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GS Paper: GS3-12.Effects of liberalization on the economy, changes in industrial policy and their effects on industrial growth

  • Why manufacturing has lagged in India

    Introduction

    Manufacturing has historically been the backbone of structural transformation, productivity growth, and mass employment. While economies such as China and South Korea used manufacturing to transition from agrarian to industrial societies, India’s manufacturing share in GDP has stagnated and, in recent years, declined relative to services. 

    Why in the News?

    India’s manufacturing sector has recently lost relative ground to services, despite decades of policy emphasis on industrialisation. This is significant because manufacturing traditionally absorbs surplus labour and drives productivity convergence. The article highlights a sharp contrast with China and South Korea, where manufacturing shares expanded rapidly. A key concern raised is that high public sector wages, limited technological upgrading, and reliance on services-led growth have made Indian manufacturing less competitive, contributing to wage stagnation, inequality, and weak employment outcomes.

    Why has India lagged behind China and South Korea in manufacturing growth?

    1. Relative manufacturing performance: Shows India’s manufacturing share in GDP remaining stagnant while China and South Korea experienced sustained expansion.
    2. Structural divergence: Reflects different growth models, with India relying on services while East Asia leveraged labour-intensive manufacturing.
    3. Growth consequences: Results in weaker productivity growth and limited mass employment creation.

    How do public sector wages distort manufacturing competitiveness?

    1. High government salaries: Raise economy-wide wage benchmarks beyond productivity levels in manufacturing.
    2. Cost escalation: Increases prices of non-tradable services, raising input costs for manufacturing firms.
    3. Labour diversion: Pulls skilled workers away from manufacturing into public employment.
    4. Competitiveness impact: Makes Indian manufactured goods less competitive in global markets.

    What is the role of the ‘Dutch disease’ mechanism in India’s case?

    1. Conceptual framework: Explains how income windfalls distort relative prices across sectors.
    2. Indian variant: Public sector wage expansion acts as a de facto windfall similar to natural resource booms.
    3. Real exchange rate appreciation: Makes imports cheaper and exports less competitive.
    4. Manufacturing crowding-out: Reduces incentives for domestic industrial production.

    Why has technological upgrading in manufacturing remained weak?

    1. Limited productivity pressure: Firms rely on cheap labour rather than innovation.
    2. Absence of induced innovation: High wages have not translated into capital-intensive or technology-driven growth.
    3. Contrast with East Asia: China and South Korea used competitive pressures to upgrade technology.
    4. Outcome: Indian manufacturing remains trapped in low productivity equilibrium.

    How has services-led growth shaped income distribution and employment?

    1. Skewed wage growth: Benefits high-skill workers disproportionately.
    2. Inequality expansion: Concentrates income gains among elite service sector employees.
    3. Employment mismatch: Services fail to absorb surplus labour from agriculture.
    4. Structural imbalance: Weakens broad-based economic transformation.

    Why has private sector dynamism not translated into manufacturing expansion?

    1. Sectoral allocation: Private investment favours services over manufacturing.
    2. Technological complacency: Growth driven by labour abundance rather than innovation.
    3. Limited spillovers: Services growth generates fewer backward and forward linkages.
    4. Long-term constraint: Manufacturing stagnation limits sustained productivity gains.

    Conclusion

    India’s manufacturing stagnation is best understood as a structural political-economy outcome rather than a cyclical or policy-intent failure. The article demonstrates that high public sector wages, acting as an economy-wide benchmark, have raised costs, appreciated the real exchange rate, and weakened manufacturing competitiveness. Simultaneously, services-led growth has generated productivity and income gains without inducing technological upgrading or mass employment, unlike East Asian manufacturing-led transitions. In the absence of sustained productivity pressure and induced innovation, Indian manufacturing has remained trapped in a low-productivity equilibrium. Reversing this trajectory requires addressing wage–productivity mismatches, technology incentives, and structural distortions, without which manufacturing cannot play its intended role in employment generation and inclusive growth.

    PYQ Relevance

    [UPSC 2017] Account for the failure of the manufacturing sector in achieving the goal of labor-intensive exports. Suggest measures for more labor-intensive rather than capital-intensive exports. 

    Linkage: The article directly explains manufacturing failure through public sector wage distortions, weak technological upgrading, real exchange rate appreciation, and services-led growth. This offers a structural political-economy explanation to this question.

  • GDP is growing rapidly, Why isn’t private capex?

    Introduction

    India recorded real GDP growth of over 8% in the recent quarter, even after adjusting for the post-COVID base effect. However, this growth has not translated into a revival of private capital expenditure (capex). Private investment as a share of GDP remains near 11-12%, significantly below earlier peaks. This divergence between output growth and investment momentum raises concerns regarding the sustainability and quality of economic expansion.

    Why in the News?

    India is witnessing a structural decoupling between GDP growth and private investment, a departure from historical growth cycles where investment led expansion. Despite low corporate leverage, improved profitability, and strong balance sheets, private firms are refraining from capacity expansion. Private capex as a share of GDP in 2023-24 stands at 11.5%, among the lowest since the early 2000s, even as overall GDP growth remains strong. This contradiction signals deeper constraints within the investment climate and demand structure.

