Until about a decade ago, Infosys, TCS, HCL Tech, Wipro, and several others in the booming information technology (IT) sector were the darlings of the stock market. Considered a value buy, the IT sector was a dependable long-term growth driver when the rest of the market remained range-bound over earnings and valuation concerns or went through volatile phases.
This was mainly because India’s IT sector, combined with Business Process Management, has been a global leader in technology services, with export earnings estimated at US $224 billion (FY2024-25), contributing to a total industry revenue of US $283 billion. Though things have changed for the celebrated Indian IT firms in recent years, rarely have they faced a narrative shock as sharp as the current wave of artificial intelligence (AI) anxiety.
Over the last four years, following the slowdown in global growth, particularly in the US and Europe, Indian tech companies have been heavily affected because their earnings have remained under pressure. Now, the fear of AI, expected to disrupt their business model, has triggered a massive sell-off in IT shares.
While the IT services sector, employing roughly 5.8 million professionals and significantly contributing to employment and economic growth, is expected to maintain its position as a major contributor to India’s foreign exchange earnings, a different story is taking hold—a lot of pessimism and ripples of worry over a compelling narrative about AI’s impact on the sector. Most of the talk hovers around doom scenarios.
Market rout and valuation reset
With valuations of the top IT companies tanking over worries of AI making main roles at technology giants redundant, the massive crash in IT equity shares has sent the Nifty IT index plunging 21 per cent so far this month, marking its sharpest decline in 23 years.
The crash, which wiped out around Rs 6.8 lakh crore in market capitalisation, was primarily triggered by a “structural value reset” driven by fears that rapidly advancing automation tools could compress project timelines and disrupt the labour-intensive delivery model, thus impacting tech firms’ benchmark earnings.
The obvious question then is: what lies ahead for the IT services sector, a key driver of India’s economic growth and a major wealth creator over the past 25 years, in an increasingly automated world?
AI trigger and revenue concerns
The immediate cause for anxiety and the intensified sell-off has been the launch of Claude Opus 4.6 by US-based AI firm Anthropic, which has heightened apprehensions that next-generation large language models can automate coding, software testing, and enterprise workflows more efficiently than before.
Since a significant share of revenue for IT companies comes from application development, maintenance, system integration, and long-term enterprise software contracts, the fear is that rapid AI-driven automation could compress billing hours, reduce workforce intensity, and alter the economics of traditional time-and-material contracts.
If AI impacts 25–30 per cent of traditional application development and maintenance work, it could potentially dent overall revenues by 10–12 per cent over the next three to four years, according to equity research analysts.
A widely circulated report by Citrini Research, which is said to be more of a financial thriller than equity research, has warned that AI automation could halt India’s US $200 billion IT export sector by 2028, citing the potential for mass contract cancellation.
This has heightened fears that AI will erode the people-heavy “labour arbitrage” model, which currently generates 22 to 45 per cent of revenue for major firms through managed services. There are no easy answers as to whether AI will eventually render IT services obsolete over the long term. But the question is whether the panic is overdone.
In the absence of evidence, the conversation around AI and its impact appears narrative-driven. Still, the story that it is coming for not just the IT sector but also large swathes of the Indian economy is too strong to shake.
Diverging views from brokerages
A slowdown, or contraction, in India’s IT sector, whether through layoffs or reduced hiring, will have consequences for employment and growth. A considered and reasoned view is that AI will have limited revenue disruption on legacy services in the near term, though efficiencies may exert pricing pressure over time.
Some of the multinational brokerages, like JP Morgan, are of the view that IT services firms will continue to play a critical role as the “plumbers of the technology world”, even as agentic AI expands its ability to write more software and automate complex tasks.
CLSA has said fear of AI-led disruption in Indian IT services may be overdone, adding that AI is being absorbed largely as an incremental efficiency and productivity tool rather than a wholesale replacement of traditional IT services.
Criticism of industry mindset
Some critics claim that the sharp meltdown in Indian IT stocks exposes a deeper problem—an industry largely trapped in short-term thinking instead of long-term planning. They argue that these companies failed to see “beyond their noses”, focusing “obsessively on the next quarter’s order book and earnings guidance rather than structural shifts reshaping global technology spending”.
This is a valid criticism of the ecosystem and mindset that focused on valuation and market capitalisation and appreciated buy-backs and short-term capital returns for investors rather than questioning the model that failed to stay relevant amid global tech spending priorities being reshaped by AI.
The blame for the mismatch between Indian IT and global tech firms in scale and relevance, according to tech experts and market analysts, goes to the promoters and managements of our tech firms, as well as the broader market ecosystem.
While Indian IT companies, despite having billions at their disposal, did not invest in research, the market gave excessive importance to cash flows, hiring numbers, balance sheets, and bonuses over research and innovation. That the IT companies failed to foresee the AI threat to their business model is a sad commentary on their vision and planning.
Though earnings do not change overnight while sentiment does, most of the broking commentary suggests the debate is less about whether AI will reshape the sector and more about how quickly.
There is little doubt that AI is going to boost productivity and, hence, will require fewer hands to achieve the same amount of work. However, software consultancy is not going to become entirely redundant, but it is certainly going to change from being human-resource-intensive. This should be a worry for India’s employment scenario.
The writer is a senior independent Mumbai-based journalist. He tweets at @ali_chougule
