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GS Paper: GS3-01.Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

  • The looming crisis of world unemployment

    The looming crisis of world unemployment

    Why in the News

    A World Bank forecast warns that 1.2 billion young people in the Global South, the developing world, will reach working age over the coming decade. The global economy will create no more than 400 million viable jobs. The gap of about 800 million jobs threatens to turn the demographic dividend, the growth boost a young workforce can give, into instability.

    Why is the old demographic dividend blueprint failing?

    1. Demographic dividend formula: As fertility falls, working-age adults briefly outnumber dependents, like a household with more earners than dependents. This window lifts productivity and savings.
    2. East Asian miracle: The formula fuelled the East Asian economic miracle of the late 20th century.
    3. Factory jobs ladder: Light manufacturing once moved unskilled workers from subsistence farming into urban jobs. Automation, robotics and industrial software have cut how much labour factories need.
    4. Premature deindustrialisation: Developing countries now lose factory jobs before reaching the income levels at which today’s rich economies industrialised.
    5. The takeaway: Youth bulges are arriving just as the old ladders of mobility stall, so a larger workforce no longer guarantees growth.

    What must change, and who must act?

    1. World Bank prescription: Unlock private capital and dismantle regulatory sclerosis, meaning rules so complex that they choke new firms.
    2. Barriers to small firms: Costly capital, erratic rules, predatory taxation and weak property rights deter investment. So small firms, the main job creators, cannot grow and hire.
    3. India’s record: India lags on regulation but does better on infrastructure. Building it absorbs labour, and the finished assets cut business costs.
    4. Shared burden: Rich economies and multilateral lenders must offer affordable long-term finance and technology transfer. Developing countries must carry out painful institutional reform.

    Which sectors can still absorb young workers at scale?

    1. Agri-tech and food value chains: Cold chains and local food processing can create rural jobs, so fewer people move to cities out of need (distress migration).
    2. Care economy: Nursing, community health and elder-care jobs cannot be outsourced and go largely to young women.
    3. Tourism and culture: Tourism is labour-intensive and resists automation.
    4. Green manufacturing: Solar components and electric two-wheelers can absorb labour if paired with skill-building.

    Why does the jobs gap matter, for the world and for India?

    1. Social instability: Educated youth shut out of work lose trust in governments, which fuels polarisation, extremism and civil unrest.
    2. Migration pressure: Joblessness in the Global South will push forced migration towards the Global North.
    3. India’s position: The world’s most populous nation adds millions of young workers each year, with a median age under 30. Its employment has not kept pace with GDP growth.
    4. India’s constraints: In a narrowing demographic window, India faces:
      • skills that do not match employers’ needs;
      • persistent underemployment and low female labour force participation;
      • farming that holds nearly half the population but yields only 16% of GDP (FY24).

    Challenges

    1. Thin formal skilling: Few young Indians hold formal vocational training. Eg. Only 4.4% of young people are formally skilled.
    2. Informality: Most workers hold informal jobs with low wages and no social security.
    3. Youth outside work and study: A quarter of youth aged 15 to 29 are NEET (not in employment, education or training).
    4. AI and services jobs: Artificial intelligence (AI) threatens entry-level IT and back-office work.

    Way Forward

    1. Job-linked incentives: Tie production incentives to jobs created in textiles, footwear and food processing.
    2. Care workforce: Expand nursing and elder-care training with formal wages and recognised certification.
    3. Regulatory simplification: Extend the decriminalisation of minor business offences begun by the Jan Vishwas (Amendment of Provisions) Act, 2023.
    4. Women’s participation: Fund childcare and safe transport so women can take up care and service jobs.

    Conclusion

    India’s demographic dividend will pay only if growth becomes labour-absorbing rather than capital-heavy. Whether the Centre and States ease regulation for small firms before the window closes will decide between dividend and disaster.

    What is the demographic dividend?

    1. UNFPA definition: The United Nations Population Fund (UNFPA) defines it as growth potential arising when the working-age (15 to 64) share of the population exceeds the non-working share.
    2. India’s window: A McKinsey Global Institute report (2023) gives India a 33-year window to use its demographic dividend.
    3. Growth potential: The International Monetary Fund (IMF) estimates it could add nearly 2 percentage points a year to India’s per capita GDP growth for two decades.
    4. Uneven across States: Southern States are nearing the end of their dividend. Northern States still have expanding workforces.

    Matching Previous Year Question

    “[2018] Consider the following statements : Human capital formation as a concept is better explained in terms of a process which enables 1. individuals of a country to accumulate more capital. 2. increasing the knowledge, skill levels and capacities the people of the country. 3. accumulation of tangible wealth. 4. accumulation of intangible wealth. Which of the statements given above is/are correct? (a) 1 and 2 (b) (b)2 only (c) (c)2 and 4 (d) 1, 3 and 4 ANSWER: (c)”

  • NABKISAN WASH Social Bond

    NABKISAN WASH Social Bond

    Why in the News?

    • NABKISAN Finance Limited, a subsidiary of NABARD, listed India’s first Social Bond exclusively focused on Water, Sanitation and Hygiene (WASH) on the National Stock Exchange (NSE) on 1 October 2026.
    • The issue raised ₹180 crore and was oversubscribed 1.8 times.

    Key Highlights

    • Issuer: NABKISAN Finance Limited.
    • Parent institution: National Bank for Agriculture and Rural Development (NABARD).
    • Sector: Water, Sanitation and Hygiene (WASH).
    • Amount raised: ₹180 crore.
    • Oversubscription: 1.8 times.
    • Tenure: 5 years.
    • Coupon rate: 8.10%.
    • Maturity: September 2031.
    • Credit ratings: CRISIL AAA (Stable) and CARE AAA (Stable).
    • Listed on the National Stock Exchange (NSE), Mumbai.

