Strategy: AI, Armageddon and Afterlife by Sanjeev Prasad, MD & Co-Head by Kotak Institutional Equities
AI, Armageddon and Afterlife
We attempt to frame the AI impact on the Indian economy in light of growing concerns around the negative impact of AI on the services sector’s employment in general and particularly in the IT software services sector. We not only see a gradual negative impact on the economy and specific sectors, but also see upsides from a possible shift in the direction and efficiency of the economy.
AI and IT services
The Indian IT services exports sector (BPO, GCC and software) accounts for around 6.5% of the GDP (exports/GDP), 1% of the workforce and 8-9% of income tax filers (see Exhibits 1-3). However, an average IT service worker earns around 3-4X of an average Indian worker (see Exhibit 4), which would suggest a moderate impact on the Indian economy in the case of a slowdown in (1) revenues of the IT software services sector and (2) new employment in the overall IT sector. For now, we assume a gradual deflation in the price of IT services rather than a sharp cut, given the high salience of IT software services in many parts of the IT services chain and within enterprises.
AI and India
The low share of the formal services sector in employment (see Exhibits 5-6), despite the high share of services in the economy (see Exhibit 7) would suggest a limited negative impact on employment and the economy of any wide-scale disruption of white-collar jobs (assuming such a drastic outcome in the next 2-4 years). Nonetheless, we expect sentiment in the IT services households to turn soft, which may result in a slowdown in spending on high-ticket items; a household may not be keen on 15-year housing loans, given the concerns around income and job stability and discretionary spending.
AI and productivity gains for the broader economy
We would expect the negative impact of AI on parts of the economy to be partly offset or even overcome by (1) productivity gains in the broader economy; as an example, AI can enable superior credit assessment, better pricing and lower potential NPLs, leading to greater confidence to lend among lenders and higher credit growth or (2) enterprises spending on more IT projects from the savings arising from the likely lower cost of individual projects; enterprises have limited IT budgets and can allocate the budget to a limited number of IT projects.
Greater thrust on manufacturing is required to manage demographics & growth
We see an indirect potential positive impact on non-IT companies and manufacturing from (1) Indian engineers pursuing careers in ‘core’ engineering (industrial manufacturing) as opposed to careers in IT software services and (2) IT professionals joining non-IT enterprises, leading to ‘positive’ outcomes for the economy. We note India’s (1) low share of manufacturing in the economy and (2) high share of imports of manufactured items across sectors (see Exhibit 8). It would be imperative for the government to provide an even greater thrust on manufacturing to convert the ‘adversity’ into a ‘positive’ event
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