As AI improves, some roles may become redundant
For labour-rich economies like India, this creates a trade-off between productivity and job absorption
To stay competitive in IT, India needs a comprehensive shift
With the increasing usage of Artificial Intelligence (AI), the Economic Survey 2025-26 has raised questions about India’s IT sector’s cost advantage model. It notes that this risks hollowing out India’s core value proposition if adaptation lags.
“If the country is to sustain its competitive edge in IT, a comprehensive evolution is necessary, one that takes full advantage of the potential embedded in AI development and deployment,” the survey adds.
1 January 2026
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The survey adds that companies that are under pressure to reduce costs and boost efficiency are the most eager to adopt AI quickly. This is most likely to happen in routine, low-value service tasks.
As AI becomes better at these tasks, companies may begin to see some roles as unnecessary and decide they no longer need as many workers for them. For labour-abundant economies such as India, this creates a trade-off between productivity gains and the capacity of the economy to absorb workers.
As the survey notes, “rapid, uncalibrated deployment of AI may boost output but risks displacing segments of the workforce faster than the economy can reabsorb them.” At the same time, delaying AI adoption to protect jobs could “lock firms into a low productivity equilibrium”.
The policy challenge, therefore, lies not in whether to adopt AI, but in managing the pace of its diffusion to ensure that labour augmentation is prioritised over displacement. This come at a time when the Indian IT sector has reduced hiring of freshers in the last few years.
Further, the ILO has also highlighted that up to 70% of existing jobs in India are at high risk due to automation and AI. Speaking to Outlook Business earlier, Phil Fersht, chief executive of global advisory firm HFS Research said, “Indian IT majors need to incubate product delivery separately from their current traditional services models as the product pricing model will cannibalise their existing businesses. Some of them are making tentative plans to do this, but I’m yet to see any of them address this aggressively. The shift to ‘services-as-software’ is going to disrupt traditional Indian IT firms and they need to be ahead of the curve to exploit the opportunity.”
However, a big pain point here is the low spend on R&D by the private sector. A fact that us being highlighted by the survey repeatedly. This year also, it points out, "Low expenditure in R&D is partly due to low investment in R&D from business sector, which accounts for only 41 per cent of the total expenditure. This is in stark contrast to countries such as China (77 per cent), United States (75 per cent), and South Korea (79 per cent), where business sector contributions to R&D are significantly higher."