    Why Has Private Investment Stagnated Despite High GDP Growth?

    1. Low Private Capex Share: Private investment remains around 11-12% of GDP, compared to over 15% during earlier growth phases, indicating limited contribution to growth momentum.
    2. Historical Contrast: During the mid-2000s investment boom, private capex expanded alongside GDP, unlike the present phase where growth is consumption- and public-investment-driven.
    3. Persistence of Trend: The stagnation has continued for over a decade, suggesting structural rather than cyclical causes.

    How Do Existing Capacities Affect Investment Decisions?

    1. Underutilised Capacity: Manufacturing capacity utilisation remains below 75%, reducing incentives for fresh investment.
    2. Sufficient Production Headroom: Firms meet incremental demand without adding new plants, weakening the case for capex.
    3. Sectoral Evidence: Manufacturing output growth has not been matched by expansion in installed capacity.

    Why Are Corporates Prioritising Deleveraging Over Expansion?

    1. Debt Reduction Strategy: Indian companies reduced leverage significantly after the balance sheet stress of the previous decade.
    2. Cash Accumulation: Firms are holding cash or investing in financial assets instead of productive capital.
    3. Merger and Acquisition Preference: Investment flows favour acquisitions rather than greenfield capacity creation.

    What Role Does Demand Uncertainty Play?

    1. Uneven Consumption Recovery: Demand recovery remains skewed, limiting visibility for long-term investment.
    2. Export Volatility: Weak global demand constrains export-led investment decisions.
    3. Cautious Business Sentiment: Firms delay irreversible investments under uncertain macroeconomic conditions.

    How Has Public Investment Substituted for Private Capex?

    1. Public Capex Surge: Government capital expenditure has expanded rapidly, compensating for private investment weakness.
    2. Crowding-In Limitations: Public capex has not yet generated sufficient downstream demand to trigger private investment.
    3. Infrastructure-Led Growth Bias: Growth relies disproportionately on state-led infrastructure spending.

    Why Has Investment Efficiency Declined?

    1. ICOR Trends: Higher Incremental Capital Output Ratios indicate reduced efficiency of capital deployment.
    2. Financialisation of Profits: Corporate profits increasingly channelled into financial investments rather than physical assets.
    3. Shift in Corporate Strategy: Emphasis on balance sheet strength over expansion.

    Conclusion

    Sustained GDP growth without commensurate private investment reflects a fragile growth model. While public expenditure has stabilised economic momentum, long-term expansion depends on reviving private capex through demand certainty, capacity utilisation improvement, and investment confidence. Without this transition, growth risks remaining shallow and state-dependent.

    PYQ Relevance

    [UPSC 2020] Explain the meaning of investment in an economy in terms of capital formation. Discuss the factors to be considered while designing a concession agreement between a public entity and private entity.

    Linkage: The question examines investment as capital formation. It directly aligns with the article’s focus on weak private GFCF despite strong GDP growth, highlighting the investment-growth disconnect.

  • [13th December 2025] The Hindu OpED: The Indian Ocean as cradle of a new blue economy

    PYQ Relevance

    [UPSC 2022] What are the maritime security challenges in India? Discuss the organizational, technical and procedural initiatives taken to improve the maritime security.

    Linkage: This question aligns with the article’s argument that maritime security now includes ocean governance, ecosystem degradation, and IUU fishing, beyond naval or territorial concerns.It reflects the article’s “security through sustainability” lens.

    Introduction

    The Indian Ocean has historically shaped global trade, civilizations, and maritime norms. India’s early advocacy during the UNCLOS negotiations to treat areas beyond national jurisdiction as the “common heritage of mankind” laid the normative foundation for today’s ocean governance debates. Half a century later, climate change, biodiversity loss, and unregulated exploitation have intensified pressures on marine ecosystems. The article argues that India now carries both opportunity and responsibility to lead a new Blue Economy paradigm rooted in stewardship, resilience, and inclusive growth.

    Why in the News?

    The article gains significance amid the BBNJ Agreement (2023), renewed focus on Blue Economy financing, and India’s expanding role in Indian Ocean governance following UNCLOS negotiations and recent UN Ocean Conferences. For the first time, the Indian Ocean is being projected not merely as a geopolitical theatre but as a laboratory for sustainability, climate resilience, and equitable growth. This marks a shift from security-centric maritime approaches toward ecosystem-based ocean governance. 

    Reimagining the Indian Ocean Blue Economy

    Normative Foundations of India’s Ocean Vision

    1. Common Heritage Principle: Positions the Indian Ocean as a shared global commons rather than a contested geopolitical space.
    2. Continuity of Leadership: Builds on India’s early UNCLOS advocacy for equity and fairness in ocean governance.
    3. Shift in Maritime Thinking: Reframes oceans from extractive zones to sustainability laboratories.

    What is the Blue Economy?

