India File: IT giants face heat from AI disruption

Feb 10 - By Nidhi C Sai, Editor Online Production, with global Reuters staff

A global selloff in software stocks sparked by rapid advances in artificial intelligence has rippled to India's shores.

For its $283 billion IT industry built on labour-intensive outsourcing, the ramifications could be substantial. Is this just a bout of AI anxiety that will pass or does the industry need to evolve structurally? That's our focus this week.

Plus, India has scrapped proposed concessions for small cars in upcoming fuel-emissions rules to level the playing field. Scroll down for more on that.

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A 30-YEAR LEGACY UNDER PRESSURE

Indian IT stocks are facing a moment of reckoning. The launch of plug-ins for Anthropic's Claude Cowork agent, designed to automate tasks across legal, sales, marketing and data analysis, has rattled investors and triggered a sharp selloff last week in what has long been one of India's most reliable growth engines.

Indian software exporters lost $22.5 billion in market value last week, with the Nifty IT index .NIFTYIT falling about 7%, marking its steepest weekly fall in more than four months. The rout mirrored a brutal global selloff. Roughly $800 billion was wiped off the S&P 500 software and services index .SPLRCIS before a rebound, its worst performance against the broader market in 25 years, according to SocGen.

Some analysts warn that the IT sector, the flagship for India's exports since the 1990s, could be vulnerable to rapid advances in AI.

"The market fears (the AI tools) may replace IT services that are currently outsourced. What the real impact will be remains to be seen," said VK Vijayakumar, chief investment strategist at Geojit Investments.

Jefferies struck a darker tone. "There is more pain ahead for Indian IT," it said, adding that Anthropic's and Palantir's PLTR.O claims highlight how AI could potentially erode application-service revenues. "With application services accounting for 40%–70% of revenues, firms face growth pressures, and consensus growth estimates do not fully reflect this, posing downside risks to valuations," Jefferies said.

Brokerage Motilal Oswal estimates that 9%-12% of industry revenues could be eliminated over the next four years due to AI-led disruption.

The timing is particularly relevant. India's IT industry is otherwise benefiting from geopolitical tailwinds, with trade deals struck with the United States and the European Union expected to support cross-border services exports and reinforce India's position as a trusted technology partner.

But those policy positives offer little insulation from technological shock. While trade deals can help expand the volume of outsourced work, AI-led automation threatens to compress project timelines and reduce billable hours, striking at the labour-intensive model that has underpinned India's IT boom for decades.

PANIC OR EARLY WARNING?

Not everyone feels this is an existential threat. Some analysts see a classic case of markets running ahead of fundamentals.

Centrum Broking's Piyush Pandey called the selloff a “knee-jerk” reaction. "AI tools have been in the works, and this is how the industry is now shaping up. However, they are not expected to materially disrupt the industry as of now," he said.

JPMorgan said it was "illogical to extrapolate the launch of some tools to an expectation that companies will replace every layer of mission-critical enterprise software," while Kotak Institutional Equities described the decline as "plenty of panic over a little flutter".

That view is echoed at the very top of the AI value chain. Nvidia NVDA.O CEO Jensen Huang dismissed fears that AI will replace software as "the most illogical thing in the world". "If you were a human or robot… would you use tools or reinvent tools? The answer, obviously, is to use tools," he said.

Still, others remain cautious. "Surely, there would be other tools in the making… we don't foresee the glory days of the IT sector… returning soon," CapGrow Capital's Arun Malhotra said.

It is not that India's IT behemoths - TCS TCS.NS, Infosys INFY.NS and Wipro WIPR.NS - are sitting quietly. Infosys is forming new AI-led partnerships, TCS is embedding AI more deeply into its services, and Wipro is saying AI now underpins many of the deals it is chasing globally.

But can they adapt fast enough, or is AI rewriting the rules of outsourcing? Write to me at nidhi.csai@thomsonreuters.com.

MARKET MATTERS

The U.S.–India trade deal has lifted the cloud over an unloved Indian rupee and may be enough to pause relentless foreign selling in stocks. But investors say a durable turnaround will require a rebound in earnings growth and stronger fundamentals.

The long-awaited agreement, announced first by President Donald Trump last week, sparked a market rally and the rupee's best gain in seven years, signalling improving diplomatic and trade ties with Washington.

Read this analysis on how India's markets are getting tariff relief but are not a buy yet, by Reuters journalists Jaspreet Kalra, Ankur Banerjee and Karin Strohecker.

Read more on how the India-U.S. trade deal is giving tariff-free access to Harley bikes, but no reprieve for Tesla TSLA.O.

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