Beginning of the year in the Indian IT sector bears similarities to the Eurozone Crisis of 2012.

The beginning of the year in the Indian IT sector bears similarities to the Eurozone Crisis of 2012. Outsourcing is the industry in India with the most external concentration. Therefore, it makes natural that experts would be wary of well-known software firms like Tata Consultancy Services Ltd. and Infosys Ltd. due to worries about a global economic slump. They are more concerned about the current fiscal year, which will end in March than they are about the traditionally slow December quarter. The twelve months starting in April might be more difficult. Since Europe is the centre of pessimism, analysts are drawing comparisons to the 2012 sovereign debt crisis in the region.

Repeating that experience can make healing a sluggish, drawn-out process. Although a decline seems imminent, Monday’s financial reports from Tata Consultancy provided few new hints about how severe it would be. Anxiety in Western Europe seems to have been offset by the expansion of a decade-long alliance with British retail customer Marks & Spencer Group Plc and a transaction with American biopharma company Gilead Sciences Inc.

The most valuable software exporter from India reported revenue of $7.08 billion, up 8.4% from the same period in 2021. The $1.3 billion in net profits was essentially flat from the prior year. In a post-earnings news conference, chief executive officer Rajesh Gopinathan stated that “we’ve gone into December with everyone being cautious.” However, in our opinion, the hue of this caution varies between markets.

The Mumbai-based company is being careful, though. Its headcount shrank by a little more than 2,000, marking the first personnel reduction since June 2020. TCS has been successful in raising its operating margin, which was around 23% six months ago and is now 24.5%. Profitability is only one part of the story, though; investors also need a better understanding of the whole order book. For TCS and Infosys, a rival business based in Bengaluru, the forecasted dollar sales increase for the 2018 fiscal year is roughly 10%.

That’s a little too hopeful. If the next downturn is anything like the 2008 financial crisis or the pandemic that opened the floodgates to new orders, it is fair to predict such a quick reversal. However, if the European recession of 2012 serves as a more useful analogy, then it may take clients far longer to regain their confidence.

Investors will thus be quite interested in Infosys’ earnings release on Thursday. The number-two Indian player had such a glaring underestimation of the 2012 slump and its effect on European banking clients that, after consistently failing to deliver on its promise, it withdrew its quarterly revenue prediction in July of that year. According to a report sent to clients last month by Mumbai-based brokerage JM Financial Institutional Securities Ltd., “consensus forecasts routinely exceeded Infosys’ early guidance, which overstated the subsequent growth, throughout the 2012 Eurozone crisis as well.” “A similar trend might indicate progressive earnings revision downward over an extended time.”

This time around, the personnel from the epidemic era have added complications. TCS experienced growth of 172,000 employees during nine quarters beginning in June 2020 as clients hurried to digitize supply chains. Now, the demand is returning to a more typical rate. On the other hand, corporate clients haven’t exactly begun coming up with big cost-cutting IT initiatives either – everyone is waiting and watching.

70% of the employments for programming code in India are from IT outsourcing companies. The local startup sector is the other significant employer in the area, although it is now laying off a lot of workers due to a financing shortage. The overarching takeaway for software developers is simple: It might not be a good idea to leave one’s employment this year.

However, even as profitability for Indian software exporters stabilizes, helped by tighter control over personnel expenses and a 10% decline in the value of the rupee versus the dollar over the last year, the order book may tremble if European clients cancel or postpone significant IT projects. The biggest concern right now is a recurrence of 2012.

Crisis in Eurozone Debt

When the world first learned that Greece might default on its debt in 2009, the crisis officially began. It grew in three years to the point that Portugal, Italy, Ireland, and Spain’s national debt defaults were a real possibility. It was difficult for the European Union to assist these members, which was led by Germany and France.

They requested bailouts from the International Monetary Fund (IMF) and the European Central Bank (ECB), but these actions did not stop many people from doubting the sustainability of the euro itself.

The Eurozone debt crisis was the greatest threat to the globe in 2011, according to the Organization for Economic Cooperation and Development, and it only grew worse in 2012. The value of the Turkish lira decreased to a record low against the U.S. dollar after President Trump threatened to impose double tariffs on Turkish imports of aluminum and steel in August 2018, reigniting concerns that the weak state of the Turkish economy could lead to another crisis in the Eurozone.

Numerous European banks have investments in Turkish lenders or have lent money to Turkish businesses. The likelihood that these borrowers can afford to repay these loans decreases as the value of the lira falls. The European economy might be adversely impacted by the defaults. First, the deal proposed by Merkel was rejected by the UK and many other EU nations that do not belong to the eurozone. They feared that the agreement would result in a “two-tier” EU. The nations of the eurozone might draft preferential agreements that would exclusively apply to their citizens and leave out non-euro EU nations.

Second, member states of the eurozone must agree to spending cuts that might limit the growth of their economies, as it did in Greece. These austerity measures have had a bad political response. Voters may elect new leaders who might leave the EU or the eurozone. Third, a fresh financing choice called a Eurobond has become available. The 700 billion euros of Eurobonds used to sustain the ESM are fully guaranteed by the member states of the eurozone. Like US Treasury securities, these bonds can be bought and sold on a secondary market. Because they compete with Treasury bonds, Eurobonds may raise interest rates in the US.

Debt rating firms like Standard & Poor’s and Moody’s asked the ECB to intervene and guarantee all loans made to eurozone nations, but Germany, the largest member of the EU, opposed this because there were no guarantees in place. 13 It forced debtor countries to enact the austerity measures required to set up their finances. Investors were worried that austerity measures would just prevent any economic rebound and that debtor countries relied on such expansion to repay their debts. Even if the austerity measures have negative short-term effects, they are essential in the long run.

Edited by Prakriti Arora