Tariff Impact, AI Age, Rise Of GCCs—Indian IT Sector Braces For A Tough FY26

India’s $280 billion IT industry is likely to see another gloomy year after two years of muted growth, as Tariff wars cast a shadow of uncertainty in the business demand. Putting hopes of revival on a backfoot, IT companies are compelled to walk a tightrope with deal conversion delays, project deferral and cancellations with tough pricing conditions.

Since Donald Trump’s re-election as US President, a wave of new policies have come in, and his unpredictable tariff decisions have fueled uncertainty. Amid volatile trade conditions, businesses around the world are taking a more cautious stance.

Last week, three Indian IT majors — Tata Consultancy Services (TCS), Infosys, Wipro — reported weak fourth-quarter results. While TCS’ results missed market expectations of margin and profit, Infosys’ missed its FY25 guidance, with margin being marred by wage hikes. Wipro guided poorly for FY26 despite a strong deal pipeline.

India’s biggest IT company Tata Consultancy Services (TCS), first to report its results, is already getting the jitters from the changing macroeconomic conditions. CEO K. Krithivasan in his Q4 commentary said, “Improving market sentiment and revival of discretionary spending have not been sustained due to tariff discussions. We are observing delays in decision-making and project starting.”

“We see the very foundations of the IT services industry being rattled to the core. We had anticipated a hike in Indian exports to the US of 20% at worst, but this is even higher at 26%. Those recession odds are rising significantly now, and so with it is spending on IT services,” research consultancy firm HFS Research in its recent note flagged.

Infosys’ growth for FY25 came in at 4.2%, missing the guidance of 4.5-5%, which was raised from earlier 3.75-4.5%, when the industry was seeing green shoots. Now, CEO Salil Parekh flags that Infosys is seeing uncertainty in the environment and is expected to see some impact in the consumer sector, while momentum continues in energy, utilities and BFSI segments.

Further, Wipro is expecting a degrowth in the first quarter of FY26, with a guidance of -3.5% to -1.5%. CEO Srini Pallia told NDTV Profit, “Some of the large deals that we have won, especially the big deal — the Phoenix deal—it’s going to take us a few more months before we start ramping up. The revenue tick will happen as per the contract. Once that happens, we will have a revenue momentum coming from that particular deal.”

Just as the industry was finding its footing after two slow years, fresh setbacks threaten to trip it up again. Green shoots had begun to sprout—BFSI was looking up, and businesses were cautiously unlocking budgets for tech transformation.

Wipro for instance, was earlier hopeful for a better year. Pallia in his third-quarter commentary had said, "We are more hopeful and resilient in 2025. Our clients are cautiously optimistic and we see discretionary spending slowly coming back.” Now, that momentum faces a new test.

Kotak Securities predicts that the IT services spending growth will reduce below the expectation of 4-5% in FY26, as multiple demand deterrents exist for the sector.

“A combination of higher uncertainty and slow growth is not a favorable environment for Indian IT service companies. The first of the year is a seasonally strong period, if the companies don't get growth during this time, the entire year becomes fragile. Now client distress will be passed on to vendors, impacting the IT players,” said Sumit Pokharna, VP Analyst, Kotak Securities.

The industry growth projection was 5.1% growth to $282.6 billion in fiscal 2025, and revenue in fiscal 2026 was expected to progress to $300 billion, according to industry body Nasscom. So far, there are no revised estimates for the overall industry in light of the changed macros. For TCS, Infosys and Wipro, the growth projection for FY26 remains in low single digits.

Gaurav Parab, Principal Research Analyst, NelsonHall, notes FY26 will remain soft with growth being the main challenge. “Although there were signs of revival in FY25—particularly with BFSI recovering, leading to optimism across adjacent sectors like retail and manufacturing—the unexpected events have disrupted this momentum, as there is lack of clarity surrounding it.”

He also notes that revenue deflation due to generative artificial intelligence (AI) will also be a deterrent. This essentially means that the clients of IT companies will demand for operational gains from usage of Generative AI to be shared with them. In this case even as Gen AI will reduce costs, it won’t result in higher income.

These new challenges come at a time when the IT industry at large is seeing disruption in the new age of Artificial Intelligence. One of the services industry honchos C Vijaykumar, CEO of HCL Technologies, recently voiced that over the past 30 years, the industry has grown in a linear fashion—both in revenue and workforce size—but this traditional model is now poised for disruption.

Now, FY26 will face challenges from project deferrals, cancellations, and slower decision-making, especially for transformation programs without immediate return on investment. Clients are expected to prioritise critical initiatives, while non-essential projects and some deal renewals may be postponed, Pokharna said.

Pareekh Jain, chief executive officer of Pareekh Consulting, explains that along with the effect of ramp-downs, margins also are likely to be impacted, with operational levers reducing. He notes that the sectors of business such as retail, and manufacturing revenue verticals will be the most hit due to the current geopolitical movements with tariff impositions.

As a new set of challenges arises for the industry, HFS Research notes that for the IT companies, where COVID forced product and business model innovation, a global trade war will be about circling the wagons, constraining costs, and slowing product innovation as consumers and other businesses will no longer be looking to buy new products.

Adding to these challenges is the rapid rise of Global Capability Centres (GCC) in India. These centres are the in-house development centres set up by multinational companies that work on tech functions and innovations. This poses a challenge to IT services players, as companies have an option to insource the operations to their own GCCs instead of outsourcing to IT service providers.

For instance, in the recent past, reportedly Citigroup, one of the major clients for Indian IT services companies, decided to reduce its reliance on IT contractors, and cut external contracts to 20% from the current 50%.

Piyush Pandey, lead analyst at Centrum India, said, “GCCs pose some risk to IT companies, because there is always a chance that some of the work would have been outsourced to IT companies. Part of it is driven by the desire of clients to maintain more control over the IT projects, to optimise costs."

Growth moderation in near term is expected, and greater impact of this will be seen on the small-mid size companies as companies might rely only on some large players and insource the remaining operations to their own GCCs, he added.

The number of GCCs in India has grown from approximately 1,430 in fiscal 2019 to over 1,700 in fiscal 2024. As of March 31, 2024, GCCs in India employed nearly 1.9 million professionals, according to Economic Survey 2025.