Signs of Stabilization: India's IT Sector Navigates Uncertain Future

India's IT services sector is showing early signs of demand stabilization despite weak visibility for 2026. Growth rates remain modest as AI-driven productivity gains reshape the industry landscape. The sector is cautiously optimistic about mid-term recovery, contingent on revived global IT spending and AI benefit stabilization.

The information technology services sector in India is exhibiting early indicators of demand stabilization, according to a Goldman Sachs report. However, the report highlights that the outlook for calendar year 2026 is still unclear. The study suggests that AI-related productivity improvements could become more widespread, potentially affecting profit margins.

Data from recent quarterly analyses show that all major IT companies in India reported sequential revenue growth, with the sector growing by 1.5% quarter-on-quarter. Projections indicate that this upward trend may continue through the December 2025 quarter, with an estimated 1.7% sequential revenue growth. Yet, for financial year 2026, revenue growth is expected to stay muted at approximately 1.1% year-on-year, improving to around 5.4% in FY27. This sluggish outlook is attributed to cautious client spending amid macroeconomic headwinds and AI-driven productivity improvements compressing traditional growth opportunities.

Operating margins improved in the second quarter of FY26 for most IT firms, supported by favorable currency effects and internal efficiency measures. Notably, headcount additions turned positive, signaling early recovery signs in hiring. Despite strong deal activities noted during the September quarter, the sector faces a competitive pricing landscape and slow project ramp-ups. The medium-term recovery is anticipated to hinge on a revival in global IT spending and the stabilization of AI-led productivity benefits.

While the fundamentals of India's IT sector remain robust, the path to recovery is challenged by ongoing issues such as decreased demand visibility and shifting client budgets. Consequently, growth expectations remain conservative, with significant acceleration in demand likely projected beyond the upcoming fiscal year.

(With inputs from agencies.)