AI Deflation is Beginning to Hollow Out India’s IT Revenue Engine

During a recent earnings call, HCL Technologies chief executive C Vijayakumar articulated something that the Indian IT industry has largely avoided saying out loud for the past two years. A $100 million deal, he told analysts, could now shrink to $80 million. 

Artificial intelligence, by making the work faster and cheaper, is compressing contract values even before they are signed.

Industry analysts tracking enterprise technology spending suggest the 2-3% annual deflation figure cited by HCL may be conservative—possibly by a wide margin. Their broader assessment, spanning both Indian and global IT players, is that cumulative revenue compression from AI-driven productivity gains could reach 10-15% across traditional IT services over the next three to five years.

“It could be much larger than that,” Gaurav Vasu, Founder and CEO of UnearthInsight, tells AIM. “AI is clearly shrinking the need for a lot of traditional tech and tech services. HCL is acknowledging it, others are too. We have actually been saying for a long time that over the next three to five years, overall deflation could be in the 10-15% range.”

Strong Numbers, Weak Signals

On the surface, FY26 did not appear to signal a crisis. Infosys reported full-year revenue growth of 3.1% in constant currency and posted a 21% jump in quarterly net profit to ₹8,501 crore in Q4. TCS, the country’s largest IT company, delivered three consecutive quarters of sequential growth and ended the year with annualised AI revenue exceeding $2.3 billion. HCL Tech’s full-year revenue rose 11.2%, while Wipro described the environment as the “new normal” and announced a ₹15,000 crore share buyback.

Having said that, concerns are emerging beneath the surface.

TCS reported a 0.5% decline in full-year FY26 revenue. Its CEO, K Krithivasan, acknowledged “degrowth” in certain areas due to AI-led automation. “Our expectation is that AI will be net accretive. In the initial year, our attempt would be to… arrest degrowth while AI revenue increases,” he said.

Infosys has guided a cautious 1.5-3.5% growth for FY27, even as it signs high-profile AI partnerships with Anthropic, Cursor, and OpenAI. Wipro, which called the current environment the “new normal”, saw full-year net profit barely move and flagged continued weakness in discretionary spending.

“There will be a degree of deflation,” Praveen Bhadada, CEO and MD of Neovay Global, tells AIM. “The deflationary pressure is going to be very real as the years unfold. Looking at the next 12 months, we believe deflation across the industry could be in the 5-8% range, given the acceleration of AI innovations and influx of investments.”

At the same time, Bhadada remains optimistic that AI will unlock new use cases and drive modernisation, creating fresh opportunities that could offset some of the pressure.

The Walls Closing In

Analysts describe the revenue squeeze as coming from multiple directions simultaneously, making it structurally different from cyclical slowdowns the sector has faced in the past.

The client budget environment has shifted. Enterprise technology spending is no longer expanding at the pace seen in FY21 and FY22. Companies are consolidating rather than expanding, and discretionary spending—which once boosted large managed services contracts—has weakened.

At the same time, the nature of deals being signed has changed drastically. While Indian IT has continued to win contracts, clients are asking their IT partners to deliver the same outcomes at a lower cost, with AI as the enabler.

Hence, when AI-driven productivity gains are achieved through these contracts, the financial benefit flows back to the client as savings, not to the IT services firm as additional revenue. In effect, the more efficiently the firm delivers clients’ operations, the more it compresses its own future billing potential.

Moreover, competition is intensifying. Thousands of private equity- and venture capital-backed AI-native startups are building specialised, vertical solutions in areas like financial services, healthcare claims processing, and supply chain intelligence.

Unlike traditional IT firms, these players do not compete on headcount or delivery scale. They compete on intellectual property, product strength, and domain-specific AI capabilities, often without requiring a large services wrapper.

Why Outcome Pricing Hasn’t Arrived

One frequently cited potential countermeasure for Indian IT is a shift to outcome-based pricing—contracts in which firms are paid for business results rather than time-and-materials effort. In theory, this model insulates revenue from deflation by tying earnings to outcomes instead of headcount.

In practice, however, analysts say this transition remains some distance away. Outcome-based pricing works best when firms sell AI applications with clearly defined, measurable outputs. But as long as most revenue continues to come from implementing or maintaining SAP, migrating workloads to AWS, or providing engineering services, pricing discussions with clients remain anchored in effort and inputs.

“That will happen once they start selling AI applications as a service,” Vasu explains. “I don’t expect that to happen today. It is still a largely linear-driven model.”