Trump's tariff may hit Indian IT amid AI shift, slower spending
Even as the Indian IT sector anticipated greater trade clarity by August—a development expected to boost US consumer spending—the announcement of an additional 25% tariff now threatens to dampen sentiment and stall the fragile recovery in discretionary spending. Phil Fersht, CEO of US-based HfS Research, said Trump's 25% tariff is the new IT services wrecking ball. "While services aren't directly taxed, the new tariffs stoke inflation in the US, forcing American firms to tighten discretionary spending.
As manufacturing, logistics, and retail customers reel from higher input costs, they'll look to slash consulting and IT-outsourcing contracts first, slowing deal cycles and delaying rollouts. Deal slippage will be most visible in manufacturing, logistics, and retail verticals by the Sept quarter."
Fersht believes the new levy is forcing American enterprises to slam the brakes on discretionary spending. "A tariff-fuelled downturn in the world's largest economy typically translates into weaker tech budgets, directly crimping Indian software export growth, which depends on US buyers for over half its $190 billion in annual revenues."
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In a recent report, Kotak Institutional Equities said the demand environment took a slight hit due to uncertainty over the Trump administration's tariff regime, with considerable impact on retail, logistics, and manufacturing verticals.
"The hi-tech vertical is focused on investing for the future (AI-related capex and opex) while optimising the present (cuts to discretionary spending and prioritising spends away from other bets to AI).
The healthcare vertical is operating under considerable uncertainty with payers under cost pressure and Trump ratcheting pressure on big pharma with threats of tariffs and changes to the drug pricing regime," the note said.
Fersht said that net-net, even a "goods" tariff of 25% acts like a tax on American buyers, cutting into the heart of India's IT services model. "Firms with higher discretionary digital exposure and deeper US footprints will bear the brunt, while the IT sector's giants may weather the storm more evenly as they are deeply rooted in stable, predictable maintenance engagements," he said.
"Unlike China's rare-earths chokehold, India has little to threaten in return.
Although US firms depend heavily on Indian IT talent, those services are broadly replaceable with other offshore providers or onshore automation—a blunt weapon that hurts more than it coerces."
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Ray Wang, CEO of US-based Constellation Research, said tariffs only apply to goods, not services. However, the increased cost of component products that face tariffs will decrease service provider margins and potentially raise prices for customers.
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