In IT Services, an Era Has Ended

It’s not just about Infosys. The golden age of Indian IT is gone, and it’s never coming back


By Dhirendra Kumar | Jul 16, 2012

Thursday, 12th July must have felt a little bit like Friday the 13th for many stakeholders in India’s IT services industry. Early in the morning, Infosys Technologies announced quarterly financial results that were a huge disappointment for the investment community. The company’s US dollar revenues, which are a key metric for a business like Infosys, had shrunk by 1.1 per cent. Late in the evening, India’s largest IT services company, TCS came out with its own numbers. These were better than Infosys but US dollar revenues were up by just 3.4 per cent. The stock markets reacted positively to TCS but to discerning analysts, it was clear that TCS was looking good only in contrast to Infosys.

If one were to step back and take a longer view by casting one’s eye back over the decade past, then the story looks different. In the decade or so to about 2007, the US dollar revenues of Indian IT majors were growing by anywhere between 30 to 45 per cent a year. The first big decline came in 2009 when growth dropped to single digits. After that, there was some recovery but the original pace was never achieved again. Now, even the rosiest predictions for growth rates barely break out above 10 per cent.

Of course, there are a many reasons for this, but the fact remains that whether from the perspective of investors or insiders, the ground has moved out from beneath the IT Services industry. This is of broader significance than is generally perceived. In almost every way, IT Services was the original animal spirits industry that played the starring role in what we love to call the India story. From 1998 till now, the industry has grown from 1.2 per cent of GDP to 7.5 per cent, its share of exports has grown from about 4 per cent to 25 per cent. Then, there were less than 1 lakh people working in this industry, now there are 28 lakh.

This last point is probably more important than all else. No one is claiming that there will be any absolute decline but there’s a huge difference between the downstream effect of an employment-intensive industry that grows at 40 per cent a year and one that grows at 8 or 10 per cent. In fact, at this growth rate, the IT industry’s share of GDP will shrink because nominal GDP is definitely going to grow much faster than this. It’s growth that matters, not size.

The effect of this deflation will be felt far and wide, not just among the business and investing communities. For almost a whole generation of young men and women entering the urban employment market, IT services has been the great safety valve. A high growth industry whose growth is almost linearly related to employment generation was the best thing that could have happened to India in the last two decades. The constantly increasing work force, with constantly increasing pay cheques and a constantly predilection to spend—it was a wonderful combination while it lasted. However, that was then. Make no mistake, an era is over—that kind of growth is not coming back.

In some ways, this is also a story of opportunities missed. It would have been nice had India been able to develop a technology industry where there was a large eco-system of software start-ups doing technologically interesting products but the profit streams of our big IT services firms never seemed to able to contribute to anything venturesome. Recently, I read an article about this year’s Google’s Code Jam contest, which is a sort of a programming skills Olympics. At the qualifying stage, 17% of the contestants were Indians. By the third round, as the competition intensified, Indians were down to 0.7%. Although India began with the highest number of participants, just three Indians lasted till round three, compared to 83 Chinese, 77 Russians, 36 Japanese, 25 Americans, 21 Poles, 13 Belarusians, 11 South Koreans etc. In fact, the code Olympics looked much like the sports Olympics.


So much for the IT superpower.