    1. Sustainable Ocean-Based Economic Model: Integrates economic use of ocean resources with long-term conservation of marine ecosystems.
    2. Human-Ocean Balance: Aligns livelihoods, trade, and development with ecological thresholds and regeneration capacity.
    3. Global Commons Perspective: Treats oceans as shared resources requiring collective governance rather than unilateral exploitation.

    How the Blue Economy Differs from Past Interpretations

    From Extraction to Stewardship

    1. Earlier Approach: Focused on maximum extraction of fisheries, offshore hydrocarbons, and seabed minerals.
    2. Blue Economy Shift: Prioritises ecosystem health, biodiversity protection, and regulated resource use.

    From Sectoral Growth to Integrated Planning

    1. Earlier Approach: Treated shipping, fishing, energy, and tourism as isolated sectors.
    2. Blue Economy Shift: Integrates marine sectors through ecosystem-based and spatial planning frameworks.

    From Security-Centric Oceans to Sustainability-Centric Oceans

    1. Earlier Approach: Viewed oceans primarily as strategic spaces for naval dominance and sea-lane protection.
    2. Blue Economy Shift: Redefines maritime security to include climate resilience, coastal livelihoods, and ocean health.

    From Short-Term Gains to Intergenerational Equity

    1. Earlier Approach: Emphasised immediate economic returns with limited concern for long-term impacts.
    2. Blue Economy Shift: Embeds intergenerational equity and long-term resilience into ocean governance.

    From National Control to Cooperative Governance

    1. Earlier Approach: Prioritised sovereign exploitation within EEZs.
    2. Blue Economy Shift: Strengthens multilateralism through UNCLOS, BBNJ Agreement, and regional cooperation mechanisms.

    Why This Shift Matters for India and the Indian Ocean?

    1. Climate Vulnerability: Indian Ocean region faces disproportionate exposure to sea-level rise and extreme weather.
    2. Livelihood Dependence: Millions depend on marine resources for food security and employment.
    3. Strategic Leadership: Enables India to lead through norms, sustainability, and inclusive regional partnerships rather than power projection.

    Stewardship as the First Pillar

    1. Ecosystem Restoration: Prioritises biodiversity protection, habitat conservation, and sustainable fisheries management.
    2. Regulated Resource Use: Counters illegal, unreported, and unregulated (IUU) fishing undermining livelihoods and food security.
    3. Shared Ocean Ethic: Positions India as a trustee rather than a dominant maritime power.

    Resilience in a Climate-Stressed Ocean Basin

    1. Climate Vulnerability: Indian Ocean houses over one-third of humanity and includes some of the most climate-exposed regions.
    2. Adaptation Imperative: Strengthens preparedness against sea-level rise, extreme weather, and ecosystem collapse.
    3. Regional Cooperation: Supports small island developing states through technology transfer and capacity building.

    Inclusive Growth and the Blue Economy

    1. Equitable Prosperity: Extends economic benefits to all littoral states, not just major powers.
    2. Green Sectors: Advances green shipping, offshore renewable energy, and sustainable marine biotechnology.
    3. Livelihood Protection: Links marine conservation with coastal employment and social stability.

    Financing the Blue Economy Transition

    1. Global Financial Momentum: Finance in Common Ocean Coalition mobilised $8.7 billion in commitments.
    2. Public-Private Synergy: Balances public pledges ($5.7 billion) and private investment ($2.5 billion).
    3. Institutional Architecture: Converts ocean pledges into implementable projects through MDBs and philanthropy.

    Security Through Sustainability

    1. Expanded Security Concept: Redefines maritime security beyond navigation and sea lanes.
    2. Ecosystem-Security Link: Addresses IUU fishing, coral degradation, and coastal erosion as security threats.
    3. SAGAR Doctrine: Anchors India’s maritime strategy in “Security and Growth for All in the Region.”

    Multilateralism and Global Ocean Governance

    1. BBNJ Agreement: Establishes governance for biodiversity beyond national jurisdiction.
    2. UNCLOS Continuity: Reinforces rule-based maritime order.
    3. Equity Focus: Integrates climate finance, technology access, and capacity building for developing states.

    India’s Diplomatic Responsibility in the IOR

    1. Leadership with Restraint: Emphasises stewardship over dominance.
    2. Consultative Approach: Aligns India’s diplomacy with shared prosperity.
    3. Global Messaging: Positions the Indian Ocean as a model for cooperative global commons governance.

    Conclusion

    The Indian Ocean is no longer merely a strategic maritime space but a critical global commons where climate stress, ecological degradation, and development aspirations intersect. India’s approach, grounded in stewardship, sustainability, and inclusive growth, positions the Blue Economy as a pathway to secure oceans through resilient ecosystems and cooperative governance. By aligning UNCLOS principles, the BBNJ framework, and the SAGAR vision, the article underscores that the future stability of the Indian Ocean and its prosperity will depend on security rooted in sustainability rather than dominance.

  • Unified Payments Interface (UPI)

    Why in the news?

