Can AI Save India’s Outsourcing Industry?
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Concerns that artificial intelligence (AI) could disrupt India’s $300 billion traditional outsourcing industry have caused an unprecedented drop in the shares of Indian technology companies in recent weeks.
The recent market volatility partly reflects a global “correction” in traditional software and IT shares amid geopolitical uncertainties, which are particularly significant for India.
Over the past three and a half decades, India’s software industry has employed millions, fostering a new middle class driven by high ambitions and strong purchasing power.
This growth has spurred increased demand for apartments, cars, and restaurants in cities like Bengaluru, Hyderabad, and Gurugram over the past 30 years.
Fear
India’s top 10 software companies, represented by the ‘Nifty IT Index,’ have seen around a 20% decline this year, resulting in billions of dollars lost by investors.
Earlier, Anthropic launched a cloud-based AI agent claiming it could automate core legal, procedural, and data-related tasks, impacting the labor-intensive business models of the industry.
Several founders have warned that IT services could decline by 2030, and some top executives caution AI might eliminate up to 50% of entry-level jobs.
In response, major Indian IT firms have tried to calm fears, dismissing some of the concern as exaggerated.
They argue AI will create new opportunities, although structural changes greater than in the past may occur.
“The nature of client engagement may structurally shift towards consulting and implementation, including application-managed services that constitute 22-45% of revenue. This will lead to rapid revenue contraction,” said global investment and banking firm Jefferies.
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Simply put, this means Indian IT companies will earn less from software operations, maintenance, technical troubleshooting, and software updates for clients such as banks or oil companies. More focus on less routine consulting tasks will cause this effect.
According to Jefferies, this will fundamentally impact revenue growth and labor demand. Their worst-case forecast predicts only a 3% revenue increase over the next five years, with no growth expected beyond 2031.
Hope
However, not all perspectives are negative.
JPMorgan Chase, known as the “plumber of the technology world,” notes that AI can accelerate complex tasks and generate more software code. AI companies also report it will become easier to serve client demands similar to traditional software companies.
This suggests collaboration rather than replacement, and “predicts more partnerships between AI tool companies and IT service firms that could create new job domains.”
Salil Parekh, CEO of Infosys, India’s second-largest IT company, supports this view and sees AI as an opportunity to expand his company’s prospects. He said the company is ready to help clients modernize systems through intellectual tools.
Infosys estimates generative AI may displace jobs for about 9.2 million software workers involved in development and testing, but create roughly 17 million new roles for data scientists, AI engineers, and AI leads.
There appears to be growing consensus among analysts on this outlook.
HSBC, in a recent report titled ‘Software Will Eat AI,’ referred to software firms as the “primary vehicle for embedding AI across the world’s largest enterprises.” IT service companies are also said to have a key role in AI adoption within organizations.
The report mentions that large-scale AI systems are “inherently fallible” and not easily substitutable for the core software platforms enterprises use. However, they can be useful for tasks such as image generation.
Irreversible Changes
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Regardless, IT companies cannot remain immune to this once-in-a-lifetime technological shift.
JPMorgan notes that measuring the impact level is challenging, with various effects already manifesting in the industry.
According to Nasscom, India’s software advocacy group, the IT sector has begun embracing these changes, expecting a decisive transition from AI pilot projects to full-scale operations by 2025.
However, AI-related revenues in 2025 are expected to be only about $10 billion, whereas the total industry revenue is $315 billion. Overall, the sector’s income is projected to grow by only 6% this year, far less than the double-digit growth previously expected.
Similarly, hiring rates are expected to decline, with employee additions anticipated to be only 2.3% in 2026.
Nasscom reports that AI is rapidly transforming how IT companies bill their clients.
It is clear that short-term pain is unavoidable.
Analysts at Nubama Institutional Equities have stated that IT firms’ revenues will initially decline, with AI benefits manifesting only in the medium term.
Beyond technical challenges, though fee-related uncertainties have eased for India, visa restrictions in the US—the largest market for Indian IT companies—have tightened.
According to Moody’s Analytics, the new visa fees are expected to increase operational costs for India’s top IT firms by an estimated $10–25 million, about 1% of their revenues.
This adds serious challenges to a crucial sector representing approximately 80% of India’s total service exports.