AI may dent IT services sentiment but could lift productivity in broader economy: Kotak Institutional Equities

India currently has a relatively low share of manufacturing in the economy, while imports account for a meaningful portion of manufacturing value

• AI may impact India's IT services, affecting job sentiment.
• Broader economy could benefit from AI-driven productivity gains.
• IT sector's income impact is higher than its employment share.

Did our AI summary help?

Artificial Intelligence (AI) could gradually disrupt parts of India’s IT services sector and dampen spending sentiment among technology professionals, but the broader economy may benefit from productivity gains and structural shifts, according to Sanjeev Prasad of Kotak Institutional Equities in the brokerage’s latest strategy report.

Impact on employment

Prasad expects AI-led disruption in the sector to play out gradually. “For now, we assume a gradual deflation in the price of IT services rather than a sharp cut,” he said, citing the high salience of IT software services across enterprise technology chains.

However, uncertainty about job stability could weigh on household behaviour. “We expect sentiment in the IT services households to turn soft,” Prasad said, adding that households may slow discretionary spending and could become hesitant about long-term commitments such as 15-year housing loans due to concerns around income and job stability.

He said the broader employment impact may be limited even if white-collar disruption emerges in the coming years. While services account for about 55 percent of India’s GDP, the sector employs around 30 percent of the workforce, suggesting the overall economic impact of job disruption may be contained.

In the report, Prasad said India’s IT services exports sector which including BPO and Global Capability Centres (GCCs) accounts for around 6.5 percent of GDP, while employing about 1 percent of the workforce and representing around 6–7 percent of income-tax filers.

The sector’s influence on incomes is significantly higher than its employment share. “An average IT service worker earns around 3–4X of an average Indian worker,” Prasad noted, adding that this could translate into a moderate impact on the Indian economy if revenues in the IT software services sector slow or hiring weakens.

Overall, IT services, BPO and GCCs together employ around 6 million people in India, according to estimates cited by Kotak.

Labour market dynamics also point to high levels of informality, the report points out. According to the data cited in the note, only about half of employees in services are salaried, and survey data indicates 58 percent of salaried non-farm workers do not have written job contracts.

Broader gains could be seen

On the other hand, Prasad said AI could generate productivity gains across the economy. “AI can enable superior credit assessment, better pricing and lower potential NPLs,” he said, which could lead to greater confidence among lenders and potentially higher credit growth.

The technology could also allow enterprises to undertake more digital initiatives. With IT budgets often fixed, lower project costs could enable companies to pursue a larger number of IT projects within the same spending envelope, Prasad said.

He also highlighted a potential structural shift in workforce choices. According to Prasad, disruption in IT services could encourage more Indian engineers to pursue careers in core engineering or industrial manufacturing, while some IT professionals may move to non-IT enterprises, potentially generating “positive outcomes for the economy.”

India currently has a relatively low share of manufacturing in the economy, while imports account for a meaningful portion of manufacturing value. Kotak’s analysis shows around 20 percent of the economic value of manufacturing output is linked to imports of non-agricultural, non-oil goods.

Prasad said a stronger policy push toward manufacturing would be necessary to convert the disruption from AI into a positive structural shift for India’s growth trajectory.