Executive Summary
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.
Fig 1: India is one of the most cost-competitive data centre locations globally
Source: JLL, July 2026
Importantly, India has rarely been a first mover in major technology waves, from the internet and e-commerce to smartphones and cloud computing. Yet it has repeatedly demonstrated an ability to learn and build as a latecomer. AI may follow a similar path.
Meanwhile India's start-up ecosystem is driving a new wave of innovation, expanding beyond services and consumer technology into deep-tech sectors such as AI, semiconductors, defence and space. To support this transition, the government has earmarked around US$12bn for the Research, Development & Innovation (RDI) Fund, which will be deployed over seven years from FY27 to catalyse investment across strategic industries and help foster globally competitive technology champions.
This is a very bold initiative by the govt aimed to crowd in private capital, attract talent back to India and eventually create 5 to 6 globally competitive companies in the "new ages" sectors. The unprecedented scale of this commitment underscores India's long-term ambition to move up the value chain. While the benefits may not yet be reflected in public markets, it does partly mitigate concerns around AI-driven worries at the macro level by strengthening the foundations for future innovation-led growth.
Investment implications
Market sentiment towards Indian IT remains subdued, reflecting concerns that AI-driven productivity gains could pressure traditional revenue streams. While some of these concerns are justified, we believe the debate is more nuanced than current positioning suggests.
First, revenue headwinds from AI-led deflation outweigh the emerging tailwinds over the next 2-3 years with clients actively demanding productivity passthrough. Reported sector EPS has held up reasonably well, supported by Rupee depreciation, but we believe the market is now increasingly focused on constant-currency growth as the truer measure of underlying business momentum.
Second, the competitive landscape is evolving. New entrants i.e., frontier AI labs and hyperscalers are launching their own enterprise services and AI deployment arms, opening a new front of competition for Indian IT. Incumbents retain meaningful advantages through decades-long Fortune 500 relationships and, increasingly, through partnerships with the frontier labs themselves. Even so, we expect the fear of rising competitive intensity to remain an overhang on the sector until there is more clarity on the new entrants’ playbook.
Third, valuations have yet to fully reset. Despite significant underperformance MSCI India IT has lagged MSCI India by ~19% year-to-date. Large-cap Indian IT still trades at mid-teens P/E multiples, versus low-teens multiples for US-listed peers. While India IT usually trades at a premium given domestic fund flows, the premium is above historical mean. Hence, we do not yet see a valuation floor that would justify a contrarian call or would allow us to position early for the eventual AI-driven recovery.
That said, we are not structural bears on Indian IT. India's leading IT companies have navigated multiple technology transitions over the past two decades and remain high-quality, cash-generative franchises. Consensus expectations suggest a meaningful AI-driven revenue inflection may still be two to three years away. However, equity markets typically re-rate well ahead of earnings recoveries, making valuation the key variable to monitor and, ultimately, the most likely trigger for a change in positioning.
Fig 2: India’s IT services valuation premium remains high despite recent normalisation from peak
Source: Bloomberg Aug 2026; US peers is the average between Accenture and Cognizant
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