The economics of India's biggest export industry go topsy-turvy

India's IT services industry heads into the September-quarter (Q2) earnings season with a problem that goes well beyond another weak quarter. The country's roughly $315-billion technology industry is still winning large contracts and global companies continue to spend on technology but the revenue generated from each unit of work is coming under pressure. AI is making software and technology work more productive but an increasing share of that productivity gain is flowing back to clients through lower prices. The Q2 IT sector results might offer an early glimpse of a deeper shift in the economics of India's biggest export industry which also has been a strong jobs engine for India.

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The old formula is beginning to break for IT companies


For much of the past three decades, India's IT services model was built around a fairly simple formula that global companies had more technology work than they could handle and India had a large pool of engineers who could perform that work at lower cost.

This model scaled remarkably well. As more clients meant more projects and more projects meant more engineers, revenue and headcount rose together. But now this formula is weakening.

Nasscom estimates India's technology industry employs nearly 6 million people but is now starting to grow without adding people at the old pace. Rajesh Nambiar, the industry body's president, recently said AI has broken the sector's traditional linear growth model. Campus hiring has remained weak as companies rethink how many entry-level employees are needed when AI can raise the productivity of experienced workers.

For shareholders, that can eventually mean better productivity. However, for the business model, it raises the question who gets to keep the productivity gain.

Clients are claiming their share

This is where the current AI disruption differs from earlier technology cycles. AI can reduce the amount of human effort needed for coding, testing, application maintenance and other services. Instead of paying for a certain number of engineers or hours, clients can increasingly demand the same outcome for less.

India's major IT companies are moving towards contracts tied more closely to outcomes rather than hours worked as clients demand greater productivity and lower prices. Some customers are also bringing work in-house using AI. The pressure is particularly visible in application management, where productivity gains can quickly translate into lower headcount requirements and shorter project timelines.

The sector is still growing but it is becoming harder to grow the old business at the old prices.

The IT pie is growing, but its shape is changing

AI does not necessarily mean companies are spending less on technology. India's enterprise AI investment grew 119% in the year to 2026, according to ServiceNow, and AI accounted for 16.6% of the average Indian company's IT budget, with that share expected to reach 21.3% by 2027. But more technology spending does not automatically mean more revenue for traditional IT service providers.

Money is moving towards AI infrastructure, software, cloud, data and internal technology capabilities. Some of the work that once went to an external vendor is being absorbed by the customer while some is being automated or repriced. This is why the industry's problem is better described as value migration than an IT spending slowdown.

GCCs are both a threat and an opportunity

The changing role of global capability centres (GCCs) makes this shift more visible. India now has more than 2,100 GCCs employing about 2.36 million people and generating close to $100 billion in revenue, according to Nasscom-Zinnov data. GCCs added nearly 200,000 people in FY26, almost twice the 110,000 added by IT services companies. They have also become a major destination for AI, cloud and product-development talent.

That should worry traditional outsourcers because a large multinational can increasingly build its own technology capability in India rather than buy all of it from a services provider.

But something more interesting is now happening. IT companies are buying or taking over parts of those captive operations. More than 20,000 employees have moved from GCCs, enterprise technology subsidiaries and product operations to IT services providers over the past year, according to industry estimates. TCS is taking over Best Buy's India GCC while HCLTech acquired Guardian Life's India operation with nearly 2,000 employees under a seven-year agreement. Wipro's $386-million acquisition of Olam's IT and digital services business Mindsprint brought more than 3,200 employees and is linked to an eight-year transformation deal. Infosys has also acquired the India technology centre of Danske Bank.

These are more than conventional acquisitions as they effectively turn a captive cost centre into a long-term outsourcing relationship while giving the IT provider access to a ready-made workforce, domain expertise and predictable revenue. Transactions involving GCCs, enterprise operations and product carve-outs represented $1.3-$1.5 billion in business value over the past year.

In a low-growth market, buying an existing technology operation can be easier than creating new organic demand. It also gives IT companies access to capabilities that would take years to build. HFS Research estimates that about 10% of mature GCCs could become candidates for some form of full or partial transfer over the next two to three years, particularly those still focused on labour-intensive work. So the GCC boom and the IT services slowdown are becoming intertwined.

The industry is moving up the technology stack

Indian IT companies are also trying to capture more of the AI value chain instead of simply absorbing the productivity shock. HCLTech's planned $1.48-billion AI data centre in Odisha with Sarvam AI is one example. TCS has announced plans for a $2-billion AI data-centre investment. These moves show traditional outsourcing companies trying to participate in infrastructure, models and applications rather than limiting themselves to delivering engineering manpower.

At the same time, AI-related deals are beginning to pick up. Centrum expects these engagements to support medium-term growth, although much of the recent deal activity is still focused on cost optimisation and vendor consolidation and is converting into revenue slowly.

What happens to India's jobs engine?

The IT industry became a major source of white-collar employment because its growth depended heavily on adding people. Naukri's September data showed IT and software-services hiring fell 4% year-on-year even as AI and machine-learning hiring jumped 20%. GCC and BPO/ITES hiring, meanwhile, rose 4%. That does not mean AI will simply destroy IT jobs. It points to a different workforce with fewer routine entry-level roles and greater demand for people who combine technology with domain expertise. The risk for India is that revenue growth and employment growth may no longer move together.

India's next advantage will have to be different

The outsourcing model gave India an enormous advantage by making skilled human labour cheaper and more scalable but AI reduces the importance of simply having more people. The next advantage is likely to lie in specialised expertise, proprietary technology, data and the ability to deliver business outcomes.

The Q2 results and the guidance will show how quickly the old model is losing pricing power and whether the new AI-led businesses are becoming large enough to compensate.