– By Dr. Manoranjan Sharma
For the last couple of decades, India’s IT industry has led India’s ascent as a financial power. Employing a workforce of over five million individuals, India’s IT-BPM (business process management) industry, contributed 7.4 per cent to India’s Gross Domestic Product, as of 2022. An estimated compound annual growth rate (CAGR) of 11-14 per cent over the next five years will take the industry’s value to a whopping USD 350 billion by 2026.
The impressive statistics point to India’s capabilities to leverage the global digital and communication revolution. However, there are some risks and challenges that India’s IT industry needs to tackle in the near future. The IT Industry Outlook 2023 report outlines how the IT industry can tackle them and move forward.
The universal/global challenges
With increasing interconnectedness and reliance on digital technologies, the IT sector has become more vulnerable to cyberattacks, data breaches, and ransomware incidents. Sophisticated cyber threats targeting businesses, critical infrastructure, and sensitive data pose a significant risk to the industry’s reputation, customer trust, and financial health. The macroeconomic uncertainty across the USA, and EU countries, has already triggered supply chain volatility, raw material shortages, and semiconductor supply concerns. Further, geopolitical uncertainties, trade tensions, and regulatory changes in global markets could affect outsourcing trends, leading to potential disruptions in the IT industry’s traditional revenue streams.
Rapid technological advancements may render the current skills of the workforce obsolete. Furthermore, any unexpected economic downturn or global crises may impact IT spending, leading to delayed or reduced technology investments from clients. We are already seeing higher interest rates slowing down the flow of orders.
Challenges in the Indian context
Indian startups in the Generative AI domain are hamstrung by the lack of patient (long-term) capital for essential and resource-intensive foundational model development. They are further constrained by the high costs associated with computer resources, and a shortage of domestic hardware OEMs or hyperscalers in the pipeline. Concerns related to data privacy, security, and copyright infringement also prevail, compounded by the absence of consensus on global regulations and usage standards. There is a limited supply of skilled personnel in the new generation of AI, rendering it challenging to upskill a large workforce quickly within the next 6-12 months. Besides, the disruption of net-zero goals has necessitated a rebalancing of growth in the light of existing and emerging ESG compliances.
Lastly, India’s technology clusters are concentrated in Tier 1 cities. The resultant talent influx into these cities has choked the existing urban infrastructure.
The strategy forward
The Central and State Governments can take efforts to develop the infrastructure in Tier 2 or Tier 3 cities to evenly distribute the IT industry’s presence and ease the load on the bigger cities. Likewise, it should prioritise addressing the skills gap in the IT industry and support for training and upskilling of workers. Tax incentives may be provided for companies that invest in research and development for the industry’s salubrious growth. Budgetary allocation for data privacy and security, and efforts to increase the adoption of digital technologies in various sectors will also help.
The current economic slowdown is denting the IT firms’ market capitalisations. If firms can enhance their work processes’ efficiency, adjust their workforce, and rely more on automation, they can successfully expand margins and increase revenues. Moreover, modernising legacy architecture and strategic mergers and acquisitions can also contribute to growth.
The IT industry has to implement resilient systems to tackle the cyclic nature of global headwinds and potential risks surrounding the IT industry. Newer avenues of innovation and opportunities can be explored in sectors, including real estate, manufacturing, and retail, to generate additional revenue streams.
Technology firms, along with Governments, should take measures to improve transparency of their environmental impact. Apart from improving their ESG quotient and helping them stay compliant, the move will also foster an ecosystem of sustainable business.
Looking into the future
India’s software services industry continues to show consistent growth in exports, demonstrating its competitiveness and potential for further development and innovation. However, the year 2023 is challenging for the Indian IT industry because of rising inflation, interest rates, and the ongoing conflict in Ukraine. Despite these hurdles, the industry is expected to maintain a healthy growth trajectory, driven by strong global client demand.
In 2023, the IT industry’s key areas of expansion will revolve around digital transformation, cloud computing, cybersecurity, and artificial intelligence. These technologies have gained increasing significance for businesses of all scales, and the Indian IT sector is well-equipped to assist clients in adopting and leveraging these cutting-edge solutions. With the Indian Government investing in improving IT infrastructure, the domestic market presents promising opportunities. Undoubtedly, India’s IT industry is positioned to grow rapidly in the near future.
(Dr. Manoranjan Sharma is the Chief Economist at Infomerics Ratings.)
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