India's prestigious information technology sector, valued at $283 billion, is navigating a significant shift as its growth trajectory decouples from that of its largest global clients. Since 2023, revenue expansion at the country's five biggest IT services companies has fallen behind the growth rates of the multinational corporations they serve, signaling a fundamental change in global technology expenditure patterns.
The Great Decoupling: A New Reality for IT Giants
Analysts from ICICI Securities highlighted this worrying trend in a note dated 28 November. Prior to 2023, the revenue growth of Indian IT services firms showed a strong correlation with the performance of major global indices like the S&P 500 and the Stoxx Europe 600, which serve as proxies for their client base. However, this link has weakened considerably. Currently, the top five Indian IT companies are growing at a modest 1-2%, while their clients on the S&P 500 and Stoxx 600 are seeing revenue increases of 3-5% or more.
This divergence is stark in the technology sector itself. Revenue for technology companies within the S&P 500 surged upwards of 15%, whereas the tech revenue of Indian IT services providers grew by only about 1%. ICICI analysts Ruchi Mukhija, Aditi Patil, and Seema Nayak attribute this gap to tech firms being early adopters of Generative AI, using the technology to optimize costs and consequently reducing their spend on external IT services.
Automation and AI: Reshaping the Client Playbook
The traditional model, where robust growth at large global companies directly translated into more business for their IT vendors, is being upended. The rise of automation tools is a primary disruptor. Projects are now increasingly priced based on outcomes rather than the number of personnel deployed, reducing the need for large headcounts even when revenue increases.
According to a Nomura report from 27 November, this "deflationary impact" from AI-driven productivity is hurting the net revenue growth of Indian IT firms. In an uncertain macroeconomic environment, clients are intensely focused on cost reduction and are delaying discretionary spending. Furthermore, multinational corporations are shifting their budgets toward building AI infrastructure, data modernization, and automation—investments that often involve heavy capital expenditure and cloud commitments rather than traditional outsourcing deals.
Spending Shifts and Internal Capabilities
Experts point to three major headwinds causing the growth gap: the shift of IT spends to Global Capability Centers (GCCs or in-house tech centers), increased spending on AI infrastructure and product companies, and the deflationary pressure from GenAI-driven productivity gains.
Peter Bendor-Samuel, founder of Everest Group, explains that the expected growth for IT services companies "did not show up... as it was stolen or shifted" by insourcing and the direct application of AI by client firms themselves. Phil Fersht, CEO of HFS Research, notes that while big enterprises are growing revenue through AI-fuelled productivity, they are not expanding traditional "run-the-business" IT contracts at previous rates.
The financial results reflect this pressure. For the last fiscal year, Tata Consultancy Services (TCS), Infosys, and HCLTech reported revenue growth of 3.78%, 3.85%, and 4.3% respectively. In contrast, Wipro's revenue declined by 2.72%, and Tech Mahindra's fell by 0.21%. This is a sharp slowdown from the 7-12% growth these companies enjoyed in FY23, a period boosted by the digital acceleration during the Covid-19 pandemic.
Cautious Outlook with Glimmers of Hope
The leadership of India's IT majors acknowledges the challenging landscape. K Krithivasan, CEO of TCS, stated in October that IT services spend is steady with no significant near-term change expected, citing lingering economic uncertainties and tight control over discretionary budgets by clients.
However, there are potential tailwinds. Nomura analysts Abhishek Bhandari and Karan Nain suggest that a faster rate-cutting cycle by central banks and an improvement in the macroeconomic situation could boost growth. Lower borrowing costs would enable companies to invest more in non-essential tech projects, a key revenue source for Indian IT. For now, the sector, which contributes 28% of the country's overall tech industry, remains in a cautious holding pattern, adapting to a new era defined by intelligent automation and changing client priorities.
