It is now clear that AI would start impacting lower end tech jobs such as coding almost immediately. However, this activity is now a small part of the total work that Indian IT performs. Work like system integration still cannot be fully automated at present. Moreover, IT services model has worked amazingly well for many mission critical work. Such work can be given to machines only over a period of time. The output of machines need to be of consistently good quality and has to undergo tests before it can be used in such applications. Regulations are another consideration. While it may be possible to do something through AI, the regulatory environment is evolving and the timing of any changes is uncertain.

The most plausible scenario is that the clients may request larger discounts than usual. Indian IT services may respond, potentially using AI tools themselves. It could result in reduced effort being put and while some benefit may be passed on, margins could move in a narrow band. Higher discounts may temporarily affect the revenue growth trajectory. Also, lower effort may imply that Indian IT reduces net hiring sharply and spends on re-skilling staff.

Lower hiring of IT workers could have broader implications for the economy. IT has been the significant employer in India. Reduced employment in this industry could create a temporary skill mismatch between demand and supply. Moreover, housing demand in IT centric metros such as Bangalore, Hyderabad and Gurgaon may also be impacted, for example. However, while IT is a large sector, Indian economy is a very well diversified economy, which is growing at over 6.5% in real terms. Even if growth of IT slows down for some time, the impact on Indian GDP growth is expected to be limited. Most manufacturing businesses could benefit from lower costs from AI adoption. At this juncture, while we are concerned about IT services growth rate, the broader impact is expected to be manageable. It may happen that growth shifts from IT centric metros to manufacturing centric metros and businesses such as real estate may need to adapt. For pan India players, the overall impact is likely to be limited.

IT has been a large forex generator for the economy. Any reversal here would mean that the country may need to explore newer exports. We do think that trade deals may increase goods exports and also potentially improve Indian labor more mobility. We would have to watch for trends on net imports going forward. The fear of forex reserves going down may also be addressed by a positive policy framework for attracting more portfolio flows.

While there are well founded concerns on impact of AI, we think that there is a case that AI could become another tool for IT services companies which may use it to enhance productivity. Also for enterprises to benefit from AI, data would have to be organized better and could be an avenue for services companies.

India offers a very competitive environment for data centers. Data Centers may represent a potential growth area going forward. Large FDI has been committed there and also a generous tax holiday.

Also Read: How Advancements in AI Will Topple the Indian IT Services Market?

Relative performance of Indian market in the world and outlook

Indian markets have been among the relatively weaker performing markets globally in recent periods, and the change in sentiment has been sharp. We saw very consistent inflows of FPI money in CY24. However, after developments around AI model of Chat GPT in the US and Deep Seek in China, the change in sentiment has been abrupt. FPIs have reallocated monies to markets which were leading AI. Our relatively higher starting valuations did not help either. FPI, promoters, PE firms, etc sold during this phase. At the same time India experienced a slowdown in earnings growth and this further impacted sentiment. Another chain of events played out. Passives are now a significant part of foreign flows in to our country and around the world. As our markets underperformed, passives allocations adjusted away from India to other markets. Also Indian currency has been weaker vs the USD while others have been relatively stronger.

Many of these issues have now been corrected. Earnings growth has picked up. Broader market earnings growth for two quarters has been same as or better than that of larger cap indices. Growth in newer growth spaces has held up quite well. As we go forward, the low base of FY26 may be supportive of growth. With Indian markets underperforming relatively vs others, the relative valuations have corrected. We are now trading lower than our historical valuation levels vs other EMs. Also, currency has stabilized.

With Indian markets underperforming relatively vs others, the relative valuations have corrected. We are now trading lower than our historical valuation levels vs other EMs. Also, currency has stabilized.

Another factor that impacted sentiment was absence of trade deals with major trading partners. This factor has also been addressed and we now have a deal with both EU and the US and many other countries.

Over time, most issues which were impacting sentiment have been addressed. AI is a new issue that has come up but it does seem that the delivery would lag promise. This implies the markets may stabilize.

Jan to March 15 has historically been a period when markets have seen an increased bout of volatility. We are approaching the end of this period and our belief is that chances of a better outcome in the rest of the year is high. As our markets find feet, the impact of passives could turn positive further providing tailwinds.