India's IT Giants Built the New Middle Class. Can They Survive AI?

India’s IT giants have been the shining examples of the India growth story. They have not only emerged as the biggest companies in India, but they have also opened the doors for hundreds of thousands of people from the hinterland to enter the white-collar middle class. Now, for the first time in three decades, they are facing a deep existential crisis. Artificial Intelligence (AI) is eating into the services they provide to their global corporate clients, causing their business models to collapse. Each time an AI company releases a new enterprise model, it reduces the value of Indian IT firms.To understand why, we need to rewind four decades to the time when white-collar jobs mushroomed in the West. This was in the 1980s, when the US and UK were privatising their economies. As the private sector took over all aspects of life — from coal mines to banks, railways to water supply — they needed a large army of educated people who could manage, supervise, and operate large systems. This sharply increased the number of ‘intellectual’ workers in the corporate sector.From the early 1980s, big global companies began outsourcing their manufacturing requirements to the Third world, especially China. This reduced their wage bills when it came to blue-collar workers, but there was a corresponding rise in white-collar managers who would oversee these global supply chains.More Degrees, Fewer Jobs: Inside India's Campus Placement CrisisThe internet revolution, in the late 1990s and early 2000s, gave American and European companies their first chance to reduce their white-collar salary bill as well. Many supervisory and operational functions could now be automated using software, and managed remotely from other countries.This is where India had a massive advantage over other nations. We had the largest English-educated population in the 'third world', and our IITs and other technical schools had produced a sizeable pool of computer science graduates. On top of that, government companies like CMC and ASCI, and TCS in the private sector, had already shown from the 1970s that we could successfully manage complicated systems abroad, using teams sitting in India.This happy combination of circumstances — big global firms looking to cut their white-collar salary bill, the internet enabling outsourcing, and India’s training advantages — helped Indian IT companies to get big contracts for IT services outsourcing and maintenance.An additional reason for their massive growth from the early 2000s was the financial boom that took place at that time. Banks, finance companies, insurance majors, all needed their systems to be computerised and streamlined. No wonder, therefore, that the Banking, Financial Services, and Insurance (BFSI) segment became the most lucrative for India’s IT companies.Indian IT firms not only ran and maintained the software backbone of global businesses, they also sent cheap white-collar workers to operate the systems on location. This kind of work — called ‘onsite’ — was not new. The Hyderabad-based government agency, ASCI, had already done such onsite work in Russia and the Soviet-bloc countries from the 1970s. Of course, the scale expanded enormously from the 2000s. Hundreds of Indian tech workers went to work in the offices of their clients. The US was a major destination, resulting in the H1B visa explosion over the past two decades.The wheel has come full circle now. The very functions that were easy to outsource to India can now be done by AI agents. It is important to understand here that AI does not need to replace every Indian IT worker. Even a 20 percent drop can completely destabilise Indian IT — both in billable hours and in terms of the employment that IT companies provide to the Indian middle class.The biggest problem for Indian IT firms is that the AI giants — Anthropic, OpenAI, Google — have access to massive amounts of funding. So, they can subsidise their AI platforms to acquire corporate customers for years to come. What an Indian IT firm might charge per hour for a mid-level developer would be enough to run a top-level AI agent for a week. It is going to be impossible to compete against this without drastically slashing the Time and Materials (T&M) or the Fixed-price and Fixed-bid rates that Indian IT companies have been charging until now.Whatever they might say in public, companies like TCS, Infosys and others have accepted the inevitable. They are now trying to pivot to a new business model for the AI-enabled world. The argument is that even companies that are onboarding AI systems need expert help to achieve the most efficient integration with their business needs. This will have to be done by trained humans, and that work will still be done cheaper by Indians sitting in Hyderabad or Bengaluru, than by an American IT employee in New York. Even sending an Indian employee abroad to work onsite will be cheaper for foreign clients. This is the new model that Indian IT companies are hoping to master. Work Hard, Live Poor: The Broken Economics of India’s Hustle CultureBut investors see it differently. While many analysts acknowledge that Indian IT will find a way to survive, the broad consensus is that the days of high growth are over. In fact, some point out that IT firms have been able to grow their rupee earnings mostly because our currency has weakened sharply — so the same dollar earnings have translated into much higher rupee revenues. Indian IT firms have historically traded at a 20–22x Price-to-Earnings ratio. That was justified when growth rates were very high. Now that future growth is likely to be much more muted, the markets are going to rerate IT stocks. This has already happened. Today, the NSE Nifty IT index trades at roughly 16x its 2026 forward earnings, and very few analysts expect this to change.However, the Indian IT story is not just about the companies and their stocks. IT has been one of the biggest white-collar employers in India, along with finance. If IT companies can only survive by sacking people — as they have already done — it will cause colossal collateral damage to India’s middle class. That, in turn, will affect the entire economy, as middle-class consumption shrinks further.This is a fundamental crisis not just for Indian IT but for the entire Indian economy.(The author was Senior Managing Editor, NDTV India & NDTV Profit. He tweets @Aunindyo2023. This is an opinion piece. The views expressed above are the author’s own. The Quint neither endorses nor is responsible for them.)

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For the First Time in 30 Years, India's IT Story Faces an Existential Threat

Each time an AI company releases a new enterprise model, it reduces the value of Indian IT firms.

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Topics: IT artificial intelligence (AI)