Main Facts
The global landscape of Artificial Intelligence (AI) policy is undergoing a profound transformation, shifting dramatically from a collaborative, innovation-first ethos to one fiercely centered on national advantage and strategic competition. This new paradigm, characterized by what experts are terming "aggressive AI policy," has been starkly illustrated by recent actions from the United States government, signaling a clear intent to control and leverage cutting-edge AI for sovereign interests.
In a move that reverberated across the global technology sector, the U.S. government recently directed Anthropic, a prominent American AI behemoth, to suspend access to its most advanced models, Fable 5 and Mythos 5, for foreign nationals. This unprecedented directive was issued on explicit national security grounds, underscoring the growing perception of advanced AI as a critical strategic asset. Concurrently, a U.S. Presidential order has established a voluntary mechanism allowing the U.S. federal government privileged access to such sophisticated AI models up to 30 days before even trusted international partners. Further amplifying this nationalistic thrust, the Trump administration is reportedly considering taking equity stakes in leading AI companies. This proposed intervention, ostensibly aimed at redistributing the supernormal profits anticipated from technological advances, highlights a potential shift towards greater state involvement in the private AI sector, blurring traditional lines between government and industry.
These policy shifts are not isolated incidents but rather the latest and most dramatic in a series of sovereign actions globally, demonstrating that governments are increasingly shaping AI policy around their respective national advantages. Europe, initially known for its "regulate first, ask questions later" approach, is now pivoting to actively invest in AI compute infrastructure and promote "Buy European" public procurement initiatives, aiming to foster regional AI champions. Even countries like Argentina, under President Javier Milei’s distinctive leadership, are embracing a proactive stance, aiming to attract substantial AI investment by offering a regulatory safe harbor, signaling a global race for AI supremacy.
For India, a burgeoning IT services economy that currently lacks its own frontier AI systems—those demanding upwards of ten septillion floating-point operations to train—these global developments present a complex strategic dilemma. The nation must critically review these international shifts and articulate a coherent, agile policy response. The imperative is clear: India must position itself to benefit significantly from frontier AI technology without allowing its economic capabilities and future prosperity to become overly dependent on policy decisions made in distant capitals. This balancing act between global integration and strategic autonomy will define India’s trajectory in the evolving AI-driven world.
Chronology of Policy Shifts
The evolution of AI policy has traversed several distinct phases, moving from initial cautious optimism to the current era of strategic competition. Understanding this chronology is crucial to grasping the depth of the current shift.
Early AI Policy: A Focus on Ethics and Innovation
In the nascent stages of modern AI development, particularly in the early to mid-2010s, global discourse predominantly centered on fostering innovation, ensuring ethical development, and addressing potential societal impacts. Governments and international bodies largely adopted a facilitative role, encouraging research and development while grappling with the long-term implications of AI. Regulatory frameworks, where they existed, were often broad, focusing on principles like transparency, fairness, and accountability. The European Union, for instance, was an early proponent of ethical AI guidelines, initiating discussions that would eventually lead to its landmark AI Act. The United States, while embracing a more laissez-faire approach to innovation, also saw calls for responsible AI development from academic and industry groups. During this period, the emphasis was on global collaboration, sharing research, and building a common understanding of AI’s potential and perils, rather than explicitly framing it as a nationalistic contest. India, too, participated in this global conversation, recognizing AI’s potential for digital transformation and economic growth, often advocating for an open and inclusive approach to technology.
The Pivot to National Advantage: The Geopolitical Awakening
The turning point, arguably coinciding with the rapid acceleration of AI capabilities and the sharpening of geopolitical rivalries, particularly between the U.S. and China, saw a significant recalibration of AI policy worldwide. Nations began to view AI not just as a technological frontier but as a critical domain for national security, economic competitiveness, and global power projection.
The United States’ Assertive Stance
The recent actions by the U.S. government represent a stark departure from its historical approach to technological development, which often prioritized private sector innovation with minimal direct state intervention. The directive to Anthropic to restrict access to its advanced models for foreign nationals on national security grounds is a potent symbol of this shift. This move is deeply rooted in a broader strategy to maintain technological supremacy and prevent adversaries from accessing dual-use technologies that could enhance military capabilities or undermine U.S. interests. The Presidential order granting federal agencies early access to cutting-edge models further solidifies this "America First" approach to AI. By ensuring its government has a head start, the U.S. aims to integrate advanced AI into its public services, defense systems, and intelligence apparatus more rapidly and effectively than any other nation. The consideration by the Trump administration to acquire equity stakes in leading AI firms, while controversial, highlights a potential deep state involvement, reflecting concerns about securing critical infrastructure and capturing the immense economic rents expected from AI breakthroughs. This aggressive posture is a direct response to the perceived challenge from nations like China, which has explicitly articulated its ambition to become a world leader in AI by 2030, fueling a technological arms race.