    Use of Bond Proceeds

    • Funds will support access to:
      • Safe water
      • Sanitation
      • Hygiene solutions
    • Target beneficiaries include rural and underserved communities.
    • Expected development outcomes include improved:
      • Health
      • Livelihoods
      • Quality of life
    • Demonstrates the use of capital-market instruments for social development financing.

    Institutional Support

    • Water.org: Technical Advisor and Knowledge Partner.
    • Other stakeholders included market institutions, advisors, trustees and arrangers.
    • The bond is intended to deepen India’s sustainable finance market.

    Important Full Forms

    • WASH: Water, Sanitation and Hygiene
    • NABKISAN: NABKISAN Finance Limited
    • NABARD: National Bank for Agriculture and Rural Development
    • NSE: National Stock Exchange
    • CRISIL: Credit Rating Information Services of India Limited
    • CARE: Credit Analysis and Research

    UPSC Prelims Trap

    • NABKISAN, not NABARD directly, issued the bond.
    • It is a Social Bond, specifically focused on WASH, not a conventional government bond.
    • ₹180 crore is the amount raised, while 1.8 times refers to the level of oversubscription.
    • 8.10% is the coupon rate, while September 2031 is the maturity period.

  • Subhash Chandra’s IBC deal: ED probe focuses on big haircuts, proxy bidders

    Why in the News

    The insolvency law was meant to take failed companies away from their promoters, but investigators allege promoters are using the process itself to buy back their companies at deep discounts. The Enforcement Directorate (ED) has made such frauds its first operational priority, after Zee founder Subhash Chandra settled bank claims of over ₹22,000 crore for ₹6.5 crore.

    How is the insolvency process meant to work?

    1. What it is: The Insolvency and Bankruptcy Code (IBC), 2016 gives creditors a time-bound process to rescue or sell a defaulting company. It works like a court-supervised auction of a failed business.
    2. Who decides: In the Corporate Insolvency Resolution Process (CIRP), a resolution professional (RP) replaces management. A Committee of Creditors (CoC) approves a resolution plan by a 66% vote.
    3. Haircut: A haircut is the share of admitted claims creditors give up under a plan. A 94% haircut returns ₹6 per ₹100 owed.
    4. The takeaway: A process designed to end promoter control can become a cheap route back to it.

    What has the ED flagged?

    1. New priority: At an internal conference in Bengaluru, ED officers named “unearthing frauds under IBC and PMLA” the agency’s first operational thrust area. PMLA is the Prevention of Money-laundering Act, 2002.
    2. Specific target: The ED will examine “collusive resolution cases involving disproportionately large haircuts through which promoters re-acquire assets”.
    3. Earlier probes: Over two years, the ED has probed about a dozen cases alleging five forms of manipulation:
      • promoter-linked entities dominating creditor committees;
      • proxy bidders used to regain companies;
      • compromised resolution professionals;
      • assets moved out before or during the CIRP;
      • bids allegedly suppressed.

    How do promoters allegedly regain control?

    1. Alchemist: A group firm allegedly held 97% of CoC votes and the RP was a former group employee. The ED alleged the aim was immunity from past offences under Section 32A.
    2. Tribunal finding: The National Company Law Tribunal (NCLT) held the Alchemist CIRP vitiated by “fraud and collusion”. The Calcutta High Court later ordered a Central Bureau of Investigation probe.
    3. Sunstar Overseas: The company allegedly financed its own takeover through Umaiza Infracon LLP, a shell with no funds of its own, at an almost 85% haircut.
    4. Richa Industries: Saariga Constructions, allegedly set up by promoters through a former employee acting as a benamidar (front holder), bought CoC votes. Banks took a haircut of about 94%.

    How are assets allegedly stripped before or during insolvency?

    1. Amtek Auto: Fifteen group companies with claims over ₹34,000 crore were resolved at an average haircut of about 81%.
    2. Shell network: In Amtek, the ED identified about 500 shell companies allegedly holding properties bought with siphoned funds.
    3. Undervalued sales: In Angle Infrastructure, two acres were allegedly sold for ₹31 crore against a valuation of ₹160 crore. The RP denied it.
    4. Assets moved out: In Bhasin Infotech, 384 commercial units were allegedly shifted beyond the CIRP through “sham” and “backdated” agreements.

    Challenges

    1. Proxy loophole: Section 29A bars defaulting promoters from bidding, but benami fronts and shells evade it.
    2. Immunity risk: Section 32A’s protection for approved plans can shield a collusive buyer if fraud surfaces late.
    3. RP independence: Resolution professionals with links to promoters face weak checks before appointment.

    Way Forward

    1. Beneficial ownership checks: The Insolvency and Bankruptcy Board of India (IBBI) should require resolution applicants to disclose ultimate owners.
    2. Haircut trigger: Mandate an independent forensic audit when a haircut crosses a set threshold.
    3. RP vetting: The IBBI should screen RPs for prior links with the debtor group.
    4. Agency coordination: Set an information-sharing protocol between the ED, the IBBI and the NCLT.

    Conclusion

    Deep haircuts now draw scrutiny as possible fraud, not only as the cost of failure. Whether the IBBI tightens checks on bidder ownership and RP independence will decide if promoters can still buy back what they lost.

