MUMBAI: The Economic Survey on Thursday called for policies that raise India’s domestic savings and make manufacturing more competitive, arguing that these are critical to lowering the country’s cost of capital and reducing overreliance on foreign sources of funding.
According to the Economic Survey for 2025-26, India’s relatively high cost of capital is widely recognized as a constraint on private investment and long-run growth. It said that between 1995 and 2025, India’s weighted average long-term interest rates averaged 7.6%, far above the average long-term rates seen in economies such as Canada (3.1%), Italy (2.9%), and Switzerland (1%).
However, India has maintained a more favourable average long-term interest rate than other emerging economies such as Indonesia (14.1), Mexico (11.05) and South Africa (9.08).
The numbers are a weighted average of central bank policy rates and 10-year government bond yields, weighted by the share of bank and market-based credit in total credit to the private non-financial sector.
“The strategic implication is that reducing India’s cost of capital requires attention not only to financial intermediation but also to the drivers of production, exports, and surplus generation,” the survey said.
It said that policies that support firm-level scale and deregulation, improve logistics, infrastructure and trade facilitation, deepen technological capabilities and R&D, and enable sustained participation in global value chains can strengthen productivity and margins in manufacturing.
“As firms retain more earnings, corporate savings rise. As exports expand and trade and current account surpluses emerge and stabilise, dependence on foreign savings diminishes, expectations of depreciation moderate, and the external-balance component of the risk premium embedded in capital costs falls over time,” it said.
Beyond bank loans
Indian companies have already started looking beyond bank loans, but the shift has not been without volatility.
According to the latest data from the Reserve Bank of India’s (RBI) monthly bulletin, non-food bank credit accounted for 65% of total resources to companies up to 31 December 2025, while the rest came from non-bank sources such as equity issuances, corporate bonds, commercial papers and overseas borrowings. The share of non-food credit was 60% in the same period of FY25. Non-food credit is bank credit adjusted for loans given to Food Corp. of India Ltd.
Funds raised through corporate bonds declined by 6% year-on-year to ₹6.76 trillion in the first nine months of FY26, data from the Securities and Exchange Board of India showed, despite a 125-basis-point cut in policy rate and sustained liquidity support from the RBI.
While a deeper bond market will help lower the cost of capital, it alone cannot do all the heavy lifting.
“The durable route to a lower cost of capital is therefore inseparable from a growth pattern anchored in higher productivity, enhanced manufacturing competitiveness, sustained export growth, and the gradual transition from structural savings deficit to structural savings strength,” the survey said.
It argues that India’s high cost of capital is a structural macroeconomic outcome. There are links, it said, between the cost of capital, the economy’s savings position and its external balance.
India’s current account deficit (CAD) widened to 1.3% of GDP in the September quarter, from 0.3% in Q2. Rating agency Icra Ltd expects a spike in gold imports will likely push the CAD above 2.5% of GDP in Q3FY26 (October-December).
The survey said that while investments must be financed either by domestic savings or by foreign savings, economies that run persistent CADs (current account deficit) are dependent on external capital inflows to support domestic investment and consumption.
“This dependence introduces a risk premium, which financial markets price into interest rates and equity returns. In this sense, the cost of capital in CAD economies is not merely a financial-market outcome; it is also a price on the macroeconomic risk associated with a structural savings shortfall,” it said.