India growth risks 2026: Bernstein flags AI job loss, weak manufacturing, subsidy burden

India’s IT and BPO sectors are facing rising disruption risks as generative artificial intelligence (Gen AI) scales rapidly across global markets, particularly in the United States and China. At the same time, manufacturing depth remains limited, with continued import dependence in critical segments such as electric vehicle (EV) batteries. Agriculture, which still employs a large share of the workforce, continues to grapple with structural inefficiencies and a growing subsidy burden, weighing on long-term productivity.

In an open letter to Prime Minister Narendra Modi, Bernstein highlighted that India may be approaching a narrowing window to restructure its economy. The note acknowledged that the past six years have demonstrated what policy alignment can achieve, pointing to improved macroeconomic stability and earnings growth driven by a shift toward capital expenditure. However, it cautioned against extrapolating recent gains, warning that significant structural gaps remain unaddressed.

IT services and BPO sectors

A central concern flagged in the note is employment. India’s IT services and BPO sectors, employing an estimated 10–15 million people, form the backbone of the country’s aspirational middle class. These sectors are now directly exposed to automation risks from Gen AI, which is increasingly capable of handling coding, customer support, and back-office functions. Bernstein warned that the economic value generated by these technologies — through models, platforms, and intellectual property — remains concentrated abroad. Without investments in domestic AI capabilities, including foundational models and compute infrastructure, India risks becoming a passive consumer in the global AI ecosystem.

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Manufacturing

Manufacturing, often positioned as an alternative growth engine, offers limited immediate relief. Despite policy support through production-linked incentive (PLI) schemes, the sector’s contribution to GDP remains stuck at around 16–17%. Employment generation within manufacturing is also constrained, with a significant portion of the workforce still engaged in low-productivity informal services. Even in sunrise sectors like EVs, India remains dependent on imports for battery cells, which account for 30–40% of vehicle costs. The much-discussed “China-plus-one” opportunity has proven more difficult to translate into large-scale factory investments and job creation than initially expected.

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Agriculture

Agriculture continues to reflect deep structural challenges. Nearly 42–45% of India’s workforce depends on a sector contributing just 15–16% of GDP. Fragmented landholdings—averaging less than one hectare—and heavy reliance on monsoons limit productivity gains. Policy responses remain skewed toward loan waivers and input subsidies, which now cost an estimated Rs 3-4 lakh crore annually. Bernstein recommends transitioning toward post-procurement income transfers that minimize market distortions while improving efficiency.

Fiscal pressures

The report also flagged rising fiscal pressures from welfare schemes. State-level cash transfer programs, particularly those targeting women, account for approximately Rs 1.7–2.5 lakh crore annually, or about 0.5% of GDP. In several states, such schemes consume 2–3% of gross state domestic product, crowding out capital expenditure on infrastructure, irrigation, power, and healthcare—areas with significantly higher long-term productivity benefits.

Overall, the report underscores that while India has made measurable progress, sustaining high growth will require deeper structural reforms across employment, manufacturing, technology, and fiscal policy.