Why India’s IT sector is shedding jobs

India’s IT sector is shedding jobs, and it’s raising tough questions about what’s driving the cuts. While slowing global demand is a key factor, analysts are also watching how artificial intelligence might be reshaping roles in an industry long seen as a pillar of the country’s economic growth.

The country’s largest private sector employer, Tata Consultancy Services, which employs over half a million IT workers, announced last month that it would cut more than 12,000 jobs from mostly the middle and senior management levels, equating to 2% of its global workforce — in what will be its biggest layoff so far.

The company’s CEO and managing director K Krithivasan attributed the move to “limited deployment opportunities and skill-mismatch” rather than AI. But that did not quell growing unease within the country, as many viewed the layoffs as a sign of broader and disruptive changes underway in the IT sector, amplified by the growing influence of AI.

TCS and its peers have long relied on India’s vast pool of low-cost, skilled labor to produce software services, a model now coming under pressure as AI is set to automate repetitive tasks and as global clients demand higher levels of innovation.

The IT sector has long been highly sought after among India’s large pool of engineering graduates, meaning any slowdown will have ripple effects across the economy. India produces over 1.5 million engineering graduates annually, according to local media reports.

The IT industry contributed roughly 7.5% to India’s gross domestic product in fiscal year 2023, with over 5 million people directly employed in the sector.

“AI adoption is a major challenge for India. Entry level routine jobs are being displaced, and mid-level jobs are transforming,” said Sonal Varma, chief economist of India and Asia ex-Japan at Nomura.

“This creates the challenge for job creation for India, since the country needs to create about 8 [million] jobs annually,” she added.

Recent earnings also painted a sobering picture of the sector’s performance, with IT majors such as TCS, Infosys and Wipro reporting muted year-on-year growth.

Although that was largely attributed to uncertainty around U.S. tariffs, which weighed on American clients’ budgeting confidence, the recent signs of slowdown in India’s IT sector may be merely a “cyclical change,” as services exports to the U.S. have eased, said Dhiraj Nim, economist and foreign exchange strategist at ANZ Research.

AI, however, will be “a trend to reckon with in the years to come,” Nim added.

New Delhi has been striving to incentivize growth in labor-intensive manufacturing sectors such as electronics, textiles, footwear and toys as part of its supply chain relocation strategy.

The layoffs also add to an already strained labor market as the country’s unemployment rate continued to rise. India’s urban unemployment rate rose to 7.1% in June from 6.9% in May and 6.5% in April. The youth unemployment rate in urban areas, among those aged 15 to 29 years, also spiked to nearly 19% from 17.9% in May, and 17.2% in April, according to the statistics ministry.

The labor market problem could persist for a few years, said Anubhuti Sahay, head of South Asia economic research at Standard Chartered, urging New Delhi to ramp up efforts in creating more salaried jobs.

She pointed out that the bulk of job creation has so far come from self-employed sectors where wages tend to remain lower than in salaried ones.

Economists have urged New Delhi to accelerate its efforts in upskilling its labor force and bridge the skill gap to lower the risk of job displacement. One in five young adults in India have participated in an AI-skilling program, according to a report supported by Google.org and Asian Development Bank.

AI will replace some jobs but also transform the nature of existing jobs through “constant skilling,” Nomura’s Varma said.

The government has rolled out an internship program aimed up skilling younger adults with actual working experience.

Nim acknowledged that AI could be a threat to jobs, but suggested that whether it will lead to increasing job displacement will depend on skilling and labor movement up the skill chain.

Notably, Infosys appears to be charting a different course from TCS. Its CEO Salil Parekh told CNBC-TV 18 last week that the company hired 17,000 people in the first quarter and plans to recruit 20,000 graduates this year, while highlighting AI, cloud and cost efficiency as key growth drivers.

But that might not be indicative of the broader outlook for the sector: Industry body Nasscom last month said some “workforce rationalization” is expected in the near term, driven by rising client expectations around agility, innovation, and speed, with AI and automation becoming central to business operations, according to local media reports.

“This shift is likely to reshape traditional service delivery frameworks and, in the near term, may lead to some workforce rationalization as traditional skillsets are re-evaluated,” Nasscom said.

New Delhi also must pivot to higher value-added services and innovation rather than focusing on low-end routine work, economists said.

“If the economy is unable to adapt, this could lead to job losses, lower services exports, moderate urban consumption,” said Varma, with ripple effects across real estate, retail and ancillary services.

“It could risk India getting stuck in the middle-income trap,” Varma added.