India's IT Sector Faces Turbulence as New Company Formations Crash by Over 90% Since FY20:

As per a new government reply in Lok Sabha, the number of IT companies started in India dropped to a mere 2,419 in FY25 from 16,388 in FY20. This accounts for an over 90% decline over the course of five years.

This drop comes at a time when the sector is already strained, and there has been a multiplier effect of industry leaders calling for substantial changes to the existing business model.

Presented with the (MCA) Ministry of Corporate Affairs data came on March 24 the construction of new IT companies in the state of Karnataka, which serves as India’s IT capital, drastically dropped over the past five financial years from 2,544 in FY20 to a dismal 212 in FY25.

Other IT hubs in Karnataka like Bengaluru where Infosys and Wipro have their headquarters are also claiming reduced revenue.

According to Akshat Vaid, Partner at Everest Group, a number of converging factors are the reason for the steep drop off.

"Over the past few years, the market has created barriers for new players to step in due to sluggish economic activity coupled with widespread geopolitical tension. Competition for discretionary expenditure is cutthroat.” Vaid mentioned.

Maharashtra, another significant IT center, saw declines from 2,483 to 375 from FY20 to FY25, while the largest IT company in India and Tech Mahindra’s offices are situated at Mumbai and Pune respectively.

In FY20, Telangana did have 2,077 new companies but only 233 new companies were started in FY25. Hyderabad, located in Telangana, accounts for mid tier IT company Cyient.

Vaid noted that artificial intelligence (AI) is indelibly changing the face of IT services, globalization based business models like outsourcing and scaling through people becomes outdated. Additionally, investors have become especially cautious and selective due to the decline in venture funding after 2021.

The trend goes beyond just the bigger states.

The smaller union territories and states have also been stagnant when it comes to the addition of IT companies.

High number of closures with low growth in turnover. The drastic decline of new businesses being created has led to an increase in the number of company closures. In FY25, roughly 2,300 IT businesses, with Karanataka and Maharasthra having 440 and 459 closed down respectively.

Over 9,100 IT companies went out of business in FY25.

According to the data, certain states, like Maharashtra and Karnataka, experienced high turnover during some years while other regions of the sector had erratic turnover growth. India’s leading IT service firms, Infosys and HCLTech, claimed that the disruption brought by AI has already rendered certain business models expendable and an overhaul in IT services is overdue. “The business model is ripe for disruption, what we saw in the last 30 years a fairly linear scalling of IT service. I think the time is already out for that model and in the last couple of years we have been challenging our teams on how you can deliver twice the revenue with half the people,” Vijayakumar said at an industry event in February.