AI Spending Reshapes IT Sector Growth, Kotak Report Finds

The global IT services industry is undergoing a significant transition as artificial intelligence (AI) begins to reshape enterprise spending patterns. According to a recent report by Kotak Institutional Equities, the sector is facing mounting pressure, with stock prices correcting sharply and several firms missing revenue expectations in the latest quarter.

The Kotak Institutional Equities report highlights that AI-driven shifts in technology spending are fundamentally altering growth dynamics for IT service providers.

AI-Led Deflation Emerges as a New Reality

What Is AI-Led Deflation?

The report introduces the concept of AI-led deflation, which is becoming increasingly relevant in today’s IT landscape. Contrary to earlier concerns that overall technology spending might slow down, the data shows that enterprise tech budgets are actually expanding. However, the composition of that spending is changing rapidly.

Companies are now allocating a larger share of their budgets to AI infrastructure, software platforms, and advanced analytics capabilities. This shift is reducing the share of spending available for traditional IT services such as application development, maintenance, and outsourcing.

As a result, IT service providers are experiencing slower revenue growth despite a broader expansion in global technology investments.

Revenue Impact of Generative AI

Kotak Institutional Equities estimates that generative AI adoption could lead to an annual revenue deflation impact of around 3.5% over the next few years. This reflects how automation and efficiency gains from AI are reducing the need for large-scale human-driven IT services.

Growth Gap Between Tech Spending and IT Services

Diverging Trends

One of the most striking findings in the report is the widening gap between overall technology spending and IT services growth.

• Global technology spending grew 10.9% in 2025
• It is expected to rise further to 13.4% in 2026

In contrast:

• IT services growth slowed to 3.1% in 2025
• It is projected to inch up to just 4.2% in 2026

This divergence indicates that while companies are investing more in technology, they are prioritising AI-driven solutions over traditional services.

Shrinking Share of IT Services

The data suggests that IT services are gradually losing their share within enterprise budgets. As AI tools become more capable of automating tasks like coding, testing, and data processing, the demand for conventional services is being compressed.

Pricing Pressure and Rising Competition

Cost Efficiency Demands

AI adoption is also intensifying pricing pressures across the sector. Clients are increasingly demanding more value for the same cost, pushing IT firms to either reduce pricing or enhance delivery efficiency.

This trend is evident in both new contracts and renewals of large deals, where enterprises are leveraging AI capabilities to negotiate better terms.

Intensified Competitive Landscape

Another key challenge highlighted in the report is rising competition. Over the past decade, leading IT firms gained market share due to execution challenges faced by competitors. However, that advantage has now diminished.

Most Tier-1 companies are operationally stable and competing for the same pool of deals. This has created a crowded marketplace with limited opportunities for differentiation and market share expansion.

Sector Outlook Remains Muted in the Near Term

Growth Expectations Lowered

Kotak Institutional Equities has maintained a Neutral stance on the IT sector, noting that earlier expectations of a recovery by FY27 have been pushed further out.

Growth estimates for Tier-1 IT companies are now tightly clustered in the range of 1 to 4%, reflecting subdued demand and ongoing structural shifts.

Impact on Margins and Profitability

The combination of pricing pressure, slower deal flow, and increased investment in AI capabilities is expected to weigh on both revenues and profit margins in the near term.

Long-Term Opportunities in the AI Era

AI as a Cyclical Disruptor

Despite current challenges, the report takes a cautiously optimistic view of the long-term outlook. It suggests that AI-led deflation is cyclical and could reverse over the next two to three years as new opportunities emerge.

Areas such as AI implementation, data architecture, and governance are expected to drive the next wave of growth for IT service providers.

Sectoral and Company-Level Opportunities

Certain industry verticals, including financial services and energy and utilities, continue to show resilience and stable demand.

Additionally, mid-tier IT companies may be better positioned to capitalise on emerging opportunities, as they tend to be more agile and adaptable compared to larger incumbents.

Conclusion: A Structural Shift, Not Just a Cyclical Slowdown

The findings from Kotak Institutional Equities highlight a fundamental transformation in the IT services industry. AI is not just another technology trend—it is reshaping how enterprises allocate budgets, negotiate contracts, and define value.

While the near-term outlook remains challenging, with slower growth and margin pressures, the long-term potential of AI-driven innovation cannot be overlooked.

For IT companies, the path forward will depend on their ability to adapt—moving beyond traditional service models and embracing new roles in AI implementation and digital transformation. Those that successfully navigate this transition are likely to emerge stronger in the evolving technology landscape.