When an India Bull Turns Underweight

When a self-professed India bull moves to a deep underweight, it forces a reassessment of what India exposure actually means. Columbia Threadneedle, which manages $662 billion, has not framed this as a tactical response to valuations or near-term growth risks. 

The shift reflects a deeper unease with the setup on which India’s rise was built. In a recent “Viewpoint” paper on emerging markets, Columbia Threadneedle lays out a regime-shift thesis and uses that to justify moving India from a long-standing overweight to a deep underweight. This column takes that view as a starting point and asks what it actually means for India.

India has been one of the clearest beneficiaries of the previous global regime, which makes this call harder to dismiss. The conditions that amplified India’s growth story — abundant global liquidity, open supply chains and a premium on labour arbitrage — are no longer the ones capital is rewarding. 

Investors are not doubting that India can grow; they are doubting how long this particular growth playbook will continue to work.

Efficiency to Security
For four decades, the global economy operated on a model that rewarded efficiency above all else. Capital flowed to economies that could minimise costs, integrate into supply chains, and scale production or services without friction. Financial assets outperformed physical assets, and growth could be sustained without controlling underlying inputs.

Columbia Threadneedle argues that this model is being replaced by one that prioritises security, resilience, and control. The transition has been driven less by ideology and more by experience. Pandemic disruptions exposed the fragility of global supply chains, the freezing of Russian reserves demonstrated how financial systems could be weaponised, and the intensifying US-China divide confirmed that economic integration is no longer the organising principle of globalisation.

What follows is a system in which nations seek to produce more of what they consume, secure access to critical inputs, and reduce dependence on adversarial supply chains. Efficiency still matters, but it no longer determines where capital concentrates. Control increasingly does.

Industrial Capacity
This shift is evident in a broad-based investment cycle that is reshaping capital allocation. Re-industrialisation in the US and Europe, a sustained increase in defence spending, the energy transition, and the build-out of artificial intelligence infrastructure are converging into a single, capital-intensive wave.

The report frames this as a return to “national capitalism”, where governments actively direct capital toward strategic sectors. Put differently, policymakers are now behaving more like portfolio managers, steering money towards factories, fabs, and power plants rather than leaving it entirely to markets. The scale is significant, with defence budgets rising, supply chains being duplicated, and infrastructure investment accelerating across multiple geographies.

In such an environment, economies that can manufacture, mine, or control key inputs are beginning to absorb a disproportionate share of incremental capital. That matters more for India than for most emerging markets because its growth model has been less dependent on industrial depth and more on services intermediation.

Bottlenecks vs Exposure
The way capital is being deployed reflects this shift. The earlier model of allocating to emerging markets as a broad growth trade is giving way to a more targeted approach that focuses on bottlenecks within the global system.

Semiconductor ecosystems in Taiwan and South Korea, particularly in high-bandwidth memory and advanced substrates, have become critical nodes in the artificial intelligence supply chain. Energy infrastructure in parts of Europe is being repriced as countries scramble to secure a reliable supply. Resource-linked companies tied to critical minerals are attracting capital as the supply-demand gap widens.

This is a move from owning growth to owning constraints, where the value lies not in participation but in control. It is this bias towards chokepoints, rather than general “EM exposure”, that underpins Columbia Threadneedle’s portfolio tilt. India, despite its scale, is not yet central to any such bottleneck, which limits its ability to capture redirected capital in the near term.

Commodity Constraints
Underlying this shift is a tightening in commodity markets that is both cyclical and structural. Mining investment has declined over the past decade, even as demand drivers have multiplied, creating the conditions for sustained supply shortages.

The report points to a widening gap in key inputs, particularly copper, alongside a resurgence in energy prices following geopolitical disruptions.

In a system where physical resources exert a stronger influence on outcomes, commodity dynamics begin to shape macro stability more directly. For India, which imports roughly 85% of its oil, this translates into a persistent external vulnerability that feeds into the current account, currency, and inflation.

Financial Conditions
The financial environment that supported the previous regime is also evolving. Developed economies are operating with debt levels close to 300% of GDP, creating an incentive to sustain inflation above interest rates over extended periods.

At the same time, reshoring and supply chain duplication are raising the cost of goods, reversing the disinflationary impulse that globalisation once provided. The combination of higher inflation and tighter real financial conditions reduces the reliability of cheap capital that previously flowed into emerging markets, including India.

The shift is gradual but sticky and quietly changing the yardstick investors use to price different growth stories.

Technology as a Physical Force
Artificial intelligence is often framed as a force that reduces costs and enhances efficiency, but its role within this framework is more complex. While it is deflationary in downstream services, it is resource-intensive upstream.

The development and deployment of advanced models require vast computing infrastructure, energy, and materials, turning technology into a driver of physical demand rather than a substitute for it. Capital that might once have been returned to shareholders is now being invested in data centres, energy capacity, and semiconductor ecosystems.

This reinforces the broader shift toward asset-heavy investment and strengthens the position of economies that control relevant inputs. It also weakens the durability of labour arbitrage, which has been central to India’s services-led export model.

Where India Fits In
India’s growth model was well aligned with the previous regime. Services exports generated foreign exchange, domestic consumption provided stability, and global liquidity amplified returns.

The emerging regime weakens each of these channels. Artificial intelligence reduces the reliability of labour cost arbitrage in tradable services. Energy dependence exposes the economy to sustained commodity volatility. Capital flows are becoming more selective as investors prioritise exposure to industrial capacity, resources, and supply chain control.

The pressures are not, by themselves, destabilising, but they repeatedly hit the same weak spots. A higher energy bill, slower growth in services exports, and more selective capital inflows together increase the sensitivity of the rupee and the current account to external shocks.

The argument holds, but only if one assumes that services and domestic demand will not evolve fast enough to offset these pressures. That remains an open question, but it does not negate the direction of change.

Why “Deep” Underweight
Columbia Threadneedle’s move to a deep underweight reflects this shift in how global capital is being allocated.

India, in this framework, represents an economy whose growth model was optimised for a system that rewarded efficiency, labour arbitrage, and financial flows, even as the emerging system rewards control over inputs, industrial depth, and strategic capacity.

The call is a recognition that the drivers of its outperformance no longer sit at the centre of global capital allocation.

India’s growth story remains intact, but the premium it commanded in portfolios is now being competed away by economies that are more directly exposed to the defining features of the new regime.

The underweight, in that sense, is less a cyclical call about next year’s GDP print and more about a market that has quietly decided its big new bets lie elsewhere.