India's technology sector is facing a period of slower revenue growth, with a recovery not expected until the late 2020s, according to a recent projection by Nasscom and McKinsey & Company. While the industry is still projected to grow, the pace of expansion is expected to be more moderate compared to previous years.
Growth Projections and Key Drivers
Nasscom has projected the Indian technology industry's revenue growth at 5.1% to $282.6 billion in FY 2025-26. While this growth is still significant, it represents a slowdown compared to earlier forecasts. Nasscom initially predicted the tech sector's revenues would reach $350 billion by FY26, but this target has now been pushed back to 2030. Despite the headwinds, the industry is targeting $500 billion in revenue by 2030, potentially contributing 10% of India's GDP.
Several factors are expected to drive growth in the coming years. Domestic revenue is projected to grow at a faster rate of 7% to $58.2 billion, compared to 4.6% for exports. Key growth drivers include strong demand from the US, a recovering BFSI sector, and expansion in telecom, retail, healthcare, and the broader APAC region. The increasing adoption of enterprise software and cloud solutions is also fueling domestic tech spending.
Specific segments within the tech industry are expected to perform well. Data and AI segments are projected to sustain strong growth of around 12-15%. Engineering Research and Development (ER&D) and Global Capability Centers (GCCs) have also been identified as key growth drivers.
Challenges and Headwinds
Several challenges are contributing to the expected slowdown in revenue growth. Global economic headwinds and policy uncertainties in key markets like the US and Europe are dampening growth prospects. Concerns about a weaker US growth outlook and a declining US dollar could reduce the advantage for Indian IT firms related to currency exchange.
The industry also faces increasing competition from other countries, such as the Philippines, China, and Costa Rica. These countries are vying for a larger share of the global IT outsourcing market.
Furthermore, a skills gap in emerging technologies like AI, blockchain, and data analytics poses a significant challenge. The need for continuous skill development and upskilling is crucial for the industry to remain competitive. Cybersecurity threats are also a growing concern, requiring increased investment in security measures.
Adapting to Change
To navigate these challenges and capitalize on new opportunities, Indian IT companies need to adapt and innovate. This includes rebalancing budgets toward AI to unlock value creation. Companies must also invest in research and development, explore partnerships, and foster a culture of innovation.
Upskilling the workforce is essential to address the skill gap in emerging technologies. Companies should invest in training programs to meet the growing demand for specialized tech roles.
Focusing on high-value services and product engineering is also crucial. This includes modernizing older technology with AI, working with different types of data, and automating basic jobs to improve efficiency.
The Role of AI
Artificial intelligence is expected to play a significant role in the future of India's tech industry. Many enterprise leaders are planning to boost digital spending in 2025, with a focus on AI. While AI presents a clear tailwind in terms of revenue, it could also be a headwind in terms of headcount. Companies must focus on achieving measurable returns on AI investments.
Overall Outlook
While India's tech industry is facing a period of slower growth, the long-term outlook remains positive. The industry is expected to recover in the late 2020s, driven by new technologies, increasing domestic demand, and a focus on innovation and upskilling. By adapting to the changing landscape and addressing the challenges, India's tech sector can continue to be a major contributor to the country's economy.
