A recently released piece of news has strongly shaken the nerves of India’s IT industry. India’s largest IT services company, Tata Consultancy Services (TCS), announced the largest-scale layoffs in its history — by March 2026, 12,000 positions will be cut, approximately 2% of the total workforce. This decision has not only unsettled tens of thousands of families but also made the entire Indian society, for the first time, viscerally and strongly feel the potential impact of the “artificial intelligence (AI) shock.”

In addition, earlier in 2025, the open-source large model DeepSeek emerged, shocking the world with its open-source model, low cost, and high efficiency, prompting the Indian industry to ask itself: Why did such a breakthrough emerge in China, and not in India, which is famous for its IT industry?

For a long time, service-industry exports centered on IT have been a pillar of India’s economy, not only bringing substantial foreign exchange and employment opportunities but also becoming a source of pride for India. However, under the AI wave, this pillar industry is undergoing severe tests. Facing technological substitution, geopolitical friction, and deep global supply chain restructuring, India must answer a major question concerning the future: will this IT giant, known for its “human advantage,” maintain its course in the AI era, or be lost in the storm?

The Halo and Shadow of India’s “Service Myth”

To understand the current deep anxiety in India’s IT industry, one must trace back its development trajectory over the past 30-plus years.

In the 1980s, India gradually embarked on a path different from East Asia’s “first manufacturing, then services” model. Through policy support and deep utilization of labor endowments, India in some sense achieved an “industrial leap”—bypassing large-scale industrialization and moving directly to a service-dominated industrial structure. After India’s economic liberalization in the 1990s, the IT services industry almost overnight became India’s most internationally competitive brand.

What truly made India famous was the Y2K (millennium bug) crisis. At that time, global software systems commonly represented the year with two digits, so the arrival of 2000 could cause program errors and massive system failures. Faced with this urgent threat, many multinational companies had to find outsourcing partners. Indian programmers, with low-cost IT services, fluent English, and a highly compliant work culture, undertook massive global program repair orders, becoming recognized as a “reliable back-office.” This not only brought India considerable foreign exchange earnings but also earned India a reputation in the global IT services market.

The Indian government keenly seized this historic opportunity, successively implementing policies such as establishing software parks, providing export subsidies, exempting hardware tariffs, and promoting technology introduction, ensuring the rapid growth of India’s IT industry. Companies like TCS, Infosys, Wipro, and Tech Mahindra quickly rose during this period, with business across Europe and America, laying the foundation for India as a “major service outsourcing country.”

Since then, India’s IT service industry maintained high-speed growth for 30 years. Between 1993 and 2022, India’s service exports expanded at a compound annual growth rate of 14%, far above the global average. By 2022, India had become the second-largest IT service exporter globally, second only to Ireland, accounting for 15% of the global market. More importantly, this industry greatly alleviated India’s long-term trade deficit, providing key support for national economic stability. Therefore, India became a striking development example among late-developing countries.

The particularity of the Indian model lies in its clever avoidance of manufacturing’s high infrastructure requirements. Compared to industrialization, which requires full support from railways, roads, and energy networks, IT services only need scattered modernized parks and broadband networks. More importantly, it bypassed India’s rigid labor laws, maximizing the advantage of “English + low cost + scale” talent. This unique niche allowed India to find its place in the global industrial chain and offered countless young people opportunities for upward mobility and decent work.

However, behind the halo lies concern. The rise of India’s IT industry has relied more on “human arbitrage” than on independent innovation—it continuously supplies low-cost programmer labor to the global market, but rarely produces original technology or products. This model was effective over the past 30 years, but as the AI wave arrives, it seems to be turning into a new “resource curse.”

Innovation Shortcomings and the “Human Resource Dilemma”

Although India’s IT industry is highly visible in the global market, an awkward fact cannot be ignored: India has been the world’s “back office” but has never become the “front stage” of innovation.

Over the past 30 years, the Indian industry has hardly launched any original software recognized globally—no independent OS, browser, social media platform, or enterprise software system like SAP or Oracle. Apart from Zoho (well-known Indian office software company) and Finacle (core banking system solution by Infosys), which have some influence in niche areas, most Indian IT firms remain “service suppliers.” India holds a relatively stable position in the outsourcing chain but lacks deep profits.

