Bernstein warns Modi on jobs, AI and subsidy risks in 2026

What the open letter says

Global brokerage Bernstein has cautioned Prime Minister Narendra Modi that India could “under-deliver on its potential” unless it accelerates structural reforms. The warning came through an open letter authored by Venugopal Garre and Nikhil Arela. The note recognises India’s recent macro gains but argues that the next phase of growth faces harder constraints. Bernstein points to employment stress, limited manufacturing job absorption, low productivity in agriculture, weak preparedness for generative AI, and a growing tilt toward subsidy-heavy politics. The letter’s central message is that the cost of delay has risen because supply chains are shifting globally and technology cycles are moving faster. It also says that India does not lack capital, talent, or ambition, but needs earlier and tougher policy decisions.

Recent gains and the risk of complacency

Bernstein credits India’s policy choice of prioritising productive capital expenditure over subsidies in recent years. According to the letter, this has supported macroeconomic stability and earnings growth. But it warns against extrapolating recent success and underplaying “how much further there is to go.” The brokerage argues that the external environment is changing, with supply chains being redrawn and technological disruption accelerating. It adds that India still trails peers in infrastructure depth, innovation capacity, and preparedness for emerging technologies. The note frames the current moment as a crossroads where reform speed matters as much as reform intent.

Jobs and generative AI: a direct stress test

Employment is presented as the most immediate pressure point, especially as generative AI reaches business workflows. Bernstein notes that India’s services-led growth model, built on IT services and BPOs, helped expand the middle class over decades. However, the letter warns that “a meaningful share” of these roles is exposed to automation. The brokerage also cautions that most value creation in frontier AI currently sits in the United States and China. In that context, it argues India risks becoming a user of AI rather than a creator, without capturing a commensurate share of the upside.

Why manufacturing may not absorb labour at scale

The letter questions whether manufacturing can take in displaced workers in sufficient numbers. Bernstein says private capital expenditure remains selective, limiting broad-based factory expansion. It also notes that the much-discussed “China+1” opportunity has been slower to translate into jobs and plants than expected. As a result, workers continue to shift into low-end urban services or precarious self-employment, raising concerns about job quality. The note also highlights that manufacturing remains around 16-17% of GDP, despite policy initiatives. It points to shallow supply chains and import dependence, including in areas such as electric vehicle batteries.

Agriculture: large workforce, low output

Bernstein flags agriculture as a key structural drag on productivity and income growth. The letter states that agriculture employs about 42-45% of India’s workforce but contributes only around 15-16% of GDP. It argues that recurring tools such as loan waivers and input subsidies are “recurring responses to a system that has not been reformed.” The note calls for scaling up irrigation and investing in storage and logistics to improve efficiency and farm incomes. It also suggests reducing reliance on subsidies as part of a broader reform push, even after the rollback of farm laws.

Energy security and electric mobility

On energy, Bernstein highlights persistent inefficiencies in the power sector, particularly in distribution, and India’s reliance on imported crude oil. The letter says crude imports meet about 88% of India’s needs. It recommends accelerating the move toward electric mobility and reducing dependence on internal combustion engine vehicles through a clear phase-out timeline. The brokerage’s view is that energy security requires lowering import dependence alongside fixing structural inefficiencies. It links the energy transition to avoiding future technological dependence.

Building AI capability at home

Bernstein argues that AI strategy should move beyond adding data centres and focus on foundational capability. It notes that India “does not own frontier AI models,” and warns that if Indian data is used to train global models without domestic capability, India could become a permanent consumer in the AI economy. The letter calls for investments in compute infrastructure, domestic AI models, and stronger data governance frameworks. It presents these steps as essential to capture value locally rather than only consuming tools built elsewhere.

Subsidies versus investment: the fiscal trade-off

A major concern is the rising scale of cash transfer schemes across states. Bernstein estimates annual outlays at Rs 170,000-250,000 crore. While acknowledging that cash transfers can support consumption, the letter warns they can crowd out capital expenditure in areas with higher multipliers such as roads, logistics, irrigation, education, and healthcare. It also flags potential inflation risks from large, broad-based transfers. Separately, the letter points to India’s R&D spending at about 0.6-0.7% of GDP, calling it well below global benchmarks. It also notes a disconnect between taxation and the quality of public services, including healthcare, education, and urban infrastructure.

Key figures highlighted by Bernstein

Bernstein’s earlier letter and what has changed

Bernstein also wrote to PM Modi in 2019 after the NDA’s Lok Sabha victory. That earlier note focused on financial sector reforms, including recapitalising PSU banks, improving liquidity, and speeding up stressed-asset resolution under the Insolvency and Bankruptcy Code (IBC). It also referenced the panel led by Bimal Jalan on RBI reserves. The 2026 letter broadens the lens to jobs, AI readiness, and the political economy of subsidies, suggesting the binding constraints have shifted. Even so, both letters share a common idea: structural reforms have compounding benefits when undertaken early.

Market impact: what investors are likely to track

The letter does not cite any single listed company, but it links policy choices to long-term earnings durability and macro stability. Its warning on AI exposure matters for markets because IT services and BPO-linked employment have supported consumption and middle-class income growth. Concerns over selective private capex and slower job creation in manufacturing also matter for sectors tied to investment cycles. The fiscal trade-off highlighted around cash transfers is relevant to infrastructure-linked spending and state finances. And the focus on R&D and domestic AI capacity connects directly to India’s competitiveness in technology-driven industries.

Conclusion

Bernstein’s open letter frames India’s recent stability and capex focus as meaningful gains, but argues that jobs, AI preparedness, manufacturing depth, and subsidy discipline will shape the next phase. It warns that gradualism may no longer be sufficient as global supply chains realign and technology disruption accelerates. The note ends by urging earlier decision-making, stating that the window to act is still open but narrowing. Any next steps will depend on how policy priorities evolve across jobs, AI capability building, energy transition, and state-level fiscal choices.