Economic Survey 2025-26's State Capacity Focus: A Groundbreaking Yet Incomplete Analysis
The Economic Survey 2025-26 has successfully stirred a vital debate on state capacity, moving India's policy conversation beyond traditional metrics like growth rates and fiscal arithmetic. By shifting focus to the institutional foundations that determine whether policy intent translates into outcomes, the survey addresses a critical need in today's geopolitical landscape, where coherent state action is essential for development.
Praise for Elevating State Capacity to Central Concern
The chief economic advisor's work deserves significant praise for bringing state capacity from the background to the forefront of analytical discussion. In an era marked by global fragmentation and contested trade regimes, the ability of the state to act predictably and credibly has become a binding constraint on progress. The survey emphasizes key elements such as:
- Implementation mechanisms
- Institutional incentives
- Regulatory credibility
- Organizational design
- Learning under uncertainty
Its sophisticated understanding of why states fail—not due to bad policies but because of how decisions are processed and potentially used as punishment—reflects deep insight into bureaucratic challenges like risk aversion and retrospective scrutiny.
Critical Gaps in the Survey's Analysis
Despite its strengths, the survey invites sharper interrogation regarding how comprehensively it answers the state capacity question. A canonical definition of state capacity involves the sustained ability to:
- Raise resources effectively
- Make and enforce credible rules
- Implement collective decisions through information-rich administrative systems
While the survey offers a detailed diagnosis, it underweighs foundational components that make capacity observable and scalable in practice.
The Tiered View of State Capacity: Missing Local Governance
One significant imbalance lies in the survey's tiered view of the state. India's federal system operates at three levels, with regulatory and administrative capacity typically declining as one moves down the hierarchy, even as citizen interaction increases. The survey excels at analyzing:
- Regulatory design at the Union level
- Central coordination mechanisms
- Accountability architecture
- National regulator functioning
However, it remains primarily oriented toward the Union and higher-capacity state institutions, largely overlooking local governments where most state-citizen interactions occur. This omission is critical because areas like property taxation, building permissions, water and sanitation, and street-level enforcement are where regulatory discretion becomes personalized and legitimacy is most fragile.
Areas Needing Further Elaboration
The survey could have fleshed out several key areas more thoroughly:
First, fiscal capacity does not serve as an organizing pillar, despite its importance. States that tax effectively build administrative systems and enforcement capabilities as by-products. India's weak local capacity is inseparable from narrow tax bases and poor property taxation.
Second, while emphasizing entrepreneurial governance and learning under uncertainty, the survey overlooks India's more mundane binding constraints: contract enforcement, land systems, municipal governance, regulatory churn, and personnel management. These represent failures of predictability rather than experimentation.
Third, the survey frames legitimacy as arising from citizen behavior like delayed gratification and voluntary compliance. However, institutional theory suggests the opposite: predictable rules and credible enforcement generate compliance by making it rational, with legitimacy emerging as a cumulative by-product of effective institutions.
Finally, advocating tolerance for failure and institutional forgiveness is theoretically valid but institutionally conditional. High-capacity states can afford forgiveness because rules are predictable and sanctions credible. Where foundations are weak, tolerance risks sliding into permissiveness.
Conclusion: A Valuable Yet Incomplete Contribution
Despite these gaps, the Economic Survey 2025-26's chapter on state capacity stands as one of its most serious and valuable contributions. The chief economic advisor and team have highlighted a crucial aspect often neglected in India's reform debates: policy design is meaningless without institutional ability. By raising the right questions, even if not fully answering them, the survey has set the stage for more comprehensive discussions on building state capacity at all levels of governance.
