Will AI displace India’s IT services sector

Will AI displace India’s IT services sector?

Yuan Yiu Tsai Portfolio Manager,Equities Eastspring Investments, Singapore

Concerns about AI disrupting India’s IT services sector may be overstated, as AI is expected to broaden opportunities and support data centre investment.

India’s expanding deep-tech ecosystem and government-backed innovation push is expected to catalyse private investment across strategic technology sectors.

India's leading IT companies have navigated multiple technology transitions over the past two decades and remain high-quality, cash-generative franchises.

The software and information technology (IT) services sector has come under pressure in recent months on concerns that Artificial Intelligence (AI) could reduce demand for traditional outsourcing and development tasks. Across Asia, India appears particularly exposed given its globally competitive IT services industry, which was built on delivering large-scale, cost-effective software development and support services.

These concerns are not without merit. The sector employs around six million people and contributes roughly 8% of India's GDP, meaning any slowdown in hiring, wage growth or demand for traditional services could weigh on economic growth. In addition, industry estimates suggest AI could drive annual revenue deflation of around 2-4% in certain legacy service lines over the next two to three years.

However, we believe these concerns are overstated as AI is simultaneously creating new opportunities across IT modernisation, data architecture, cloud transformation and enterprise AI adoption. Rather than eliminating demand, AI is shifting spending towards a new generation of technology services and solutions.

Enterprise AI adoption opportunity

For India, this transition may ultimately represent a larger opportunity. While AI tools are becoming increasingly accessible, enterprises still face significant challenges in deploying AI across complex organisations. In fact, enterprise AI adoption rarely is plug-and-play.

Integrating new AI capabilities with legacy technology infrastructure, modernising data environments and ensuring AI applications deliver measurable business outcomes are all areas where established IT service providers retain a competitive advantage. This creates greater dispersion across vendors rather than a structural decline for the sector.

Some of the strongest validation comes from the frontier AI companies and hyperscalers themselves; OpenAI, Anthropic and Microsoft have collectively committed close to US$8bn this year to kickstart their own enterprise services businesses, recognising that access to AI models alone is not enough to unlock value from the technology.

Near term, however, the translation remains uncertain. Pricing pressure, competitive intensity and delayed decision-making suggest near-term growth could stay muted, which in our view keeps the debate more about timing than long-term viability.

Broader AI opportunities India may not be leading the race to develop frontier AI models, but it is well positioned to capture value elsewhere in the AI ecosystem. The country has become Asia's largest destination for hyperscale data centre investment, attracting more than US$100bn in commitments, supported by strong domestic demand, competitive power costs, favourable government incentives and growing interest from global technology firms seeking to diversify beyond China.