CLSA: AI to boost India's IT sector by FY30, faces short-term hurdles

A CLSA report projects AI as a long-term growth driver for India's IT services, expecting AI-led volumes to outweigh revenue pressure by FY30. However, it warns of near-term constraints due to weak macroeconomic conditions and softer demand.

Artificial intelligence (AI) could become a net growth driver for India's IT services industry over the longer term, with AI-led volumes potentially outweighing revenue pressure from automation by FY30, according to a report by CLSA. The report further warned that near-term growth remains constrained by weak macroeconomic conditions and softer discretionary demand.

CLSA's Assessment: Short-Term Pain, Long-Term Gain

CLSA said the industry is facing "multiple macro/micro headwinds", but expects AI to eventually create new growth opportunities. It said AI could initially compress revenues as productivity gains are passed on to clients, but "AI volumes could supersede deflation by FY30." The brokerage expects the industry's US-dollar revenue growth to reach mid- to high-single digits by FY31, supported by increasing AI-related demand. It also sees a potential industry growth inflection over the next 18-24 months, with FY28 emerging as an important period for stronger growth. "Near term negative but long term positive" is CLSA's assessment of AI's impact on systems integrators. The brokerage said it prefers to believe that AI will eventually provide strong growth opportunities despite near-term revenue compression. It also said there is currently no evidence of a major contraction in large deals or IT-services budgets among large global companies because of AI.

AI Spending on the Rise

AI spending itself is expected to expand sharply. According to CLSA and IDC estimates cited in the report, generative AI's share of overall IT services spending is expected to double to 11 per cent by 2029. Total technology spending linked to AI is also projected to rise across software, services and hardware, with AI applications and platforms seeing particularly strong growth.

Signs of Resilience in IT Demand

There are already signs of resilience in Indian IT demand. CLSA said most companies reported healthy year-on-year order-book growth, helped by cost-saving and vendor-consolidation deals. It also noted an improvement in revenue per employee across its covered companies, suggesting greater use of AI tools in delivery.

Lingering Concerns and Future Outlook

However, competitive intensity is rising, while weaker discretionary spending, geopolitical uncertainty and structural pressure from global capability centres remain concerns. CLSA also flagged the risk of IT services losing a share of global AI spending to hardware and software. The brokerage said the key question ahead will be whether AI-driven demand can scale quickly enough to offset the revenue deflation created by productivity gains, with the balance expected to improve towards FY30-FY31.

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