Indian IT services companies are navigating 'AI revenue deflation,' with analysts projecting a 2–3.5% annual revenue decline in legacy segments through FY2028. As automation reduces effort-based billing, firms must balance protecting profit margins with the costly shift toward AI-native service models.
The Indian information technology sector is undergoing a structural transition as artificial intelligence reshapes how global clients consume digital services. While companies have historically built their business models on charging clients for the time and effort spent by employees, the rise of AI tools is reducing the amount of manual work required for tasks like software coding and maintenance. This shift has led to what industry experts call 'AI revenue deflation,' where the efficiency gains brought by AI translate into lower billable hours for IT providers.
The Shift from Legacy Billing
For decades, major Indian IT firms, including TCS, Infosys, HCLTech, and Wipro, grew by scaling up headcount. The current disruption is challenging this model because AI-driven automation is effectively cannibalizing legacy revenue. While deal pipelines remain active, industry analysts expect a 2–3.5% annual revenue compression in these traditional segments to persist through FY2028. This means that even as companies land new contracts, the total revenue generated from older, effort-heavy projects is shrinking.
Margin and Investment Pressure
Corporate leadership is currently in a defensive posture, prioritizing margin protection over aggressive transformation. However, this strategy carries its own risks. To remain competitive against international players that are more agile with AI-first delivery, Indian firms must invest heavily in infrastructure, talent reskilling, and new AI-native platforms. These costs are creating significant pressure on profit margins. While recent quarterly results in 2026 showed some stabilization, growth remains in the low single digits, leading to a period of volatility for the sector.
The Strategic Dilemma
Executives, such as Tech Mahindra CEO Mohit Joshi, have noted that the current transition is more profound than past shifts like the move to agile software development. The industry is essentially trying to rebuild its service units to handle AI workflows while keeping legacy revenue streams alive for as long as possible. The primary risk for investors is that this 'L-shaped' recovery trajectory could extend well into FY2029 or FY2030 if firms fail to pivot their business models faster than their legacy revenues decline.
Investors are now closely monitoring whether companies can replace lost legacy revenue with higher-value, AI-driven work. The critical monitorable for the coming quarters will be the mix of revenue—specifically, how much growth is coming from new AI-native projects versus declining maintenance work. Success will depend on the ability of these firms to pass on the value of AI productivity to clients without sacrificing long-term profitability.