    An IMF report has recognized UPI as the worlds largest real time retail fast payment system by transaction volume. As per ACI Worldwide (Prime Time for Real Time 2024), UPI accounts for about 49 percent of global real time payment transactions.

    Note: UPI accounts for 85% of all digital payments within India.

    Key Facts

    • Global leadership
    • India: 129.3 billion transactions
    • 49 percent share of global real time payment volume
    • Followed by: Brazil 14 percent, Thailand 8 percent, China 6 percent and South Korea 3 percent
    • Developed by National Payments Corporation of India (NPCI)
    • Regulatory oversight Reserve Bank of India and Ministry of Finance support policy push
    • Government support initiatives
      • Incentive scheme for low value BHIM UPI transactions
      • PIDF (Payments Infrastructure Development Fund) for merchant infrastructure in Tier 3 to 6 areas
      • Expansion of RuPay UPI acceptance across transport, ecommerce, and public services

    Infrastructure Growth: 5.45 crore digital touch points deployed through PIDF in Tier 3 to 6 centers (as of Oct 2025)

    • 56.86 crore QR codes deployed to approx 6.5 crore merchants (FY 2024-25)
    Which one of the following links all the ATMs in India? (2018)

    (a) Indian Banks’ Association 

    (b) National Securities Depository Limited 

    (c) National Payments Corporation of India 

    (d) Reserve Bank of India

  • How the rupee’s fall is ‘real’ this time

    Introduction

    The rupee’s depreciation in late 2024 and 2025 has raised concerns not merely because of its nominal slide but because the Real Effective Exchange Rate (REER) also shows a downward trend. Unlike previous years, when inflation differentials kept the rupee “overvalued,” the REER for 2024-25 has fallen below 100, indicating undervaluation and revealing deeper currency pressures.

    Why in the news

    The rupee breached the ₹89-per-dollar mark for the first time, closing at ₹89.46, marking a significant psychological barrier. More importantly, the rupee has weakened not only nominally but also in real effective terms, a sharper and broader fall than seen in recent years, including against the euro, pound, yen and yuan. This constitutes a shift from earlier patterns where inflation-adjusted metrics often showed the rupee as stable or overvalued. The current fall is “real,” signaling deeper macroeconomic pressures.

    How have the rupee’s effective exchange rates behaved recently?

    1. NEER trends: The Nominal Effective Exchange Rate (NEER) fell from a peak of 106.19 (2022) to 103.53 in October 2024, showing broad-based weakening.
    2. REER trends: The Real Effective Exchange Rate (REER) also declined from 109.86 (Nov 2024 high) to 97.05, pushing it below the 100-mark, indicating undervaluation.
    3. Shift from past pattern: For years, REER stayed above 100 due to India’s higher inflation, which normally made the rupee appear stronger, this trend has reversed.

    Why is the current fall described as “real” rather than just nominal?

    1. Inflation-adjusted depreciation: The rupee has weakened even after adjusting for inflation differentials with 40 trading partners, capturing “true” competitiveness loss.
    2. CPI-driven REER insight: Higher CPI inflation in India (5.2% Oct 2024) versus trading partners like the US (3%), Japan (3%), and Euro Area (2%) historically kept REER high, but the nominal fall is now so steep that REER has slid below 100.
    3. Undervaluation signal: A REER below 100 means the rupee is undervalued relative to its long-term average, a reversal from the usual overvaluation.

    What explains the rupee’s weakening across multiple currencies?

    1. Broad-based decline: Rupee weakened against the dollar, euro, pound, yen, and yuan, not just one currency.
    2. Comparative movements: Between Nov 1-28, rupee depreciated:
      1. Against EUR: ₹90.18 to ₹93.36
      2. Against GBP: ₹103.32 to ₹106.37
      3. Against JPY (100 units): ₹54.62 to ₹57.18
      4. Against yuan: ₹11.82 to ₹12.49
    3. Higher import costs: Rising global inflation and domestic CPI have jointly exerted pressure.

    How does the RBI’s shift to a ‘stabilised arrangement’ matter?

    1. IMF reclassification (Nov 2024): India moved from “floating” to “stabilised arrangement”, meaning RBI intervenes more actively to limit volatility.
    2. Operational effect: RBI’s increased forex operations indicate greater management of rupee movements.
    3. Significance: Signals persistent depreciation pressure requiring defensive central bank actions.

    What macroeconomic factors are pushing REER below 100?

    1. Persistent CPI inflation: Even modest inflation differentials now fail to offset nominal weakness.
    2. Import-price pass-through: Costlier imports make domestic inflation elevated, weakening competitiveness.
    3. Global monetary tightening: Stronger dollar and higher yields globally reduce EM currency strength.

    Conclusion

    The current weakness of the rupee is not merely a nominal slide but a deeper, inflation-adjusted depreciation. With both NEER and REER falling sharply, and REER moving below 100 for the first time in years, the pressure is structural. Combined with higher domestic inflation and global monetary tightening, the rupee’s fall now reflects broader competitiveness concerns rather than short-term volatility.