    Key numbers

    1. Richa Industries recovery: ₹40.29 crore against admitted claims of ₹696 crore (October 2025).
    2. Sunstar Overseas sale: ₹196 crore against admitted claims of ₹1,274.14 crore.

    Back2Basics: Section 32A of the IBC

    1. What it does: It ends a company’s liability for offences committed before the CIRP once the NCLT approves a resolution plan.
    2. Asset protection: The company’s property cannot then be attached for those earlier offences.
    3. Condition: The protection applies only where control passes to a new owner who is not a promoter, related party or abettor of the offence.
    4. Origin: Inserted in 2020, it gives genuine buyers a clean start; offenders stay personally liable.

    Matching Previous Year Question

    “[2024] Consider the following statements: Statement-I: Syndicated lending spreads the risk of borrower default across multiple lenders. Statement-II: The syndicated loan can be a fixed amount/lump sum of funds, but cannot be a credit line. 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 explains Statement-I (b) Both Statement-I and Statement-II are correct, but Statement-II does not explain Statement-I (c) Statement-I is correct, but Statement-II is incorrect* (d) Statement-I is incorrect, but Statement-II is correct ANSWER:”

  • Global capital is no longer cheap, that’s the challenge

    Why in the News

    Ten-year government bond yields in the United States (US) and France have hit 5.34% and 4.99%, their highest since 2002, and Japan’s has crossed 3.1% for the first time since 1996. Investors now demand higher returns even from rich-country governments, so India must plan for a world where global capital is no longer cheap.

    What is a bond yield, and why does its rise matter?

    1. What it is: A bond yield is the return investors demand for lending to a government through tradable debt. It works like the interest rate a lender charges a borrower.
    2. Why it was seen as safe: Government bonds are treated as default risk-free, because a sovereign can tax and print currency to repay.
    3. What changed: Borrowing costs for rich-country governments rose 1.2 to 1.4 percentage points in a year, roughly twice India’s rise.
    4. No safe-haven discount: Investors now treat advanced and emerging economies as almost equally risky, and advanced-economy bond yields have surged to multi-decade peaks.
    5. The takeaway: When even the safest borrowers pay more, every other borrower, India included, pays more for global money.

    Why are rich-country borrowing costs rising?

    1. Persistent deficits: Developed-country governments keep running deficits because of ageing populations, expanded welfare alongside military build-up, and voter resistance to higher taxes or entitlement cuts:
      • US public debt has crossed $40 trillion;
      • the US defence budget reached a record $1 trillion for 2026;
      • advanced economies paid over $3.3 trillion in interest last year, according to the Institute of International Finance (IIF);
      • China, wary of US fiscal risk, cut its holdings of US Treasuries (US government bonds) to an 18-year low of $618 billion in July 2026.
    2. Commodity inflation: War and weather-driven supply shocks raise commodity prices, so central banks raise interest rates and signal more increases.
    3. Artificial intelligence (AI) infrastructure race: The four hyperscalers (firms running giant cloud data centres), Meta, Microsoft, Amazon and Google, are funding much of their capital spending with debt. As technology firms borrow in bond markets, governments must compete harder for investors, which drives up yields even on “safe haven” long-term US Treasuries.

    What does this mean for India?

    1. Domestic yield: India’s 10-year government security (G-sec) yield rose 0.7 percentage points in a year and closed the week at 7.21%.
    2. Costlier foreign capital: Policymakers and corporates must accept that cheap global capital is no longer available for borrowing or investment plans.
    3. Fiscal discipline: Heavy government borrowing at home pushes up interest rates and leaves less credit for private firms. This is crowding out, so restraint matters for India too.

    Challenges

    1. Portfolio outflows: Higher US yields pull foreign investors out of Indian bonds. Eg. Net foreign portfolio outflows pressured the rupee in 2025.
    2. Large borrowing programme: The Centre still plans heavy market borrowing, competing with firms for domestic savings.
    3. Imported inflation: Commodity shocks raise India’s import bill, so interest rate cuts get delayed.
    4. Corporate foreign debt: Firms with unhedged foreign currency loans, meaning loans not protected against currency swings, face higher refinancing costs.

    Way Forward

    1. Debt anchor: The Centre should hold to its path of cutting debt to about 50% of GDP by March 2031.
    2. Quality of spending: Shift borrowing toward capital expenditure rather than revenue spending.
    3. Deeper bond market: The Reserve Bank of India should widen the domestic investor base for long-term G-secs.
    4. Currency hedging: Regulators should push corporates to hedge external commercial borrowings (loans raised abroad).

    Conclusion

    A world of costlier capital punishes fiscal slippage faster than before, and emerging economies have less room than rich ones to absorb it. Whether India keeps its borrowing in check as advanced-economy deficits and AI-driven debt keep rising is what will set its cost of capital.

    Key numbers

    1. Chinese holdings of US Treasuries, peak: $1.32 trillion, November 2013.
    2. Proposed US defence budget: $1.5 trillion for the coming fiscal year.
    3. Hyperscaler capital spending: $410 billion (2025), $725 billion projected (2026), over $1.1 trillion (2027).

    Back2Basics: Government security (G-sec)

    1. What it is: A G-sec is a tradable debt instrument issued by the Central or a State government, acknowledging its debt.
    2. Types: Short-term Treasury Bills mature in under one year; dated securities run for one year or more.
    3. Who manages it: The Reserve Bank of India issues and manages G-secs on the government’s behalf.
    4. Why its yield matters: The 10-year G-sec yield is the benchmark against which other long-term loans in the economy are priced.

