On 2nd April 2025, U.S. President Donald Trump announced a policy of reciprocal tariffs, imposing a 26% tariff on Indian exports under a larger initiative against more than 180 countries. Though the tariffs do not have a direct impact on IT services, the $250 billion Indian IT industry that draws more than 60% of its revenue from the U.S. has felt the ripple effects. The Nifty IT index has dropped 17% till April 3, 2025, with midcap companies like Persistent Systems and Coforge taking outsized hits.

This blog demystifies the causes for the decline of the IT sector, the asymmetric blow to midcaps, and the way forward, supported by strategic facts and tables.

The U.S. Tariff Trigger: IT’s Indirect Exposure

India’s IT sector, a world leader, sent $150 billion worth of services to the U.S. in 2024, according to NASSCOM figures. The 26% tariff, targeted at goods, indirectly imperils this ecosystem by shaking up U.S. markets Nasdaq futures fell 3% after the announcement and spooking investors about lower tech spending. X tweets such as “Tariffs = uncertainty = IT budgets slashed” reflect the sentiment behind the sell-off. For an industry already slowing from its pandemic high, this is a devastating blow.

Midcap IT Stocks: The Steeper Fall Explained

While TCS and Infosys, those large-cap elephants, declined by 2-4% on April 3, midcaps fell harder. Here’s the snapshot of the damage:

Key Facts:

Persistent Systems: Appointed 55% in 2024, emerging as one of the leading Nifty IT performers prior to the tariff shock.

Coforge: Traded at 50x earnings, a 40% premium to the Nifty IT average of 35x.

Nifty IT Index: Down 17% in 2025, with midcaps pulling the pack down.

Why the difference? Midcaps have special pressures:

Greater U.S. Dependence: Persistent Systems gets 80% of its revenues from the U.S., versus TCS’s 50%. A slowdown in the U.S. hurts them more.

Niche Specialization: Coforge’s BFSI and travel focus, and Persistent’s digital engineering gambles, do not have the diversification of large caps.

Overvaluation Overhang: Midcaps’ 2024 rally saw them overbought, waiting to be corrected. Persistent’s P/E ratio of 60x dwarfed TCS’s 30x.

Liquidity Squeeze: Lower trading volumes enhance sell-offs, as retail investors scramble out in tariff apprehension.

The Broader IT Sector Fallout

The tariff news adds to ongoing woes. Endava’s revenue warning in February 2025 indicated a global tech slowdown, shaving off 10-15% from midcap IT stocks. Oracle Financial Services has plummeted 40% YTD, mirroring sectoral pain. Let’s view IT export trends:

Fact: IT recruitment slowed to 2% growth in 2024 from 10% in 2022, according to NASSCOM, indicating demand fatigue even prior to tariffs.

Large caps such as TCS (Q4 FY25 result on April 10) come under the lens, but their size $28 billion in sales vs. Persistent’s $1.2 billion provides strength. Midcaps, with ambitious targets (eg, Persistent’s $2 billion by FY27), now appear weak

Why Midcaps Are More Exposed

Large caps boast international footprints and cash hordes (Infosys: $2.5 billion cash horde), and midcaps count on U.S.-focused expansion. Persistent’s health care and hi-tech thrust is tied to discretionary U.S. expenditures, vulnerable if tariffs choke budgets. Coforge’s deal-fueled business model (e.g., Cigniti buy) introduces danger if synergies don’t come through. X users observe, “Midcaps overpromised, now overexposed.”

The Road Ahead: Challenges and Opportunities

Challenges:

• Demand Dip:  US customers might slash IT expenses 5-10%, as estimated by JPMorgan.
• Cost Hikes: Hardware imports could rise 20% if tariffs extend, squeezing margins.
• Sentiment: The Nifty IT’s 17% decline threatens a prolonged low in confidence.

Opportunities:

• China Diversion: Since China is exposed to 34% tariffs,
• Domestic Push: PLI schemes for electronics might compensate for import costs.
• Trade Talks: The proposal by India to reduce duties on $23 billion of US imports may relax tensions.

Conclusion: Riding out the Storm

The US 26% duty has shaken the IT sector in India, hurting midcaps like Persistent and Coforge on account of dependence on the US niche concentrations, and valuations adjustments. Large caps have stability, though the sector awaits a turning point. Numbers reveal a decelerating growth path exports only 5% higher in 2024 compared with 15% higher in 2022, now compounded by tariff anxieties. But promising opportunities are on the horizon: India can shift to alternative markets, cash in on U.S.-China tensions, and strengthen local tech. For investors, midcap declines could be buying opportunities if earnings remain intact, but dangers lurk. The IT industry’s destiny depends on flexibility—cash in on this decline to become a springboard or a further plunge.