Wednesday, May 17, 2017

Impact of IT job losses on Indian Economy

IT industry is going through a rough phase. Blame in on Trump or Brexit or Automation, jobs are being lost in this sector. They were high paid jobs in comparison to others sectors and these employees were earning forex. So the impact would be substantial. Let us try to estimate what would be the impact of this on Indian Economy.

1. Job losses: Estimates show that there are 48 lakh employees work in IT industry. Regarding job cuts, every report has their own numbers ranging from 2 lakhs to 10 lakhs. But most seem to agree that there will be around 5 lakh jobs being lost. Many senior management jobs which get top salary are cut along with the jobs at lower end being lost to automation. If we assume that average pay of these employees is Rs. 10 lakh per annum (since it includes highly paid management jobs), it will amount to USD $7.8B (billions) of total lost income per year. The actual impact could be less as many of these people are likely to find another job, may be with a lesser pay. But we need to make an estimate, so we will assume the worst case impact, and we get this $7.8B figure.

2. Reduced pay: Those who remain in the job face lots of heat too. Their variable pay or bonus whatever you call it, can be trimmed and IT companies will not shy out from doing this as we have learnt from the last downturn. If we assume that around 20 lakh (out of those 43 lakhs remaining on job) lose around 10% pay, it will sum up to $3.1B.

3. Secondary impact: As those losing their income reduce their spend on eating out, travel, etc. and also free up office space, reduce load on facilities and utility services etc. it will lead to reduced spend on services and it will have a negative impact on national income (GDP). I assume that would be equivalent to number of jobs being lost (5 lakhs) but at reduced pay. This would amount to $3.8B.

All this will sum up to close to $15B.

For Indian economy, which is around $2 trillion, $15B is not a huge impact. And on the economy growth rate of 7%, the negative impact is almost negligible as it is spread out over 2-3 years. But yet, this will kill the optimism in the industry and also reduces the employee morale which is intangible. And for cities like Bangalore where IT industry has significant presence, it may feel like recession.

If the estimated job losses begin to go up 3x or 4x, then it will start hurting the Indian economy. That no one is predicting now and probably we should not worry about. But for this down wave in IT, Indian economy is likely to digest and move forward.