Economic Survey flags states as weak link, warns growth will stall without reforms

The Economic Survey pegs India's growth at 6.8-7.2 percent in FY27.

• Economic Survey warns states must improve execution for India's growth ambitions
• Poor governance, overregulation, and slow reforms hinder investment and growth.
• Tripura and Andaman & Nicobar cited as examples of successful deregulation

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The Economic Survey 2025–26 tabled by Finance Minister Nirmala Sitharaman in Lok Sabha on Thursday has delivered a blunt message to state governments, warning that India's high-growth ambitions will falter unless states overhaul governance, execution and regulatory systems. The Survey states that "the next phase of growth will be determined not by policy intent, but by state capacity to implement reforms", flagging uneven performance across states as the biggest structural risk to the economy.

The Survey identified weak execution as the primary bottleneck, noting that while states have announced multiple reforms, delivery remains inconsistent and slow. "Implementation gaps have emerged as a binding constraint on economic performance," the Survey notes, adding that delays, overlapping approvals and manual processes continue to raise transaction costs for businesses.

It further warns that without fixing these issues, "policy announcements risk becoming a substitute for real reform rather than a driver of it".

Overregulation at the state level is flagged as another major drag in the Survey. Although the Centre has decriminalised thousands of minor economic offences, most states have not followed suit, allowing the inspector raj to persist, it states.

"States account for the majority of compliance burden faced by firms," the Survey observes, adding that excessive inspections and outdated rules "discourage formalisation and investment". It also points to slow progress in land reforms, incomplete digitisation of land records and restrictive construction norms, which together can increase project costs by 15 to 25 per cent in some regions.

A key warning in the Survey is that institutional capacity, not funding, remains India's key constraint. "The availability of resources is not the problem; the ability to deploy them effectively is,” the Survey notes. It highlights persistent vacancies in technical departments, weak inter-departmental coordination and limited use of data-driven governance. As a result, many schemes fail to achieve outcomes despite high spending.

The Survey also draws attention to growing divergence among states. States that have simplified approvals and reduced regulatory friction are converting a far higher share of investment proposals into actual projects, while lagging states are struggling to translate even a fifth of announced investments into reality. This uneven performance, it warns, could widen regional disparities and weaken cooperative federalism.

"Unequal reform momentum risks creating unequal growth outcomes," the Survey cautions.

As India aims for sustained 7–8 per cent growth, the Survey makes clear that the next leap will not come from new schemes alone. "India's growth story will be written in the states," it says, adding that unless states build stronger institutions, improve accountability and speed up execution, high growth will prove difficult to sustain.

The Survey also flags Tripura and the Andaman & Nicobar Islands as examples of how deregulation can translate into real economic gains. In Andaman & Nicobar, online land-use approvals cleared hundreds of applications within months, boosted tourism capacity and improved household credit flows, it states. In Tripura, coordinated reforms across land, labour and utilities helped convert a significant share of investment proposals from the 2025 Northeast Investors Summit into projects on the ground, it adds.