What does Economic Survey 2025-26 say about India’s AI push and urban challenges?

India’s Economic Survey 2025-26 has outlined a development-focused roadmap for artificial intelligence while flagging deep structural challenges in urbanisation that need institutional and governance reforms to make cities work better for citizens.

The Survey said India’s approach to artificial intelligence must differ from the capital-intensive, frontier-model-driven strategy followed by some advanced economies.

It noted that global AI development has diverged into two paths — a top-down model dominated by large private firms and a bottom-up approach focused on application-led innovation and state coordination.

Given India’s resource constraints and development priorities, the Survey said a bottom-up approach is strategically necessary.

According to the Survey, India enters the AI era with notable strengths. It ranks among the top global contributors to AI research and has a large pool of technical talent.

The country also has a relatively high level of AI literacy in its workforce and a large base of domestic data across sectors such as health, agriculture, finance, education and public administration. However, the Survey said this data advantage remains underutilised.

The Survey highlighted that India faces constraints in access to advanced computing infrastructure, limited financial resources for large-scale model training and lower private participation in foundational AI research.

These factors make large frontier models difficult to pursue as the centrepiece of India’s AI strategy. Instead, it called for a focus on sector-specific applications and shared digital and physical infrastructure.

It also flagged concerns around the high energy and water intensity of AI data centres. The Survey noted that AI development is closely linked to physical infrastructure, with data centres placing pressure on electricity grids and water resources.

It said unchecked expansion of AI-related infrastructure could strain energy systems even in advanced economies, highlighting the need for careful sequencing of AI deployment in India.

On governance, the Survey proposed the creation of an AI Economic Council to align AI adoption with labour markets, skilling systems and social priorities. It said AI policy must be sensitive to India’s labour structure, which is marked by high informality and limited safety nets. The Survey emphasised that skill policy must evolve alongside technology policy to ensure productivity gains do not erode employment and work dignity.

The Survey also stressed that regulation, data governance and AI safety must develop in parallel with deployment. It warned that unmanaged AI diffusion could deepen structural divides if accountability and safeguards are deferred.

Alongside AI, the Survey devoted a full chapter to urbanisation, describing India’s cities as engines of growth that also face daily strain. It said cities generate a majority of national output but suffer from long commutes, uneven service delivery and institutional fragmentation.

A key concern flagged was the governance deficit in cities. The Survey said urban local bodies lack sufficient economic agency, fiscal autonomy and planning authority. Fragmented metropolitan governance limits the ability of cities to plan, finance and deliver infrastructure at scale.

The Survey identified land, housing, mobility, sanitation and waste management as binding constraints. It said restricted land supply, unclear titles and limited land recycling constrain affordable housing.

Urban transport systems remain heavily dependent on private vehicles, adding to congestion and pollution. While access to basic services has expanded, the Survey said the focus must now shift from expansion to reliability and efficiency.

On informality, the Survey said urban informality should be viewed as an outcome of structural constraints rather than a problem to be eradicated. It called for integrating informal workers and settlements into the urban economy through better services, secure tenure and regulatory reforms.

The Survey also pointed to non-tangible aspects of future cities, including civic order, trust and social contracts between citizens and institutions. It said improving urban outcomes requires not only physical infrastructure but also institutional credibility and citizen engagement.

Taken together, the Survey said India’s development path in both AI and urbanisation depends on sequencing reforms, strengthening institutions and aligning technology with social and economic priorities.