Indian IT firms need to invest in more US-based services to avoid tariffs: industry experts

BENGALURU: With concerns growing about the effects of US President Donald Trump’s proposed tariffs, experts say the IT services industry is not an exception as the US is always a major destination, and that they need to invest in more US-based services in order to avoid tariffs. According to them, significant tariffs placed on services could significantly disrupt the IT services trade.

Phil Fersht, CEO of HFS Research, told this newspaper that there will be pressure on the Indian government to lower trade barriers for US firms to create parity.  “Currently, India’s tariff rate on US goods is 9.5% compared to only 3% in Indian goods, namely cars, textiles, steel and pharmaceuticals,” he said.

He expects that “IT services contracts are likely to have a similar 9.5% imposed on them by the US government but could be as high as 20% depending on government policy, which is highly unpredictable.”

Even if currently offshored services increase by about 10%, many will still be significantly cheaper than re-employing onshore as the wage costs are usually 30-70% higher. The short-term impact should be small, but we cannot ignore the longer-term effect, especially for areas requiring skilled workers that can be highly effective when boosted by AI tech, the chief analyst added.

However, Peter Bendor-Samuel, CEO of Everest Group, a research firm, is of the view that the IT firms will escape the tariff threat at least initially. He said, at this point, it seems unlikely that reciprocal tariff will significantly affect services and the Indian IT industry.

The new US administration has focused on physical goods and moving manufacturing back to the US. This plays to their blue-collar constituents that are focused on manufacturing jobs. To go after servicers would work against the technology sector, which backed Trump in the last election. Furthermore, it is far more complicated to place tariffs on services than physical goods, he added.

“Significant tariffs placed on services could significantly disrupt the IT services trade. The average savings firms experience by offshoring is 20%. Significant tariffs would eliminate all or most of these savings. The impact to the industry would take some time, but it would dramatically increase the use of AI and cause a repatriation of work back to the US. The impact of this would be devastating over a multiyear period to the Indian IT industry,” the CEO of Everest Group added.