India IT faces uncertain demand environments from GenAI-led deflation and geopolitics: Report

The Indian IT sector is navigating a challenging demand landscape, marked by the dual pressures of GenAI-induced deflation and geopolitical uncertainties, a JPMorgan research report indicates. The brokerage warns that a significant recovery in industry growth remains elusive as companies adjust to evolving technology priorities and constrained budgets.

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The India IT sector is facing an uncertain demand environment from an unprecedented confluence of technology and business cycle headwinds from GenAI-led deflation and geopolitics.

JPMorgan highlighted that the IT services industry has experienced stagnant revenue growth of 2-3% over the past three years. With AI deflation only in its second year, the report anticipates continued growth headwinds for the next two years. Consequently, the brokerage has revised its medium- to long-term growth projections downward, now expecting large-cap companies to achieve revenue growth of only around 3-4%, a notable decrease from previous expectations of mid-single-digit growth.

The report attributes the current uncertainty to "fear, uncertainty, doubt" among enterprises stemming from shifting technological priorities and geopolitical instability. These factors are crowding out IT services budgets, with spending increasingly directed towards AI tokens and cloud infrastructure, further complicating the outlook for industry growth recovery. Observations of delayed deal ramp-ups and signings, driven by client indecision related to geopolitical concerns and rapid AI advancements, suggest that this weakness may extend into the second quarter of fiscal year 2027.

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AI deflation still only in Year 2, it sees "further headwinds to growth over the next two years."

JPMorgan reiterated its view that the sector is in the initial phase of its three-stage AI adoption model, termed "Deflation." In this phase, AI-driven productivity gains in traditional areas are not fully offset by revenue from new AI services. The firm suggests that a positive inflection point is still some time away, potentially prolonging the industry's growth slump. The recovery timeline has been pushed back, with expectations now extending beyond fiscal year 2029 to 2030, resulting in a more pronounced "L-shaped" near-term growth curve.

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Enterprises face FUD (fear, uncertainty, doubt) from changing tech and geopolitics, with tech services budgets crowded out from spending on AI tokens and cloud keeping industry growth recovery prospects uncertain.

In response to these outlook changes, JPMorgan has reduced revenue growth assumptions for the first quarter across the board and anticipates downward revisions to fiscal year 2027 revenue guidance, as the typical first-half strength is not expected this year. Structurally, the firm no longer projects a return to the historical long-term average growth rate of 7-8% in the medium term, instead modeling growth to remain below 3-4% for the foreseeable future. This recalibration has led to P/E multiple cuts of 10-25% across the sector, with JPMorgan arguing that current multiples, trading below pre-COVID-19 averages, are justified given the structural growth limitations.

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Checks indicated "delays in deal ramp-ups and signings due to continued client indecision from geopolitical uncertainty and sharp AI changes," with weakness likely to "bleed into 2QFY27."