India’s services exports declined 0.87% year-on-year to $36.35 billion in September from $36.67 billion a year earlier, raising concerns amid weak demand in Western markets and the growing impact of artificial intelligence on traditional outsourcing. The moderation in the pace of services exports coincides with increased opportunities in higher-value technology services. Services exports grew 8.69% to $216.31 billion in April-September, following an all-time high of $421.3 billion in FY26, up nearly 9% from $387.5 billion in the previous year. However, the September decline points to mounting challenges in sustaining growth after a sharp post-pandemic expansion, according to a report by Global Trade Research Initiative (GTRI)’s Ajay Srivastava. India’s dependence on Western markets leaves its services exports particularly exposed to shifts in demand. The US, European Union and the UK together account for 85.1% of India’s software exports, with respective shares of 54.1%, 18.6% and 12.4%, according to the report. ALSO READIndia frontloads exports to US amid tariff threat; September shipments up 48% Economists including former RBI governor Raghuram Rajan had noted that India's services exports needed to diversify into high-value segments to sustain the tempo.  The country also faces protectionist policies from the West, like the US visa restrictions, which affect boosting foreign exchange receipts from services shipments.          Persistent inflation and elevated interest rates in major Western economies have prompted companies to rein in discretionary technology spending, defer digital transformation projects and prioritise cost optimisation, the GTRI report noted. This is weighing on demand for some of the IT and business services traditionally supplied by Indian firms. Generative artificial intelligence is adding to the pressure by automating coding, software testing, maintenance and routine business processes. As clients increasingly seek productivity gains and outcomes rather than manpower-intensive contracts, Indian exporters could face lower billable hours and pressure on contract values, the report added. The shift is also reshaping hiring at global capability centres (GCCs) in India, as multinational companies seek to extract greater output from existing teams rather than expand workforces at the earlier pace. ALSO READGoods exports jump 23% in Sept; seen to top $550 bn in FY27 However, AI also presents an opportunity for India’s technology industry. Its established outsourcing ecosystem and large technology workforce could help it capture demand for AI implementation, data engineering, cybersecurity and specialised consulting. The key challenge will be to generate enough new revenue from higher-value services to offset pressure on traditional outsourcing, while reskilling workers for changing requirements. A higher export base is another factor behind the potential moderation. Services exports have more than doubled from around $200 billion before the pandemic to over $420 billion in FY26, making comparable growth rates harder to sustain. Geopolitical conflicts, shipping disruptions and tighter scrutiny of cross-border data flows could add to operating costs and delays in transport, logistics and legal and financial consulting. Despite September’s decline, first-half growth remained healthy. The outlook will depend on global demand, the pace of AI adoption and India’s ability to diversify markets and move towards higher-value services.