The firm highlighted important sectors on which they shed light on, adding that the traditional services engine of IT and BPOs, which supported 10-15 million people, supported consumption, and boosted growth, is now being challenged by GenAI.
A meaningful share of these roles, which lifted that cohort, are directly exposed to automation, according to Bernstein, while most of the surplus value in AI, which is models, platforms, IP, remain concentrated in the US, and to an extent, in China.
“The risk is that India becomes a user of these technologies without capturing a commensurate share of the upside, Bernstein wrote in its letter.
Here are the critical areas highlighted by Bernstein in its letter to PM Modi:
Agriculture
Nearly 42% to 45% of India’s workforce continues to depend on a sector that contributes only 15% to 16% of India’s GDP, according to Bernstein, who also called the loan waivers and input subsidies as “recurring responses to a system that has not been reformed.”
The firm recommends starting the farm laws process with a more calibrated approach, scale up irrigation meaningfully to reduce weather dependence, aggressive monitoring of capex to physical capacity conversion projects, so as to disallow leakage of funds.
Bernstein also recommends scaling down of input subsidiaries on power and fertilisers, which now cost up to ₹4 lakh crore annually should be phased down, while ensuring that farmers are protected through higher and more predictable pricing.
It also recommends investments in agri-infra as 5-15% of agri output is lost due to inadequate storage and logistics.
Energy
Although India is encouraging investments in data centers and advanced manufacturing, Bernstein said that reliable power supply remains inconsistent and distribution companies continue to accumulate losses.
At the same time, it also pointed to India importing nearly 88% of its crude oil, which it called a “strategic vulnerability.”
“The transition to electric mobility should have been accelerated more than a decade ago; instead, policy hesitation and industry resistance delayed progress, allowing global supply chains—particularly in China—to scale up and control capacities,” Bernstein wrote, warning that continuing on the current part risks locking India into technological dependence again.
Here are the recommendations made by Bernstein:
- A clear phase-out timeline for ICE vehicles is now necessary
- Incentives should shift away from PLI towards demand-side support allowing new entrants to compete, provided they meet localization thresholds.
- Government should consider taking stakes in cash-rich companies who solicit PLI in the future.
- Electrification should also extend to household energy use, particularly cooking
AI: From User To Driver
AI risk is likely to be profound over time, as per Bernstein’s letter. India may be positioning itself as a data center hub but this risks overestimating the value captured domestically. “India risks becoming a permanent consumer in the AI economy,” Bernstein wrote.
The brokerage recommends policy taking a more strategic view by supporting domestic development of foundation models, build compute capacity, and to ensure data governance frameworks prioritize national value creation.
“Waiting for global incumbents to scale and then attempting to regulate them is unlikely to be effective,” the letter stated.
Manufacturing
Bernstein suggests that the approach here needs to shift towards early identification of emerging sectors such as automation, robotics, advanced materials, AI-integrated manufacturing, and committing capital and policy support before global supply chains are fully formed.
“Celebrating incremental gains in low-value segments will not change India’s position in global manufacturing,” Bernstein wrote, adding that theory to execution needs a more comprehensive organization than the NITI Aayog, with adequate abilities to make decisions on funding.
Railways and Transport
Citing China and Japan, who both understood the need for high speed rail ecosystems, Bernstein said that there has to be a stronger emphasis on high-quality mass transit, denser metro networks, dependable bus systems, and a stronger emphasis on maintaining and upgrading existing road stock, instead of treating new road length as the primary metric of progress.
“We had flagged this direction of travel in 2019 and the urgency is higher now. If capital allocation continues to favour cars and planes over metros, buses and rail, India risks hard-wiring a transport systems that is congested, expensive to run and exclusionary for a large share of its citizens.
Cash Transfers and Subsidies
Bernstein says that the cash transfer schemes is a “very expensive way to buy growth”, especially in an investment starved emerging economy.
However, it asserts that it does not make an argument to scrap cash transfers, as targeted, time-bound support will always be needed for pockets of distress or major shocks.
“The concern is about making large, unconditional, election-synchronized transfers a permanent feature of state budgets,” the firm said, adding that India risks locking into a low-productivity equilibrium, where a rising share of taxes fund consumption than capabilities for tomorrow.
R&D And Innovation
Bernstein says that R&D spending at 0.6% to 0.7% of GDP is well below global benchmarks and that India’s ambitions remain ahead of their investments. It also highlights that there will need to be an openness to global expertise and a sharper focus on merit-based hiring of both students and professionals within leading educational and research institutions.
“If one thinks that talent and merit are not required and vote banks need to be prioritized, India will remain a low-income country depending on US and China for technology. Without strengthening foundations, aspirations in semiconductors, AI and deep technology will remain constrained, regardless of policy intent,” the letter stated.
Taxation and State Capacity
Bernstein notes in its letter that while India’s tax burden is not low, the quality of public goods remains weak in most cities. It also cites cash usage persisting despite progress in digital payments and addressing this issue requires more than incremental measures.
“Broadening the tax base by removing exemptions, including for economically significant but currently untaxed institutions such as political, religions and sporting bodies, would improve equity and create room for lower rates,” the letter suggests.
It went on to conclude its letter by stating that India does not lack capital, talent or ambition. What it requires now is sharper willingness to take difficult decisions early rather than defer them. “The window to act is still open but is narrowing,” the firm said.
