OPINION | India’s next competitiveness test is input costs, not incentives

Economies that depend on external capital carry a risk premium, and that premium is reflected in borrowing costs.

India enters 2026 on a relatively firm economic footing. Growth has held up in a difficult global environment. Public investment has expanded capacity. Corporate balance sheets are healthier than they were a few years ago. And, for the most part, policy has become more predictable.

Yet speak to business leaders across sectors, and a quieter concern surfaces. Compliance has become easier. Approvals are more transparent. But operating costs remain stubbornly high. The friction has shifted, not disappeared.

This is the more interesting business story buried in the Economic Survey 2025–26, which repeatedly points to a less visible constraint: system-level input costs. Not just the cost of capital, but energy, freight, logistics pricing, upstream materials, and the way climate transition costs are layered onto firms. Together, these costs are beginning to shape competitiveness more than regulation or taxation.

In simple terms, India has reduced many of the visible barriers to doing business. The harder work now lies in fixing the invisible ones.

Infrastructure pricing hasn’t caught up

Logistics is often cited as a success story and rightly so. Highways, freight corridors, ports, and digital coordination platforms have expanded rapidly. The Survey acknowledges these gains and notes improvements in logistics efficiency over recent years.

But it also flags something businesses encounter every day: pricing still distorts behaviour. Rail freight, for instance, continues to be cross-subsidised in ways that raise tariffs for industrial users. Predictably, cargo shifts back to roads, eroding efficiency gains and pushing up costs across the system.

The contrast with global peers is telling. Rail accounts for roughly a quarter to a third of freight movement in India, compared to 40–50 per cent in many large manufacturing economies. This is not simply about building more tracks. It is about how incentives are structured and prices are set. For firms operating on thin margins, reliability and predictability matter as much as physical capacity.

Power costs remain an issue

The Survey is unusually candid on electricity pricing. It explains how cross-subsidisation in power distribution loads higher tariffs onto industrial and commercial users to offset lower tariffs elsewhere. In many states, industrial tariffs remain materially above the average supply cost.

That matters because electricity is not a niche input. It underpins manufacturing, cold chains, healthcare facilities, data centres, and an increasingly digital services economy. Availability has improved. Outages are fewer. But pricing still penalises precisely those users who need scale and efficiency to compete globally.

Reforms to move toward more cost-reflective tariffs are underway, and that direction is important. Until then, power will continue to be a quiet but persistent drag on competitiveness.

Climate transition can raise costs

Much of the public discussion around the climate transition assumes competitiveness will follow automatically. The Economic Survey itself is careful not to make that assumption. While it does not directly link net-zero pathways to input-cost distortions, it does underscore the importance of sequencing, system readiness, and cost discipline in sustaining growth.

The risk, therefore, lies not in ambition but in design. If climate mandates are rolled out faster than grids are strengthened, transition finance deepened, and pricing structures rationalised, they could add to existing cost pressures before productivity gains materialise. For export-oriented firms, that timing mismatch matters.

Capital cost reflects more than interest rates

One of the Survey’s more under-appreciated arguments concerns capital costs. It suggests that India’s relatively high cost of capital cannot be explained by monetary policy or financial depth alone. Instead, it links capital costs to structural factors, notably India’s reliance on foreign savings because of a persistent current account deficit.

Economies that depend on external capital carry a risk premium, and that premium is reflected in borrowing costs. This helps explain why long-term capital in India continues to trade at a premium to some peers with similar credit ratings, despite strong growth prospects.

For businesses, the implication is straightforward. Cheaper capital is not just a banking-sector issue. It is also about export depth and external resilience. Corporate strategies that remain import-heavy or inward-looking may make sense individually, but collectively they reinforce the macro conditions that keep capital expensive for everyone.

When protection quietly becomes fragility

The Survey is refreshingly direct on industrial policy trade-offs. It warns that protection in upstream sectors such as steel, aluminium, and textile fibres often amounts to a tax on downstream manufacturers, particularly exporters. Decisions about what not to protect, it argues, can be just as important as decisions about what to support.

In a fragmented global economy, protection can feel reassuring. Over time, however, it raises input costs, discourages scale, and weakens competitiveness. Firms disciplined by global prices may ultimately be more resilient than those shielded from them.

The Survey goes a step further, noting that where upstream sectors are capital-intensive, lowering the cost of capital is a more efficient form of support than raising import barriers, precisely because it preserves downstream competitiveness.

Next reform frontier is cost discipline

None of this diminishes India’s growth story. The Survey itself is optimistic about medium-term prospects. But it does suggest that the next phase of reform will be less visible and more difficult. It will focus on pricing structures, sequencing, and system-wide efficiency rather than on headline announcements.

For policymakers, that means aligning energy pricing, logistics tariffs, climate transition finance, and trade policy with competitiveness outcomes. For business leaders, it means recognising that firm-level optimisation is no longer enough. Cost structure is now a strategy.

India has done the hard work of removing many obvious barriers to growth. The challenge ahead lies in fixing the quieter ones, the costs embedded in systems that compound across sectors. If those are addressed with the same seriousness as past reforms, India’s growth story will not just endure; it will thrive.

(Suryaprabha Sadasivan, Senior Vice President, Chase Advisors.)

Views are personal, and do not represent the stand of this publication.