Rough patch for Indian IT

Indian IT companies are hitting a rough patch. At least in the short term, the future doesn't look any brighter either. And this isn't just us speculating or echoing market experts — it's straight from the horse's mouth.

Here's what Infosys, India's second-largest IT services provider, said during their latest earnings call:

“Based on what we are seeing in the environment today, and building on large deal wins in the past quarters, our guidance for growth for FY26 is 0% to 3% in constant currency terms.”

That's significantly below analysts' expectations, which were around 6.3%.

Infosys isn't alone here; TCS and Wipro are feeling the heat too. Wipro's CEO, Srini Pallia, shared similar sentiments, pointing out, "Going from FY25 to FY26, uncertainties have dramatically increased." He even forecasted a sequential revenue decline of between 1.5% to 3.5% for the coming quarter. ICICI Securities noted that Wipro’s guidance for Q1FY26 “is the weakest ever (except Covid)”

Industry leader TCS, meanwhile, missed its earnings estimates last week. Of course, these estimates aren’t always reliable, but yet another more indicator that things aren't exactly rosy. The stock market is reflecting this anxiety as well. While the broader Nifty 100 index has almost broken even for the year, the IT basket is down about 20% since the beginning of the year.

Now, we did touch upon this issue last month, pointing out concerns around the weakening US dollar and how that could negatively impact Indian IT exports. Back then, we talked about potential economic hurdles from Trump's second run — higher inflation, slower growth, and elevated interest rates in the US — were all bad news for Indian IT. After all, Indian IT exports track the US economic growth, given how the US contributes 60-62% to the revenues for the sector.

But since then, things have gotten much trickier. Trump's latest "reciprocal tariffs" announcement has added massively to the uncertainty. And now, with recent earnings and commentary from the big three — TCS, Infosys, and Wipro — we're getting a clearer picture of what’s happening directly from the companies themselves.

So think of this piece as an extension of our earlier conversation. The fate of the sector looks the same to us — ultimately, things aren't looking good. But now, we've got even more clarity on why exactly that's the case. And as always, we're here to break it down for you.

The Tariff Impact

Now, the new US tariffs target merchandise exports, not on software or IT services exported from India to the US. There’s nothing there that directly targets Indian IT services. And it doesn’t seem like the United States is going to target them either — industry experts opine that it is "too complicated to tax tariffs" on services.So shouldn’t India’s IT companies be insulated from all the chaos?

Not quite. Because while tariffs might not impact IT companies directly, they’re definitely affecting their clients. Major clients in the US—especially in manufacturing, retail, logistics, and consumer sectors — are all gearing up for higher costs due to tariffs on goods.

These increased costs — along with the fact that they don’t know what the next twist or turn is in this policy rollercoaster — are expected to make business difficult for US and European clients. Uncertainty under the Trump administration has reached levels not seen before in modern times.

And as companies that primarily cater to American and European businesses, Indian IT companies will be hit particularly hard. Here’s how that’s happening:

Falling tech spending

Clients in tariff-affected industries (e.g., automotive, electronics) are cutting down on their tech spending. They’re pausing IT spends and re-evaluating supply chains causing project delays. IT companies might soon see their deal cycles slow down, and find it much harder to bag any discretionary projects that clients can afford to defer. Case in point is that Wipro reported a 13.4% YoY decline in discretionary deals in FY25.

In fact, the current environment has opened up a clear bifurcation in IT spending patterns. While cost efficiency and operational projects maintain some momentum, innovation-focused discretionary spending face significant contraction. Clients can’t afford to focus on innovation when survival is at stake after what’s happening around.

Uncertainty around contracts

Even the deals that Indian IT exporters have already bagged aren’t safe. See, IT companies have won a large number of multi-year contracts over the last few years — and in theory, those should see them through a rough patch. At the moment, they’re sitting on record deals by total contract value (TCV) — TCS TCVs, for instance, were at a highest ever $12.2B in Q4. But as the economy curdles, those might be postponed, or cancelled altogether. Clients in changing business environments are not as enthusiastic about going ahead with those contracts as they were earlier when the deals were first signed.

So, as uncertainty spikes, there’s a growing disconnect between contract signings and actual project implementations on the ground. Brokerages warn of "leakage" as projects face delays or cancellations.

That said, the less a client is built around importing goods, the more resilient it probably is. The BFSI sector — built around financial flows instead of the flow of goods — is the least affected by the whole tariff drama. And so, IT companies with higher exposure to clients in the BFSI sector, compared to consumer or manufacturing sector, are less likely to bear the heat of these “leakages” and “project delays”.But still it’s hard to conclude anything with certainty.

