Three Signs That Investments In India's IT Sector Will Pay Off In An AI-First Future

The IT services sector continues to offer stable growth and investment opportunities thanks to ongoing digital transformation projects across the globe. The industry is also protected to a degree due to its value model built on technical expertise. 

As a result, the outsourced IT services market stands at $573 billion globally and, with an 8% annual growth rate, is on track to nearly double by 2031, according to analysis from Baird Capital. 

The sector is also a significant lever for growth and employment in India, the world’s most populous country, with revenue expected to pass $300 billion in 2026 and to add 126,000 jobs on a net basis according to a Reuters report citing commentary from NASSCOM. 

However, the continued evolution of AI has also given rise to Agentic AI, which has concerned investors as the evolved AI emphasizes autonomous systems capable of making decisions without human intervention, and could impact employment, among other areas. 

Investors need to be aware of how the technology is likely to impact the IT service sector and potentially disrupt the longstanding layers of protection around revenue. 

This is particularly true in India, where the Indian IT sector is projected to contribute around 10% of the nation's GDP.

While foreign direct investment (FDI) into India has fallen this year, the following three trends indicate that there is still plenty of room to be bullish on India’s IT sector in 2025. Here's what investors need to know. 

AI won't take away jobs from India's 5.8 million person IT sector 

One of the largest concerns with the rise of AI is its potential impact on jobs in India, with the IT sector being a significant employer within the Indian economy. For instance, according to a report by McKinsey, by 2030 up to 60% of jobs could be significantly altered by AI tools.

However, the rise of AI has shaped the IT labor market in ways that are contrary to what many doomsayers have expected. 

For example, at first glance the recent news that Microsoft Corporation (MSFT) is laying off 6,000 employees grabs the headlines and could support the idea that AI will replace large swathes of the workforce. 

However, Microsoft shared that the figure is less than 3% of its workforce, as "organizational changes necessary to best position the company for success in a dynamic marketplace,” and not due to AI. 

In fact, recent data showed that the rise of GenAI has had a limited impact on the job market so far, according to economists Anders Humlum and Emilie Vestergaard.

“AI chatbots have had no significant impact on earnings or recorded hours in any occupation,” the authors state in their paper.

For software engineers in India, AI hasn't eliminated the need for employment, but rather changed how value is distributed internally and as a service. It is also changing the employee roles and departments most critical to company growth. 

Employment in the IT sector will remain a pillar in India's economy, and we can expect even more investments to flow into this. The reason is, to protect future revenue and the stability of IT service companies, decision makers will need to double down on investments in people and talent.

This will include software engineer talent, data science, security, and more. 

As AI flips the software engineer service pyramid, India is in a strong position for re-skilling 

For investors in India, the country's IT sector and the greater digital economy are clearly major economic drivers for its economy. 

This is why attention needs to be paid to the ways that AI is changing the very fundamentals of how IT services are structured and sold. The rise of AI doesn't mean that these aren't valuable, however companies must get ahead of how it's changing the fundamental economics of the industry. 

Most notably, it's expected to invert the traditional hierarchy based on a higher volume of junior engineers to fewer senior engineers. This pyramid is historically how IT service firms built contracts. 

Now, with AI, this pyramid will invert on itself. The need for high volumes of junior engineers is replaced by AI which can take on simple coding tasks. 

According to Ness CEO Dr. Ranjit Tinaikar in The Economic Times, a study by his company was conducted into the impacts of AI on software engineering productivity. Ness found that AI wasn't just changing the way that tasks were completed, but was actually changing the very structure of the team needed.

"We used AI-enabled software engineering tools to study the impact on productivity. And we came up with four results," said Dr. Tinaikar. "The first result was that senior developers get more benefits from AI than junior developers. Both of them had productivity improvements, but senior people had more value from it." 

"Now, if AI says that the senior engineers are still valuable, but the junior engineers, you will end up compressing. What happens to the pyramid of an IT services industry? It has fundamentally changed," he added.

The good news is that India is well prepared for this change, in particular due to the country's younger workforce. The reason is, according to studies younger employees are more likely to welcome training and development to prepare for the future of AI in the workplace. For instance, three-quarters of Gen Zs (74%) and millennials (77%) believe GenAI will impact the way they work within the next year. 

Today 52%, or more than half, of India’s population is under the age of 30. 

The India Corridor will flourish with so many engineers in the country

A trend worth noting is the India Corridor, in which India's engineering talent found companies abroad, including in Silicon Valley, while maintaining large development teams in India and further supporting the nation's IT sector. 

Harbir Kaur Bhatia, CEO of the Silicon Valley Central Chamber of Commerce, noted, “Indians are one of the largest leaders of innovation in Silicon Valley. At one point, the data showed 40 per cent of Silicon Valley CEOs or founders were from South Asia or India." 

Further, a third of top graduates from the prestigious Indian Institutes of Technology move abroad to continue their professional careers. These represent high-quality graduates who hold engineering skills in high demand with companies globally. 

Rather than being a typical brain drain, this export of tech talent is acting as a way to strengthen diplomatic ties, send resources back to invest in India’s IT sector, and also to nurture the country’s homegrown tech scene. 

With increasing tension between China and the U.S., India's IT sector looks set to benefit. Said Frank-Jürgen Richter, Chairman of Horasis, in an interview, “India is also making significant strides diplomatically, with new think tanks and institutions positioning the country as a major player on the international stage. However, India distinguishes itself by not positioning itself as a counterpart. Instead, it follows a non-alignment philosophy, striving to maintain good relations with all nations. This approach, along with India's democratic governance, is a significant advantage.”

We should expect to see increased investments from US business and venture capitalists into the country's tech sector.

When it comes to the India Corridor, Rajat Mishra, CEO of business communication platform Prezent, which recently closed a $20M funding round, offers an example of the cyclical benefits that could come from India's tech talent migrating.

Founded in 2021 in Los Altos, his company also has a team in Bengaluru employing local talent. This is part of a wider trend of interest in Bengaluru, also known as India's Silicon Valley, where Google is investing heavily in office perks and infrastructure. 

For investors, the strength of India's tech labor market and the influence of the India corridor are noteworthy. 

Today, India has the fastest-growing developer community and it is projected to become the world’s largest by 2027.

However, the strength of India's deep tech talent pool isn't just about the scale of numbers. As AI tools like CoPilot continue to develop, this is fundamentally changing the productivity of software engineers and how teams collaborate and operate. 

India is well positioned for this.

As the country prepares to see growth for its tech sector, getting ahead of AI's role in the IT services industry will be key to the future, helping unlock new opportunities.