Former Reserve Bank of India governor Raghuram Rajan has warned that the global frenzy around artificial intelligence may be overlooking major economic and political risks, arguing that investors and policymakers are treating the sector with excessive optimism despite mounting vulnerabilities.
In a recent Project Syndicate column titled “A Cold Shower for the AI Mania,” Rajan said the rapid rise of generative AI has created a market euphoria similar to earlier technology booms, even as key structural challenges remain unresolved.
Rajan argued that one major risk is the growing dependence of AI companies on debt financing. He said firms are investing heavily in data centres, chips and computing infrastructure without clear evidence that future revenues will justify the scale of spending. According to him, investors appear to be assuming uninterrupted growth in demand for AI services, despite uncertainty over long-term profitability.
The economist also cautioned that the AI industry could face compute shortages as demand for high-end semiconductors and processing power surges. Such bottlenecks, he suggested, may slow deployment and raise operational costs for firms racing to expand their models.
Another concern highlighted by Rajan is the possibility that advances in large language models could begin to plateau. While AI systems have improved rapidly in recent years, he warned that future gains may become harder and more expensive to achieve. If technological progress slows while investment expectations remain elevated, financial markets could face a sharp correction, he suggested.
Rajan further pointed to the risk of political backlash against AI, especially if the technology contributes to large-scale job displacement or widening inequality. Governments, he argued, may eventually respond with tighter regulations, taxes or restrictions if public anger grows over the social consequences of automation.
The former RBI governor said that enthusiasm surrounding AI resembles earlier periods of financial excess in which investors ignored underlying fragilities. Rajan, who gained prominence for warning about vulnerabilities in the global financial system before the 2008 crisis, said markets should be more cautious about assuming AI-driven growth will continue indefinitely.
He nevertheless acknowledged that generative AI has already demonstrated significant capabilities and could transform productivity across industries. But he argued that optimism should not obscure the economic, technological and political constraints that could derail the current boom.
