New Delhi, Jan 29 (PTI) The Economic Survey on Thursday said growth patterns that rely disproportionately on domestic demand and credit-enabled consumption, without commensurate productivity and export gains, may raise near-term activity but do not materially strengthen surplus formation.

"In a structurally savings-short setting, this configuration tends to sustain a weaker currency and rollover risk premium in domestic capital costs," the pre-Budget document said as it made a strong case for reducing capital cost.

It also highlighted that reducing India's cost of capital requires attention not only on financial intermediation but also on the drivers of production, exports, and surplus.

Emphasising the importance of financial sector reforms, the Survey called for deeper bond markets, broader institutional participation, credible benchmarks and improved risk pricing.

Such elements will help reduce intermediation costs and improve capital allocation.

However, the Survey also mentioned that these reforms are most effective in environments where domestic savings are increasing and the external position is improving.

"Greater reliance on foreign capital can bridge temporary gaps but, when persistent, tends to elevate risk premia and narrow policy space-outcomes that are already reflected in the pricing of capital in CAD economies," it noted.

In the first half of the current financial year, the current account deficit (CAD) was moderate at 0.8 per cent of GDP.

"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 pre-Budget document said, stressing that financial deepening can support the transition but cannot substitute for it.

Among other aspects, the Survey said rigidities in labour regulation and firm-scale dynamics have historically constrained capital deepening, learning by doing, and the movement of firms up the productivity ladder.

"... growth patterns that rely disproportionately on domestic demand and credit-enabled consumption, without commensurate productivity and export gains, may raise near-term activity but do not materially strengthen surplus formation.

"In a structurally savings-short setting, this configuration tends to sustain a weaker currency and rollover risk premium in domestic capital costs," it said. PTI RAM TRB TRB

Domestic demand and credit-led growth without productivity or export gains weakens currency and raises capital cost risk premia. Reliance on domestic demand and credit-enabled consumption without commensurate productivity and export gains raises near-term activity but does not materially strengthen surplus formation and, in a structurally savings-short setting, tends to sustain a weaker currency and elevate rollover risk premia in domestic capital costs; durable reduction in the cost of capital therefore requires higher productivity, manufacturing competitiveness, sustained export growth, and a transition to structural savings strength, with financial deepening supporting but not substituting for these real-sector changes.