💥Join UPSC 2027,2028 Mentorship (August Batch) + XFactor Notes & Microthemes PDF
Talk to Mentor

Civilsdaily

Login

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

  • 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

     

  • The race to break China’s rare earth stranglehold

    Introduction

    Rare earth minerals form the backbone of modern industries, from smartphones and electric vehicles to solar panels and missiles. Yet, China controls nearly 70% of global mining and 90% of processing, weaponizing this dominance through export restrictions and technology control. The recent spate of US-led agreements with Australia, Thailand, and Malaysia signals a tectonic shift in global supply chain strategy aimed at ending China’s monopoly.

    Why in the News

    The US has signed multiple agreements to diversify sourcing of rare earth minerals, a sharp contrast to past decades when Western nations relied on China’s cheap supplies. This urgency arises as China restricts exports and machinery transfers, challenging global industrial autonomy. India too has proposed a ₹7,350-crore scheme to build domestic capacity, underscoring how critical and vulnerable this resource chain has become.

    China’s Rare Earth Monopoly

    1. Dominance in Production: China accounts for 70% of global rare earth mining and 90% of processing, having invested heavily since the 1990s.
    2. Weaponization of Supply Chains: China uses export restrictions and licensing to maintain strategic leverage, especially in high-tech and defense manufacturing.
    3. Environmental Cost Advantage: Western nations avoided rare earth mining due to pollution concerns, allowing China to gain mastery in low-cost extraction and processing.
    4. Technology Restriction: Beijing limits the transfer of technology and machinery, preventing rivals from catching up.

    Why Rare Earths Matter

    1. Strategic Applications: Essential for EV batteries, solar panels, semiconductors, consumer electronics, and defense equipment (missiles, fighter jets, submarines).
    2. Energy Transition Role: Critical to clean energy technologies and electrification, making them central to global climate goals.
    3. Industrial Dependency: Nearly all modern batteries and chips depend on rare earth inputs, linking them to national security and supply resilience.

    The US-Led Diversification Push

    1. Recent Agreements: The US signed deals with Australia, Thailand, and Malaysia to source critical minerals and reduce Chinese dependence.
    2. Strategic Vision: Seeks a transparent and diversified market by 2030, per Lowy Institute projections.
    3. Optimism vs Reality: Despite US optimism, experts predict a decade-long transition before tangible independence from China.
    4. Australia’s Role: Emerging as a long-term alternative supplier, though benefits will accrue only post-2030.

    India’s Position and Challenges

    1. Limited Domestic Reserves: India lacks sufficient rare earth resources and depends on imports from South America and Africa.
    2. Policy Push: A ₹7,350-crore scheme aims to boost domestic extraction and processing capacity.
    3. Technology Constraints: China’s machinery restrictions hinder India’s expansion; Japan and Germany’s tech is available but costly.
    4. Strategic Need: India’s electronics and defense manufacturing goals hinge on securing reliable rare earth access.

    Why China’s Grip Is Hard to Break

    1. Cost Advantage: China’s large-scale, low-cost production undercuts global competitors.
    2. Controlled Liberalization: By restricting but not banning exports, China maintains market share while disincentivizing new investments abroad.
    3. Decades of Lead: Its dominance results from 30 years of investment, while other nations are only beginning their efforts.
    4. Market Manipulation: Price control and selective technology transfer ensure continued dependence.

    Economic and Environmental Trade-Offs

    1. High Environmental Cost: Rare earth mining involves radioactive waste and groundwater contamination.
    2. Policy Dilemma: Nations balancing green commitments against strategic autonomy face a major contradiction.
    3. Australia’s Advisory: Buyers urged to prioritize secure supply chains over the lowest available price, signaling a policy shift from cost to security.

    Conclusion

    Breaking China’s rare earth stranglehold is not merely an economic goal but a geopolitical necessity. It will require sustained investments, technology-sharing frameworks, and environmental innovation. While the US, India, and allies are recalibrating, China’s cost, experience, and ecosystem advantages mean its dominance may persist until at least 2030. The world’s clean energy and defense ambitions hinge on how successfully nations can build resilient, transparent, and diversified critical mineral supply chains.

    PYQ Relevance

    [UPSC 2018] With growing energy needs should India keep on expanding its nuclear energy programme? Discuss the facts and fears associated with nuclear energy.

