ChatGPT maker OpenAI’s recent launch of GPT-5, the latest and most advanced version of ChatGPT, could pose a significant challenge to India’s $283 billion IT services industry. According to a report in Economic Times, quoting Kotak Institutional Equities report, the adoption of generative AI, bolstered by GPT-5’s enhanced coding capabilities, may lead to a 2-3% revenue decline for Indian IT companies over the next 2-3 years, impacting both software services and customer service outsourcing sectors. The Indian IT industry, heavily reliant on large-scale software coder hiring, is already grappling with AI-driven disruptions. The report notes that AI has improved productivity by 20-40%, reducing the need for engineers and shifting away from traditional people-based billing models. This, combined with a tariffs-induced economic slowdown, has led to flat or negative growth for IT firms over the past two years. Phil Fersht, CEO of HFS Research, said, “If your business still depends on armies of coders grinding through routine builds, your margins are about to get hammered.” He emphasized that clients will demand lower rates due to AI-driven productivity gains, forcing IT firms to overhaul delivery models within 12–18 months to focus on AI-augmented, higher-value services.OpenAI described GPT-5 as “our best AI system yet,” with significant improvements in coding, math, writing, and more, according to the report. The model offers better reasoning, accuracy, and instruction-following, with a 65% reduction in hallucination rates, as per a Gartner report quoted in the article. These advancements could lower costs and risks for clients modernizing legacy systems, providing some advantages to IT service providers. However, major firms like Tata Consultancy Services, Infosys, HCLTech, and Wipro are facing revenue challenges due to a shift from employee-based to outcome-based pricing models.
Gartner and Kotak see short-term pain, long-term gain for Indian IT companies
Gartner, as cited by the report, noted that GPT-5’s reduced API fees and improved reliability make it more suitable for enterprise use, though it requires careful integration and governance. Anushree Verma, a senior director analyst at Gartner, said, “This is the year of advanced models, and GPT-5 is designed to address the needs of developers by reducing hallucinations and simplifying coding.” However, she cautioned that GPT-5 is not artificial general intelligence and still has limitations, including risks of misuse for scams or harmful outputs, similar to its predecessor, GPT-4. Despite short-term challenges, the report says that there are potential long-term benefits. Kotak’s report too suggests that while GenAI adoption may create revenue headwinds initially, new opportunities from AI-enabled use cases could offset losses over time, though a lag in realizing these benefits is expected. “However, we expect a lag in the pickup of new opportunities and for savings in software development to be deployed into these new opportunities, leading to a period of net headwinds,” the note said.