Export-led Indian IT sector is not directly hit by Trump’s tariff order on goods, but there could be worrisome indirect bearings on it arising out of possible slowdown in decision-making and GDP growth in America over higher tariffs, which may then cloud demand from specific verticals, according to some analysts.
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While the $250-billion Indian IT pack — that derives a sizeable chunk of its revenue from servicing US clients — is on a wait-and-watch mode to assess the full impact as it unfolds in coming quarters (as well as the trade negotiations in offing that could sway equations) they remain hopeful that any near-term slowdown in growth in America would, in fact, push nudge more companies to chase efficiencies through outsourcing deals and tech adoption in the long-term.
Jittery in morning trade on Thursday, shares of IT services companies, including Infosys, Tech Mahindra, and TCS came under heavy selling, plunging up to 9 per cent after US President Donald Trump announced sweeping reciprocal tariffs on about 60 countries, including India.
During the December quarter for Indian IT services companies — the March quarter and full-year report card will be out in the coming days — North America accounted nearly 48 per cent of TCS’ revenue, 58.4 for Infosys, and 50.8 per cent (clubbed under ‘Americas’) for Tech Mahindra and so on.
As it is, India’s IT services sector has been facing growth headwinds over the past quarters with clients in the US and EU closely scrutinising tech spends amid economic pressures, while increased charm of AI had led to fears of reduced job creation globally.
Adding to that now, prospects of global economic wars, given the US’ fresh tariff offensive on trading partners and major allies, has deepened worry lines about slowdown in the United States, and uncertainties ahead.
“While the IT sector is not directly impacted by Trump’s tariff order, there may be indirect impacts from slower GDP growth due to higher tariffs which may impact demand from manufacturing/logistics and retail verticals despite rate cuts,” Jefferies said in its note.
Onshoring could potentially rise along with tighter immigration norms in the future, but IT firms are better placed to deal with these risks, it observed.
Slower GDP growth in the US may lead to rate cuts, and lower interest rates may reduce pressures on demand from verticals such as communications, energy, utilities that have leverage on balance sheet, it further said.
While manufacturing and retail may also benefit from lower rates, tariff uncertainties are likely to impact manufacturing, logistics and retail verticals, more.
Impact of rates on banking, financial services and insurance (BFSI) is uncertain as certain parts like mortgage may benefit, though banks’ larger revenue pools may take a hit during periods of falling interest rates as also highlighted by management in the past, Jefferies said.
“In this context, IT firms with higher exposure to communications/ healthcare/ hitech may be better off, whilst companies with higher exposure to manufacturing, retail and logistics may be worse-off,” the brokerage observed.
Rise in onshoring and potential tightening in immigration norms could be on the anvil.
While IT services firms are unlikely to be impacted directly via tariffs, there may be a potential tightening of immigration norms.
In Trump’s previous term, H-1B visa regime became stricter due to which visa denial rates shot up by five times, it warned.
“While denial rates fell under Biden’s presidency, Trump could tighten immigration norms again.
“However, the impact of this change maybe lesser this time as Indian IT firms have higher share of work being done offshore and have also reduced their reliance on H-1B visas since 2017 and over 60 per cent of their employees in the US being local-hires,” it added.
Rishi Shah, Economist and Partner at Grant Thornton Bharat, believes that are considerable uncertainties in the short term due to the newly imposed tariffs.
“There are considerable uncertainties in the short term due to the newly imposed tariffs, which are creating ripple effects across the global economy.
“This uncertainty may lead to slowdowns in decision-making and impact US growth, potentially creating second-order effects on Indian IT services companies,” he said.
Shah added, “In such an environment, economic growth overall tends to decelerate as key decisions get postponed.
“It will now be incumbent upon the private sector, including the Indian IT industry, to demonstrate its characteristic dynamism by identifying and capitalising on new opportunities and avenues for growth, as it has successfully done in the past.”
