As we look toward the future, one of the most pressing questions for India's economy is how artificial intelligence (AI) will affect its largest and most significant industry: the IT services sector. According to a scenario outlined by Citrini Research in its 2028 report, AI disruption could lead to a rapid acceleration of contract cancellations for India's biggest IT companies, including TCS, Infosys, and Wipro, as more and more companies replace human coding with AI-powered tools.
The impact of AI on India's IT exports, which currently total over $200 billion annually, could be profound. These exports are the largest contributor to India's current account surplus, helping offset the country's persistent goods trade deficit. However, as the cost of AI-driven coding tools continues to plummet, India's traditional business model—relying on outsourced human coding—faces a major challenge.
AI Coding Agents: The Game Changer
The report from Citrini Research paints a scenario where the marginal cost of an AI coding agent has dropped to essentially the cost of electricity, making it a much cheaper option than hiring a human developer. This is a significant shift, as companies increasingly deploy AI-driven tools to handle coding tasks, leading to contract cancellations for the major IT firms that have long relied on human workers.
As more companies adopt these AI tools, they no longer need to outsource development work to companies like Infosys, TCS, or Wipro. The cost-effectiveness of AI coding makes it an attractive alternative, and Indian IT firms—who have thrived on providing outsourced services—are now facing the consequences of AI’s expansion.
India’s Unique Challenge
India's IT services sector has long been a powerhouse of the country's economy, thanks to its competitive cost advantage. The difference in labor costs between India and the U.S. has been a key driver for this industry’s growth, with Indian developers offering high-quality services at a fraction of the cost of their American counterparts. However, AI-driven coding tools present a threat to this labor-cost advantage, as these tools can now replace human workers at a fraction of the cost.
Citrini Research highlights that India’s situation is unique: while other economies are benefiting from the rise of AI infrastructure, India is actually facing economic pressure because of its reliance on human-intensive IT services. While countries with strong AI infrastructure are thriving, India is being squeezed as AI capabilities continue to improve and take over traditional outsourced tasks.
The Economic Ripple Effect: Currency Depreciation and IMF Discussions
As AI tools replace human workers in the IT sector, the demand for traditional outsourcing begins to dwindle. This leads to a decline in services exports, which has been a major source of revenue for India. The erosion of demand for human-intensive services causes significant strain on India's external accounts. As the IT sector weakens, the Indian rupee takes a hit, falling 18% against the dollar within just four months.
By the first quarter of 2028, the International Monetary Fund (IMF) begins to have what it calls “preliminary discussions” with the Indian government. These discussions could signal deeper economic concerns and potential steps needed to address the supply-side shocks caused by AI’s increasing dominance in the IT sector.
Human coordination is the largest, most exponential cost in any business. Economist Ronald Coase’s seminal 1937 Theory of the Firm can be paraphrased as- Firms exist because internal coordination costs are lower than market transaction costs, but only up to a point. The firm stops growing when the marginal cost of organizing one more internal transaction equals the cost of doing it via the market. Passing instructions from a founder to a product manager to an engineer is a lossy game of telephone, requiring endless messages, meetings and presentations just to keep everyone aligned. Indeed, we can think of the entire Microsoft Suite of Outlook, Word, PowerPoint and Excel as human coordination technologies. AI agents, however, share nearly perfect, continuous context. Where feasible, swapping humans for agents eliminates this massive coordination tax, collapsing friction and ramping output. - Alap Shah
The Long-Term Outlook: Erosion of India's IT Outsourcing Model
India’s IT sector has long relied on outsourcing as its core business model. Companies have outsourced everything from software development to IT support, capitalizing on India’s large pool of skilled developers at lower costs. However, the rise of AI tools like agentic AI coding systems is making human-intensive outsourcing increasingly obsolete. As AI adoption accelerates, it’s likely that demand for outsourced services will continue to weaken.
Citrini Research explains that AI’s capabilities are improving at a rapid pace, and as a result, machines are becoming cheaper substitutes for human developers. This shift could dramatically reshape the global IT services market. For India, the challenge will be adjusting to a new world where AI agents take over much of the work that was once done by human developers.
What’s Next for India’s Economy?
The scenario presented by Citrini Research paints a troubling picture for India’s IT sector. The once-thriving industry may soon find itself on the defensive as AI tools replace human labor. The loss of IT outsourcing contracts, coupled with a weakening currency and increasing pressure on India’s external accounts, could lead to a severe economic downturn.
While this report is a scenario, not a prediction, it serves as a wake-up call for India to recognize the risks that AI disruption poses to its economy. The shift towards AI-driven services could be a game-changer for the country’s long-standing reliance on human-intensive outsourcing, and businesses must begin preparing for the economic ripple effects that are likely to follow.
Note: This article is based on CitriniResearch's report, "The 2028 Global Intelligence Crisis: A Thought Exercise in Financial History". It explores a scenario where AI disruption accelerates and its potential economic fallout. The views expressed here are speculative and aim to highlight the potential left tail risks of AI’s rise.