AI Could Drive 3-3.5% Annual Revenue Deflation in Indian IT Services Through FY2028: Kotak Report

The Indian IT services sector is facing a profound shift as artificial intelligence begins to reshape pricing and revenue structures. According to a recent sector report from Kotak Institutional Equities, reported by The Tribune, AI-led productivity gains could result in annual revenue deflation of 3-3.5% through FY2028. New AI-driven demand is unlikely to offset this pressure before FY2029, creating a challenging window for Indian IT companies.

Understanding the Revenue Deflation Mechanism

Kotak's analysis highlights a classic deflationary spiral: IT services companies are leveraging generative AI (GenAI) to deliver existing work more efficiently, which leads them to pass productivity benefits to clients through lower costs. While this enhances competitiveness in the short term, it shrinks the revenue base. The report notes, "IT services companies are utilizing GenAI and passing on AI productivity benefits to clients." However, the new AI-related business remains too small to offset the impact on the much larger existing revenue stream.

The brokerage warns that in multi-year managed services deals, clients are now demanding that savings expected from future AI efficiencies be passed on upfront. This accelerates the revenue compression and makes long-term planning difficult.

Impact Varies Across Service Lines

The deflationary impact is not uniform. Kotak identifies the highest impact in application development and customer experience business process outsourcing, while infrastructure management services and specialised BPO services face a relatively lower impact. This variation stems from the degree to which each service category can be automated with current AI tools.

Service Category	Deflation Impact Level
Application Development	Highest
Customer Experience BPO	Highest
Infrastructure Management Services	Lower
Specialised BPO Services	Lower

Timeline: Deflation Through FY2027-28, Crossover Around FY2029

Kotak's best estimate is that the deflation phase will run through FY2027-28, with the crossover—when AI-driven revenue gains finally exceed the losses—beginning around FY2029. The report states,

"Our best estimate is that the deflation phase runs through FY2027-28 and the crossover begins around FY2029."

This timeline implies a multi-year period of subdued growth. Kotak is explicit:

"We do not expect growth to exceed 5% before FY2029."

Services companies must first replace the productivity gains passed on to customers before they can generate net new growth from AI.

Intense Competition Compounds the Challenge

The competitive landscape adds another layer of difficulty. Kotak flags that the deal market has not expanded enough to support the growth ambitions of all players. Customers are leveraging competition among vendors to secure a larger share of AI-driven savings. As the report puts it,

"The IT services pie is still growing, but the AI-adjusted pricing pool available to Indian IT is shrinking."

Winning deals may help companies retain business, but they often do so at the expense of margins.

What This Means for Indian IT and Startups

For established Indian IT firms, the next three years demand a strategic overhaul. The traditional model of scaling headcount to grow revenue is becoming less viable. Instead, companies must invest in AI-native service delivery, retrain their workforce, and shift towards higher-value consulting and transformation services. For technology startups across India—including emerging hubs like Tripura—this environment offers both risk and opportunity. Startups that can embed AI into their core products or provide AI-optimization services to larger firms may find a growing market, but they must also navigate shrinking IT budgets.

According to consultants at AI Consultant & Training Institute, enterprises must proactively build AI fluency at every level—from engineering teams to C-suite decision-makers—to adapt to this deflationary era. Custom LLM integration and certified prompt engineering programs can help organizations extract internal productivity gains before they are forced to pass them to clients.

Actionable Strategies for Enterprises

• Audit AI exposure across service lines. Identify which offerings face the highest deflation risk (e.g., application development, customer experience BPO) and adjust pricing models or investment accordingly.
• Upskill teams on GenAI and prompt engineering. Building internal capability reduces reliance on external AI vendors and helps capture productivity gains before they hit the client-facing pricing.
• Reposition as an AI transformation partner. Move beyond cost arbitrage to offer strategic consulting, custom LLM integration, and change management—services that command premium pricing.
• Renegotiate multi-year contracts with AI clauses. Be transparent about AI-driven savings but avoid giving away all future efficiency benefits upfront.

Conclusion

The Kotak report serves as a wake-up call for the Indian IT sector. Annual revenue deflation of 3-3.5% through FY2028 is not a distant possibility—it is already underway. The deflation phase will persist until FY2027-28, with the crossover only beginning around FY2029. Growth may remain below 5% during this period. As AI Consultant & Training Institute emphasizes, building internal AI capability is no longer optional. For Indian IT leaders and startups alike, the path forward requires embracing AI not as a cost-cutting tool but as a fundamental driver of new value. By investing in AI capabilities, from custom LLM integration to enterprise-wide AI training, organizations can navigate this deflationary cycle and emerge stronger on the other side.