India enters 2026 with macroeconomic indicators that compare favourably with most large economies. Real GDP growth has remained above 7 per cent for a second consecutive year. The Union government's fiscal deficit declined to 4.8 per cent of GDP in FY25, marginally outperforming budget estimates, and is projected to fall further to 4.4 per cent in FY26, less than half the pandemic peak of 9.2 per cent recorded in FY21. Public capital expenditure has remained elevated, bank balance sheets are strong, credit growth has accelerated, and foreign exchange reserves provide a substantial buffer against external shocks.
Yet the defining feature of this year's Economic Survey is that it treats these outcomes not as an endpoint, but as a starting point for a more demanding diagnosis. The Survey's central claim is that India's binding constraint is state capacity, i.e., the ability of institutions to act coherently, learn under uncertainty, and deliver outcomes in a more hostile and fragmented global environment.
This marks a substantive shift in emphasis from earlier Surveys.
The Survey situates India's recent performance within a global environment characterised by persistent geopolitical uncertainty, fragmented trade regimes, and rising risk premia. Despite sound domestic fundamentals (moderate inflation, manageable external debt, and credible fiscal consolidation) the Indian rupee depreciated more than many peers in 2025. The Survey attributes to the structure of India's external balance.
India continues to run a sizeable merchandise trade deficit that is only partially offset by services exports and remittances. Consequently, external stability remains dependent on capital inflows that are increasingly shaped by global risk sentiment rather than domestic fundamentals alone. This vulnerability is reflected in sovereign borrowing costs. India's 10-year government bond yield has hovered around 6.7 per cent, higher than that of peers such as Indonesia (approximately 6.3 per cent), despite comparable sovereign credit ratings. Markets are increasingly pricing the consolidated public-sector balance sheet, including the fiscal behaviour of States, where populist expenditure pressures have intensified.
The global context has also become structurally less benign. Reciprocal tariffs of up to 25 per cent imposed by the United States in 2025 disrupted expectations that India would benefit unambiguously from trade reconfiguration. Financial markets responded by pricing in heightened uncertainty. Gold prices rose from roughly USD 2,600 per ounce at the start of 2025 to over USD 4,300 by year-end, crossing USD 5,100 by January 2026. These movements reflect a durable rise in geopolitical and financial tail risks rather than transient volatility.
Against this backdrop, the Survey undertakes a conceptual reworking of the Swadeshi debate. Import substitution is neither rejected nor endorsed as a general doctrine. Instead, it is positioned as one element within a broader strategic sequence, i.e., import substitution → strategic resilience → strategic indispensability.
Strategic resilience is defined as the capacity to withstand shocks without systemic disruption. Strategic indispensability goes further, referring to the embedding of domestic capabilities so deeply into global production systems that other economies acquire a stake in India's stability and continuity. This distinction allows the Survey to differentiate between insulation and influence.
To operationalise this framework, the Survey introduces a tiered approach to indigenisation. It distinguishes between sectors where import dependence creates acute vulnerability, sectors where domestic capability is feasible but hindered by coordination failures or scale disadvantages, and sectors where substitution would impose economy-wide efficiency costs without materially improving resilience. Crucially, any protection or support is framed as conditional, time-bound, and linked to performance, with export exposure treated as a necessary disciplining mechanism. Permanent shelter without productivity upgrading is explicitly identified as a source of long-term fragility.
One of the Survey's more analytically novel contributions is its treatment of input costs as a macroeconomic constraint rather than a sectoral issue. Tariff inversion, high logistics and energy costs, and regulatory compliance burdens are presented as horizontal distortions that raise transaction costs across the economy.
The proposed National Input Cost Reduction Strategy reframes competitiveness as a public good. Once domestic capacity in widely used inputs has been established, the Survey argues, these inputs should not continue to be treated as revenue instruments or protected indefinitely. Elevated input costs may benefit a narrow set of producers, but they undermine downstream manufacturing, exports, and employment generation.
This diagnosis is grounded in export performance. Since 2020, India's total exports have grown at a compound annual rate of roughly 9.4 per cent. However, merchandise exports have expanded at only about 6.4 per cent, with services exports accounting for most of the aggregate momentum. The Survey is explicit that services exports, however successful, cannot substitute for manufacturing exports in delivering employment absorption, supplier ecosystems, and durable external balance.
Manufacturing occupies a central analytical role in the Survey, not merely as a growth driver but as an institutional stress test. Manufacturing exposes weaknesses in power supply, logistics, regulation, standards enforcement, and coordination that more footloose service activities can often bypass.
For an efficient manufacturing ecosystem, state capacity becomes a prerequisite. Advanced manufacturing requires predictable regulation, reliable infrastructure, disciplined standards, and rapid problem resolution across multiple agencies. Failures in governance become immediately visible and economically costly.
This framing informs the Survey's engagement with East Asian experience. Japan, South Korea, Singapore, and Vietnam are not presented as models to be replicated, but as examples of a shared institutional logic, i.e., bounded experimentation, tolerance for good-faith failure, and credible withdrawal of support when performance thresholds are not met. The emphasis is on design principles rather than policy mimicry.
The Survey's ambition ultimately extends beyond resilience to influence. Drawing on external assessments of regional power, it highlights India's persistent "power gap", i.e., the difference between material resources and the ability to convert them into external economic influence. Despite ranking among the top economies in Asia by size, India underperforms in translating growth into supply-chain centrality and rule-setting power.
Strategic indispensability is presented as the mechanism for closing this gap. When firms, supply chains, and foreign economies become dependent on Indian capabilities, influence follows without coercion. The test of success, as the Survey implicitly suggests, is when Indian production becomes the default choice rather than a contingent alternative.
What ultimately distinguishes this year's Economic Survey is its analytical centre of gravity. Institutions (not expenditure levels, not headline growth rates) are treated as the core infrastructure of India's next development phase. State capacity is analysed as a composite outcome shaped by incentive structures, organisational design, regulatory architecture, private-sector behaviour, and citizen norms.
The Survey moves beyond exhortation toward diagnosis by integrating industrial strategy, deregulation, trade policy, and administrative reform within a single conceptual frame. It does not promise insulation from global uncertainty. Instead, it argues for the more demanding task of building institutions capable of acting, learning, and adapting under uncertainty.
That makes this Survey more restrained in its optimism (and more consequential in its implications) than many of its predecessors.
(Aditya Sinha writes on macroeconomics & geopolitics)
Disclaimer: These are the personal opinions of the author
