Bernstein letter to Modi flags AI, jobs risks in 2026

What Bernstein told the Prime Minister

Global brokerage Bernstein has flagged jobs, artificial intelligence (AI), and rising subsidies as key risks to India’s long-term growth in an open letter addressed to Prime Minister Narendra Modi. The letter, authored by Venugopal Garre and Nikhil Arela, argues that India could “under-deliver on its potential” if structural reforms do not accelerate. It acknowledges recent macro stability and earnings growth, but warns against assuming recent progress will automatically sustain.

Recent gains, and the warning on complacency

Bernstein said India has benefited from prioritising productive capital expenditure over subsidies, supporting macroeconomic stability. But it cautioned that the “temptation to extrapolate recent success” could be costly, especially as global supply chains shift and technology cycles move faster. The brokerage also said India still lags peers in infrastructure, innovation capacity, and preparedness for emerging technologies.

Jobs at the centre of the risk assessment

Employment is a central thread in the letter. Bernstein pointed to stress in job creation and job quality, warning that where and how India deploys its workforce will define the next growth phase. It questioned whether the next leg of growth will produce more engineers, product builders, and innovators, or more low-skill service roles and precarious self-employment.

Generative AI and exposure in services

Bernstein highlighted that India’s services sector, led by IT services and BPOs, has been a key driver of middle-class growth. But it said “a meaningful share” of these roles are directly exposed to automation as generative AI scales up. It also warned that most AI value creation is currently concentrated in the US and China, raising the risk that India becomes primarily a user of AI rather than a creator.

The push to build domestic AI capability

The letter stressed that India does not own frontier AI models and should not rely only on global players. It warned that if Indian data is used to train global models without building domestic capability, India risks becoming a “permanent consumer” in the AI economy. Bernstein called for investments in compute infrastructure, domestic AI models, and stronger data governance frameworks.

Manufacturing: limited absorption of surplus labour

Bernstein expressed doubts about manufacturing’s ability to absorb surplus labour at scale. It said private capital expenditure remains selective and the “China+1” opportunity has been slower to translate into jobs and factories than expected. It also noted that manufacturing remains stuck at about 16-17% of GDP despite policy initiatives, while supply chains remain shallow and import dependence is high in some areas, including electric vehicle batteries.

Agriculture: high employment, low output share

Agriculture was flagged as a structural constraint. Bernstein noted that agriculture employs about 42-45% of the workforce but contributes only around 15-16% of GDP. Referring to recurring measures such as loan waivers and input subsidies, the letter said these are “recurring responses to a system that has not been reformed.” It called for scaling up irrigation, reducing reliance on subsidies, and investing in storage and logistics to improve farm incomes and efficiency.

Energy dependence and the EV transition

On energy, Bernstein highlighted inefficiencies in the power sector and India’s heavy reliance on crude oil imports, which meet about 88% of demand. It recommended accelerating the shift to electric mobility and reducing dependence on internal combustion engine vehicles through a clear phase-out timeline. The letter argued that energy security requires both lower import dependence and reduced structural inefficiencies.

Fiscal trade-offs: cash transfers versus capex

Bernstein raised concerns about the growing scale of cash transfer schemes across states. It estimated annual outlays at Rs 170,000-250,000 crore. While acknowledging that such schemes can support consumption, it warned that they can crowd out capital expenditure, which typically carries higher long-term multipliers through infrastructure, logistics, irrigation, and related productivity improvements.

Innovation gap: R&D and public service delivery

The brokerage said India’s R&D spending, at about 0.6-0.7% of GDP, remains well below global benchmarks. It also flagged a disconnect between taxation and public service delivery, noting that outcomes in healthcare, education, and urban infrastructure remain weak despite a significant tax burden. The broader message was that innovation is becoming a necessary condition for sustained growth, not an optional add-on.

Key figures cited by Bernstein

A note on Bernstein’s earlier 2019 letter

Bernstein had also written to PM Modi in 2019 after the NDA’s Lok Sabha victory. That earlier letter highlighted financial sector reforms, including better liquidity and faster resolution of stressed assets under the Insolvency and Bankruptcy Code (IBC). The argument then was that a stronger financial system could lower interest rates and support demand.

Why the letter matters for markets and policy watchers

The letter ties together multiple constraints that investors track: job creation, the durability of the services-led model, manufacturing competitiveness, fiscal choices between capex and transfers, and energy import vulnerability. It also frames AI as both a labour market disruption and a strategic capability gap. Bernstein’s conclusion was that India’s gradual reform approach may no longer be sufficient, and that delays now can translate into long-term dependence.

Conclusion

Bernstein’s open letter credits India’s recent macro gains but warns that employment stress, AI disruption, manufacturing constraints, subsidy-heavy politics, and low innovation spending could limit future growth. It argues that the “window to act” is still open, but narrowing, placing emphasis on earlier and harder policy decisions rather than deferred reforms.