Can AI Save India’s Outsourcing Industry?
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Artificial Intelligence (AI) has posed a challenge to India’s traditional outsourcing model, threatening the $300 billion industry and causing an unprecedented decline in Indian technology company shares in recent weeks.
As part of a global correction in software and IT shares, recent geopolitical uncertainties have shaken markets, a development that is particularly significant for India.
Over the last three and a half decades, India’s software industry has provided employment to millions, fuelling the rise of a new middle class characterized by strong ambitions and increased purchasing power.
This growth has increased demand for apartments, cars, and restaurants in cities like Bengaluru, Hyderabad, and Gurugram over the past 30 years.
Fear
The Nifty IT Index, representing India’s ten biggest software firms, has fallen about 20% this year, causing investors to incur losses worth billions of dollars.
Recently, Anthropic released a new AI tool claiming the ability to automate legal, procedural, and data-related tasks, threatening the existing business model heavily reliant on human labor.
Several founders in the industry have warned that the IT services sector may not exist by 2030, heightening fears. Some leading executives predict AI could cut up to 50% of entry-level jobs.
Amid these challenges, major Indian IT companies have sought to downplay fears and reassure concerned stakeholders.
They argue that AI will create new opportunities, although some structural changes more profound than before are likely.
“The nature of client engagement is structurally likely to shift towards advisory roles and implementation, including application-based managed services, which account for 22 to 45 percent of revenues. This could cause sharp declines in certain revenue segments,” said global investment and banking firm Jefferies.
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Simply put, this means Indian IT companies will earn less from software operation, maintenance, bug fixes, and updates for banks or oil companies. This primarily impacts lower-value, routine consulting services.
Jefferies predicts this will fundamentally affect revenue and job demand. Under the worst-case scenario, the firm forecasts only 3% revenue growth in the next five years with little prospect of growth beyond 2031.
Hope
However, not all outlooks are negative.
Known as the “plumber of the technology world,” JP Morgan Chase believes AI will accelerate complex tasks and increase software coding output. AI companies will also be able to deliver services tailored to client demand, making demand more predictable.
Greater partnerships between AI tool companies and IT service firms are expected, potentially creating new employment sectors.
Salil Parekh, CEO of Infosys, India’s second-largest IT company, stated that AI offers opportunities to expand and that the company is eager to modernize systems through intelligent tools.
According to Infosys, generative AI could displace 9.2 million jobs in software development and testing but simultaneously create around 17 million new roles such as data annotators, AI engineers, and AI leads.
Among analysts, consensus is growing.
HSBC’s report titled “Software Will Eat AI” refers to software companies as the “primary channels for AI enforcement in world’s large enterprises.” The report emphasizes the role IT service firms will play in integrating AI into organizations.
The report also points out that large-scale AI systems are naturally prone to errors and that major software platforms are not yet ready for replacement or upgrades, although AI can be useful for illustrative applications.
Irreversible Changes
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Still, IT companies cannot remain immune to this transformative technological shift within their lifetime.
JP Morgan notes the difficulty in measuring AI’s precise impact but acknowledges that the industry is affected in multiple ways.
India’s software consulting group Nasscom has said the IT industry has begun to embrace change and forecasts that by 2025 the technology sector will fully transition from AI testing to operational deployment.
However, expected revenue from AI projects by 2025 is only $10 billion while total industry revenue stands at $315 billion. Overall revenue growth this year is likely limited to 6%, far below historic leaps.
Similarly, hiring is projected to slow, with employee growth expected to reach only 2.3% in 2026.
Nasscom has also indicated that due to AI, the way IT companies charge clients is rapidly evolving.
It is clear that short-term pain is unavoidable.
Analysts at Nubama Institutional Equities believe IT company earnings will initially decline, with AI benefits becoming visible only in the medium term.
Technical challenges persist, and visa restrictions in India’s largest market, the U.S., have increased, reducing the chance of fee-related uncertainty easing.
According to Moody’s Analytics, new visa fees will increase operating costs for India’s top IT firms by an estimated $10 to $25 million, roughly 1% of their revenues.
This adds a significant hurdle for an industry that accounts for 80% of India’s service exports.