The Information Technology Industry In India: Growth And Investment Outlook

In FY23, the Indian IT industry was responsible for 7.5% of the country's GDP, and it is expected to reach 10% by FY25¹. With 76 crore Indian citizens having access to the internet, the country is ready for its next rate of growth. 

Export revenue is also predicted to reach $224 billion in FY25. The revenue from IT could easily surpass $300 billion in FY26, according to a NASSCOM report.

The government offers complete support to the growth of the industry with its new initiatives like 67 Software Technology Parks of India (STPIs), 100% Foreign Direct Investment (FDI), and the National Policy on Software Products (NPSP). The whole IT industry has registered solid growth in the past decade. Keep reading to see how investors can capitalise on this growth. 

Key Challenges Impacting IT Sector Valuation 

While the growth in the IT sector is relevant, the industry faces major challenges. 

1. Margin Squeeze And Attrition 

In the past decade, employee expenses in the IT industry have increased by 206% while revenue grew by 185%². In FY24, the average employee cost expressed as a percentage of revenue increased to 57%. 

For IT companies, including the leaders in the industry, attrition continues to remain a major concern. To fill the gaps, the companies are unable to find replacements for their own employees. So, they depend on lateral hires, which further increases the hiring costs by 25% to 30%. 

Hiring policies like subcontracting, underutilisation, and inflated wages reduce the profit margins of Indian IT companies. Some companies make attempts to reduce the variable pay and hire more junior staff, but these digital investments continue to put pressure on the company's margins. 

2. Regulatory And Geopolitical Risks 

Companies in India can store data only according to the Digital Personal Data Protection Act. This includes the localisation of sensitive data. This increases compliance costs for companies. Storing data adhering to the localisation guidelines increases infrastructure investments and increases the operational complexity for IT firms. 

Further, Indian companies that perform cross-border operations must comply with legal frameworks like the EU's GDPR and US data regulations. Moreover, they must also comply with the regulations in India, and ensure this alignment can increase costs. Even though international clients increase a company's revenue, it can further increase costs. 

3. Skill And R&D Gaps 

The talent deficit in emerging tech areas continues to increase. For example, cloud computing technology needs 3.9 million professionals, but only 1.5 million are available. Cybersecurity roles also face a major gap of 700,000 professionals. For many high-skill roles, Indian tech workers feel unprepared. 

The Indian education system has not developed on par with the tech industry's demands. In the core tech functions, only 51% of the graduates are considered employable³. The outdated curriculum and limited practical exposure to academic training further increase the skill gap. 

In an attempt to boost revenues and capture new markets, Indian IT companies continue to expand their services. They don't focus as much on skill development. R&D spending remains low, which hinders innovation and reduces competitiveness. 

Also, there is limited collaboration with academic institutions. Compared to other countries, India has had limited breakthroughs in the deep tech or product development space. 

Also Read: Fastest Growing Sectors In India

Digital Evolution In India’s IT Industry

The IT sector continues to go through change, and traditional outsourcing services are no longer the target. Companies are working on innovation-driven domains to benefit from high-margin services. Through infrastructure expansion, IT companies can expand to advanced digital services, and this is supported by government encouragement for homegrown tech products.   

1. AI, Cloud, Cybersecurity 

Generative AI is being applied in the cloud to improve cybersecurity. Enterprises are moving towards AI-driven security and protection. Cloud expansion is accelerating globally, and India is no exception. Hyperscalers like AWS, Microsoft, and Google offer innovative cloud services that help Indian IT companies of all sizes migrate to hybrid and multi-cloud environments to optimise performance and compliance. Compared to legacy IT outsourcing, AI, cloud, and cybersecurity services have a higher margin. 

2. Data Centres And Cloud Buildout 

The data centre capacity in India can exceed 4,500 MW by 2030. By 2027, it may grow to 1.8 GW. This is a 77% increase compared to the current levels. Widespread cloud adoption, increasing AI workloads, and demand for data localisation contribute to the growth of data centres. 

Many data-centre projects with hyperscaler collaboration attract interest from global and institutional investors. 

3. Emerging SaaS And Product Firms – A Diversifying Landscape

The SaaS market in India is expanding as companies focus on building scalable platforms. Cloud-native infrastructure forms the basis of such organisations, and start-up companies like Neysa are excelling in this space. Many product-first companies like Kissflow continue to contribute to the growth of this ecosystem. Product-led models are bound to offer more recurring revenues for Indian IT companies with strong user retention. This can shift the tech industry's focus from outsourced services to leadership through innovation. 

How Investors Can Position Smartly 

Indian investors have a wide range of choices, from established companies to niche alternatives in the Indian IT industry. Investors can balance growth with income and use both private and public company investments to build a balanced portfolio. 

1. Equity vs Fixed Income 

Leading bluechip IT stocks like TCS, Infosys, Wipro, and HCL Tech, among others, have strong balance sheets and offer long-term growth⁴. They may provide consistent dividends. Such stocks provide access to the global IT demand with lower volatility compared to mid-cap tech companies that experiment with innovation. 

