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

India’s IT services sector is facing a period of prolonged stagnation as generative AI and geopolitical tensions reshape enterprise spending. According to a recent JPMorgan research report, the industry’s recovery may be much further away than previously anticipated, potentially stretching into the next decade.

The Stagnation Trap: Why Growth is Slowing

For the past three years, India's IT services industry has been caught in a low-growth cycle, with revenue growth hovering stubbornly between 2% and 3%. JPMorgan warns that the sector is currently facing an "unprecedented combination" of technology and business cycle headwinds. Unlike previous cycles, enterprises are showing extreme caution, reassessing technology budgets and shifting investment priorities amidst global instability.

The brokerage has notably lowered its medium- and long-term growth expectations. It no longer expects large-cap IT firms to return to their historical long-term average of 7–8% growth. Instead, the new forecast suggests growth will remain stuck below 3–4% for the foreseeable future, creating what analysts describe as an "L-shaped" recovery curve.

The AI Deflation Phase and Budget Crowding

A critical factor in this slowdown is the current state of Generative AI adoption. JPMorgan identifies the industry as being in the first of three stages: the "Deflation" phase. In this stage, productivity gains driven by AI in legacy and maintenance-heavy areas are actually reducing revenue, as these gains are not yet fully compensated by the demand for new AI-driven services.

Furthermore, the report highlights a phenomenon of "budget crowding." Enterprises are facing "Fear, Uncertainty, and Doubt" (FUD) due to rapid technological shifts and geopolitical volatility. Consequently, traditional tech services budgets are being diverted toward spending on AI tokens and cloud infrastructure, leaving little room for the traditional IT services that have historically driven the sector's growth.

Delayed Recoveries and Valuation Revisions

The impact of these shifts is already visible in client behavior. Channel checks indicate significant delays in deal signings and ramp-ups, driven by client indecision. JPMorgan expects this weakness to bleed into the second quarter of FY27, with a meaningful sector-wide recovery unlikely until FY30.

As a result of these structural changes, JPMorgan has also adjusted its financial outlook for the sector:

  • Revenue Guidance: Estimates for first-quarter revenue growth have been cut across the board, with expectations that FY27 guidance will also be lowered.
  • Valuation Cuts: The brokerage has slashed price-to-earnings (P/E) multiples by 10–25% across the sector.
  • Structural Shifts: The report argues that current valuations are more realistic given that structural growth has dropped from the 7–8% range to below 5%.

Key Takeaways

  • Prolonged Slowdown: India's IT sector is facing an "L-shaped" recovery, with growth expected to stay below 4% and a meaningful rebound unlikely before FY30.
  • AI Impact: The industry is in an "AI deflation" phase where productivity gains in legacy services are currently outstripping the revenue generated by new AI offerings.
  • Valuation Reset: Due to the shift from 7–8% historical growth to a lower structural baseline, JPMorgan has cut sector P/E multiples by up to 25%.