Can AI Save India’s Outsourcing Industry?
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Artificial Intelligence (AI) is challenging the traditional outsourcing model that has built India’s $300 billion industry, triggering an unprecedented drop in the share prices of Indian technology firms in recent weeks.
The global “correction” in traditional software and IT stocks is partly driven by recent geopolitical uncertainties, which have particularly affected India.
Over the past 35 years, India’s software industry has provided employment to millions, fueling the rise of a new middle class characterized by high aspirations and strong purchasing power.
This growth has increased demand for apartments, cars, and restaurants in cities like Bengaluru, Hyderabad, and Gurugram over the last three decades.
Fear
India’s largest 10 software companies, tracked by the ‘Nifty IT Index,’ have seen their stock values fall by nearly 20% this year, resulting in billions of dollars in losses for investors.
Recently, Anthropic, a cloud agent company, launched a new AI tool claiming it can automate legal, procedural, and data-related tasks, directly challenging the traditional business model that relies on large workforces.
Several founders of such companies have warned that the IT services sector may cease to exist by 2030, fueling widespread concern. Some senior executives estimate AI could cut 50% of entry-level jobs.
Amid these challenges, India’s major IT firms have sought to downplay fears and reassure an anxious market.
They argue that AI will create new opportunities, although they acknowledge that the industry might undergo more structural shifts than before.
“The nature of client engagement will structurally shift towards advisory groups and implementation. This involves application-based management services that account for 22 to 45 percent of revenues. This will lead to a sharp decline in revenue,” warned Jefferies, a global investment and banking firm.
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Simply put, this means Indian IT companies will see reduced revenue from contracts to operate, maintain, fix errors, and update software for banks or oil companies, since these services mainly involve routine consulting.
Jefferies forecasts this will fundamentally impact income and job demand. In the worst-case scenario, revenue growth could be limited to 3% over the next five years, with no growth expected beyond 2031.
Hope
However, not all perspectives are bleak.
JP Morgan Chase, known as the “plumber of the tech world,” states AI will accelerate complex tasks and generate more software code. AI companies will also be able to deliver services based on customer demand, making the process more predictable.
Partnerships between AI tool companies and IT service providers are expected to increase, potentially creating new employment areas.
Infosys CEO Salil Parekh stated that AI will expand opportunities and that the company is eager to modernize systems through intelligent tools.
According to Infosys, generative AI could displace 9.2 million jobs involved in software development and testing but create approximately 17 million new jobs for data annotators, AI engineers, and AI leads.
Among analysts, consensus is growing.
HSBC’s report titled “Software Will Eat AI” describes software companies as “the primary channel for AI adoption among large global enterprises.” The report also highlights that IT service providers help organizations integrate AI.
The report notes that large-scale AI systems are inherently prone to errors and that major software platforms are not yet prepared for replacement or upgrades, though they might be useful for illustrative programs.
Irreversible Changes
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However, IT companies cannot remain insulated from this transformative technological shift in their lifetime.
JP Morgan noted that while measuring the impact of AI tools is difficult, the industry is being affected in various ways.
India’s software consultancy group Nasscom predicts that the IT industry has already started embracing change and expects the sector to transition fully from AI experimentation to operational deployment by 2025.
However, AI project revenues in 2025 are expected to be only $10 billion, compared to the total industry revenue of $315 billion. The overall income growth this year is projected at a modest 6%, much lower than previous leaps.
Similarly, employee recruitment is expected to slow, with workforce growth of only 2.3% anticipated by 2026.
Nasscom points out rapid changes in how IT companies charge clients due to AI.
It’s clear that short-term pain is unavoidable.
Analysts at Nuvama Institutional Equities say IT firms’ earnings will initially decline with AI benefits only apparent in the medium term.
Despite technical progress, visa restrictions in the United States—India’s largest market—are reducing the likelihood of fee-related uncertainties easing.
According to Moody’s Analytics, new visa fees could increase operating costs by $10–25 million for India’s top IT companies, representing roughly 1% of their revenues.
This will pose a significant hurdle for an industry that accounts for 80% of India’s service exports.