Academics even describe India’s IT trajectory as “missing all the express trains.” From desktop software to mobile apps, from social networks to short videos, every wave of the digital economy failed to incubate globally influential innovative IT companies in India. Even in the domestic market, the situation has not changed. After TikTok was banned in India for security reasons, numerous copycat apps emerged, but most were poorly made with bad user experience and soon faded. This systematic lack of original products reflects deep-seated issues in India’s system and model.

Objectively, India’s IT talent is indeed in short supply internationally. The best graduates are quickly recruited by high-paying positions in Silicon Valley and Wall Street; Indian-origin executives are common at Microsoft, Google, and Adobe. Mid-to-high-end talent is employed directly by multinationals’ R&D centers in Noida, Gurgaon, and Bangalore. While domestic firms absorb a large pool of programmers, they mainly occupy low value-added positions. The “siphoning” of talent results in a serious “brain drain,” preventing elites with innovation potential from rooting locally.

A deeper contradiction lies in India’s lack of incentives for innovation. Giants like TCS and Infosys have stable profit models in monopolistic market structures. They prefer expanding manpower to meet client needs rather than risking R&D investment; they hire low-skill labor to lengthen project cycles instead of employing high-skill talent to improve efficiency. This leaves programmers in repetitive work, locking the industry into low-end service chains.

Data illustrate the problem. In 2024, India’s R&D spending accounted for only 0.65% of GDP (~$25.4B). By contrast, China’s total R&D investment in 2024 was 3.6 trillion RMB (~$505.35B), 2.68% of GDP; in the U.S., total R&D spending in 2024 was about $970B, 3.3% of GDP.

Moreover, India’s gap is not only in absolute scale but also in R&D culture and ecosystem. India lacks a complete venture capital–R&D–product chain and sufficient Venture capital investment to support startups. Even with innovation ideas, financing difficulties and market monopolies often kill them.

In this environment, Indian IT firms rarely venture into emerging fields. They function more as “work-hour factories,” providing labor for Western clients as needed, rather than as “innovation engines.”

The cost of this dilemma is now emerging. For young Indians, entering IT once offered a path to the middle class, but as wage growth stagnates and AI replacement accelerates, that dream is breaking. Meanwhile, insufficient manufacturing leaves India without alternative industries to employ these youth.

It can be said that India’s IT industry’s past glory is built on low-cost labor rather than technology-driven innovation. Once AI shows its absolute superiority, the fragility of this model is fully exposed.

AI and Geopolitical Dual Shocks

If the success of India’s IT industry over the past 30 years relied on labor cost advantages and globalization dividends, after 2025, both of these supports have simultaneously weakened. The rapid evolution of artificial intelligence technology, along with the U.S. President Trump’s protectionist policies, is brewing a harsh storm that could change India’s future.

For a long time, Indian programmers were considered “low-cost, high-efficiency” labor resources. Whether for code debugging, database management, or technical support, Indian firms could complete tasks at far lower costs than in Europe or the U.S. However, this advantage is being rapidly eroded by AI. Generative AI tools such as ChatGPT, Claude, and Gemini can now efficiently perform repetitive work previously handled by large teams of Indian programmers. These tools can complete massive outsourced tasks faster and cheaper, instantly erasing India’s “human labor cost differential.”

TCS’s announcement of 12,000 layoffs is a microcosm of this AI substitution effect. Although TCS did not explicitly mention AI, the industry widely believes it is the result of automation and intelligent systems. In the future, human programmers will still be needed, but mainly for complex, innovative, and strategic positions, while demand for mid- and low-end repetitive roles will sharply decline. This means India’s enormous IT workforce may face structural unemployment.

In fact, the AI impact on India’s IT industry and its workforce did not arrive suddenly. The global AI boom had already appeared around 2015, but Indian IT giants did not actively respond. They were immersed in the large labor outsourcing market, obtaining stable profits through low-cost labor arbitrage.

In addition to technological shocks, India must also face policy strikes from its largest market—the United States. Over half of India’s IT service exports depend on U.S. clients, with TCS, Infosys, and other giants generating over 60% of their revenue from North America. This overconcentration in a single market has always been a risk in the Indian model.

