Is India ready to pivot its services economy in the age of AI? Jefferies weighs in

Jefferies' latest report warns that India's services-led economy, which contributes 64% of its gross value addition, faces significant disruption from artificial intelligence, projecting muted 1.4% CAGR for IT services and a 20% revenue deflation by FY30 due to automation. Despite this vulnerability, the brokerage highlights India's strategic advantages, including a substantial demographic dividend, robust digital public infrastructure like the India Stack for massive data generation, and strong government backing via the IndiaAI Mission. While challenges such as semiconductor import reliance persist, Jefferies suggests these strengths can enable India to pivot from disruption to long-term opportunity, notably in data center expansion, favoring mid-sized IT players over larger ones.

Analysis

According to a Jefferies equity strategy report, India's service-driven economy is at a critical inflection point due to generative AI. The services sector, contributing 64% to gross value addition, faces significant headwinds, with IT services clients already demanding 15-30% lower project costs. Jefferies projects a muted 1.4% CAGR for IT services from FY25-28 and forecasts a potential 20% revenue deflation by FY30 due to AI-led productivity gains. However, India possesses key strategic advantages to counter this disruption. A substantial demographic dividend will see the working-age population grow to 1.07 billion by 2033, and its advanced digital public infrastructure, the India Stack, provides an unmatched ability to generate vast datasets for training AI models. Government support is also robust, exemplified by the $1.2 billion IndiaAI Mission. Despite these strengths, significant hurdles persist, including a reliance on imported semiconductors—which constitute 22% of the trade deficit—and limited private appetite for deep-tech funding. Jefferies notes a bifurcation in the market, favoring mid-sized IT players like Coforge and Hexaware while maintaining 'underperform' ratings on Tech Mahindra and Wipro. A major growth area identified is the data center market, which is expected to grow fivefold to 8GW by 2030, attracting $30 billion in capex and benefiting telecom and infrastructure firms such as Bharti Airtel, Reliance, and Adani Enterprises.

Key Decisions for Investors

• Investors in the Indian IT services sector should consider re-evaluating their holdings, potentially rotating from large-caps like Tech Mahindra and Wipro, which face significant AI-driven revenue headwinds, towards mid-cap players such as Coforge and Hexaware, which Jefferies views more favorably.
• Consider exposure to the infrastructure enablers of India's AI transition, particularly the data center and telecom sectors, as companies like Bharti Airtel, Reliance, and Adani Enterprises are positioned to capture a large share of the projected 5x growth in data center capacity by 2030.
• Monitor India's policy developments and private investment in domestic semiconductor manufacturing, as the nation's high dependence on imported chips remains a key risk that could cap its ability to move up the AI value chain beyond being a raw data provider.