India's tech spends to revert to pre-Covid levels, says McKinsey

Pandemic has decoupled the GDP growth and tech spends, it says

The Indian IT services industry will see growth rates at pre-pandemic levels, which would mean growth levels of 8-10 per cent. This is below the 14-15 per cent that the industry saw in the last three years, said McKinsey.

Importantly, from a macroeconomic standpoint the correlation of industry growth with gross domestic product (GDP) growth numbers has also undergone a shift. “Global IT services growth (and tech spending) has been traditionally correlated with GDP growth. For example, during the 2008-09 slowdown, tech spending slowed by 3x versus GDP growth,” said Vikash Daga, senior partner and global leader of tech services practice at McKinsey & Company.

He further explained, “However, since Covid, we have observed a decoupling of the GDP and tech spending correlation, with tech spending growing more independently of GDP. During Covid, we observed only a 0.8x dip in tech spend, with tech spending outpacing GDP growth as digital technologies emerged as a priority and a strategic requirement to reinvigorate businesses and drive growth.”

Post-pandemic, McKinsey expects this trend to only accelerate as technology continues to become a CEO priority. The global consulting firm estimates that tech spending will be more resilient in the current economic climate with only a 0.3-0.4x dip versus GDP growth.

“It is very clear to us that technology is the business now for many companies. And they see technology as the way to come out of this growth slowdown. Which is why investments particularly in digital and cloud are going to continue,” added Daga.

Even amid the decoupling, India headquartered firms have emerged more resilient than global providers in the last two years — driven by their fast pivot to digital and cloud technologies and the global delivery model advantage. The Indian firms have grown at 2X of the overall market in the last year and we expect them to continue outpacing the overall market in the next 2 years, said McKinsey.

When it comes to future tech spends, McKinsey says cloud will continue to dominate, but with a twist. “Cloud is clearly a big driver of that. We predict that it will go from $230 billion today to $450 billion by 2025. There is going to be a lot of pressure to create real value with those cloud deals,” said Steve Van Kuiken, senior partner and global leader of McKinsey technology, McKinsey & Company.

He also cautioned that some of the big cloud deals haven’t delivered on the value that was expected. “Almost 90 per cent of clients who had done big cloud migrations feel like they haven’t lived up to the early promises. So we’re going to see continued growth in cloud but a shift towards more value based contracts. I think you’re going to see more verticalisation of cloud offerings,” said Kuiken.

McKinsey estimates that digital and analytics on cloud is a $20-22 billion market today, and will grow at 25-30 per cent to be a $60-65 billion market by 2027. This value chain consists of cloud data analytics and strategy; analytics and visualisation; data ops and management; and data foundation and engineering.

This growth will be driven by increased post-migration enterprise spends, demand for scalable and modular environments for AI-led analytics, and a rise in the number and scale of analytics solutions.