    Linkage: Rare earths are critical for renewable and clean energy technologies (e.g., EVs, solar, wind). This question relates to energy diversification and sustainability, highlighting material dependencies that influence India’s clean energy choices.

  • China’s WTO complaint against India’s PLI Schemes

    Why in the News?

    China has lodged a formal complaint at the World Trade Organisation (WTO) alleging that India’s Production-Linked Incentive (PLI) schemes for Advanced Chemistry Cell (ACC) batteries, Automobile and Auto Components, and Electric Vehicles (EVs) violate WTO subsidy rules.

    About the Production Linked Incentive (PLI) Scheme:

    • Overview: Launched in 2020 under the Atmanirbhar Bharat initiative to strengthen domestic manufacturing and global competitiveness.
    • Objectives:
      • Provides financial incentives based on incremental sales of manufactured goods over a base year.
      • Aims to attract global investment, enhance exports, create jobs, and integrate MSMEs into value chains.
    • Coverage: Covers 14 strategic sectors, including electronics, autos, solar modules, textiles, and pharmaceuticals.
    • Incentive Design: Incentives are non-export linked, based on domestic sales and value addition achieved within India.

    PLI Schemes Challenged by China:

    1. PLI for Advanced Chemistry Cell (ACC) Batteries: Incentivises giga-scale battery manufacturing with 25% Domestic Value Addition (DVA) requirement.
    2. PLI for Automobiles and Auto Components: Promotes Advanced Automotive Technology (AAT) products with 50% DVA target.
    3. PLI for Electric Vehicles (EVs): Encourages global EV manufacturers to establish production bases in India.

    Issues Raised by China at WTO:

    • Complaint: In October 2025, China filed a case at the World Trade Organization (WTO) claiming that India’s PLI schemes violate global subsidy and trade rules.
    • Core Allegation – DVA Linkage:
      • The Domestic Value Addition (DVA) requirement in the PLI scheme, where incentives depend on how much of a product’s value is created within India, is the main point of dispute.
      • China argues that by linking financial incentives to DVA thresholds, India is indirectly forcing firms to use locally made components instead of imported ones.
      • This, China claims, acts as a “local content requirement”, which WTO rules prohibit because it discriminates against imported goods, especially Chinese batteries, auto parts, and electronic components.
    • Why China Objects to DVA:
      • According to China, the PLI design discourages import of foreign components, making it harder for Chinese products to compete in the Indian market.
      • It considers DVA-based incentives as “import substitution subsidies”, banned under the WTO’s Agreement on Subsidies and Countervailing Measures (SCM).
      • China also claims this approach distorts trade, reduces fair competition, and restricts market access for foreign suppliers.
    • Summary of the Dispute:
      • China’s view: DVA = hidden import restriction → violates WTO rules.
      • India’s view: DVA = measure of domestic value creation → fully WTO-compliant.

    WTO Rules Cited by China:

    • Subsidies and Countervailing Measures (SCM) Agreement:
      • Article 1 – Defines subsidy as a financial benefit given by a government.
      • Article 3.1(b) – Bans subsidies that depend on using domestic goods over imports.
    • GATT 1994 (General Agreement on Tariffs and Trade):
      • Article III.4 – Ensures equal treatment for imported and domestic goods.
    • TRIMs (Trade-Related Investment Measures) Agreement:
      • Article 2.1 – Forbids policies that violate national treatment.
      • Annex – Lists Local Content Requirements (LCRs) as WTO-inconsistent.
    • China argues that India’s PLI incentives linked to DVA break all three rules and act as local content conditions.

