A global sell-off, triggered by investor concerns over the business impact of artificial intelligence, has thrust Indian IT services in the spotlight, given the industry’s outsized reliance on software exports that are at risk of becoming redundant.
Shares in India’s software exporters settled 0.6% lower on Thursday, a day after plunging 6% in their worst session for nearly six years, as AI-driven automation from US-based Anthropic and Palantir fuelled fears of compressed project timelines and disruption to the industry’s labour-intensive business model.
Indian IT services giants like Tata Consultancy Services (TCS), Infosys, Wipro, and HCL Technologies operate as global outsourcing powerhouses, employing more than five million engineers — primarily in India — to handle “back-office” technology work for multinational corporations, particularly in the US and Europe.
Also on AF: India’s 20-Year Tax Break For Data Centres Faces Resource Crunch
These firms specialise in application services, which include everything from custom software development to deploying and managing enterprise resource planning (ERP) software that can unify a company’s finance, HR, supply chain, and inventory operations. Typically these services can involve multi‑year contracts and charges by the hour.
But new AI tools out this month could change much of that.
Last Friday, AI developer Anthropic launched plug-ins for its Claude Cowork agent that could automate many of those tasks across legal, sales, marketing and data analysis. Meanwhile, Palantir said this week that its AI platform could drastically slash timelines for the complex enterprise projects that form the bread and butter of the $283 billion Indian IT industry.
“As Indian enterprises integrate Claude for critical coding workflows, dependency on large vendor teams may decline, squeezing billable hours and margins,” Systematix Group analyst Ambrish Shah told Reuters.
Anthropic’s advanced AI systems also threaten entry‑level talent pool at Indian IT firms by replacing routine development and testing tasks, he added.
“There is more pain ahead for Indian IT,” investment banking firm Jefferies cautioned, adding that Anthropic’s and Palantir’s claims highlight how AI could potentially erode high-margin application service revenues for IT firms.
“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.”
AI risks trigger outflows
Among India’s large IT firms, Tech Mahindra, TCS, Infosys and Wipro have higher exposure to application services, which account for about 55%–60% of revenues, while HCL Tech has the lowest exposure at around 40%.
Their stocks fell between 4% and 7% % on Wednesday, and extended losses on Thursday.
Brokerage Motilal Oswal estimates that 9%-12% of industry revenues could be eliminated over the next four years due to AI-led disruption.
Jefferies expects AI to weigh on India’s IT-sector revenue growth over the next one to two years, arguing that deflation in legacy service-line revenues will more than offset gains from AI-related opportunities.
Indian IT firms have been ramping up AI investments and re-skilling efforts, even as weak global tech spending, delayed client decision-making and pricing pressure have weighed on the sector.
Still, foreign investors offloaded a record $8.5 billion worth of Indian IT stocks in 2025 in light of their exposure to potential AI disruption.
India’s IT sub-index has lost 17% since last year, including Wednesday’s selloff, and is on track for its worst week in over four months.
“The selling pressure in software and data analytics reflects a deepening structural debate” Schroders analyst Jonathan McMullan told Reuters.
“The speed of AI advancement makes long-term valuations harder to defend, particularly as AI tools allow businesses to do more with fewer staff, threatening the traditional model of charging per software user.”
AI impact still unclear
Some analysts, however, say the sharp selloff may be overdone.
JPMorgan said that while concerns around AI disruption were not without merit, it was illogical to extrapolate the launch of some tools to an expectation that companies will replace every layer of mission-critical enterprise software.
Indian brokerage Kotak Institutional Equities described Wednesday’s declines as a case of “plenty of panic over a little flutter”.
Amid the global sell-off, some analysts also argue that the success of these AI platforms is far from guaranteed, given that they lack the specialised data crucial to businesses in the industries.
Mark Murphy, head of US enterprise software research at JPMorgan, said it “feels like an illogical leap” to say a new plug-in from an AI firm would “replace every layer of mission-critical enterprise software.”
Even Nvidia CEO Jensen Huang dismissed fears that AI would replace software and related tools, saying these concerns were “illogical” and “time will prove itself.”
Software is seen as especially vulnerable to disruption as tools such as Claude increasingly automate the routine tasks that have long underpinned the industry’s pricing power.
“I think the software selloff is getting overdone and the logic seems flawed,” Talley Leger, chief market strategist at The Wealth Consulting Group, told Reuters referring to the global ‘software‑mageddon’.
“Shouldn’t improving AI tools make it easier to create new and better software applications at lower prices, therefore improving software company margins?”
- Reuters, with additional editing and inputs from Vishakha Saxena
Also read:
Nvidia Joins $12bn India Push To Back AI, Robotics, Chip Firms
Amazon, Microsoft Set to Spend Over $50 Billion on AI in India
Google To Build $15bn AI Data Centre In Biggest India Investment
India Launches Plan to Let Users Shop Online With ChatGPT
India Taps AI in Forecasts as Extreme Weather Weighs on Economy
Amid Fears Of An AI Bubble, Indian Equities Become Surprise Hedge
India To Pump $1.2 Billion Into AI Projects, Startups
‘Big Short’ Wagers $1-Billion Bet That ‘AI Bubble’ Will Burst
AI is ‘Effectively Useless,’ Veteran Analyst Warns
Is the AI frenzy a hallucinatory bubble?
