It could be the end of India’s Information Technology (IT) services industry, as we know it. If Y2K gave wing to a fledgeling industry in the early part of this millennium, making it one of the biggest recruiters of young talent, the big boys of the Indian IT industry are now being forced to transform their business models in a bid to counter any potential downside from US President Donald Trump’s call for tighter immigration laws and a stricter H-1B visa regime.
According to executives in the IT industry, the change in strategy is two-pronged — abandon the path of taking talent from India on work visas to dip into the local labour pool, and speed up the transformation to a business model that is less reliant on headcount and more focussed on adopting new technology platforms.
“The industry had already embarked on this journey. Now, this will be done faster to adopt to the new paradigm,” said the Chief Executive Officer of a leading IT company.
Indian IT Services exports, at $110 billion in FY2016, have grown at a 10-year CAGR (compound annual growth rate) of 16 per cent. Exports contribute the majority of the Indian IT sector’s earnings. The US contributes 62 per cent of the exports. The industry’s overall revenue accounts for 9.3 per cent of GDP and it is one of the largest private sector employers, with 3.7 million people.
This model was fine until now, as Indian IT companies relied on low-cost skilled labour to be competitive in terms of pricing while delivering value to clients. But the rules of the game are changing. Automation and the shift towards digital technologies are the most critical issues facing the industry. These new beasts do not need a large workforce unlike earlier projects.
Also, there has been a slowdown in growth over the last two fiscal years due to lower IT spends by developed economies.
“Indian IT services companies have increased their on-site presence through local hiring over the last few years and reduced dependence on H-1B visa holders owing to the cap on visa issuance, among other factors. Companies having an on-site presence through local hires will have a competitive advantage and flexibility while bidding for new contracts as well as future scrutiny of outsourcing models by various regulators,” said analysts at ICRA.
Wage hitAccording to analysts, if Trump’s call for increasing minimum wages of H-1B workers to $130,000 comes through, Indian IT companies will have to fork out an average of 70-80 per cent more in salaries to on-site employees. IT firms say that though the wage bill will rise, the impact may be lesser.
“Analysts are assuming that even at $130,000, IT companies will still stick to the old preference for work visas over local hiring. As long as the H-1B cost is similar or even slightly higher than local prevailing wages, the preference will be for H-1B because there is greater flexibility and mobility in the expat workforce. But if the cost is raised materially above the market price, IT companies will hire locally,” said the executive of a Mumbai-based IT firm.
Traditionally, when visa costs have gone up, companies have responded by reducing hiring. Equirus Securities analysts point out that when L-1 costs went up to $4,500, Infosys responded by reducing L-1 staff from 2,200 in fiscal year 2011 to 1,364 in fiscal year 2016. But this time, the industry is not looking for short-term solutions.
“The fact is that the industry is also changing significantly in the delivery-model focus with artificial intelligence, cloud, robotics etc coming in very rapidly. Indian IT players are already adopting the new paradigm and would need to accelerate to adopt to the changing landscape from perspectives in shift in delivery models as well as USH-1B proposed changes,” said Raja Lahiri, Partner, Grant Thornton India.