H-1B shock meets AI squeeze: How Indian IT may rewrite its playbook

India’s IT sector, the country’s crown jewel of globalisation, is suddenly staring at a one-two punch: a policy earthquake in Washington and a technology tremor in Silicon Valley.

First came the shock from US President Donald Trump’s pen. An executive order signed on September 21 raises the fee for every new H-1B visa application from $2,000-5,000 to a staggering $100,000. The order represents a “100x jump” that will first hit new petitions in FY27.

Neutral effect on EPS

At first glance, it looks like a simple death blow to the outsourcing model. But, counterintuitively, the fee hike could actually boost profit margins for some vendors. As Motilal Oswal explained in a note: “If new H-1Bs vanish, on-site revenues will decline, but so do on-site costs. This shift could improve operating margins, as offshore work tends to be structurally more profitable.”

The brokerage concluded that the net effect on earnings per share (EPS) could be neutral, “although top-line growth could be slower”.

Industry insiders say, companies might no longer pay for armies of Indian engineers stationed in Dallas or Des Moines and, instead, more work will be delivered from offices in Latin America and hubs in Bengaluru or Pune, where costs are lower.

Franklin Templeton’s research noted that providers are likely to “accelerate offshoring, expand nearshore operations in Canada and Mexico, pursue acquisitions in Europe and APAC to diversify geographically, and invest in automation and AI to enhance productivity”.

Also Read: Indian Americans vs H-1B, F-1 holders: Trump visa fee hike sparks row

A two-track industry

This shift could split the industry in two. Offshore-heavy, lean vendors might become margin winners, while legacy accounts that still depend on large teams of Indian staff in US client sites might face revenue deflation — a slow shrinking of what clients are willing to pay.

The structure of contracts might change, too. More deals could move to fixed-price models, where companies are paid for results, not hours billed. If delivered efficiently, these contracts fatten margins but leave vendors carrying more risk.

Watch | Trump’s H-1B shocker: Can Indian IT sector weather the storm? | Capital Beat

“This nuance matters,” a senior Mumbai-based analyst who did not wish to be named told The Federal. “The common narrative of ‘H-1B fee = India IT loses’ missed the point. For some firms, this could be the perfect excuse to finally restructure and push offshore delivery.”

The AI undertow

Even as visa fees dominate headlines, another force has been reshaping the sector. Artificial intelligence (AI) — specifically generative AI and its emerging cousin, Agentic AI — is changing the economics of IT services.

HSBC warned that “AI deflationary impact is real but factored in estimates,” pegging the squeeze at 8–10% over the next three or four years. Clients have demanded cheaper contracts, since AI could generate code or automate testing. HSBC calculated that the hit could be as much as 3-4% annually in FY26 and FY27.

A vice-president in a Chennai-based IT firm called this "a deflation in IT services — where clients expect to pay less for the same project because automation reduced the hours of human labour required."

Yet paradoxically, revenues could still rise. HSBC noted that Indian vendors “have been able to compensate for this impact so far via higher volumes from customers and hence total revenues continued to grow”.

Misplaced fears?

The longer-term risk is what HSBC described starkly as “Agentic AI = software killer = IT services killer.” Agentic AI refers to autonomous systems that could manage multi-step workflows — not just answering questions but handling an entire process, like processing an insurance claim end-to-end. If such tools take off, they could eat into both software and services budgets.

Also Read: US may exempt doctors from $100,000 H-1B visa fee: Report

But HSBC also noted that similar fears proved misplaced before. When businesses moved from traditional software to cloud-based SaaS (software-as-a-service), IT services were supposed to die.

Instead, companies needed more integration and customisation help, which gave Indian firms new work.

Winners, laggards, and the hardware cycle

Brokerage house Motilal Oswal suggested that the AI debate isn’t simply “AI vs non-AI,” but rather a hardware-versus-services cycle. Since ChatGPT’s launch in late 2022, capital-intensive companies like chipmakers and hyper-scalers have seen stock gains of more than 200%, while IT services firms have lagged at just 26%.

“Services adoption has always lagged the product frontier,” the report argued, pointing to earlier cycles such as dotcom to app services, iPhone to enterprise cloud, where services caught up only once hardware growth plateaued.

Also read | A $100,000 visa fee and a failed friendship: India’s H-1B reckoning

That implies today’s pain could be temporary. Once AI chips and models stabilise, enterprises would have the confidence to build large-scale services contracts again.

The brokerage also sees potential upside for mid-tier vendors. Firms like Coforge and Hexaware, it argued, thrive in cost-sensitive environments and may capture market share while larger peers wrestle with legacy, on-site contracts.

Jobs, skills, and career ladders

Franklin Templeton’s report offers a sober assessment of workforce impact. It notes that only 3–5% of Indian IT employees now hold H-1B visas, much less than a decade ago, but the new fee will accelerate structural shifts.

Strategic roles like product owners, architects, or compliance managers will increasingly be reshored to US hires, commanding higher wages but fewer slots, said a Bengaluru-based CTO. "Meanwhile, the bulk of engineering work will flow offshore, aided by automation," he told The Federal.

Also Read: Sridhar Vembu asks Indians to ‘return home, rebuild lives’ amid chaos over H-1B visa fee

That creates a bifurcation in skills. For US talent, there may be fewer entry-level coding jobs but rising pay at the senior end. For Indian engineers, more work may come home, but much of it will be commoditised, with billable hours undercut by automation.

Even jargon like offshore leverage, which is how much work is delivered from India versus onsite in the US, takes on new meaning. Vendors with higher offshore leverage will now be better insulated, since US on-site staffing is not just politically fraught but financially punishing.

Resilience and rebirth

The story is not purely grim. Franklin Templeton reminds investors that India’s IT sector remains a $282 billion powerhouse, contributing 7.3% of GDP, with exports growing 12.5% in FY25.

Yes, valuations of IT stocks have corrected in the past year. But India’s broader corporate earnings are improving, domestic consumption is recovering, and private investment is slowly picking up. HSBC adds that as companies migrate to multi-agent systems, “enterprise software architectures and infrastructure may need redesign, which is more work for Indian IT”.

The convergence of a six-figure H-1B fee and AI’s relentless deflation creates a structural test, said analysts. Firms locked into old models may bleed. Offshore-heavy players who embrace automation may thrive.

“This order is likely to be challenged in US courts and may not survive in its current form,” Motilal Oswal observed. But even if it does, the direction of travel is clear: less reliance on visas, more automation, and a ruthless push offshore.

Indian IT has been here before as during Y2K, during the SaaS revolution, during the pandemic’s remote pivot. Each time, it reinvented itself. This time, however, the reinvention will not be optional, but the price of survival.