After a prolonged cycle of negative news and concerns over AI disrupting traditional outsourcing models, the Nifty IT index recorded its biggest weekly gain in 18 years, rising 11.7% in the week ended 16 October. Improved quarterly performance of Indian IT firms, coupled with Accenture’s optimistic growth and margin projections, temporarily lifted sentiment.

Despite the rebound, the index has stayed 29.1% below its December 2024 peak and 14.6% below its January 2026 level, reflecting sluggish business demand and thinning prospects for traditional service offerings.

Growth Challenges
For the five-decade-old Indian IT and IT-enabled services industry, growth slowed too low to mid-single digits over the past decade, except for the exceptional 15.5% growth in 2021–22 driven by post-Covid digital transformation.

In contrast, some mid-tier IT firms have shown greater agility and execution. Persistent Systems more than doubled its revenue and expanded margins by 170 basis points over the past five financial years.

The rapid expansion of global capability centres, increasingly transforming into innovation hubs, is intensifying competitive pressures. As global clients expand these centres, Indian firms face greater challenges in attracting and retaining talent in advanced skill areas.

Monetising accumulated expertise through value-added, contextual solutions has been a persistent challenge, hindering the shift to growth that does not depend on proportionate increases in headcount. Despite successes such as Zoho, Freshworks, Postman, Icertis and Druva, India’s software product businesses remain small compared with its IT services giants.

Indian IT firms have also embraced inorganic expansion. Between 2025 and 2026, industry leaders including TCS, Infosys, HCL, Wipro, Tech Mahindra, LTI Mindtree and Coforge executed more than 20 acquisition deals. However, Accenture’s inorganic growth contribution, declining from 3% in 2024-25 to 1.5% in 2025-26 despite more than 200 deals since 2020, suggests acquisitions are no silver bullet.

Importantly. rising trajectory of AI raises critical questions about the disruption of traditional outsourcing models and the industry’s ability to adapt. While some experts foresee existential and deflationary risks to the industry, others view AI as a transformative opportunity to drive innovation, productivity, value creation, and growth.

Manpower-centric IT models inevitably face disruption across the services chain. AI automates functions across coding, design, testing, IT operations, business process outsourcing and engineering research. While reducing direct manpower needs, it also presents opportunities to enhance value.

Enterprise-scale AI demands workflow redesign, operating model transformation, governance frameworks and modernisation of legacy IT and data architectures augmented with knowledge layers. Emerging services will involve orchestrating enterprise AI and agentic workflows while embedding risk, security and compliance standards.

Even partial realisation of the anticipated value could expand services spanning advisory, design, assurance and implementation of new models of platform-based, ecosystem-partnered, domain-contextual solutions. It remains to be seen whether expanded service portfolios, fully integrating AI into delivery capabilities, can offset revenue deflation.

Future Capabilities
It is time for the Indian IT sector to remodel its business and operating models for AI-era services that deliver business outcomes. Beyond relying on hyperscalers and solution partners for low-risk service reconfiguration, a shift is required to develop capabilities that enhance competitiveness.

Indian IT firms must deepen investment in AI strategy, governance, integration, model testing, cybersecurity, cost management and performance management. Integrating innovative services from start-ups and partners through targeted investment and incubation can strengthen these offerings.

Rather than relying on downsizing as an easy response, workforce strategy must focus on reskilling and redeploying contextual expertise in high-end business and technology consulting and AI-enabled delivery. Equally important is cultural realignment that fosters agility and adaptability.

To sustain global leadership amid rising competition from Eastern Europe, Asia and Latin America, Indian IT firms must strengthen their local and nearshore workforce presence. Engineers, architects and domain experts working close to customers can support high-value solutions, integrated services and deeper partnerships.

Traditionally focused on global markets, Indian IT firms also risk overlooking growing domestic opportunities. India’s economic rise and ambition to build world-scale AI capabilities are creating vast domestic opportunities for IT firms to develop platform-based, contextualized solutions across financial services, healthcare, public digital services education, manufacturing, and logistics. Likewise, India’s push on home-grown consulting and professional services firms offers a timely opportunity to capitalize on their vast global sectoral expertise and rise up in the value chain.

Beyond sovereign AI infrastructure, firms can build and orchestrate integrated AI factories connecting technology layers at scale. Leveraging domain expertise and global best practices, these platforms can accelerate innovation while addressing jurisdictional and enterprise requirements for data and AI sovereignty. The reported investment interest of non-India origin Cognizant in Indian sovereign AI start-up Sarvam points to emerging strategic direction.

Underpinning all these opportunities is the need to strengthen the education and skilling ecosystem that supported India’s IT success. Investment in new learning models, AI labs, skills development and workplace training is critical. This must be a shared priority, with every IT firm embracing its responsibility and playing its part.