    Matching Previous Year Question

    “[2026] Which one of the following best describes the ‘Crowding Out Effect’ in the context of fiscal policy? (a) A situation where private investment increases due to increased Government spending (b) A situation where Government borrowing leads to higher interest rates, which reduces private investment (c) A situation where an increase in taxes leads to increased private sector investment (d) A situation where Government spending has no impact on aggregate demand Answer: B”

  • Next-Gen GST and India’s next phase of growth

    Why in the News

    The Union Finance Minister has said that Next-Gen GST, the rate rationalisation in force since September 2025, has widened reported economic activity without weakening tax revenue. A second round of process reforms on registration, returns, refunds, disputes and input tax credit goes before the GST Council on October 7.

    What is Next-Gen GST, and why was it introduced?

    1. What GST is: The Goods and Services Tax (GST), introduced in 2017, is one national indirect tax. It works like a single checkout counter in place of separate central and State taxes.
    2. What Next-Gen GST is: Next-Gen GST is the next stage of GST reform, built on nine years of taxpayer and State experience.
    3. Two connected purposes: It set out to reduce and rationalise rates and to make compliance easier. The rate changes took effect on 22 September 2025.
    4. The takeaway: The reform is now judged on whether lower rates can expand activity enough to keep revenue growing.

    What has happened to economic activity since the rate cut?

    1. Taxable supplies: The value of reported taxable supplies grew 25.8% in the ten months after the rate cut, compared with a year earlier.
    2. Breadth of growth: Supplies grew across all 11 sector groups and all major States.
    3. Consumer sales: Reported business-to-consumer (B2C) sales, meaning sales to households, rose 26.7%. Lower prices lift household buying, which flows back to retailers, suppliers and producers.

    Has revenue held up alongside the relief?

    1. Gross collections: Gross GST collections reached ₹12.46 lakh crore in the first half of 2026-27, up 11.6% on a year earlier.
    2. Monthly momentum: Collections grew at double digits each month from June to September, nearly 15% combined.
    3. Net collections: Collections net of refunds grew 10.4% over the half year, so lower rates did not shrink the revenue base.
    4. States’ position: Aggregate State GST (SGST) receipts, including their share of Integrated GST (IGST), the tax on supplies between States, grew about 16%, funding infrastructure and public services.

    What do the coming process reforms aim to fix for small firms?

    1. Wider participation: About 1.71 crore businesses were registered under GST by end August, so more firms sell into a national market.
    2. Timely filing: GSTR-3B returns (the monthly summary return through which tax is paid) filed on time rose 12.6% for April to July.
    3. Input tax credit: Input tax credit lets a firm deduct tax already paid on inputs. A larger share of liability is now paid through credits, and idle accumulated credit has declined, which frees working capital.
    4. Refund predictability: Predictable refunds let firms plan purchases and production. Refund speed also shows how well tax administration performs.
    5. Smaller towns: The reforms aim to cut compliance time for firms in Tier-2 and Tier-3 towns.

    Challenges

    1. Self-reported data: The gains rest on reported supplies, so part of the rise may be formalisation, meaning firms newly declaring existing sales, not new activity.
    2. Refund delays: Exporters and firms with an inverted duty structure (higher tax on inputs than outputs) still depend on slow refunds.
    3. Dispute backlog: Appeals pile up because the GST Appellate Tribunal has only recently begun hearing cases.
    4. Excluded items: Petroleum and electricity stay outside GST, so firms cannot claim credit for tax paid on them.

    Way Forward

    1. Refund deadlines: Fix time-bound, risk-based refund processing for small exporters.
    2. Tribunal capacity: The Centre and States should staff all GST Appellate Tribunal benches to clear pending appeals.
    3. Price pass-through data: Publish sector-wise data showing whether rate cuts reached consumer prices.
    4. Energy inclusion roadmap: Set a timeline to bring petroleum products into GST.

    Conclusion

    Next-Gen GST has so far combined tax relief with rising revenue, which strengthens the case for the Council as a forum of cooperative federalism. Whether the Council adopts the process reforms at its coming meeting will decide if the rate gains last.

    Key numbers

    1. Refunds paid: about ₹1.80 lakh crore, April to September 2026.
    2. Growth in registrations: nearly 15% year on year, end August 2026.

    Back2Basics: GST Council

    1. Constitutional basis: The GST Council is a constitutional body under Article 279A, inserted by the Constitution (One Hundred and First Amendment) Act, 2016.
    2. Composition: The Union Finance Minister chairs it, with the Union Minister of State for Finance and the Finance Ministers of all States and Union Territories with legislatures as members.
    3. Voting: Decisions need a three-fourths weighted majority, with the Centre holding one-third of the vote and the States together two-thirds.
    4. Role: It recommends GST rates, exemptions and procedures to keep the tax uniform across States.

