Former Reserve Bank of India governor Raghuram Rajan has warned that the global frenzy over artificial intelligence could overlook key economic and political risks, arguing that investors and policymakers are treating the sector with excessive optimism despite growing vulnerabilities.
In a recent Project Syndicate column titled “A Cold Shower to AI Mania,” Rajan said the rapid rise of generic AI has created market excitement similar to earlier technology booms, even if key structural challenges remain unresolved.
Rajan argued that a bigger risk is AI companies’ increasing reliance on debt financing. He said companies are investing heavily in data centers, chips and computing infrastructure without clear evidence that future revenues will justify the scale of spending. According to him, despite uncertainty over long-term profitability, investors are assuming uninterrupted growth in demand for AI services.
The economist also cautioned that the AI industry could face a compute shortage as demand for high-end semiconductors and processing power increases. He suggested that such bottlenecks could slow deployment and increase operating costs for companies racing to expand their models.
Another concern highlighted by Rajan is the possibility that progress in larger language models may begin to stall. While AI systems have improved rapidly in recent years, he warned that it may be harder and more expensive to achieve future benefits. He suggested that if technological progress slows and investment expectations remain high, financial markets could face a sharp correction.
Rajan further pointed to the risk of political backlash against AI, especially if the technology contributes to large-scale job displacement or increased inequality. He argued that if public anger over the social consequences of automation grows, governments could eventually respond with tougher regulations, taxes or sanctions.
The former RBI governor said the excitement around AI is reminiscent of an earlier era of financial overhang, in which investors ignored underlying weaknesses. Rajan, who gained fame for warning about vulnerabilities in the global financial system before the 2008 crisis, said markets should be more cautious about assuming that AI-powered growth will continue indefinitely.
Yet he 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 obstacles that could derail the current boom.