Economic Survey Assigns 40% Probability of Supply Chain Disruption

The Economic Survey 2025-26 has assigned a 40% probability to a scenario where global supply chains could be "realigned under political pressure," as part of its assessment of risks facing the Indian economy in the coming year.

The Survey, released by the Department of Economic Affairs on January 28, describes a possible scenario where "trade becomes increasingly explicitly coercive, sanctions and countermeasures proliferate, supply chains are realigned under political pressure, and financial stress events are transmitted across borders with fewer buffers and weaker institutional shock absorbers."

While the Survey's risk assessment covers supply chains broadly across sectors, the implications are relevant for India's automotive industry, which exported 5.3 million vehicles across all segments in FY25 and relies on global sourcing for various components and materials.

The Survey describes this scenario as one where "policy becomes more nationalised, and countries face sharper tradeoffs between autonomy, growth, and stability." It notes that in such an environment, "minor shocks can escalate into larger reverberations" with "financial stress episodes, trade frictions, and policy mistakes" transmitting more rapidly.

The assessment comes as industries including automotive deal with various supply chain challenges. The Survey notes that countries are increasingly "focusing on emerging strategic industries such as renewable energy, electric vehicles, critical minerals, semiconductors, and AI" with these sectors "viewed as critical for economic growth, national security and supremacy."

Critical Minerals and Technology Access

The Survey discusses how countries are securing critical minerals and technological resources, with China specifically mentioned as having tightened export controls on "certain dual-use item exports to Japan, including materials crucial to the automotive industry." The document also references "extensive export controls on advanced semiconductors and associated manufacturing equipment."

The Survey observes that supply chains "are being restructured to ensure technological autonomy and independence," with "perceptions of geopolitical risk" driving "diversification of critical minerals, telecom infrastructure goods."

The Survey's discussion of these risks is paired with a perspective on how to manage them. "In a more uncertain world, risk is unavoidable. The advantage lies in managing it better," the Survey states. "Countries that can act before certainty emerges, correct course without paralysis, and align incentives across the State, firms, and citizens are better placed to convert growth into influence."

On the question of protecting domestic industries, the Survey argues that attempts to "insulate" domestic production through import barriers "functions as a tax on downstream manufacturing and export competitiveness." The document suggests that building competitiveness through innovation, infrastructure, and institutional improvements is more effective than protectionism.

Manufacturing and Global Integration

The Survey makes a case for why participation in global manufacturing and trade matters. "Manufacturing, exports, and participation in global value chains act as institutional stress tests, exposing weaknesses that sheltered activities can conceal," it states.

The document adds that "success in these domains depends as much on the quality of institutions as on capital, incentives, or intent."

The Survey's risk assessment and emphasis on diversification suggests several considerations for manufacturing sectors dependent on global supply chains:

1. Supply chain diversification beyond single-country dependencies
2. Balancing cost efficiency with supply security in sourcing decisions
3. Building domestic manufacturing capability where feasible
4. Developing multiple sourcing options for critical inputs

The Survey notes that India's "diversification of export destinations and import sources" has "strengthened resilience amid rising protectionism and tariff uncertainties."

Trade Performance of PLI Sectors

The Survey's analysis of Production-Linked Incentive (PLI) sectors shows the automobile sector with positive export growth alongside negative import growth during FY21-FY25—a pattern the Survey describes as indicating "maturing domestic manufacturing capability."

This differs from some other PLI sectors like electronics and solar PV, which show high import growth accompanying their export expansion.

The Survey discusses potential financial market disruptions, noting that "risks associated with leveraged technology investments are looming." It mentions that "highly leveraged AI-infrastructure investment has exposed business models that could, if they unwind, create significant stress in broader capital markets."

The Survey suggests such financial stress could have broader economic effects, potentially affecting credit availability across sectors.

The Survey discusses the concept of "strategic autonomy" in manufacturing. It notes that some level of indigenization may be necessary for strategic sectors, but argues this should be pursued through building competitiveness rather than protectionism.

"Intelligent indigenisation requires discipline, outward orientation, and credible exit," the Survey states.

The Survey's 40% probability assessment for supply chain disruption reflects policymakers' view that significant changes to global trade arrangements are possible. The document suggests that countries managing these risks through competitiveness, institutional quality, and diversification will be better positioned than those relying primarily on protective measures.