The rising adoption of automated platforms remained a threat and this could dilute the labour cost arbitrage Indian IT services companies have over international peers, said a recent tech industry analsis released by Fitch Ratings, a New York-based credit rating agency.

The increasing use of cloud infrastructure, rather than owning servers, and the renting of software as a service, instead of buying software, could affect the growth of the Indian IT industry, it observed, adding, ‘‘Furthermore, this can lead to a decline in profitability and a loss of market share.’‘

The report also observed that IT services companies operated in a rapidly evolving sector, where the emergence of new technologies such as AI and machine learning could be disruptive to the companies’ position.

It also said, the Indian IT services sector would continue to be affected by subdued discretionary IT spending as clients will remain cautious in FY25 given global uncertainties, particularly on economic growth and the timing of interest rate cuts. However, IT services revenue growth may remain stable in the financial year as clients continue to hold off on discretionary IT spending. Profitability also may rise modestly over the medium term, as wage pressures decrease and cost increases are gradually passed onto customers, said Fitch Ratings.

Fitch’s global economic outlook published in June 2024 forecasts U.S. real GDP growth to slow to 2.1% in 2024 (2023: 2.5%) and eurozone real GDP to pick up to 0.8% (2023: 0.5%).

‘’We expect this economic backdrop will support revenue growth in the mid to high single digits, on a constant currency basis, for most Indian IT services companies in FY25,’‘ the report said.

The credit rating agency said the tech sector’s long-term growth would be supported by client spending on digital transformation, cloud migration and artificial intelligence (AI), despite short- term economic uncertainties. ‘‘Digital transformation projects and cloud migration are trends which we expect will continue because they can improve clients’ operating efficiency and resilience,’‘ it further said.