Economic Survey 2025-26 Flags Savings and Manufacturing as Crucial for Lowering India's Capital Costs
The Economic Survey for 2025-26, tabled in Parliament on Thursday, has issued a stark warning about India's persistently high cost of capital, identifying it as a significant constraint on private investment and long-term economic growth. The comprehensive document calls for urgent policy reforms focused on enhancing domestic savings and bolstering manufacturing competitiveness, arguing these measures are essential to reduce the nation's reliance on foreign sources of funding.
Comparative Analysis of Interest Rates Reveals Structural Challenges
According to the survey's detailed analysis, India's weighted average long-term interest rates averaged 7.6% between 1995 and 2025. This figure stands considerably higher than rates observed in several developed economies, including Canada at 3.1%, Italy at 2.9%, and Switzerland at a mere 1%. However, the report notes that India has maintained a more favorable position compared to other emerging markets like Indonesia (14.1%), Mexico (11.05%), and South Africa (9.08%).
These calculations are based on a weighted average of central bank policy rates and 10-year government bond yields, adjusted for the share of bank and market-based credit in total credit to the private non-financial sector. The survey emphasizes that addressing India's capital cost dilemma requires a multifaceted approach beyond financial intermediation alone.
Strategic Recommendations for Sustainable Economic Transformation
The Economic Survey outlines a comprehensive strategy to tackle the high cost of capital through structural economic reforms. It advocates for policies that:
- Support firm-level scale and deregulation
- Improve logistics, infrastructure, and trade facilitation
- Deepen technological capabilities and research & development
- Enable sustained participation in global value chains
These measures, the survey argues, will strengthen productivity and profit margins in the manufacturing sector. As firms retain more earnings, corporate savings will increase. Simultaneously, expanding exports and achieving stable trade surpluses will reduce dependence on foreign savings, moderate depreciation expectations, and gradually lower the risk premium embedded in capital costs.
Shifting Funding Patterns and Market Volatility
Indian companies have already begun diversifying their funding sources beyond traditional bank loans, though this transition has been marked by volatility. According to the Reserve Bank of India's latest monthly bulletin data, non-food bank credit accounted for 65% of total corporate resources as of December 31, 2025, with the remaining 35% coming from non-bank sources including equity issuances, corporate bonds, commercial papers, and overseas borrowings. This represents an increase from 60% in the same period of FY25.
Despite a 125-basis-point policy rate cut and sustained liquidity support from the RBI, corporate bond fundraising declined by 6% year-on-year to ₹6.76 trillion in the first nine months of FY26, as per Securities and Exchange Board of India data. The survey acknowledges that while a deeper bond market would help lower capital costs, it cannot single-handedly address the structural challenges.
Macroeconomic Implications and Current Account Concerns
The Economic Survey presents India's high cost of capital as a structural macroeconomic outcome, intricately linked to the economy's savings position and external balance. It notes that economies running persistent current account deficits (CADs) become dependent on external capital inflows to support domestic investment and consumption, introducing a risk premium that financial markets incorporate into interest rates and equity returns.
Recent data shows India's CAD widened to 1.3% of GDP in the September quarter, up from 0.3% in the previous quarter. Rating agency Icra Ltd anticipates that increased gold imports could push the CAD above 2.5% of GDP in the third quarter of FY26 (October-December).
The survey concludes that "the durable route to a lower cost of capital is therefore inseparable from a growth pattern anchored in higher productivity, enhanced manufacturing competitiveness, sustained export growth, and the gradual transition from structural savings deficit to structural savings strength." This comprehensive approach, it argues, represents India's most viable path toward sustainable economic development and reduced capital costs.
