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AI's Deflationary Hit: IT Services Growth Slows
1 May
Summary
- AI adoption may cause 3.5% annual revenue deflation for IT.
- Global tech spending grows over 10%, IT services lag significantly.
- Mid-tier IT firms better positioned for emerging AI opportunities.
The IT sector is experiencing a significant shift as enterprise budgets increasingly prioritize AI infrastructure, software, and platforms. This reallocation of funds is diverting resources from traditional IT services, impacting overall growth.
Kotak estimates that the adoption of generative AI could lead to an annual revenue deflation of approximately 3.5% over the next few years. This effect is evident in the widening gap between overall technology spending, which grew 10.9% in 2025 and is expected to reach 13.4% in 2026, and IT services growth, which slowed to 3.1% in 2025 and is projected to reach only 4.2% in 2026.
This trend indicates a gradual loss of market share for IT services within broader enterprise technology budgets. The situation is further compounded by increasing pricing pressure on both new deals and renewals, as clients demand greater cost efficiencies. Intense competition among operationally stable Tier-1 companies is also limiting opportunities for market share gains.
Despite these near-term headwinds, a long-term positive outlook remains. Kotak believes the AI-led deflationary impact is cyclical and could reverse within two to three years as new opportunities in AI implementation, data architecture, and governance emerge. Verticals like financial services and energy remain resilient, and mid-tier IT companies are seen as better positioned to capture these emerging opportunities compared to larger incumbents.