    Matching Previous Year Question

    “[2025] Consider the following statements: Statement I: In India, income from allied agricultural activities like poultry farming and wool rearing in rural areas is exempted from any tax. Statement II: In India, rural agricultural land is not considered a capital asset under the provisions of the Income-tax Act, 1961. 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 explains Statement I (b) Both Statement I and Statement II are correct but Statement II does not explain Statement I (c) Statement I is correct but Statement II is not correct (d) Statement I is not correct but Statement II is correct Answer: B”

  • [3rd October 2026] The Hindu OpED: India’s Model BIT: a decade later, amid changes

    [3rd October 2026] The Hindu OpED: India’s Model BIT: a decade later, amid changes

    Question (2020, GS3 – 15 Marks): 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 a private entity.
    Linkage: A Bilateral Investment Treaty is effectively a macro-level concession/protection agreement between a host state and foreign private investors. Designing a BIT requires balancing public interest safeguards against the private entity’s need for capital security and predictability.
    [2022] Which one of the following situations best reflects “Indirect Transfers” often talked about in media recently with reference to India ?
    (a) An Indian company investing in a foreign enterprise and paying taxes to the foreign country on the profits arising out of its investment
    (b) A foreign company investing in India and paying taxes to the country of its base on the profits arising out of its investment
    (c) An Indian company purchases tangible assets in a foreign country and sells such assets after their value increases and transfers the proceeds to India
    (d) A foreign company transfers shares and such shares derive their substantial value from assets located in India

    Mentor’s Comment

    India’s treaty practice has already moved ahead of its model. The UAE, Uzbekistan and Israel agreements shortened the remedies period and allowed counterclaims while the 2015 text stayed unchanged. The revision matters only if it writes this practice into the model. If it does not, the model remains a reference that negotiators bypass.

    Why in the News

    The Union Budget 2025-26 announced that India’s Model Bilateral Investment Treaty (BIT) would be revamped and made more investor-friendly, and the revised model is reportedly finalised and awaiting Cabinet approval. The real question is not whether investors get more or less protection, but what India has learnt from a decade of treaty practice.

    What is a Model BIT, and why was the 2015 version cautious?

    1. What it is: A BIT protects one country’s investors in the other. A Model BIT is India’s opening template, like a standard contract form, showing the protections it offers and obligations it expects.
    2. Why it turned cautious: The White Industries Australia Limited vs Republic of India award (2011) and worries about investor-state dispute settlement (ISDS), where investors sue states before international tribunals, made India defensive.
    3. Design of the 2015 Model: It narrowed what counts as an investment and kept regulatory exceptions for state action. Investors had to exhaust local remedies for five years, using Indian courts first, before arbitration.
    4. The takeaway: After nearly a decade, the revision decides whether India keeps this defensive design or trades some of it for investor confidence.

    How has India’s own treaty practice moved since 2015?

    1. New-generation agreements: Since 2015, India has concluded newer investment agreements with the United Arab Emirates (UAE), Uzbekistan and Israel.
    2. Shorter local remedies: The India-UAE BIT and the India-Israel Bilateral Investment Agreement, in force since July 2026, cut the local remedies period to three years.
    3. Greater flexibility: These treaties show India has already departed from its own model in practice.

    How has the global investment regime changed?

    1. UNCTAD’s shift: UN Trade and Development (UNCTAD) records treaties moving toward investment facilitation, making investing procedurally easier, with narrower protections. They rely less on ISDS.
    2. UNCITRAL reform agenda: The UN Commission on International Trade Law (UNCITRAL) is examining a permanent tribunal with an appellate mechanism to correct errors. It is also studying rules on damages and dispute prevention.
    3. Rule-shaper, not rule-taker: Scholar Makane Moïse Mbengue argues a developing state can shape investment law through its treaties, so India’s model must answer this new regime, not merely edit the old text.

    How should the new model handle the MFN clause?

    1. What MFN does: A Most Favoured Nation (MFN) clause lets one partner’s investor claim any better treatment India gives under another treaty. Most Indian treaties omit it, and a new clause needs precise scope.
    2. Maffezini vs Spain: An investor used MFN to bypass an 18-month local-court requirement by borrowing friendlier dispute rules from another treaty.
    3. Plama vs Bulgaria: The tribunal refused to import such dispute provisions where the treaty did not clearly allow it.
    4. Carve-out practice: Recent treaties expressly exclude dispute settlement from MFN, so a waiting period cannot be bypassed.

    What else must the new model get right?

    1. Counterclaims: The India-Uzbekistan BIT lets a state file a counterclaim, suing the investor back in the same case. The new model can list investor obligations and when counterclaims apply.
    2. Dispute prevention: The model can add consultation and dispute-prevention steps before arbitration, now discussed at UNCITRAL Working Group III (WG III).
    3. Precise protections: Expropriation (the state taking an investment) and fair and equitable treatment (FET) (a broad promise of fair handling) need clear wording. Precise terms protect the state’s right to regulate.
    4. Binding, balanced text: Responsible investment must be written as a legal duty, not a declaration. The model should be clearer for both sides and leave room to adjust each treaty.

    Challenges

    1. MFN imports: Tribunals have used MFN to import stricter standards. Eg. White Industries borrowed an “effective means” duty from the India-Kuwait BIT.
    2. Tax claims: Easier arbitration exposes sovereign tax measures to challenge. Eg. The Vodafone and Cairn Energy awards of 2020.
    3. Thin treaty network: India terminated most older BITs after 2016, so few partners hold treaties under any model.

    Way Forward

    1. MFN carve-out: The Department of Economic Affairs should exclude dispute settlement and procedural rights from any MFN clause.
    2. Closed FET list: Define FET as a closed list of breaches, such as denial of justice and manifest arbitrariness.
    3. Active WG III role: India should help design the permanent tribunal so its appellate review reflects developing country concerns.

    Conclusion

    India must write a model that reassures investors without surrendering the space to regulate in the public interest. Whether the Cabinet-approved text settles MFN scope and investor obligations, or leaves them to tribunals, will show if the decade’s lessons were learnt.

  • Industry is growing, but isn’t creating jobs

    Why in the News

    India’s registered manufacturing sector grew its output by 7.8% in 2024-25, according to the Annual Survey of Industries (ASI). Yet manufacturing has not become a mass employer as it did in Korea and China, and most non-farm workers remain outside the formal economy.

