Manufacturing is macroeconomic insurance, not nostalgia: Economic Survey

Economic Survey 2026 says that in a fragmented global economy, manufacturing is closely tied to external and currency stability, warning that services alone cannot offset rising global pressures

India’s macroeconomic indicators reflect a relatively stable environment where inflation is under control, public investment is high and banks are healthy. Yet the Economic Survey 2025-26 opens with a warning that in today’s global system, strong growth no longer guarantees currency stability, steady capital inflows, or insulation from shocks. The global economy, it says, is fragile, divided and increasingly shaped by geopolitics rather than rules.

 

The Survey’s central argument about the antidote to this volatility is not about chasing higher growth at any cost, but about building resilience as economic insurance against a world where trade can be weaponised, capital can exit suddenly, and supply chains can fracture without warning. 

 

Global growth fragile and diverging

 

In its opening chapter, the Survey describes a world where global growth is holding up, but fragility is increasing by the day. Trade policy is now driven by security concerns, not efficiency. “The most disruptive amongst these disturbances was the imposition of tariffs by the USA on imports from its trade partners,” it said.

 

It also notes that effective bilateral trade deals with the US and others have lowered effective tariffs and eased some pressures on global finance. Financial markets, however, are pricing in fear, reflected in the sharp rise in gold prices.

 

For India, the Survey noted, the risk is clear: disruption to capital flows. Even short episodes of global stress can weaken the rupee if foreign inflows slow. In such a world, macroeconomic strength alone is not enough.

 

Strategic indispensability as insurance

 

This is where the Survey introduces the idea of deliberately cultivating “strategic indispensability” as an important factor for India going ahead. This would come when the Indian economy offers goods, services or roles that are sufficiently critical to global value chains that partners cannot easily substitute.

 

Such indispensability, the Survey argues, reduces the effectiveness of coercive measures. India must become an economy that is harder to bypass, sanction or isolate.

 

“As a large and rapidly growing economy, India possesses scale, diversity, and capabilities that can anchor it firmly within global economic networks,” the document highlighted. 

 

Growth is strong, but vulnerability persists

 

Domestically, the picture remains reassuring. Growth momentum is strong as infrastructure investment has eased logistics constraints, banks are well capitalised and corporate balance sheets have improved. The Survey raised India’s potential growth rate to 7 per cent.

 

Yet vulnerability persists because India still runs a trade deficit in goods. Its surplus in services and remittances helps, but does not fully offset this gap. As a result, India remains dependent on foreign capital to balance its external accounts, a structural weakness in volatile times.

 

External risks remain despite growth

 

The global economy is undergoing a structural reordering, with the era of seamless globalisation and trade liberalisation weakening, the Survey highlighted. Global trade is slowing, becoming more fragmented and less predictable as tariffs, sanctions and industrial subsidies reshape trade routes.

 

“All these developments have profound implications for a developing economy like India, as this altered milieu presents both constraints and transformative opportunities,” it said.

 

Between 2020 and 2025, total exports grew at 9.4 per cent annually, but merchandise exports expanded by only 6.4 per cent. Services exports have stabilised the economy, but they have not eliminated external vulnerability, the document noted.

 

Services power growth, but don’t insure it

 

This is one of the Survey’s clearest arguments. Services exports, especially IT and business services, have powered growth and generated foreign exchange earnings, but they do not provide system-wide insurance.

 

Successful service firms can work around weak institutions, relocate operations easily and rely less on physical infrastructure. As a result, they do not force broad improvements in logistics, regulation or state capacity in the way manufacturing does.

 

“They act as a pressure valve, allowing the system to muddle through rather than confront its structural weaknesses,” the Survey observed.

 

In direct terms, the Survey argues that services stabilise the economy, but they cannot substitute for goods-based export ecosystems.

 

Manufacturing as external insurance

 

Manufacturing, the Survey argues, is critical for currency stability and external strength. Countries with stable currencies are almost always strong manufacturers. Goods exports create scale, deepen supply chains and impose discipline on infrastructure, logistics and governance.

 

This is why the Survey repeatedly links manufacturing strength to currency stability, export resilience and strategic capacity. Trade agreements matter, it said, but only if India can produce competitively at scale.

 

The Survey also flagged that India’s fundamental strategic risk lies in downplaying structural discontinuities rather than any single external shock.

 

The real constraint: cost of capital

 

At the heart of the Survey lies a less visible argument: India’s high cost of capital. This, it said, is not primarily due to policy rates or banking spreads, but a structural outcome of persistent current account deficits.

 

Countries that rely on foreign savings must pay a risk premium. Surplus economies, by contrast, can finance investment cheaply and steadily at home.

 

For India, this creates a loop. Expensive capital hurts manufacturing competitiveness, weak manufacturing keeps exports low, and low exports sustain the external deficit, perpetuating high capital costs.

 

What the Survey is not arguing

 

The Survey rejects nostalgia-driven protectionism and indiscriminate Quality Control Orders that raise input costs for downstream exporters. Protecting upstream industries without discipline, it says, functions like a tax on competitiveness.

 

“A country that persistently runs current account deficits and depends on foreign savings must, by definition, pay a risk premium to global capital,” it noted.

 

Industrial policy, the Survey argues, must be selective, time-bound and focused on lowering costs, especially the cost of capital. “Decisions about what not to protect can be as important as decisions about what to support. That is what the East Asian experience, starting with Japan, reminds us of,” it said.

 

The execution risk

 

The final constraint is execution. State capacity, regulatory quality, logistics coordination and state-level fiscal discipline all affect competitiveness and borrowing costs. Weak fiscal discipline at the state level, the Survey notes, already feeds into sovereign borrowing costs.

 

Without improvements in governance and coordination, manufacturing-led resilience will remain aspirational.

 

“A state that can act before certainty emerges, structures risk rather than avoids it, learns systematically from experimentation, and corrects course without paralysis. This is not an abstract aspiration,” the Survey noted.

 

The bottom line

 

The Survey’s conclusion is simple: resilience comes from combining services and manufacturing, not choosing between them. Services support growth, but manufacturing provides insurance.

 

In a hostile global economy, India must grow, but it must also build buffers. That, the Survey argues, is the only way growth can translate into lasting economic security.