Indian IT firms brace for delayed discretionary spending revival amid Trump tariff, recession fears

This is bad news for the $283 billion Indian IT industry, which saw the healthiest recovery in 18 months in the third quarter of FY25 (Q3FY25) ended December 31, 2024, after a prolonged period of slowdown for several quarters at a stretch.

Recovery for the industry was expected to be on the back of pent-up demand, increasing sentiment, and a wave of modernisation to enable AI services.

“Post the uncertainty regarding tariffs and the broader geo-political environment, we find ourselves in a situation of decision paralysis. This is one of the worst things that happens to the sectors because clients don’t say yes or no but simply defer the decision on big initiatives because that is the safe thing to do,” Jinit Arora, CEO, of consulting firm Everest Group, told Moneycontrol.

A US recession would mean the industry could end FY26 at $290-$292 billion, not meeting the expectation of industry body Nasscom’s prediction of crossing the $300 billion mark in the next fiscal, according to market intelligence firm UnearthInsight.

Most of the revenues for IT companies originate from the North American market, and a recession in this market weighs heavily on the topline and bottomline.

Period of Uncertainty

Enterprises will find it challenging to plan medium or long-term in this environment and will be cautious, according to Pareekh Jain, Founder and CEO, EIIRTrend.

“If there is some stability in the business environment and rates are cut, then there is the possibility of change in sentiments and acceleration in discretionary spending,” Jain further added.

Further, with the new technology cycle ongoing, analysts believe there’s a likelihood of a "transition phase" as spending gets re-prioritised and growth rates moderate for a prolonged period.

In this context, Morgan Stanley has lowered its revenue growth forecasts for the sector as a whole for FY26-27. As a result, the brokerage has cut the target price for almost all Indian IT software majors.

Moreover, Indian IT companies are closely dependent on the US economy, and such uncertainty can affect their decision-making, according to Piyush Pandey, SVP - Institutional Equity Research (Lead Analyst) at the broking firm Centrum.

Short-Term Impact vs. Long-Term AI-led Growth

Nonetheless, despite the immediate challenges, analysts believe Indian IT firms could benefit in the long run.

Historically, recessionary periods have driven enterprises to optimise costs, leading to increased outsourcing, and efficiency-driven mandates for Indian IT service providers.

AI-driven transformation remains a structural growth opportunity, Arora argues.

“Companies are moving towards ‘Systems of Action,’ a new wave of AI-powered process transformation that will drive demand for services in integration, engineering, data, and talent transformation. Similar to past waves—outsourcing in the 1980s, labour arbitrage in the 2000s, and cloud/digital in the 2010s—this shift will fuel growth over the next several years,” Arora added.

Additionally, Everest Group believes there are green shoots for the services sector despite the recessionary concerns such as the GCC opportunity and the smaller companies outside Fortune 500 which have significant transformation needs.

FY26 Projections at Risk

Gaurav Vasu, Founder & CEO of UnearthInsight, projected 5-6% growth for the Indian IT sector in FY26 but warned that a US recession could push it down to 2-3%.

“A slowdown in discretionary spending would immediately impact BFSI, retail, and manufacturing, as consumer sentiment directly affects enterprise spending,” Vasu said.

While AI investments and cost-efficiency measures could eventually revive spending, Indian IT firms will have to wade through a volatile global environment before discretionary IT budgets fully recover.