    What does the ASI show about formal factories?

    1. What it is: The ASI is the government’s yearly survey of registered factories, the formal part of manufacturing covered by factory laws. It works like an annual health check of organised industry.
    2. Jobs and pay grew: That year, factory employment rose 7.2% and emoluments (wages, salaries and benefits) rose 12.08%.
    3. Workforce size: Persons engaged in organised manufacturing have passed 2 crore. This is still only a fraction of the labour force.
    4. The takeaway: Formal factories are growing steadily, but they are too small a part of the economy to absorb India’s workers.

    Who gains from factory growth?

    1. Capital over labour: Invested capital has risen steadily, but output per worker has stayed roughly the same over the years.
    2. Profits ahead of wages: Wages per worker have grown more slowly than net profit, so owners gain more from growth than workers do.
    3. Economy-wide effects: Slow wage growth and flat output per worker affect consumption, investment and productivity across the economy.

    Where do most non-farm workers actually work?

    1. Informal dominance: Nearly three in four non-farm workers work in informal-sector enterprises, according to the Periodic Labour Force Survey (PLFS) 2025.
    2. Formal shortfall: The formal sector, in both manufacturing and services, simply does not create enough jobs.
    3. Organised versus unorganised: In the previous year, organised manufacturing employed 1.9 crore people against about 3.3 crore in the unorganised segment, according to the Economic Survey.
    4. Firm size matters: Organised manufacturing is dominated by small firms, yet factories with more than 100 workers employ a larger share, pay higher wages and have higher labour productivity.

    Why has manufacturing not become a mass employer?

    1. Share unchanged: Successive governments have tried to boost manufacturing, yet its share in GDP and in employment has barely moved.
    2. Missed transition: Factories have not absorbed the millions who enter the labour force each year or who want to leave farming.
    3. Fallback options: Without factory jobs, low-skilled and unskilled workers stay on the farm or take gig work, short platform jobs such as delivery. This is the core of India’s employment challenge.

    Challenges

    1. Size thresholds: Labour rules that tighten above a worker count push firms to stay small. Eg. Lay-off permission above 100 workers under the Industrial Disputes Act, 1947.
    2. Capital-heavy incentives: Industrial support often flows to capital-intensive sectors that create few jobs per rupee. Eg. Semiconductor fabrication plants.
    3. Export shocks: Labour-intensive exporters face sudden demand losses. Eg. The 50% United States tariff of 2025 on textiles and gems.
    4. Skill gaps: Many new entrants lack the vocational skills factories need, so firms prefer machines to hiring.

    Way Forward

    1. Employment-linked support: The Ministry of Labour and Employment should target the Employment Linked Incentive (ELI) scheme at first-time factory workers.
    2. Higher lay-off threshold: States should apply the Industrial Relations Code, 2020 threshold of 300 workers for lay-off permission, so firms can grow without penalty.
    3. Labour-intensive parks: The Centre should expand PM MITRA textile parks and plug-and-play parks for apparel, leather and food processing.
    4. Apprenticeships: The National Apprenticeship Promotion Scheme should be linked to factory hiring targets.

    Conclusion

    India’s factories are growing on capital rather than on workers, so formal manufacturing expands without changing where most Indians earn a living. Whether policy shifts from output targets to jobs created per rupee in labour-intensive sectors will decide if manufacturing absorbs those leaving the farm.

    Key numbers

    1. Organised manufacturing workforce, 2021-22: 1.72 crore.
    2. Non-farm workers in informal-sector enterprises (PLFS 2025): 73.1%.

    Matching Previous Year Question

    “[2023, GS3, 15 marks] Most of the unemployment in India is structural in nature. Examine the methodology adopted to compute unemployment in the country and suggest improvements.”

  • We have a model investment treaty. And are losing billions because of it

    Why in the News

    India’s bilateral investment treaties (BITs) in force fell from 73 in 2015 to eight by 2021 after the 2016 Model BIT tightened its terms for foreign investors. Eighteen months after the Finance Minister promised Parliament a revision, the model is unchanged and foreign investment stays weak.

    What is the 2016 Model BIT, and why is it called restrictive?

    1. What it is: A BIT protects one country’s investors in the other and lets them take disputes to international arbitration, a neutral tribunal. The 2016 Model is India’s negotiating template.
    2. Five-year local litigation rule: A foreign investor must litigate in Indian courts for five years before arbitration. Indian courts rarely finish a case in that time, so the rule brought only delay.
    3. Global norm: Other countries require only a three to six month consultation period, like a cooling-off period before a divorce, to try to settle.
    4. Partial easing: Newer treaties with the United Arab Emirates (UAE) and Israel cut the wait to three years; proposals for two give no stated reason.
    5. The takeaway: The model made arbitration hard to reach, so India’s treaty network shrank.

    What has the 2016 model cost India?

    1. Treaty network dismantled: The new model produced only six new treaties. None of the eight still in force covers a significant source of foreign capital.
    2. Investment forgone: American investment is large even without a treaty; the cost is the extra investment a treaty would add.
    3. Obstruction charge: India is described as the most obstructionist member of the World Trade Organization (WTO), with a matching treaty model. Deregulation and a US trade deal have also stalled.

    Why does a record FDI inflow hide a weak picture?

