The Economic Survey for 2025-26 strikes a note of caution rather than optimism on India’s economic outlook. That is hardly surprising in an increasingly protectionist world marked by rising geopolitical tensions, trade fragmentation, disrupted supply chains, and the ever-present risk of financial stress spilling rapidly across borders. Doing business globally will not get easier; indeed, conditions could worsen. Paradoxically, India’s stand-out performance in 2025—its strongest in decades—has neither delivered currency stability nor insulated the country strategically. Even so, the Survey expects India to keep chugging along, with growth of about 7% next year, slower than the projected 7.4% this year but close to its medium-term potential rate, earlier pegged at 6.5%.
From Protectionism to Global Integration
Reaching even this steady-state growth will not be effortless. To counter external headwinds, India must fire up its domestic growth engines, with a sharper focus on goods-based exports rather than relying disproportionately on services. The Survey makes a persuasive case for pivoting away from import substitution towards deeper integration with global value chains. That, in turn, demands larger, more competitive firms. This ambition cannot be realised without a meaningful increase in private-sector spending on research and development—total spends now at a paltry 0.6% of GDP remains woefully inadequate. The underlying idea is not blanket self-sufficiency but resilience—building depth and competitiveness in select areas to better absorb external shocks. The Survey’s stated goal of making India “strategically indispensable” and capable of shaping outcomes is laudable. But ambition alone will not suffice; the economy needs several hard fixes.
High Cost of Capital
To begin with, the government, private sector, and households must all raise their game—upgrading capacity and, crucially, taking risks. The government must ease regulations, cut red tape, and improve administrative efficiency. Failure to do so, the Survey warns, could compromise growth. High capital costs—estimated at around 7.6%—are another drag, deterring private investment and weighing on production and exports, thereby shrinking the economy’s surplus. The Survey also flags the risks of fiscal populism at the state level, cautioning that rising unconditional cash transfers and widening revenue deficits could push up sovereign borrowing costs and threaten fiscal stability.
As the Survey notes, lower capital costs are difficult to achieve for economies that are structurally savings-deficient and run current account deficits. Such economies often turn fiscally accommodative, but this raises input costs for upstream producers, making it harder for them to scale. The result is a familiar trap: firms opt for the “lazier alternative of negotiated shelter”, sacrificing efficiency and scale. This vicious cycle—weak competitiveness hurting exports, which in turn worsens savings imbalances—is one India must break.
If the economy is to realise its full potential, credit flows to the micro, small, and medium enterprise sector—critical for both production and employment—must be stepped up. Greater reliance on cash flow-based lending, along with deeper digital lending partnerships, can help channel more affordable credit to small enterprises. Finally, while a weaker rupee may help exports partly offset the impact of high US tariffs, the Survey rightly draws attention to the reluctance of foreign investors to commit capital. It quotes the Australia-based Lowy Institute’s Power Gap Index to suggest that India is operating far below its full strategic potential. Whether the upcoming Budget will ease tax and regulatory rules for portfolio investors remains to be seen. But higher and more stable capital inflows would undoubtedly help—both in easing financing constraints and reinforcing confidence in India’s growth story.