An Economic ‘Sagar Manthan’ Beckons for India

India’s three-decade-long growth story was built on a critical engine: IT services exports worth $225 billion a year that funded India’s current account, created a million middle-class jobs each year, and powered domestic consumption. That engine is now slowing due to a maturing global outsourcing market and due to the substitution of cognitive labour by AI. The consequences are already visible — decelerating consumption, softening real estate prices in IT cities, and mounting pressure on the rupee. Yet within this disruption lies a significant structural opportunity. A depreciating INR combined with landmark Free Trade Agreements (FTAs) with the UK, US and EU gives India tariff advantages over China, Vietnam, and Bangladesh. Export-led manufacturing is poised to take over as India’s next engine of growth. This transition from IT to manufacturing will be uneven and painful in the near term; the winners are few and localised, while the losers are many and dispersed.

“In every age there comes a time when the old ways of earning a living pass away and new ones must be built in their place. The nation that moves first, with clear eyes and steady nerve, inherits the next era of prosperity. The nation that mourns too long for what was lost shall find itself mourning its future as well.”

— John Stuart Mill, Principles of Political Economy (1848)

India’s Economic Identity Was Built on IT Services

India’s post-liberalisation story is, in many ways, a story about software. For over three decades, IT services have not merely been an industry — they have been the very engine of India’s integration with the global economy. Since the early 1990s, India’s largest export by value has been IT services, generating roughly $225 billion per annum in foreign exchange earnings. This single sector financed India’s current account deficit, allowing the country to import the essentials of modern life — electronics, energy, machinery — predominantly from China and the West.

Beyond the balance of payments, IT services created a class of urban, aspirational, middle-income professionals. It generated jobs for millions of engineering graduates, funded consumption across metros, and — through that consumption — drove ancillary employment in real estate, retail, and services. Bangalore, Hyderabad, Pune, and Gurgaon became cities that grew up around the IT services sector.

The sector’s steady expansion over 30 years was not merely an industry success story; it was the primary driver of India’s economic growth rate, anchoring the country’s fiscal story and its external account. The four largest listed IT services firms — TCS, Infosys, HCL Tech, and Wipro — grew revenues at a CAGR of 15.8% in the 15 years between FY2005 and FY2020, absorbing over a million new employees each year and generating further waves of ancillary employment. As Exhibit 1 shows, however, this era of synchronised growth between IT jobs and consumption has now decisively broken down.

A Structural Shift Is Bringing This Era to an End

What took 30 years to build is now fraying — not because of a single shock, but because of two compounding structural forces that are fundamentally altering the dynamics of India’s IT services sector. Together, they are ending the era of IT-led job creation and with it, the economic model that underpinned India’s middle-class expansion.

1.The Maturing of the IT Services Sector

With 8 million employees, India’s IT services sector remains the country’s largest formal employer. But growth has decisively decelerated. In the post-Covid era, as Fortune 500 companies — the largest clients of Indian IT firms — accelerated their own technology adoption, the need for incremental outsourcing slowed sharply. Revenue growth for the four largest IT services firms dropped to a CAGR of just 6.8% in the five years ending FY2025, roughly half the historical rate. Proportionately, employment growth slowed: the sector now absorbs fewer than 0.5 million new recruits per annum, down from over a million.

As Vishnu Gopal, Marcellus’ technology analyst, explains: global outsourcing penetration was at mid-single digits in the early 2000s and has since risen to approximately 30%. That headroom is now largely exhausted. Clients in developed markets are also diversifying their vendor base across geographies to manage geopolitical risk, further limiting the market share gains historically available to Indian IT players. As Exhibit 2 illustrates, the downward trend in IT headcount growth is unmistakable and structural.

 2. AI Replacing Humans in Routine Cognitive Tasks

Artificial intelligence is substituting human labour at an accelerating pace across both blue-collar and white-collar roles. In the blue-collar world, India’s 12 million security guards — one of the largest employment categories in the country after construction — now face displacement by cameras, sensors, and automated systems. In the white-collar world, IT services companies are cutting thousands of jobs as AI handles coding, quality assurance, customer support, and back-office operations.

Major firms including TCS and HCL Tech have announced significant workforce reductions. A study by Niti Aayog projects 2 million job losses in IT and customer experience sectors by 2031. The asymmetry here is stark: Western countries facing labour shortages benefit from automation. India — with a median age of just 29 and millions of young workers seeking employment — confronts the opposite problem. For a nation already struggling to generate sufficient jobs, AI’s substitution effect threatens to eliminate white-collar employment options before the complementarity effects — where technology makes remaining workers more productive — can materialise. India’s white-collar job creation engine has, in effect, comprehensively jammed.

If IT services — the sector that financed India’s current account, employed its graduates, and powered the aspirations of its middle class — is entering a prolonged period of stagnation, the questions that follow are consequential: What happens to the Indian economy’s growth drivers? What fills the foreign exchange gap? And critically, are there sectors where this disruption creates genuine new opportunity for the country?

