The old playbook of Indian IT services companies — hire more people, deliver more projects, grow revenue and profits — is now broken. The Q3 results lay bare this stress, which is likely to persist for
several winters. The new labour code has intensified this pressure, shaving off over half a billion dollars in Q3 net profit, while the clients' demand for faster implementation of AI at much lower costs has led these firms to cut hirings at an alarming pace: the top five IT services companies added just 17 net hires for the first nine months of the current financial year, the lowest since their existence.
Compare this to FY22, when these companies hired a total of 2.03 lakh employees. The country's newly implemented labour codes had forced a one-time reset of employee benefit liabilities, with the top three companies bearing the brunt of the regulatory shift that came into effect in late November 2025. This is because the new four Labour Codes — covering wages, industrial relations, social security, and occupational safety — have redefined “wages” to mandate that basic pay plus dearness allowance should constitute at least 50 per cent of total compensation, up from the 30-40 per cent that was typical in the sector, fundamentally widening the base on which provident fund, gratuity and leave encashment are calculated.
For employees, especially at senior levels, the higher basic‐pay share is expected to reduce monthly take‐home by roughly 4-6 per cent as PF and gratuity deductions rise sharply. These companies are likely to neutralise the impact by moderating future increments rather than delivering real pay increases, according to industry experts and staffing firms. This dynamic, combined with intense pricing pressure from global clients and a still-cautious demand environment, leaves limited room for IT firms to pass through higher wage costs without margin compression. The alarming reduction in net hirings, down from 2.03 lakh in FY22 to 17, is not a short-term pause.
It reflects a deeper shift in which revenue growth is no longer tied to workforce expansion. AI-led automation, outcome-based pricing (pricing linked to delivered business outcomes), and productivity tools now allow companies to deliver more work with fewer people. Net hiring is defined as total new hires (freshers + lateral hires) minus total exits (attrition + resignations + terminations). The FY 22 hirings were largely driven by unprecedented pandemic-era demand for digital transformation, cloud migration, and remote-work infrastructure. Three structural challenges are coming together to create this crisis.
First, demand remains weak, and pricing is under pressure. Discretionary spending by clients (non-essential spending deferred by clients) continues to lag across banking, retail, and telecom. Traditional service lines such as application maintenance, testing, and infrastructure management are shrinking by 15 to 20 per cent each year as clients move to AI-driven tools. Second, the new labour codes have locked higher recurring costs into business models at a time when pricing power is at its weakest. The ₹4,900 crore charge in the third quarter was only a balance-sheet clean-up. The ongoing impact is an estimated 3-5 per cent annual increase in employee costs.
Even a 2 per cent rise in India-based wage expenses could cut earnings by 2 to 4 per cent in FY27. While management teams argue that the margin impact will be limited to 10 to 20 basis points, many analysts remain unconvinced, pointing out that clients are already pushing for lower fees. Third, AI itself is creating a margin trap. Companies are signing large AI-led deals and reporting strong deal pipelines. However, many of these contracts focus on cost reduction rather than growth, replace higher-margin legacy work, and deliver lower profitability in the near term compared with traditional pricing models.
As a result, strong deal wins are not translating into equivalent gains in revenue or margins. The pressure will continue until the industry accepts a simple but uncomfortable truth. It can no longer compete by offering cheap labour; it must instead create real value through innovation. This means investing in intellectual property, proprietary products, and higher-margin services, even if that hurts profits in the short term. So far, there is little sign that the industry is ready to make this shift.
