Sandip Agarwal on IT sector: Improved margins, but growth expectations need a reset

The Indian Information Technology (IT) sector has been a cornerstone of the nation's economic growth and global standing for decades. Its journey from nascent beginnings in the late 20th century to becoming a global IT services powerhouse is a remarkable success story. The recent observations by experts like Sandip Agarwal, indicating improved margins but a need to reset growth expectations, signal a crucial juncture for this vital industry. This nuanced outlook is critical for understanding the evolving landscape of India's economy.

Historically, the Indian IT sector's boom can be traced back to the economic liberalisation policies of 1991, which opened India to global markets. The Y2K phenomenon in the late 1990s provided an unprecedented opportunity for Indian companies to showcase their capabilities in software development and maintenance, driven by cost arbitrage. This laid the foundation for India becoming the world's back office, attracting massive outsourcing contracts from developed nations. Companies like TCS, Infosys, Wipro, and HCL Technologies grew exponentially, becoming household names and major employers. The sector has consistently contributed significantly to India's GDP, foreign exchange earnings, and employment, becoming a symbol of modern India's economic prowess.

The current scenario, as highlighted by the article, presents a mixed picture. While a large-cap firm's upgraded FY26 revenue guidance boosted market sentiment, the underlying caution from experts stems from the perception that the sector is maturing. Improved margins could be a result of various factors, including better operational efficiencies, automation, a shift towards higher-value digital transformation projects, or even a temporary reprieve from intense pricing pressures. However, the call to 'reset growth expectations' implies that the days of double-digit, high-velocity growth might be behind us for the sector as a whole. This is a characteristic of mature industries, where market penetration is high, and expansion opportunities become more incremental rather than exponential. The comparison to 'quasi-cash substitute' for expensive sectors like FMCG suggests that IT stocks are now seen more for their stable cash flows and dividend potential rather than aggressive growth. The concern about 'stretched valuations' further indicates that current stock prices may not fully reflect the revised, more moderate growth outlook.

Several key stakeholders are deeply invested in this narrative. The **Indian IT companies** themselves, from large-cap giants to mid-tier players and startups, are constantly adapting their strategies, investing in new technologies like Artificial Intelligence (AI), Machine Learning (ML), Cloud Computing, and Cybersecurity, and reskilling their vast workforce. **Investors and financial analysts**, like Sandip Agarwal, play a pivotal role in shaping market sentiment through their research and recommendations, influencing capital allocation. **Millions of IT professionals** constitute a significant workforce, and the sector's health directly impacts their career prospects and skill development needs. The **Government of India** is another crucial stakeholder, formulating policies to support the sector's growth, promote digital infrastructure, and encourage skill development. Policies like the **Information Technology Act, 2000**, which provides legal recognition for electronic transactions and addresses cybercrime, and the **Special Economic Zones (SEZ) Act, 2005**, which offered tax incentives to IT/ITeS units, have been instrumental. More recently, initiatives like **Digital India** and the **National Policy on Software Products, 2019**, aim to foster innovation and domestic product development.

This evolving outlook for the IT sector has profound significance for India. Economically, a moderation in IT growth could impact India's overall GDP growth rate, foreign exchange reserves (as IT exports are a major component), and job creation. Socially, it necessitates a greater focus on skill development and reskilling programs under initiatives like the **Skill India Mission** to ensure the workforce remains competitive in an era of automation and AI. For governance, the sector's continued vitality is linked to India's aspiration to become a global digital leader, as enshrined in the broader vision of 'Atmanirbhar Bharat' (Self-Reliant India). While no specific constitutional articles directly govern the IT sector's growth expectations, the sector's contribution is vital for achieving the Directive Principles of State Policy, particularly **Article 38** (promoting welfare of the people) and **Article 39** (securing economic justice and preventing concentration of wealth), by generating employment and fostering inclusive growth. Furthermore, the freedom to practice any profession or carry on any occupation, trade or business, guaranteed by **Article 19(1)(g)**, underpins the entrepreneurial spirit that drives this sector.

Looking ahead, the future implications suggest a continuous transformation. The Indian IT sector will likely pivot further towards niche, high-value services, leveraging technologies like AI, blockchain, and quantum computing. Companies may increasingly focus on product engineering and intellectual property creation rather than just services. Talent acquisition and retention, along with constant upskilling, will remain critical challenges. Geopolitical factors, global economic slowdowns, and protectionist policies in client countries will continue to pose risks. However, India's large talent pool, robust digital infrastructure, and government support provide a strong foundation for the sector to navigate these changes, albeit with revised growth expectations. The focus will shift from volume-based growth to value-based growth, emphasizing innovation, efficiency, and deep domain expertise to maintain India's competitive edge in the global digital economy.