The Costs Are Immediate; the Opportunity Is Real but Delayed

Economic Impact 1: Consumption Growth Slows

The most immediate consequence is a structural deceleration in domestic consumption. India’s middle class — a cohort of urban, educated professionals that sits squarely in the middle of the income distribution — was the primary beneficiary of three decades of IT services expansion. It is precisely this class that drives the bulk of discretionary spending in the country.

The evidence is already visible. As Exhibit 3 shows, FMCG volume growth — a broad proxy for consumption across India — has trended steadily downward over the past 14 years. [The time series charts for consumer durables and cars look almost identical to the FMCG chart shown below.] We believe this trajectory will worsen as the combined effects of sector maturation and AI-led displacement ripple through the incomes and expectations of this class. Residential real estate markets in Bangalore, Hyderabad, and Pune — cities that rose on the back of the IT services boom — are also beginning to see moderation.

Economic Impact 2: Sustained Pressure on the Indian Rupee

India’s development path was unusual: the country leapfrogged a large manufacturing phase and moved directly to a services-led growth model. IT services, in particular, generated the foreign exchange surpluses that kept the current account deficit in check and the rupee relatively stable. As that engine decelerates — with no immediate alternative source of dollar inflows at scale — the rupee faces structural downward pressure.

India’s RBI forex reserves are already declining at roughly $10 billion per month (stripping out the mark-to-market impact of rising gold prices). The RBI cannot absorb the shortfall from falling IT services exports indefinitely; at some point, it is more likely to let the currency find a new equilibrium. Adding to this pressure, the Trump administration’s “expectation” that India purchase $100 billion in American goods will place further exogenous strain on the rupee. A weaker INR is not simply a macroeconomic data point — it has real consequences for import costs, inflation, and the purchasing power of middle-class households.

Structural Opportunity in Export-Led Manufacturing

Here, however, a critically important inflection point presents itself. A weaker rupee — by making Indian goods cheaper for foreign buyers — combined with new Free Trade Agreements (FTAs) with the UK, EU, and potentially the US, creates conditions for a genuine and durable acceleration in India’s manufactured exports.

India currently exports approximately $400 billion in manufactured products. The foreign exchange shortfall arising from slower IT services growth must, by definition, be offset either by the RBI drawing down reserves (unsustainable) or by a rise in other exports. The path of least resistance — and the one most consistent with India’s structural advantages in labour, engineering talent, and growing industrial capacity — is a step-change in manufactured goods exports.

For the first time since 1991, FTAs mean that India will have access to developed markets at tariff rates that are either comparable to, or meaningfully better than, what China, Vietnam, Bangladesh, and Mexico receive. This is a genuinely new and significant development. Exhibits 4 and 5 set out the scale of the opportunity across the US and EU markets respectively.

The Asymmetry Between Winners and Losers is Here to Stay

There is a critical asymmetry in this transition that must be understood. The beneficiaries of India’s coming boom in manufactured exports will be manufacturers in industrial towns — Coimbatore, Hosur, Chennai, Hyderabad, Vizag, Pune, Surat, Baroda, and Ludhiana. They will be real, and their prosperity will be significant.

The casualties of slower IT services growth will be millions of employees living in condominiums in Hyderabad, Bangalore, Pune, Gurgaon, and Mohali — people whose careers, mortgages, and identities were built around the assumption of continued IT sector growth. This mismatch between the scale of winners and losers in this economic Sagar Manthan will weigh on property prices and on the lives of tens of millions of families.

The pain that the losers will feel is already upon us. The prosperity that the winners will see is still several years away — most likely arriving between 2027 and 2037. Overall, the Indian economy faces a few genuinely difficult years as it navigates an epic inflection point in its post-liberalisation history.

Investment Implications

This inflection point calls for individual-level action. There are three things that all of us can do to navigate the turbulence ahead. First, retrain yourself for the era of white collar gig jobs that is upon us. Structured, long-term corporate employment will diminish gradually – especially for younger people in the IT and ITES sector – as AI does more of the repetitive tasks that white collar workers like coders and equity analysts are accustomed to.

Second, as we enter a era of white collar gig jobs, the volatility of our personal incomes will increase. Therefore, each of us needs to maintain a large financial buffer to help us tide through difficult years.

Third, as the broader economic climate becomes more volatile in this Trumpian age, all of us will need to plan our financial futures better especially since our employers will not be around to inject structure and stability into our lives.

Our colleagues at Marcellus can help you plan your future if you visit plan.marcellus.in and seek a free financial plan. Alternatively, you can also click or scan the QR code below.



Nandita Rajhansa and Saurabh Mukherjea work at Marcellus Investment Managers (www.marcellus.in). This material is for informational and educational purposes only and should not be considered as financial, investment, or other professional advice.