India’s net services exports fall to $16.95 bn: Is AI starting to bite?

Net services exports fell to $16.95 billion in July 2026, down 5% month-on-month and up just 3% from a year earlier, according to a trade balance note published by Emkay Global. Gross services exports of $36 billion rose 6% year-on-year, while services imports at $19 billion were up 10%.

The monthly figure would be unremarkable on its own but the trend behind it is not. Emkay economists Madhavi Arora and Harshal Patel wrote that net services export growth has slowed sharply in recent months, falling to low single digits in the face of what they described as “AI headwinds”. They warned that further moderation would create upside risks for India’s current account deficit.

A buffer India has come to depend on

The scale of India’s services-export success is easy to underestimate.

Services exports reached $421.3 billion in FY2025-26, according to government data, helping lift the country’s combined merchandise and services exports to a record $863.1 billion.

The latest Economic Survey described services exports as a “critical buffer” for India’s external sector. Their share of GDP averaged 9.7% between FY23 and FY25, compared with 7.4% before the pandemic. Software alone accounts for more than 40% of India’s services exports, while professional and management consulting have rapidly increased their contribution.

That has been particularly valuable because India remains structurally dependent on imported energy, electronics, machinery and precious metals.

The contrast is especially visible in the latest trade data. India’s merchandise trade deficit widened to a six-month high of roughly $32 billion in July, as imports climbed to $76.2 billion. Capital-goods imports, including electronics and machinery, were among the biggest drivers.

Against deficits of that magnitude, a monthly services surplus of $17 billion, besides being a good export statistic, is also an important part of the country’s external-financing arithmetic.

Put simply, the merchandise gap is widening at precisely the moment the services cushion is losing air.

Corporate results tell the same story

The macro data is not moving in isolation. India’s largest technology exporters reported a June quarter that was, in dollar terms, close to flat.

Infosys posted Q1 FY27 revenue of $5.08 billion, up 2.4% year-on-year and 1% sequentially in constant currency and trimmed its full-year revenue growth guidance to 1.5-3% from 1.5-3.5%.

Tata Consultancy Services reported rupee revenue of Rs 72,275 crore, up 13.9% year-on-year, and net profit of Rs 13,349 crore, up 4.6%. In dollars, quarterly revenue came in at $7,624 million against $7,621 million in the preceding quarter, a sequential move of $3 million.

Constant currency growth decelerated to 0.4% quarter-on-quarter. Operating margin compressed 130 basis points to 24%, with wage hikes accounting for 170 basis points of drag. Headcount rose by 9,279 sequentially to 593,798 but remained 19,271 lower than a year earlier.

Across the large IT firms, the message is increasingly similar: deal pipelines have not disappeared, but customers are demanding more automation, higher productivity and measurable business outcomes.

That can be good for margins and productivity. It is less obviously good for the old relationship between revenue growth and hiring.

But calling AI simply a threat misses half the story

There is a complication in the “AI headwind” narrative: AI is also creating a substantial new market for Indian technology companies.

TCS said its annualised AI revenue reached $2.6 billion in the June quarter, up 13.6% sequentially. Infosys said AI accounted for 8.2% of its quarterly revenue, while HCLTech reported that its Advanced AI revenue rose 62.1% year-on-year to $171 million.

The government’s Economic Survey is even more optimistic about the longer-term effect.

Its analysis of RBI balance-of-payments data found that services categories considered more exposed to AI — including software and business services — actually grew significantly faster than less AI-exposed categories after the diffusion of generative AI. The survey estimated an approximately 39.5% relative increase for AI-exposed services, with particularly strong results for software and business services.

So the issue may not be whether India loses its services-export industry to AI. The more relevant question is whether Indian companies can replace traditional outsourcing revenue quickly enough with higher-value AI, engineering, consulting and transformation work.

Macro risk lies in the transition

From the perspective of India’s balance of payments, what matters is the gap between the disruption to existing services work and the growth of new AI-related business.

Emkay estimated that net services exports in the first four months of FY27 were still up 7.5% year-on-year to about $69 billion. But the monthly momentum has weakened and the brokerage expects services-export growth to slow further.

If that slowdown becomes persistent, the arithmetic gets uncomfortable.

India is simultaneously importing more capital goods. Core imports rose 20% year-on-year in July, while electronics imports were up 44%. Even strong growth in electronics and engineering exports has not been sufficient to prevent the core merchandise deficit from widening.

A weaker services surplus would therefore leave more of the goods deficit exposed.

Emkay still expects the current-account deficit to remain manageable, forecasting 1.3% of GDP in FY27 assuming Brent crude averages $85 a barrel. But it explicitly identified further moderation in net services exports as an upside risk to that forecast.

Fortunately for India, services are not the country’s only reliable source of foreign exchange.

The second buffer

India has another unusually powerful stabiliser: the money sent home by Indians working overseas.

Remittances reached a record $155.1 billion in FY26, up 14.5% from the previous year, according to the Finance Ministry’s June Monthly Economic Review. Their value rose to around 4% of GDP.

Unlike foreign portfolio investment, remittances do not typically swing dramatically with global financial-market sentiment. They tend to be linked more closely to employment and wages among Indians working overseas.

That stability matters if services exports become more volatile.

It is also why Emkay expects strong remittances to provide a buffer even as services-export growth moderates. However, remittances cannot permanently substitute for export competitiveness. Nor should they have to.

The larger challenge is whether India can repeat in the AI era what it managed during previous waves of technology change: move employees and businesses up the value chain faster than automation removes the value of older work.

That transition is already visible. According to industry commentary from firms like Nasscom and recent earnings calls from major IT services providers, tech companies are increasingly selling AI transformation rather than merely treating it as an efficiency tool. Global capability centres (GCCs) are also taking on more complex, higher-value work in India. Engineering, research and development, cybersecurity and data services are growing in importance. The industry is also becoming less obsessed with adding employees as a proxy for growth.

That may ultimately make the services sector more productive.

But it also means the old assumptions surrounding India’s services-export machine — more global IT spending, more outsourcing, more Indian hiring and steadily rising export receipts — can no longer be taken for granted.

July’s $16.95-billion services surplus is hardly a crisis signal. India still possesses one of the world’s most formidable technology-services ecosystems, services exports remain enormous and remittances offer an additional layer of external resilience.

The warning is subtler.

AI is beginning to rewrite the economic model behind one of India’s most dependable sources of foreign exchange. The outcome could eventually be a stronger, higher-value export sector. Getting there, however, may involve a period in which productivity rises faster than revenues, traditional contracts shrink faster than AI businesses scale, and the services surplus becomes less reliable than policymakers and markets have grown accustomed to.

For India’s external account, that makes the next few quarters worth watching closely.