India must prepare for a prolonged phase of geopolitical uncertainty, trade disruption and capital volatility, according to the Economic Survey 2025–26, which cited China’s decision to operationalise the Hainan Free Trade Port as a signal of a changed global trade and investment landscape
By converting the entire island province into a low-tariff, services-heavy economic zone with relaxed rules on trade, customs, investment and visas, China has created a large new economic space that could, over time, influence supply-chain routing, tourism flows and corporate investment decisions across Asia, said the survey tabled in Parliament on Thursday.
While the Hainan port does not pose an immediate disruption for India, the survey said it represents a gradual structural shift unfolding amid growing global fragility, where production and capital decisions are increasingly shaped by strategic considerations rather than efficiency alone.
Against this backdrop, the survey made a strong case for Swadeshi as both an economic necessity and a strategic imperative, stressing that self-reliance must be pursued not as blanket protectionism but as a disciplined, performance-linked strategy.
Framing swadeshi not as blanket protectionism but as a disciplined, performance-linked strategy, the survey released on Thursday said that export controls, technology denial, border carbon levies, and aggressive industrial policies across advanced and emerging economies have fundamentally altered the calculus of openness.
“The policy question is no longer whether the state should encourage Swadeshi, but how it should do so without undermining efficiency, innovation or global integration,” the survey said, warning that naïve assumptions about permanent access to inputs, technologies and markets are no longer tenable.
The survey mirrors the Narendra Modi government’s focus on promoting self-reliance across sectors and reducing dependence on foreign markets, following US President Donald Trump’s imposition of punitive 50% tariffs on Indian goods.
India has already signed a series of trade agreements to diversify exports. The country this month concluded negotiations with the European Union for an unprecedented reciprocal access to each other’s markets. It has already signed pacts with the UK and Oman, and finalized negotiations with New Zealand.
The EU deal expands market access for India’s labour-intensive manufactured exports while enabling deeper integration with Europe’s technological and manufacturing capabilities, a linkage the survey said is critical for strengthening export resilience and strategic capacity.
“To sustain trade momentum, India is pursuing a broader strategy that includes the India-UK Comprehensive Economic and Trade Agreement, the India-Oman Comprehensive Economic Partnership Agreement, and ongoing FTA engagements with the US, Chile and Peru,” it said.
The Economic Survey, however, cautioned that not all import substitution is desirable and that poorly designed protection can raise economy-wide costs, entrench inefficiency and weaken export competitiveness. Avoiding the pitfalls of such undesirable import substitution becomes crucial in an unsettled global environment.
“India should definitely aim to be self-reliant in the sense that whenever a big global power sneezes, our economy shouldn’t catch a cold. This means becoming a strong export-driven economy with a meaningful role in global supply chains where we matter to the world as much as the rest of the world matters to us,” said Piyush Doshi, operating partner at Foundation for Economic Development (FED), a policy think tank.
“What it doesn’t mean is shutting doors on other countries in terms of imports or FDI and trying to make everything locally, usually at the expense of cost and quality,” said Doshi.
Risk of capital flight
The survey said the competition for investments has intensified, revealing fragility in the global economy. “Decisions on production and capital are increasingly entangled with geopolitics rather than efficiency. For India, a country that runs a goods trade deficit and depends on global capital flows, this means planning for liquidity risks and maintaining external buffers, especially as new channels of capital flight, including US stablecoins, emerge.”
The survey noted that these vulnerabilities were exposed in 2025, when the US, India’s largest trading partner, announced reciprocal tariffs of 25% on India in April, followed by an additional penal tariff of 25% on most Indian merchandise exports in August. The escalation came as a surprise, as India had been widely expected to be an early beneficiary of the US tariff regime. Growth forecasts were revised downward at the time, reflecting concerns that higher trade barriers would dent exports and investment sentiment.
While India remains better placed than most economies to sustain growth, its resilience will be tested by continued dependence on external capital, energy and critical inputs such as fertilizers.
India’s merchandise trade deficit widened in December to $25.04 billion from $24.53 billion in November and $20.63 billion a year earlier, following a sharp rise in imports, even as demand for Indian goods in the US remained resilient despite the tariffs.
