TLDR: A recent Jefferies equity strategy report highlights that India’s services-led economy is at a critical juncture as Artificial Intelligence (AI) reshapes global labor markets. While the nation’s heavy reliance on services makes it vulnerable to AI-driven automation, its robust digital infrastructure, vast talent pool, and proactive government initiatives position it with unique advantages to adapt. The report projects significant shifts in the IT services sector due to AI, alongside substantial growth in data center capacity, emphasizing the need for India to pivot towards higher-value roles and domestic semiconductor capabilities to fully capitalize on the AI era.
India’s services-dominated economy is facing a transformative period as Artificial Intelligence (AI) rapidly redefines global labor markets, according to a comprehensive equity strategy report from Jefferies. The brokerage firm’s analysis, published on September 12, 2025, underscores that while India’s significant dependence on its services sector presents vulnerabilities to automation, the country possesses inherent strengths in its digital infrastructure, a burgeoning talent pool, and strategic government policies that could facilitate a successful pivot.
The services sector is a cornerstone of the Indian economy, contributing a substantial 64% to the nation’s gross value addition and employing approximately 42% of its workforce. This sector, which has been a primary engine of growth since the 1990s, is now directly exposed to the disruptive potential of generative AI, which is increasingly automating routine cognitive tasks ranging from software coding to customer service.
Jefferies analysts noted, ‘AI-led disruption is already becoming visible in IT services with customers asking for 15-30% lower project costs in anticipation of AI improvement gains at service providers.’ This trend is expected to lead to muted growth in the IT services sector, with a projected Compound Annual Growth Rate (CAGR) of just 1.4% over FY25-28. Furthermore, AI-led productivity gains are anticipated to deflate revenues by as much as 20% by FY30. In this evolving landscape, Jefferies favors mid-sized IT players such as Coforge and Hexaware, while maintaining underperform ratings on larger entities like Tech Mahindra and Wipro.
Despite these challenges, India holds several distinct advantages. The country’s working-age population is forecast to expand significantly, from around 980 million in 2024 to 1.07 billion by 2033, constituting nearly 70% of the total population. With 8-9 million individuals joining the workforce annually, this demographic dividend offers a potential buffer, provided job creation shifts towards higher-value roles that complement AI rather than being replaced by it.
India’s digital public infrastructure, exemplified by the ‘India Stack,’ is another formidable strength. This ecosystem has facilitated over 1.4 billion Aadhaar enrollments, nearly 9.5 billion documents through DigiLocker, and approximately 20 billion monthly UPI transactions, accounting for 85% of India’s digital payments and half of all global real-time transactions. Jefferies highlighted that this unparalleled scale provides India with the ‘ability to generate digital data at unmatched scale,’ a crucial resource for training sophisticated AI models.
Government support is also central to India’s AI readiness. The IndiaAI Mission, launched in 2024, commits $1.2 billion over five years to democratize access to computing resources, enhance data quality, and foster the growth of AI startups.
However, the report also identifies critical risks. Without developing domestic capacity for advanced semiconductor nodes, India risks ‘becoming a raw data provider and missing out on the higher-value stages of the AI value chain.’ This underscores the importance of investing in advanced manufacturing and research capabilities.
Looking ahead, India’s data center capacity is projected to grow fivefold to 8GW by 2030, attracting an estimated $30 billion in capital expenditure and expanding the leasing market to $8 billion. Telecom operators, including Bharti Airtel, Reliance, and Adani Enterprises, are expected to capture a significant 35-40% of this burgeoning capacity.
Also Read:
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- India’s Generative AI Market Set for Explosive Growth, Driven by Content Creation and Video Production
Jefferies concluded by stating, ‘India is at a crucial juncture with rising working-age population but high dependence of economy on services when AI threatens to automate many routine cognitive jobs.’ This emphasizes the urgent need for strategic adaptation and investment to harness AI’s potential while mitigating its disruptive impacts on the workforce.
