Subir Roy
Senior Economic Analyst
The Indian information technology (IT) sector, which opened up a new world for the country’s middle class, is facing potentially short-term headwinds. Things are likely to improve in the next financial year (2024-25), hence the ‘short-term’ aspect needs to be emphasised. But since we live in the here and now, it is necessary to examine the factors behind the current negative sentiment and work out how issues can be addressed to deliver positives in the longer term.
Major Indian IT companies, such as TCS, Infosys, HCLTech and Wipro, have all reported subdued earnings for the last quarter (July-September 2023). Among them, Infosys stood out by reporting a mere 3.2 per cent rise in net profit over the corresponding period of last year. For Wipro, the bottom line remained virtually where it was last year.
More than the results, which are influenced by the factors we will go into presently, what stands out is the likelihood that the IT majors will be conspicuously missing from the campuses when the time comes to make job offers for the next financial year (FY25). They are expected to be back again on the campuses only next year when they will be recruiting for FY26. This comes even as there is considerable anxiety over the fact that many currently with offer letters in hand are not getting the green signal to join.
The slowdown in recruitment, which has signalled that jobs in the industry are right now not easy to come by, has also meant that there is a fall in attrition — staff leaving jobs for better offers which have also become somewhat scarce. This is true of all leaders and is in stark contrast to the high levels of attrition that prevailed during the Covid-19 pandemic. At that time, IT services firms were seeking to expand quickly in order to meet the demand from clients to enable work from home and move operations to the cloud.
There has been a 30-40 per cent decline in hiring compared to the pre-Covid era. When you add up all this and look at the total headcount or staff strength, you find that all leaders have reported a fall during the last quarter.
If this scenario is gloomy, the situation among tech firms, especially those venturing into new business areas with startup funding, is downright scary. The last time when tech firms added to their headcount was in 2021. Thereafter, these ventures have seen a fall in staffing as a result of sacking in both 2022 and 2023, which is still not over. The major areas in which tech firms have come up, including education, food and retail, have shed weight as funding has dried up.
IT services firms primarily provide employment opportunities to individuals with middle-level skills, whereas startups, which use their technological capabilities to venture into new areas, require staff with higher skills. Thus, the sombre job scenario stretches right across the information technology space.
It is, therefore, natural that those who are still able to hang on to their jobs are having to live with lower levels of increment. In the present financial year (2023-24), they are projected to go down to the 6-10 per cent range compared to 12-18 per cent, which prevailed in the last financial year (2022-23).
Why is this happening? First, the global economic scene was plunged into uncertainty as a result of the war in Ukraine. To this has now been added the uncertainty created by the conflict in West Asia between Israel and Hamas. As a result, IT clients all over the world are going slow on discretionary spending, thereby going easy on expanding operations and postponing the launch of new ideas. Additionally, the rise of artificial intelligence (AI) is causing firms to increasingly use generative AI to do the first draft, be it of software coding or almost any kind of report, instead of using staff.
Additionally, the decision by the US Federal Reserve to increase interest rates to curb inflation has led to a significant surge in the returns (yields) from US bonds. This has prompted startup funds to withdraw their investments out of risky new ventures and put them in safe fixed-income paper. This, in fact, lies at the heart of the drying up of funding for startups and the resultant sacking in tech companies.
What does this do to the Indian economy and society? Over the last two decades, since the turn of the century which had just put behind it the Y2K (year 2000) boom, Indian IT operations have been on an upward march, offering jobs to educated middle-class youngsters who till then had to rely on public sector recruitment. This had given a new dimension to the middle class and caused a long boom in discretionary spending.
The Indian economy is still growing at a high rate compared to other major economies, but the job scene is far from promising. The GDP (gross domestic product) is rising healthily but most of it is going into the hands of a few at the top income levels. The clearest indicator of this is the disjunction between the buoyant demand for SUVs and high-end smartphones on the one hand and the poor volume growth faced by FMCG companies, which cater to basic consumption.
At this juncture, policymakers need to focus on creating jobs for the educated middle class to replace those which have been lost in the IT and tech slowdown. Sadly, political parties, both in power at the Centre and in the poll-bound states, are busy distributing freebies. If educated youngsters, whose families have invested significantly in their engineering and management education, are forced to go back to queuing up for government jobs, it could lead to social unrest.
Government policies should focus on helping larger companies grow so that they have more middle management jobs to offer — what used to be earlier labelled as ‘management trainees’. The government has already been prioritising infrastructure development. This needs to be refocused to give a boost to the capacity for renewable energy so that there is a sharp rise in the output of solar panels, wind turbines, storage capacity (battery banks) and the expansion of power transmission networks. As for the corporate sector, it has to be pushed to focus on the ESG (environmental, social and governance) agenda and take that broad spectrum forward. The country has to wait for a huge policy push after the 2024 General Election.
