The tech sector in India has been facing significant heat, especially after TCS announcement to cut 2% of employee strength. Demand caution and macro uncertainties, coupled with a cyclical downturn and emphasis on cost optimization spell out the challenges ahead. What’s further depressed sentiment is the constant chatter about layoffs and potential job losses. The prediction that layoffs may worsen going forward is no doubt casting a pall of gloom on the sector and overall business dynamics.
A recent report by Kotak Institutional Equities highlighted that as valuations remain disconnected from on-ground demand deterioration and hopes of a meaningful recovery are pushed back deeper into H2FY26, the “tough stance on employee costs,” is expected to continue. Ashutosh Sharma, VP & Research Director, Forrester, also reiterated the point and said he expects “more layoffs and manpower rationalisation by tech companies in FY26.”
Layoffs the only margin lever for tech sector now?
In fact, employee headcount declined by 2-4% across companies on a sequential basis. On an absolute basis, cumulative employee headcount declined by 2000 people. Organic employee headcount declined by 5-10% YoY across L&T Tech, KPIT, Tata Elxsi and Cyient. Including inorganic contribution at L&T Tech, headcount declined by 4.2% on a cumulative basis across pure-play Indian ERD services companies.
Ashutosh Sharma of Forrester pointed out how Indian IT services companies have been outlining margin improvement strategies for the last couple of quarters. “This was partly driven by the fact that their expectations of a demand rebound in 2025 did not materialise. Now, many are being forced to recalibrate and become lean. They are trimming headcount and streamlining operations to protect profitability.”
Speaking specifically about the situation for the Big 4 tech companies in India, As per analyst at one of the leading brokerages, “TCS is running out of margin levers. This could be one of the ways to address this. HCL Tech and Infosys may resort to similar measures. From a margin expansion strategy, there is a possibility that they may resort to some measures.”
Kotak Institutional Equities highlighted that “Reasonable employee attrition trends and a benign supply-side situation provide some room for companies to control employee expenses as a lever to limit margin declines in a scenario of increased competitive intensity.”
AI and tech layoffs: Is there a real connection
But that’s not the only concern. Is the tech world influenced by the growing role of AI? Sharma explained that “the imperative to invest in AI capabilities is accelerating, as firms prepare for a future where AI will fundamentally reshape service delivery models. I expect that the economic uncertainties created by tariffs will play out by the end of this year. In the coming years we will see a return of large transformation deals enabled by these AI capabilities.”
He pointed out that as tech companies go on an overdrive to conserve as much of their resources and “prime their war chest to prepare for a world impacted by AI in a significant way. They will invest in building AI capabilities for their service delivery as well as industry solutions.”
Trump tariff a challenge for Indian tech companies
The continuing stalemate in India-US trade talks is seen as another big factor weighing on sentiment in the tech sector. According to Forrester’s Ashutosh Sharma, “These tariffs have no new direct impact expected because services as a sector remain outside their scope. Most of the second-order effects created by Trump administration’s tariff reversals and ongoing global conflicts have manifested in the form of uncertainty around the business environment. This volatility is making businesses cautious, delaying decisions and pulling back on discretionary spending.”
Analyst at one of the leading brokerages we spoke to mentioned that “Most tech sectors have been going through supply chain disturbances and tariff-related uncertainty. Lot of sectors are going through issues. Growth for IT companies is likely to be muted. Growth for Infosys may be capped at 3%. HCL Tech clearly mentioned about margin impact… a clear reflection of cost pressure from employee levels.”
Attrition across IT sector: A reality check
Attrition levels across the IT sector has been alarming. Here is a look at how the ground realities are after the Q1 earnings. KPIT has showcased best-in-class attrition in the 7% range, while at others it remains in the 13.8-16.9% range, despite a modest increase during the quarter.
A cyclical downturn with higher emphasis on cost optimization by clients has led to targeted initiatives to improve efficiency of R&D spends and improve RoI. Service providers have focused on tweaking levers such as utilization, tight control of discretionary expenses to maintain profitability.
Tata Elxsi has deferred wage hikes, while KPIT is yet to decide on the timing of increments. KPIT has deferred salary increments by atleast a quarter. We note that L&T Tech too had delayed wage revisions in the previous cycle.