AI, Iran, and capital flows: Warning signs for India's middle class

Let us recall the trifecta of eventful developments in February 2026. On the 3rd, Anthropic announced Claude Cowork, on the 23rd Citrini Research published a doomsday scenario for two years hence, and on the 28th the US attacked Iran. The first two shook up the IT services industry in India and the third one shook up many more things. We believe that the impact of these three events is compounded and will have long term consequences in reshaping the Indian middle class and possibly, even resurrecting some of the difficult memories of the pre-liberalisation era.

 

Information technology services (ITS) companies like TCS and Infosys directly employ about 8 million workers. There are about 2000 global capability centres (GCCs) operating in India employing about 2 million more. There are also the IT departments (ITDs) of many large Indian companies, mostly in the BFSI and manufacturing sectors, and Indian IT product companies that together employ an additional 2 million. The sector contributes about $350 billion to the GDP of India. In terms of foreign exchange, this sector generates more than $250 billion in exports. There is also the remittances from this sector from Europe and Americas that total at least $50 billion. These two components together, more than $300 billion, contribute to 30-35 per cent of India’s foreign exchange inflow. All of this has the potential to be disrupted by AI ⁽¹⁾.

 

 

The GenAI disruption to the tech sector is expected to be a multilayered process. First, the ITS companies are headcount driven, i.e., they charge their overseas clients, on a per employee basis ⁽²⁾ . GenAI assisted increase in productivity can cause a reduction in the headcount that their clients demand expecting AI driven increases in productivity by the resources that they procure ⁽³⁾. Second, GenAI can make the clients keep more work inside their companies, i.e., insource more and outsource less. Third, many of the clients, especially in the BFSI segment that accounts for nearly half the ITS+GCC revenue, are also under threat of disruption by nimbler startups. Such nimble startups have been made viable by doors that AI has opened for them and they can encroach into the big- company-space; the Citrini report describes this in starker detail and was convincing enough that the stock markets reacted. Another trifecta is in play!

 

The attacks on Iran provide at least two sources of disruption: Increased oil prices causing an increase in the oil import bill; in 2025 this was about $150 billion corresponding to about a half of the forex from the tech sector; increased demand was offset by lower prices. The expat community in West Asia numbers around 9 million and the remittances from them is valued at about $30 billion each year. Any disruption in West Asia can affect both these numbers significantly.

 

India’s current account deficit sits at a manageable $30 billion (FY26) against reserves of $700 billion. But this comfort rests on continued tech inflows. As we say above, the risk is not of a single shock but of the interaction of at least four strong, perhaps reasonably obvious, correlated drivers and several less obvious indirect drivers.

 

1. AI induced tech demand reduction: Western clients insource work using AI, compressing IT services exports and GCC revenue. This will create significant labour shedding by the companies ⁽⁴⁾. We believe that there is a bigger issue. There is a massive supply of IT labour via the hundreds of engineering colleges. This can result in significant wage compression and perhaps increased unemployment. The knock on effect on the education sector will be substantial, not to mention on the secondary employments that the sector generates.

 

2. Middle East geopolitical shock: US-Iran conflict has pushed Brent past $100. This is expected to inflate the oil bill and reduce West Asia remittances. There is also the economic disruption that may result if there are layoffs in West Asia and the expats return home. There is also the social impact.

 

3. Capital account contagion: FIIs reprice Indian IT stocks that today have combined market cap of more than $250 billion. This could trigger outflows independent of the current account.

 

4. Rupee-oil feedback loop: A weaker rupee, driven by Drivers 1 and 3 above makes oil imports more expensive in rupee terms even if Brent stays flat, thus amplifying Driver 2.

 

There are several knock on effects that the preceding can lead to. A fiscal-social squeeze in which the government tax revenue from IT, that currently stands at about 7 per cent of GDP, shrinks even as the spending needs for displaced workers rise. An additional concern is transmission into the real estate & banking sectors. To understand this, note that GCCs absorb about 40 per cent of Grade A office space, and the salaries of the tech sector underpin residential property values in cities like Bangalore, Hyderabad, Pune, and Chennai. An employment shock to the tech sector hits developer loans, NBFCs, and state revenues.

 

While it is tempting to guess and put numbers to these factors, it is best we leave it to the reader, and the planners to map out the scenarios. The key concern for us is the impact on the middle class in India that numbers between 200-400 million. Job losses, reduced asset values, increased inflation can have many long term impacts on the morale and the social fabric that will be hard to predict. The Citrini report has put out a scenario. We believe that is the scenario to prepare for with policies and social nets should be in place to absorb these shocks.

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The authors are with IIT Bombay

  (Disclaimer: These are the personal opinions of the writer. They do not reflect the views of www.business-standard.com or the Business Standard newspaper) 

1- The valuation of the IT sector by Nasscom and RBI+MEItY are very different; see graphics. Hence we have used approximate numbers in this discussion. A white paper, to be made available soon, will provide a more detailed analysis.

2- Adjusted to inflation, the revenue per employee and cost per employee of major IT services companies has remained flat for at least 15 years now.

3- Q4 results of HCL, announced on 22 April 2026, appears to suggest that our concerns are beginning to show, their constant currency revenue fell 3.3% Q-on-Q. EBIT and net profit have also dropped Q-on-Q.

4-TCS has shed at least at least 20,000 jobs during Apr 2025-Mar 2026. New York Times has reported on

Apr 21 that Bank of America has shed 1000 jobs and increased profitability by “eliminating work and applying technology.”