Why India’s AI Challenge Is About Power, Not Just Productivity

Picture this: you are the CFO of a multinational company headquartered in Belgium. It is 2 a.m., and your banking app crashes. By the time you wake from a restless sleep, a technical expert in Bengaluru has already fixed the bug and taken corrective action. This is India’s back-office powerhouse at work: round-the-clock call centres, rapid IT support, and digital services that transcend borders.

For decades, India’s advantage lay in scale, skill, and time-zone arbitrage. That model built an IT empire, but also confined the country to the lower end of the technology value chain.

The Economic Survey 2025-26 underlines both the opportunity and the risk. IT services and professional consulting account for nearly 65% of services exports. Global Capability Centres employ around 1.9 million people. India ranks second only to the US in AI skill penetration. These are formidable strengths. Yet they primarily reflect India’s role as an execution hub, not as a centre of technological origination.

In today’s services-driven economy, trade power no longer rests on who writes the most code, but on who owns the underlying technology. Countries that control core AI systems set the rules, capture the profits, and shape the future of digital commerce. Those that merely implement them remain dependent. India now stands at that crossroads.

Countries that moved early into higher-value digital services now dominate global platforms and standards. India must follow, or settle for declining returns.

The Survey’s findings are telling. Adoption of AI in core services boosts software exports by 44% and business services by 67%. AI-intensive service exports have grown 39.5% faster than those with limited technological integration. These are not marginal gains. They indicate a structural shift in how value is created in modern trade.

Yet building models and platforms is qualitatively different from maintaining systems. Troubleshooting demonstrates competence. Designing foundational architecture demonstrates power. Without ownership of core technologies, India’s rise will remain incomplete.

Strategic Shift
The case for upgrading India’s digital economy is strengthened by its broader export performance. IT consulting’s share in services exports has risen from 10.5% to 18.3%. A services PMI of 58.9 points to sustained momentum. More than 1,700 GCCs now operate across the country, many of them moving steadily beyond support work into analytics, design, and research.

India also starts with structural advantages. A large, English-speaking technical workforce makes global collaboration easier. UPI and digital public infrastructure allow rapid experimentation in finance, commerce, and data services. Low-cost internet keeps development expenses manageable. Together, these have created an environment in which AI-driven products can be built, tested, and scaled at home before being taken abroad.

Employment fears, often raised in debates around automation, deserve a more careful reading. Employment elasticity has risen to 0.63 from 0.43 before the pandemic. The services sector has created close to 40 million jobs in six years, with formal employment expanding by 51.7%. So far, technology has raised productivity without triggering mass displacement.

But this balance will not hold automatically. As routine work declines, demand must rise for higher-order skills—model development, systems architecture, applied research. Without large-scale retraining, automation will widen social and regional divides. With it, it can become a pathway to upward mobility.

Geography adds another layer to this challenge. Services already dominate output in several lower-income states. Bihar, for example, derives nearly 58.7% of its GVA from the sector, mostly in low-value activities. AI-enabled platforms offer a chance to distribute more sophisticated work beyond major cities, provided digital infrastructure and training keep pace. In the digital economy, location is more flexible than it has ever been.

This is where policy becomes decisive. An AI-building economy cannot emerge through market forces alone. It requires sustained coordination between the state, industry, and universities.

Policy Imperative
National computing capacity must be expanded. Limited access to high-performance infrastructure remains a major constraint on domestic model development. Public–private cloud and GPU programmes could reduce reliance on foreign providers.

Incentives must also reward intellectual property creation. Faster patent approvals, targeted R&D credits, and preferential procurement for domestic AI solutions would signal that original technology, not just service delivery, is the national priority.

Education policy must move beyond generic IT training towards advanced machine learning, data engineering, and systems design. Without that shift, India will produce competent users of global systems rather than its architects. Skill India and university funding should reflect this priority. Employment and education are not parallel processes; they are mutually reinforcing.

Finally, regional expansion of technology hubs must be paired with serious institutional support. Setting up offices in semi-urban areas without faculty, research networks, and venture capital will produce little more than distributed call centres.

The forthcoming Annual Survey of Incorporated Services Sector Enterprises will help clarify structural weaknesses within IT-enabled services. Used well, it can guide targeted reform rather than cosmetic intervention.

India has reinvented itself before. From Y2K-era coders to cloud architects, each technological shift has been met with adaptation. But the AI transition is more demanding than any previous wave. It rewards not just skill and scale, but originality and ownership.

India can remain the world’s most dependable technology workshop, or it can become a genuine centre of digital power. The former ensures stability. The latter secures influence.

History suggests that moments of structural change are rare and unforgiving. They favour countries that invest early, coordinate intelligently, and think beyond immediate returns.

If this window is missed, catching up will be far harder. If it is seized, the country will not merely participate in the global digital economy; it will help shape it.