    1. Gross versus net: Net foreign direct investment (FDI) is money coming in minus money going out. Gross inflow hit a record, but net FDI was only $7.65 billion last year.
    2. Money going out: Foreign investors took home or sold off $53.6 billion, and Indian firms invested $33.3 billion abroad.
    3. Reinvested earnings: Profits foreign firms reinvest in India reached $25.6 billion, over three times net FDI. This is not a fresh commitment.
    4. Older definition: Excluding reinvested earnings, as India once did, gives a net direct investment outflow of about $18 billion.
    5. Portfolio exit: Indian shares trail other emerging markets by about 30 percentage points this year. Foreign investors have pulled out another $10.5 billion.

    Is counting long-held portfolio investment as FDI a fix?

    1. What separates the two: Direct investment is a stake large enough to give a say in running the business; portfolio investment is too small for that.
    2. Reported proposal: Counting portfolio investment held over three years as direct investment, a reported plan, adds no new dollar and changes only the headline.
    3. International standard: The Organisation for Economic Co-operation and Development (OECD) Benchmark Definition, the global rule for counting FDI, bars extra conditions. No country uses holding period.

    Challenges

    1. Arbitration exposure: Easier arbitration exposes India to treaty claims over tax. Eg. The Vodafone and Cairn Energy awards of 2020.
    2. Slow commercial courts: Commercial case backlogs make local litigation a denial of remedy for investors.
    3. Statistical credibility: Redefining FDI to flatter the headline would weaken trust in balance of payments data.

    Way Forward

    1. Revised model: The Department of Economic Affairs should publish a revised Model BIT replacing local litigation with a short consultation window.
    2. Priority partners: India should first negotiate with its largest capital sources, such as the European Union.
    3. Stake-based definition: The Reserve Bank of India (RBI) should keep FDI defined by size of stake, in line with the OECD standard.

    Conclusion

    India’s problem is not the headline inflow but whether foreign capital makes fresh, long-term commitments. Whether the promised revised model drops mandatory local litigation is the decision to watch.

    Key numbers

    1. Gross FDI inflow, 2025-26: $94.5 billion, a record.
    2. Net FDI, 2024-25: 0.02% of GDP.
    3. Net FDI, 2025-26: about 0.18% of GDP, the second-lowest in three decades.
    4. Reinvested earnings: excluded from India’s FDI data until 2000-01.
    5. BITs in force: 29 (2017) and 16 (2019).
    6. Newer BITs: UAE (2024) and Israel (2025).

    Government Initiatives on Foreign Direct Investment

    1. Liberalised routes: Most sectors allow 100% FDI through the automatic route, without prior approval.
    2. Invest India: The national investment facilitation agency since the Foreign Investment Promotion Board (FIPB) was abolished in 2017.
    3. EFTA pact: The India-European Free Trade Association (EFTA) Trade and Economic Partnership Agreement commits $100 billion of investment over fifteen years.

    Matching Previous Year Question

    “[2022] Which one of the following situations best reflects “Indirect Transfers” often talked about in media recently with reference to India ? (a) An Indian company investing in a foreign enterprise and paying taxes to the foreign country on the profits arising out of its investment (b) A foreign company investing in India and paying taxes to the country of its base on the profits arising out of its investment (c) An Indian company purchases tangible assets in a foreign country and sells such assets after their value increases and transfers the proceeds to India (d) A foreign company transfers shares and such shares derive their substantial value from assets located in India Answer: D”

  • Bankers’ Books Evidence Act, 2026

    Bankers’ Books Evidence Act, 2026

    Why in the News?

    • The Bankers’ Books Evidence Act, 2026 comes into force on 1 October 2026, replacing the Bankers’ Books Evidence Act, 1891.
    • It modernises the evidentiary framework for banking records by recognising physical, electronic and digital records.

    Key Highlights

    • Applies to court cases, arbitrations, investigations and inquiries where banking records are required as evidence.
    • Covers banking records stored in physical or digital forms.
    • Introduces standardised authentication and certification of bankers’ books.
    • Certified copies can generally be used instead of producing the original banker’s book.
    • Bank officials are protected from routine appearance solely to prove bank records when the bank is not a party.
    • Government can extend the Act to specified financial sector entities by notification.
    • Provides safeguards against unauthorised changes, tampering and loss of data integrity.

    Bankers’ Books

    • Include:
      • Ledgers
      • Day-books
      • Cash-books
      • Account books
      • Other records maintained in the ordinary course of banking business.
    • Records may be maintained in written/physical form or any data-storage mechanism.
    • The definition of bank/banker also covers specified financial-sector entities to which the Act is extended, besides banks and certain post office offices.

    Electronic and Digital Records

    • Electronic/digital records are admissible subject to conditions including:
      • Copy must be a true and accurate representation of the original record.
      • Unauthorised changes must not be detected.
      • No tampering or event affecting integrity and accuracy of the system should be detected.
    • Authentication may use manual, digital or electronic signatures.

    Production of Bankers’ Books

    • A certified copy can ordinarily prove the contents of a banker’s book.
    • Bank officers ordinarily cannot be compelled to produce the original records or appear as witnesses merely to prove them.
    • A court may require production or appearance through a written order recording special cause.

    Special Cause

    A court may require production/appearance where:

    • Accuracy or authenticity of an entry is uncertain.
    • Regular record-keeping was interrupted by an event.
    • The bank failed to comply with a previous court order concerning inspection or production of certified copies.

    Prelims Quick Revision

    • 2026 Act replaces: Bankers’ Books Evidence Act, 1891.
    • Effective from: 1 October 2026.
    • Covers physical + electronic + digital banking records.
    • Certified copies can ordinarily establish the contents of bankers’ books.
    • Bank officer appearance requires a court order recording special cause.
    • Government can extend the Act to specified financial-sector entities by notification.
    • Electronic records require safeguards relating to authenticity, unauthorised changes and data integrity.
    • The Act applies to proceedings including arbitration, investigation and inquiry.

