U.S. Rates Cast A Long Shadow On Indian Outsourcing

(Bloomberg Opinion) — With US inflation surprisingly picking up speed again, the cheerless outlook for outsourcing jobs in India may turn even gloomier. (Bloomberg Opinion) — With US inflation surprisingly picking up speed again, the cheerless outlook for outsourcing jobs in India may turn even gloomier. An uptick in white-collar youth unemployment may not affect Prime Minister Narendra Modi’s prospects in the upcoming elections — the glitzy temple inauguration gala he has planned for Jan.

22 may be enough to keep his core Hindu voters electrified. Still, if the downturn in large American deals extends to next year, lackluster mass consumption in the world’s most-populous nation may start to weigh on an exuberant stock market that’s betting big on a third term for Modi. Infosys Ltd.

’s latest results, announced shortly before the release of the US consumer price index on Thursday, reflect the challenge. Revenue from North America fell nearly 5%(1) from a year earlier in three months to December, while Europe grew by the same amount. Overall, India’s second-biggest software exporter saw a 1% slide in sales.

Financial-services, technology and telecom clients led the decline. Throw in the revised guidance of 1. 5% to 2% revenue expansion in the fiscal year that will end in March, and it appears quite likely that the current quarter may show a decline over the previous three months.

It isn’t just Infosys that’s struggling with dismal growth. Tata Consultancy Services Ltd. , which has also just reported earnings, eked out sales growth of 1.

7% simply because the biggest outsourcing firm is less dependent on clients from North America, where it too saw a decline. Both TCS and Infosys are focusing on improving margins. Between them, they shed nearly 12,000 employees since September — not good news for the labor market.

A fifth straight quarter of shrinking workforce is highly unusual. It’s also a clear signal that the broader industry, which employs more than 5 million people and garners nearly $250 billion in revenue, is still in the doldrums. After the pandemic-era hiring spree, the loss of jobs is a rude shock in urban India, where coding as a career has been hard-wired in the preference order of middle-class families over the past two decades.

The revival that investors in Indian information technology stocks have been betting on may be some distance away. Earlier this month, Kotak Institutional Equities, a Mumbai-based brokerage, drew attention to a surprising dip in North American deals. For 21 Indian outsourcing operations, the total fell to just three between October and December, from a seven-quarter average of eight.

The onset of this slump for Infosys, which garners 28% of its revenue from financial-services clients, was during the March 2023 quarter. The timing suggests a strong possibility that Wall Street firms have been reluctant to open their wallets since last year’s regional US banking crisis. The ensuing panic in the deposit market may have eased, but financial institutions are still wary of placing expensive technology orders, unless these projects show immediate cost reductions.

For anything more strategic, chief financial officers would rather wait to see interest-rate cuts in full flow than take a premature bet that the fight against inflation, which began late, is now really over. India’s software industry is an odd place to look for trouble emanating from a prolonged campaign of higher US interest rates. These cash-rich firms have no debt refinancing to worry about.

It’s their lumpy order flows that make them vulnerable to cycles of client sentiment. While the mood seems upbeat enough in Europe and the rest of the world, it’s still rather weak in the US. Infosys reported large deal wins of just $3.

2 billion in the December quarter, down from $7. 7 billion in the previous three months. TCS disclosed new assignments from the Munch Museum in Oslo for interactive exhibits, ASX Ltd.

, the Australian stock exchange operator, for a new clearing and settlement system, and Virgin Media O2, a British media and telecom firm, for a modern, digital workplace. The only US client the press release talked about is a healthcare company that wants its operating model to be reimagined by using cloud computing. The absence of large American orders is worrisome.

In the 20-to-24-year-old age group, when college graduates start their first jobs, unemployment is as high as 45% in Indian cities. Low-end coding positions are already at risk from generative artificial intelligence. Higher-for-longer US interest rates might be making the problem worse.

More from Bloomberg Opinion: India’s Growth Story May Not Have a Happy Ending: Mihir Sharma India’s Sell-Side Researchers Can’t Spin This: Andy Mukherjee The West’s India Problem Isn’t Getting Any Easier: Pankaj Mishra (1) All year-on-year comparisons are in constant-currency terms. This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners. Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services in Asia.

Previously, he worked for Reuters, the Straits Times and Bloomberg News. More stories like this are available on bloomberg. com/opinion ©2024 Bloomberg L.

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