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Inside India: The world’s IT powerhouse

The Covid-19 pandemic is turning out to be a big fork in the road for many companies. But what about the industry that keeps the lights on for them?

When the Narendra Modi government announced a flurry of investments in quantum computing, datacentres and broadband connectivity in February 2020, industry watchers welcomed the move to bolster India’s ICT sector.

India’s tech sector currently makes up around 8% of its GDP. According to market research firm GlobalData, the domestic enterprise ICT market in India was projected to grow at a compound annual growth rate (CAGR) of around 7% for the next five years.

“The initiatives announced by the government should provide a considerable boost to the domestic ICT market, and we believe the growth can be higher – very close to the double-digit mark, if such initiatives and incentives for the technology sector continue in the subsequent union budgets as well,” said Nishant Singh, head of technology and telecoms data at GlobalData.

That changed in just over a month, when workplaces were shuttered and countries including India went into lockdown mode as the Covid-19 coronavirus pandemic gripped the world. More companies started cutting down on discretionary IT spending, leading ICRA, an Indian investment information and credit rating agency, to slash its growth forecast of the local tech sector to just 3-5% this year.

Right now, the big IT players are busy renegotiating contracts and correcting courses. Speculations about price revisions and discounts are already afoot. Vivek Iyer, partner for financial services at PricewaterhouseCoopers, pointed to industry conversations and concerns around costs, remote working and the economic slowdown.

“With reduced cash flows, most of the players want to avoid the force majeure clause,” said Iyer, referring to terms that let vendors and customers bail out of their contractual obligations due to events outside their control.

“So, they find renegotiation of contracts a good option because even with some hit on their margins, they would still be able to take care of salaries and other overheads. Soon, major players would be seen investing in remote working infrastructures and virtual internship experiments.”

Even though the months ahead will be challenging, the impact can be softened if India’s IT companies tap their well-honed ability to handle complexity and understand business needs.

“The foundational strength of the Indian IT industry is its ability to align with a client’s needs, to learn, and unlearn in continuous cycles,” said Thomas George, president of CMR, a market research company. “That is a major winning card now.”

“IT has really saved us in the lockdown. Without IT, the pandemic would have been a bigger disaster than what it has been”
Arun Jethmalani, ValueNotes Strategic Intelligence

Clearly, from the Y2K panic of the 1990s when India’s IT industry supplied the world with armies of coders, to the later years when major IT firms acquired digital platforms, India has always been able to help businesses sort out legacy issues and address new requirements. This can play out again.

The future of India’s IT and outsourcing industry will also depend on the choice of verticals and markets it caters to.

For Cognizant India, over 60% of its business is in financial services and healthcare, which tend to do better than the travel, hospitality, retail and automotive industries that have been hardest hit by the coronavirus pandemic.

“International markets, which tend to rebound more slowly, represent just 25% of our business,” said Ramkumar Ramamoorthy, Cognizant’s chairman and managing director. “We are primarily exposed to Global 2000 clients, which we believe will be more resilient than smaller companies. We also have confidence in the strength of our balance sheet and liquidity.”

Ramamoorthy added that the company was now planning for a slow transition back to normalcy and could begin to see the sequential headwinds ease in the second half of this year.

Compared with the US and China, where more IT companies are involved in core technology development, IT services firms such as Cognizant make up the lion’s share of India’s IT industry, which remains heavily dependent on spending by the US and large corporations.

As such, how quickly the US recovers will affect not only 2020 contracts, but also those in 2021, said Ray Wang, principal analyst and chairman at Constellation Research.

“The consulting operations are facing the toughest challenges – though large business process outsourcing and infrastructure deals are doing well,” said Wang. “We see some consolidation with customers as 20% of the Fortune 500 will be merged, acquired, or bankrupt by 2022.”

Jim Handy, a semiconductor expert from Objective Analysis, is worried that the pandemic will cause a macroeconomic collapse. Other analysts affirmed these fears in their own ways.

