While there's a popular narrative about a US manufacturing resurgence, the massive capital spending on AI contradicts it. By consuming a huge portion of available capital and accounting for half of GDP growth, the AI boom drives up the cost of capital for all non-AI sectors, making it harder for manufacturing and other startups to get funded.

AI creates a stark economic divergence. Nations with advanced industrial manufacturing (e.g., Taiwan, Netherlands) will experience massive growth by supplying AI's physical needs. In contrast, knowledge-based economies will face mass disruption as white-collar jobs are automated in a winner-take-all dynamic.

While financials and industrials are clear beneficiaries of India's growth, the IT services sector is a contrarian opportunity. Currently facing uncertainty and disruption due to AI, the sector is overlooked and undervalued. As the impact of AI becomes clearer, IT services could emerge as a highly attractive area for investors who can tolerate the current confusion.

The fear was that AI would eliminate outsourced coding jobs. Instead, the complexity of integrating AI with legacy business systems has created a new opportunity. Indian IT firms are now being hired as consultants to reconfigure clients' operations for AI, turning a potential job-killer into a significant source of revenue.

Vinod Khosla warns that AI will decimate the traditional business process outsourcing and IT services sectors, which are foundational to India's economy. Incumbent firms face extinction unless they radically reinvent their business models.

The playbook of leveraging a large, low-cost workforce to become a manufacturing power is obsolete. Future competitiveness will be determined by automation density (robots per 100,000 people), making it impossible for nations like India to simply replicate China's industrial rise.

For India, "leapfrogging" with AI means overcoming systemic resource shortages. AI acts as a horizontal productivity multiplier, enabling, for example, a limited number of doctors to deliver better healthcare outcomes through AI-powered diagnostics, thus enhancing sectoral capacity without massive infrastructure investment.

While Indian IT service companies might see a short-term boost by using AI tools, the technology fundamentally lowers the barrier to entry for their core business. The market is already reacting to the long-term risk that their value proposition will be commoditized and automated away.

While AI-driven tech exports boosted 2025 growth, they are capital-intensive with limited job creation. The expected 2026 recovery in non-tech exports is more significant as it will drive broader economic benefits like job growth, capital expenditure, and consumer spending across the region.