCL Tech shares were down over 2 percent as of morning. Tech Mahindra, Mphasis and other IT stocks too were trading in the red with losses of over a percent each.
According to global research consultancy firm HFS Research, the tariff hike of Indian exports to the US at 26 percent was significantly higher than the earlier anticipated 20 percent. This will fuel the fears of recession further leading to a negative impact on spending on IT services.
“We see the very foundations of the IT services industry being rattled to the core,” analysts at HFS Research said in a blog post.
The blog post cited Goldman Sachs estimates of 30% chances of an economic recession before President Trump’s “Liberation Day” announcement of tariffs, which has now become far more severe than expected.
“These expectations are now over 50% and there will be a rapid domino impact on the IT services industry by immediately slowing down enterprise decision-making and increasing immediate focus on cost controls,” the blogpost added.
This comes at a time when the industry is already reeling with the uncertainty and disruption caused by artificial intelligence (AI) and generative AI as deal sizes and tenure have started to shrink, with top industry leaders foreseeing a fundamental shift in the business models of IT companies.
Further, US government's IT spends getting cut by Elon Musk-led Department of Government Efficiency (DOGE) has only made the situation worse, with companies like Accenture already feeling the heat.
Discretionary spend reduces, AI booms
While IT company customers would become wary yet again of discretionary tech spending amidst uncertainties, the chances are that AI-led productivity gains, leading to outcome-based spending, will take centerstage for IT companies to sustain.
“As firms are forced to determine how they’ll survey the impending economic uncertainty or decline, the IT services industry has no option but to double down on AI-led productivity gains and deep domain expertise to help clients weather the storm,” said HFS Research
Akash Verma, practice director at global research firm Everest Group believes that the reciprocal tariffs will impact “IT services demand, not supply”. According to him, in the short term, specific sectors including manufacturing, electronics, and parts of retail/CPG will face cost pressures and uncertainty, leading to cuts in non-essential and discretionary IT spending.
“However, the exemption of semiconductors and pharmaceuticals is a critical relief. In the medium term, businesses will adapt by optimising costs, diversifying suppliers, and increasing automation, ultimately creating new growth opportunities for service providers,” he said.
In the near to midterm, NelsonHalls' principal analyst believes tariffs will impact companies across sectors, especially retail and manufacturing. The focus will shift to managing the fast-evolving tariff situation to optimise supply chain and pricing.
"This is an existential challenge requiring calibrated steps by even Fortune 2000 companies. There will be a freeze on discretionary spending on IT and a cutback on some non-critical existing projects until there is more clarity, which is another unknown since the administration is known to revise policies rapidly," Parab told Moneycontrol.
Resetting growth expectations
Piyush Pandey, SVP- Equity analyst- IT and Telecom sector, Centrum Broking told Moneycontrol, “Higher US inflation can affect future interest rate cuts by the Fed. We might see less cuts. Also, it creates downside risk to US GDP growth. This can affect tech spending of clients there…For IT companies, the recovery in discretionary tech spending by clients might get delayed.”
Analysts at BNP Paribas in a note said that some of the US macroeconomic data have started showing signs of a slowdown, raising the risk of “a stagflation at best and a recession at worst”.
“IT Services demand, especially discretionary, is unlikely to be left untouched from this slowdown. Investors have accordingly slashed growth expectations sharply and now expect FY26 revenue growth to be weaker than in FY25,” the note said.
HFS Research added, “The best case will be a harsh but brief storm, as we hope a sudden economic downturn can bounce back in late 2025. But this summer will likely be one of frozen spending, cost cutting, and restructuring.”
On the other hand, Parab believes there has always been a bit of temporary re-balancing between offshore, onshore, and nearshore sourcing and business models due to geopolitical and economic events, and something similar will happen in IT but more due to the impact of AI and not necessarily the trade wars.
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