GenAI and Geopolitics to Stifle India IT Sector Growth, Says JPMorgan

India’s IT services industry is facing a prolonged period of stagnation as technological shifts and global instability reshape enterprise spending. A recent report by JPMorgan suggests that the sector may struggle to find a meaningful recovery until FY30, creating an "L-shaped" growth trajectory.

The Stagnation Trap: 2-3% Growth Benchmark

For the past three years, India’s IT services sector has been caught in a low-growth cycle, with revenue expansion hovering between only 2% and 3%. JPMorgan warns that this "growth funk" is set to persist, as the industry faces an unprecedented combination of business cycle headwinds and technological disruption.

The brokerage has significantly downgraded its long-term outlook, stating that large-cap IT firms are unlikely to return to their historical long-term average growth of 7-8%. Instead, the new structural reality suggests revenue growth will struggle to stay above the 3-4% mark for the foreseeable future.

The GenAI 'Deflation' Phase

One of the primary drivers of this slowdown is the transition toward Generative AI (GenAI). JPMorgan identifies the industry as being in the "Deflation" phase of a three-stage AI adoption model. In this stage, AI-led productivity gains in legacy and maintenance-heavy services are actually reducing costs for clients, but these savings are not yet being fully offset by the revenue generated from new AI-driven services.

Because "AI deflation" is only in its second year, the math for IT service providers is currently unfavorable. As enterprises reallocate their technology budgets toward AI tokens and cloud infrastructure, traditional IT services budgets are being "crowded out," leading to delayed deal signings and slower ramp-ups.

Geopolitical Uncertainty and Shifting Budgets

Beyond technology, the report highlights a climate of "Fear, Uncertainty, and Doubt" (FUD) among global enterprises. Geopolitical instability is causing clients to hesitate, leading to significant indecision regarding long-term contracts and digital transformation projects.

JPMorgan’s channel checks indicate that this indecision is not just a short-term glitch; the weakness is expected to bleed into 2QFY27. This uncertainty is forcing companies to reassess their investment priorities, making it difficult for Indian IT firms to secure the high-value, multi-year deals that previously fueled double-digit growth.

Downward Revision of Valuations

As a direct consequence of these structural shifts, JPMorgan has slashed its price-to-earnings (P/E) multiples by 10-25% across the sector. The brokerage argues that current valuations are too high given that structural growth has plummeted from the 7-8% range to below 5%. For market valuations to see a meaningful improvement, the industry must demonstrate accelerating revenue growth and provide better visibility to investors—milestones that may not arrive until FY30.

Key Takeaways

  • Structural Slowdown: The IT sector is shifting from a 7-8% long-term growth average to a much lower 3-4% structural growth bracket.
  • AI Disruption: The industry is in a 'Deflation' phase where GenAI-driven productivity is cutting legacy revenues faster than new AI services can replace them.
  • Delayed Recovery: Due to geopolitical FUD and budget reallocation, a meaningful industry recovery is not expected until FY30, creating an "L-shaped" growth curve.