Company Outsider: Indian IT's perfect storm may be a temporary squall and not a sign of climate change

The latest results of the top four IT companies along with the accompanying commentary do point to a serious slowdown that is expected to continue this year. Slimmer order books and fewer mega-deals add to the gloom, with each of the country’s top four IT services companies guiding for a slow start to FY26.

But we have been there before; in the aftermath of the dotcom crash in 2000 and again during the fallout of the financial crisis in 2008 when clients slashed their IT budgets and cancelled deals. On both occasions, the percentage growth of exports of Indian IT and ITeS halved in the subsequent year, only to bounce back over the one next year as Indian IT companies figured out the dynamics of the changed environment.

In the present context, there are two forces buffeting the business. The first is the slowdown in its two major markets - the US and Europe - which is largely on account of the tariff tantrums unleashed by the three-month-old Trump administration. Large US companies, which constitute the major share of Indian IT’s client base, have turned cautious, cutting down or placing on hold spending on technology services. At an internal strategy meet, TCS CEO K Krithivasan confirmed that, holding microeconomic uncertainties as the company’s biggest challenge.

Also read: TCS CEO Krithivasan faces biggest challenge amid macroeconomic uncertainty, threat posed by GenAI

The big problem here is the uncertainty and not the financials of these companies. US banks, for instance, among Indian IT’s biggest customers, are flush with cash. A Bloomberg report says that capital at 20 of the largest US banks surged by more than $175 billion in the past three years.

But already, Donald Trump seems to be walking back on much of his tariff threat, particularly after facing a defiant pushback from China. Eventually, after the 90-day grace period which allows many countries including India to work out mutually agreeable terms, some tariffs will stay. These are expected to lay the grounds for Trump’s campaign promise to lower the US corporate income tax rate to 15%. If that happens, it should thaw the spending freeze.

The other big threat to Indian IT companies is that of artificial intelligence (AI) which has the potential to wipe out entire layers of their workforce with serious implications for billing.

However, this isn’t going to happen overnight. Large software services contracts are complex, multi-year affairs with specific delivery targets tied into them. To expect that a big American financial institution will suddenly cancel a billion dollar contract with its vendor of five years or even that it will slash rates unilaterally is too simplistic. Sure, newer orders will feel the squeeze but that’s because the better companies who are already reskilling their workforce with AI technologies, will be more willing to pass on some of the cost savings to potential clients.

That there is pain ahead is obvious. Hiring is down, salary hikes are being postponed and layoffs have started. But to write off a $280 billion industry’s future on the basis of a few bad quarters is foolhardy. While technology changes are rapid, their transmission into business isn’t. It takes years for large, mature companies to switch entirely to a new technology. The term cloud computing first gained currency in the early 1990s but it wasn’t till 2006, when Amazon launched AWS, that large companies started adopting cloud-based computing. Even then, in 2016, only an estimated 35% of corporate data was stored in the cloud.

Also read: TCS vs Infosys vs Wipro vs HCL Tech: Hiring plans, salary hike, headcount ratio, layoffs

In 2019, in a $1.8 billion deal, HCL Technologies bought some of the legacy software products of IBM. In its strategic rationale for the sale, the erstwhile technology giant said “IBM runs the world’s most critical business processes, increasingly helping enterprise clients on their journeys to AI and to cloud." Since then, IBM’s revenue growth at 1.93% over the last five years trails that of the industry. By contrast, HCL has been the fastest growing among India’s top four IT firms over the last two years. Significantly, a big contributor to the company’s profitability has been its software products arm.

The first mover isn’t always the winner in business. In fact, it is those that bridge the past with the future in seamless ways that are more successful.