AI Investment Bubble Could Trigger Global Shock Worse Than 2008 Financial Crisis, Says Economic Survey

The Economic Survey 2025–26 has cautioned that the world could face a financial shock in the coming years, which could leave scars deeper than those of the 2008 global financial crisis. In a worst-case scenario, a “systemic shock” triggered by an artificial-intelligence (AI) investment bust, coupled with “geopolitical escalation or trade disruption”, could wreak havoc across the financial landscape, with far greater intensity and magnitude than the 2008 global financial crisis.

“The recent phase of highly leveraged AI-infrastructure investment has exposed business models that are dependent on optimistic execution timelines, narrow customer concentration, and long duration capital commitments,” it said. Such a scenario, it added, would not end technological adoption, but could tighten financial conditions, trigger risk aversion and spill over into broader capital markets. If that were to happen in tandem with escalation in geopolitical tensions or trade disruption, it could lead to sharper contraction in liquidity, sudden weakening of capital flows, which, in turn, could push countries into adopting defensive economic policies.

The survey said the probability of such an occurrence was 10-20 per cent. Nonetheless, the consequences could be “significantly asymmetric.” At the heart of the threat was the boom in AI-heavy infrastructure, which is built on long-term funding, optimistic project schedules, and reliance on just a few major customers, it added.

Implications For India's IT Sector Jobs

For India, the implications could extend beyond markets to employment. The Survey highlighted growing stress in the country’s IT and services sector, long seen as the engine of white-collar job creation. Using trends in the US Professional, Business and Information Services sector as a reference, it observed a clear shift after late 2022, when generative AI went mainstream. Since then, economic growth has no longer translated into proportionate job creation in these segments, it added.

According to the survey, jobs have not disappeared overnight, but the relationship between output growth and hiring has weakened, particularly for roles involving information processing, routine analysis, and standardised cognitive tasks. This change was gradual but led to a persistent drift in labour demand, which is largely confined to highly digitised sectors. Traditional industries, however, showed no such comparable break.

What Investors Should Do

Magotra cautioned against overreacting to the Survey’s worst-case scenario. Rather than exiting equities altogether, he argues for reducing concentration risks. “It is always better to have a portfolio that is diversified and not disproportionately biased toward AI or tech-heavy themes,” he said. “Excessive concentration in AI-proxy just increases vulnerability if growth expectations reset.”

He added that the risk is less about equities as an asset class and more about chasing narratives. “It’s not a call to exit equities, but to rebalance away from narrative-driven tech. If early signs of an AI-led correction emerge, a balanced portfolio will make it easier to reduce exposure decisively and rotate capital,” Magotra said.

The Survey’s warning has also revived interest in defensive sectors such as FMCG, healthcare and utilities. However, Magotra believes traditional playbooks may not work cleanly this time. “During sharp corrections or bubble-burst sort of events, investors usually don’t try to pick ‘better’ equity sectors, they just move out of markets altogether,” he said. In such phases, money typically flows into gold, sovereign bonds or cash.

That said, the current global backdrop complicates the picture. “Bond yields are already high across the world owing to stretched fiscal debt levels and commodity price surges,” he said, adding that it makes it harder to predict which defensive assets will attract flows in a stress scenario.

Even fixed income, often seen as a safe harbour, is no longer risk-free. “While sovereign debt usually remains safer than equities, it is not entirely risk-free especially in the current context,” Magotra said, pointing to elevated global bond yields. With policy shifts underway in Japan and narrowing interest rate differentials globally, volatility has crept into debt portfolios as well. “Debt should be seen as a risk-mitigation tool rather than a risk-free asset,” he said.

Should Investors Hold Cash, Invest In Gold

In times of crisis, usually safe haven assets perform better than other asset classes. Holding cash is also important in order to preserve wealth. However, Magotra said that instead of rushing into safe-haven assets, investors are better off sticking with a balanced portfolio. “Many companies are still showing clear earnings growth, which means staying invested in equities still makes sense.” However, he acknowledged that rising geopolitical risks and swings in commodity prices are adding to market volatility. In this backdrop, assets such as gold and cash can act as shock absorbers, but they should play a supporting role rather than taking centre stage, since equities continue to be the primary driver of long-term wealth creation.