Indian IT Firms Face Dual Challenges

India's leading IT companies are currently facing significant margin pressures due to a combination of macroeconomic slowdowns and the transformative impact of artificial intelligence (AI). The first quarter of FY26 has seen these firms adopting aggressive cost-control measures to sustain profitability.

Strategic Responses to Margin Pressures

From delaying salary hikes to reducing sales and administrative expenses, IT firms are exploring all avenues to maintain their margins. Experts suggest that despite potential modest revenue growth from pent-up demand, margin pressures are expected to persist in the near term.

The Rise of a Negotiator's Market

Nitin Bhatt of EY India describes the current scenario as a 'negotiator's market,' where margin pressures are exacerbated by investments in new sales strategies, solution development, and reskilling initiatives. Additionally, the shift towards outcome-based pricing for AI projects is reshaping margin dynamics.

Impact of AI on Efficiency and Employment

Generative AI is reported to bring about 25-30% efficiency gains in software development and up to 50% in business processes, with conversational AI potentially reducing contact center headcount by up to 75%. However, these advancements come with their own set of challenges, including the need for significant investment in reskilling.

Looking Ahead: FY26 as a Year of Margin Protection

With growth in the US and core verticals remaining weak, IT firms are focusing on margin protection and expansion. Tight operational controls, including deferred salary hikes and reduced variable pay, are among the strategies being employed. Despite a robust deal pipeline, the market remains highly competitive, with clients demanding more value for less expenditure.