European Evolution: From Regulation to Investment
Europe’s journey has been distinct but equally significant. Initially, the EU garnered global attention for its "regulate first" philosophy, exemplified by the ongoing development of its comprehensive AI Act. This approach prioritized fundamental rights, safety, and ethical considerations, aiming to establish a trusted framework for AI development and deployment. However, a growing realization of the strategic implications of AI, coupled with concerns about falling behind in the global innovation race, has prompted a significant recalibration. The EU is now actively investing in building its own AI compute infrastructure, recognizing that access to powerful processing capabilities is fundamental for developing competitive AI models. Initiatives promoting "Buy European" public procurement aim to nurture domestic AI champions and reduce reliance on foreign technology providers. This dual strategy seeks to balance ethical governance with a robust industrial policy, aiming for "digital sovereignty" in AI.
Emerging Economies Join the Race: Argentina and Beyond
The shift isn’t limited to major powers. Emerging economies are also formulating strategic responses. Argentina, under President Javier Milei, has adopted a bold approach, offering a regulatory "safe harbor" to attract AI investment. This strategy aims to create a conducive environment for AI companies, potentially by reducing regulatory burdens or offering incentives, positioning Argentina as an attractive hub for innovation. Other nations, like the UAE and Singapore, have also been proactive, investing heavily in AI research, talent development, and infrastructure, often through public-private partnerships, to secure their future economic competitiveness and strategic relevance in the AI era. These diverse approaches underscore the universal recognition that AI is a foundational technology that will reshape global power dynamics.
India’s Evolving Stance
Historically, India’s approach to AI has been characterized by a blend of cautious optimism and a focus on leveraging AI for social good and economic development, particularly in areas like healthcare, agriculture, and education. While there have been discussions around national AI strategies and initiatives to foster research and development, the current global climate demands a more robust and explicit policy framework. India’s past stance, while commendable for its emphasis on ethical and inclusive AI, now needs to evolve to address the immediate and pressing geopolitical realities of AI dependence and strategic vulnerability. The call for a "coherent policy response" reflects this urgent need to move beyond general principles to concrete, actionable strategies that secure India’s place in the aggressive new normal of AI.
Supporting Data and Economic Realities
The shift towards nationalistic AI policies is driven by stark economic realities and the immense capital requirements of frontier AI development. For a nation like India, understanding these figures is paramount.
The Unfathomable Cost of Frontier AI
Frontier AI systems are defined by their sheer computational demands, often requiring "upwards of ten septillion floating-point operations to train." To put this into perspective, a septillion is 10^24. The scale of investment needed to develop such models is staggering. OpenAI, a leader in frontier AI, reportedly projects its compute spending alone to reach $50 billion this year. This figure is not just immense; it serves as a crucial benchmark for the kind of resources required to compete at the cutting edge of AI.
In stark contrast, India’s total annual expenditure on research and development (R&D) stands at approximately 0.6% of its GDP. Furthermore, the private sector accounts for only about a third of this R&D spend. When comparing OpenAI’s projected $50 billion compute spending to India’s entire annual private R&D spend, the disparity is glaring: OpenAI’s figure is over six times greater. This massive capital asymmetry immediately highlights a fundamental challenge: India cannot hope to outspend or directly compete with global AI giants in the race to build indigenous frontier models in the short to medium term. The implication is straightforward: direct competition in foundational model development is not a viable strategy for India currently.
India’s IT Services Economy: A Foundation, Not a Frontier
India’s strength lies in its robust IT services economy and a vibrant app ecosystem. Indian IT and app companies are exceptionally well-positioned to scale the everyday use of AI across various sectors, both domestically and globally. This capability is crucial for raising domestic productivity, enhancing competitiveness, and driving digital transformation. The Indian IT sector is a powerhouse, contributing significantly to the nation’s GDP and export revenues, with IT exports reaching substantial figures, demonstrating its global footprint in service delivery. This vast talent pool and established infrastructure can effectively deploy, customize, and integrate existing AI models to create innovative solutions.
However, this strength in application and integration contrasts sharply with the lack of indigenous frontier AI systems. While Indian firms excel at leveraging existing AI tools, they are largely consumers, not producers, of the foundational models that power these applications. This creates a critical vulnerability.
