India’s high cost of capital is a macroeconomic outcome rather than a financial-sector flaw. Borrowing is expensive not because malfunction in market, but because the economy saves too little and relies on foreign capital to fund its investment gap. Persistent current account deficits force India to pay a risk premium to global investors, which is then embedded in domestic interest rates and equity returns. The result, the Survey says, is a cost of capital that acts as a tax on growth.For the first time, the blame of high interest rates is placed outside the financial system. As the Survey notes, “Empirical analysis suggests that improving the Current Account Balance (CAB) is nearly twice as effective in lowering long-run interest rates compared to simple financial deepening (private credit to GDP)”. External balance matters more than credit expansion. Fiscal structure reinforces this pressure.“Weak fiscal discipline at the state level, driven by revenue deficits and unconditional cash transfers, affects sovereign borrowing costs as investors increasingly assess consolidated general-govt finances,” pushing up the risk premium across economy.High capital costs also shape industrial behaviour. Capital-intensive upstream sectors struggle to scale, nudging firms towards protection and policy shelter rather than productivity gains. When capital becomes costly, efficiency gives way to negotiation and resilience is sought through insulation rather than competitiveness.
