GenAI and Geopolitics to Pressurize India's IT Sector Growth: JPMorgan

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

The Stagnation Trap: 2-3% Revenue Growth

For the past three years, the Indian IT services industry has been caught in a low-growth cycle, with revenue increasing by only 2-3%. JPMorgan warns that this trend is unlikely to break in the immediate future. The brokerage has significantly revised its medium- and long-term growth forecasts, stating that large-cap IT firms are unlikely to return to their historical long-term average growth of 7-8%. Instead, the sector is expected to hover around a much lower 3-4% revenue growth for the foreseeable future.

AI Deflation and the Three-Phase Adoption Model

One of the primary drivers of this slowdown is the transition toward Generative AI (GenAI). According to JPMorgan, the industry is currently in the "Deflation" phase of its three-stage AI adoption model. In this stage, AI-led productivity gains in legacy and maintenance-heavy areas are offsetting revenue, as these efficiencies are not yet being fully compensated by the sale of new AI-driven services.

Because AI-led productivity is currently acting as a "deflationary" force on existing contracts, the industry is struggling to find new revenue streams that outpace the losses in traditional service models. The report suggests that this "growth funk" could last longer than many analysts initially anticipated.

Geopolitical Uncertainty and Budget Shifts

Beyond technology, macro-environmental factors are creating a climate of "Fear, Uncertainty, and Doubt" (FUD) among global enterprises. JPMorgan's channel checks indicate significant delays in deal signings and ramp-ups due to client indecision.

Enterprises are currently reassessing their technology budgets, often prioritizing spending on AI tokens and cloud infrastructure. This shift is effectively "crowding out" traditional tech services budgets, making it difficult for IT service providers to secure large-scale renewals or new project commencements. This weakness is expected to persist, potentially bleeding into the second quarter of FY27.

Downward Revision of Valuations and Forecasts

The combination of structural growth slowdowns and uncertain demand has led JPMorgan to take a bearish stance on sector valuations. The brokerage has cut price-to-earnings (P/E) multiples by 10-25% across the IT sector. The rationale is clear: current valuations are difficult to justify when structural growth has shifted from the 7-8% range to below 5%.

The report concludes that for valuations to see any meaningful improvement, investors will need to see clear evidence of accelerating revenue growth—a metric that currently lacks visibility and confidence in the market.

Key Takeaways

  • Growth Reset: Large-cap Indian IT firms are expected to see growth settle around 3-4%, a significant drop from their historical 7-8% average.
  • AI Impact: The industry is in an "AI deflation" phase where productivity gains in legacy services are neutralizing new service revenue.
  • Delayed Recovery: Due to geopolitical uncertainty and shifting budgets, a meaningful recovery for the sector may not materialize until FY30.