A breakdown in the global AI trade may not be the gift for India it’s made out to be

Think of a small town where a giant factory is being built. The tea stall near the gate is packed, the landlord has tenants, and the truck owner has bookings. None of them owns a share in the factory. Yet if construction stalls halfway, every one of them feels it.

That is the problem with a popular idea in Indian markets right now. It goes like this: India has no equivalent of Nvidia, TSMC, or Samsung, so if the AI boom cools, global money will rotate into India. Veteran strategist Chris Wood has called India the potential "reverse AI" trade. In a mild correction, that logic might just work.

But every major correction or market bust, always starts with a minor correction, a small pin prick. The question worth asking is what happens if the money poured into AI simply fails to earn a return.

Everyone has money riding on AI, not only tech companies

The AI build-up is no longer funded by Big Tech's spare cash alone. Venture funds, private credit funds, bond investors and pension funds have all joined in. That widens the circle of people who lose if the returns disappoint.

Source: News articles, Morgan Stanley estimates, IMF

With about $950 billion of funding supporting $1.4 trillion of expected future revenue, setbacks at one AI company could create pressure for both lenders and borrowers across the sector.

The IMF adds that hyperscalers now account for about 10% of global investment-grade bond issuance, up from less than 1% in 2024. In plain terms, the AI story has moved from the stock market into the debt market.

The returns have not caught up with the spending

A lot of this has been spoken about and discussed in the media. But for those who continue to believe that India is a reverse AI trade, this should give some pause. If even one of these dominoes falls, where does it stop? Will it be a minor correction or the start of a systemic, sweeping collapse? The idea here is not to be an alarmist or cause panic, but to point out something that is unfortunately not as widely discussed.

Has this happened in the past?

A small corner of one market once broke the world

In March 2007, US Federal Reserve chairman Ben Bernanke told Congress that the damage from subprime mortgage problems "seems likely to be contained". On paper he had a point. Subprime loans were about $1.4 trillion of roughly $10 trillion in US home loans.

It was not contained. Banks that held those loans stopped lending to each other, and households that felt poorer stopped spending. India did not own a single subprime mortgage. Still, the Sensex fell from 20,873 in January 2008 to below 10,000 by October, and the rupee lost nearly 25%. Growth in Indian auto loans collapsed from close to 30% to 1.2%.

The parallel today is uncomfortable. In the mid-2000s, homes made up close to 50% of American household assets. That share is now at a record low of 32.4%, while equities make up a record 46.6% of household financial assets. Stocks, heavily tilted towards AI, have replaced houses as the engine of American spending.

A correction and a bust have two very different impacts

The "India benefits" argument quietly assumes a gentle correction. Allianz Research's Global Wealth Report, released on September 29, models both kinds of corrections, and the gap between them is wide.

Source: Allianz Global Wealth Report 2026

In the first scenario, money leaving crowded AI stocks looks for cheaper homes, and India is an obvious candidate. In the second row, money does not rotate. It retreats. When American consumers, lenders and fund managers are nursing losses, they do not go shopping in emerging markets.

How an AI bust would find its way to Dalal Street

India is less insulated than the "no AI stocks" label suggests. The shock has several roads in.

• Foreign money that is already leaving. Overseas investors have sold a record $32.52 billion of Indian equities this year and the Nifty 50 is down almost 14%. Losses at home make global funds sell what they can, wherever they can, further accentuating the fall.

• The clients of Indian IT. North America brings in anywhere between 30-50% of major IT companies’ revenue. A wounded US corporate sector trims exactly these budgets, hurting major Indian companies.

• India's own AI stocks. India does have significant AI exposure, except for the peripheral kind. Optical fibre maker Sterlite Technologies is up 804% this year, and global hyperscalers are committing more than $50 billion to Indian data centres. Those orders depend on continued spending.

• Nasdaq SIPs. Overseas equity and debt investment under the Liberalised Remittance Scheme rose 56% in FY26 to $2.65 billion, and domestic funds investing abroad grew 83% to ₹49,430 crore. Plenty of young Indians own the AI trade without realising it.

What could soften the blow this time

This is not 2008 on repeat, and some differences work in India's favour. Foreign investors own just ~16% of the Indian market, which is a 17-year low. There is simply less foreign money left to pull out. Oil is the other wild card. A global slowdown usually drags crude prices down, and India imports most of its oil. That doesn't mean India is immune. It means the hit could be smaller, but not absent.

The question worth sitting with

AI may well pay off over a decade, the way the internet did after the dotcom crash. Markets, though, do not wait a decade. If AI's returns arrive late, companies will write down assets and lenders will get choosier. And when that happens, it won't stay inside Silicon Valley. The impact could spill over and affect not just those invested in AI, but everyone worldwide.

The tea stall by the factory gate never did either. For investors, the useful habit is to ask not only "am I exposed to AI?" but also "who around me is?"