    PYQ Relevance

    [UPSC 2018] How would the recent phenomena of protectionism and currency manipulations in world trade affect macroeconomic stability of India?

    Linkage: Protectionism and currency manipulation directly affect exchange rate stability and India’s external sector, a core GS-III theme. They link to rupee depreciation, import costs, inflation, and RBI’s intervention needs.

  • India’s Q2 FY26 GDP Growth  

    Why in the News?

    India’s GDP grew 8.2% in Q2 of FY 2025-26 (July–September), marking a six-quarter high, supported mainly by manufacturing and services.
     However, economists flagged concerns over low nominal GDP growth (8.7%), which signals subdued economic activity and potential stress on fiscal targets.

    Key Data

    • Real GDP growth (Q2 FY26): 8.2%
    • Real GDP growth (Q1 FY26): 7.8%
    • Growth in H1 FY26: 8%
    • Nominal GDP growth: 8.7% (vs Budget assumption of 10.1%)
    • Last higher GDP growth: Q4 FY24
    • Government revised full-year growth forecast: “7% or higher”

    Why High Real but Low Nominal Growth?

    • Nominal GDP = Real GDP + Inflation (GDP deflator)
    • A very low deflator (~0.5%) boosted real growth artificially
    • Indicates inflation in tradable/manufactured goods is low, not necessarily high economic momentum
    • Low nominal growth → Lower tax revenues, harder to meet fiscal deficit target of 4.4%

    Sector-wise Performance

    1. Manufacturing

    • Growth: 9.1% (six-quarter high)
    • Reasons:
      • Corporate earnings showed strong growth
      • Low base effect (growth was only 2.1% last year)

    2. Services

    • Growth: 9.2%
    • Within services:
      • Financial, real estate, professional services: 10.2% (nine-quarter high)
      • Public admin, defence & other services: 9.7%

    3. Agriculture

    • 3.5% (lower than 4.1% last year)
    • Slight moderation due to uneven monsoon patterns

    Fiscal Concerns

    • Nominal GDP shortfall may:
      • Reduce tax buoyancy
      • Pressure fiscal deficit (target: 4.4%)
      • Lower denominator for deficit calculation
    • Lower capital expenditure visible (“no upswing in GFCF”)

    Opposition Criticism

    • IMF recently rated India’s national accounts ‘C’, the second-lowest grade
      • Claims real GDP inflated using unrealistically low deflator
      • Points to weak private investment and thin capital formation

    With reference to Indian economy, consider the following statements : (2015)

    (1) The rate of growth of Real Gross Domestic product has steadily increased in the last decade. 

    (2) The Gross Domestic product at market prices (in rupees) has steadily increased in the last decade. 

    Which of the statements given above is/ are correct? 

    (a) 1 only (b) 2 only (c) Both 1 and 2 (d) Neither 1 nor 2 

  • [27th November 2025] Hindu OpED Limited room: On the Indian rupee

    PYQ Relevance

    [UPSC 2018] How would the recent phenomena of protectionism and currency manipulations in world trade affect macroeconomic stability of India?

    Linkage: Protectionism and currency pressures weaken the rupee, widen the CAD, and raise imported inflation. This directly affects India’s macroeconomic stability, as seen in the article’s emphasis on dollar strength and RBI’s limited room.

    Mentor’s Comment

    India’s recent 7% rupee depreciation has revived an uncomfortable truth, monetary tools alone cannot stabilise the currency when structural vulnerabilities remain unaddressed. The article examined today highlights India’s long-standing dependence on oil imports, the RBI’s limited manoeuvring room, and why external pressures have outweighed domestic macro stability. For UPSC aspirants, this topic offers rich intersections across macroeconomics, external sector management, energy security, inflation dynamics, trade policy, and structural reforms.

    Introduction

    India’s rupee has depreciated about 7% between late November 2024 and now, sliding from ₹83.4/$ to nearly ₹89.2/$. Despite large-scale RBI intervention, including selling nearly $50 billion in forex, the currency continues to weaken amid external pressures. The episode mirrors the 2018 phase of global dollar strength and U.S. interest rate hikes, exposing India’s long-standing vulnerability: heavy dependence on expensive crude oil imports. With crude forming more than one-fifth of total imports, and India transitioning away from Russian supplies, monetary stabilisation alone is insufficient.

    Why in the News 

    The rupee has dropped nearly 7% to ₹89.2 per dollar, even after the RBI sold $50 billion to stabilise it. This mirrors the 2018 downturn when global dollar strength and U.S. rate hikes triggered similar pressure. What makes this episode striking is the contradiction: inflation is low (0.25% in Oct 2025), forex reserves remain comfortable at $693 billion, yet the rupee continues to slide. The rapid fall highlights India’s structural weakness, oil import dependence, which raises the current-account deficit and inflation risks despite favourable domestic conditions.

    What Explains the Recent Rupee Depreciation?

