AI is exposing cracks in India’s growth story as it hits high-paying IT

Hello, this is Priyanka Salve, writing to you from Singapore.

Welcome to the latest edition of “Inside India“ — your one-stop destination for stories and developments from the world’s fastest growing large economy.

Over the past two decades, India’s IT sector has been driving a consumption boom that has in many ways anchored the India growth story. But as AI forces IT companies to shift away from volume hiring, it exposes a critical gap that risks hampering economic growth: a lack of quality jobs.

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Even as the conflict in the Middle East disrupts global supply chains, the IMF earlier this month reaffirmed its forecast that India will remain the fastest-growing large economy in 2026.

But last week, global equity research firm Bernstein wrote an open letter to Indian Prime Minister Narendra Modi, warning of a deepening employment crisis in the country, especially as artificial intelligence threatens quality jobs in the information technology sector.

Those jobs with relatively high wages and productivity have had spillover effects across real estate, education, and services, making white-collar employment a key pillar of the country’s economic growth.

For the past two decades, 10 million to 15 million Indians working in IT services and the business process outsourcing industry have anchored the “aspirational middle class—buying homes, taking flights, driving consumption,” Bernstein said. “Gen AI now challenges that template.”

India’s IT sector used to outcompete global peers as the vast talent pool at relatively low cost gave it an edge, experts said. But AI has tilted this equation in favor of tech arbitrage, from labor arbitrage earlier. The lack of quality jobs will stress-test the India growth story, which relies on the demographic dividend and domestic consumption.

“Without job creation, India’s consumption-led economy will struggle to grow, limiting investment demand at a time when the export growth-led model is at risk globally,” Shumita Sharma Deveshwar, chief India economist at GlobalData TS Lombard, told CNBC.

“India has struggled to raise the share of manufacturing in the economy to shift labour from farm to factories,” she said, adding that the AI boom now poses a threat to jobs in both manufacturing and services.

Close to 45% of India’s workforce continues to depend on agriculture, which only contributes 15%–16% of its GDP, according to Bernstein.

In an interview with CNBC-TV18 during the AI Summit earlier this year, Ashwini Vaishnaw, India’s IT minister, acknowledged that disruption to jobs in the tech sector was a “real challenge,” but stressed that the solution was in “upskilling and reskilling the workforce.” The Indian government expects AI to reinvent the country’s IT sector.

“Not all jobs are at risk of being replaced by AI,” said Alexandra Hermann Prasad, lead…