India’s information technology sector, once considered the backbone of the country’s services exports and employment generation, is now facing one of its biggest structural challenges in decades. Recent revenue guidance and market performance indicate that growth has slowed sharply, raising serious questions about the sector’s long-term sustainability.

India’s fourth-largest IT company has recently given revenue guidance of only 0 to 2 percent, suggesting minimal growth in the coming year. Meanwhile, Infosys has projected a revenue growth of 3 to 3.5 percent. When we examine the guidance of most top Indian IT companies, it ranges between 0 and 5 percent.

If revenue growth remains below 5 to 6 percent over the long term, stock returns are also likely to remain muted. This slowdown is already visible in market performance. The IT index has declined nearly 6 percent in the last five days and is down around 14 percent over the past year.

This weak performance is driven by two major visible problems and one deeper, less discussed structural issue that could have long-lasting consequences.

The First Challenge: Artificial Intelligence Disrupting Traditional IT Services

The first major problem facing Indian IT companies is the rapid advancement of artificial intelligence.

Recently, Anthropic launched new AI tools focused on automating software development and coding. These tools are designed to reduce human intervention in programming, testing, and system maintenance.

As AI breakthroughs continue, basic coding and low-level development jobs are gradually being automated. This directly threatens India’s outsourcing-based IT business model, which depends heavily on large-scale manpower.

Today, Anthropic operates with only around 2,000 employees, yet its valuation is estimated at about ₹34 lakh crore. In contrast, India’s top IT companies collectively employ nearly 16 lakh people but still have a much lower combined valuation.

This gap reflects how technology-driven companies are creating far more value with far fewer employees.

Indian IT firms have responded by starting AI training programs for employees to improve productivity. However, this response is largely defensive and does not fundamentally change their business model.

The Second Challenge: Rise of Global Capability Centers (GCCs)

The second major challenge comes from the rapid expansion of Global Capability Centers, or GCCs.

Large multinational companies such as Uber, Barclays, Intel, Google, AWS, JPMorgan, and Salesforce have established their own development, innovation, and research centers across Indian cities like Bengaluru, Hyderabad, Pune, and Mumbai.

These centers are known as Global Capability Centers. They are owned and operated directly by foreign companies and handle core functions such as software development, research and development, finance, HR, analytics, and innovation.

Currently, more than 1,700 GCCs operate in India, serving over 1,000 global brands. These centers employ more than one million professionals and generate annual value exceeding ₹4 lakh crore.

In 2026 alone, over 150 new GCCs have already been established in India.

How GCCs Are Hurting Indian IT Companies

Earlier, most of this work was outsourced to Indian IT firms such as Tata Consultancy Services, Infosys, and Wipro.

However, multinational corporations gradually realized that:

India offers high-quality technical talent at relatively low cost.
Owning in-house centers gives better control over innovation.
Sensitive research and product development cannot be fully outsourced.
Long-term cost savings are higher with captive centers.

This trend began as early as 1985, when Texas Instruments set up India’s first GCC in Bengaluru.

Over time, companies started shifting high-value work such as R&D, product design, and digital transformation to their own centers. Once these centers became stable, even routine outsourcing work was moved in-house.

According to Business Today, around 65 percent of companies now route at least 10 percent of their vendor work through their own GCCs.

This directly reduces outsourcing revenue for Indian IT companies.

Talent Drain: GCCs Attracting Top Employees

GCCs are also attracting the best talent from Indian IT firms.

While most Indian IT companies offer annual salary hikes of 5 to 8 percent, their low revenue growth prevents them from paying much more. In contrast, GCCs offer significantly higher compensation and better career growth.

As a result, top-tier engineers and managers are increasingly moving to GCCs.

Infosys CFO Jayesh Sanghrajka has publicly acknowledged that increased competition from GCCs is a major reason for rising attrition.

Last year, GCCs hired around 11,000 employees, while major IT firms announced layoffs. TCS alone announced plans to reduce over 12,000 jobs.

