How Will AI Impact India’s Services Industry?

A Sector at a Turning Point

Artificial Intelligence (AI) is transforming industries across the world, but its impact on India’s services industry will be especially significant. For decades, India’s IT giants thrived on a business model built around scale, skilled human labour, and cost efficiency. Today, however, that model is under strain as automation and AI-driven platforms rapidly change how technology services are delivered.

For India’s $263 billion IT services sector (FY25 estimate, excluding hardware, from Nasscom), the question isn’t whether change will come, but how deep and fast it will be. “Change is imminent, and it is upon us,” said Salil Parekh, CEO of Infosys, at a Nasscom technology leadership forum earlier this year. His counterpart, C Vijayakumar of HCL Technologies, was even more direct: “The business model is ripe for disruption.”

This disruption matters not only for IT but also for India’s wider services economy—from banking and healthcare to retail, manufacturing, and public services. The stakes are high: millions of jobs, the health of the middle class, and India’s global reputation as a technology powerhouse all hang in the balance.

India’s IT Industry Under Pressure

Tata Consultancy Services (TCS), India’s largest IT company and one of its biggest private employers, recently announced cuts of more than 12,000 jobs at middle and senior levels. The company described the decision as a step to become “future ready” by deploying AI at scale.

For decades, companies like TCS and Infosys thrived by offering cost-effective software development and outsourcing services. But as clients demand more innovation and automation, that labour-driven model no longer looks sustainable. AI tools can automate routine coding, testing, and maintenance—tasks that once provided steady work for thousands of engineers.

Industry experts point to a growing skills mismatch. According to Nasscom, India needs one million AI professionals by 2026, yet fewer than 20% of its IT workers are trained in AI. Companies are investing heavily in reskilling, but the pace of change means many employees risk being left behind.

Vijayakumar of HCL outlined the challenge clearly: “We’ve been asking our teams how we can deliver twice the revenue with half the people.” This shift highlights how disruptive AI could be for a sector that directly employs 5.8 million people and indirectly supports many more across real estate, transport, and consumer markets.

From Labour-Based to Outcome-Based Models

Historically, Indian IT companies charged clients based on inputs such as hours worked or number of staff deployed. That model is now under pressure. “We need to dramatically change from being input-based to becoming more output- and outcome-based—even cannibalise our revenues to create completely new businesses,” Vijayakumar explained.

This evolution aligns with a broader industry shift toward “services as software.” Many tasks that once required human expertise are now being delivered through AI-driven platforms. The opportunity—and challenge—for India’s IT companies is to build new offerings around AI-led software, industry-specific platforms, and partnerships with global tech firms.

Infosys, for example, has developed four specialised small language models (SLMs) as part of its Topaz AI suite, targeting industries such as banking and IT operations. These are built on Nvidia’s AI stack, reflecting how Indian IT firms are being shaped by investments in AI infrastructure from global leaders like Microsoft, Google, Meta, and OpenAI.

Global Headwinds and Domestic Fallout

The push towards AI has coincided with weak demand for traditional IT services. After an initial rush to cloud adoption during the pandemic, major customers in the US and Europe cut back spending amid geopolitical and economic uncertainties. As a result, overall hiring slowed dramatically.

In the past, India’s IT majors absorbed 600,000 graduates a year. Recently, that figure has dropped to around 150,000. Alternative employers such as fintech startups and Global Capability Centres (GCCs) have absorbed some workers, but not at the same scale. Analysts warn that 20–25% of new graduates may remain unemployed, fuelling wider economic and social challenges.

The ripple effects are already visible. Once-booming cities like Bengaluru, Hyderabad, and Pune have seen tens of thousands of job losses, while reduced demand threatens sectors like real estate and premium consumption. As entrepreneur Arindam Paul warned, “Almost 40–50% of white-collar jobs that exist today might cease to exist.”

AI Across Other Service Industries

While IT sits at the centre of the AI debate, other service industries in India are also being reshaped:

• Healthcare: AI-powered diagnostics and telemedicine platforms are addressing doctor shortages, especially in rural areas.

