Services Exports Fall 0.87% as Indian Businesses Face Slower Western Demand and AI Disruption

NEW DELHI, Oct 16: India’s services exports declined marginally in September, reflecting softer demand in major Western markets, high borrowing costs and growing changes in traditional outsourcing caused by artificial intelligence.

Services exports fell 0.87 per cent year-on-year to $36.35 billion in September, compared with $36.67 billion during the same month a year earlier, according to data cited in a report by the Global Trade Research Initiative (GTRI).

Despite the monthly setback, the sector continued to record growth during the first half of the financial year. Services exports rose 8.69 per cent to $216.31 billion between April and September, following a record $421.3 billion in the 2025–26 financial year.

The September decline nevertheless highlights the challenges facing an industry that has expanded rapidly over the past decade and become a major source of foreign exchange earnings and skilled employment.

India’s services sector includes information technology, business-process management, financial and professional services, engineering support, consulting and other activities supplied to customers at home and abroad.

The country’s established technology workforce and extensive outsourcing network have helped Indian companies secure business from multinational corporations. However, changing spending patterns in overseas markets and rapid technological developments are forcing exporters to reconsider their growth strategies.

Dependence on Western markets creates exposure

The United States, the European Union and the United Kingdom remain central destinations for India’s software exports.

According to the GTRI report, these markets together account for 85.1 per cent of India’s software exports. The United States contributes 54.1 per cent, followed by the European Union at 18.6 per cent and the United Kingdom at 12.4 per cent.

This concentration provides Indian companies with access to large technology budgets and established business relationships. It also exposes them to changes in economic conditions across a relatively limited group of markets.

When Western businesses face uncertainty, they may postpone technology upgrades, reduce discretionary consulting projects or renegotiate outsourcing contracts to control expenditure.

Elevated interest rates can make financing more expensive and encourage companies to focus on immediate savings rather than long-term expansion. Persistent inflation can further constrain operating budgets.

These conditions can affect Indian service providers even when domestic demand remains comparatively resilient.

Companies that depend heavily on overseas clients may experience slower contract growth, longer sales cycles and increased pressure to demonstrate measurable returns on technology spending.

For exporters, the challenge is to maintain revenue growth while adapting to a more selective environment in which clients increasingly assess the financial benefits of each project.

Artificial intelligence reshapes outsourcing

The growing use of generative artificial intelligence is another factor changing the economics of India’s services industry.

AI-based systems can assist with coding, software testing, documentation, routine maintenance and several business processes that previously required substantial manual effort.

As these tools become more capable, customers may need fewer billable hours for certain assignments. Contracts based mainly on the number of employees or hours supplied could consequently face pressure.

For service providers, this creates a need to reconsider how work is priced and delivered.

Traditional outsourcing models often generate revenue through teams assigned to clients for specified periods. AI-assisted delivery may allow the same work to be completed faster, reducing the volume of labour required even when the customer’s overall demand for technology remains unchanged.

That does not necessarily mean the entire outsourcing industry will contract. Businesses may use productivity improvements to launch new projects, modernise older systems and develop products that were previously too costly.

However, service providers will need to capture part of the value created by automation rather than allowing all productivity gains to translate into lower contract prices.

Companies that can deliver complete business outcomes, integrate complex systems and provide specialised advice may be better positioned than firms whose work consists largely of repetitive tasks.

Moving towards higher-value services

Industry experts have emphasised the need for Indian exporters to expand into more specialised services to sustain growth.

Potential opportunities include AI implementation, data engineering, cybersecurity, cloud architecture, advanced analytics and technology consulting.

AI adoption requires more than access to software tools. Businesses often need support with data preparation, integration with existing systems, governance, security and staff training.

Indian technology companies could use their experience in enterprise IT to help overseas customers deploy these systems and measure their performance.

Cybersecurity is another area of demand as organisations expand digital operations and face increasing risks involving data breaches, identity theft and disruption to critical systems.

Companies that can provide continuous monitoring, risk assessments and secure infrastructure may be able to build longer-term client relationships.

Data engineering is also important because AI applications depend on reliable, organised and accessible information. Businesses frequently need assistance in combining data from multiple systems, improving its quality and ensuring that it can be used safely.