Investors looking for a steady income with exposure to the IT industry's growth can go for tech-linked corporate bonds. Platforms like Grip Invest offer several AAA-rated bonds from tech-aligned companies. They can provide yields in the range of 8% to 11%. Compared to equity investments, these tech-linked bonds carry a lower risk and offer periodic payouts. So, these can be used to add liquidity to the fixed-income layer of your portfolio. 

2. Thematic Funds And Infra Plays 

Many thematic mutual funds and ETFs focus on the IT sector. These allow investors to benefit from sector-specific growth. SEBI has proposed double mutual fund exposure through REITs and InvITs. Some sectoral funds focused on data centres and cloud infrastructure have shown strong returns, with a 5-year CAGR going up from 30% to 40%. 

Many such funds are also concentrated on the growth in the digital infrastructure, which provides more exposure to the growing tech infrastructure space.  

3. Alternative Access 

The private venture and growth funds allow investors to invest in deep-tech firms. These enable access to India's next-generation tech ecosystem, even before they become public. Hedge funds provide an opportunity to invest in high-potential tech firms that are about to go big in the future. The global institutional investors continue to bridge the gap between listed equities and private venture strategies. 

These alternative investments allow investors to capitalise on early-stage growth and also help them to diversify risk. These reduce dependence on traditional IT outsourcing companies. 

IT Sector Investment: Risks, Returns And Right Timing

Despite the growth in the Indian IT sector, the growth is still impacted by macroeconomic and regional dynamics. Knowing these risks and understanding the timing windows to enter and exit the market can help investors optimise exposure and boost their returns. 

1. Macro Environment And Spend 

Spending continues to decline globally as companies have limited tech budgets. Particularly, global tech spending was reduced by 50% in 2023, according to a NASSCOM report. BFSI companies are continuing to invest in system upgrades, but non-essential IT spending is on the decline. 

However, growth is expected to be higher in software and data centre investments. As per Gartner reports, the IT spending can reach $160 billion in 2025. The sector growth is expected to be limited in FY26-27, and there could be a potential acceleration in growth in the future. Investors who cautiously invest now may be able to benefit from future growth. 

2. Broadening Geographies 

With respect to IT exports, India relies on the US, as at least 50% of its revenues come from the USA. Trade policy shifts, geopolitical tensions, and visa constraints create tension in the India-US dependency. This increases the risk for Indian companies dependent on the US for exports. This pushes the companies to expand their geographies beyond the USA. Several Indian companies are expanding to the UK, EU, etc. 

Locally, cities like Chennai, Hyderabad, and Pune are emerging as hot IT hubs. They also allow investors to expand beyond the traditional IT centres in India. Global diversification allows investors to reduce region-specific risks as well. 

Conclusion

India's IT industry is at the forefront of growth with expanding domestic demand, exports, and digital transformation. Short-term challenges such as increasing hiring costs, regulatory overhead, and reduced tech spending may limit revenues. However, due to AI and cloud innovations, the growth of the SaaS and digital infrastructure industry continues to increase the demand. 

This can reshape the industry, and investors can still benefit from the growth potential of the IT industry. Combining equity, fixed income, thematic funds, and alternative vehicles can help investors balance their risk with returns. 

FAQs On Information Technology Industry In India

1. How can Indian investors gain exposure to the IT sector? 

Indian investors can buy blue-chip IT companies' stocks directly to invest in the stock market. The big five IT companies in India offer growth and dividend income. Sectoral mutual funds offer diversified access to IT stocks, making them more suitable for risk-averse investors who want growth. ETFs also provide exposure to the IT sector. Using SIPs in sector funds, investors can reduce the timing risk as well. 

2. Are there low-risk investment options related to the IT industry? 

AAA and AA-rated corporate bonds yield more moderate returns with a reduced risk compared to equities. Many stocks also offer a stable dividend income while providing equity growth. Hybrid funds and balanced funds reduce overall risk as they diversify between equity and debt funds. All investment options carry risks, and depending on the instrument you choose, the risk varies. 

3. What are the major challenges faced by Indian IT companies? 

Some of the major challenges that IT companies in India face include higher staff turnover, rising talent costs that reduce profitability, increasing regulatory requirements both locally and globally, skill shortage, and innovation gap. 

References:

1. India Brand Equity Foundation, accessed from: https://tinyurl.com/3at57sj5

2. Economic Times, accessed from: https://hr.economictimes.indiatimes.com/news/industry/it-giants-skyrocket-revenue-but-soaring-employee-costs-spell-trouble/117778632

3. India Today, accessed from: https://www.indiatoday.in/education-today/latest-studies/story/only-51-indian-graduates-job-ready-in-employability-crisis-economic-survey-2570363-2024-07-22

4. Financial Express, accessed from: https://www.financialexpress.com/money/grip-brings-corporate-bonds-with-8-10-pre-tax-yield-to-maturity-who-should-invest-2720583/

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