Indian AI-led technological shooting could derail middle class dreams

The Indian exhibition software industry is facing a moment of calculation.

The nation's largest private sector employer, TATA Consultant Services (TCS), the largest IT services company, has announced it will cut more than 12,000 jobs at the medium-term and senior management levels. This will reduce the company's workforce by 2%.

The Mumbai software giant employs over half a million IT workers and is considered the floor of business sentiment across India's $283 billion software industry. It forms the backbone of formal, white-collar employment in the country.

According to TCS, the decision was taken to “preparation in the future” the company to invest in new areas and deploy artificial intelligence amid the earthquake disruption of traditional business models.

For decades, companies like TCS have relied on cheap, skilled labor to produce software for global clients at low cost, covered by AI automation tasks and clients that demand more innovative solutions as well as reducing human resources costs.

“Many reskilling and redeployment initiatives are ongoing,” TCS said in a statement, adding that “we will release associates for organizations where deployment may be infeasible.”

“Across the IT companies, people are let go while they're stored to streamline their workforce and bring efficiency,” Neeti Sharma, CEO of TeamLease Digital at Staffing Firm, told the BBC.

She added that new technology adoption in areas such as AI, cloud and data security “had a massive spike” but not as strong as people have been fired.

The TCS announcement also highlights a sharp “skill discrepancy” in the country's software industry, experts say.

As generative AI leads to rapid productivity growth, “this technological change forces businesses to reassess their workforce structure and analyze whether they should redirect resources to roles that complement AI capabilities,” Rishi Shah, economist at Grant Thornton Bharat, told the BBC.

According to industry group Nasscom, India needs 1 million AI experts by 2026, but even 20% of the country's IT experts are not AI-skilled.

Upskilling spending by tech companies has skyrocketed quite a bit as they rush to prepare a new pool of AI talent for the future, but people without the necessary skills are being shown the door.

In addition to the structural changes brought about by the advent of AI, the TCS announcement “reflects the broader growth challenges facing the Indian IT sector,” according to global investment banking company Jeffries.

“Total net employment at the industry level has been weak since fiscal 2020 [financial year 2022]mainly because demand outlook has eased over the long term,” Jeffries said in a memo.

Demand for IT services in the US, which contributes half of the revenues of Indian software majors, is affected by Donald Trump's tariffs.

While tariffs are primarily targeted at physical goods, analysts say companies are suspending discretionary IT spending when they reconsider tariff uncertainty and the economic impact of their global procurement strategies.

Also, the growing adoption of AI has led US companies to negotiate lower costs, and according to Jeffries, people's heavy IT companies are being forced to work with fewer employees.

The ripple effects of this began to feel in cities like Bengaluru, Hyderabad and Pune. According to one estimate, around 50,000 people in the industry lost their jobs last year. And net employee additions fell by 72% in India's top six IT services companies.

All of these have been struggling to create jobs for the millions of young graduates who participate in the workforce each year, with the potential to affect India's wider economy.

With the absence of a strong manufacturing sector, these software companies made India the world's back office in the 1990s, and were a priority employment option for hundreds of thousands of new IT workers. They have created new, wealthy middle classes that foster growth in many cities and drive the demand for cars and homes.

However, as stable, high-paying jobs shrink, there are questions about the service-driven economic boom in India.

Until just a few years ago, the IT major in India absorbs 600,000 freshmen each year. According to TeamLease Digital, that number has dropped dramatically to around 150,000 over the past two years.

Other emerging sectors such as financial technology startups and GCC (Global Capacity Centre) are offshore units of multinational companies that perform support tasks like it, finance, research and development — absorbing the rest, but at least “20-25% of freshmen have no jobs,” Sharma says.

She added, “GCCS never matches the amount of employment done by IT companies.”

Several top business leaders in India are beginning to flag the economic outcomes of these trends.

India's trimmed IT sector “can have a negative impact on many related services and industries, crash real estate and hit premium consumption,” said D Muthukrishnan, one of South India's largest mutually funded distributors, responding to the announcement of TCS.

A few months ago, entrepreneur Arindam Paul, founder of motor technology company Atomberg, warned in a linked post about the potentially crippling impact of AI on the middle class of India.

“The nearly 40-50% of white-collar jobs that exist today may no longer exist,” Paul wrote. “And that would mean the end of the middle class and the consumption narrative.”

How quickly India's tech giant adapts to the extent of the disruption brought about by the AI revolution will determine whether the country can maintain its advantage as a global technology player. Also, whether we can expand the middle class in consumption, which can keep GDP growth on a steady basis.

Follow BBC News India Instagram, YouTube, x and Facebook.