Fallen on hard times: AI pressure is mounting on the Indian IT industry

AI-led disruption, weak client spending and the rise of GCCs are reshaping India's IT sector, weighing on earnings, hiring and stock valuations

The past few months have been bearish for the Indian stock market in general and for the information-technology (IT) industry in particular. In the first half of 2026, while the benchmark BSE Sensex lost about 10 per cent, the IT index declined over 30 per cent, underperforming the market considerably. The downtrend had started before the crisis in West Asia, which raised geopolitical risks and intensified bearish sentiment. There are several reasons for the slump in the IT sector, which has been a growth driver and employment creator for many years. The Indian IT services industry is facing several issues. Only one of them is the macroeconomic uncertainty stemming from geopolitical tensions, which has led to increased caution over discretionary spending on the part of clients, according to some large IT firms.

 

The bigger reason for the downturn is the realignment of investor expectations around the IT ecosystem. India’s IT sector is built around the provision of cost-effective services — the segment most likely to be heavily impacted by the advent of artificial intelligence (AI) and the associated migration of work to Cloud.  Another contributory factor is the increasing popularity of the global capability centre (GCC) model, where multinational corporations (MNCs) opt to develop IT competencies in-house.

 

The induction of AI has compressed margins across many IT services segments, and AI coding is beginning to replace a large number of coders who worked in India’s firms. This has led to structural changes. Arguably, the impact of AI on the workforce has been visible in data since late 2024-25 (FY25). That is when “fresher headcounts” at IT companies started dropping. That trend of reduced hiring continued through FY26 and is expected to continue into FY27 and beyond. Moreover, in a tight global market with high competition between IT service providers, any efficiency gains arising from AI induction is being passed on to clients. As a result, margins are also under pressure. Investors are, therefore, downgrading their estimates of gains in earnings, at least in the near term.

 

There is justified hype around new AI models, which has cut both the time taken to write codes and also demonstrated the ability to detect bugs with unprecedented speed and precision. This has led to the concern that AI adoption will continue to have deflationary effects for some time, resulting in downgraded earnings expectations and lower valuation multiples for IT companies that are not at the cutting edge of AI. Indian companies are widely seen as playing catchup in this area. The consensus is that growth is likely to remain structurally weak across the services space until AI adoption moves into its next phase, which may be expansionary. Eventually the more nimble among IT services providers should be able to carve out new roles supervising AI.

 

Most industry insiders agree that AI will eventually offer both productivity gains and market expansion. But the gains will come with a lag and until then, valuations may remain low. Current advisories suggest continuing caution about discretionary spending on the part of clients. In the absence of revenue growth, margins are likely to remain under pressure, and a weaker rupee would provide only partial relief. As such, consensus expectations about the first half of FY27 are muted. Over the medium term, a lot will depend on how the AI world evolves and how Indian companies adapt and innovate.