Specialised consulting can help organisations identify where automation is appropriate and redesign workflows to improve efficiency.

Moving into these areas requires investment in employee training, research, technical infrastructure and sales capabilities. It may also involve a shift from labour-intensive contracts towards services that command higher prices because of their expertise or business impact.

Global capability centres face a changing model

Multinational companies have established global capability centres (GCCs) in India to manage technology, finance, analytics, research and other corporate functions.

These centres have become an important part of India’s services ecosystem, creating skilled jobs and supporting the transfer of specialised work to the country.

However, the growing use of automation is changing how some organisations plan their workforce requirements.

Companies may seek to increase output from existing teams rather than expand employee numbers at the pace seen in earlier years. AI tools can help workers complete certain tasks more quickly, but they can also change the mix of skills required.

For Indian technology professionals, this shift increases the importance of continuous training in emerging technologies, data management, cybersecurity and business analysis.

Employers may need to redesign roles and provide opportunities for employees to move from repetitive tasks into more complex responsibilities.

The overall employment impact will depend on the balance between jobs affected by automation and new positions created by expanding digital services.

Market diversification becomes more urgent

Reducing dependence on a small group of export destinations could help Indian businesses manage fluctuations in demand.

Companies may explore opportunities in the Middle East, Southeast Asia, Africa and other markets where businesses are investing in digital infrastructure and modernisation.

Diversification, however, requires more than opening new offices. Exporters must understand local regulations, establish distribution and sales networks, adapt services to different customer requirements and compete with regional providers.

Some markets may offer strong demand but smaller technology budgets, while others may impose restrictions on data transfers or require local partnerships.

Businesses will therefore need to select markets carefully and develop strategies suited to their commercial conditions.

Indian companies can also diversify within existing markets by serving additional industries, including healthcare, manufacturing, financial services, logistics and energy.

A wider client base can reduce dependence on a handful of large customers and make revenue less vulnerable to spending cuts in a single sector.

Policy and talent development remain important

The performance of services exports has implications beyond individual technology companies. The sector contributes to India’s foreign exchange earnings, employment and position in global business networks.

Maintaining competitiveness will require cooperation between companies, educational institutions and policymakers.

Training programmes can help workers develop skills in AI systems, cloud computing, cybersecurity and specialised consulting. Universities and research institutions can contribute by strengthening applied research and encouraging collaboration with industry.

Exporters may also benefit from measures that simplify international business operations, improve digital infrastructure and support access to overseas markets.

At the same time, companies must address client concerns about data security, intellectual property and regulatory compliance. These issues are increasingly important when technology services involve sensitive business information or AI-generated outputs.

The transition towards higher-value work may require substantial investment before the financial benefits become visible. Smaller service providers could face particular challenges because they have fewer resources for training and research.

Partnerships, shared technology platforms and specialised service offerings may help smaller firms remain competitive.

Strong first-half growth offers some support

The September decline should be considered alongside the sector’s longer-term expansion.

Services exports more than doubled from roughly $200 billion before the pandemic to a record $421.3 billion in FY26. Such a higher base makes it harder to sustain earlier growth rates indefinitely.

The 8.69 per cent increase recorded during April–September indicates that the sector retained momentum during the first half of the current financial year, even as the latest monthly figure weakened.

One month’s decline does not establish a lasting downturn. Future results will depend on global technology spending, the pace of AI adoption and the ability of Indian businesses to win new contracts.

However, exporters cannot rely solely on historical growth or the availability of a large workforce. Competition is increasingly shaped by productivity, technical specialisation, quality of delivery and the capacity to solve complex business problems.

Outlook

India’s services industry continues to have important advantages, including a large skilled workforce, experience serving international clients and established delivery infrastructure.

The latest figures nevertheless underline the need to adapt to changes in global demand and technology.

Companies that invest in higher-value services, develop AI-related capabilities and diversify their customer base may be better equipped to manage pressure on traditional outsourcing revenue.

The coming months will show whether stronger first-half performance can be sustained and whether new technology-related opportunities can compensate for slower demand in established service categories.

For India, the long-term objective will be to increase not only the volume of services sold overseas but also the value generated by each contract, helping maintain export competitiveness in a rapidly changing global economy.