IT Sector Slump To Impact Consumer Demand

'A cutback in hiring and compensation growth by IT companies will have a significant impact on consumer demand, especially in the urban sector of the economy.'

A reduction in headcount and subpar salary increments by information technology service exporters, including Tata Consultancy Services, Infosys, and HCL Technologies, could negatively impact overall consumer demand in India.

The IT sector is the largest employer in the corporate sector, accounting for nearly a third of the salary and wage expenses of listed companies in FY23, up from a 22 per cent share a decade ago.

Historically, there is a strong positive correlation between the growth of compensation (salary, wages, etc) in the IT sector and the growth of private final consumption expenditure (PFCE) in the economy.

For instance, the year-on-year (Y-o-Y) growth rate in PFCE at current prices slowed to 10 per cent in FY18 from a high of 17.5 per cent in FY12.

During the same period, Y-o-Y growth in IT companies' salary and wage expenses decelerated to 6.2 per cent in FY18 from 24.8 per cent in FY12.

Similarly, the post-Covid boom on private consumption was accompanied by a record surge in hiring and compensation growth in the IT sector.

The 56 listed IT companies in Business Standard's sample (which includes firms from the BSE 500, BSE Midcap, BSE Smallcap indices) spent nearly Rs 4.27 trillion on salaries and wages in FY23, up 18.4 per cent from Rs 3.6 trillion a year ago.

In comparison, the combined salary and wage expenses of 1,080 listed companies (including the 56 IT companies) in this sample rose by 14.8 per cent to Rs 13.4 trillion in FY23, from Rs 11.7 trillion a year ago.

Over the past 10 years, IT company expenses on salaries and wages have grown at a compound annual rate (CAGR) of 15.4 per cent, much faster than the compensation growth for the rest of India Inc.

In comparison, the combined salary and wage expenses of non-IT companies in Business Standard's sample grew at a CAGR of 9.9 per cent over the last ten years.

As a result, the IT sector has been the biggest driver of job and compensation growth in the corporate sector.

According to analysts, the overall IT sector is much larger with thousands of unlisted companies.

The growth in salaries and wages of listed companies is an indicator of a broader slowdown in the sector and its impact on the job market, employees' income, and overall consumer demand in the economy.

The banking, financial services, and insurance (BFSI) industry is the second biggest employer in value terms in India Inc.

Listed companies in the BFSI space spent around Rs 3 trillion on salaries and wages in FY23 -- an increase of 15.3 per cent Y-o-Y.

The sector accounted for 22.3 per cent of the combined salary and wage expenses of all listed companies last financial year.

IT services companies are witnessing a sharp slowdown in hiring and compensation growth after a post-Covid boom.

The salary and wage expenses in the sector were up by 18.4 per cent in FY23, slowing down from a decade high of 21.9 per cent in FY22.

This slowdown continued in H1FY24, too, given that these expenses grew by 13.2 per cent Y-o-Y in the case of the Big Three: TCS, Infosys, and HCL Technologies.

This is expected to result in a deceleration of overall salary and wage expenses in the corporate sector, which will weigh on consumer demand in the economy over forthcoming quarters, according to analysts.

The biggest impact is likely to be on discretionary consumer demand while only a marginal impact is expected on demand for staples, such as food and personal care.

"A cutback in hiring and compensation growth by IT companies will have a significant impact on consumer demand, especially in the urban sector of the economy. The IT and BFSI sectors were among the few with a double-digit rise in compensation over the last few years; manufacturing compensation is not even keeping pace with inflation," says Dhananjay Sinha, head-research and equity strategy at Systematix Institutional Equity.

According to Sinha, this decline in IT hiring and compensation will hit demand for high-value discretionary items/services, such as vehicles, consumer durables, housing, and hospitality.

But others see a smaller impact on overall consumer demand.

"Discretionary spending is a small part of overall PFCE and I don't see any major impact on demand for basic consumer goods and services," says G Chokkalingam, founder & CEO, Equinomics Research & Advisory.

Feature Presentation: Aslam Hunani/Rediff.com