Bernstein Warns India May Underperform Without Key Reforms

India's Growth Trajectory at Risk: Bernstein Warns of Structural Issues

A recent note to Prime Minister Narendra Modi from managing director Venugopal Garre of international brokerage Bernstein highlights a set of structural risks that could limit India's growth trajectory over the next decade. The report cautions that India "risks under-delivering on its potential" if key issues persist, even as the global economic cycle evolves.

India's Lagging Infrastructure and Innovation Capacity

India continues to lag its peers on physical infrastructure, innovation capacity, and readiness for the next wave of technology. Bernstein identifies eight themes that will shape the country's risk-reward outlook for investors. The report notes that the agriculture sector is a significant burden, with 42-45% of the population employed in the sector accounting for only 15-16% of GDP. Factors contributing to low agricultural productivity include small farm sizes, dependence on monsoons, and a continued focus on subsidies rather than reforms. The report calls for increased investment in irrigation facilities, closer monitoring of capital expenditure, and a gradual reduction from the Rs 3-4 lakh crore allocated to subsidy input towards income-based subsidies.

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Energy and Artificial Intelligence Concerns

Regarding energy, the report notes a discrepancy between ambition and implementation. While India is aggressively investing in data centers and manufacturing, electricity supply is inconsistent, and distribution companies are experiencing losses of Rs 5-6 lakh crore, with large industries covering their inefficiencies. Additionally, the report highlights India's reliance on foreign oil and the urgent need to switch to sustainable and resilient energy sources. On artificial intelligence, Bernstein expresses concerns about India becoming a "passive consumer" in the AI global economy, even though it invests heavily in data centers due to a lack of domestic frontier models.

Manufacturing and Infrastructure Challenges

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Manufacturing in India reflects what the report describes as "intent without depth." While schemes such as the Production Linked Incentive (PLI) have created momentum, the sector still accounts for only 16-17% of GDP, and India imports crucial items such as batteries for electric cars. Bernstein stresses that India should give support to innovative industries (robots, advanced materials, and AI-based manufacturing) rather than enter any industry late and play "catch-up."

The report also calls for a rethink in transport priorities, flagging an over-reliance on aviation and underinvestment in rail and mass transit. Expanding rail networks, metros, and bus systems would be more suited to India's scale and help reduce energy imports while improving urban mobility.

Taxation and State Capacity Concerns

The report raises concerns around the growing use of cash transfer schemes, warning that rising welfare spending, funded by a relatively small taxpayer base, could crowd out productive capital expenditure if not balanced carefully. It links this trend to deeper issues such as weak job creation and gaps in social security. On taxation and state capacity, the report points to a disconnect between relatively high tax burdens and weak public service delivery. Low spending on healthcare and education, persistent urban infrastructure gaps, and a narrow tax base continue to weigh on outcomes.

Gradualist Approach to Reforms

Stepping back, Bernstein cautions that India's gradualist approach to reforms, while stable, has often led to missed opportunities. With capital and talent in place, the report says the next phase of growth will depend on taking tougher decisions sooner rather than later, as the window to act narrows.