OPINION | The AI threat to Indian IT services is real but the doom narrative is overblown

Indian IT companies tapping into AI opportunity

The recent selloff in Indian IT services stocks has triggered sweeping pessimism about the future of companies such as Infosys and TCS — and, by extension, about the economic prospects of major IT hubs like Bengaluru, Pune and the National Capital Region.

For many investors who hold these stocks as long-term compounders, the anxiety is understandable. If artificial intelligence can write code, automate testing, answer customer queries and generate reports, what happens to a business model historically built on headcount growth and labour cost arbitrage?

The honest answer is this: AI will change Indian IT. But change does not automatically mean decline.

Generative AI tools are already improving productivity in software development and back-office processing. Tasks that once required large teams can now be executed faster with AI assistance. That inevitably moderates hiring growth and may pressure billing rates in commoditised services.

This explains the recent market reaction. Investors are discounting a future where revenue growth slows and margins compress.

But what is often missing from the discussion is that adopting AI is not as simple as switching on a new tool or treating it as a plug-and-play solution. It is not like installing a routine software update. For large global companies, using AI effectively often means reworking parts of their systems, processes and even the way teams operate.

And that is where opportunity emerges.

Where AI Creates New Opportunities

AI does not operate in isolation. Before a company can use AI meaningfully, it must:

* Clean and organise decades of scattered data

* Upgrade legacy systems

* Move operations to secure cloud platforms

* Build safeguards for privacy and regulatory compliance

* Redesign workflows so employees can work alongside AI

* Retrain internal teams

Each of these steps requires planning, integration, execution and ongoing management — precisely what Indian IT firms have specialised in for decades.

In fact, AI may expand the revenue opportunity for Indian IT services companies capable of managing complex, multi-year transformation mandates. While maintenance and coding support work will still continue, it is likely to become more automated and less labour-intensive — pushing firms toward higher-value, end-to-end AI transformation programmes spanning consulting, implementation and ongoing monitoring. Pricing pressure, therefore, may not be uniform: commoditised services could see rate compression, while consulting-led transformation mandates may command stronger pricing power.

Simply put: AI may reduce routine coding, basic software testing, documentation and repetitive maintenance support — but it also generates new categories of work.

Consider the practical implications:

- Banks want AI tools to detect fraud in real time and personalise customer engagement — but these must integrate securely with existing core banking systems.

- Manufacturers want predictive maintenance and automated quality checks — but AI must be trained on operational data and embedded into factory workflows.

- Healthcare companies want AI-assisted diagnostics — but within strict regulatory frameworks.

The real work is not just building or accessing the AI model. It lies in integrating it into a company’s systems and processes and helping businesses use it effectively. That is precisely the kind of transformation work that Indian IT companies are well placed to undertake going forward.

What Indian IT Companies Are Doing to Tap AI Opportunity

Infosys recently announced a collaboration with Anthropic to integrate advanced AI models into enterprise solutions. The strategy is clear: rather than building foundational AI models, Infosys aims to become the implementation partner that adapts these technologies to real-world corporate environments.

Across the industry, IT services firms are:

# Signing partnerships with major AI and cloud service providers

# Embedding AI tools into existing service offerings

# Training tens of thousands of their employees in AI and data skills

# Reorganising teams around cloud, analytics and automation

# Pursuing selective acquisitions to strengthen capabilities

AI-related projects are increasingly part of large deal wins. While still a modest percentage of total revenue, they are growing — and often tied to broader transformation contracts. For example, Infosys recently disclosed that AI-related work accounted for about 5.5% of its sales revenue in the December quarter, with approximately 4,600 active AI projects across 90% of its top 200 clients, signalling that AI work is being woven into larger enterprise programmes rather than isolated pilots. Similarly, HCL Technologies has reported faster revenue growth from its AI business vertical, which accounted 4% of its sales revenue.

Nevertheless, this transition will not be smooth. Hiring growth is likely to slow materially, particularly at the entry level where routine coding and support roles are most vulnerable to automation. Some categories of jobs could shrink permanently rather than temporarily. Margins may also come under sustained pressure as firms invest heavily in re-skilling, partnerships and new capabilities while pricing power weakens in traditional services.

But this is adaptation — not retreat.

Are Broader Economic Fears Overdone?

Many worry that slower IT hiring could ripple into property markets in Bengaluru, Pune, NCR, and other IT hubs, strain banks exposed to home loans for IT professionals, and dampen urban consumption, especially discretionary demand for cars and SUVs, travel, and tourism, in addition to premium homes and villas.

These concerns warrant attention — but the systemic risk may be overstated.

India’s total employed workforce is roughly 560 million, with 60-70 million in formal salaried jobs. The IT services sector employs 5 million people directly. That makes it important within formal urban employment, but still a relatively small share of the overall workforce.

The balance sheets of Indian banks are stronger with healthier capital buffers and NPAs at multi-year lows. Mortgage lending is diversified across income groups. Real estate demand is no longer solely dependent on IT employees; it includes entrepreneurs, startup founders, professionals from finance and healthcare, and Indian employees of global capability centres (GCCs).

Moreover, Trump’s restrictive visa policies are expected to accelerate the expansion of global capability centres in India. That will add more high-paying jobs in major urban hubs. A prolonged IT slowdown could create localised effects, but extrapolating it into a systemic economic shock is an exaggeration.

What Investors Should Watch Over the Next 12–18 Months

For long-term investors and minority shareholders, the key question is not whether AI will disrupt Indian IT — it already has. The real question is whether Indian IT services companies can capture a meaningful share of the AI transformation cycle.

Over the next 12–18 months, investors should therefore track:

* Large AI-linked deal wins — especially those embedded in broader digital transformation contracts.

* Revenue contribution from AI-related services — is it steadily increasing?

* Margins — are productivity gains from AI offsetting pricing pressure?

* Hiring commentary — is the mix shifting toward higher-skilled roles rather than pure volume hiring?

* Client spending behaviour — are discretionary tech budgets stabilising?

The next phase of the Indian IT sector is likely to look different: less headcount-driven growth, more productivity-led delivery, greater reliance on partnerships, and deeper domain expertise.

Growth may be slower than the boom years. Earnings may be less predictable. But the addressable market opportunity — helping global enterprises rebuild themselves for an AI-driven world — is substantial.

Markets often swing between excessive optimism and excessive pessimism. The recent correction reflects genuine uncertainty. Yet writing off Indian IT as structurally impaired is not well-thought through given the scale of the transformation underway.

AI may eliminate traditional revenue sources, but it will also create new revenue verticals. For Indian IT services companies, the challenge is execution — but the opportunity is real.

(Ritesh Kumar Singh is a business economist and CEO, Indonomics Consulting Private Limited. His X account @RiteshEconomist.)

Views are personal and do not represent the stand of this organisation.