Covid-19 may take a toll on IT sector

The Covid-19 global pandemic triggered by a novel strain of coronavirus has been crippling the world's economy for the past several months. India's economy is also not immune to the side-effects of the Chinese-born deadly virus. Most economic activities came to a standstill in the country after the complete lockdown was imposed in the later part of March this year.

Though unlocking of the economy began in June, many sectors continue to suffer on the account of the pandemic and its associated curbs. Key sectors like aviation, hospitality and public transport are likely to reel under the adverse impact of the pandemic for several years. But one important segment has shown some kind of resilience so far. And that's the information technology (IT) sector.

Given its prowess in the technology domain, this sector quickly embraced the concept of work-from-home and continued operations without large-scale disruptions as witnessed in other sectors. This was amply evident when Tata Consultancy Services (TCS), the crown jewel of diversified Tata Group, and India's largest software company, announced its first quarter results recently. Its revenues increased slightly during the first quarter of current fiscal compared to the same period a year ago. Though its revenues in dollar terms fell by 6.3 per cent, the software major reported decent revenues during April-June 2020 despite the fact that the world went through an unprecedented health crisis and India was under lockdown in that period. Going by the available data, the majority of IT companies adapted to changing dynamics after the pandemic broke out.

But the key question is whether the IT sector which employs over 40 lakh people in India will continue to remain immune to the impact of Covid-19 for long. It looks unlikely that the key sector will continue to fare well because the deadly pandemic has caused both demand and supply side shocks. Of course, IT companies handled supply side shocks by enabling their employees to work from home. However, it is not easy for them to handle demand side shocks as their clients may defer new projects in the wake of the deteriorating global economy.

IT billing charges might also be under pressure. But these demand side shocks will not kick in immediately as IT companies will work on the existing projects. However, once demand side shocks kick in, the IT sector is set to feel the pinch of the pandemic. If that happens, the sector may also see layoffs as being seen in several other sectors now. India's rating agency ICRA, in its recent report, said that the Indian IT services sector would register a negative growth of 3 per cent in FY21. The agency had, earlier, forecast a positive growth of 6-8 per cent for the sector in the current fiscal. India's IT companies generate 80 per cent of their revenues from the US and Eurozone, whose economies are expected to see GDP contraction of (-) 8 per cent and (-) 10.2 per cent respectively this year, due to the pandemic. As a consequence, the Indian IT sector is likely to face a deep downturn in FY21. That is a bad omen, indeed, for the software sector in India.