• Retail and E-commerce: Companies like Flipkart and Amazon India use AI for personalised shopping, demand prediction, and fraud detection.

• Manufacturing: AI-powered robotics and quality control are pushing Indian factories towards Industry 4.0.

These shifts illustrate a broader truth: AI will not just impact IT outsourcing but will ripple through every service-driven sector of India’s economy.

Job Displacement vs. Job Creation

The central question is whether AI will destroy more jobs than it creates. Repetitive tasks such as data entry, basic customer support, and manual software testing are clearly at risk. However, AI is also creating new opportunities in fields like data science, cybersecurity, and AI engineering.

Infosys, for instance, is embedding AI into core products like Finacle (banking), McCamish (insurance), and Equinox (e-commerce). Similarly, TCS’s BaNCS and HCL’s enterprise IT platforms are being enhanced with AI. These initiatives show how new jobs and services may emerge around AI-driven platforms rather than disappear entirely.

Yet, adoption will not be seamless. As analyst Wayne Butterfield notes, while AI can handle routine queries effectively, most consumers still prefer humans for complex or sensitive issues. AI excels at structure but struggles with empathy and nuance—suggesting that human-AI collaboration will remain central.

The Upskilling Imperative

With disruption looming, reskilling and upskilling are non-negotiable. The National Skill Development Corporation (NSDC) is playing a vital role by partnering with tech giants like Microsoft, Google, and IBM to expand AI training. Meanwhile, platforms like Coursera, UpGrad, and Simplilearn are enabling affordable, industry-ready courses.

Workers who adapt quickly—whether by learning machine learning, cloud integration, or AI-enabled process design—will remain relevant. Those who don’t may struggle in an increasingly automated world.

Government and Industry Responses

The Indian government recognises the stakes. Initiatives like Digital India and AI for All aim to democratise AI education and boost innovation. NITI Aayog’s national AI strategy prioritises healthcare, education, mobility, and agriculture, with investments in AI Centres of Excellence.

At the same time, industry leaders stress that IT firms must pivot from chasing revenue to delivering value. Parekh of Infosys noted that AI is now part of nearly every client discussion.

Vijayakumar echoed the sentiment: “What India’s IT companies ought to be doing is doubling down on becoming ever more relevant to their customers.”

Challenges of AI Integration

Despite its promise, AI integration is not without risks:

• Skill Gaps: Urban professionals have better access to AI learning than rural workers, deepening inequality.

• Data Privacy: AI depends on vast amounts of data, raising concerns about misuse and cybersecurity.

• Economic Inequality: Without affordable access, small businesses and less privileged communities may fall behind.

• Liability Issues: AI decision-making creates new legal and ethical challenges, especially when errors occur.

Experts caution against seeing AI as inevitable or frictionless. As Harvard researchers David Gray Widder and Mar Hicks noted, technologies like railroads and electricity once seemed inevitable but required decades of infrastructure building and governance. AI will be no different.

Outlook: An AI-Powered Services Industry

If managed well, AI could add nearly $1 trillion to India’s economy by 2030. But that future depends on how effectively India navigates reskilling, governance, and equitable access.

The signs are mixed. On the one hand, Nasscom projects that the sector will still be a net hirer in FY25, adding 126,000 jobs despite disruptions. On the other, the industry’s leaders openly admit that the days of linear, labour-driven growth are over.

As Parekh observed, “If you look back over the last few years, at one stage we were 20% digital. Now we are over 60%. It’ll be a similar story with AI.”

Preparing for the Future

The impact of AI on India’s services industry will be profound, complex, and uneven. Jobs will be lost, but new roles will emerge. Clients will demand faster, cheaper, and smarter solutions, forcing IT firms to rethink their business models. Upskilling, outcome-driven services, and human-AI collaboration will be the pillars of success.

The real test for India is whether it can use AI not only to retain its global IT leadership but also to create inclusive growth across its diverse economy. If it succeeds, AI could power India’s next economic leap. If it fails, it risks widening inequality and stalling progress.

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