How Indian IT can turn adversity into opportunity in Covid-19 era

With the quarterly results around the corner, a look at what ailed the IT industry and the opportunities of the Covid-19 disruption, including XAAS and new tech like AI, IOT, blockchain, it can take advantage of

Updated: Oct 6, 2020 11:25:16 AM UTC
Image: Shutterstock

Hard times present a chance to change course, to reinvent and build resilience. Now is the time for the Indian information technology (IT) industry and the government to introspect and recalibrate their long terms goals and plans to not only safeguard but also ensure the sector can thrive in the coming times.

The size of the global IT industry has shrunk by about 8 percent from last year to $3.4 trillion in 2020. India’s share of this global pie is expected to be approximately $191 billion in 2020 with 1,000-plus global delivery centres spread across 80 countries in the world. The Indian sector comprises of big players such as TCS, Infosys, Wipro, Tech Mahindra, HCL along with numerous mid-sized players providing end-to-end solutions. Together, these IT services account for over 8 percent relative share of India’s GDP.

Given the size and scale of the industry in India, it is imperative to measure the impact of Covid-19 on the sector. The first quarter results faced the full brunt of the demand pull backs, along with supply side disruptions in the light of the nationwide lockdown initiated on March 24.

Towards this, we referred to the quarterly results of the top listed IT companies–Wipro, Infosys, TCS, L&T Infotech, HCL, and Mindtree. On comparison of available consolidated data for Q1 FY21 with the immediate preceding quarter (Q4 FY20), we observed that:

» Europe and India were worst hit geographies for most companies; » Earnings from America and rest of world were impacted to a lesser extent; and
» The operating revenue, except for Infosys, declined 2-7 percent.

With regard to supply side disruptions, we observed that:
» Employee costs, except for Infosys, declined up to ~6 percent due to salary cuts;
» Travel cost declined 60-83 percent across companies; and
» Communication cost grew by 2.8-17 percent.

Although, the negative impact of Covid-19 has been felt by the top IT industry players, it doesn't seem to be a cause an alarm. While demand challenges persist, from supply perspective, the industry has been able to adapt swiftly to the remote and digital work-model. Support from the government and public institutions towards work from home (WFH) rules, relief in tax and related procedural matters, stimulus packages, etc. have helped the industry. Further, the relatively lesser impact of the pandemic on tier 2 and 3 cities, have allowed companies to continue functioning with limited disruptions. While not commenting on any specific company, we have referred to the aforesaid industry majors for the limited purpose of ascertaining the indicative trend for the IT industry. Having said so, only the complete Fy20-21 results will lead us to understand the real and full impact.

The industry is being lauded for its quick activation of business continuity plans (BCP), which allowed up to 90 percent of the workforce to WFH and meet time-critical milestones. The strong BCP backbone coupled with several cost austerity measures towards marketing spends, travel cost, deferment of increase in salary and bonus, and so on, have helped the industry survive and also pave way for growth by reaffirming India’s delivery capabilities, and thus laying the groundwork for fresh investments.

India is pitching itself as a centre for global in-house centres (GICs), IT hardware, semiconductor, phones, and so on, but there are several other countries that have been vying to attract foreign investments. To be the preferred destination, India needs to address multiple challenges, which act as bottlenecks to the industry’s growth; while it has taken some steps, but more needs to be done.

One such challenge is our labour law that is complex and commands high compliance costs. Regulations around data privacy and data localisation also need to be simplified while being strengthened.

India’s tax system is amongst the most complicated in the world. While the move towards the globally-aligned indirect tax and transfer pricing (TP) laws are welcome, more can still be done. India should revisit the TP safe harbour provisions and align the expected returns to industry actuals.

The laborious tax assessment procedures also serves as a dampener to new investments. As an impetus to the IT industry, India may consider setting up special audit cells, thus fast-tracking assessments, advance ruling and pricing programs with more industry knowledge.

Leading Indian IT firms are diversifying their offerings and investing into emerging technologies such as IoT, AI, robotics and blockchain, as spending on traditional technologies is expected to go down. Growth will be driven by newer areas such as automation, cloud computing, big data analytics, mobile technology, etc., which will shape the industry in future.

According to a Deloitte survey, many technology companies are shifting to a flexible consumption or everything-as-a-service (XaaS) model for their enterprise, wherein products or services are paid for, based on usage. To maintain competitive advantage, companies are looking beyond traditional technologies. Hence Indian IT majors need to recalibrate and invest in setting up new age infrastructure, reskilling the workforce and improving the value chain.

About authors:
Bhupendra Kothari is Senior Director and Vishesh Agarwal is Manager, Deloitte Haskins and Sells LLP

The thoughts and opinions shared here are of the author.

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