Economic Survey: Responsive state, competitive firms key to resilience

Economic Survey 2025-26 says India's resilience to global shocks hinges on state capacity, effective governance, competitive firms and trust-based regulation, not just macro stabilit

Highlighting that as trade, capital flows and supply chains become more vulnerable to geopolitical disruptions, the Economic Survey 2025-26 on Thursday emphasised that a country’s economic resilience depends not just on strong macroeconomic fundamentals, but also on the quality of governance and execution.

 

The Survey stated that this can be achieved with “the ability of the State to regulate effectively, build institutional capacity, instill competition among firms to make them of global standard and respond to uncertainty”, which have emerged as a key determinant of how countries manage external risks.

 

At the core of the Survey’s argument is the concept of state capacity, which it identifies as India’s key binding constraint, while assigning responsibility not only to the government, but also to firms and citizens.

 

 

“State capacity is not a single reform or a single institution but a composite outcome shaped by how decisions are made, how risk and failure are managed, how administration is organised around outcomes, how regulation is designed and implemented, and how incentives influence the behaviour of firms and citizens,” the Survey stated.

 

The document penned by economic advisors calls for the emergence of an “entrepreneurial state” — not one that runs businesses, but one that can act under uncertainty, structure and absorb risk, experiment and adapt when policies fail.

 

Manufacturing and advanced industrial ecosystems are highlighted as critical to this transition, as they impose discipline on logistics, regulation and coordination, forcing institutional upgrades that service-led growth often bypasses.

 

Regulation is reframed as an expression of the country’s capability rather than a hurdle to growth. The Survey argues for predictable, proportionate and trust-based regulation that lowers compliance costs while maintaining standards and credibility.

 

“Regulatory institutions do not operate in isolation,” it noted, underlining that outcomes depend as much on incentives and behaviour as on formal rules.

 

The private corporate sector is assigned a central role in nation-building, with the Survey offering a candid assessment of current incentives.

 

Large firms, it observed, operate in a hybrid environment where rents persist, enforcement is uneven and political mediation often substitutes for market discipline. This weakens incentives to invest in long-term risk absorption, productivity and global competitiveness.

 

“A corporate sector that externalises risk to the State does not exert pressure for higher state capacity, instead, it generates demand for discretion,” the Survey stated, warning that “discretion, in turn, corrodes rule-based institutions.”

 

Short investment horizons, low R&D intensity and concentration in regulated or quasi-monopolistic sectors further limit the private sector’s ability to act as a forcing mechanism for institutional upgrading.

 

The Survey urges firms to move away from negotiated protection and instead embrace competition, productivity-led growth and deeper integration into global value chains to become globally competitive.

 

Citizens and social norms form the final pillar of the framework. Trust, compliance and civic responsibility underpin institutional effectiveness and policy legitimacy.

 

The Survey concluded that in a volatile global order, strategic resilience will depend on alignment between a capable State, a competitive private sector and citizens who provide legitimacy and trust.