Changing dynamics of IT sector in India business

In the second quarter of FY25 India’s biggest IT services company Tata Consultancy Services Limited registered a 95.2% year-on-year growth in its India business. As a percentage of the overall revenue, the share of India's business now stands at 8.9% in Q2 of FY25, up from nearly 5% in Q1 of FY24. Gartner’s latest forecast for India’s IT spending on software and services is pegged to reach $54.5 billion in 2025 compared to $50 billion in 2024 while the overall IT spending along with data centre, communications and devices is set to grow 11% in 2025 to reach 159 bn from 143.9 bn this year. Even as India's geography remains a small fraction of the overall revenues for IT companies, the emergence of a new wave of AI/Gen AI technologies coupled with rapid cloud adoption and digitisation, industry experts are seeing newer opportunities emerging in the market away from traditional government contracts.

According to NASSCOM in the last fiscal year (FY24), domestic market revenue for India's tech industry increased by 5.9%, reaching $54.4 billion and grew 1.8X faster than the export market compared to FY2023. “Service providers are focusing more on India-centric solutions to address specific challenges, contributing nearly $10 billion in growth across various segments over the last three years. A key driver of this growth has been a 10-12% rise in cloud adoption, particularly among the banking, insurance, and government sectors, as well as increased cloud use in manufacturing, semiconductors, and fintech,” says Sangeeta Gupta Senior Vice-President, NASSCOM

For the IT companies looking at big contracts in the Indian market, typically the government has been its biggest client. While in recent times ₹15000 crore outlay for the 4G rollout of the state-owned BSNL has stood out, other large government contracts in the past two decades were the likes of IT infrastructure of Aadhar, India Post modernisation, GST IT implementation where firms like TCS, Infosys, HCL Infosystems, LTI Mindtree have all been associated with. While earlier, companies' focus on India was limited given the government’s complex procurement process, and lack of sophisticated demand, Akhilesh Tuteja, partner & national leader, Clients and Markets and TMT KPMG in India says things are changing given the bullishness around India’s growth story. “There is a lot more transparency in procurement processes, there is a lot more flexibility in the operating model when it comes to the government buying technology services and the speed at which the process is happening is now faster,” he adds.

If one looks at the recent announcements by the central government, large outlays have been planned such as the IndiaAI mission with a budget outlay of ₹10,371.92 crore to use AI innovation through strategic programs and partnerships across the public and private sectors including building LLMs and computing infrastructure. Others like MeghRaj (the government’s cloud initiative) aimed at accelerating delivery of e-services in the country and optimising ICT spending of the Government, creation of Public digital infrastructure, public-private partnerships (PPPs) in tech research along with 5G rollout are fuelling the government spending. Ravi Kant Sharma, Research Director for Government Insights for Asia/Pacific (APEJC) at IDC points out that the pandemic induced accelerated consumption of technology services in the government sector and IDC’s research says that nearly 90% of this spent on areas of operation efficiency, citizen services, modernisation of legacy infrastructure. “We have also started ministries spending on technology, like railways on IT services, Ministry of road and transport, highways, Health ministry on Aayushman Bharat in creation of health cards, Ministry of Finance, Rural development where BharatNet program on rural broadband connectivity," he says. Also states like Karnataka are themselves drawing up their plan, like the creation of Karnataka Digital Economy Mission a not-for-profit entity aimed at supporting technology investments, scouting technology opportunities through research, promotional efforts abroad, providing policy, and laying out strategic roadmap.

From the private sector, especially for the IT services companies, the rise of artificial intelligence, Gen AI and cloud adoption has seen sectors like Automotive, Healthcare, Pharmaceuticals, Software, Telecom, and BFSI splurge on tech spending in FY24 and FY25. “The business environment in 2023 shifted from cautious spending cuts early in the year to a resurgence in tech demand, culminating in large-scale deals later,” says Vinay Firake, Chief Executive Officer – APMEA, Wipro Limited adding that there is also a move towards longer-term commitments in business transactions, in line with a global increase in tech contract values. Wipro also sees India as a strategic market and is deepening its engagements with clients and aligning its offerings with the client priorities in areas such as Generative AI, Data and Analytics, Cloud, Cybersecurity, Digital, and Engineering with an outcome-focused approach. With industry focus now on RPA, digital analytics, application modernisation, intelligent automation, and data engineering, tech providers are expecting a rise in foundational spending on cloud, IT modernisation, digital customer experience, and digital engineering projects, with Gen AI continuing to be a key focus, says Vinay. 

The private sector, especially the Banking and financial services sector along with telecom has seen large deals coming by. For instance in Q1Fy25 TCS saw a large general insurance company go live with over 100 products across 8 business lines, from underwriting to policy servicing, claims processing and reinsurance on TCS BaNCS platform. In Q2 FY25, Infosys signed a deal with the Life Insurance Corporation of India (LIC) for its digital transformation initiative called DIVE. “We are seeing significant incremental opportunities in sectors such as telecommunications, healthcare, and banking, which are undergoing transformative changes,” says Atul Soneja, Chief Operating Officer, Tech Mahindra. Pointing at the evolving nature of the IT contracts especially in sectors such as BFSI and telecom which are often multi-year contracts, with values ranging from several million to over a hundred million dollars with phased implementations and longer tenures, (usually spanning over 3-5 years). “Margins in the Indian market are competitive but can vary depending on the complexity of the project and the value-added services. Moreover, margins in India are generally competitive, with higher margins seen in specialised services like cybersecurity, AI, and cloud migration, where the demand for expertise outweighs supply,” he adds.

With the adoption of technology, cybersecurity has also become a focal point for both government and the private sector. From creating public awareness to the adoption of cyber security tools and products Akshay Garkel Partner and Leader, Cyber & IT Risk, Grant Thornton says that today the need for cyber security services from both enterprises and government can be seen coming from three buckets namely India Inc, End citizens and third being cross border. “Indian IT services companies are contributing to all three spaces and there is a fair bit of work coming their way on these segments as well,” he adds.

The IT industry seems bullish, as the NASSCOM Annual Enterprise CXO Survey 2024 saw companies expecting strong demand and momentum in digital spending to continue. With Indian enterprises relatively being newer entrants in the tech spending landscape Harish Krishnakumar senior market analyst, IDC India Enterprise IT Services & Cloud team sees both Indian, as well as foreign service providers looking keen to capitalise on. “For the future demand, cloud will be the bedrock followed by cybersecurity and GenAI and we are already seeing companies like Microsoft, AWS, and Oracle making significant investments,” he says. Even NASSCOM’s CXO survey saw GenAI as a top priority for over 95% of organisations, and in the near term digital deals and outsourcing are only expected to expand from here on, says Sangeeta, with both deal volume and duration likely to see an increase as companies focus on cost efficiencies and AI-specific digital initiatives.