In July 2025, the Trump administration imposed a 25% tariff on Indian goods, and by August, citing trade involving Russia, further raised tariffs to 50%. Although these measures mainly target goods trade, the resulting political climate also deeply affects India’s service industry. Soon after, the U.S. Senate proposed the “Preventing Job Offshoring Act”, which would impose a 25% tax on all outsourced services, directly aimed at preventing companies from continuing to outsource jobs to India and other low-cost service providers, promoting “job repatriation.”

If this policy is implemented, Indian IT companies will be directly affected. Unlike manufacturing, which can shift production across countries, service outsourcing chains are shorter and more concentrated. Once barriers appear in the U.S. market, India will find it difficult to quickly find alternative markets. In other words, India could lose half of its export foundation.

The reality is that AI is helping the U.S. achieve “reshoring of services.” Previously, U.S. firms outsourced much back-office work to India because of its significant cost advantage. Today, AI can complete many tasks domestically, and with protectionist policies, outsourcing becomes rapidly unnecessary. While Trump emphasized “manufacturing return,” AI is making service reshoring more feasible. Compared with high-investment manufacturing, service reshoring is easier, faster, and more directly stimulates employment. For India, this is an unprecedented blow.

AI and U.S. policy dual shocks have placed India’s IT sector in an unprecedented predicament. For India, this is not just an industrial challenge but could evolve into a social and political crisis. Currently, India’s IT industry directly employs over 5.4 million people, indirectly driving tens of millions more. If a wave of mass layoffs spreads, youth unemployment will inevitably rise. Considering India already faces over 8% unemployment, this rise could trigger widespread social dissatisfaction and increase political pressure.

More seriously, IT service exports are a key pillar in offsetting India’s goods trade deficit. In 2023, India’s service exports reached $325 billion, offsetting roughly $250 billion of goods trade deficit. If this pillar is shaken, India may face pressure on foreign reserves, rupee depreciation, and imported inflation, impacting not just economic stability but also the political prospects of the Modi government.

Response Measures and Future Choices

Facing the above pressures, since 2025, the Indian government and industry have launched a series of “emergency response” measures to try to rescue the faltering IT myth.

Within just 10 days after DeepSeek caused shockwaves, India’s Ministry of Electronics and Information Technology (MeitY) announced the launch of a national AI program, publicly soliciting R&D proposals for multipurpose large AI models. The government coordinated consortia such as Reliance Industries and the Tata Group to contribute computing power, and mobilized nearly 19,000 GPUs from private cloud service providers and data centers at subsidized prices for research teams developing local models. The decisiveness and speed of these actions are rare in India’s tech history.

However, problems are obvious. India’s higher education system has produced many qualified programmers but has failed to form a research team capable of competing with the world’s top research groups. Even with government-subsidized computing power, the lack of original algorithms, corpora, and application ecosystems confines India’s AI development to a “follower” level.

At the corporate level, some Indian IT giants have recognized that transformation is urgent. Infosys and Wipro have announced plans to increase investment in AI R&D and employee retraining over the next three years, attempting a shift from human outsourcing to intelligent outsourcing. TCS plans to allocate more resources to high-end consulting and system integration, reducing reliance on low-end programming labor.

Meanwhile, multinational companies’ Global Capability Centers (GCCs) in India may become a breakthrough for transformation. These centers, responsible for back-office support, are increasingly taking on R&D, legal, and financial tasks with higher added value. If India can use these platforms to improve domestic talent and encourage knowledge spillovers, it may gradually escape the low-end trap.

However, the cost of transformation is significant. Millions of workers in low-skill positions must rapidly adapt to AI-era demands. Retraining and skill upgrades require massive funding and deep adjustments to the education system and industrial structure. Without a smooth transition, large-scale talent mismatches could become a latent social hazard.

For India, the current challenge is not only an industrial crisis but a national strategic test. An Indian industry expert remarked:

“DeepSeek may serve as the best reminder for India that past success does not guarantee future results.”

Ultimately, the future of India’s IT industry depends on whether it is willing to fully embrace and catch up with the innovation-driven era of today.

Editor: Zhiyu Wang