Merchandise exports rose to $38.51 billion in December from $37.80 billion a year ago, while imports surged to $63.55 billion from $58.43 billion, according to the commerce and industry ministry data.
Return of interwar years?
The survey warned that the period up to 2045 could resemble the interwar years of the 20th century, marked by geopolitical conflict, economic fragmentation and social stress in advanced economies. While such periods historically produced innovation and industrial expansion, the survey said that surviving and converting disruption into opportunity would require proactive, not defensive, policy frameworks. The contours of this more contested world, it said, are already visible in India’s external economic environment.
Against this backdrop, the survey laid out clear guardrails for swadeshi. “Import substitution is justified only when domestic production is feasible but held back by coordination failures or regulatory burdens, when protection is explicitly time-bound and linked to learning and scale, when firms face export discipline and measurable benchmarks, and when the product is strategically critical even if cost disadvantages persist,” it noted.
Permanent protection, by contrast, is inappropriate where India is already cost-competitive, where exports operate at scale, or where inputs are widely used across labour-intensive industries, as it risks raising costs and eroding competitiveness.
Focus on competitiveness
The survey calls for a new National Input Cost Reduction Strategy that treats competitiveness as infrastructure. High input costs—spanning raw materials, intermediates, energy, logistics and compliance—impose diffused but persistent penalties on manufacturing, exports and employment, particularly for micro, small and medium enterprises (MSMEs) operating on thin margins. The survey cited tariff inversion, where duties on intermediates exceed those on finished goods, as a structural distortion that discourages domestic value-addition and entrenches assembly-oriented imports.
Rather than sector-specific interventions, the survey called for rule-based reforms that lower costs of general-purpose inputs once domestic capacity exists, arguing that protecting such inputs benefits a narrow set of producers while weakening multiple downstream value chains. “Lowering input costs strengthens export competitiveness, supports global value chain integration, boosts employment and encourages investment in upgrading,” it said.
Yet, cost reduction alone is not enough. Once price competitiveness is achieved, the binding constraint shifts to performance—reliability, quality, process control and coordination across institutions, according to the survey. This is where advanced manufacturing becomes decisive.
Value-addition real end goal
Manufacturing exposed to global benchmarks, the survey argued, tests infrastructure, logistics, regulation and skills simultaneously, revealing weaknesses that sheltered activities can absorb for years. In this sense, input-cost reform prepares the ground, but advanced manufacturing is where real capability is built, it said.
Moreover, the survey cautioned against judging swadeshi purely by import reduction. As incomes rise, imports inevitably increase, a pattern seen across two centuries of economic development. China’s experience shows that imports can grow alongside domestic industrial dominance. The true test of swadeshi, according to the document, is whether it creates export capability and strengthens resilience in a world where capital flows and trade are increasingly shaped by geopolitical alignment rather than neutral markets.
“The Survey rightly focuses on converting global and India’s recent trade diversion into sticky supply chains by pushing scale in select verticals within new-age manufacturing sectors,” said Madhavi Arora, chief economist at Emkay Global Financial Services Ltd.
“More strategically, factors such as fast-tracking customs, logistics and port efficiency, lowering domestic costs by keeping tariffs low on capital goods and intermediates, ensuring stable tax and incentive regimes, deregulating factors of production, and providing regulatory clarity for long-term FDI matter far more than tariffs in the medium term,” Arora said.
External risks
Amid a highly uncertain global environment, the survey noted that economic policy must focus on ensuring stability of supply, building resource buffers and diversifying trade routes and payment systems. Policy credibility, predictability and administrative discipline, it said, have become strategic assets rather than just principles of good governance. The document warned that India’s external sector is entering a more hostile and unpredictable phase, where strong domestic growth and sound macroeconomic fundamentals no longer guarantee currency stability, sustained capital inflows or protection from external shocks.
While global trade volumes have held up better than expected, the Survey cautioned that this apparent resilience masks rising fragility, with economic shocks increasingly transmitted through capital markets rather than traditional trade channels.