The Dependence Dilemma: Globalization vs. Strategic Autonomy
The current reality presents India with a profound dilemma: the need for "rapid diffusion" of AI technologies to maintain competitiveness pulls in one direction, while the imperative to reduce "model dependence" for strategic autonomy pulls in the opposite. Businesses in India, to outcompete rivals in a globalized market, must use the best available AI models, which are predominantly developed by foreign entities. This immediate necessity, however, deepens their reliance on technologies whose development and access are increasingly subject to foreign policy decisions.
The core argument is that using foreign AI models today is the only pragmatic way to build the economic surpluses, generate expertise, and foster the ecosystem necessary to eventually depend on them less in the future. Yet, this reliance comes with inherent geopolitical risks that individual businesses are ill-equipped to manage. They cannot insure themselves against sudden policy shifts, export controls, or geopolitical tensions that might restrict access to critical AI infrastructure or models. This is precisely where public policy must intervene. India’s internal discourse, unfortunately, often remains "stuck in a false binary between globalisation and industrial policy," whereas the strategic reality demands a simultaneous embrace of both. India’s industries must benefit from global access while simultaneously building domestic capabilities.
The Pharmaceutical Precedent: A Cautionary Tale
The strategic dilemma presented by frontier AI is not entirely new for India. A compelling lesson can be drawn from the pharmaceutical industry, where India is a global leader in generic drug manufacturing but remains deeply dependent on foreign sources for critical raw materials. Indian pharma is "deeply dependent on ingredients from China," even as it navigates "wavering policy regimes for market access in the U.S." This creates a precarious situation where a vital industry’s resilience is undermined by upstream dependencies.
In response, the Indian government implemented a Production-Linked Incentive (PLI) scheme to promote domestic manufacturing of bulk drugs and active pharmaceutical ingredients (APIs). While the PLI scheme has shown some positive results in creating domestic capacity, NITI Aayog’s latest assessment reveals that India still sources approximately 65% of its critical pharmaceutical ingredients from China. This demonstrates a crucial lesson: "Industrial policies can create footholds, not instant resilience." Building strategic autonomy takes sustained effort, massive investment, and a long gestation period, and even then, complete self-sufficiency might be elusive or economically inefficient. The pharma example serves as a potent warning for the much larger scale of the AI challenge.
Global Competitor Landscape: No Room for Complacency
The notion that India’s IT dominance is unassailable is a dangerous misconception. The global technology landscape is dynamic, with new competitors emerging rapidly. The Philippines, for instance, generates approximately $40 billion in IT exports annually, already nearly a sixth of India’s IT exports, and is reportedly growing faster than the global industry average. This illustrates that India’s position, while strong, is not immutable and requires continuous innovation and strategic adaptation to maintain its edge.
Furthermore, India’s app companies, despite the nation’s vast digital user base, have struggled to make a significant global impact. No Indian app currently features among the top 10 globally by downloads, in-app purchase revenue, or monthly active users. This highlights a gap in global market penetration, product innovation, and potentially, a lack of access to the most advanced underlying AI technologies that power globally successful applications. These data points collectively underscore the urgent need for India to move beyond past successes and proactively address the challenges posed by the new AI geopolitical order.
Official Responses and Proposed Solutions
Recognizing the multifaceted challenges and opportunities, India’s official response must transcend traditional policy approaches. The imperative is to craft a nuanced strategy that fosters domestic capabilities while judiciously leveraging global advancements.
India’s Policy Imperatives: Blending Globalization and Industrial Policy
The prevailing discourse in India often pits globalization against industrial policy, creating a "false binary" that hinders effective strategic planning. In the context of AI, this dichotomy is particularly unhelpful. India cannot afford to withdraw from the global AI ecosystem, given its current dependence on foreign frontier models and the immense capital required for indigenous development. Simultaneously, a purely globalized approach risks perpetual dependence and strategic vulnerability. Therefore, India’s policy must integrate the benefits of both.
The coherent policy response must enable Indian industries to "benefit from both at the same time." This means facilitating access to the best global AI technologies for immediate productivity gains and competitive advantage, while simultaneously implementing targeted industrial policies to build long-term domestic AI capabilities, reduce critical dependencies, and foster innovation within the country. The goal is to move beyond mere consumption to strategic co-creation and eventual self-reliance in critical AI domains.
A "Whole-of-Government" Approach to AI
Given the pervasive nature of AI and its implications across various sectors, an isolated approach from a single ministry is insufficient. India requires a truly "whole-of-government" strategy, where key ministries coordinate closely to serve the technology industry and national interest effectively.
