Raghuram Rajan says AI will disrupt India's services sector but not derail it

Former RBI Governor Challenges Alarmist AI Predictions

Raghuram Rajan, former Reserve Bank of India Governor and professor at the University of Chicago Booth School of Business, has dismissed fears of an AI doomsday scenario devastating India's services sector 1

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. Speaking in an interview with Bloomberg Television's Haslinda Amin and Menaka Doshi, Rajan acknowledged that artificial intelligence will create challenges for software firms but argued that warnings of complete derailment are exaggerated 2

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. His comments come as markets reacted to a Citrini Research note predicting severe revenue pressure on Indian IT companies, triggering a selloff in their stocks earlier this week 3

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"The Indian services story can still persist in many other areas outside of software, but yes, AI will be a challenge," Rajan stated, emphasizing that the sector will be disrupted, not derailed 1

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. He cautioned against getting "overly wound up in science fiction," noting that while technology creators move fast, adoption outside the frontier takes much longer 3

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AI Disruption Demands Rapid Adaptation from Software Firms

India's position as home to the world's back-office operations, from call centers to IT outsourcing, makes it particularly exposed to automation of routine coding and customer-support jobs that employ millions 1

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. While software firms are cutting jobs as artificial intelligence rolls out more widely, the technology could simultaneously create new demand 1

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. The impact on software firms will require swift action, but Rajan expressed confidence in the sector's adaptability.

Retooling and reskilling will be critical for survival, according to Rajan. India's software firms and employees will need to adapt "really fast," but "this is not something they cannot overcome" 3

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. Many global firms have yet to implement AI at scale, leaving opportunities for Indian companies to reposition themselves during this gradual transition 1

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. Large-scale displacement remains unlikely as firms that are not technology-savvy will take more time to adopt these tools 1

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India's Cost Advantage Remains a Competitive Edge

Despite the challenges posed by automation, India's cost advantage continues to attract multinational corporations. "The reason many firms are moving to India is because of its highly skilled service people," Rajan explained, noting that a consultant in India costs "one-fifth the price of a consultant in the West" 1

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. This pricing edge, combined with access to the same AI tools, helps level the playing field for Indian firms 3

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Multinationals are expanding their global capability centers in India, shifting more high-end engineering and digital work to the country 1

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. This trend suggests that India's skilled workforce remains attractive even as technology evolves. The Citrini Research prediction overlooks this adaptation capacity and exaggerates the speed of disruption, according to Rajan 2

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Policy Priorities Should Focus on Human Capital Investment

Looking beyond immediate concerns, Rajan argued that artificial intelligence will also reshape manufacturing as robotics becomes more efficient 1

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. He suggested a strategic shift in policy priorities, recommending that rather than subsidizing costly chip manufacturing investments without reaching the frontier, India would gain more by investing in human capital through training, education, and research and development 3

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. This approach would better prepare the workforce for an AI-driven future while maintaining India's services sector competitiveness in areas beyond traditional software development 1

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