AI adoption rises, but global uncertainty keeps Indian IT on edge

The earnings season for the Indian IT industry has begun, with TCS and HCLTech announcing their Q3 results, offering mixed signals. While revenue growth at TCS remained tepid, HCLTech continued to lead among large IT firms. One clear trend, however, is the growing impact of AI adoption. And it is already reflecting in headcount numbers.

TCS saw its total employee base decline by more than 11,000 in the third quarter of current financial year. Over the last six months, its employee count had fallen by around 30,000. HCLTech also witnessed a marginal decline, with its total headcount shrinking by 261 during the third quarter. Although many IT companies are yet to announce their Q3 performance, the overall picture is unlikely to be very different, barring a few exceptions.

Two key challenges continue to weigh on the sector. First, the demand environment remains subdued, with geopolitical uncertainties and the threat of Trump tariff policies creating obstacles to any meaningful global economic recovery. Second, the adoption of artificial intelligence (AI) is forcing significant business disruption for Indian IT services companies. Their traditional business models are under pressure as AI-led adoption gains momentum. However, the overall enterprise adoption remains slow. As management teams have pointed out, clients are frequently shifting their AI spending plans. That makes big spending difficult at this point of time.

While any major technology shift is bound to be gradual, there is a silver lining: AI offerings are seeing increasing acceptance and are no longer confined to proof-of-concept (PoC) projects. “Enterprises are transitioning from AI pilot programmes to ROI-driven deployments,” said HDFC Securities, adding that decision-making cycles have shortened as spending commitments become more visible.

However, rising demand for AI-led services is still not enough to significantly accelerate revenue growth. This is because the legacy part of the business continues to face tepid demand. Unless global economic growth recovers, a sharp upside in IT earnings remains a far cry. Given the geopolitical volatility across the world, near-term stability also appears unlikely.

Another key takeaway from the earnings of TCS and HCLTech is that AI-powered productivity gains are beginning to reshape the employee pyramid. Many repetitive tasks are being automated through agentic AI tools, reducing the need for large numbers of entry level jobs. More importantly, with rising AI adoption, many mid-level jobs are also coming under pressure. If employees at this level fail to upskill in practical AI capabilities, redundancy becomes inevitable. This wave of optimisation is leading to job losses across companies and is unlikely to stop until the AI cycle stabilises.

Meanwhile, pricing is another area under pressure. Clients are demanding productivity gains be passed on to them, leading to project price reductions of 20-30 per cent in some cases. Additionally, projects are becoming smaller and shorter in duration owing to the AI wave.

This means means IT firms now need to win a higher number of smaller projects to maintain their total contract value (TCV). The world is undergoing rapid shifts, both technologically and geopolitically. How Indian IT firms navigate this complex landscape, balancing business model and employee-investor expectations will determine their long-term trajectory.