On February 4, the $300 billion Indian IT sector faced a moment of reckoning.
The country’s benchmark IT stocks index slumped nearly 6%, reacting to Anthropic’s release of its Claude Cowork agentic plugin.
The new plugins are designed to automate precisely the high-volume, repetitive knowledge work that has been the bread and butter of Indian IT: contract reviews, regulatory compliance tracking, and sales forecasting, among other things. The stock sell-off was triggered by fears that clients could now use AI for such tasks instead of outsourcing them to companies in India.
The Indian IT model is now facing existential pressure.”
This was the first concrete sign of AI’s long-feared threat to the industry, which makes for 10% of India’s GDP and directly employs 5 million people.
Indian IT firms have been preparing for this eventuality. Still, experts who have observed the industry closely believe many of these companies and their services will soon become obsolete. AI won’t kill the entire sector, they said, but only the companies that innovate and adapt to AI quickly will thrive in the future.
“The math is simple: If a U.S. company can automate legal contract reviews internally using Claude Cowork or OpenAI Codex, why would they pay for a 50-person team in Bengaluru to do it?” Ishan Talathi, co-founder of Pune-based cloud infrastructure firm CloudPe, told Rest of World . “The Indian IT model is built on man-day billing; we charge for bodies on projects. That model is now facing existential pressure.”
Over the past four decades, India has become the “back office of the world,” recruiting affordable labor in cities like Bengaluru, Hyderabad, and Pune to execute low-end tech-related tasks for clients in North America and Europe. The cost of labor in India can be 60%–80% cheaper than in the West.
Talathi believes up to half of traditional outsourcing work is directly exposed to extinction by AI, with areas like contract reviews, compliance documentation, data processing, routine coding, and testing being the most vulnerable.
The business model shift “forces an overdue evolution from cost arbitrage to genuine innovation, which is healthy, [but] a mismanaged transition could devastate urban economies, real estate, and ancillary services,” Talathi warned.
Typically, IT services companies rely on billable hours — charging clients for the amount of time spent on projects. With a smaller workforce and more AI, “the timelines of engagements will massively shrink further, impacting billing,” Yugal Joshi, partner at global research firm Everest Group, told Rest of World .
In recent years, companies have been trying to insulate their business models. Market leaders Tata Consultancy Services and Infosys have been integrating generative AI and machine learning into their core business processes and offerings.
AI should not be viewed as an existential risk to Indian IT, but as a filter.”
By mid-2025, India’s top five IT companies had trained more than 250,000 employees on AI.
TCS — the biggest Indian IT firm and the first and only one to publicly disclose this information so far — pegs its annualized AI services revenue at $1.8 billion . That’s around 5% of the company’s quarterly consolidated revenue.
“Large enterprises don’t engage Indian IT firms to run isolated tasks; they outsource complex, interdependent systems with accountability attached,” Nirmit Biswas, senior research analyst at Market Research Future, told Rest of World . “AI tools may shorten delivery cycles, but they don’t replace vendor responsibility for uptime, integration, compliance, or transformation outcomes.”
Biswas estimates only “roughly a fifth of the effort embedded in traditional IT delivery” to be affected by AI. “That does not translate into a similar proportion of revenue at risk,” he said.
As of now, experts said, junior roles that execute repetitive, standardized tasks are most vulnerable. Mid-level jobs with low specialization could also become redundant in the next decade. Workers who upskill will likely continue to earn good salaries.
“AI should not be viewed as an existential risk to Indian IT, but as a filter,” Biswas said.
Some believe that AI’s threats may push the Indian IT industry into a better direction.
“The scaremongering has some merit, and not every tech services firm will survive,” Joshi said. “The impact will not depend on an industrywide AI impact, but the strategic initiatives each service provider undertakes. Speed to partner with AI vendors, scaling solutions, and internal operating model transformation will be crucial.”
