Is GenAI causing a Manchester moment for IT services?

Rising GenAI adoption could erode India's IT labour arbitrage model and pressure service revenues, unless firms pivot to IP, product innovation, and higher-value tech

Generative AI’s rise has drawn comparisons to India’s 19th-century “Manchester moment.” In the late 1700s, British industrialists like Richard Arkwright used water-powered spinning and weaving machines to revolutionise cloth production, displacing India’s world-class handloom weavers. Today, India’s IT services industry – built on labour arbitrage and contract coding – faces a similar test. Could GenAI and cloud automation make large portions of routine coding redundant, triggering a restructuring of a sector that has driven exports and built middle-class prosperity?

 

Early signs of automation impact

 

Evidence suggests the shift is underway. In 2023, Indian tech and IT-related firms cut around 240,000 jobs – 50 per cent more than in 2022. Entry-level roles such as research, testing, lead generation, and call-centre support are being automated, requiring far fewer people. Globally, AI adoption is also reshaping workforces – Meta cut 10,000 jobs in early 2024, Microsoft 15,000 this year alone. 

If India’s software giants – whose bread-and-butter is application development and maintenance billed on a time-and-materials model – continue facing budget cuts from AI-enabled productivity gains, the traditional cost-arbitrage model may no longer provide a competitive moat. 

Hyperscalers take the high ground

 

Meanwhile, global hyperscale cloud and AI leaders are investing heavily in next-gen infrastructure. OpenAI’s Stargate Project will deploy $500 billion in US data centres and AI hardware over four years. Microsoft, Oracle, and others are committing tens of billions to AI server farms.

 

These hyperscalers are vertically integrating hardware and software to own the AI stack – unlike Indian IT firms, which provide services on top of others’ platforms. While hyperscalers shift from renting data centre space in India to owning the top of the value chain, Indian firms hold little in foundational IP or infrastructure.

 

In contrast, even India’s top CEOs have sometimes been chastised by public markets for trying to take minority stakes in AI start-ups (unlike Google or Microsoft executives, who routinely invest huge sums in pre-competitive AI research). Listed IT services majors face quarter-on-quarter pressure to show profit and revenue growth that dissuades long-term investments.

 

Revenue and IP gaps

 

The gap is stark in revenue per employee: Indian majors like TCS, Infosys, and HCL Tech average $50k–$60k annually, compared to $1.1 million for Microsoft and $1.9 million for Google. See table below:

 

India’s IT exporters also remain largely service-oriented rather than product-led. US tech leaders thrive on proprietary platforms – Google’s Android, Microsoft’s Windows – while India lacks homegrown equivalents. Without strong R&D, much of the value generated in software flows overseas.

 

Structural workforce risks

 

The industry’s “pyramid” hiring model – many junior engineers under a few senior architects – has kept margins healthy. But these vocationally trained, task-oriented roles are most vulnerable to automation. With engineering education still focused on rote coding, India lacks a nationwide push for advanced AI skills, leaving its workforce aligned to an outdated manual coding model.

 

A shift toward product and IP

 

A split is emerging between listed public IT service behemoths and a new generation of product-focused firms. While stock markets pressure service companies over slow growth and margin risks, private investors are backing SaaS and AI firms building their own IP.

 

Zoho Corporation, for example, surpassed $1 billion in revenue in 2021 without venture capital, developing dozens of in-house software products. Similarly, Freshworks, Icertis, Postman, and Razorpay – part of India’s “centaur” SaaS cohort – are attracting billions in private equity and global cloud funding.

 

The road ahead

 

India’s challenge is to bridge the two worlds: can capital and strategy shift toward R&D-led, product-centric models, or will markets remain fixated on quarterly service earnings?

 

India has the building blocks – world-class engineers, a growing AI ambition, and government-corporate AI initiatives. But survival demands reinvention:

 

Move up the value chain from coding to AI-enabled solution design

 

Invest in proprietary platforms and intellectual property

 

Retrain the workforce in advanced AI and computer science fundamentals

 

The lesson from history is clear: clinging to labour-arbitrage and commodity services risks leaving India’s IT sector flat-footed in an AI-dominated market. To thrive in the GenAI era, India must seize the opportunity to innovate – or risk watching the crown slip once again. 

The author is vice-chairman and managing director, Equirus group