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Author | Mao Keji
This issue is edited by Li Ran, reviewed by Jiang Yi and Chen Zhuuke
On February 10, in the Elysee Palace in Paris, France, French President Macron (right) and Indian Prime Minister Modi were preparing to attend a welcome banquet. The two-day Artificial Intelligence Action Summit began on February 10 at the Grand Palais in the capital city of Paris. Source: "Global" magazine
A recent announcement has strongly stimulated the nerves of India's IT industry. Tata Consultancy Services (TCS), India's largest IT services company, announced its largest-ever staff reduction plan - cutting 12,000 positions by March 2026, which accounts for about 2% of the total number of employees. This decision not only unsettles tens of thousands of families but also makes the entire Indian society feel the impact of "artificial intelligence (AI) shock" for the first time.
In addition, at the beginning of this year, the open-source large model "DeepSeek" emerged suddenly, shaking the world with its open-source model, low cost, and high performance, prompting the Indian industry to ask itself: why did such a breakthrough emerge in China, rather than in India, which is known for its IT industry?
For a long time, the service industry exports dominated India's economy, bringing a lot of foreign exchange, employment opportunities, and becoming a source of pride for India. However, under the AI wave, this pillar industry is now facing severe challenges. Facing technological replacement, geopolitical friction, and deep reshaping of the global supply chain, India must answer a major question concerning its future: will this IT giant, known for its "human resource advantage," maintain its course in the AI era or be lost in the storm?
One, the Glory and Shadows of India's "Service Myth"
To understand the deep anxiety of India's IT industry today, one must trace its development trajectory over the past three decades.
In the 1980s, India gradually embarked on a development path different from that of East Asia, which was "first manufacturing, then services." By policy support and deep utilization of labor endowment, India achieved a kind of "industrial leap" - bypassing large-scale industrialization and directly moving towards a service-oriented industrial structure. After India's economic liberalization in the 1990s, the IT service industry became the most internationally competitive business card of India almost overnight.
The real reason for India's fame was the "Y2K crisis" at the turn of the century. At that time, global software systems commonly used two-digit numbers to represent years, so the arrival of 2000 could cause program errors, leading to widespread system failures. Faced with this urgent threat, many multinational companies had to look for outsourcing partners. At that time, Indian programmers, with their low-cost IT services, fluent English expression ability, and highly obedient work culture, took on massive amounts of program repair orders globally, becoming recognized as the "reliable back-office office." This not only brought India considerable foreign exchange income but also earned it a reputation in the global IT service market.
The Indian government seized this historical opportunity, implementing policies such as establishing software parks, introducing export subsidies, exempting hardware tariffs, and promoting technology introduction, which provided security for the rapid growth of India's IT industry. Companies such as Tata Consultancy Services (TCS), Infosys, Wipro, and Tech Mahindra rose rapidly during this period, with their businesses spread across Europe and America, laying the foundation for India's status as a major outsourcing country.
Since then, India's IT service industry has maintained a long-term high-speed growth for 30 years. Between 1993 and 2022, India's service exports expanded at an annual compound growth rate of 14%, far exceeding the global average. By 2022, India had become the second-largest IT service exporter in the world, second only to Ireland, accounting for 15% of the global market share. More importantly, this industry greatly alleviated India's long-standing trade deficit and provided a key support for national economic stability. For this reason, India has become a notable development model among developing countries.
The uniqueness of the Indian model lies in its clever avoidance of the high requirements of manufacturing on infrastructure. Compared to industrialization, which requires comprehensive support from railways, roads, and energy networks, the IT service industry can operate with point-like modernized parks and broadband networks. More importantly, it bypassed India's rigid labor laws, maximizing the advantages of "English + low cost + mass scale" in talent. This unique niche position allowed India to find its place in the global value chain and provide countless young people with opportunities for social mobility and decent jobs.
However, behind the glory, there are hidden concerns. The rise of India's IT industry has relied more on "labor arbitrage" than on independent innovation - it continuously delivers low-cost programmer labor to the global market, but rarely has original technology and products. This model worked well for the past 30 years, but when the AI wave comes, it seems to become a new "resource curse."
Two, Innovation Shortcomings and the "Human Resource Dilemma"
Although India's IT industry is very prominent in the global market, an embarrassing fact remains unavoidable: India is the world's "back-end," but has never been the "front stage" of innovation.
Over 30 years, the Indian industry has hardly launched a single globally successful original software - no autonomous operating system, browser, or social media platform, nor has it formed an enterprise management software system like SAP or Oracle. Except for Zoho (an Indian well-known office software company) and Finacle (a core banking system solution developed by the Indian software giant Infosys), most Indian IT companies remain in the role of "service providers." India stays relatively stable in the outsourcing chain, but lacks deep profits.
