The 500 Million Worker Problem

AI subscriptions replace Indian engineers at "higher precision and speed"

For decades, India’s economic promise has rested on its demographic dividend – the competitive edge of a massive, young, and increasingly educated workforce. Economists and policymakers have routinely cited the country’s population profile as its ticket to economic superpower status, with projections of reaching $10 trillion in GDP and achieving high-income status by 2047.

These forecasts depend heavily on a critical assumption: that roughly 500 million Indians currently aged 5-24 will find productive employment as they enter the workforce over the next two decades. But a sobering new analysis from Bernstein suggests this fundamental premise may be crumbling under the weight of rapid advances in AI.

“The advent of AI threatens to erode all the advantages of India’s rich demographic dividend,” write Bernstein analysts Venugopal Garre and Nikhil Arela, who characterize their assessment as a potential “doomsday scenario” for a nation that has hitched its economic wagon to services-led growth.

At stake is India’s $350 billion services export sector — a sprawling ecosystem of IT outsourcing, business process management, and offshore knowledge centers that employs over 10 million workers, mostly in jobs that place them in the top 25% of the country’s income distribution.

While India's IT giants have successfully navigated previous technological shifts — from basic call centers in the late 1980s to cloud computing and data analytics more recently — AI poses a fundamentally different challenge. Unlike earlier transitions that required human adaptation, today’s AI systems threaten to replace rather than complement the workforce.

“AI subscriptions that come at a fraction of the costs of India’s entry level engineers can be deployed to perform tasks at higher precision and speed,” the report notes, adding that services-sector disruption requires minimal capital investment compared to manufacturing automation. This makes the transition to AI both faster and more inevitable in precisely the sector where India has staked its economic future.

The report takes aim at what it calls the standard formula that has underpinned growth projections for years: “Large young population → high productivity → lower wages → more work coming to India → Prosperity.” This equation, the analysts argue, “now needs some serious revisit” as AI undermines each link in this logical chain.

What makes India particularly vulnerable is a scenario where AI simultaneously threatens both ends of its labor market. High-end IT services and knowledge work face disruption from sophisticated AI systems, while low-end service jobs — elevator operators, parking attendants, toll booth collectors — risk elimination from simpler forms of automation. Manufacturing, which might offer refuge from service-sector automation, employs just 12% of India’s workforce and remains in its “infancy” compared to the services sector.

The troubling signs are already visible in employment data. The proportion of Indians working in agriculture has climbed from 42.5% before the pandemic to over 46% today, despite the sector’s contribution to GDP remaining stagnant at 16-17%. Meanwhile, 70% of college graduates and 42% of those with postgraduate degrees work in positions that underutilize their skills — a mismatch between education and opportunity that AI seems poised to worsen.

Perhaps most telling is what the report calls an innovation paradox. India leads the world in AI skills penetration among professionals, scoring 2.75 compared to America’s 2.22. It boasts thousands of AI startups. Yet the country has failed to convert this talent into meaningful innovation, with Indians registering a mere 0.2% of global AI patents against China’s 61% and America’s 21%.

The report points to a crucial strategic difference between India and China. While China systematically developed domestic alternatives to foreign technology “in every area from micro-blogging to EVs to AI models,” India remained content to use Western platforms and services. “India didn’t take the ‘ban foreign; develop own’ approach in the internet age,” the analysts observe, “and it’s too late now.”

This leaves India in a precarious position just as AI threatens to rewrite the rules of global economic competition. The very demographic dividend that promised future prosperity could become a burden if India cannot generate sufficient quality jobs for its growing workforce.