The flagship software services sector, one of India’s biggest employment generators for educated youth, is slamming the brakes on new hiring for this year after being hit by a global slowdown that’s resulted in far less business than expected coming in.
Indian software services companies had hired large numbers of people last year because business was booming and attrition levels were at around 15 per cent. Now, business has lost pace, especially in the two largest markets – the US and Europe – and fewer employees are leaving.
Says Pareekh Jain, CEO, Pareekh Consulting: “What’s happening now is that the overall macro-economic environment is down so growth is down. The companies over-hired last year, assuming there would be a lot of attrition and that just hasn’t happened.”
Industry revenue growth is expected to slow to around 5 per cent this year and is likely to stay at that level for some time, a far cry from breakneck expansion in earlier years. Nasscom said that fiscal 2023 growth slowed to 8.4 per cent from 15.5 per cent expansion the year before. That growth was the best in a decade thanks to the Covid-19 pandemic forcing higher technology spends.
Hiring down 46%
The Naukri Jobspeak Index, which tracks the Indian job market, reckons that software and software services hiring was down 46 per cent in July 2023 compared to the same month the previous year.
In the first quarter, IT companies reported a drastic reduction in headcount addition as compared to the year-ago quarter. For instance, TCS added 523 employees in the quarter ended June 2023 after adding 14,136 employees in the year-earlier quarter.
Wipro’s net headcount addition went down by 8,812 employees in the first quarter of fiscal 2024 in sharp contrast with the year-ago quarter where the company added over 15,446 employees.
“Hiring is always on the basis of sentiment. You hire one year in advance and right now sentiment is a little bit cautious,” says Jain. With a US recession forecast by some economists for the December quarter, due to dwindling pandemic savings, stubbornly high interests, a global slump, surging oil prices and ongoing geopolitical uncertainty due to the Ukraine war, companies are worried.
Lowest net additions
Tata Consultancy Services, Wipro and HCL Tech reported the lowest net additions for the first quarter of a financial year in five fiscal years. Even in the last fiscal year to March 31, 2023, the overall headcount growth slowed to 2.90 lakh from 4.5 lakh jobs added in the previous financial year. The total IT headcount is around 5.4 million, according to Nasscom. Increments have been reduced and pay cuts are also occurring.
“In the good times, people were asking for 50 per cent hikes and getting them when they changed jobs. Now they are giving barely 5 per cent-10 per cent even when they jump companies,” says Jain.
The demand outlook has been worsening due to the continued pressure on spending with IT firms witnessing a clear slowdown in new business blamed on geopolitical economic worries and recession fears. Nasscom president Debjani Ghosh says the industry is looking at a “'no normal’ future”. India presently meets 57 per cent-58 per cent of global outsourcing needs.
Strong bench strength
There is a raft of factors to blame for the slowdown in hiring. One big factor is the strong bench strength of IT companies which hired more employees than needed in previous quarters.
Indian software services companies are still faring better than their global competitors because they’re getting a large number of cost accounting deals that involve identifying how global companies can find cost savings. However, such deals, inevitably, don’t offer huge margins.
The Indian companies have made several acquisitions in recent months – mostly, as part of cost-accounting deals. HCL, for instance, acquired the Indian operations of Cloud Software Group which is the holding company for enterprise software provider TIBCO. The 400 CSG employees have become part of the HCL team.
New business for Infosys
Similarly, Infosys has taken over Danske Bank’s operations in India. As a result, it will also get Danske Bank’s 1,400 employees in India. Since they will be taking on the organisation’s existing employees, they don’t need to make fresh hires.
In August, Infosys also expanded its collaboration with Liberty Global, under which it will “evolve and scale” the company’s digital and connectivity platforms. Under the deal, Infosys will provide services for Liberty Digital worth around $1.5 billion for five years and that could be expanded over the following three years. However, again, there won’t be any extra hiring involved in this deal as 400 Liberty Global staffers will move to Infosys.
The Indian companies have, so far, avoided sacking excess staff, unlike Accenture which fired 19,000 people globally earlier this year. About 40 per cent of Accenture’s 738,000 staff are based in India. “Accenture fired so many people but our guys didn’t fire. We have never had a mass firing,” notes Jain.
Cloud of doubt over AI
A cloud of doubt has descended over the entire industry amid speculation among the tech world’s experts about what impact generative AI will have and how much it will take over work that’s now done by the Indian software services sector. Some, however, believe that AI will spawn greater opportunities just as earlier technological leaps like digital and cloud have done.
Says Jain: “Growth is happening but companies are still in a cautious mode. As a result, they are not doing mass hiring.” He adds: “Over the last two years, they hired a huge number of people.”
As the industry has slowed down, attrition has also dropped steeply while the start-up sector has cut hiring very sharply and in many cases software services executives are not accepting jobs with start-ups even when offered sizeable pay hikes because of the sudden insecurity surrounding such companies.
The Indian companies are seeing some upside from the uncertainty because starting salaries for youngsters have not risen very much in recent years due to economic uncertainty and Covid-19. Wipro created a stir in February by reducing the amounts it was offering to new hires. The company cited the "changing macro-economic environment" for its move which was widely criticised in the industry but may be seen now as harbinger of things to come.
In the past month, financial analyst firms like Jeffries have lowered growth estimates for the current financial year for the Indian IT sector. It warns growth pressures could persist into the next fiscal year as global IT spending will shrink due to slower economic growth in the US and Europe.