The potential for AI to disrupt India's historically strong services exports introduces a new risk. To counter this, policymakers must urgently boost the manufacturing sector's competitiveness. This would not only diversify export revenues but also attract more stable, long-term Foreign Direct Investment (FDI) instead of relying on short-term capital.

VCs have traditionally ignored the massive $16T services sector due to its low margins. AI automation can fundamentally change this by eliminating repetitive tasks, allowing these companies to achieve margin profiles similar to software businesses, thus making the sector newly viable for venture investment.

The fear was that AI would eliminate outsourced coding jobs. Instead, the complexity of integrating AI with legacy business systems has created a new opportunity. Indian IT firms are now being hired as consultants to reconfigure clients' operations for AI, turning a potential job-killer into a significant source of revenue.

Vinod Khosla warns that AI will decimate the traditional business process outsourcing and IT services sectors, which are foundational to India's economy. Incumbent firms face extinction unless they radically reinvent their business models.

For India, "leapfrogging" with AI means overcoming systemic resource shortages. AI acts as a horizontal productivity multiplier, enabling, for example, a limited number of doctors to deliver better healthcare outcomes through AI-powered diagnostics, thus enhancing sectoral capacity without massive infrastructure investment.

Technology's share of the economy will grow as it underpins every industry. Conversely, the services sector, which sells human intelligence for repetitive tasks, is fundamentally threatened by AI that can automate processes and commoditize expertise.

The narrative that AI will immediately and negatively disrupt all software companies is flawed. Significant infrastructure capex is required before widespread adoption, delaying the impact. Furthermore, many well-positioned incumbent software companies will actually benefit from AI, using it to expand their margins.

Instead of betting on unknowable AI winners, a better strategy is to find quality companies the market has written off as "losers" due to AI fears. Similar to the unloved "old economy" stocks during the dot-com bubble, these perceived victims could offer significant upside if the disruption threat is overblown.

While Indian IT service companies might see a short-term boost by using AI tools, the technology fundamentally lowers the barrier to entry for their core business. The market is already reacting to the long-term risk that their value proposition will be commoditized and automated away.