Trump tariff effect: Delay in deal decisions, tightening of budgets to hit IT service firms hard

Donald Trump's tariffs are likely to impact Indian IT services companies, which are expected to perform below expectations in FY25. Most of the experts who spoke to THE WEEK feel that most of the Indian IT services firms will have a weak exit to FY25 and a modest start to FY26. One of the likely direct effect of Trump's tariffs will be that many of the companies in the US will avoid going in for large mega deals with IT services companies. Most sectors such as product-oriented industries such as manufacturing, retail, consumer product goods etc are likely to tighten their spends on Information Technology (IT).

“There was a hope of rise in discretionary spends but the current macro uncertainty will further push the recovery cycle. We expect cost optimisation deals to continue. At the same time, the increased activity in GCC/captives can impact the near-term growth prospects for the IT services sector. The IT index is down reflecting higher level of uncertainty caused by the Trump reciprocal tariffs,” pointed out Amit Chandra, DVP Research HDFC Securities.

Experts believe that Indian IT services sector will be impacted negatively, albeit indirectly, due to Trump policies. The uncertainty in the business is going to create confusion in the sector as corporates would be reluctant to spend on IT and will refrain from going in for multi-year mega deals due to the tariff effect.

“The immediate issue is the uncertainty in the business environment that will lead to deal-decision delay. The second major issue is greater scrutiny on discretionary IT spend. While there was an expectation of discretionary spend coming back after two years of relative lull, this will unlikely to happen across most industries. Product product-oriented industries (manufacturing, retail, CPG, etc.) bearing the direct brunt of tariff are going to be hit harder. It means service providers exposed to these industries will be impacted more,” remarked Rajesh Ranjan, managing partner, Everest Group.

Experts are expecting that the cost optimisation deals in order to be more efficient and agile in the aftermath of the tariff effect may bring in some benefit for the Indian IT services providers as they will want to spend less on technology but think of achieving more from their existing technology infrastructure.

Trumps tariff effect can also possibly bring in slowdown in the US economy putting many sectors in the US under stress indirectly affecting the Indian IT service providers who scout for potential customers in the US.

“While India’s information technology (IT) services sector is not subject to tariffs by the Trump Administration, economic sluggishness in the US spawned by the plethora of tariffs imposed across various sectors could increase inflationary pressures there and cause tightening of client budgets. That can have a bearing on the revenue growth of domestic IT services providers. The US accounted for 57 per cent of the $193 billion revenues of Indian IT services companies in fiscal 2024. We expect the revenue of the Indian IT services sector to grow only a modest 6-8 per cent in fiscal 2026,” observed Anuj Sethi, Senior Director, Crisil Ratings.

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