The Impact Of Fiscal Cliff On The IT Sector

The much talked about fiscal cliff came into the limelight post the outcome of the U.S. presidential elections. If the government fails to reach a consensus on a long-term deficit reduction plan, a two-point agenda is set to be implemented, effective January 01, 2012. In accordance with this, there would be a series of tax raises and spending cuts that would bring down the fiscal deficit in the U.S. by almost USD 600 billion in 2013 itself. However, it is now highly likely that the situation would be dealt with in order to avoid going down the cliff.

However, due to the uncertainty over the outlook, it is important to assess the impact of going down the cliff. The immediate effect on the economy is expected to drastically withdraw income from the economy. This would in turn take a toll on spending and thus hamper the ability of the economy to recover. Moreover, since the tightening is to the extent of 4 per cent of GDP, there is increased probability of the U.S. dipping into recession.

Indian companies with a large exposure to the U.S. would face direct repercussions of this slowdown. This would be specifically relevant for the Indian IT sector which depends on the Americas for more than 50 per cent of its revenues. Despite this, the National Association of Software & Services Companies (NASSCOM) feels it is unlikely that it would have an adverse impact on the Indian IT industry. NASSCOM President Som Mittal believes that the Obama administration would focus on economic growth and that job creation would take priority.

In our opinion, the direct impact on IT companies’ customers would be spending cuts and delayed decision making. The industry has been facing these issues since 2007 and has thus been taking efforts to reorganise itself to grow on the back of non-linear models and by banking on changing technological trends to poise itself aptly for sustained long-term growth. Changing strategies have already begun the phase of execution and have been showing results as observed from the financials of companies like Cognizant and Persistent Systems, among others. Thus, it stands true that the Indian IT industry would be impacted. However, the extent of this impact would be minimised as a result of adjustments made/being made by the technology companies.