Artificial intelligence is rapidly transforming the technology services industry, but the immediate impact may be more painful than profitable for Indian IT companies. According to a JP Morgan report, AI-driven productivity improvements are creating “deflation” in traditional IT services, a trend that could suppress industry growth and delay a full recovery until FY30.
The brokerage said the Indian IT services industry is still in the first phase of its three stage AI adoption cycle, where productivity gains from AI are reducing demand for legacy technology services faster than new AI related business can replace it. As a result, the sector continues to face structural growth challenges despite strong enterprise interest in AI.
“We expect AI adoption to follow a classic three stage Deflation, Digestion, Reflation cycle,” the report said. “The first stage of Deflation comes from AI led productivity gains in legacy and maintenance heavy areas that are not entirely compensated by new AI services.”
J.P. Morgan noted that enterprises are increasingly allocating technology budgets towards AI models, AI tokens and cloud infrastructure, leaving fewer resources for conventional IT outsourcing projects. This shift has contributed to the Indian IT services industry remaining stuck at just 2 to 3 per cent revenue growth over the past three years.
The report estimates AI driven deflation could reduce industry growth by 2 to 4 per cent annually during the current phase. It also expects large IT companies to deliver only 3 to 4 per cent medium term revenue growth, well below the sector’s historical average of 7 to 8 per cent.
The brokerage warned that geopolitical uncertainty is compounding the problem by making enterprises more cautious about technology spending. “India IT is going through an uncertain demand environment never seen in its long history, with multiple headwinds from GenAI led deflation and geopolitics,” the report said. “It is becoming tougher for enterprises to formulate a clear tech strategy.”
While AI is expected to become a long term growth driver, J.P. Morgan believes the industry must first pass through a prolonged “Digestion” phase before reaching the “Reflation” stage, when AI services become a meaningful share of enterprise technology spending. Until then, investors should prepare for slower revenue growth, lower valuations and continued earnings pressure across much of the Indian IT sector.
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