Services exports may beat recession woes, hit record $300 billion: Merchandise sector expected to see a slowdown

Downside risks from elevated inflation, tight monetary conditions and the Ukraine war are adding to the already “gloomy and more uncertain” global outlook, the IMF said.

Services exports may beat recession woes, hit record $300 billion: Merchandise sector expected to see a slowdown
Inflation in several advanced economies, especially the US and many in Europe, has hit multi-decade high.

India’s services exports will likely defy the impending recession in the largest markets – the US and the EU — and grow at an impressive pace in FY23, even as the merchandise sector is expected to see a slowdown in growth.

Services exports are expected to jump 18% on year to a fresh peak of $300 billion in the current fiscal, Services Export Promotion Council (SEPC) chairman Sunil Talati, told FE. Already, services exports climbed 27% in the June quarter to $71 billion, he said.

If anything, a sharp slowdown in growth or recession in advanced economies may brighten the prospects for Indian services exporters, as these countries tend to start diverting a larger number of orders to cheaper destinations to cut down on costs, Talati said. This is especially true of segments like accountancy and legal services.

Senior company executives in the services sector that FE spoke to say their order flows remain strong. While a few segments may get affected, on a net basis, export order flows are expected to remain robust in the coming months, some of them said. The US (and Canada) and Europe (including the UK) made up 56.2% and 30.1%, respectively, of India’s software services exports worth $134 billion in FY21, according to the latest RBI data.

Amit Chadha, CEO and managing director at L&T Technology Services, said: “Despite currency fluctuations and supply chain shortages as headwinds, we are witnessing a lot of promising opportunities across the engineering and technology services landscape. The good thing is that broadly our global customers are proceeding with their transformational programs with Digital Engineering being an area of priority and spend.”

Chadha believes the Six Big Bets focus (EACV, 5G, digital products and AI, digital manufacturing services, medtech and sustainability) of L&T Technology Services and its strategic investments are aligned with the multi-year focus areas of the global engineering and R&D firms and will help his company drive further growth.

A Wipro spokesperson said, “Our customers continue to invest in digital acceleration, cloud adoption and technology and business transformation that is core to their products and services. As we have shared in our earnings call, our pipeline, order bookings, and the ongoing discussions with customers remain robust.”

Given that the US and the countries in Europe are witnessing runaway inflation, a consequent wage spiral in these markets would make local sourcing there more expensive. Moreover, a weak rupee will also help the cause of India’s services exports, the industry executives said. Despite the recent rise, the rupee is still down 6% against the greenback so far this year.

In an earnings call on July 24, Infosys chief executive and MD Salil Parekh said the “overall pipeline is strong at this stage, but of course, we are watching out for what can happen as the environment evolves and changes”.

Parekh suggested that the recession fears and the hike in the interest rates by the US Federal Reserve may impact “some pockets” like the mortgage business (financial services), “but the prevalent view across our pipeline today is we have a good pipeline overall”.

Venkatraman Narayanan, managing director and chief financial officer at IT firm Happiest Minds, said: “A recession in other geographies would further strengthen India’s story for offshoring, as there would be a stark increase in wages in these countries, mostly driven by inflation.”

Inflation in several advanced economies, especially the US and many in Europe, has hit multi-decade high.

“With India’s offshoring capabilities and competencies well-accepted across the globe, the country is also accepted as a leading offshoring destination for the world. We don’t have to hard sell our capabilities,” Narayanan said.

The International Monetary Fund last week trimmed its 2022 growth forecasts for the US to 2.3% from 3.7% predicted in April. Similarly, it pegged 2023 US growth at just 1%, down from the earlier forecast of 2.3%. The Euro zone will grow just about 2.6% and 1.2% in 2022 and 2023, respectively, down from the Fund’s earlier projections of 2.8% and 2.3%.

Downside risks from elevated inflation, tight monetary conditions and the Ukraine war are adding to the already “gloomy and more uncertain” global outlook, the IMF said, cautioning that the spike in inflationary pressure, if unchecked, could ultimately trigger a global recession.

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