India risks complacency without reforms: Bernstein in open letter to PM Modi

India risks squandering recent economic gains unless it accelerates structural reforms, particularly in jobs, manufacturing and innovation, brokerage Bernstein warned in an open letter addressed to Prime Minister Narendra Modi. "The last six years demonstrate what India can do when policy is aligned," the note said, citing stronger macro stability and earnings growth driven by a shift toward capital expenditure. "But they also carry a risk: the temptation to extrapolate recent success and underplay how much further there is to go." India's rise in global GDP rankings and focus on infrastructure spending over subsidies have underpinned growth, Bernstein said, but the global environment is shifting rapidly, with supply chains being redrawn and technological disruption accelerating. A central concern is employment, especially as generative artificial intelligence threatens the services sector that has powered India's middle class for decades.

"A meaningful share of the roles that lifted this cohort are directly exposed to automation," the note said, adding that most AI value creation remains concentrated in the United States and China. "The risk is that India becomes a user of these technologies without capturing a commensurate share of the upside." Bernstein questioned whether manufacturing can absorb displaced labour at scale, noting that private capital expenditure remains selective and the much-touted "China+1" shift has been slower to translate into jobs. "Ultimately, where and how a country deploys its people is what defines its long-term trajectory," it said. "Does the next leg of our growth story create more engineers, product builders and innovators, or does it mostly create more drivers, delivery staff and domestic help?"

Structural Bottlenecks

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The letter highlighted agriculture as a key drag, with roughly 42-45 per cent of India's workforce contributing only about 15-16 per cent of GDP. It called for renewed reforms despite the rollback of farm laws, alongside increased irrigation and reduced reliance on subsidies. "These are not solutions; they are recurring responses to a system that has not been reformed," Bernstein said, referring to loan waivers and input subsidies. On energy, the brokerage flagged persistent inefficiencies in power distribution and heavy reliance on imported crude oil, which meets about 88 per cent of demand. It called for a clearer transition toward electric mobility, including a phased shift away from internal combustion engine vehicles. "Continuing on the current path risks locking India into technological dependence once again," the note said.

AI and Manufacturing Gaps

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Bernstein cautioned that India risks falling behind in artificial intelligence by focusing on data centres rather than building foundational technologies. "If Indian data continues to be used to train global models without building domestic capability, India risks becoming a permanent consumer in the AI economy," it said. Manufacturing, meanwhile, remains stuck at about 16-17 per cent of GDP despite policy initiatives, with supply chains shallow and dependence on imports high in sectors such as electric vehicle batteries. "India cannot continue to enter industries decades after global leaders and expect different outcomes," the note said.

Fiscal Trade-Offs and Infrastructure

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The brokerage also raised concerns about rising cash transfer schemes by states, estimating annual outlays of Rs 1.7-2.5 lakh crore. "For an investment-starved emerging economy, it is a very expensive way to buy growth," it said, warning that such spending could crowd out infrastructure investment and add to inflation risks. On transport, Bernstein argued for greater focus on rail and mass transit over aviation, saying India risks "hard-wiring a transport system that is congested, expensive to run, and exclusionary."

Call for Decisive Action

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India's spending on research and development, at about 0.6-0.7 per cent of GDP, remains well below global benchmarks, the letter said, while public services lag despite relatively high taxation. "India does not lack capital, talent, or ambition," Bernstein said. "What it requires now is a sharper willingness to take difficult decisions early, rather than defer them." "The window to act is still open, but it is narrowing."