- Ministry of External Affairs (MEA): The MEA’s role is critical in AI diplomacy. This includes forging strategic partnerships for AI research and development, negotiating international norms and standards for AI governance, and ensuring access to critical technologies through bilateral and multilateral agreements. The MEA must actively engage in global dialogues on AI ethics, safety, and responsible use, safeguarding India’s interests and promoting its vision for a democratic and inclusive AI future.
- Ministry of Commerce and Industry: This ministry must focus on promoting AI-driven exports and attracting foreign direct investment (FDI) in the AI sector. It should work to identify new market opportunities for Indian AI products and services globally, facilitate trade agreements that support AI technology transfer, and address non-tariff barriers that hinder market access for Indian tech companies.
- Ministry of Electronics and Information Technology (MeitY): As the nodal ministry for IT, MeitY is central to fostering domestic AI innovation. This includes developing national AI strategies, setting up AI research centers, promoting skill development, and creating a robust digital infrastructure. It also plays a crucial role in data governance, ensuring data availability and security for AI development while upholding privacy.
- Ministry of Defence: AI has profound implications for national security. The Ministry of Defence must focus on integrating AI into defense systems, developing AI-enabled intelligence capabilities, and securing critical military infrastructure from AI-powered threats. Collaborations with domestic AI firms for defense applications and strategic research are paramount.
- Ministry of Power/Energy: The immense computational demands of frontier AI models translate into significant energy consumption. The Ministry of Power/Energy must plan for the necessary energy infrastructure, including renewable energy sources, to power future AI data centers and supercomputers, ensuring sustainable growth of the AI ecosystem.
- Ministry of Communications/Telecom: Robust and high-speed telecommunications infrastructure is the backbone of AI deployment. This ministry must ensure ubiquitous, affordable, and secure broadband connectivity to facilitate the widespread adoption of AI applications and services across the country, including 5G and future network technologies.
Government as Underwriter of Geopolitical and Technological Risk
Private firms, by their very nature, are designed to manage commercial risks through contracts, market diversification, and supply chain resilience. However, they are fundamentally unable to "insure themselves against geopolitical risk or concentrated technological dependence." These are sovereign risks that only the government can effectively underwrite. India must adopt models from other strategic sectors to mitigate these unmanageable risks for its AI industry.
- Export Credit Analogy: Export credit agencies, often state-backed, recognize that firms cannot shoulder geopolitical risks on their own. They provide insurance and guarantees to exporters against political and commercial risks in foreign markets, thereby encouraging international trade even in volatile regions. Similarly, the government could offer mechanisms to de-risk Indian firms’ engagement with foreign AI technologies, protecting them against sudden policy shifts or supply disruptions from the source country. This could involve sovereign guarantees for AI model access or funding for parallel research efforts to build redundancy.
- Hybrid-Annuity Infrastructure Models Analogy: In long-gestation infrastructure projects, private capital often shies away due to high upfront costs and extended risk periods. Hybrid-annuity contracts address this by having the state fund a significant portion of the project and make fixed payments over time, rather than leaving private capital to bear the full risk. This model could be adapted for AI infrastructure. For instance, the government could fund a substantial part of building sovereign compute infrastructure (supercomputers, data centers) or advanced AI research labs, then lease access or provide grants to private firms for their AI development, thereby sharing the immense financial and technological risks.
- Applying to AI: For AI, this means the government actively supporting firms in deepening their "backward linkages" to frontier AI. This could involve facilitating strategic partnerships with leading global AI developers, even potentially through government-to-government agreements, to ensure access to advanced models and training data. Concurrently, it must strengthen "forward linkages" by promoting Indian AI products and services in global markets, potentially through export promotion schemes specifically tailored for AI solutions, and by creating an environment where Indian AI innovations can thrive and compete internationally.
Fostering Strategic AI Linkages
The twin objectives of deepening backward linkages and strengthening forward linkages form the core of India’s strategic response. Deepening backward linkages means securing access to the fundamental building blocks of AI – advanced models, specialized hardware (GPUs), and high-quality datasets – even if they originate from abroad. This could involve bilateral agreements, joint ventures, or even strategic investments. Strengthening forward linkages involves aggressively promoting Indian AI applications, services, and talent in global markets, ensuring that India remains a net exporter of AI solutions and value-added services. This requires investing in talent, fostering an innovation ecosystem, and removing regulatory hurdles.
