Mint Primer: What the US-China trade deal means for IT services cos
Summary
The world’s two largest economies, US and China, have temporarily agreed to lower tariffs for each other’s goods, after trade talks in Geneva.
The $300 billion information technology (IT) services business in India was hoping for a better FY26 than the previous fiscal. But unprecedented hikes in US tariffs made clients hold back on key spending decisions. Will the tariff pause change things?
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What is the US-China trade deal?
The world’s two largest economies, US and China, have temporarily agreed to lower tariffs for each other’s goods, after trade talks in Geneva. This latest development marks the first step towards de-escalating trade tensions between the US and China following US President Donald Trump’s ‘reciprocal’ tariff hikes announced on 2 April. Now, Washington has agreed to cut duties on Chinese goods from 145% to 30% for 90 days, while Beijing agreed to lower its levies from 125% to 10% during the pause period. The easing of levies by both sides will provide some much-needed relief for global trade.
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What does it mean for Indian IT services cos?
The $300 billion IT services business was betting on a better fiscal FY26 led by artificial intelligence (AI), compared with the previous one. But the tariff hikes announced by the US had a cascading impact on the business. Indian IT was not directly impacted, but decision-making slowed down as global clients took a wait-and-watch approach. Now, discretionary spending is expected to be back and projects that were on hold will be back on the discussion table. The tariff pause provides that window of opportunity to sign new deals and convert AI proof of concepts into projects.
Did the tariff hikes have an impact on other industries?
Factory output slowed down, companies like Tata Motors halted exports to the US (now resumed) and there were risks of firms having to lay off workers and across the board increase in prices of commodities. Uncertainty around tariffs caused disruptions in global supply chains, across industries, including automobiles, manufacturing and agriculture.
What’s the projection for IT in Q1 and Q2?
The sector can at best hope to recover some ground in the second half of Q1, though Q2 looks more promising. IT services providers can expect new deals, even in tariff-hit sectors like pharma, auto, manufacturing and retail. While BFSI (banking financial services and insurance) is the biggest vertical, pharma, manufacturing, retail and auto each accounts for 10-12% of the $300 billion industry revenue. If the pause on tariffs continues, the second half of this fiscal could see accelerated growth and mitigate the Q1 slowdown.
What about global capability centres?
In these challenging times, GCCs or in-house captive units of global majors, have emerged as growth and employment engines for the IT services sector. According to industry body Nasscom there are around 1,750 GCCs in India, employing around 1.5 million. While decision-making slowed down, particularly in tariff-impacted sectors, the pause period will be used to resume GCC expansion. GCCs are also expected to partner with IT companies to set up centres and over time, could outsource tasks to their partners.