The academic community even uses the phrase "missing all the trains" to describe the development trajectory of India's IT industry. From desktop software to mobile applications, from social networks to short videos, every wave of the digital economy has failed to produce globally influential innovative IT companies in India. Even in the domestic market, the situation has never changed. When TikTok was banned by the Modi government on security grounds, many imitative apps emerged in India, but most were crude, poor user experience, and eventually faded away. This systemic lack of original products reflects the deeper problems of India's system and model.
Photo of an Indian software exhibition. Source: "Global" magazine
Objectively speaking, Indian IT talents are indeed in high demand in the international market. The best graduates in relevant fields in India are often immediately recruited by high-paying positions in Silicon Valley and Wall Street. From Microsoft and Google to Adobe, Indian executives are everywhere. The remaining mid-to-high-level talents are directly employed by multinational companies' R&D centers in Noida, Gurgaon, and Bangalore in India. Although Indian local enterprises have absorbed a large group of programmers, they are mostly concentrated in low-value-added positions. The "siphon effect" of talent leads to the difficulty of truly innovative elites to take root locally, forming a serious "brain drain" phenomenon.
A deeper contradiction lies in the lack of incentives for innovation in Indian companies. Giants like Tata Consultancy Services and Infosys have formed stable profit models in a monopolistic market structure. They prefer to expand human resources to meet customer needs, rather than take risks to invest in research and development; they would rather hire low-skilled labor to extend project cycles, instead of investing in high-skilled talents to improve efficiency. This leads to a large number of programmers being stuck in repetitive work, and the entire industry is locked into a low-end service chain.
Data best illustrates the problem. In 2024, India's R&D expenditure accounted for only 0.65% of GDP, amounting to about $25.4 billion. According to data from China's Ministry of Science and Technology, in 2024, China's total R&D investment in society was 3.6 trillion yuan (approximately $505.35 billion), accounting for 2.68% of GDP; in the United States, according to a report by the National Science Foundation, the U.S. R&D investment in 2023 was $940 billion, with an annual growth rate of 3% to 3.5%. Based on this, the U.S. R&D investment in 2024 is estimated to be around $970 billion, accounting for about 3.3% of GDP.
Moreover, India's gap is not only reflected in the absolute scale, but also in the lack of R&D culture and ecosystem. India lacks a complete venture capital - R&D - productization chain, and there is not enough risk capital to support startups, so even if there are innovations and R&D ideas, they are often stifled due to financing difficulties and market monopolies.
In this environment, Indian IT companies rarely dare to enter emerging areas. They are more like "work-hour factories," providing labor to Western clients as needed, rather than "innovation engines."
The cost of this dilemma is becoming evident. For Indian youth, entering the IT industry used to be a shortcut to join the middle class, but with stagnant wage growth and accelerated AI substitution, this dream is crumbling. At the same time, the lack of manufacturing development means that India lacks an alternative industry to provide employment for these youths.
In short, the glory of India's IT industry is actually a business model centered on "low-cost labor," not an industrial logic driven by "technological innovation." Once this model faces the vertical strike of AI, its fragility will be fully exposed.
Three, the Dual Impact of AI and Geopolitics
If India's IT industry's success over the past 30 years relied on the advantage of labor costs and the benefits of globalization, then after 2025, these two pillars have simultaneously shaken. The rapid evolution of artificial intelligence technology and the protectionist policies of U.S. President Trump are brewing a harsh storm that may change India's future.
For a long time, Indian programmers have been regarded as "low-cost and efficient" labor resources. Whether it's code debugging, database management, or technical support, Indian companies can complete tasks at a much lower cost than in Europe and the United States. However, this advantage is being rapidly eroded by AI. Generative AI tools such as ChatGPT, Claude, and Gemini can efficiently complete repetitive work previously handled by a large number of Indian programmers. These tools can complete a large number of outsourcing tasks faster and cheaper, making India's "labor price difference" advantage disappear instantly.
The news of TCS announcing the layoff of 12,000 people is a microcosm of the AI substitution effect. Although TCS did not explicitly mention AI, the industry generally believes that this is the result of automation and intelligent driving. In the future, companies will still need human programmers, but mainly in complex, innovative, and strategic positions, while the demand for mid-to-low-end, repetitive positions will significantly decrease. This means that India's large IT workforce may face "structural unemployment."
In fact, the impact of AI on India's IT industry and workers is not sudden. The global AI boom appeared as early as 2015, but Indian IT giants did not actively respond. They were immersed in the vast human outsourcing market, gaining stable profits through low-cost labor arbitrage.
In addition to the technological impact, India also has to face the policy strikes from its largest market - the United States. Over half of India's IT service exports depend on American customers, and the top companies like TCS and Infosys get over 60% of their revenue from the North American market. This over-reliance on a single market has always been a risk for the Indian model.
