The Indian IT services sector is navigating a complex landscape of challenges as it adapts to the global shift towards artificial intelligence (AI) and grapples with recent changes to US H-1B visa regulations.

H-1B Visa Fee Changes and Their Impact

Moody's Ratings has warned that recent changes to US H-1B visa fees could slow India's services export growth and reduce remittance inflows. The new fees will raise operating costs for Indian IT services companies, with an additional potential 25% tax under the proposed HIRE Act if US companies outsource to foreign entities.

Key points:

• The White House clarified that the $100,000 H-1B fee is a one-time payment for new applicants only.
• Petitions submitted before September 21 remain unaffected.
• Indians receive nearly 70% of H-1B visas.

Moody's noted that large IT firms like Tata Consultancy Services and Infosys Limited are better positioned to manage these pressures due to:

• Higher profitability
• Strong balance sheets
• Increased local hiring focus

However, the IT sector has seen a sharp decline:

• Nifty IT index fell over 3.5%
• Tech Mahindra led losses at 5.8%
• TCS, Infosys, Wipro, HCL Technologies, Mphasis, and Persistent Systems fell up to 5% each

Global Investor Sentiment and Growth Deceleration

• Technology services stocks, including those in the Indian IT sector, are currently among the most shorted globally.
• This trend reflects a shift in investor focus towards AI-related themes.
• The IT services sector has experienced a sharp deceleration over the past two years.
• In contrast, hyperscalers (typically large cloud service providers) have seen faster growth.

AI Impact on Industry Growth

The integration of AI technologies is expected to have a dual effect:

1. Potential reduction in IT industry growth by 1-3%
2. Emergence of new service areas such as data engineering and AI implementation

Challenges in AI adoption:

• Most enterprises remain at the proof-of-concept stage
• Less than 5% of companies have successfully scaled AI from pilots to production

Long-Term Outlook and Adaptation

Despite near-term headwinds, the Indian IT sector has historically demonstrated resilience:

• Successfully navigated major technology transitions over the past 20 years (ERP, cloud, and mobile waves)
• Expected growth as AI implementation scales up, though this inflection point may be 1-3 years away

Future Direction for the Sector

To remain competitive, the Indian IT sector needs to focus on:

1. Developing proprietary intellectual properties
2. Creating specialized AI models
3. Building platforms that leverage AI capabilities

Conclusion

The Indian IT services sector is at a critical juncture, facing challenges from both the global shift towards AI and recent H-1B visa changes. While Emkay Global projects net IT services export growth of 5% for FY26, down from historical trends of around 7% CAGR, the sector's history of adaptability provides a foundation for optimism. As enterprises move beyond the pilot stage and begin scaling AI implementations, growth opportunities are expected to emerge. However, this transition period may extend for 1-3 years, during which the sector will need to innovate and evolve to maintain its global competitiveness in the new AI-driven landscape.

Former U.S. President Donald Trump has proposed a substantial increase in H-1B visa sponsorship fees, potentially causing significant ripples across the Indian IT services sector. The proposal suggests raising the fee to $100,000 annually, a dramatic jump from the current range of $1,700 to $4,500.

Impact on Indian IT Companies

The proposed fee hike could have far-reaching consequences for Indian IT services companies, which are among the largest beneficiaries of the H-1B visa program. Tier-1 IT companies, which typically receive between 1,500 to 5,000 approved H-1B visas annually, could face additional costs ranging from $150 million to $500 million.

Financial Implications

The increased visa fees are expected to have a notable impact on the earnings of major IT firms:

• Potential reduction in earnings by 2-4%
• Elimination of 30-50% of cost arbitrage benefits

H-1B Visa Program and Indian Professionals

The proposed changes are particularly significant for Indian IT professionals, as Indian citizens received 71% of H-1B visa approvals last year. While current H-1B holders in the U.S. would not face immediate impact, those outside the country would be unable to re-enter unless their employers pay the new fee.

Industry Response and Adaptations

The substantial increase in visa costs is expected to discourage both visa renewals and new applications. This could lead to several strategic shifts in the IT industry:

1. Increased offshoring
2. Greater focus on near-shoring
3. Accelerated localization efforts

It's worth noting that Indian IT services companies have already made significant progress in localization, with 65-70% of their onsite employees being local hires, reducing their dependence on H-1B visas.

Long-term Implications

If implemented, the proposed fee hike could effectively transform the H-1B program. The unsustainable costs may lead to:

• A shift towards more offshore work assignments
• Increased utilization of Global Capability Centers in India
• Potential restructuring of U.S.-based project staffing and management

Conclusion

While the proposal is still under consideration, its potential implementation could mark a significant shift in the operational strategies of Indian IT services companies. The industry will likely need to adapt quickly, balancing cost considerations with talent acquisition and project delivery models in the face of these changing visa regulations.

Stakeholders in the Indian IT sector will be closely monitoring any updates or changes to the proposed visa fee structure and its potential impact on their business models and workforce strategies.