AI disruptions, subdued tech spending to weigh on India's IT services growth for two fiscals

Information technology (IT) services sector revenue growth in India is set to stay muted this fiscal (FY27) and the next (FY28), as artificial intelligence (AI)-driven disruptions, weak discretionary spending and continuing geopolitical uncertainties deepen a four-year slowdown, a report showed on Thursday.

Mid-tier IT companies could prove to be nimble in this environment. For the broader industry, the key test will be how quickly companies reinvent business models, adapt effectively to the changing industry landscape and expand into newer services, said a Crisil Ratings report.

While a 5-7 per cent depreciation in the rupee would support revenue growth and operating profitability this fiscal, that tailwind is likely to fade next year, it said, adding that credit profiles should remain stable, supported by robust balance sheets, low debt and healthy liquidity.

“AI is no longer just a productivity lever for IT services companies; it is beginning to challenge their traditional revenue model. Rising adoption of AI-native solutions is intensifying pricing pressure, triggering deal renegotiations and slowing execution as clients reassess technology spending,” said Anuj Sethi, Senior Director, Crisil Ratings.

At the same time, weak discretionary spending and uncertainty in the US and Europe continue to weigh on demand. This will keep revenue visibility modest over the near term, he mentioned.

The overall muted industry outlook is expected to temper momentum, with their growth likely to remain at high single-digit levels over this fiscal and the next.

“Notwithstanding the mid-tier’s rise, the subdued growth outlook and rising AI-propelled disruptions are also reshaping hiring. Net headcount addition in the sector is expected to remain muted this fiscal and the next as companies focus on defending margins and improving productivity,” said the report.

Automation, higher employee utilisation and selective hiring for AI-related skills will remain the key levers.

“Prudent resource management and currency tailwinds should help the sector sustain healthy operating margins of 22-23 per cent this fiscal. But that cushion could narrow from next fiscal as revenue pressures persist, talent costs rise, AI investments continue and forex support moderates,” said Aditya Jhaver, Director, Crisil Ratings.

Overall, the sector remains exposed to heightened uncertainties stemming from AI disruptions, even as geopolitical and macroeconomic headwinds continue to constrain demand in key export markets.