    1. Global Dollar Strength: Mirrors 2018 trends where strong U.S. interest rates and trade tensions pressured emerging market currencies.
    2. Widening Current Account Deficit: Rising bullion imports as a hedge in uncertain times widened the CAD.
    3. Exporter Competitiveness Issues: Exporters struggled to maintain margins due to high U.S. tariffs, increasing pressure on the INR.

    Why Are RBI Tools Proving Insufficient?

    1. Floating-but-Managed Regime: RBI can only “smoothen volatility”, not fix the rate.
    2. Forex Market Intervention: RBI sold nearly $50 billion, yet depreciation continued, signalling strong external headwinds.
    3. Liquidity Supports via Swaps:
      1. 2018: First longer-term currency swap as a systemic liquidity check.
      2. 2019: Completed a $5 billion three-year swap.
      3. Feb 2025: Conducted a $10 billion buy-sell auction to infuse long-term rupee liquidity.

    Why Is This Rupee Slide Concerning Despite Low Inflation?

    1. Exceptionally Low CPI Inflation: Headline CPI at 0.25% (Oct 2025), well below RBI’s 2-6% band, should normally support the rupee.
    2. Transition-Induced Cost Pressures: Shift from cheaper Russian crude toward costlier U.S. imports exerts upward pressure.
    3. Risk of Imported Inflation: Higher oil prices raise logistics, manufacturing, and CPI components.

    Why Must India Reduce Dependence on Oil Imports?

    1. Over One-Fifth of FY25 Imports Are Crude: A single commodity dominates the import basket, creating vulnerability.
    2. Rupee-Oil Linkage: Any crude price rise automatically weakens the rupee by widening CAD.
    3. Limited Monetary Space: Rupee stabilisation cannot rely solely on forex intervention or interest rate changes.

    What Structural Reforms Are Needed?

    1. Faster Transport Electrification: Must be treated as a strategic imperative, not a long-term aspiration.
    2. Holistic Trade Policy: India’s bilateral deals (Japan, UAE, ASEAN) have tilted the trade balance against it, offering limited diversification of energy trade routes.
    3. Reduced Oil Intensity in GDP: Accelerating renewable capacity, green hydrogen, and domestic energy alternatives.

    Conclusion

    The current rupee slide highlights a deeper structural flaw: India’s dependence on oil imports exposes it to global price volatility and external shocks. With RBI intervention offering only temporary relief, sustainable currency stability requires reducing crude dependence, reforming trade strategy, and accelerating energy transition. Unless structural measures address the root vulnerability, India cannot insulate the rupee from future external pressures.

  • Capital Gains Accounts (Second Amendment) Scheme, 2025

    Why in the news? 

    The Ministry of Finance has notified the Capital Gains Accounts (Second Amendment) Scheme, 2025, introducing major changes to the existing Capital Gains Account Scheme (CGAS), 1988. The amendments aim to modernise processes, expand banking access, and increase clarity for taxpayers seeking capital gains exemptions.

    About Capital Gains Account Scheme (CGAS), 1988

    • Launched by the Central Government in 1988.
    • Objective: To help taxpayers claim exemptions on long-term capital gains when reinvestment cannot be completed before the ITR filing due date.
    • Linked mainly to Section 54, 54F, and related provisions of the Income Tax Act.

    Why CGAS is Needed?

    • Exemption requires reinvestment of capital gains within:
      • 2 years (purchase of property)
      • 3 years (construction of property)
    • If this period extends beyond the ITR filing deadline, the taxpayer can temporarily deposit unutilised gains in CGAS to keep the exemption claim valid.

    Important Conditions

    • Deposit must be made before filing Income Tax Return.
    • Money deposited is treated as reinvested for exemption.
    • If the amount is not utilised within the stipulated period, it becomes taxable long-term capital gains in that year.
    • Only long-term capital gains qualify — short-term gains are NOT eligible.

    Who Can Deposit in CGAS?

    • Any person with long-term capital gains, including: Individuals, HUFs, Companies, Firms, Trusts, and Any eligible taxpayer seeking exemption
    • Mainly used by property sellers who need more time to reinvest.

    Capital Gains Accounts (Second Amendment) Scheme, 2025 — Key Changes

    • Expansion of Authorized Banks: Previously limited mostly to Public Sector Banks + IDBI Bank.
      • Now extended to 19 private and small finance banks at all non-rural branches.
    • Non-rural branch condition: Branch must be located in an area with population ≥ 10,000 (2011 Census).
      • Rural branches cannot open CGAS accounts.
    • Wider Definition of Electronic Payments: Electronic deposits can now be made through: Credit cards, Debit cards, Net banking, IMPS, UPI, RTGS, NEFT and BHIM Aadhaar Pay.This modernises the earlier narrow definition of “electronic mode”.
    • Online Closure of CGAS Accounts (From April 1, 2027): Closure requests can be submitted electronically using:
      • Digital Signature (DSC)
      • Electronic Verification Code (EVC)
      • Earlier: Closure only through physical branches.
    • Clarification on Effective Date of Deposit: For cheque/DD/electronic transfers, the date of receipt of the payment instrument along with account application at the Deposit Office is treated as the effective date.Removes ambiguity around last-day deposits for tax exemption.
    • Electronic Statements Permitted: Banks can now issue electronic statements instead of physical passbooks.
      • Aligns CGAS with general digital banking norms.
    •  Extension of CGAS to Section 54GA: CGAS can now be used for exemptions under Section 54GA:

