AI Adoption in IT Services to Weigh on Sentiment but Boost Broader Economic Productivity: Kotak Institutional Equities Analysis

India's IT Services Sector at Risk of Disruption from AI

Key Findings

• Sanjeev Prasad, a senior analyst at Kotak Institutional Equities, predicts that artificial intelligence (AI) could gradually disrupt parts of India's IT services sector, leading to a decline in spending sentiment among technology professionals.
• The broader economy may benefit from productivity gains and structural shifts, according to Prasad's latest strategy report.

Impact on Employment

Read also: Treasury Yields Experience Largest Increase in Two Weeks Following Release of Labor Market Data

• AI-led disruption in the sector is expected to play out gradually, with a possible deflation in the price of IT services.
• Uncertainty about job stability may weigh on household behavior, leading to a softening of sentiment among IT services households.
• Households may slow discretionary spending and become hesitant about long-term commitments, such as 15-year housing loans, due to concerns about income and job stability.
• The overall employment impact may be limited, as services account for 55% of India's GDP, but employ only around 30% of the workforce.

Economic Impact

• India's IT services exports sector, including BPO and Global Capability Centres (GCCs), accounts for around 6.5% of GDP and employs about 1% of the workforce.
• The sector's influence on incomes is significantly higher than its employment share, with an average IT service worker earning around 3-4X of an average Indian worker.
• A moderate impact on the Indian economy is possible if revenues in the IT software services sector slow or hiring weakens.

Productivity Gains and Structural Shifts

Read also: US-Iran Tensions Spark Uptick in Oil Prices Amid Global Market Decline

• AI could generate productivity gains across the economy, enabling superior credit assessment, better pricing, and lower potential non-performing loans (NPLs).
• The technology could also allow enterprises to undertake more digital initiatives, with lower project costs enabling companies to pursue a larger number of IT projects within the same spending envelope.
• A potential structural shift in workforce choices may occur, with disruption in IT services encouraging more Indian engineers to pursue careers in core engineering or industrial manufacturing.