Why has AI spooked the Indian IT sector?

Summary: AI headlines have sparked widespread anxiety among investors about the future of Indian IT companies. However, a closer look beneath the panic reveals a far more complex picture.

For over 20 years, Indian IT companies have found themselves among the most dependable wealth builders. Their formula looked almost unbeatable: deliver technology services to global companies, execute projects reliably and steadily expand the workforce to meet rising demand.

Yet the past year seems to have shattered this image. Over the last one year, the BSE IT Index tumbled by almost 22 per cent. And the trigger wasn’t an economic downturn or a macroeconomic crisis. It was artificial intelligence, or AI.

The problem investors see

To understand why investors are anxious about the rise of AI, it is first important to zero into how Indian IT companies typically generate revenue.

Most outsourcing contracts are structured around the number of engineers deployed and the hours billed to the client. As projects grow and companies add more employees, revenues expand. This manpower-driven model powered the rise of firms such as TCS, Infosys and HCL.

Artificial intelligence disrupts this equation. Generative AI tools can assist developers in writing code, fixing bugs and documenting software. According to McKinsey, generative AI can significantly improve productivity in activities such as coding, testing and documentation.

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Thus, investors are now asking, if AI can write code, test software and automate several technology tasks, will companies still need a large workforce? For an industry built around deploying people on projects, that question strikes at the heart of the business model.

Pressure is already visible in the deals

Investors’ fear isn’t unfounded. Reports in the Economic Times suggest that some IT deals are now being renegotiated at 30-50 per cent lower values, as clients expect vendors to pass on productivity gains from AI tools. If this trend becomes widespread, it could put pressure on the sector’s traditional growth engine.

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A Motilal Oswal report has mentioned that productivity improvements from generative AI could put up to 15 per cent of IT services revenues at risk if certain tasks become automated or clients demand lower prices.

For investors, the implication is clear. If the same work can be done with fewer people, then the old formula of hiring more engineers to grow revenues may not work as smoothly as it did in the past.

In the past, most contracts were largely based on effort-based pricing, where clients paid for the number of engineers working on a project. Increasingly, however, clients are pushing for outcome-based arrangements, where vendors are paid for results rather than hours worked.

This shift introduces uncertainty. Productivity gains from AI may reduce the effort required to complete projects, but it is not yet clear how much of that benefit IT companies will be able to retain.

Why the fears may be exaggerated

Despite these concerns, it would be premature to assume that AI will make Indian IT companies irrelevant.

First, enterprise technology systems are far more complex than they appear from the outside. Large organisations operate vast technology infrastructures built over decades. These systems often involve legacy platforms, strict regulatory requirements and multiple layers of integration.

Second, managing such environments requires far more than writing code. It involves system architecture, cross-platform integration, regulatory compliance and continuous monitoring. AI can certainly help engineers work faster. It can generate code, assist with testing and automate repetitive tasks. But designing and managing large enterprise systems still requires deep human expertise and long-term experience.

Not all IT companies are at risk

Another nuance often gets lost in the broader debate around AI and IT services: the impact will not be uniform across the industry.

Companies that continue to rely mainly on simple outsourced projects or routine coding work may face the greatest pressure. Firms that remain dependent on such work and fail to adapt could struggle in the coming years.

However, companies operating higher up the value chain are better positioned. Work involving system architecture, consulting, platform integration and large-scale digital transformation requires complex problem-solving and deep domain expertise.

At the very top sit product-oriented technology companies that build their own software platforms and intellectual property. These firms are relatively rare in India’s technology landscape, but they usually command stronger pricing power because clients pay for the product itself rather than the manpower behind it.

The shake-down in the sector may therefore end up separating companies that create technology from those that mainly execute projects.

The bottom line

The current shake-down in IT stocks reflects a period of adjustment rather than a complete collapse of the business model. AI will change how technology projects are executed and how contracts are priced. But this should not be treated as a passing phase. AI represents a serious test for the global IT services industry, and perhaps an even bigger one for Indian IT, which has long relied on large-scale outsourcing models.

The real change is that the industry will have to evolve. Some companies will adapt better than others, and investors will need to recognise that difference.

At Value Research Stock Advisor, we believe we have identified a company that has not only withstood the recent AI panic but is actively adapting to it, even as the market discounts its prospects. On March 14, 2026, at 12:30 pm, we will reveal this recommendation and walk through the complete investment case in our first Stock Advisor Live session, available exclusively to Stock Advisor subscribers.

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This article was originally published on March 11, 2026.