Is India’s Mission AI impossibly sunny?

Is the party over for India’s much-hyped information technology (IT) sector? That’s the question thoughtful investors are asking, looking past the chatter and considering the looming threats of Trump’s tariff wars and the still-uncertain impact of artificial intelligence (AI) technologies, such as OpenAI’s ChatGPT (backed by Microsoft), Google’s Gemini, and China’s DeepSeek.

The verdict from the Hindu BusinessLine research bureau was blunt: the party is over, but investors are still around. The article (28 October 2024) pointed to what it called the ‘impossible trinity’: lower revenue growth, reduced margins and inflated valuations.

It compared earnings from September 2024 to September 2022 (when IT companies were riding the Covid-19 boom) and revealed that the revenues of the Big 5 global IT companies—Accenture, TCS, Infosys, HCL and Wipro—had dropped by a third to a fifth in percentage terms.

Operating margins—the percentage of revenue left after deducting expenses like wages, rent and raw material costs—which are a key profitability indicator also declined, though this was partly offset by cost-cutting measures like workforce reductions and slashing marketing and travel expenses.

The real dichotomy it pointed to was the unreasonably high valuations of these companies’ stocks, disconnected from their financial realities. The IT sector has suffered in the recent sell-off by foreign funds, with the Sensex and Nifty indexes falling by over 10 per cent, with no clear bottom in sight.

The BusinessLine report warned investors that stock prices in the market are driven by earnings growth, which looks grim due to macroeconomic uncertainty (read: tariff threats), decelerating growth in Europe and the rise of AI.

Infosys recently made headlines for failing half of its intake cohort of 700 trainees at its Mysuru campus—both the scale and the method of the sackings caused a stir.

Infosys, which enjoys a reputation for good practices in the industry, was rightfully excoriated for the abrupt and callous firing of the trainees, and the government’s labour department is now asking questions about what happened.

If the US imposes tariffs and other countries retaliate, it will severely disrupt international trade, lowering global growth and business activity. The bigger worry is AI, which threatens not just Indian IT but the very nature of work. AI is enabling computers to think, act, and solve problems like humans.

Self-driving cars, precise medical diagnosis and pattern recognition show AI’s capabilities. It can now perform routine and repetitive tasks much better than humans— it’s far quicker, doesn’t make mistakes and doesn’t get tired! AI is already taking over jobs in the software industry that don’t require much imagination or judgement.

Entry-level positions focused on coding and testing are directly threatened. India’s IT-enabled services (ITES) and business process outsourcing (BPO) sectors employ around 5.4 million people. Recent trends show a slowdown in hiring (a 7 per cent decline was forecast for 2024). For the quarter ending December 2024, the top five Indian IT firms cut 2,587 employees, compared to a net addition of 15,000 the previous quarter.

Countries like Vietnam and the Philippines are competing for low-cost software services, but Indian firms believe they have an edge due to engineering skills, English proficiency and long-standing client relationships.

Despite optimism about a potential rebound, hiring isn’t expected to increase due to AI disruptions and uncertainty in the US market, which accounts for 50–60 per cent of business for Indian IT firms. With IT contributing 7.5 per cent of the country’s GDP, it’s a make-or-break factor for India.

The greatest threat is AI. Silicon Valley venture capitalist Marc Andreessen predicted that AI would decimate Indian IT, and he’s not alone.

In August 2024, a piece in the Wall Street Journal headlined ‘AI Is Coming for India’s Famous Tech Hub’ stated: ‘AI is upending traditional tech outsourcing and the industry is pivoting to adapt, but the changes could cost a large number of jobs.’ Estimates suggest 20,000 jobs could go, though ‘silent firings’—layoffs done quietly—may mean the actual number is higher. Meanwhile, employees are facing burnout, with some working up to 16 hours a day.

Indian IT firms are adapting by integrating AI into their operations. Accenture, for example, offers online AI upskilling courses for staff. However, these efforts may not save low-end operations like call centres that perform basic tasks. Firms like TCS, Infosys and HCL are pivoting from plain vanilla outsourcing to more advanced products and platforms offering solutions to global clients, such as TCS’s BaNCS (banking), Infosys’ Finacle (financial solutions) and Cobalt (cloud), HCL’s AI-based DRYiCE.

HCL Tech’s CEO, C. Vijayakumar, recently acknowledged that the traditional IT business model, which relied on increasing headcount to boost revenue, is obsolete in the AI era.

Speaking at the NASSCOM (National Association of Software and Services Companies) Leadership Forum in Mumbai on 23 February, he said the new focus is on delivering more value with fewer people, as clients expect “double the business with half the headcount.”

This shift was echoed by Infosys CEO Salil Parekh. While AI threatens traditional IT services by automating routine tasks, it also creates new opportunities. There will be growing demand for AI/ML expertise, which Indian firms are developing.

AI also requires human oversight and problem-solving, allowing Indian firms to tap into the AI value chain. The challenge lies in how well they adapt.

Firms that embrace AI as a means towards value-added services— instead of a tool merely to cut costs and improve margins—are more likely to remain competitive. Reskilling the workforce and securing capital investment to compete with Western tech giants will be no easy task, despite the monies being allocated.

The government’s IndiaAI Mission was sanctioned Rs 551 crore in the Union Budget for 2024–25, which was underutilised and subsequently revised to Rs 173 crore, with Rs 2,000 crore allocated for 2025–26.

State governments, including Maharashtra, Tamil Nadu, Kerala, Karnataka and Andhra Pradesh, are also pushing AI initiatives, though these efforts will take time to yield results.

To stay relevant, Indian IT companies must move beyond outsourcing and bodyshopping factories built on low-cost software skills to becoming technology innovators. This shift could reduce dependence on US visa programmes, like the H1B, which already has a massive backlog of Indian applicants.

Given opportunities at home, Indian students studying abroad may decide to return rather than endure the uncertainty of securing the prized green card or permanent US residency.

It’s not just Indian firms that face the AI threat. US tech giants like Facebook, Amazon, Apple, Alphabet (Google), Netflix and Microsoft are also impacted. Researchers from RationalFX, which tracks tech layoffs, say more than 26,000 jobs have already gone globally in 2025, over 18,000 of them in the US. This includes 3,600 layoffs at Meta (Facebook) and 2,280 at Microsoft.

The year 2023 was especially brutal with an estimated 264,000 jobs lost around the world—without factoring in China, whose data is hard to come by. The year 2024 was not much better with 152,000 jobs lost. In many cases, the cuts were the direct outcome of a headlong rush to invest in AI.

German software giant SAP, for instance, is investing $2 billion while axing 8,000 jobs to restructure around generative AI. These layoffs reflect the end of the Covid tech boom, as companies brace for recession.

If current trends hold, the IT sector will shift from its traditional pyramidal structure— relying on low-tech coding jobs at the base— to a diamond-shaped structure, where AI and bots handle routine tasks and AI-skilled workers manage the systems. The sector is in the midst of a big change and the sunny outlook of its nearterm prospects strain credulity.