India's IT giants are navigating a complex landscape marked by increasing AI demands and persistent tariff uncertainty, showcasing resilience and adaptability in the face of global economic challenges. Companies like TCS, Infosys, HCL Tech, and Wipro have demonstrated sustained deal momentum, adapting to the growing need for AI capabilities while facing potential US tariffs.
Adapting to the AI Revolution
Indian IT companies are proactively integrating AI into their service offerings. Instead of focusing on creating foundational AI models, they are positioning themselves as leaders in applying AI across various businesses. This strategic shift involves investing in employee upskilling, forming partnerships, and establishing innovation labs to drive enterprise-wide AI adoption. TCS reports over 100,000 employees with advanced AI and ML skills, while Infosys has over 270,000 "AI-aware" employees.
These IT giants are not competing with the likes of OpenAI or Google in building large language models (LLMs). Instead, they are deepening partnerships with hyperscalers like Microsoft, Google, and AWS, as well as chipmakers like Nvidia, to access the latest models and infrastructure. This approach allows them to focus on high-margin AI applications and integration.
Indian CEOs are recognizing AI as a top investment priority, with 57% planning to allocate 10-20% of their budgets to AI over the next year. They anticipate returns on these investments within one to three years. Indian companies are also experimenting with AI to discover new use cases, with many having started more than 10 AI pilots in 2024. Areas of focus for AI investment include IT operations, software coding, and data quality management.
Navigating Tariff Uncertainty
The Indian IT sector is apprehensive about potential US tariffs on software exports, which could significantly impact the industry's largest market and exacerbate existing challenges from global business uncertainty and AI-driven automation. The imposition of tariffs could lead to double taxation for Indian software service providers and increase operational costs due to a surge in hiring in the US or nearby locations. Some experts have warned that such tariffs could result in dual taxation and increased operational costs, further straining the sector.
The US tariffs of 50% on Indian exports have already affected sectors like textiles and apparel, and gems and jewellery. While the IT sector may not be directly hit, rising input costs could prompt US companies to reduce discretionary tech spending. Concerns arose after suggestions of applying tariffs on all outsourcing and foreign remote workers.
To mitigate these challenges, India is seeking to diversify its exports to markets in Africa, Latin America, Southeast Asia, and China. The sector is also focusing on building resilience by creating competitive global brands and exploring opportunities arising from the disruption.
Resilience and Future Outlook
Despite the challenges, Indian IT companies have demonstrated resilience in their September quarter results, reporting sustained deal momentum. They are proactively developing strategies to implement AI capabilities in their offerings, securing new deals based on their AI-enhanced services. This aligns with current market dynamics, where AI is driving a significant portion of discretionary IT spending.
Improved hiring and a weaker rupee are expected to support performance in the latter half of the fiscal year. While it's too early to declare a complete transition to advanced AI, the strong deal pipelines of these companies are a positive sign. Addressing the uncertainty related to tariffs remains a key requirement for long-term decision-making.
The Indian IT sector is adapting to technological changes and integrating AI capabilities into their service deliverables. This proactive approach, combined with a focus on upskilling and strategic partnerships, positions them to navigate the challenges and capitalize on the opportunities presented by the AI revolution and global economic uncertainties.
