MICRO ECONOMICS ASSIGNMENT - 2

DYNAMICS RELATED TO “LOG IN IT HEADWINDS” ARTICLE

Submitted to:
Dr. V. P. Singh
Director - PGDM & Professor
Great Lakes Institute of Management, Gurgaon
Submitted by: Group-5

• Gautam Harbola (P221C019)

• Giritharan R (P221C020)
• Gourav (P221C021)
• Khushi Garg (P221C029)
1) RISE IN DEMAND FOR IT SERVICES EXPERIENCED IN PAST

In the post-reform years, India's IT industry grew at an

extraordinarily fast rate and contributed significantly to the
national GDP. Despite the global economic uncertainty, India's
IT industry has consistently strengthened and accelerated its
expansion. This industry absorbs a significant pool of
qualified Indian human resources, transforming India into a
global IT hub. The IT industry has played a significant role in
altering the whole Indian economic and governmental
landscape. India's IT industry is gaining ground in new
disruptive technologies and will play a key part in the world's
current fourth industrial revolution.
2) SLOWING DOWN OF US AND EU ECONOMIES

US ECONOMY
 After falling by 1.6 percent in the first quarter, real
gross domestic product (GDP) shrank by 0.6 percent
annually in the second quarter of 2022. The
"advance" estimate given in July saw a 0.3 percentage
point increase in the second-quarter decline.
 When compared to the first quarter, the second
quarter's reduction was less pronounced, mostly due
to an increase in exports and a lesser decline in
federal government spending.
 After declining 2.2 percent in the first quarter, profits
grew 6.1 percent at a quarterly pace in the second
quarter.
 EU ECONOMY
 In the second quarter 2022, seasonally adjusted GDP increased
by 0.7% in the euro area and by 0.6% in the EU, compared with
the previous quarter, according to a preliminary flash estimate
published by Eurostat, the statistical office of the European
Union.

 In the first quarter of 2022, GDP had grown by 0.5% in the

euro area and 0.6% in the EU. These preliminary GDP flash
estimates are based on data sources that are incomplete and
subject to further revisions.

 Compared with the same quarter of the previous year,

seasonally adjusted GDP increased by 4.0% both in the euro
area and in the EU in the second quarter of 2022, after +5.4%
in the euro area and +5.5% in the EU in the previous quarter.
3) EXPECTATION ABOUT FALLING DEMAND FOR IT SERVICES

The signs of a global recession create uncertainty in

the demand faced by the IT industry which affects the
operating margins in the short term. Apart from the
high employee turnover ratio leading to high
switching costs and a dampening in the demand of IT
services, the costs for companies like TCS, and Wipro
would increase in the short term but since the future
lies in tech the demand for IT services would recover
from the initial setback that it faced. Also, the industry
is optimistic about the improving employee attrition
ratio which improves operating margins.
4) THE RISING AVERAGE COST FOR IT FIRMS

 IT firms have increasing average costs due to a rise in

employee salaries, attrition rates, and the hunt for talent.
Due to high attrition rates in tech giants such as TCS and
CTS, they are in search of talent, and acquiring new talents
results in increased costs. For example, in TCS out of all
expenses employee costs contribute about 70 – 75% of the
total costs. For Q1 2022-23 employee cost was Rs. 30,327
Cr and other costs summing to Rs. 10,444 Cr. The
employee costs of TCS are approx. 3 times the other costs.
 The tech giant’s operating margins were falling due to
human resources-related factors and to remedy that they
should interact with employees to reduce the employee
turnover ratio.
 COST DISTRIBUTION OF TCS FROM Q1-2016 TO Q1-2023

  TCS Q1 YoY data, Figures in Rs. Cr

Other Employe Total Other Employee Total
Year costs e Cost Costs cost% cost% Revenue

Q1 2016-17 6596 15374 21970 30.02% 69.98% 30280

Q1 2017-18 6514 16183 22697 28.70% 71.30% 30543

Q1 2018-19 7152 18548 25700 27.83% 72.17% 35486

Q1 2019-20 8143 20809 28952 28.13% 71.87% 39847

Q1 2020-21 7181 22093 29274 24.53% 75.47% 38920

Q1 2021-22 8174 25649 33823 24.17% 75.83% 46132

Q1 2022-23 10444 30327 40771 25.62% 74.38% 53547

5) DECLINING OPERATING MARGINS
 The top four IT firms — Tata Consultancy Services (TCS),
Infosys, Wipro, and HCL Technologies — reported a consistent
fall in operating margins for the quarter ending March 31, 2022,
mostly due to supply-side problems such as rising staff expenses,
high attrition rates, and pricing pressure. TCS' operating margin
was 25% in Q4FY22, stable year on year; Infosys' operating
margin fell to 21.5 percent from 23.5 percent the previous
quarter. Wipro's operating margin declined to 17% from 17.6%
the previous quarter, while HCL Technologies' operating margin
fell to 17.9% from 19% the previous quarter.

 There are Supply side challenges, higher employee costs, high

attrition rates and pricing pressures continue to weigh on the IT
industry of India.