The bad news for Indian IT investors is that last Friday's share bloodbath may only be the beginning as investors digest the threat to the sector posed by AI.
The brutal sell-off which hammered India's largest software exporters was triggered by an earnings warning by Accenture, considered an outsourcing industry bellwether.
"The industry is still hoping that conditions normalise," says Parekh Jain, chief executive of Pareekh Consulting. "But there's nothing that suggests some immediate turnaround.
"Indian IT companies missed the AI boat," says Jain.
Indian IT stocks have already endured a bad year, and analysts say the US consulting giant's results underscore the risks AI poses to the business model that turned India into the world's back office.
Accenture's shares slumped nearly 20 per cent – the stock is now down nearly 50 per cent from its 12-month peak – after it cut its annual revenue growth forecast to 3-4 per cent from 3-5 per cent and reported continued weakness in consulting demand. Its order book has plunged 14.7 per cent year-on-year.
On the back of Accenture's gloomy outlook, shares of Infosys slumped to a 52-week low on Friday, while the Nifty IT index plunged as much as 6.4 per cent on worries that the same pressures could hit Indian companies.
Technology stocks have fallen to levels that are relatively cheap, but “the growth outlook remains uncertain, with AI-driven disruptions expected to continue," says brokerage Motilal Oswal.
Analysts are spooked about continued shrinking demand for labour-intensive software services, reduced pricing power and a growing wave of competition from both AI companies and customers bringing work back in-house thanks to their new AI capabilities.
For more than three decades, Indian outsourcing companies prospered by supplying vast armies of engineers to write code, test software, maintain applications and run technology systems for multinational corporations.
Artificial intelligence threatens the amount of human labour needed for many of those tasks. "The concern is that clients will need fewer people to deliver the same amount of work." And that means IT companies will have fewer billable hours.
Between 2000 and 2018, India's technology industry routinely created between 250,000 and 350,000 jobs annually. By contrast, for 2025-26, Nasscom projected only 135,000 new hires, reflecting a sharp slowdown in employment growth.
"What once required dozens of engineers can now be done by a much smaller team equipped with AI tools," says Jain. "The productivity gains are real, but they don't automatically create more demand."
Investors are particularly worried about application maintenance, software testing and routine support work, which account for a significant share of revenues across the industry.
"Every previous technology wave created more work for Indian IT companies," Jain says. "Y2K, enterprise software, digital transformation and cloud computing all generated fresh demand for armies of engineers."
Adding to the pressure is the rise of Global Capability Centres, or GCCs, through which multinational corporations are building technology teams in India and carrying out more work internally rather than outsourcing it to Indian vendors.
At the same time, a new breed of competitors is emerging from the AI industry itself. "One concern that isn't getting enough attention is that AI companies themselves are building services businesses," Jain says.
"OpenAI, Anthropic and others are not just building products. They're increasingly competing for services work as well."
The latest Morgan Stanley CIO survey shows technology budgets continuing to rise while spending on external IT services is slowing sharply. Instead of outsourcing more work, many companies are using AI tools to bring software development and maintenance back in-house.
"That creates a new source of competition for traditional IT services firms," Jain says. "The AI-related work is growing, but some of it may go directly to these AI-native services companies rather than to traditional outsourcers."
While firms such as Infosys, TCS and Wipro have announced partnerships with leading AI companies and invested heavily in training employees, there are doubts that new AI revenues can offset pressure on the sector's traditional businesses.
"The market is looking for one of the large players to deliver convincing results," Jain says. "If a major company starts showing genuine improvement in demand, the market could turn very quickly. At the moment, there isn't much evidence of that happening."
Not all parts of the technology sector face the same level of disruption.
Jain argues that engineering and research-and-development services companies such as Tata Technologies, Tata Elxsi, KPIT, Cyient and LTTS are likely to prove more resilient because their businesses are more closely linked to hardware, manufacturing and product development.
"Engineering services companies will be less affected by AI than pure software services companies," he says.
"The opportunities coming with AI are more on the hardware side," he says. "A lot of the next wave of AI investment will be in physical AI, robotics and automation, which creates additional work for engineering companies rather than replacing existing work."
He estimates that while software services could face disruption of 30-40 per cent in some areas, engineering services may see disruption closer to 5-10 per cent.
"Physical AI is the next frontier," he says. "We're talking about humanoid robots and automation systems, and that creates entirely new categories of engineering work."
But those opportunities from physical AI remain largely medium-term prospects, while the pain facing traditional IT services companies is immediate.
For now, analysts argue the industry's response has not matched the scale of the challenge. "If I were running one of these companies today, I would be accelerating acquisitions," Jain says.
"The priority should be expanding into new industries, new geographies and new client relationships before AI reshapes the market," he says.
Although most major firms are making purchases, analysts say the pace is insufficient. Even then, acquisitions take time to build and to deliver.
Among other major investment banks, Citi remains cautious, citing AI disruption, growing competition and the rise of GCCs as major risks. Nomura, meanwhile, warns the Middle East conflict is creating headwinds by delaying technology spending and slowing deal activity.
It all amounts to a perfect storm.