The Indian stock market’s information technology sector has witnessed a brutal sell-off over the past three trading sessions, wiping out nearly ₹2.5 lakh crore in market capitalisation. The Nifty IT index has declined close to 8 per cent, with heavy selling pressure seen across large- and mid-cap IT stocks. The sudden erosion of value has left investors anxious and sparked a larger debate: is this merely a short-term correction, or does it signal a deeper threat to India’s IT-led digital growth story?

Market participants point to the rapid rise of artificial intelligence (AI) as the primary trigger behind the panic. AI-driven automation is advancing at a pace that has raised concerns about the long-term viability of the traditional IT outsourcing model that has powered India’s technology sector for decades. Recent announcements by AI firm Anthropic and US-based data analytics company Palantir have intensified these fears.

Palantir’s claim that its AI platform can now complete complex enterprise software migrations—such as SAP implementations—in a matter of weeks rather than years sent shockwaves through the market. ERP migration has long been considered a stable, high-value revenue stream for Indian IT companies. The suggestion that AI could drastically compress timelines and costs prompted investors to swiftly pare exposure to IT stocks.

Is India’s IT Sector at Risk?

According to an Economic Times report, Abhishek Pathak, analyst at Motilal Oswal, warns that 30–40 per cent of IT services revenue is already vulnerable to what he terms “AI deflation”, particularly in areas such as application development, maintenance and testing. He estimates that if AI improves productivity by 30–50 per cent in these lower-end services, 9–12 per cent of total industry revenue could be eroded over the next three to four years, directly impacting annual growth rates.

The concern is no longer confined to routine coding or testing work. If AI begins to dominate ERP migrations and third-party enterprise software services, the pressure on IT firms could intensify further. These segments account for an estimated 10–15 per cent of total industry revenue, making them critical to overall profitability.

Signs of Resilience Amid the Gloom

Despite the sharp sell-off, not all analysts are convinced that the outlook is bleak. Amish Shah of BofA Securities believes that AI will disrupt traditional software companies more aggressively than IT services firms. He argues that Indian IT companies possess the scale and client relationships needed to pivot towards AI-driven enterprise solutions.

Several large Indian IT players are already partnering with AI-first companies to build next-generation platforms and services. These collaborations, analysts say, could open up new revenue streams and help the sector reinvent itself.

Historically, every major technological shift—from the rise of cloud computing to the evolution of the BPO industry—has initially triggered fear and market volatility. Over time, however, the Indian IT sector has repeatedly adapted and emerged stronger. AI could follow a similar trajectory, though the transition is expected to be challenging.

The key question now is whether Indian IT companies can convert AI from a disruptive threat into a growth opportunity. The answer may determine not just the sector’s future, but also the next chapter of Digital India’s growth story.