Why are Indian IT service providers not tapping into the domestic market?

While the 'Make in India' initiative has boosted domestic smartphone manufacturing, the $200 billion Indian IT services industry remains focused on international markets over the domestic one

A decade ago, if someone asked Indian IT service providers why they weren't focused on the domestic market, the response typically pointed to the limited size of the Indian IT market and its price sensitivity.  

 

Another key factor behind their lack of interest was the comparatively lower pricing of deals in India, which paled in comparison to the higher revenues they could earn in markets like the US. Most importantly, regions such as the US, Europe, and Japan were (and remain) the largest investors in technology, making them far more attractive to Indian IT companies.  

 

Additionally, the Indian government, despite being the largest investor in technology, posed challenges as a client. Contracts were often complex, payment cycles irregular, and navigating the bureaucracy tedious.  

 

While the ‘Make in India’ initiative has successfully boosted domestic smartphone manufacturing, and semiconductor manufacturing is poised to gain momentum with new plants set to become operational next year, the over $200 billion Indian IT services industry remains steadfastly outward-focused, continuing to prioritise international markets over the domestic one.  

 

Why are we raising this point now? A recent Gartner report said that India’s IT spending is projected to total $160 billion in 2025, an increase of 11.2 per cent from 2024. Moreover, software spending in India is projected to record the highest annual growth rate, increasing by 17 per cent in 2025.  

 

Compare this to 3.8 per cent growth estimated by Nasscom for FY24 for the industry. Overall growth has dropped to low single digits after the Covid-backed boom in FY21 and FY22. For FY25, the growth estimate for the Indian IT services sector is 2 per cent.  

 

“Despite the global services market being characterised by cautious spending, macroeconomic uncertainty, and higher capital costs, IT services spending in India is projected to grow by 11.4 per cent in 2025,” said Naveen Mishra, vice president and analyst at Gartner.  

 

“Service engagements around cloud, application, and consulting are expected to drive stronger growth in India. Furthermore, generative AI’s role in delivering industry use cases and improving labour productivity will be a key expectation from Indian enterprises in 2025 and beyond,” he added.  

 

Another reason why Indian tech services players need to focus on the Indian market is that many are seeing their growth being pulled up by India.  

 

For Tata Consultancy Services (TCS), India’s largest IT services player and one fairly focused on the domestic market, growth in the last two quarters was led by India. In Q1 FY25, the Indian geography grew by 61.8 per cent year-on-year in constant currency. In Q2 FY25, India led growth with 95.2 per cent YoY. This is despite India’s contribution to overall revenue being less than 10 per cent.  

 

TCS’s growth in India is largely driven by the ramp-up of the BSNL deal.  

 

The same holds true for Infosys. For Q2 FY25, which ended September 30, 2024, the India geography grew by 16 per cent YoY in constant currency. In Q1, it grew by 19.9 per cent YoY. For Infosys, India’s contribution to overall revenue is less than 5 per cent.  

 

Players such as HCLTech and Wipro, which in their early days focused on India, now include the domestic market within the broader Asia-Pacific and Middle East regions.  

 

In contrast, several multinational companies are strengthening their presence in India. Japanese tech major NTT Data, with total revenue of $30 billion, is a notable example. Known for its infrastructure focus and significant presence in the data centre segment, the company is now ramping up its presence in the IT services segment, already a large business in Japan.  

 

In an earlier interaction with Business Standard, Avinash Joshi, CEO of NTT Data India, said he aims to double the company’s growth pace in the country. While the market is growing at 11–12 per cent, he aims for NTT Data to grow by 17–18 per cent.  

 

When asked about competition from local players like TCS, Infosys, and Wipro, Joshi remarked, “I have been a part of the IT services industry for 22–23 years. What I observe is that businesses tend to go where they see growth and profitability. Most Indian service providers focus on the international market for profitability. Many see India as a short-term market. But once they see their major markets bounce back, they move there.”  

 

Players like TCS and Infosys have always focused on government projects, which tend to be large and of scale. For instance, TCS has been part of almost all significant government digitisation tenders, from making telecom player BSNL 5G-ready to transforming the passport issuance process. Infosys, on the other hand, played a key role in setting up the Income-Tax portal, among other deals. However, such projects are few in number.  

 

Akshay Garkel, partner at Grant Thornton Bharat, believes Indian IT services players need to leverage their expertise and tailor offerings to meet the specific needs of Indian businesses.  

 

“The Indian market is experiencing a paradigm shift with a growing economy and the influx of new businesses. This dynamic environment demands faster turnarounds and a heavy reliance on high-tech assets. Indian IT companies must adapt to these changes, ensuring they can deliver innovative solutions quickly and efficiently. Understanding the unique challenges and opportunities within the domestic market is crucial for their success,” he said.  

 

This is significant as Indian businesses, like their international peers, seek to embrace generative AI, cybersecurity, and cloud.  

 

Mishra of Gartner noted that in 2025, Indian chief information officers (CIOs) will start allocating budgets for generative AI beyond initial proof-of-concept projects. “Additionally, Indian CIOs are expected to significantly boost spending on technologies such as cybersecurity, business intelligence, and data analytics in 2025 compared to 2024,” he added.