IT is still better off than other exporting sectors

Ultimately, the main risk is not the tariff itself, but its ripple effects on the global economy and client budgets. And that means that while our IT sector has been hit, in a time like this, nobody is safe. If anything, the IT sector is relatively better off than other sectors.

WTO estimates that, despite these headwinds, digitally delivered services (including IT services) are still expected to maintain relatively robust growth, though below initial projections. Specifically, digitally delivered services growth is forecast at 5.6% in 2025, down from an initial baseline scenario of 6.6%.

The AI Effect

All of this uncertainty is coming in an already uncertain time, as the rise of AI is already rippling through the sector.

Hear out Satish H.C., Executive Vice President and Chief Delivery Officer of Infosys:

“You can't approach AI in the same way you approach digital projects.”

Generative AI (GenAI) is making IT companies much more efficient, especially in tasks like software development, code generation, and automation. For example, companies like Cognizant now produce about 20% of their code with AI assistance. Of course, for the companies themselves, this is arguably a good thing. GenAI reduces the amount of manual work required, so companies can deliver the same projects with fewer people or in less time, lowering operating costs.

But that doesn’t mean that the companies get to hold on to those benefits.

Clients are aware of these savings too, and are demanding lower prices or a share of the cost benefits, all of which puts pressure on IT firms to pass on some of the savings. They’re being offered less for the same work, putting a deflationary pressure on the revenue of these IT companies. So while the margins of a company remain more or less the same, their topline takes a hit unless they’re able to expand their surface area of work. Several industry reports, including from Gartner and Cognizant’s own commentary, confirm this pricing pressure.

But that said, AI is also creating room for differentiation. Companies that can pivot to productised services, build IP-led platforms, or take on higher-order consulting roles, as things stand today, would probably thrive. Basically, AI could separate the traditional body-shop models from modern, consultative tech partners.

On Hiring Patterns

More than IT companies though, it’s their workers that are really hurting from all the change and uncertainty.

Hiring trends across the Indian IT sector clearly reflect the current cautious market environment. Companies that were aggressively hiring fresh talent until recently have significantly slowed down their pace. Kotak Institutional Equities noted that headcount decline is expected "across many companies in the quarter," reflecting the broader challenge of aligning workforce capacity with current demand levels.

Infosys, for example, onboarded just 15,000 freshers in FY25 — a sharp drop from previous years. Hiring numbers will stay depressed for a while, moreover — they’re only planning a modest increase to 20,000 in FY26. This comes after Infosys recently terminated several hundred trainees and freshers. In the first quarter of 2025, 500+ trainees were let go after failing internal assessment tests. The layoffs are not described as mass layoffs due to business contraction but are tied to performance standards and internal assessments. However, Infosys has acknowledged a tougher business environment.

Others are hiring even less. Wipro, on the other hand, added a mere 614 employees in its latest quarter, highlighting a visible slowdown in net hiring. TCS followed a similar pattern, with just 625 net additions during the quarter.

Meanwhile, those that remain are harder at work. The industry’s utilisation rates — the proportion of billable employees engaged on active client projects — have climbed across the board. For instance, Wipro's utilization rate rose to 84.6%, up 110 basis points sequentially. Higher utilization means that companies are keeping more of their workforce productively employed.

Wage hikes, another indicator of sentiment, have also been put on hold or delayed. TCS, for example, held back its usual annual raises.

All of this suggests a broader strategic shift. Companies are actively trying to cut down on costs, to make their way through a period of muted demand. They’re trying to do more with less. Growth is no longer the north star these companies are chasing: they’re now prioritizing efficiency and internal reskilling. That’s great for margins, but signals less room for slack, and less appetite for aggressive hiring.

The sentiment is clear: cautious is the new normal.

The downside to this, though, is that while it reflects current efficiency, it leaves little room to absorb new demand quickly if markets recover to favour IT companies.

Conclusion

India's IT services sector is at a crossroads. It has many problems at the moment, stemming from a complex interplay of economic uncertainty, shifting client priorities, and evolving trade policies. Clients are turning cautious, big projects are sinking, and there’s growing disparity between robust deal signings and weak revenue realization. There are severe headwinds ahead. Some of it is temporary in nature, like the uncertainty around tariffs, hiring freezes because of slower discretionary spend, etc. and some of it is more structural, like AI changing pricing and delivery models, the reducing relevance of legacy outsourcing (or labour arbitrage), etc.

By the current looks of it, the companies that come out stronger here will be the ones that read this distinction clearly, and adapt accordingly.

The good news is that bad times probably won’t last forever. Despite immediate challenges, the world’s broader trajectory towards digital transformation remains intact, which means that there’s still a market for our IT exporters to cash in. But the companies that do so will probably look very different — having changed how they do things at a time of acute stress.