In open letter to PM, Bernstein flags structural risks to India's growth

Global brokerage Bernstein cautions India may under-deliver on growth potential without reforms, flagging risks from AI disruption, weak manufacturing gains and rising welfare spending

Global brokerage Bernstein has flagged a series of structural risks to India’s growth trajectory, cautioning that it could “under-deliver on its potential” unless key policy bottlenecks are addressed. 

The India strategy note, styled as an ‘open letter to the Prime Minister’, marks a reprise of a similar exercise undertaken by the brokerage in 2019, when it had outlined six priorities for the government following the general elections. “That was a different world: pre-Covid, pre-GenAI, with trade integration largely intact and de-globalisation still an academic concern,” said Bernstein strategists Venugopal Garre and Nikhil Arela. 

“Many of the underlying constraints that have historically limited India’s rise remain unresolved,” they added. While the format is uncommon, market veterans said such notes are typically aimed at investors rather than policymakers. 

 

“This is essentially a strategy note packaged differently. Brokerages use such formats to frame long-term risks and opportunities for global investors,” said a Mumbai-based market strategist. 

U R Bhat, cofounder of Alphaniti Fintech, said the recommendations in the letter were good and praiseworthy, but “how many of these are actionable in our system with immediate results is something one has to give some thought”. 

Bernstein acknowledged that India has made the “correct choice” by focusing on capital expenditure, which has supported macro stability and earnings growth. However, it warned against extrapolating recent gains. 

“If the last six years demonstrate what India can do when policy is aligned, they also carry a risk: the temptation to extrapolate recent success,” the report said. 

The brokerage highlighted gaps in infrastructure, innovation capacity, and preparedness for emerging technologies, particularly artificial intelligence (AI). 

A central concern flagged in the report is employment, especially in the context of rapid advances in AI. 

“Gen AI now challenges that template… A meaningful share of the roles that lifted this cohort are directly exposed to automation,” it said. 

India risks becoming “a user of these technologies without capturing a commensurate share of the upside,” the brokerage warned. 

Market experts said this reflects a growing concern among global investors, given the sharp selloff in domestic IT companies seen this year. 

Bernstein has struck a cautious note on manufacturing, saying India’s gains from the China+1 shift have been limited and employment remains concentrated in low-productivity segments. 

“India’s limited gains from the China+1 shift highlight the time required to build capabilities, but also the cost of delayed action. Supply chains remain shallow, talent in advanced manufacturing is constrained, and execution timelines are often slower than in competing economies,” wrote Garre and Arela. 

On agriculture, it pointed to structural inefficiencies, noting that nearly half the workforce depends on a sector contributing a much smaller share to GDP, and called for renewed reforms and higher investment in irrigation and storage. 

Bernstein also flagged rising welfare spending as a potential drag on long-term growth. 

“A rupee locked into broad, politically timed cash schemes is a rupee not building roads… or R&D,” it said. 

Acknowledging that cash transfers support consumption, the report warned that a sustained shift toward such schemes could “lock” the economy into a “low-productivity equilibrium, where a rising share of taxes funds consumption today rather than capabilities for tomorrow.” 

Market participants said this reflects a broader debate on fiscal priorities around revenue spending crowding out investment-led growth, especially at the state level. 

Bernstein said India’s ambitions continue to outpace its investments, with R&D spending at around 0.6-0.7 per cent of gross domestic product, well below global benchmarks. “Innovation ecosystems require sustained capital, high-quality talent, and institutional rigour,” the brokerage said. 

Across sectors — from energy and transport to R&D and taxation — the brokerage called for more decisive policy action, arguing that gradualism may no longer suffice. 

Market observers noted that the letter format allows the brokerage to present a candid, top-down critique of India’s growth model while engaging a global investor audience. 

“This is less about advising the government and more about signalling to investors where the risks are,” said a senior market expert. 

After being among the most favoured markets in the emerging-market pack in 2024, India has recently slipped down the pecking order for foreign brokerages, which are turning more constructive on markets such as South Korea and Taiwan—seen as key beneficiaries of the AI supply chain—and offering relatively more attractive valuations. 

“India does not lack capital, talent, or ambition. What it requires now is a sharper willingness to take difficult decisions early,” the report said. 

It added that the “window to act is still open, but it is narrowing.” 

‘India strategy’

• Country risks “under-delivering on potential” if longstanding constraints remain unaddressed
• At risk of becoming consumer rather than creator
• Mfg sector unlikely to absorb surplus labour
• R&D spending remains below global benchmarks