GenAI and Geopolitics to Pressure India IT Growth, Warns JPMorgan

India's massive IT services sector is facing a prolonged period of stagnation as generative AI and global geopolitical tensions disrupt traditional spending patterns. A new research report from JPMorgan suggests that the industry may struggle to find its footing until FY30, shifting the growth outlook from a rapid recovery to a cautious "L-shaped" trajectory.

The 'L-Shaped' Growth Reality

For the past three years, the Indian IT services industry has been trapped in a low-growth cycle, with revenue growth stagnating between 2% and 3%. JPMorgan has warned that this "growth funk" is likely to persist longer than many analysts previously anticipated.

The brokerage has significantly revised its medium- and long-term growth estimates, noting that large-cap IT firms are unlikely to achieve their historical long-term average growth of 7-8%. Instead, the report forecasts that revenue growth will hover around a modest 3-4% for the foreseeable future. This shift suggests a structural change in the industry, where the rapid expansion seen in previous decades is being replaced by a more subdued environment.

The AI 'Deflation' Phase and Budget Crowding

A critical factor in this slowdown is the industry's transition into the first stage of AI adoption: the "Deflation" phase. According to JPMorgan, while generative AI is driving massive productivity gains in legacy and maintenance-heavy areas, these gains are not yet being fully compensated by the revenue generated from new AI-led services.

Furthermore, enterprise spending is being redirected. Clients are experiencing "Fear, Uncertainty, and Doubt" (FUD) regarding rapid technological shifts and geopolitical instability. This has led to a "crowding out" effect, where traditional technology services budgets are being diverted toward spending on AI tokens and cloud infrastructure. Consequently, channel checks indicate significant delays in deal signings and ramp-ups as clients remain indecisive about their long-term technology roadmaps.

Downward Revisions in Forecasts and Valuations

The cautious outlook has prompted JPMorgan to implement several downward revisions across the sector. The brokerage has reduced its first-quarter revenue growth estimates "across the board" and anticipates that FY27 revenue guidance will likely be lowered, as the traditional strength seen in the first half of the fiscal year fails to materialize.

The impact is also being felt in market valuations. JPMorgan has cut price-to-earnings (P/E) multiples by 10-25% across the sector. The rationale is that current valuations must reflect the new reality: structural growth is now stuck below 5%, compared to the 7-8% seen in earlier years. For stock valuations to see an upward trend, the brokerage suggests that the industry must demonstrate accelerating revenue growth with higher visibility and client confidence.

Key Takeaways

  • Stagnant Growth Outlook: India's large-cap IT firms are expected to see revenue growth settle at 3-4%, significantly lower than their historical 7-8% average.
  • AI-Induced Deflation: The industry is currently in an "AI deflation" phase where productivity gains in legacy systems are outstripping the revenue generated from new AI services.
  • Delayed Recovery: Due to geopolitical uncertainty and shifting enterprise budgets, a meaningful industry recovery is not expected until FY30.