What is the predicted impact of AI on Indian IT contract deflation?

AI is expected to increase annual contract deflation to 6-7%, nearly double the previous rate, as clients demand higher discounts due to enhanced automation and cost savings.

What is the base case growth projection for the Indian IT sector?

In the base case, Indian IT companies are projected to adapt to AI, with growth recovering to mid-to-high single digits.

How might AI change IT budget allocation?

AI could reduce maintenance costs, leading enterprises to reallocate savings towards innovation and transformation projects rather than cutting overall tech budgets.

Home / Business and Economy / AI Sparks Indian IT Sector Shake-up, Growth to Recover

AI Sparks Indian IT Sector Shake-up, Growth to Recover

23 Feb

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Summary

AI may cause 6-7% annual deflation in IT contracts.
IT sector to adapt, recovering to mid-high single-digit growth.
Valuations may return to early twenties in a base case scenario.

AI Sparks Indian IT Sector Shake-up, Growth to Recover

The Indian IT sector is navigating a period of significant change due to advancements in Artificial Intelligence. Experts predict that AI could lead to higher contract deflation, potentially doubling annual revenue deflation from 3-4% to 6-7%. This shift is driven by clients demanding greater discounts, moving from 15-20% to 20-30%, as AI enhances automation and cost savings. This increased deflation is currently the primary challenge for the sector.

However, a more optimistic outlook suggests that Indian IT companies will adapt, mirroring their response to previous technological disruptions. This adaptation is expected to facilitate a growth recovery to mid-to-high single digits. As AI is monetized and implemented within existing IT infrastructures, demand is anticipated to rise. This scenario could lead to valuations returning to the early twenties, a significant improvement from potential bear-case multiples of 10-12 times earnings.

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