    India’s Response:

    • WTO Compliance: India says PLI is WTO-compliant and does not force local sourcing.
    • Clarification: DVA only measures economic value created in India, like labour, R&D, and innovation, not just use of local parts.
    • Open for Global Firms: Foreign companies can join and freely import materials; PLI only rewards domestic value creation.
    • Legal Justification: India cites GATT Article XX, allowing policies for environmental or developmental goals, especially for green tech like EVs and batteries.
    • Policy Standpoint: India argues that industrial subsidies are a sovereign tool to fix trade imbalances and promote sustainable growth.
    • WTO Procedure: India will first hold consultations with China (first step of dispute). If unresolved, a WTO panel may be formed, but no ruling will take effect soon as the Appellate Body is non-functional since 2019.
    • Practical Impact: India can continue the PLI schemes while the dispute is pending.
    [UPSC 2023] Consider the following statements:
    Statement I: India accounts for 3.2% of global exports of goods.
    Statement II: Many local companies and some foreign companies operating in India have taken advantage of India’s ‘Production-linked Incentive’ scheme.
    Which one of the following is correct in respect of the above statements?
    (a) Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for Statement-I
    (b) Both Statement-I and Statement-II are correct and Statement-II is not the correct explanation for Statement-I
    (c) Statement-I is correct but Statement-II is incorrect
    (d) Statement-I is incorrect but Statement-II is correct *

     

  • RBI draft norms on Capital Market Exposure (CME)

    Why in the News?

    The Reserve Bank of India released draft “Capital Market Exposure Directions, 2025” to overhaul rules on banks’ exposure to capital markets.

    What is Capital Market Exposure (CME)?

    It simply means how much a bank is involved in the stock market and related financial activities.

    When banks deal with the capital market, they can do this in two main ways:

    1. Direct Exposure: When the bank itself invests in shares, bonds, or mutual funds, just like an investor would. Example: if a bank buys shares of a company or invests in government bonds, that’s direct exposure.
    2. Indirect Exposure: When the bank gives loans linked to the stock market, for example, lending money to stockbrokers, mutual funds, or investors who want to buy shares.

    Because the stock market goes up and down, these activities are riskier than normal banking (like giving home or business loans). So, the Reserve Bank of India (RBI) keeps a close watch and sets limits on how much banks can invest or lend in the capital market.

    About Draft Norms on Capital Market Exposure, 2025:

    • Objective: To modernise, unify, and simplify rules on banks’ capital-market lending and investment exposures.
    • Expanded Scope: Permits acquisition-finance lending for corporates and higher credit limits for individuals participating in Initial Public Offerings (IPOs), Follow-on Public Offerings (FPOs), and Employee Stock Option Plans (ESOPs).

    Key Features of the Draft CME Norms:

    • Exposure Limits:
      • Direct exposure (investments + acquisition finance) capped at 20 percent of Tier-1 capital on solo and consolidated bases.
      • Aggregate exposure (direct + indirect) capped at 40 percent of consolidated Tier-1 capital.
    • Acquisition Finance:
      • Banks may finance up to 70 percent of acquisition cost, with borrowers contributing 30 percent equity from own funds.
      • Permitted only for listed companies with sound financials and independent valuations compliant with Securities and Exchange Board of India (SEBI) norms.
      • Aggregate acquisition-finance exposure limited to 10 percent of Tier-1 capital; not allowed for Non-Banking Financial Companies (NBFCs), Alternative Investment Funds (AIFs), or related parties.
    • Individual Market-Participation Loans:
      • Maximum loan per individual increased to ₹ 25 lakh; up to 75 percent of subscription value may be financed with a 25 percent margin.
      • Shares allotted under IPOs, FPOs, or ESOPs must be pledged and lien-marked to the lending bank.
    • Loans Against Securities:
      • Capped at ₹ 1 crore per individual for eligible securities (government securities, mutual-fund units, listed shares, or high-rated corporate debt).
      • Banks must maintain prudent LTV ratios and adopt internal risk-control systems for valuation and monitoring.

    Need for Such Norms:

    • Modernisation: Replaces fragmented rules with a unified prudential framework.
    • Corporate Expansion: Enables M&A financing, supporting Indian firms’ global competitiveness.
    • Retail Participation: Encourages individual investment and deepens equity-market access.
    • Risk Containment: Exposure caps and buffers ensure stability and discipline in bank lending.
    • Global Alignment: Harmonises with Basel III and international acquisition-finance standards.
    • Economic Impact: Enhances financial depth, liquidity, and investment-led growth in capital markets.
    [UPSC 2023] Which one of the following activities of the Reserve Bank of India is considered to be part of ‘sterilisation?

    Options: (a) Conducting ‘Open Market Operations’ *

    (b) Oversight of settlement and payment systems

    (c) Debt and cash management for the Central and State Governments

    (d) Regulating the functions of Non-banking Financial Institutions