The sell-off has been driven by anxiety over artificial intelligence and whether it threatens the core economics of India’s $250 billion technology services industry. Investors who once saw the sector as a defensive compounder now fear that generative AI could automate coding, testing and maintenance work that traditionally powered Indian IT growth.
A new report by Aequitas says the correction may not just be about AI hype, but about capital allocation choices made over the past five years.
Between FY20 and FY25, India’s top five IT companies returned about Rs 4.8 lakh crore to shareholders, equivalent to roughly 87% of their combined net profits. TCS alone distributed close to 99% of its earnings during this period. In 2025, Infosys announced one of its largest-ever buybacks, worth Rs 18,000 crore.
These payouts reflected strong cash generation and disciplined balance sheets. But Aequitas said prioritising dividends and buybacks could have come at the cost of reinvesting aggressively in future technologies such as AI, machine learning and proprietary platforms.
The report highlights a widening research and development gap. The share of total corporate R&D spending by the Indian IT software sector fell from 4% in FY21 to under 3% in FY24. By contrast, global technology majors invest double-digit percentages of revenue in R&D. Microsoft spends around 13-14%, Alphabet 15-16%, Meta over 20% and Amazon roughly 10-12%.
The distinction is between owning technology stacks and delivering services on top of them. Indian IT firms historically perfected execution, scale and cost efficiency. Western tech giants focused on product innovation and platform control.”That difference becomes more critical when AI shifts the value chain from integration to automation-driven innovation. The fear in markets is that highly autonomous tools could compress billable hours and weaken the traditional pyramid staffing model. If enterprises use AI tools to generate code internally, the addressable revenue pool for outsourcing could shrink,” it said.
Meanwhile, Motilal Oswal’s Abhishek Pathak estimates that 12-15% of sector revenue faces direct exposure to AI-driven productivity and displacement risk. “In the long term, answers to whether the industry goes extinct, thrives, or just survives will not come easily,” he said.
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Nomura’s Abhishek Bhandari takes a more measured view. “We believe these concerns are oversimplifying the role of IT services companies,” he said. According to him, large enterprises prioritise risk management and regulatory compliance over short-term cost savings. He adds that the sell-off reflects “front-loading of pains” before new AI-led business models scale up.
Aequitas says that this is not yet an existential threat for Indian IT, but a transformational one. Companies that fail to evolve towards AI-driven solutions risk margin compression and loss of strategic relevance.
The stakes go beyond stock prices. The IT sector contributes around 7.3% of India’s GDP, employs about 5.8 million professionals directly and accounts for roughly $224 billion in services exports, nearly 58% of total services exports.
A prolonged slowdown would affect hiring, urban consumption and credit cycles in major cities such as Bengaluru and Hyderabad.
There is also portfolio exposure to consider. According to the report, IT accounts for over 10% of holdings in top mutual funds, leaving retail SIP investors more exposed than they may realise. A sustained period of underperformance could weigh on broader fund returns.
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