Recent global market fluctuations, driven by investor anxiety regarding the ramifications of artificial intelligence (AI) on business operations, have placed Indian IT services firmly in the limelight. This is particularly concerning for an industry heavily dependent on software exports that may soon face redundancy.
On Thursday, shares in India’s software exporters dipped by 0.6%, following a dramatic 6% drop the previous day—the largest decline in almost six years. This downturn has been largely attributed to excitement over AI-driven automation, particularly initiatives from US-based companies like Anthropic and Palantir. Investors are worried about the potential for shorter project timelines and significant disruption to the labor-intensive business models that Indian IT firms have relied upon.
Leading players in the Indian IT sector, such as Tata Consultancy Services (TCS), Infosys, Wipro, and HCL Technologies, function as global outsourcing giants, employing over five million engineers—mostly in India—to manage “back-office” technology tasks for multinational corporations, especially in the United States and Europe.
Also on AF: India’s 20-Year Tax Break For Data Centres Faces Resource Crunch
These companies focus on application services, encompassing a range of activities from custom software development to the deployment and management of enterprise resource planning (ERP) systems that streamline finance, HR, supply chain, and inventory operations within businesses. Such services typically involve multi-year contracts and billable hourly rates.
However, new AI tools released this month have the potential to transform this landscape.
Last Friday, AI innovator Anthropic introduced plug-ins for its Claude Cowork agent that could automate various tasks in areas like legal, sales, marketing, and data analysis. In the same vein, Palantir announced that its AI platform could significantly reduce timelines for the intricate enterprise projects that represent a substantial portion of the $283 billion Indian IT sector’s revenue.
“As Indian firms begin adopting Claude for essential coding tasks, the need for large vendor teams may diminish, which could constrict billable hours and profit margins,” analyst Ambrish Shah from Systematix Group told Reuters.
Moreover, Anthropic’s advanced AI technologies pose a threat to entry-level positions within Indian IT firms by automating routine development and testing activities, he noted.
Investment banking firm Jefferies issued a warning, stating, “More struggles lie ahead for Indian IT,” suggesting that claims from Anthropic and Palantir indicate the possibility of AI eroding high-margin application service revenues for IT companies.
“With application services representing 40–70% of revenues, these companies are facing pressures for growth, and current consensus growth estimates may not fully account for this risk, posing potential downsides to their valuations.”
AI Risks Trigger Outflows
Among India’s major IT players, Tech Mahindra, TCS, Infosys, and Wipro have a significant exposure to application services, which account for approximately 55%–60% of their revenues. Conversely, HCL Tech has a lower exposure at about 40%.
On Wednesday, their stocks declined between 4% and 7%, continuing the downward trend into Thursday.
Brokerage Motilal Oswal estimates that up to 12% of industry revenues could be lost over the next four years due to disruptions fueled by AI advancements.
Jefferies predicts that AI will impact revenue growth in India’s IT sectors over the coming one to two years, suggesting that declines in traditional service-line revenues will likely overshadow gains from AI-related ventures.
In response to these challenges, Indian IT firms are ramping up investments in AI and re-skilling initiatives, even as slow global tech spending, delays in client decisions, and pricing pressures continue to burden the industry.
Despite this, foreign investors have divested a record $8.5 billion worth of Indian IT stocks in 2025, largely due to concerns about potential AI disruptions.
The IT sub-index in India has plummeted by 17% since last year, including the recent sell-offs, and is heading towards its worst week in over four months.
“The selling pressure affecting software and data analytics reflects an intensifying structural debate,” said Jonathan McMullan, an analyst at Schroders, in remarks to Reuters.
“The rapid advancements in AI technology render long-term valuations challenging to justify, especially as these tools enable businesses to achieve more with fewer employees, thus jeopardizing the conventional model of charging per software user.”
The Unclear Impact of AI
However, some analysts contend that the recent sell-off may be excessive.
JPMorgan commented that even though the concerns regarding AI disruption are valid, it is unreasonable to assume that the launch of a few tools will result in the replacement of every layer of critical enterprise software.
Indian brokerage Kotak Institutional Equities characterized Wednesday’s market declines as a situation of “significant panic over a minor disturbance.”
While some analysts suggest that the success of these AI platforms is not a certainty, citing a lack of specialized data necessary for various industries, the viewpoint remains diverse.
Mark Murphy, head of US enterprise software research at JPMorgan, mentioned that it “seems illogical” to predict that a new AI plug-in would entirely replace critical layers of enterprise software.
Notably, Nvidia’s CEO Jensen Huang dismissed concerns that AI might replace software and tools associated with it, labeling such worries as “illogical” and suggesting that “time will reveal the truth.”
It is widely believed that software is particularly susceptible to disruption, as AI tools like Claude continue to automate routine tasks that have traditionally underpinned the pricing structure of the industry.
“The software sell-off is becoming overstated, and the reasoning behind it appears flawed,” asserted Talley Leger, chief market strategist at The Wealth Consulting Group, in comments to Reuters‘software-mageddon’.
“Don’t improving AI tools work towards creating new and superior software applications at more affordable prices, thereby enhancing profit margins for software companies?”
- Reuters, with additional editing and inputs from Vishakha Saxena
Also read:
Nvidia Joins $12bn India Push To Back AI, Robotics, Chip Firms
Amazon, Microsoft Set to Spend Over $50 Billion on AI in India
Google To Build $15bn AI Data Centre In Biggest India Investment
India Launches Plan to Let Users Shop Online With ChatGPT
India Taps AI in Forecasts as Extreme Weather Weighs on Economy
Amid Fears Of An AI Bubble, Indian Equities Become Surprise Hedge
India To Pump $1.2 Billion Into AI Projects, Startups
‘Big Short’ Wagers $1-Billion Bet That ‘AI Bubble’ Will Burst
AI is ‘Effectively Useless,’ Veteran Analyst Warns
Is the AI frenzy a hallucinatory bubble?