    UPSC Prelims Trap

    • The 2026 Act does not discard the certified-copy framework of the 1891 law; it retains and modernises it.
    • Electronic/digital records are not automatically admissible; prescribed authenticity and integrity conditions apply.
    • A bank officer is not routinely required to appear to prove records, but a court can order appearance for special cause.
    • The Government can extend the Act to other financial-sector entities by notification; such extension is not automatic.

  • We innovated with UPI. Why not with merchant fee?

    Why in the News

    Unified Payments Interface (UPI) payments are moving from no merchant charge to a card-style merchant discount rate (MDR) of 0.40 per cent with a maximum of Rs 300. Welcomed as making UPI self-sustaining, the fee still raises whether a rail built as an alternative to card networks should copy their percentage-of-value pricing.

    What is UPI, and how does it differ from a card payment?

    1. What it is: UPI moves money directly from one bank account to another, across any bank or app, at population scale. India built it as a home-grown rail to cut dependence on international card schemes.
    2. Credit transfer (push): The payer starts the payment from their own account. Real Time Gross Settlement (RTGS), National Electronic Funds Transfer (NEFT) and Immediate Payment Service (IMPS) work alike.
    3. Card payment (pull): The merchant starts a card payment, and the customer’s account or credit line is debited once approved.
    4. Merchant discount rate (MDR): The fee a merchant pays on each payment it receives, the way card networks price their service.
    5. The takeaway: As a push system, UPI resembles NEFT more than a card network, so card-style pricing is contested.

    How has India priced its other credit-transfer rails?

    1. Slab pricing, not percentages: NEFT and RTGS have charged fixed slab fees with maximum caps, not a percentage of the amount sent.
    2. NEFT example: NEFT historically charged at most Rs 5 for transfers up to Rs 1 lakh.
    3. IMPS rule: In 2016 the government directed public-sector banks that IMPS charges above Rs 1,000 must not exceed NEFT charges.
    4. Real-time precedent: The National Payments Corporation of India (NPCI), which runs UPI, priced its real-time IMPS system in simple, low slabs. A percentage MDR breaks that tradition.

    What does it actually cost to run UPI?

    1. NPCI’s cost per transaction: An Indian Institute of Management (IIM) Bangalore analysis puts NPCI’s 2024-25 cost at about 9.8 paise per transaction.
    2. Operating cost alone: Without marketing, the cost is around 5 paise per transaction.
    3. Wider ecosystem costs: Banks, merchant acquirers (firms that sign up merchants), fraud management, security and customer support add costs beyond NPCI’s own.
    4. Low cost at scale: NPCI keeps its cost to a few paise by running very high volumes frugally, a lesson for the wider ecosystem.

    Should UPI adopt card-style pricing?

    1. Sustainability within purpose: Banks and technology firms must earn enough to keep running, and profit is not the problem. That need should not override UPI’s public purpose.
    2. Participation, not revenue: UPI and India’s Digital Public Infrastructure (DPI) were built to widen economic participation, not to maximise revenue. Eg. A small merchant accepting Rs 50, or a migrant sending money instantly.
    3. Pricing as the next innovation: UPI’s next innovation should be how the rail is priced, not only how it moves money, because efficiency must serve well-being.

    Challenges

    1. Small merchant burden: A percentage fee weighs most on small merchants with thin margins, who may steer customers back to cash.
    2. Fee rises with value, cost does not: A percentage MDR grows with payment size, but processing cost per transaction stays flat.
    3. Unclear cost base: No published benchmark shows what revenue banks and acquirers need.

    Way Forward

    1. Slab-based charge: The government and NPCI should price UPI in flat rupee slabs with a low cap, matching NEFT and IMPS practice.
    2. Annual cost study: NPCI should publish a yearly cost-of-service study so any fee is tied to measured cost.
    3. Small-payment exemption: The government should exempt small-value payments so participation does not fall.

    Conclusion

    The UPI fee debate is about whether a public payment rail is priced as infrastructure or as a card network. The final design, percentage or slab, will decide whether small merchants stay digital.

    Key numbers

    1. NPCI’s 2024-25 base: Expenses of Rs 2,270 crore against 230.2 billion transactions (IIM Bangalore analysis).
    2. NEFT above Rs 1 lakh: Maximum charge of Rs 25.
    3. RTGS caps: Rs 25 for transfers of Rs 2 to 5 lakh; Rs 50 above Rs 5 lakh.
    4. UPI users: Over 800 million active users (May 2026).

    Payment Systems and DPI in India

    1. Digital Public Infrastructure: DPI is a set of shared digital systems for development and inclusion. Through India Stack, India was first to build all three pillars: digital identity, fast payments and consent-based data sharing.
    2. UPI’s scale: UPI processed about 23.2 billion transactions in May 2026.
    3. RuPay credit on UPI: From June 2026, an MDR applies to large RuPay credit card transactions on UPI, raising merchant costs.

    Matching Previous Year Question

    “[2026] An e-commerce revenue model where the seller has control over pricing but doesn’t keep products in stock and instead transfers customer orders and shipment details to a third-party supplier, who then ships the goods directly to the customer, is called: (a) Dropshipping Model (b) Affiliate Revenue Model (c) Transaction Fee Revenue Model (d) Agency Revenue Model Answer: A”