Implications and Way Forward
The choices India makes today regarding its AI policy will have profound and lasting implications for its economic future, national security, and geopolitical standing. The path forward requires a blend of urgent action, strategic foresight, and relentless execution.
Consequences of Inaction: A Looming Threat
Should India fail to articulate and implement a coherent and aggressive AI policy, the consequences could be severe. The most immediate implication is a deepening of technological dependence. Without an explicit strategy to build domestic capabilities and diversify access, India’s industries would become increasingly reliant on foreign-developed frontier AI models, making them vulnerable to supply chain disruptions, restrictive export controls, and geopolitical pressure. This dependence could stifle innovation, as Indian firms might be limited to customizing existing foreign models rather than developing truly novel solutions.
Furthermore, a lack of proactive policy could lead to a significant loss of economic competitiveness. As other nations leverage AI to boost productivity and create new industries, India risks falling behind. This would not only impact its IT services sector but also permeate manufacturing, healthcare, agriculture, and other critical areas. Critically, national security vulnerabilities would also mount. AI is increasingly integral to defense, intelligence, and critical infrastructure. Without sovereign capabilities or secure access to advanced AI, India’s ability to protect its interests in a rapidly evolving threat landscape could be compromised.
The Industry’s Mandate for Innovation and Quality
While government action is indispensable in creating the conditions for success, "competitiveness must ultimately come from firms themselves." The Indian tech ecosystem, both incumbent IT giants and burgeoning startups, needs to shed any vestiges of complacency. The global market is intensely competitive, and mere cost-effectiveness is no longer sufficient.
Indian firms must pivot decisively towards "quality and innovation that makes services and products valuable to the world." This means investing heavily in R&D, fostering a culture of risk-taking, and focusing on creating proprietary intellectual property. The rise of competitors like the Philippines, whose IT exports are growing faster, serves as a stark reminder that India’s global position is not guaranteed. Similarly, the limited global penetration of Indian app companies—with no Indian app among the top 10 by downloads, revenue, or monthly active users—highlights a critical gap in product-market fit and global ambition. This calls for "greater ambition from the industry itself," moving beyond serving domestic needs to creating world-class products and services.
A Coherent Strategic Voice for Indian Technology
The Indian technology industry, despite its scale, currently lacks a unified and "coherent strategic voice." Incumbent IT firms often remain "preoccupied with visas and market access," advocating for policies that facilitate their existing business models. Start-ups, on the other hand, are frequently "consumed by regulatory frictions and fundraising," focusing on immediate operational challenges. While these concerns are valid, they represent disparate interests rather than a cohesive national AI strategy.
"Yet, both ultimately share the same interest: ensuring that India remains deeply connected to the world’s leading AI ecosystems while steadily building greater domestic capability." There is a pressing need for these diverse segments of the Indian tech industry to come together, articulate a shared vision for India’s AI future, and advocate for policies that serve this overarching strategic goal. This unified voice can provide invaluable input to the government, ensuring that policies are well-informed, pragmatic, and aligned with industry needs.
Balancing Integration and Sovereignty: The Core Objective
The "real contest in AI is not simply over who builds the best models. It is about who captures the economic and strategic advantages they create." For India, the ultimate objective must be crystal clear: "remain deeply integrated with global AI ecosystems while steadily reducing the strategic vulnerabilities that such integration creates."
This involves a multi-pronged approach:
- Strategic Access: Negotiating and securing reliable access to advanced foreign AI models and compute resources through robust international partnerships and agreements.
- Indigenous Development: Investing significantly in foundational AI research, talent development, and the creation of sovereign AI infrastructure (e.g., national supercomputing grids, large language model initiatives tailored for Indian languages and contexts).
- Ethical Framework: Continuing to champion an ethical, responsible, and inclusive approach to AI development and deployment, ensuring that AI serves societal good and adheres to democratic values.
- Workforce Development: Rapidly upskilling and reskilling the workforce to leverage AI effectively across all sectors, from IT services to manufacturing and agriculture.
- Regulatory Sandboxes: Creating agile regulatory environments that encourage experimentation and innovation while safeguarding against risks.
The choices India makes in the coming years will not merely shape its technological landscape; they will fundamentally determine its economic prosperity, national security posture, and its position in the emerging global order. By embracing a holistic, "whole-of-government" approach, fostering industry innovation, and strategically balancing global integration with domestic capability building, India can navigate the aggressive new normal of AI and emerge as a significant player on the geopolitical chessboard of artificial intelligence.
Vivan Sharan is Partner, Koan Advisory; Vedika Pandey is Manager, Koan Advisory