Eight new shifts in India’s IT industry

  1. Local talent pools from tier-three towns and villages will be harnessed.
  2. Smaller cloud and hosting providers can still differentiate themselves and leverage the closer connection with customers.
  3. As more capacity moves to cloud-based delivery, the hardware market will have to narrow its focus.
  4. Pay-for-consumption models can be attractive, where costs and the need for on-premise capacity make sense for enterprises.
  5. Domestic demand for IT – unleashing India’s consumer potential could be revolutionary.
  6. Expect more movements towards nearshoring and building up in-country resources.
  7. Campus startups could be the new product hubs.
  8. Industries like retail, e-commerce, logistics, pharmaceutical and insurance could open more opportunities for IT services than ever before, driven by the IT needs of a more distributed workforce.

“It is going to be a serious phase of economic contraction – if the client’s business sustainability is a question mark, it will affect the service provider for sure,” said CMR’s George. “And as massive layoffs percolate, wouldn’t governments insist on keeping the jobs inside?”

However, Arun Jethmalani, managing director of ValueNotes Strategic Intelligence, believes India’s IT industry is resilient enough to overcome the odds.

According to trade association Nasscom, IT industry revenues still grew by 1.9% in the first quarter of 2020 compared with the same period last year due to sustained client wins and growing digital adoption. Digital revenues rose 3% sequentially, while revenues from fixed price contracts rose by over 59%.

“IT has really saved us in the lockdown – whether we look at the ease of digital payments or health apps or work-from-home meetings,” said Jethmalani. “Without IT, the pandemic would have been a bigger disaster than what it has been. That’s what many businesses have realised.”

Manoj Sukumaran, senior analyst for datacentre compute at Omdia, added: “Enterprises have increased their demand for cloud services, virtualisation, workforce transformation and cost reduction programmes. It could create a pull for more IT services like robotic process automation, where the Indian IT services companies were building significant capabilities over the last few years.”

Overcoming the talent crunch

The quality remote work undertaken by India’s IT services firms may have eased concerns that non-Indians have had in the past about the sheer distance between India and their countries. But does India have enough talent to take the industry forward?

PwC’s Iyer noted that brain drain may have been a problem some years back, but with the abundance of untapped talent in India’s villages and towns, that narrative could be flipped.

“We are getting used to the idea of working from anywhere as the world is expected to stay locked down for longer periods now. That’s exactly where the untapped talent lying in our tier-three towns can be a massive fuel.”

This was what Ajay Wadhwa, a technology entrepreneur and former CIO with 30 years’ experience in manufacturing, retail and education, passionately argued for: “Why can’t we now employ an acid victim or a wheelchair-bound person when things are going faceless and remote? They can be easily trained on new apps and platforms, even if they do not know English.”

In addition, the total fresh employable talent in India from universities with relevant skills to work in “new age” technologies were approximately 78,000 in 2018, according to a Nasscom report, and is expected to grow at a CAGR of 5% until 2021.

New turning points

In a post-Covid world, India’s biggest IT firms have the benefit of being exposed to skills and clients in multiple countries – though they also face the challenge of overcoming inertia and fostering meaningful innovation.

On the other hand, homegrown startups and innovators would find it difficult to build a presence in the market as there is a flight to the safety of well-known brands in difficult times, said Eric Hanselman, chief analyst at 451 Research.

“The lack of demand was stopping us from becoming the product capital of the world. But it was only a matter of time and now the iron is hot. The world needs new ways to look at software. If we can make it, the globe will look at us with a huge appetite”
Arun Jethmalani, ValueNotes Strategic Intelligence

“In the current economic situation, that can mean that the best path for both ends of the spectrum is consolidation,” said Hanselman. “The large companies should have started looking at acquisition and partnership opportunities already. The smaller ones have to prove how indispensable they are for their current customers and raise their visibility to the big players.”

Objective Analysis’s Handy expects larger firms to conduct “business as usual”, but there will also be opportunities for smaller, more nimble companies to fill needs without having to go through bureaucratic processes.

“Big players that provide cloud infrastructure will prevail, but along with them, domestic players and innovators will jump in with specialised and localised solutions. So, both Amazon and Zoho will rule well,” said ValueNote’s Jethmalani.

In fact, the next Apple and Microsoft from India is no longer a pipe dream. It is already happening with players like Staqo that are leveraging their CIO experience to cater to domestic and international demand.

Jethmalani said: “The lack of demand was stopping us from becoming the product capital of the world. But it was only a matter of time and now the iron is hot. The world needs new ways to look at software. If we can make it, the globe will look at us with a huge appetite.”

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