Saumyen's Pages
Rethink
India is in the midst of a massive economic pandemic while we are locked down at homes!. It is perhaps the right time to reflect upon the potential impact on industry in the short- and long-run and plan a strategy for a quick and robust recovery.
India has faced many a turmoil in the past both social and political –and has always emerged victorious with faded scars in her growth story. We know that this time it is of an unfathomable and unknown magnitude.
Indeed, macroeconomics of post-pandemic crisis of this scale is a new subject. Our generation world has not witnessed something like this in the current economic-social-political-technology framework. The global business model has evolved gradually since the nineties and has become more interconnected with dependence across geo-political boundaries for business, supply chain, skills and demand. Advancement of communication and technology has helped establishing different new business and models. Travel and logistics services have grown to support the business including tourism, hospitality etc. Financial sector has continued to support the organised sector growth well. Interdependence is clearly reflected in the behaviour of stock market across the globe.
India over the last decades cleverly and diligently made a stride to take the benefits of these changes and maintained its high average annual growth of 6.8% (FY2001-18).
The Covid 2019 Impact: India and beyond
India faced a slowdown in growth in the last year– primarily due to lower domestic demand and dwindling international ones, rising unemployment and low consumer sentiments. Low demand resulted in the lower production and in turn, negatively impacted employment, income, buying power etc. Government invested in infrastructure to support the demand and growth – even at the cost of higher fiscal deficit. The growth rate for FY20 was estimated at ~5% vis-à-vis 7-8% between FY17-19.
Now COVID 2019 has struck another blow on the fragile economic outlook for India. China, the epicentre of Covid19, has triggered a shortage in supply of raw materials, components and products i.e impacting the supply chain. India’s imports from China is high ($74 Bn in 2019) and this disruption will have a spiral effect on Indian economy. Moreover, lower oil price, holding of stronger currency (devalued Rupee) indicate a recessive demand and sentiments globally. According to UNCTAD, it will likely cost the global economy between $1 trillion and $2 trillion in 2020 and India will, of course be no exception.
The time-critical decision of the country-wide lockdown to arrest the spread of the epidemic in India will necessarily make the growth bleaker in short (3-6 months) and medium term (about a year from now). A ballpark estimate (by Care Ratings) shows that this 21-day long national lockdown potentially hit the economy Rs 6.3-7.2 lakh crore i.e.4-5% of real GDP of FY20 and an estimated 12-13% reduction in Q1-FY21 (vis-à-vis Q1-FY20). This indicates a downturn for the economy in early FY21 though the progression of the same is difficult to predict.
While a more accurate projection maybe done after the current phase of virus transmission, most of the agencies have now pegged GDP growth around 4 – 4.5% in FY20 with 4th quarter growth around 2.5% (SBI Research). Moreover, FY21 remains highly uncertain. One estimate pegs the growth around 3.5% with the assumption that India will have a normal monsoon and also a subsidising of the pandemic's economic impact in the June quarter (Crisil).
This pandemic is primarily a supply shock due to, among other factors, production shutdown, breakdown of supply chain etc. Demand is also impacted as the consumers may like to hold cash during and immediately after crisis in fear of uncertainty. The lower demand has helped mitigating the demand supply balance for now but this may also delay the revival of many sectors, including manufacturing.
China has successfully implemented low-cost manufacturing production model and dominates the global market. Given the recent experience, many may intend to reduce dependency on China but this may result in higher cost of production and inflation in the short run. There is clearly an opportunity for India to address this demand and the Government of India’s recent announcement hopefully triggers some actions towards that. Lets discuss separately some other time.
While performance of the economy is impacted across all sectors and industries, the short-term and long-term outlook and the extent of impact may vary. Resiliency of a sector or industry would depend on multiple factors including the size of the sector, global linkage and dependency for business and delivery, financial strength and support etc.
Impact and Road Ahead for IT/ITES
IT & IT Enabled Services (IT/ITES) Sector that contributes about 8% of GDP (15% of Services sector) has so far shown resilience to the shock and may continue the same in the short run.
It is very hard to predict the effect on IT budgets when the scenario keeps changing every week. It is clear though that FY21 will be a challenging year for Indian IT as budgets across sectors will get cut and/or deferred. It is expected to slow down once the companies assess financial and market positions and initiate cost-saving measures post the crisis.
Broadly, the sector has product (hardware, software) and services offerings. The increased demand for network and computer accessories (notebooks, headsets, displays, VPNs and wireless LANs) during the crisis is more driven by the work from home initiative by most of the companies. This, along with higher cloud technology adoption, may continue to show growth in short term and medium term, as the current delivery model may be an ongoing one for some business.
The impact in medium to long-run may be more pronounced in IT/ ITES services. We expect renegotiation of existing outsourcing contracts as well as a decline in potential business for new non-critical investment in next 6-12 months. Sentiment to hold stronger currency at this time of crisis has resulted in Rupee devaluation. This may provide short term gain for most Indian IT exporters, but may lower the demand over time as the cost of buying increases.
In post crisis scenario, the sector is likely to witness some directional changes:
- Business will drive more automation to reduce dependency on workforce including offshore. The focus will be on change of process and automation through digital solutions. RPA, IOT, Chatbot that can affect cost reduction may start seeing bigger market and more diverse usage.
- Government has started providing more impetus to boost the economy and may be a key target sector for products and services. We expect to see an uptake of digital solution for monitoring/ managing operations, supporting exigencies and providing essential services in crisis etc. Hopefully, the budgetary share of healthcare in GDP would also see an increase from the current level of 1.8%
- As the dependence on reliable communication and risk-free internet framework is of paramount importance, so will be the potential increase in cybercrime. The market is likely to witness growth in services (cyber consulting, IT security etc) that help off-office work risk and hassle free
- In a cost-saving scenario, buyers will be interested in minimising the risk of delivery (investment). This may trigger contracts and payment terms linked to result (output). While this is a positive step for the industry in the long-run, the transition from current model to the new one will cost IT services providers in terms of cash flow and in many cases, losses. Larger IT firms may be able to withstand this, but smaller IT firms may face a bigger challenge
- In an era of uncertainty of growth, the workforce plan may shift from bulk employment to flexible hiring. This will not only help manage the staff cost better but also may reduce the cost of re-training in a changing world of technology
- Focus will be on technologies that would provide face-to-face experiences in digital platforms with use cases in many areas, namely tele-medicines, sales of products on retail platform. It may trigger need for more advanced automated or distant support framework
- Videoconferencing, messaging, collaboration tools and document sharing will be examples of technologies that facilitate remote work
- New way of work may trigger new organization structure and processes for both buyers and providers
- Surge of online teaching is visible now and is expected to be a new model in the long-run for education sector
- New technology/ system may be introduced to check and filter medical conditions/ history in office work and travel. It may be a new norm if the crisis persists. Do we remember strict security arrangements before 9/11 – the incident changed the norm!
Its anybody’s guess at this point the duration of quarantine and impact it will have on the sector. But the learnings from this experience will definitely set a new framework of engagement and business. Sooner the companies prepare for them and adopt a more aggressive approach towards doing business, better the potential of its success. Its not necessarily a cost drive, it will be an innovation drive – in product, solution, approach and financials.
(The view expressed is personal)
Post-Covid19 India: Quo Vadis IT Sector
(March 2020)