IT marks time, amid that shrinking feeling

Subir Roy

The heady days of 20 per cent growth are long gone, but the big issue facing the Indian information technology (IT) industry is how far below 10 per cent it will go.

The industry is likely to achieve a top line growth of 9 per cent in 2019-20, around the same as the 9.1 per cent reached in the previous year, according to the guidance issued by the industry body Nasscom (National Association of Software and Services Companies), indicating that growth is plateauing.

The rating agency ICRA has made roughly the same kind of projection, signalling that the sector will grow by 7-9 per cent in US dollar terms, largely fuelled by the delivery of digital services.

In 2019, digital revenues grew by 30 per cent to $33 billion. The outward looking industry grew its exports the same year by 8.3 per cent to $136 billion, against a domestic revenue growth of 7.9 per cent.

Perhaps the most heartening has been the growth in startups which marks out India as a global frontrunner in innovation. Startup funding reached an all-time high of $14.5 billion in 2019, with nine startups reaching unicorn status (valuation of over $1 billion), bringing up the total to 24.

But most recently, the outlook for 2020 has taken a dip with Boeing announcing it will stop production of its flagship 737 Max aircraft from January. As a result, a question mark hangs over outsourcing contracts of major Indian IT outsourcing firms totalling over $1 billion which are part of the supply chain for the aircraft.

Boeing is a key client for many Indian IT service providers and the ripple effect of Boeing being hit will touch the entire ecosystem of the global aerospace industry and consequently, all those who live by it in any significant way. For decades now, aircraft have become more and more “fly by wire” that is relying increasingly on IT for their avionics and more.

There is, however, one silver lining. If the 737 Max is grounded in any serious way, then the global commercial aviation leader -- the industry is dominated by the Boeing-Airbus duopoly -- may end up putting additional focus on the development of 797, another of its new aircraft programmes.

Even without this recent setback, Nasscom had looked forward to 2020 with “cautious optimism” and no more. In fact, such has been the growing uncertainty in the business environment for the sector that the industry body announced earlier in the year that it would stop offering industry “projections” and instead only come up with “guidance”.

As industry projections are not forthcoming, the shape of how things will emerge can be fleshed out a bit by looking at the numbers for the industry leader Tata Consultancy Services. According to one analyst, it is likely to grow its top line by 7.3 per cent in 2019-20, which is a far cry from the stellar performance that it turned in during the previous year (2018-19) with a top line growth of 19 per cent. But margins (EBITDAM, or earnings before interest, income taxes, depreciation, amortisation, and management fees) are likely to remain steady at 26.7 per cent.

A key headwind the Indian industry faces is the inward-looking attitude of the Donald Trump administration which has been reflected in stiffer visa restrictions. This has upped the need to increase near-shore hiring, which is costlier than outsourcing skills in or form India. For a service industry, this means pressure on margins.

The tailwinds flow from the compulsions under which business across the globe are operating to take forward their digital agenda. This has led to a rise in the size of digital deals. The industry has till now been able to capitalise on this, by growing its digital business rapidly.

But perhaps the biggest challenge which the industry will face is finding the right kind of superior talent which will enable the growth of the digital business. The downside, according to Nasscom, is that a good third of the industry’s workforce, now occupying the middle level, is staring at redundancy over the next five years.

This is because they do not have the skills to deliver in areas like artificial intelligence, Internet of things, machine learning and blockchain. Therefore, the key focus for tomorrow has to be on imparting the right type of training and delivering on the Herculean task of reskilling a million employees who are no longer all that young and have become used to performing a middle management role.

A CEO survey conducted by Nasscom in 2019 sees the biggest challenge facing the industry going forward -- increased protectionist policies and India’s own lack of digital skills. This tempers their optimism with caution.

Global macro-economic risks can pose challenges to growth, but right now there are two positives. The US-China trade war is marking a pause and the Brexit uncertainty is over. The EU-UK separation is coming, but the contours of the new scenario that will emerge by end-2020 are not known. The final shape of things will be significant for the IT industry as the UK has till now been the base from which the Indian IT industry has managed its European business.

The ultimate question is: Will London remain the home away from home by end-2020 or will it mean relocations to, say Frankfurt, taking a toll on business in the short term.

Subir Roy is a senior journalist and author. The views are personal.