The AI threat and Indian IT services

AI and the new world

Last week Anthropic CEO Dario Amodei warned that software engineering could become obsolete within the next 12 months as AI systems take over most coding work. This was a huge “cat-among-the-pigeons” moment for Indian IT services providers with most stocks sharply down post the announcement. The IT industry, especially in countries like India, is witnessing a shrinking pipeline for entry-level and repetitive roles, with high-volume tasks like document review, compliance, and basic programming increasingly automated by enterprise AI tools. Studies from McKinsey confirm that jobs focused on clerical, inventory, billing, and quality assurance tasks are at high risk, while roles requiring high-level problem-solving, leadership, empathy, and hands-on expertise (such as electricians and healthcare workers) are less exposed[1]

Did the computer put the world out of work?

We have seen many announcements in the past regarding technological innovation proclaiming to change the world as we know it putting many careers and sectors at risk. If history is any indication all serious technological breakthroughs have achieved increased productivity, opening of newer means of production and a general increase in human well-being. When computers entered the work domain for the first time, many eulogies were written about how the ways of working will damage a large mass of humanity and put them out of work. Similar warnings had been spoken about throughout the history of mankind right from the advent of the motor vehicle to the commercialization of aviation. In fact, the world propelled itself on a faster trajectory of growth every time such “earth changing” innovations were introduced and fears induced.

So, is there no threat? Of course, threats are ever present for companies and individuals who are not prepared to change in line with the new developments. The scenario is for rapid adaption and prudent allocation of capital. We are ever mindful of indiscriminate capital allocation to new technologies that do not deliver on the promise and ensure that such investors face the ramification of their hasty actions. Truth be told, it is never easy to predict the success of any technology in advance and the most patient, diversified, investors win in the end. It could be a long wait, and many may face serious wealth erosion on the way to prosperity in the interim. Success doesn’t come with any guarantees.

What impact does this have on India IT services currently?

While many proclaim the death of IT services as we know it, the truth may be far removed from the hype. For starters, to adopt AI you require human engineers to set it up and the first phase will require constant oversight even after implementation. While the promise of AI is in the shortening of the time taken, assurances on quality control and the use of AI in mission critical processes especially for client data remains a topic of much debate. Client facing data has far too many risks to be taken over by AI, especially public enterprise packages such as the one Anthropic vends. The on-the-ground issues are still too complex from a legal and compliance aspect that has hardly been investigated at this time.

What does this mean for Indian IT services and the potential going forward?

Trust human ingenuity

• While the jury is out regarding the eventual success or failure of the Indian IT services business framework, this industry has covered itself in glory in the past by re-inventing itself, adapting to changing norms and thriving in the environment.

• AI implementation is currently fraught with no reliable public data. Programming LLMs for specific tasks will require intensive human input before it can be allowed to operate. Private and proprietary data remains out of reach for a realistic AI driven solution

• Closed loop AI implementation and special applications will thrive in the interim and Indian IT services can be a bridge for such solutions, contrary to wholesale adaption of current AI infrastructure and jettisoning of current engagements.

• BFSI is currently fragmented in many discrete legacy systems that are simply not amenable to wholesale AI adaption and will stay away from the churn

While there may be cost implications and that clients may demand a lower cost from Indian IT vendors if they in turn use AI to reduce cost, but in this world, it will be difficult to remain opaque, and the benefits will need to be passed on. Does that mean large volume increases with lower margins? That will be the key variable to watch.

The brave new world

Investors should brace for a new investing environment. As always, the world is in a state of constant change and companies will need to adapt to continue to enjoy market capitalizations in line with current multiples. Diversification will continue to be key, and investors should ensure that they do not bite the next fad and fashion and maintain a balanced view of the developing landscape. But this has not changed for prudent investors in any scenario. So, has anything changed?

Happy investing!

[1] AI generated by India Today