Overview: The Indian IT companies make up a large portion of the worldwide IT market, and the growth of the domestic tech industry is closely tied to global market conditions. Thus, the Indian technology sector is all set to confront a new set of challenges in 2023 including a potential economic slowdown globally. While tech stocks outperformed during the pandemic pressures of 2020–21, the sector led considerable stock market declines in 2022. After a rough ride in 2022, the NIFTY IT stock index continues to be down 12%-on-year in the beginning of the New Year. Beyond the concerns around macroeconomic conditions, the technology industry faces global challenges ranging from geopolitical tensions to supply chain uncertainties, ongoing semiconductor concerns, raw material shortages and reduced global sales. Global growth is slowing sharply in the face of elevated inflation, higher interest rates, reduced investment, and disruptions caused by Russia's invasion of Ukraine, according to the World Bank's latest Global Economic Prospects report. Given fragile economic conditions, any new adverse development—such as higher-than-expected inflation, abrupt rises in interest rates to contain it, a resurgence of the COVID-19 pandemic, or escalating geopolitical tensions—could push the global economy into recession. This would mark the first time in more than 80 years that two global recessions have occurred within the same decade. The global economy is projected to grow by 1.7% in 2023 and 2.7% in 2024. The sharp downturn in growth is expected to be widespread, with forecasts in 2023 revised down for 95% of advanced economies and nearly 70% of emerging market and developing economies. Growth in advanced economies is projected to slow from 2.5% in 2022 to 0.5% in 2023. Over the past two decades, slowdowns of this scale have foreshadowed a global recession. In the United States, growth is forecast to fall to 0.5% in 2023—1.9 percentage points below previous forecasts and the weakest performance outside of official recessions since 1970. In 2023, euro-area growth is expected at zero percent—a downward revision of 1.9 percentage points. In China, growth is projected at 4.3% in 2023—0.9 percentage point below previous forecasts.

Meanwhile, Gartner slashed its overall spending growth forecast a little more than half, to 2.4% for 2023. It now projects $4.5 trillion of IT spending this year. This is down from the previous quarter’s forecast of 5.1% growth. The software and IT services segments are projected to grow 9.3% and 5.5% in 2023, respectively. The devices segment is forecast to decline 5.1% this year. While inflation continues to erode consumer purchasing power and drive device spending down, overall enterprise IT spending is expected to remain strong, according to the latest forecast by Gartner, Inc.

Budget Expectations:

The technology sector and the overall economy are expected to receive a noteworthy boost in the upcoming Budget 2022-23. The country is set to make headway in the technology industry with an increased focus on building startup ecosystems, digital infrastructure and innovation. Budget 2023 must continue to focus on capital expenditure as a growth driver and give an impetus to local manufacturing. The Centre should lift certain tariffs and announce incentive schemes for sectors impacted by recession in the Union Budget for FY24. Some of the smaller tariffs should be done away with to support local businesses and bring ease of doing business. These measures will create a more conducive environment for manufacturing in India while promoting the Make in India initiative and reducing dependence on imported goods.

The pandemic drove the pace of digitalization and technological expansion but kick started the shortage in semiconductors. The world’s supply chain has yet to recover from the adverse effects of Covid-19. Moreover, the latest outbreak in China that has crippled most of its activities has also forced the factory floor to hit a pause on massive investments aimed at building a chip industry. Although India may have the expertise in designing chips, the lack of push leads it to depend on imports. A budget push on this front would help the Indian tech sector go a long way and become less dependent on imports. In December 2021, the government approved a Rs 76,000 crore production-linked incentive (PLI) scheme, a first of its kind, to boost semiconductor and display manufacturing in the country. Also reduction of import taxes could go a long way in building a strong semiconductor ecosystem, given that almost all the semiconductor demand in India is currently met by imports from countries such as the US, Japan and Taiwan.

Deferment of time of payment of tax on stock options could be made available to employees of more startups. It is suggested that the deferment facility should be extended to employees of startups registered with the Department for Promotion of Industry and Internal Trade. The facility is available only to startups holding an Inter-Ministerial Board Certificate. If accepted, this will open an option for startups to hire and retain talent. It should be available subject to appropriate conditions but should not require each start-up to seek permission for this. Alternatively, in case it is not feasible to provide the above framework at this stage, a process may be designed to have fast track/ deemed IMB certification process. Other start-ups may be evaluated by a committee for a fast-track IMB certification.

Moreover, it is suggested to align the long-term capital gain tax rate on par with that applicable for non-resident investors for certain types of domestic investors (like AIFs, government managed/ owned funds, QIBs, Portfolio Investors etc.) to invest in start-ups from the rate of 20% to 10%.
Startups also want minimum alternative tax (MAT) for eligible startups to be reduced to 9 percent from 15 percent. Currently, MAT provisions have no threshold and all companies, notwithstanding their size, are subject to the provisions of the tax. Startups are also liable to pay MAT even if they claim exemption under section 80IAC of IT Act. If MAT is reduced, it will help smaller businesses in meeting their daily working capital requirements, especially during the initial days.

Outlook:

With mass layoffs all around and the effects of the COVID-19 pandemic slowly receding, the country’s tech sector has gone through a tough 2022 when compared with the massive boom it saw in 2020 and 2021. Indian technology sector is all set to scale greater heights in line with the ‘AatmaNirbhar Bharat - Vocal for Local and Make for Global’ vision of Government of India and in the process contribute $1 trillion to the economy. The pandemic induced digitisation demand is tapering with rising interest rate scenario and weakening investor sentiments amid possible recession. The Upcoming budget can ease any concerns of the sector through demand creation, skilling and investments into the sector. Thus, with Government of India’s commitment to semi-conductor production and hardware, mobile manufacturing through the production linked incentives approach, a whole new technology ecosystem could be created for the future.