      • Relates to capital gains arising from shifting an industrial undertaking from an urban area to a Special Economic Zone (SEZ).
      • Broadens applicability beyond property-related reinvestments.
    Consider the following statements: (2025)

    I. Capital receipts create a liability or cause a reduction in the assets of the Government. 

    II. Borrowings and disinvestment are capital receipts. 

    III. Interest received on loans creates a liability of the Government. 

    Which of the statements given above are correct? 

    (a) I and II only 

    (b) II and III only 

    (c) I and III only 

    (d) I, II and III

  • [12th November 2025] The Hindu Op-ed: Exploited workers, a labour policy’s empty promises

    PYQ Relevance

    [UPSC 2024] Discuss the merits and demerits of the four ‘Labour Codes’ in the context of labour market reforms in India. What has been the progress so far in this regard?

    Linkage: Building directly on the same reform trajectory, the draft Shram Shakti Niti 2025 extends the labour codes’ framework of ease of doing business over worker protection. This highlights continued informalisation and weak enforcement.

    Mentor’s Comment

    India’s draft Shram Shakti Niti 2025 arrives at a critical juncture, when over 90% of India’s workforce is informal, and 11 million people endure modern slavery-like conditions. While the government calls it a “rights-driven, future-ready” labour vision grounded in “ancient Indian ethos”, the policy remains mired in contradictions. Behind its digital optimism and flexibility rhetoric lie deep structural issues, casualisation, exclusion of women, erosion of unions, and poor enforcement of safety norms. This article analyses how the draft Shram Shakti Niti 2025 attempts reform but risks widening inequality instead of bridging it.

    Introduction

    India’s labour force, the world’s largest after China, is undergoing unprecedented informalisation. A majority of workers remain without contracts, benefits, or occupational safety, particularly in construction, seafood, textiles, and stone quarrying. Against this backdrop, the government has unveiled the draft Shram Shakti Niti 2025, the first comprehensive labour and employment policy in independent India, aimed at aligning with India@2047 goals. Yet, its “future-ready” tone contrasts sharply with the daily struggles of India’s informal workers. The draft blends cultural nostalgia with digital platforms and flexible labour regimes, but experts warn that without strong safeguards, it may formalise exploitation under a new vocabulary of efficiency and empowerment.

    Why is the draft Shram Shakti Niti 2025 significant?

    1. First comprehensive labour policy: India has never had a single overarching labour and employment policy before; this is the first draft of its kind.
    2. Presented as “rights-driven” and “future-ready”: The draft positions itself as a framework for inclusive, dignified employment by 2047.
    3. Ground reality contrast: It appears while millions remain in debt bondage or unsafe informal work, revealing a sharp policy-practice gap.
    4. Cultural framing: It draws legitimacy from “ancient Indian ethos” and texts like Manusmriti, a move critics call regressive in a modern labour context.

    Does the draft empower workers or employers?

    1. Contractual and casual labour domination: In several sectors (textiles, seafood, stone quarries), workers are hired by middlemen without contracts, paid daily wages, and denied ESI or PF benefits.
    2. Employer-biased flexibility: The draft promotes “ease of doing business” but underplays enforcement of worker rights, effectively institutionalising job insecurity.
    3. Constitutional dilution: The framework overlooks Articles 14, 16 and 21, which guarantee equality, opportunity, and dignity, replacing them with moral and cultural justifications.
    4. ILO mismatch: The policy ignores obligations under ILO Conventions 42, 155, and 156, especially concerning maternity protection, safety, and gender equity.

    Can digital optimism bridge the informal-formal divide?

    1. Digital skilling and employment matching: The draft relies heavily on AI-driven National Career Service (NCS) and Skill India digital platforms, promising to reduce mismatches.
    2. Reality check: Digital literacy in India remains at 38%, and most informal workers, particularly women and the elderly, remain excluded from such systems.
    3. eSHRAM limitations: Despite over 30 crore registrations, payouts remain minimal and inconsistent, with large data gaps for unorganised workers.
    4. Algorithmic exclusion: Tech-based hiring may amplify caste and gender bias, lacking oversight on fairness, grievance redress, or algorithmic accountability.

    Does the draft align with constitutional and global standards?

    1. Constitutional inconsistency: Ignores equality provisions (Articles 14-16) and fails to guarantee dignity (Article 21) by sidelining unionisation and inspectorate powers.
    2. ILO and OECD compliance gap: India risks non-alignment with ILO Conventions 87 and 98 (freedom of association and collective bargaining) and OECD recommendations on equitable labour transitions.
    3. Rights to collective action: Tripartite bodies (state, employer, worker) are mentioned but not institutionally strengthened, weakening labour representation.

