Economic Survey highlights growth momentum but flags urgent need for deregulation-led reforms

Economic Survey Analysis

• Economic Survey highlights growth momentum but flags urgent need for deregulation-led reforms
• Economic Survey setting up a stage for next-decadal growth for India
• Economic survey highlights two challenges to the state’s fiscal balances

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The economic survey pegs the India’s GDP growth between 6.8-7.2% for the FY 2026/27 and indicates momentum across services, and manufacturing using high-frequency data points. Economic survey does an excellent job in using data-driven economic analysis to explore important relationships such as the impact of exchange rates or PLI-Schemes on exports or India’s debt sustainability analysis. The economic survey is also bold where it needs to be, for example highlighting the worsening of state’s fiscal math. But what stands out even more is the economic survey’s focus on how deregulation-easing up of laws and processes-a term it uses 35 times in the survey- can fuel India’s long-term growth, resonating with much of the recent academic research.

Economic survey highlights two challenges to the state’s fiscal balances: First is the doubling of number of states since FY23 providing “Unconditional cash Transfers” (UCT), and second is the falling revenue receipts as a % of GDP from 13.3% in FY19 to 12.2% in FY25, constraining fiscal space further. The combined debt of central and state government now stands at 81%, higher than 73% for emerging markets.

More worryingly, the fiscal situation in states with larger than expected state bond issuances is spilling over to the central government yields which have hardened and are hovering around 6.65% despite the RBI cutting rates by 125 basis points over 2025, and despite the central government likely to adhere to the fiscal target. The interest repayment is 30% of government’s revenue expenditure and higher cost of borrowing implies even larger share of interest payments eating up government’s budget. But higher yields on GSec are also limiting monetary policy transmission for private sector, constraining CAPEX.

The Economic survey points to many interesting nudges and small initiatives which are having large impact: One example is NUDGE experiment by tax officials improving tax compliance, or JIT system for scheme-related cash outlays implemented by the government which reduces the idle cash balance from Rs 1.67 lakh crore to Rs 0.4 lakh crore over the past 18 months.

More generally, the economic survey pushes strongly for reforms and deregulation led growth. Economists highlight rigid labour codes and slow and inefficient liquidation laws as the two main challenges to India’s scaling-up problem, exactly the issues the survey stresses on. The seminal research by Chang-Tai Hsieh and Peter Klenow estimate in their 2009 paper published in the Quarterly Journal of Economics that a mere reallocation of capital from low to high productivity plants/firms can raise India’s productivity by 40-60%. India has capital with Capital stock to GDP ratio of around 4X for India relative to 3.15X for the USA as per the latest PennWorld tables. The problem is that due to “misallocation of capital”, our labour productivity is 10X lower to that of the USA.

The rigid labour laws in India which have historically constrained the ability of the businesses to downsize, actually make them fearful to scale-up the employment and leads them to employ suboptimal contract workers. The result is that while average US establishment grows its workforce by 8X over a 35-year life cycle, Indian plants grow it by a factor of 1.4, even lower compared to Mexico’s 2.5. The new labour codes allowing more flexibility in downsizing as well improving safety net to the workers shall go a long way in helping firm scale-up as well as reduce the incidence of contract workers, which typically drag the productivity down.

The difficulties in liquidation- both stretched timelines and lower recovery rates as highlighted by the survey, despite implementation of the Insolvency and Bankruptcy Codes (IBC) stifle firm exits and leads to low entry rates and lower innovation than potential. Indian firm exit rates are one of the lowest in the world (around 3.1% as per recent estimates by Chatterjee et al (2025), and even lower than 1% as per the IMF), which means limited market space and capital for newer entrants, dragging productivity down.

The examples of misallocation of capital are a plenty in India: For example, consumer loans share rising to 34% now while share of Industrial loan share falling to 21%, pointing to “premature Industrialization”- a term coined by economist Dani Rodrick. Even within industry, quality of loans is poor with 57% of the loans being working capital as per the RBI’s FSR released in December-2025, and worse is the perverted trade credit system where smaller firms take longer to realize their sales receivables compared to larger firms implying that smaller firms essentially finance larger firms in trade credit market.

The “Viksit Bharat” mission needs India to correct these misallocations, and recent labour reforms, adding up of IBC courts, UPI revolution that is deepening credit access to productive small businesses through QR code technology, all go in the right direction. The Economic Survey is spot on to address these issues and setting up a stage for next-decadal growth for India.