Budget Series 2017-18 #7 Impact on IT Sector

By Anil Shankar & Divya Ramesh

The famous Greek scholar Heraclitus one said: “change is the only constant”. There was a perception that nothing can hinder the phenomenal growth of Indian IT sector. But for the past couple of years, that image has taken a dent due to various factors. In this article, we analyze major factors that have affected the Indian IT sector and the effects of the same.

BREXIT

The volatility in the British pound was one of the major points of concern which the IT sector had post BREXIT. Also, there is a lot of uncertainty regarding the structure of the financial and banking sector. One of the early victims of BREXIT was the deal between Infosys and RBS to float a new standalone bank called Williams and Glyn. The move to abandon this project forced Infosys to shift nearly 3000 of its employees to other projects. It also affected their bottom line and also had to reduce the revenue guidance subsequently. On the other hand, if structural changes are to be carried out on financial sectors, then this might actually result in more contracts.

TRUMP PRESIDENCY

The uncertainty revolving around the Trump presidency is one of the main factors which might have a detrimental effect on the Indian IT sector. More than 60% of the revenues that the IT industry generates comes from the US. Recently, a bill was introduced in the US House of Representatives which seeks to double the minimum wage of H1B visa holders to $130,000. If passed, the Indian IT companies would be forced to hire more Americans than Indians and thereby affecting their bottom line.

During the campaign, Trump made his intentions clear about the possible repeal of Obamacare. Since healthcare has been one of the areas which have been growing fast for the IT sector, implementation of such actions would have a negative impact. Also, Trump has plans to cut back on regulations and compliance related spending by Banking and Financial services sector. Since about 40% of the revenue is generated from these clients, lowering the regulations would have an adverse impact on the revenue generated.

BUDGET 2017

From the graph below, we can observe that 35% of the domestic revenue that the IT sector makes comes from government projects followed by the banking and financial sector. With the Budget 2017 containing schemes to digitalize India, the domestic IT sector would witness a lot of government opportunities knocking on its door. The Government’s motive to weed out corruption through digitalization has been shown in the Budget 2017 with a push to a digital economy. Budget 2017 has acted as a foundation for India to technologically transform and evolve into a digital economy.

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Fig 1: Shows the contribution of various sectors to the domestic IT Revenue

The e-governance portal’s traffic has been on the rise from 2060 million transactions in 2013 to 4940 million transactions in 2016 which is a 140 % increase. TCS, Infosys, Mind-tree and few other players in this sector have been handling government projects like automation of immigration system by TCS, application development and maintenance of unique identification authority of India by Mindtree and implementation of GSTN by Infosys which is crucial for the implementation of GST which was also a highlight of the Union Budget 2017. The programs like:

  1. BHIM app promotional schemes
  2. Aadhaar pay app for cashless transactions
  3. Political parties entitled to receive donations through digital mode
  4. Aadhaar based smart cards to monitor health for senior citizens
  5. High-speed internet for gram panchayats

have provided a platform full of government IT projects.

AUTOMATION

There has been a big emphasis on automation by the IT industry in the recent past. The idea is to improve efficiency and productivity of firms. Automation can lead to a smaller workforce and more revenues. Although there is a point of debate as to whether this move is good for the economy in the entirety, big companies are going all out to automate their products. Some companies build their own products to realize this goal while others take the route of inorganic expansion to acquire these capabilities. For example, Infosys acquired US based automation technology company Panaya to bring about automation in several of Infosys’s service lines. Automation, hence, would play a big role in the IT companies profitability in the coming future.

Which of the following events of 2016 would have a significant impact on Indian economy in 2017?

IMPACT OF BREXIT ON EU

Author: TANUJ GUPTA

Love gone bad! No I am not referring to any Bollywood couple’s breakup but Britain’s exit from the European Union (EU). On 23rd June 2016, the people of Britain voted for the most important decision of their life which will impact not only them but also the future generations of Great Britain and EU. BREXIT will surely transform the economic, political and social landscape of EU.

ECONOMIC – Official trade statistics show that EU is the destination for half of British exports. But Britain’s share of intra-EU exports and imports is only 10.1% and 6.0% respectively. This number is also inflated because goods exported by Britain out of Europe are transited through Rotterdam port in The Netherlands. This phenomenon is termed as ROTTERDAM EFFECT.

Britain’s Total Export to EU 402.3 Billion Euro Britain’s share in total intra – EU exports Britain’s share in total intra – EU imports
Britain’s Total Import to EU 344.2 Billion Euro 10.1% 6.0%

Foreign investments in EU might dry up as companies use Britain as gateway to Europe because of Zero–tariff environment and free movement of labour and capital. Britain with 28% has the highest foreign investment in EU.

EU will have to find a replacement for London which has long served as the financial nerve centre of EU. Many investment banks having headquarters in London will have to move out of London so as to serve the European market. Germany which imports 14% of financial services will be the biggest loser in EU because of increase in cost of financial services.

POLITICAL – For starters, EU would lose an influential member which would have helped them to crack trade deals and have a say in World politics and economics. There will certainly be a shift in the power of decision-making in EU. Germany and France will want the decision-making power to shift towards them which might create further political frictions.

SOCIAL – Another pressing issue is immigration. The free movement of labour might be restricted in Britain due to BREXIT. This will result in the surge of low-wage migrant labourers from Africa and Middle East to EU. This might add fuel to the existing anti-immigration movements in EU and may lead to further political differences amongst EU members.

SECURITY – With the growing threat of ISIS, security is a key issue for EU. Britain is home to world-class intelligence agencies like MI5 and MI6. BREXIT will put EU at the back foot in counter terrorism and intelligence operations. The plans for building a unified European army will also be hit.

The EU after BREXIT will be an impaired regional and a geopolitical union as compared to the current EU, which already punches far below its economic weight in regards with  the global and regional diplomatic and strategic matters.

Grexit vs. Brexit

By- Amrita Dubey

Grexit has been widely debated in the past few years. But the latest acronym to have entered the economic discourse in the last one year is Brexit. Grexit is referred to the potential Greek exit from the Eurozone, while Brexit is the prospect of the United Kingdom leaving the European Union.

Grexit Although Grexit seemed a very probable event last summer, the idea has lost merit over time. The notion that a Greece exit could pave the way for other

Although Grexit seemed a very probable event last summer, the idea has lost merit over time. The notion that a Greece exit could pave the way for other debt-burdened states like Portugal, Spain to reject the path of austerity  forced the authorities in Brussels to issue a third bailout for Greece

The Greeks were caught between a rock and a hard place. With the strong Euro, they couldn’t export their way out of a crisis as other nations in the past had done. But leaving the Euro would be accompanied by a period of uncertainty which could have led to further economic hardships for the Greek public.

 Brexit                                                                  

It arose because of PM Cameron’s election promise to conduct a referendum on whether the UK should leave the EU or not. Supported by the political right and opposed by the political left on both sides of the Atlantic, it has sharply divided opinion among the British people. Proponents feel that Britain has been held back by the EU on account of red tapes and want to have more control over its borders to reduce the number of migrants coming into the country for work. The opposition believes that leaving the EU would lead to lower growth, impact investments and exports and in general increase risk to financial stability.

Conclusion

Since there has not been any precedent of such exits, there are a lot of uncertainties over what would really happen if Grexit and Brexit were to come true. Although both the events might not materialize but the fact that more and more people are questioning the concept of the EU does not augur well for the future of Union.