IT Sector in India – Significance & Challenges – Explained Pointwise

The Indian Information Technology (IT) sector is a cornerstone of the country’s economy, renowned for its strong export-oriented services and a rapidly evolving domestic market. The industry has shown remarkable resilience and adaptability, transitioning from a focus on traditional services to a hub for high-value, digital-first solutions.

Introduction:

• The IT industry mainly encompasses IT services, IT-enabled services (ITES), e-commerce (online business), Software and Hardware products. This industry is also instrumental in creating infrastructure to store, process and exchange information for important business operations and other organisations.
• Industry Size: Total IT spending in India is forecast to reach $160 billion in 2025, with major boosts in software, cloud, cybersecurity, and digital infrastructure.

Evolution of Indian IT Sector: 

Distribution of IT Industry:

Significance of IT Sector:

1. GDP Contribution: The IT sector contributed about 7.5% to India’s GDP in FY23 and is projected to reach 10% by FY25.

   

2. Economic Growth: The IT-based services and products have become indispensable for flourishing any business enterprise and accomplishing success. This industry has a conspicuous impact in improving the productivity of almost every other sector of the economy, it also has huge potential for further accelerating the growth and economic development.
3. Export Revenue: IT and IT-enabled services (ITeS) exports are expected to reach $224 billion in FY25, and could surpass $300 billion in FY26.
4. Employment Generation: The sector supports over five million direct jobs and drives indirect employment through startups and digital platforms. IT hiring is expected to grow by 15–20%, with over 150,000 fresher hires in 2025.
5. Global Leadership: India remains the top offshoring destination worldwide. Over 67 Software Technology Parks of India (STPIs) and 100% FDI support foreign investment.
6. Innovation & Start-up Ecosystem:
   • The IT sector is at the core of India’s start-up boom and innovation ecosystem, powering rapid advances in AI, fintech, healthtech, and other emerging fields.
   • India’s robust Digital Public Infrastructure (DPI), including platforms like the Unified Payments Interface (UPI) and Aadhaar, is creating new opportunities. IT companies are leveraging this infrastructure to build scalable solutions for fintech, e-commerce, and other sectors within the country.

Government initiatives for IT Sector:

1. Digital India Mission: Launched in 2015, Digital India transforms governance and public services through digital infrastructure, e-governance, digital payments, and broadband for all.
2. Production Linked Incentive (PLI) Scheme: To reduce India’s reliance on imports and boost domestic manufacturing, the Production Linked Incentive (PLI) scheme for IT hardware and electronics was introduced. The scheme provides financial incentives to companies based on their incremental sales from products manufactured in India.
3. National Policy on Software Products: Promotes domestic software product development, innovation, start-up growth, and export competitiveness.
4. Startup India Initiative: The Startup India initiative, while not exclusively for the IT sector, has provided a significant boost to technology startups. It offers various benefits, including tax exemptions, streamlined registration processes, and funding support.

Challenges faced by the IT Sector:

1. Talent and Skills Gap: There is a constant demand for skilled professionals, particularly in emerging technologies like AI, machine learning, and data science. Companies are actively focusing on upskilling their existing workforce and hiring for specialized roles to meet this demand.
2. Low on Innovation:
   • Predominant focus on outsourcing rather than creating intellectual property (IP).
   • Indian IT giants (TCS, Infosys, Wipro) prioritize human resource deployment over technological innovation.
   • Despite a 55% share in global outsourcing, India lacks global software products comparable to Google or OpenAI.
3. Absence of long-term technology vision:
   • Companies prioritise dividends over investing in long-term research and development (R&D).
   • Risk aversion leads to missed opportunities in emerging fields like AI, blockchain, and automation.
   • In contrast, countries like China invest heavily in cutting-edge technologies.
4. AI blind spot:
   • Limited investment in AI, with industry leaders underestimating the feasibility of building cost-effective Large Language Models (LLMs). DeepSeek’s success proves AI models can be developed for under $7 million.
   • Underrepresentation of Indian languages in AI datasets (only 3% of global web data), hindering AI models from effectively serving Indian users.
5. Overreliance on Global Capability Centres (GCCs):
   • GCCs, despite hiring Indian engineers, retain innovation and IP abroad.
   • These centres diminish revenues for Indian IT firms and may exploit tax loopholes through transfer pricing.
6. Dependence on American digital firms:
   • India failed to develop indigenous tech giants despite having early industry leaders.
   • Unlike China, which fostered domestic alternatives (Baidu, WeChat, Tencent), India’s market is dominated by foreign platforms.
   • Weak policy support for homegrown companies has exacerbated this reliance.
7. Low Data centre capacity:
   • India’s data centre capacity stands at 1GW, significantly lagging behind the US’s 20GW.
   • Reliance on foreign data hosting limits India’s sovereignty over data-driven innovations.
8. Weak Start-up culture:
   • Start-ups focus mainly on services (e.g., Zomato, Swiggy) rather than deep-tech solutions.
   • Investors prefer low-risk ventures, unlike in the US or China where venture capital supports high-risk, innovative technologies.

Way Forward:

1. Accelerate Skill Development:
   • Expand advanced training in AI, data science, cybersecurity, cloud, and other in-demand skills through industry-academia-government collaboration.
   • Promote continuous learning, reskilling, and upskilling to bridge the talent gap and reduce attrition.
2. Fostering innovation and risk-taking:
   • Shift from a service-oriented model to product-based innovation.
   • Encourage companies to reinvest profits into R&D rather than distributing them solely as dividends.
3. Promoting indigenous AI and deep-tech development:
   • Develop AI models in Indian languages to cater to local users.
   • Invest in cost-effective solutions like open-source models (e.g., DeepSeek).
4. Building a robust Start-up ecosystem:
   • Government to incentivise deep-tech start-ups through funding and procurement policies.
   • Support for venture capital investment in high-risk, high-reward ventures.
5. Strengthening data sovereignty:
   • Expand India’s data centre capacity to reduce dependence on foreign infrastructure.
   • Implement policies to retain data within national borders for security and innovation benefits.
6. Ease of Doing Business:
   • Simplify regulations, incentivize R&D, streamline FDI policies, and reduce compliance burdens to attract investment and outcomes-based innovation.
   • Foster coordination between central and state governments for uniform digital policy implementation.

Conclusion:
True leadership in IT will only come when India embraces a culture of innovation, risk-taking, and long-term vision.