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Transforming India's Technology SMEs for a Digital Future: Navigating the AI Frontier

India’s technology SME sector is one of the key contributors to the country’s digital economy, driving innovation and growth. As AI adoption gains momentum, tech SMEs are exploring AI-driven transformation to enhance efficiency, competitiveness, and revenue growth. However, despite recognizing AI’s strategic importance, most SMEs struggle with adopting and scaling AI initiatives. Monetizing AI also remains an uphill task, with many firms still in the early stages of commercialization. This report, titled Transforming India's Technology SMEs for a Digital Future: Navigating the AI Frontier, not only highlights the shifts in the Indian tech SME landscape over the past two years, but also dissects these challenges and presents a structured analysis across multiple sections. More importantly, it delivers a detailed, actionable playbook with strategic recommendations to help SMEs overcome barriers and unlock AI’s full potential. By addressing these critical issues, this report aims to equip India’s tech SME ecosystem to navigate AI-driven growth effectively, aligning with the FY30 industry outlook.
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Key Findings

01

  • While USA continues to be the largest market for Indian tech SMEs, many SMEs have diversified to non-core markets like Japan, Australia and South-East Asia.
  • Between FY23 and FY25E, Indian SMEs have grown faster in non-BFSI sectors, with BFSI’s share declining from 55% to 51%, and Hi-Tech segment’s share growing from 18% to 21%.
02

  • Indian tech SMEs employ 1,30,000+ digital services professionals, including AI/GenAI, growing at ~12% CAGR between FY20 and FY25E.
  • 15-20% of Digital Tech SMEs have Agentic AI, AI Services and Advanced AI platform development skills. However, 50%+ have talent focused on common product skill areas, such as Microsoft Azure, AWS, and GCP.
  • More Indian Tech SMEs’ are drifting towards Partnership and Direct Sales/ Regional Sales Set up-based GTM models in FY25E compared to FY23 when ~60% of the GTM strategies were Founder-led/ Organic.
  • For Gen AI, majority of the Indian tech SMEs follow Project-specific adoption strategy rather than investing in building “Strategic’’ Gen AI capabilities.
  • Traditional ADM constitutes about 54% of the Traditional SME revenue in FY25E seeing a dip from 59% in FY23, whereas New Software Development segment continues to be a growth lever for SMEs, seeing a steady increase from 31% to 36% over the same time period.
03

  • Majority of the Indian tech SMEs exhibit early-stage AI monetization with cautious spending, driven by persistent ROI uncertainties.
  • Indian tech SMEs’ AI adoption is largely reactive, with unclear use cases and uncertain ROI limiting transformative integration.
  • Incremental integration dominates as majority of the Indian SMEs embed AI into existing services, while limited investment in scalable tech curtails disruptive innovation.
  • Steep AI costs, talent shortages, and fragmented funding intensify scaling challenges, undermining the ability of Indian SMEs to achieve sustainable, long-term AI deployment.
04

  • $33-36B opportunity in FY30 with share of digital services going to 40-44% at 17-19% CAGR. To effectively leverage AI for powering this growth engine, a multi-stakeholder approach will have to be adopted. 
  • Establishing standardized ROI measurement tools, proven business cases, and industry-wide benchmarks can help SMEs transition from experimentation to sustainable AI-driven growth.
  • SMEs need to shift AI spending toward scalable technology solutions – such as advanced software, R&D, and automation – while maintaining a strategic balance between human capital and innovation.
  • Expanding cost-effective AI solutions, enhancing upskilling initiatives, and fostering industry-academia partnerships can mitigate high AI costs and bridge talent shortages.
  • Promoting dedicated AI funding mechanisms, government incentives, and industry-led investment programs can help SMEs overcome financial constraints and scale AI initiatives effectively.

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