Discretionary Spending Revival To Boost Generative AI Deals For Indian IT Firms

The revival of discretionary technology spending is expected to enable Indian IT companies to see incremental revenue growth, as they capitalise on the new cycle of investments. This resurgence is also expected to drive demand for Generative AI-related transformation deals. 

After a prolonged downturn, the IT industry is experiencing a revival in demand. Technology spending, which had been restrained due to uncertainty in Western economies, is now being deployed more aggressively. Macroeconomic factors, including Fed rate cuts and the new Trump administration, are contributing to improved business sentiment. 

Major IT companies including Tata Consultancy Services Ltd., Infosys Ltd., Wipro Ltd., and HCLTech’s third quarter results largely met market expectations. Their commentary on discretionary spending also turned positive after many quarters.

Infosys, for instance, is seeing discretionary spending for the BFSI vertical in Europe and US pick up. “We are also seeing an improvement in retail and consumer product industry in the US, with discretionary pressures easing,” Chief Executive Officer, Salil Parekh, said. 

Similarly, Tata Consultancy Services also said it is seeing early signs of revival in discretionary spend in BFSI and retail. Its CEO, K Krithivasan, also noted that with the reduction in the interest rates, easing of inflation, and reduced uncertainty with the new US administration taking over, the company expects discretionary demand to strengthen.

With discretionary spend reviving, IT analysts expect incremental increase in the revenue for companies. Gaurav Parab, principal research analyst at tech research firm NelsonHall, noted that when the BFSI sector starts discretionary spending, it positively impacts adjacent industries, like retail and manufacturing, leading to early signs of recovery in Q3.

However, caution is advised due to potential policy changes that could affect industries such as retail, high tech (especially semiconductors), and healthcare. Any major policy shifts in the current quarter could alter the recovery trajectory, he added. 

“This year, growth was around 4-5%, with some inorganic factors contributing. Next year, expectations are for a better performance, with a growth of 5-8%, including an inorganic component expected. Overall, a 2-3% increase compared to this year is anticipated,” said Pareekh Jain, chief executive officer of Pareekh Consulting.

The revival in technology spends is also expected to give a fillip to Indian IT industry's GenAI endeavours, which have been in infancy in comparison with global services companies like Accenture.

Jain notes that with the start of the new year and quarter, there is hope for an increase in discretionary spending, particularly on transformation projects. This increase in discretionary spending is expected to signal the revival of the next cycle of AI growth, particularly in the GenAI space. While the immediate impact may not be substantial, the industry anticipates that more discretionary spending will eventually lead to a broader recovery and growth, he added. 

Wipro in its third quarter earnings pointed out that it is seeing an increasing focus on spending related to Gen AI across operations, infrastructure, and applications, presenting new opportunities, especially in areas involving data readiness, AI, and cloud.

Indian IT companies have been trying to push their case in the generative AI race. So far, companies have built AI first platforms and announced some investments. However, except for TCS, once the companies haven't called out GenAI specific deal pipeline or revenues.

Infosys for instance has built Infosys Topaz, an AI-first set of services, solutions and platforms using generative AI technologies. Previously, it had called out that it is working on 225 Gen AI programs, and trained 2.5 lakh employees on Gen AI. Recently, the company said that it is has developed about 100 Agentic AI solutions and now has four small language models.

Wipro has committed to invest $1 billion AI over three years, dedicated to advancing its foundation in AI, data and analytics capabilities. The company also had launched Wipro ai360, an AI-first innovation ecosystem, and had said it would train all of its about 250,000 employees on AI over the next 12 months.

TCS has been the only company to call out its AI deal pipeline once. In April it said that the company had $900-million worth of generative AI and AI projects. It had trained around 350,000 of its employees in AI skills.

In contrast, global rival Accenture has been calling out its Generative AI deal pipeline. In its latest quarter, the company clocked in Gen AI new bookings worth $1.2 billion.

The GenAI proof-of-concepts being developed by the IT companies so far for clients could start going into production at a faster pace with technology budgets loosening, according to Parab.

The IT companies will see more transformational deals, which yield better revenue and margins in comparison to the run of the mill system maintenance and cost efficiency deals.

“For clients to fully reap the benefits of investment, it's essential to replace the legacy core with a new technology stack. Sticking to the old system will prevent you from realising the full potential of new technologies like AI," said Sumit Pokharna, VP analyst, Kotak Securities.

However, he added that it's too early for major AI deal announcements. Currently, companies are focusing on reducing costs and improving efficiency through AI, with expectations of some benefits being shared with clients. While AI-driven revenue streams are anticipated, they will take more time to materialise.