GenAI and Geopolitics to Pressure India's IT Sector Growth, Says JPMorgan

India's IT services industry is facing a prolonged period of stagnation as generative AI disruption and global geopolitical tensions reshape enterprise spending. A recent report from JPMorgan suggests that the sector may face an "L-shaped" recovery, with meaningful growth potentially delayed until FY30.

The Stagnation Trap: 2-3% Growth Benchmark

The Indian IT services landscape has struggled to find momentum, remaining stuck at a modest 2-3% revenue growth rate over the last three years. JPMorgan warns that this "growth funk" is unlikely to break in the immediate future. The brokerage has significantly revised its medium- and long-term outlook, stating that large-cap IT firms are unlikely to hit mid-single-digit growth. Instead, revenue growth is expected to hover around a low 3-4% for the foreseeable future, a sharp departure from the historical long-term average of 7-8%.

The GenAI 'Deflation' Phase

A critical factor in this slowdown is the industry's current position in the AI adoption cycle. JPMorgan categorizes the sector as being in the "Deflation" phase—the first of a three-stage model. During this period, AI-led productivity gains in legacy and maintenance-heavy service areas are actually reducing revenue, as these gains are not yet being fully compensated by new, high-value AI service contracts.

Because "AI deflation" is only in its second year, the brokerage expects further headwinds over the next two years. This shift is causing a "crowding out" effect, where traditional tech services budgets are being diverted toward spending on AI tokens and cloud infrastructure.

Geopolitical Uncertainty and Client Indecision

Beyond technology, the macroeconomic environment is contributing to a climate of "Fear, Uncertainty, and Doubt" (FUD). Channel checks indicate significant delays in deal signings and ramp-ups as enterprises reassess their investment priorities amidst geopolitical instability. This indecision is expected to bleed into the second quarter of FY27, making the near-term growth curve look increasingly flat.

Downward Revision of Valuations and Forecasts

In light of these structural changes, JPMorgan has taken a bearish stance on sector valuations. The brokerage has cut price-to-earnings (P/E) multiples by 10-25% across the IT sector, arguing that current valuations must reflect the reality of structural growth being stuck below 5%.

Furthermore, revenue growth estimates for the first quarter have been reduced across the board. The report notes that the typical strength seen in the first half of the fiscal year is unlikely to materialize this time, and FY27 revenue guidance will likely face downward revisions. For valuations to recover, the industry will need to demonstrate accelerated revenue growth and improved visibility in new service lines.

Key Takeaways

• Delayed Recovery: The IT sector is expected to follow an "L-shaped" recovery path, with meaningful growth potentially delayed until FY30.
• AI Impact: The industry is currently in an "AI deflation" phase where productivity gains in legacy areas are cannibalizing traditional revenue.
• Valuation Cuts: Due to structural growth slowing from 7-8% to below 4%, P/E multiples for IT firms have been slashed by 10-25%.