Currently, more than 53 percent of the world’s GCCs are located in India. They contribute about 2 percent to India’s GDP, which may rise to 4 percent by 2030.

The Double Impact: AI at the Bottom, GCCs at the Top

The IT sector’s job structure resembles a pyramid.

At the bottom are low-skill, repetitive coding and maintenance jobs. These are being rapidly replaced by AI.

At the top are high-value roles involving architecture, product design, and innovation. These are increasingly being absorbed by GCCs.

As a result, Indian IT firms are being squeezed from both ends.

AI is removing low-margin jobs.
GCCs are capturing high-margin jobs.

This leaves Indian IT companies trapped in the middle, with shrinking profit opportunities.

Strong Cash Flows, Weak Innovation

Despite low growth, Indian IT companies still generate massive free cash flows.

For example, TCS generated nearly ₹46,000 crore in free cash flow in the last financial year. Out of this, around ₹45,612 crore, or nearly 98 percent, was distributed as dividends. Most of this went to Tata Sons.

Only about ₹420 crore was invested in R&D, which is less than 1 percent of revenue.

This pattern is common across most Indian IT firms.

Instead of reinvesting in innovation, companies prefer to return cash to shareholders.

Global Comparison: India vs China and Global Peers

International competitors take a very different approach.

Accenture spends nearly 5 percent of its revenue on R&D.

In 1990, both India and China spent around 0.6 percent of GDP on R&D. By 2025:

India spends about 0.64 percent.
China spends about 2.8 percent.

Chinese companies invest aggressively in technology.

BYD spent more than double its net profit on R&D in 2025.
Huawei invests billions annually in research.
Xiaomi has announced plans to double R&D spending.

Meanwhile, India’s top ten companies together earn around $43 billion in profit annually but spend less than $1 billion on R&D.

India’s R&D spending is nearly five times lower than the global average.

The Mindset Problem: Short-Term Profits Over Long-Term Innovation

The biggest structural problem is mindset.

Indian corporate leadership focuses heavily on short-term profits, dividends, and stability. Risk-taking, experimentation, and long-term research are discouraged.

This was evident during the tenure of Vishal Sikka as CEO of Infosys.

After taking charge in 2014, Sikka recognized that labor-based outsourcing would not survive in the long run. He proposed transforming Infosys into a product-driven, AI-focused company.

He recommended investing $1 billion in OpenAI before ChatGPT even existed.

However, co-founder N. R. Narayana Murthy criticized this aggressive approach. The proposal was rejected, and Sikka resigned in 2017.

Had Infosys invested ₹7,000 crore in OpenAI at that time, its stake today could have been worth nearly ₹5 lakh crore, comparable to Infosys’s current market capitalization.

This opportunity was lost due to risk aversion.

A Rare Exception: Zoho’s Innovation-Driven Model

One major exception in India’s tech ecosystem is Zoho Corporation.

Zoho invests nearly 30 percent of its revenue in R&D.

Its founder, Sridhar Vembu, stepped down as CEO and took the role of Chief Scientist to focus on research.

Zoho has built development centers in rural Tamil Nadu and small towns, creating local employment and developing global products.

Over the last five years:

Zoho’s profit has grown at 36.7 percent CAGR.
Revenue has grown at 23.6 percent CAGR.

This proves that innovation-led growth is possible in India.

The Road Ahead: What Lies for Indian IT?

India’s IT sector is at a critical crossroads.

AI will continue replacing low-end jobs.
GCCs will continue capturing high-value work.
Revenue growth is likely to remain in single digits.
Talent drain may accelerate.
R&D spending remains weak.

Most companies are still generating strong cash flows, but they are not investing enough to secure the future.

If this trend continues, Indian IT firms risk becoming low-growth, dividend-paying utilities rather than global technology leaders.

In the future, companies that invest heavily in research, product development, and innovation—like Zoho—are more likely to thrive. Those that depend solely on manpower and outsourcing may gradually lose relevance.

The choice is clear: innovate and adapt, or slowly decline.