Indian IT Firms Face Uncertainty as Discretionary Spending Lags Amid Trump Tariffs and Recession Concerns

The revival of discretionary spending by clients of Indian IT firms is likely to face further delays as concerns grow over a potential US recession, exacerbated by possible tariff measures under the Trump administration.

Investor sentiment has been dampened by uncertainty, especially after US President Donald Trump refrained from dismissing the possibility of an economic downturn while trade tariffs continue to be implemented.

Invest in Indian Markets and Unlock Future Potential With 5paisa!

Open Account Now

As a result, key US stock indices—including the Nasdaq, the Dow Jones Industrial Average, and the S&P 500—have plummeted to their lowest levels since September 2024. The impact is also being felt in India, where the Nifty IT index has already declined by approximately 16% this year.

On March 12, the Nifty IT index fell nearly 2% in early trading, marking its lowest level since July 2024. This followed a report by brokerage firm Morgan Stanley, which highlighted mounting risks for the sector due to evolving global macroeconomic conditions and rapid technological shifts.

These developments spell trouble for India's $283 billion IT sector, which had just started to recover in the third quarter of FY25 (ending December 31, 2024) after multiple quarters of slowdown. The rebound was largely attributed to pent-up demand, improving market sentiment, and a surge in modernization efforts to support AI-driven services.

Uncertainty Stalling Decision-Making

According to Jinit Arora, CEO of consulting firm Everest Group, businesses are facing a "decision paralysis" due to uncertainty surrounding tariffs and the broader geopolitical climate. He notes that this scenario is particularly detrimental to the industry, as clients neither approve nor reject major initiatives but rather defer them as a precautionary measure.

A potential US recession could significantly impact the sector’s growth trajectory, with projections for FY26 suggesting revenue figures between $290-$292 billion—falling short of industry body Nasscom’s expectation of crossing the $300 billion mark. Market intelligence firm UnearthInsight highlights that since North America contributes the bulk of revenues for Indian IT firms, an economic downturn in the region would inevitably weigh on their financial performance.

Challenges in Business Planning

Pareekh Jain, Founder and CEO of EIIRTrend, points out that in such an environment, enterprises may struggle to plan medium- or long-term strategies and will likely adopt a cautious approach. However, if business conditions stabilize and interest rates are lowered, it could positively influence market sentiment and potentially revive discretionary spending.

Moreover, analysts believe that the ongoing shift in technology spending priorities could lead to a transition phase, moderating growth rates for an extended period. Acknowledging these risks, Morgan Stanley has revised its revenue growth forecasts for the Indian IT sector for FY26-27 and consequently lowered the target prices of most major IT firms.

Given the Indian IT sector’s strong reliance on the US economy, such uncertainties are expected to impact corporate decision-making, says Piyush Pandey, Senior Vice President - Institutional Equity Research at Centrum.

Short-Term Volatility vs. Long-Term AI-Driven Growth

Despite near-term headwinds, industry experts believe that Indian IT firms could benefit in the long run. Historically, economic downturns have prompted enterprises to focus on cost optimization, increasing demand for outsourcing and efficiency-driven services—an area where Indian IT companies excel.

According to Arora, AI-driven transformation remains a structural growth opportunity. He highlights the emergence of "Systems of Action," an AI-powered process transformation trend that could drive demand for integration, engineering, data, and talent transformation services. Similar to previous shifts—outsourcing in the 1980s, labor arbitrage in the 2000s, and cloud/digital transformation in the 2010s—this new wave is expected to fuel long-term growth.

Additionally, Everest Group notes that, despite recession concerns, some positive trends remain for the IT services sector, including opportunities in the Global Capability Centers (GCCs) and demand from smaller enterprises outside the Fortune 500 that require significant digital transformation.

Growth Projections for FY26 at Risk

Gaurav Vasu, Founder & CEO of UnearthInsight, had initially forecasted 5-6% growth for the Indian IT sector in FY26. However, he warns that a US recession could significantly impact this outlook, potentially reducing growth to just 2-3%.

A slowdown in discretionary spending would have immediate consequences for sectors such as banking, financial services, insurance (BFSI), retail, and manufacturing, as enterprise IT budgets are closely tied to consumer sentiment, Vasu adds.

While AI investments and cost-efficiency initiatives could help revive spending over time, Indian IT firms must first navigate a highly volatile global environment before witnessing a full recovery in discretionary IT budgets.