Why Is India's Crown Jewel IT Sector Failing?

The Indian IT sector is often referred to as the jewel of India's economy. It has been a key driver of Indian growth for decades. It contributes to its fame due to high-value additions to GDP and leadership in global IT outsourcing. The sector has put India on the world map as a technology hub.

However, recent trends have indicated that this once-thriving industry is facing a period of stagnation and decline as well. Revenue growth has slowed down, and clients are turning elsewhere.

Let us understand the reasons behind the Indian IT sector struggle and the challenges the establishment is facing.

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The Rise and Significance of the Indian IT Sector

The Indian IT sector has been of vital importance in the growth of the Indian economy. This industry consists of BPO, IT services and more. The ascent of the IT industry began in 1990, fueled by economic liberalisation and STPI schemes,. Meanwhile, the Y2K crisis further accelerated growth as Indian firms offered cost-effective solutions to global clients while positions. 

The Y2K crisis further accelerated growth as Indian firms offered cost-effective solutions to global clients, cementing India's reputation as an outsourcing hub.

The sector's economic impact on the Indian economy has been very profound. In FY 2021, the revenue of the industry reached more than $200 Billion, with exports accounting for more than 79% of the total, as per industry estimates. 

The IT sector employs over 2.8 million people directly and supports various indirectly. In 2019, the IT sector contributed 7% to India's GDP, which was slightly down from 7.5% in 2012.  

Let's understand the factors contributing to the decline in the Indian IT sector.

Slowing Revenue Growth: A Global Economic Challenge

Indian IT Sector observed a growth of just 3.8,% which is much less compared to previous years. The slowdown can be attributed to the global slowdown, particularly in key markets like the US or Europe, which accounts for a significant portion of India's IT exports.

In various countries, the global economic slowdown has squeezed client budgets while leading discretionary spending and smaller projects pipeline. Companies around the globe are prioritising cost-cutting over new IT investments.

The external factors are a reason for the decline in the IT sector, but its not the whole truth. Let's understand what other factors are bleeding the Indian IT sector.

High Attrition Rates: Bleeding Talent

Indian IT sector is currently suffering from a very high attrition rate among their employees which is a very chronic issue. In 2023, with 2.8 million employees, the industry saw an attrition rate of 12-15%. Internal attrition means shifting employees between projects and disrupting the workflow and team cohesion. This talent drain stems from many factors.

• Limited career progression: As the industry matures, fewer leadership roles are available, leaving many workers feeling stagnant.

• Work-life imbalance: Long hours and night shifts to align with global clients contribute to burnout.

• Better opportunities elsewhere: Competitive salaries and benefits from domestic startups and international firms lure talent away.

The cost of high attrition imposes significant costs while eroding institutional knowledge which is further impacting this sector.

Skill Gaps in Emerging Technologies

The global IT scenario is shifting towards new technologies like artificial intelligence (AI), machine learning (ML), data analytics, and cloud computing. But India's IT professionals are lagging behind. A report by upGrad points to an emerging gap in these industries, predicting companies to be short of skilled professionals when demand is at its peak.

A number of reasons account for this gap:

Aged education: Indian engineering schools focus more on outdated IT skills than innovative technologies.

Sluggish upskilling programs: Firms provide training in some cases, but the programs are too small and not fast enough to address demand in the market.

Brain drain: Professionals tend to emigrate overseas for better money and growth

This gap is handicapping  Indian IT companies' competitiveness.

Growing Competition from Emerging Markets

India's leadership in IT outsourcing is being challenged by countries such as the Philippines, China, and Costa Rica. The Philippines is a BPO leader because of the availability of low-cost and English-speaking workers. China, on the other hand, is heavily investing in AI and other high-tech industries and is bound to become a technology leader. These countries are taking India's market share by providing the same services at lower prices or specialising.

It is this rivalry which has created price wars and shrinking profit margins for Indian firms. Clients have also diversified outsourcing portfolios away from India and left the industry vulnerable to relinquishing its unparalleled so-far leadership.

Deceptive Pricing and Quality Worries

Allegations of false billing and substandard work have tarnished the reputation of the Indian IT sector. Most firms employ a "blended rate" approach, whereby clients are billed a fixed fee for groups that consist of seasoned professionals and recruits. Practically, groups are skewed heavily towards fresh graduates with negligible experience, leading to overpayment and substandard deliverables.

This is at the cost:

Client frustration: Overworked senior personnel and underproductive juniors cause delays and errors.

Eroding trust: Unhappy customers are switching to in-house development or captive centres.

Damaged credibility: The reputation of Indian IT as a source of "cyber coolies" rather than top-notch talent is gaining ground. 

If these quality issues are not addressed, the industry risks alienating its customer base even more.

The Data Story: Quantifying the Decline

The numbers paint a different picture of the IT sector in India

• Revenue: The overall revenue of the IT sector in 2021 was just $194 Billion, which is a sluggish growth.

• Growth rates: 3.8% in FY2024, projected at 4-6% in FY2025, down from historical double-digit figures.

• GDP contribution: Declined from 7.5% in 2012 to 7% in 2019.

• Attrition: 12-18% in FY2023, with higher internal churn.

• Employment: 2.8 million direct jobs in FY2023, but at risk from automation.

These data showcase how the sector is struggling with both external and internal shortcomings.

Beyond the Story: A Critical Approach

The firm blames the ills of the IT sector on global economic downturns or immigration policy—beyond its control. While sincere-sounding as they are, they hide more fundamental problems: dependence on low-cost labour, lack of innovation, and inability to develop human resources. The sector's ills are as much of their own as they are due to forces beyond the sector, which necessitate staring into the mirror and taking radical action.

Conclusion

Once crowned as the jewel of the Indian economy, it is seeing a slow growth, talent loss and technological disruption. Though there are international factors at play, the industry's inability to invest in skills, quality, and innovative commoditised services are the reasons for its distress. But, with targeted investment in skills, quality, and innovation, it can reinvent and bounce back once more. The crown jewel can get tarnished, but together, it can shine once more.

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