In July 2025, the Trump administration imposed a 25% tariff on Indian goods, and by the end of August, it further increased the tariff on India to 50% on the grounds of trade with Russia. Although these measures mainly target goods trade, the resulting political atmosphere deeply affects India's service industry. Soon after, the U.S. Senate introduced the "Stop Offshoring Jobs Act," proposing to impose a 25% tax on all outsourcing services, directly targeting the prevention of companies continuing to outsource jobs to low-cost service providers like India, thus promoting "job relocalization."
If this policy is implemented, Indian IT companies will be hit first. Unlike manufacturing, which can transfer production capacity through multiple countries, the service outsourcing chain is 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 may lose half of its support for exports.
Facts show that the rise of AI is helping the United States achieve "service relocalization." Previously, American companies outsourced a lot of back-office work to India because of its significant cost advantage. But now, AI can complete many tasks domestically, combined with protectionist policies, the necessity of outsourcing is rapidly declining. Although Trump focuses most on "manufacturing relocalization," AI is making "service relocalization" more realistic. Compared to high-investment manufacturing, service relocalization has a lower threshold, faster speed, and a more direct impact on employment. For India, this is undoubtedly an unprecedented shock.
The dual impact of AI and U.S. policy has placed India's IT industry in an unprecedented困境. For India, this is not just an industrial challenge, but may evolve into a social and political crisis. Currently, over 5.4 million people are directly employed in India's IT industry, and indirectly support millions of jobs. If a large-scale layoff trend spreads, the youth unemployment rate is bound to rise. Considering that India already faces an unemployment rate of over 8%, this data rising could trigger broader social dissatisfaction, bringing greater political pressure.
More seriously, IT service exports are a key pillar for India to offset its goods trade deficit. In 2023, India's service exports reached $325 billion, offsetting about $250 billion of goods trade deficit. If this pillar is shaken, India may face a chain reaction of foreign exchange reserve pressure, rupee depreciation, and imported inflation. This not only relates to economic stability, but also directly affects the ruling prospects of the Modi government.
Four, Response Measures and Future Choices
Facing the above pressures, since 2025, the Indian government and industry have launched a series of "emergency response" measures, trying to save the fragile IT myth.
Only 10 days after the "DeepSeek" caused a stir, the Indian Ministry of Electronics and Information Technology (MeitY) announced the launch of a national AI plan, publicly soliciting proposals for multi-purpose large model development. The government coordinated Reliance Industries, Tata Group, and other conglomerates to contribute computing power, and mobilized nearly 19,000 GPUs at subsidized prices from private cloud service providers and data centers for research teams to develop local models. The decisiveness and speed of this decision are rare in India's technological history.
However, the problems are also obvious. India's higher education system has trained a large number of qualified programmers, but has not formed a research group capable of competing with international top research teams. Although the government provides subsidies for computing power, the lack of original algorithms, language corpora, and application ecosystems will lock India's AI development in the "follower" level.
In the corporate sector, some Indian IT giants have also realized the urgency of transformation. Infosys and Wipro have separately announced that they will increase investments in AI research and employee retraining in the next three years, attempting to transition from "labor outsourcing" to "smart outsourcing." Tata Consultancy Services, on the other hand, proposed to allocate more resources to high-end consulting and system integration business, reducing dependence on low-end programming hours.
At the same time, global capability centers (GCC) established by multinational companies in India may also become a breakthrough for transformation. These centers are not only responsible for back-end support, but are gradually taking on high-value-added tasks such as R&D, legal, and finance. If India can leverage these platforms to enhance the capabilities of local talents and promote knowledge spillovers, it may gradually escape the "low-end lock-in" dilemma.
However, the cost of transformation cannot be underestimated. How can millions of workers who rely on low-skill jobs adapt to the requirements of the AI era in a short time? Retraining and skill upgrading not only require huge funds, but also need a deep adjustment of the education system and industrial structure. If a smooth transition cannot be achieved, a large-scale "talent mismatch" will become a potential risk for Indian society.
For India, the current challenge is not just an industrial crisis, but also a test of its national strategy. An Indian industry expert said, "DeepSeek may be the best reminder for India. It made us realize that we can no longer take our past successes as guarantees for the future."
The future of India's IT industry ultimately depends on whether it is willing to truly embrace and catch up with the current era centered on innovation.
About the Author: Mao Keji, Assistant Researcher at the International Center of the National Development and Reform Commission.
This article is reprinted from the article titled "India's IT Industry Faces a Major Turning Point" published in the Global magazine on October 22, 2025.
This issue is edited by Li Ran.
This issue is reviewed by Jiang Yi and Chen Zhuoke.
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