TLDR: Indian IT companies are experiencing significant margin pressure due to a combination of persistent macroeconomic challenges and the increasing impact of AI-driven productivity enhancements. In response, firms are implementing stringent cost-control measures, including delaying pay hikes and reducing operational expenses, as they navigate a ‘negotiator’s market’ and weak deal momentum.
India’s leading information technology (IT) firms are currently facing a substantial squeeze on their profit margins, a situation exacerbated by ongoing macroeconomic headwinds and the transformative effects of AI-driven productivity improvements. The first quarter of fiscal year 2026 has already revealed a decisive shift towards aggressive internal cost control strategies across the sector, according to industry analysts.
Companies are deploying a range of measures to sustain profitability amidst a period of subdued deal momentum. These include deferring pay hikes for employees, trimming sales and administrative costs, and re-evaluating bench policies. Experts suggest that the pressure on margins is unlikely to abate in the immediate future, even if there’s a modest improvement in revenue driven by pent-up demand. This outlook is largely due to the evolving landscape where clients are demanding greater value and AI pricing models are still taking shape.
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Nitin Bhatt, technology sector leader at EY India, characterized the current environment, stating, “The sector is entering a negotiator’s market.” He further elaborated on the challenges, noting, “Margin pressures will worsen with investments in new sales and go-to-market motions, solution-building, reskilling, and in some cases, discounts to protect the current estate.” This highlights the dual challenge of managing costs while simultaneously investing in future capabilities to remain competitive in an AI-influenced market.