    What are the draft policy’s main areas of concern?

    1. Inspectorate dilution: Reduction in on-ground inspections under the garb of self-certification leads to unchecked safety violations.
    2. Gendered impact: While women’s participation is targeted to rise to 35% by 2047, no clear mechanism ensures safe, accessible, or equitable workplaces.
    3. Wage inequality and gig exclusion: Wage Code 2019 is silent on platform workers’ benefits, leaving gig labourers outside social protection systems.
    4. Union erosion: By promoting individual “digital dashboards” over collective negotiations, the draft undermines trade union power and collective action.

    What should guide India’s final labour framework?

    1. Universal social protection floor: Extend ESI, EPFO, and health coverage to informal and gig workers.
    2. Reinstate labour inspectorates: Institutionalise independent audits for occupational safety and minimum wage compliance.
    3. Gender-responsive budgeting: Make gender equity measurable through labour audits, wage reporting, and leadership representation.
    4. Digital inclusion safeguards: Ensure data privacy, algorithmic fairness, and accessibility for low-literacy workers.
    5. Constitutional morality over cultural ethos: Replace rhetoric with enforceable rights, ensuring compliance with Articles 14, 19, 21, and 23 (prohibition of forced labour).

    Conclusion

    The draft Shram Shakti Niti 2025 aspires to modernise India’s labour market, but its moral overtones and digital bias risk leaving the poorest behind. Without strong enforcement, union empowerment, and gender-sensitive safeguards, this “future-ready” vision may perpetuate rather than resolve inequality. India’s final policy must reflect constitutional morality, not cultural nostalgia, ensuring labour dignity remains the cornerstone of economic growth.

  • Govt panel working on New SEZ Norms for Exporters to Access Domestic Market

    Why in the News?

    A government panel comprising officials from the Commerce and Industry Ministry, NITI Aayog, and exporters is drafting new Special Economic Zone (SEZ) norms to revive manufacturing and support exporters hit by steep U.S. tariffs in 2025.

    Back2Basics: Special Economic Zones (SEZs) in India

    • Overview: Duty-free enclaves treated as foreign territory for trade, designed to boost exports, investment, and employment.
    • Legal Framework: Governed by the SEZ Act, 2005 and SEZ Rules, 2006 with single-window clearances and liberal FDI norms.
    • Policy Evolution: Introduced in 2000, replacing Export Processing Zones (EPZs) to strengthen export-led industrialization.
    • Objectives: Promote export growth, foreign and domestic investment, and infrastructure creation.
    • Incentives: Include duty-free imports, tax holidays, zero-rated GST, and ECB up to $500 million annually.
    • Scale: As of 2025, India has 276 operational SEZs– notably GIFT City (Gujarat), SEEPZ (Mumbai), and Noida SEZ.
    • Reform Outlook: The Development of Enterprise and Service Hubs (DESH) Bill 2022 aims to evolve SEZs into flexible, multi-use economic hubs linking domestic and global value chains.

    Need for SEZ Norms Revision:

    • U.S. Tariff Impact: Recent U.S. tariff hikes on gems, jewellery, and textiles have reduced price competitiveness of India’s SEZ-based exporters, leading to production losses.
    • Export Decline: SEZ exports dropped to $172 billion (FY25), with domestic sales stagnating at 2%, exposing overdependence on foreign markets.
    • Idle Capacity & Job Losses: Fluctuating export demand left labour and machinery underutilised; reforms aim to let SEZs meet domestic orders during downturns.
    • Global Benchmarking: Indian SEZs lag China and Vietnam in scale, policy stability, and productivity, prompting structural reform for competitiveness.
    • Revenue Balance: The government seeks industry relief while safeguarding tax revenues, given SEZs’ extensive tax exemptions.

    Proposed SEZ Reforms under Review:

    • Reverse Job Work Permission: SEZs may be allowed to accept domestic processing contracts to use idle capacity during off-peak seasons.
    • DTA Sales Flexibility: Partial permission for direct domestic sales, with duty adjustments to protect local manufacturers.
    • Simplified De-notification Rules: Faster conversion of non-performing SEZs into industrial parks or enterprise hubs.
    • Sectoral Support: Gems and jewellery exporters seek moratoriums, longer export obligations, and interest relief.
    • Integration with DESH Bill (2022): Adoption of hybrid zone model for both exports and domestic production under the Development of Enterprise and Service Hubs framework.
    [UPSC 2010] The SEZ Act, 2005 which came into effect in February 2006 has certain objectives. In this context, consider the following:
    1. Development of infrastructure facilities. 2. Promotion of investment from foreign sources. 3. Promotion of exports of services only.
    Which of the above are the objectives of this Act?
    Options: (a) 1 and 2 only* (b) 3 only (c) 2 and 3 only (d) 1,2 and 3

    [UPSC 2016] Recently, India’s first ‘National Investment and Manufacturing Zone’ was proposed to be set up in-
    Options: (a) Andhra Pradesh* (b) Gujarat (c) Maharashtra (d) Uttar Pradesh