Mass Hiring in the IT Sector a Thing of Past

 Chennai: While the Information and Technology services industry has been growing in low single digits since FY24, the slowdown in revenues and hiring is more a structural shift than a cyclical change. In the age of AI, even if Indian IT companies return to double-digit revenue growth in the future, hiring will not return to the pre-AI levels, says Aditya Jhaver, Director, Crisil Ratings.

From FY24 onwards, we have been witnessing IT services revenues growing by less than 5%. Your study finds that this year and next year the growth will remain muted. Before we discuss your latest projections, can you explain why the sector has been slowing down over the past few years? How different is this slowdown compared with previous decades?

The slowdown in IT services is the result of several factors coming together—macroeconomic pressures, changing enterprise spending behaviour and the disruptive impact of Artificial Intelligence on the traditional delivery model. The industry's largest markets, the United States and Europe, contribute nearly 85% of revenues. These regions have experienced economic uncertainty, corporate budgets have tightened and enterprises have become much more cautious in their technology spending. This has resulted in longer decision cycles and delayed project ramp-ups.

However, the current slowdown is different from previous cycles because of the AI angle. Generative AI has become both a competition and a risk for the traditional labour-based outsourcing model on which the Indian IT services industry has operated for decades. Clients are increasingly asking service providers to deliver the same outcomes with fewer people by leveraging automation and AI-assisted development. This has led to productivity-linked contracts, vendor consolidation and renegotiation of existing labour-based outsourcing contracts. Therefore, this is not merely a cyclical slowdown. It is a structural transition in the way IT companies run their business and price their contracts. We believe growth is likely to remain in single digits over the next couple of years because these structural changes are here to stay.

Do you believe this subdued growth pattern will continue in the coming years?

Yes. The structural transition towards AI-based services is not going to reverse over the next few years. These factors will continue to influence the sector, and therefore the overall growth outlook is expected to remain subdued.

Your report says companies must reinvent their business models, adapt to the changing industry landscape and expand into newer services. What are large and mid-sized IT service providers doing in artificial intelligence and deep technology?

Large and mid-sized IT companies are reorienting their business models around AI. They are investing heavily in AI platforms, strategic partnerships, domain-specific solutions, talent reskilling and AI-led service delivery. Most leading firms have established dedicated AI business units, are training their workforce on generative AI tools and are forging alliances with hyperscalers and model providers to help clients move from pilot projects to production-scale deployments.

Globally, AI companies are moving very fast. Where do Indian IT services companies stand in this global landscape?

India's strength has traditionally been on the services side, providing skilled manpower to global customers. That transition to AI is taking time because the entire business model and revenue model are changing. While we are reasonably well placed in terms of talent training, the shift in the way business is conducted is still evolving. One of the challenges is research and development spending. Indian IT companies typically spend only about 1-2% of their revenue on R&D, whereas global AI leaders spend around 15-20%. That is a significant gap the industry will have to bridge.

When growth remains muted, hiring is also affected. Tell us about the hiring scenario since FY24 and what your projections are for this year and next year. Also, how does the current headcount compare with FY23?

Historically, there was a very strong correlation between revenue growth and hiring in the IT services sector. That relationship is no longer as strong. Over the last few years, hiring in the IT and ITeS sector has slowed significantly because AI is changing the hiring equation altogether. Companies are reducing hiring for traditional delivery roles while increasing recruitment for specialised skills in artificial intelligence, data analytics, cloud computing and cybersecurity. As a result, we expect net hiring to remain subdued, with employee additions likely to remain flat or register only marginal growth. In FY23, net additions were around 96,000 employees. Over the last two years, however, there have been virtually no meaningful net additions. Earlier, employee growth used to be in the range of 6-8% annually. We do not see that returning over the next several years.

What does this mean for fresher hiring and entry-level salaries? Campus hiring has moderated across the industry. Is this a cyclical slowdown or a structural shift?

Campus hiring has certainly slowed compared with previous years because of AI-driven automation and the industry's focus on specialised skills. Companies are hiring selectively for AI, cybersecurity, cloud and related technologies rather than recruiting large numbers of fresh graduates. At the fresher level, salaries have largely remained flat. Professionals with specialised AI and cybersecurity skills continue to command better compensation, but entry-level salaries have not seen significant growth. This is more of a structural shift than a temporary cyclical slowdown. Until the industry completes its transition to AI-led business models, we do not expect a meaningful change in hiring patterns or salary structures for freshers.

Has muted revenue growth affected operating margins as well?

There has been some pressure on operating margins because revenue growth has remained weak. However, companies have managed profitability through disciplined cost control, tighter resource management, lower attrition and gains from AI-related investments. Currency depreciation has also supported rupee revenues over the last couple of years. Going forward, however, depreciation may not continue to provide the same support. Companies will also increase investments in AI capabilities, talent development and workforce training. At the same time, older contracts are being renegotiated and pricing pressure is increasing. These factors could weigh on profitability over the next few years, although companies have so far managed to maintain healthy margins.

For the past three decades, India's IT story has been measured by export revenues and job creation. In the age of AI, even if Indian IT companies return to double-digit revenue growth, will hiring also return to the levels seen earlier?

The IT services sector has always been known for two things—strong export revenues and large-scale job creation. That linkage between growth and employment is unlikely to remain the same in the AI era. Even if IT services companies return to double-digit growth, we do not expect hiring to increase proportionately because AI will continue to improve productivity. Work that previously required ten people may now be completed by five or six using AI tools and automation. Therefore, workforce requirements are unlikely to rise in line with revenue growth. There will continue to be demand for data engineers, data scientists, AI specialists, cybersecurity professionals and cloud architects. The future will depend on how quickly professionals reskill themselves and align with these emerging requirements.

So while there will be strong demand for AI, cloud and cybersecurity skills, IT services may no longer remain the mass job creator it once was?

Yes. That is the structural shift the industry is witnessing. For decades, India's IT success story was defined by both export growth and employment generation. Going forward, those two may no longer move together. AI-driven productivity gains mean companies can grow without proportionately increasing headcount. The sector will continue to create opportunities for highly skilled professionals, but the era when revenue growth automatically translated into large-scale hiring appears to be coming to an end.