India emerging as ‘anti-AI play’ in global markets, warns HSBC

Is India lagging in the ongoing artificial intelligence (AI) revolution? Global brokerage HSBC believes so. While globally, the excitement surrounding AI is reaching a fever pitch, the brokerage noted that India remains at a disadvantage. In fact, HSBC's global clients have opined that India is being positioned as a global anti-AI play.

"While this is not a positive development, it appears to be the harsh reality. Global AI exuberance is palpable, and it seems India, at this stage, is at a distinct disadvantage in the AI ‘revolution’, although eventually the technology hype curve versus India’s catch-up and positioning in this curve will be critical for investors," said HSBC.

There are three key areas in which India is at a disadvantage as a result of the AI thrust:

1. The domestic IT sector will see significant deflation going ahead, especially as growth and hiring have already slowed. The sector remains among the top white-collar job sector in the country, providing employment to roughly 20 million people, directly and indirectly.
2. India's domestic services industry, which contributes roughly 55 percent to the country's GDP, could see an impact over the medium- to long-term. HSBC noted that India's reliance on services is much higher than the global average and the impact of AI on knowledge workers in India could have a disproportionate impact on the job market.
3. Foreign institutional investors will continue selling their Indian holdings in favour of AI destinations and investments.

Impact of AI on Indian IT firms

According to HSBC's calculations, the near-term impact of AI on IT services will be revenue deflation of 8-10 percent, which are likely to be realised over the next three to four years as current deals are slated to be renewed.

The demand for AI is massive, and global investments into AI could spur IT demand. HSBC noted that the top AI hyperscalers - Amazon, Microsoft, Google, and Oracle - are likely to spend $2 trillion over five years on the AI-thrust. This could draw investment away from traditional sectors, including India.

However, drawing from the past, the shift towards SaaS from on-premise software was supposed to be negative for IT services, but SaaS was commensurately services-intensive. On similar lines, the move from current AI agents move to multi-agentic AI systems could lead the need for enterprise software architecture and infrastructure to be redesigned, which should create more demand for Indian IT.

Impact of AI on Indian services

As a result of India's heavy dependence on the services sector to drive economic growth, the impact of AI on knowledge workers in India could have a disproportionate negative impact on the jobs market.

AI could materially reduce headcount in low-end knowledge roles. "We think most global, including Indian, companies are 12-18 months away from significant traction in AI adoption for mid- and back-office functions such as collections, customer onboarding, loan approval process, overall lending process, policy administration, finance and accounting, supply chain management," said the brokerage.

In functions such as sales and marketing, customer onboarding, or some finance operations, AI could create a headwind to more hiring. At the current juncture, however, HSBC added that most enterprises have not considered job reductions from AI; rather, most discussions are around improving productivity and quality of service.

Also Read | AI will not lead to layoffs at HDFC Bank, says CEO Sashidhar Jagdishan

Impact of AI on FII selling

Foreign institutional investors have relentlessly sold their holdings in Indian equities. Weak earnings growth has kept investor sentiment muted, even as various government schemes to spur consumption have been implemented.

"Global AI plays, in our view, have attracted the bulk of these funds moving away from India. Our positioning and flows data highlights a notable rotation of funds from Indian equities amid elevated valuations and subdued earnings growth, redirecting money towards the tech markets of South Korea and Taiwan," the financial services firm noted.

In the September quarter, FIIs net bought $15 billion in Taiwanese equities, making it the largest quarterly inflow on record. Further, the fund positioning in South Korea is at the highest level in over a decade, while foreign investors continue to cut their India holdings.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.