Tech Layoffs and the Margin-Growth Dilemma: What It Means for India’s MSMEs

As India’s tech sector grapples with a series of layoffs, triggered by margin pressures, delayed recovery, and the looming presence of artificial intelligence, the tremors are being felt far beyond the glass towers of IT campuses. Micro, Small, and Medium Enterprises (MSMEs), which often serve as vital ancillaries to the tech giants or rely on them for digital infrastructure and outsourcing projects, are now caught in a crosscurrent of uncertainty.

Recently, Tata Consultancy Services (TCS) announced plans to cut 2% of its workforce, citing demand caution and cost optimisation as driving factors. This marks yet another addition to a growing list of headcount reductions across major tech firms like L&T Tech, KPIT, Tata Elxsi, and Cyient, which have reported a 2–4% sequential fall in headcount and even sharper declines year-on-year.

The Domino Effect on MSMEs

While layoffs at tech multinationals dominate headlines, their quieter consequence unfolds in India’s MSME landscape. These small firms—ranging from hardware vendors and cloud service resellers to contract recruiters and digital agencies—often rely on steady contracts, subcontracted work, and digital upskilling projects handed down from bigger tech players.

When tech majors start slashing costs, the first to feel the pinch are outsourced partners and smaller vendors. Wage deferrals, contract renegotiations, and cancellation of discretionary spending quickly follow, drying up revenue streams for MSMEs who operate on already razor-thin margins.

For instance, Tata Elxsi’s decision to defer wage hikes and KPIT’s postponement of salary increments by at least a quarter may seem internal, but they signal a tightening of purse strings that MSME partners cannot ignore. These ripple effects translate into stalled payments, frozen hiring, reduced R&D spending, and lower budgets for innovation, directly impacting small players that depend on continuity and stability.

AI Spending Replaces Traditional Projects

Another curveball for MSMEs comes from the aggressive pivot toward artificial intelligence. Large tech companies are now diverting substantial resources into building AI-driven service delivery models. While this future focus is strategically essential, it sidelines traditional projects often outsourced to smaller players. MSMEs that have not yet adopted AI capabilities find themselves excluded from the new ecosystem being built.

Ashutosh Sharma, VP & Research Director at Forrester, underscores this shift: “Companies are conserving resources and priming their war chest for a world fundamentally reshaped by AI.” In simple terms, if you’re not AI-ready, you’re left behind. And for MSMEs, many of whom struggle with digital adoption, this creates a worrying gap.

Tariff Headwinds Add to the Pain

Geopolitical tensions, especially the return of tariff threats under Trump’s trade policies, have further contributed to the sector’s hesitation. While the services industry is largely outside the direct scope of tariffs, the second-order effects—uncertain business environments, frozen investments, and cautious client behaviour—continue to have a chilling impact.

As growth estimates for IT firms are revised downward—Infosys may be capped at 3% and HCL Tech is already seeing margin impact—the belt-tightening inevitably reaches downstream stakeholders, including the MSME backbone.

MSMEs Need a New Survival Strategy

In a market gripped by uncertainty, MSMEs can no longer afford to wait for things to return to “normal.” To survive the tech slowdown, small businesses need to recalibrate swiftly:

• Embrace AI and Automation: MSMEs must invest in AI capabilities or at least start building collaborative models with AI-first firms to remain relevant.

• Diversify Client Base: Relying solely on big tech contracts is increasingly risky. Exploring newer verticals like fintech, edtech, or government-backed digital missions could help spread the risk.

• Focus on Value-Added Services: Cost-cutting is the new norm. MSMEs offering innovation, efficiency, or niche capabilities will likely retain business even during downturns.

Conclusion: A Tightrope Walk for All

The Indian tech sector’s current trajectory reveals a harsh truth—it is walking a tightrope between sustaining margins and fueling long-term growth. While trimming employee costs and deferring increments may balance the books for now, the real cost is paid by the ecosystem that surrounds them.

MSMEs, which form the beating heart of India’s digital economy, must navigate this terrain with agility and foresight. The ongoing churn is not just a sectoral correction—it is a signal to small enterprises that the rules of the game are changing. And only those ready to play smart and adapt fast will stay in it.