IT sector sees 90% drop in new company formations, down to 2,400 in FY25

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The number of IT companies established in India has plummeted by over 90%, falling to just 2,419 in FY25 from 16,388 in FY20, according to a recent government response in the Lok Sabha.

This sharp fall comes at a time when the sector is facing challenges, and industry leaders have called for an overhaul of the business model.

Data from the Ministry of Corporate Affairs (MCA), submitted as part of a Lok Sabha response on March 24, shows that Karnataka, India’s IT hub, recorded a sharp decline in the number of new IT companies formed over the last five years, from 2,544 in FY20 to 212 in FY25.

Karnataka’s capital city, Bengaluru, is home to major IT companies such as Infosys and Wipro.

Akshat Vaid, Partner at Everest Group, believes there are multiple converging factors contributing to the sharp decline.

“The market has become challenging for new entrants in recent years, with the decline driven by prolonged economic slowdown and geopolitical instability. Discretionary spending has become more constrained and fiercely competitive wherever it exists,” Vaid said.

Another major IT hub, Maharashtra, saw its numbers decline from 2,483 in FY20 to 375 in FY25. India’s largest IT company is headquartered in Mumbai, while Tech Mahindra is domiciled in Pune.

Telangana, which saw 2,077 companies established in FY20, reported only 233 new companies in FY25​. Hyderabad in Telangana is home to mid-tier IT player Cyient.

Vaid pointed out that artificial intelligence (AI) is reshaping the IT services landscape, challenging core models such as labour arbitrage-based outsourcing and workforce-driven scaling. Moreover, a pullback in venture funding since the 2021 peak has made investors far more selective and risk-averse.

The decline is not limited to large states.

Smaller states and union territories have also seen minimal additions to the number of IT companies.

High closures, modest turnover growth

The sharp drop in new company formations has also coincided with an increase in closures. Data made available by the government shows that almost 2,300 IT companies closed down in FY25, with Karnataka alone accounting for 440 closures, followed by Maharashtra with 459 closures.

In FY20, a little over 9,100 IT companies shut shop.

While some states, such as Maharashtra and Karnataka, reported high turnover during certain years, inconsistent turnover growth in the sector was seen, according to the data.

Two of India's largest IT services companies, Infosys and HCLTech, have called for an overhaul in IT business models amid AI disruption and that time has already run out for that model.

“The business model is ripe for disruption, what we saw in the last 30 years a fairly linear scalling of IT service. I think the time is already out for that model and in the last couple of years we have been challenging our teams on how you can deliver twice the revenue with half the people,” Vijayakumar said in February at an industry event.