New Delhi [India], August 25 (ANI): Artificial Intelligence-led productivity gains could result in annual revenue deflation of 3 per cent to 3.5 per cent in the Indian IT services market through FY2028, with new AI-driven demand unlikely to offset the pressure before FY2029, according to a sector report by Kotak Institutional Equities.

Kotak said the revenue deflation would come as IT companies use AI to deliver existing work more efficiently and pass productivity benefits to clients through lower costs, while new AI-related business remains too small to offset the impact on the much larger existing revenue base.

'Our best estimate is that the deflation phase runs through FY2027-28 and the crossover begins around FY2029,' Kotak Institutional Equities said in its IT Services sector report.

The report estimates annual revenue deflation of 3-3.5 per cent for the Indian IT services market, with the impact varying across different services. It expects the impact to be highest in application development and customer experience business process outsourcing, while being lower in infrastructure management services and specialised BPO services.

'IT services companies are utilizing GenAI and passing on AI productivity benefits to clients,' the report said. It added that in multi-year managed services deals, clients are demanding that savings expected from future AI efficiencies be passed on upfront.

Kotak said the pressure could persist because AI implementation currently accounts for a relatively small part of the business, while productivity-related price reductions affect a much larger existing revenue base.

'We do not expect growth to exceed 5% before FY2029,' the report said, adding that services companies first need to replace productivity gains passed on to customers before generating net growth from AI.

The brokerage also flagged intense competition as another challenge for Indian IT companies. It said the deal market has not expanded enough to support the growth ambitions of all players, while customers are using competition among vendors to secure a larger share of AI-driven savings.

'The IT services pie is still growing, but the AI-adjusted pricing pool available to Indian IT is shrinking,' the report said. It added that winning deals may help companies retain business without necessarily translating into revenue growth.

However, Kotak does not expect AI to eliminate the need for IT services. It said deploying AI in businesses still requires data engineering, workflow redesign, security, testing, governance and integration with legacy systems, sustaining a role for IT services companies.

The report said meaningful scaling of enterprise AI applications is likely to be gradual, with significant activity expected during 2027 and accelerating into 2028. (ANI)