Artificial intelligence is reshaping India's IT sector, causing 'AI-deflation' and pricing pressure as productivity gains are passed to clients. This intensifies competition and tightens margins, even as new AI-led demand emerges, a report says.
Artificial intelligence (AI) is increasingly reshaping the growth and margin outlook for India's IT services sector, with firms facing rising pricing pressure even as new demand opportunities emerge, according to a recent sector report by Kotak Institutional Equities.
The Rise of 'AI-Deflation' and Competitive Pressure
The report flags higher competitive intensity amid demand and AI headwinds, noting that AI-led productivity gains are now being passed on to clients, resulting in what it terms "AI-deflation." It adds that industry players indicate "pricing pressure in renewals due to client expectations of higher productivity pass-through driven by GenAI adoption," alongside intensified competition.
Evolving Business Models and Deal Structures
A key shift underway is the rise of large transformation deals, driven by cost optimisation and AI adoption. While deal wins are accelerating, the report cautions that "large/mega deals can carry margin and execution risks due to higher pricing pressure driven by AI-deflation."
The traditional IT services model is also undergoing structural change. According to the report, the sector is shifting its economics from labour-based to outcome-based models and moving toward AI-infused rate cards, where pricing reflects a blended model of human and digital effort.
Corporate Responses and New Opportunities
To counter margin pressures, companies are undertaking restructuring initiatives focused on automation and workforce optimisation. These programs aim to deliver AI-led operational efficiencies while freeing up capital for reinvestment into AI capabilities and future growth areas.
At the same time, AI is opening new revenue streams. The report highlights strong demand for AI-led services and notes that companies are already seeing scale, with over 5,000 AI engagements and a growing share of AI-assisted work in delivery. Demand drivers include customer service transformation, enterprise automation, and infrastructure expansion, particularly as global technology firms ramp up investments in AI. The report points to AI data centre infrastructure buildout as a major emerging opportunity area.
Navigating a Challenging Transition
However, near-term conditions remain challenging. The report states that the "demand environment has softened" and highlights "incremental stress in the sector from macro deterioration and AI deflation," which is weighing on both growth and margins.
It concluded that while AI is a powerful long-term growth driver, it is simultaneously compressing traditional revenue models, leaving the Indian IT sector navigating a period of transition marked by tighter margins, evolving pricing structures, and heightened competition. (ANI)
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