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

  • How are the principles followed by the NITI Aayog different from those followed by the erstwhile Planning Commission in India?

    NITI Aayog, established in 2015, replaced the Planning Commission to reflect India’s transition from a centralized planned economy to a market-led, cooperative federalist model.

    Key Differences Between Planning Commission and NITI Aayog

    Similarities Between NITI Aayog and Planning Commission

    National Development Objective

    Advisory Role to Government

    Coordination Function

    Focus on Long-term Vision

    Multisectoral Engagement

    Importance of of NITI Aayog

    Reflects shift from state-led to market-led development model

    Improves Centre-State cooperation for faster execution

    Enhances accountability and outcome-based governance

    Encourages policy experimentation and innovation

    NITI Aayog reflects India’s evolving needs as a 21st-century, globally integrated economy.

  • Enumerate the indirect taxes which have been subsumed in the goods and services tax (GST) in India. Also, comment on the revenue implications of the GST introduced in India since July 2017.

    The Goods and Services Tax (GST), implemented on 1 July 2017, unified India’s fragmented indirect tax system into a single, destination-based tax, aimed at creating a ‘one nation, one tax’ System.

    Indirect Taxes Subsumed under GST

    Revenue Implications of GST Since July 2017

    Rising Revenue Collections – Eg – Average monthly collections rose from to .

    Formalisation – E-invoicing, ITC matching and GSTN integration improved compliance, pushing MSMEs into the formal economy

    Reduction in Cascading – Unified tax with seamless input credit reduced the tax-on-tax effect, improving supply-chain efficiency and indirectly boosting revenues.

    Support for Manufacturing: Correcting inverted duty structures enhances domestic value addition, strengthens export competitiveness, and boosts revenue.

    Ease of Compliance – lower rates under GST 2.0 combined with better compliance can increase GST collections in the medium term.

    Challenges

    Post GST 2.0 revenue shortfall of . Due to reduced rates and zero-rating of many goods.

    PRS Report– the aggregate revenue under GST has declined from 6.5% of GDP in 2015-16 to 5.5% of GDP in 2023-24. (below the 7% GST-to-GDP ratio projected by the 15th FC)

    Initial Revenue Volatility – States faced shortfalls despite compensation, indicating

    High Compliance Burden – Multiple monthly, quarterly, and annual returns, e-invoicing, and ITC reconciliation increase administrative load, especially for SMEs.

    State Revenue Concerns – Dependence on compensation cess and delays in payments strain state finances

    Evasion and fraud through fraudulent activities like fake invoices persist.

    Nearly half of the economy remains outside the GST framework. Eg- petroleum products, real estate, and electricity duties are excluded from GST.

    For higher, predictable and efficient revenue generation, the need is to

    Include petroleum and electricity under the GST

    Anti-Evasion Measures: Eg- Utilizing advanced data analytics

    Bring emerging sectors- crypto-assets, carbon credits under GST

  • Do you agree with the view that steady GDP growth and low inflation have left the Indian economy in good shape? Give reasons in support of your arguments.

    India is projected to sustain GDP growth of 6.5% between FY28-30, positioning it as the world’s third-largest consumer market by 2026 and the third-largest economy by 2028. (UBS)

    Arguments Supporting the View (Indian economy in good shape)

    High GDP Growth – India remains the fastest-growing major economy. 7% in FY 2025.

    Moderating Inflation – Eg- Retail inflation fell to a historic low of 0.25% in October 2025, due to GST rate cuts

    Forex reserves at over $689 billion provide external stability.

    Fiscal Consolidation Path- Fiscal deficit targeted to reduce to 4.8% of GDP in 2025-26.

    Robust Financial Sector- Gross NPAs have declined from 9.11% (2021) to 2.8% (2025).

    Production-linked incentives (PLI) has raised India’s manufacturing attractiveness. Eg: Electronics exports at a record $38 billion in 2024-25. (32% increase)

    Arguments Against the View (Macro vulnerabilities persist)

    Jobless Growth –Service sector contributes 55% of GDP but employs less than 30% workforce

    High food inflation due to climate shocks, hurting the poor.

    Rural Distress due to weak agriculture real wages and uneven monsoons.

    Global slowdown, protectionism, and China’s dominance limit India’s merchandise exports.

    High Public Debt- General government debt remains around 82% of GDP (IMF, 2024), limiting fiscal room.

    The share of Gross Fixed Capital Formation (GFCF) was about 34.6% of GDP in 2023-24 and slipped to 29.61% of GDP in 2024, indicating weak investment.

    Way Forward

    Enhance R&D (2.5% of GDP), reduce logistics costs (PM Gati Shakti), and expand PLI schemes to boost manufacturing.

    Promote labour-intensive manufacturing (textiles, toys, food processing) and expand services exports (IT, GBS, health tourism).

    Improve ease of doing business, accelerate contract enforcement, and reduce regulatory uncertainty to crowd-in private capital.

    Strengthen FOREX buffers and expand rupee trade settlement

    Encourage domestic production of critical inputs (electronics, APIs, green tech) to reduce vulnerability to global shocks.

    As highlighted by the Economic Survey, India must prioritise blue-sky thinking and foster a virtuous cycle of investment to achieve Viksit Bharat@2047.

  • Explain the rationale behind the Goods and Services Tax (Compensation to States) Act of 2017. How has COVID-19 impacted the GST compensation fund and created new federal tensions?

    The GST, implemented on 1 July 2017, unified India’s fragmented indirect tax system into a single, destination-based tax, aimed at creating a ‘one nation, one tax’ System.

    Rationale behind the GST (Compensation to States) Act, 2017

    GST subsumed major state taxes (VAT, entry tax, octroi). To prevent short-term revenue loss, the Act assured 14% annual revenue growth for 5 years (2017-22).

    Addressing Loss of Fiscal Autonomy – Compensation ensured states’ fiscal stability during structural shifts.

    Cooperative Federalism- States agreed to adopt GST in exchange for legal assurance of compensation from the Centre.

    Creating Predictability in Budgeting – Guaranteed revenue helped states plan welfare schemes, salaries, and capital projects without fear of instability.

    Compensation Fund Mechanism- A dedicated GST Compensation Cess (on luxury/sin goods like tobacco, coal, automobiles) was created to finance the compensation pool.

    Impact of COVID-19 on the GST Compensation Fund

    According to the 41st GST Council meeting, states projected a for 2020-21. With an estimated , the shortfall in the GST compensation fund was expected to be .

    was due to GST implementation-related revenue gaps, and

    was attributed to the COVID-19-induced economic shock

    The Centre admitted an unprecedented shortfall, stating it could not fully compensate states from the fund.

    Borrowing Controversy

    The Centre asked states to borrow via RBI under two options.

    Many states (Kerala, Punjab, Chhattisgarh) argued that the borrowing burden should lie with the Centre, not states.

    Breakdown of Consensus in GST Council – For the first time since 2017, the Council saw voting instead of consensus. States alleged weakening of cooperative federalism.

    Increased Fiscal Stress on States – Shortfalls forced states to cut capital expenditure, delay welfare payments, and increase market borrowing.

    States demanded extending the compensation period beyond June 2022 due to pandemic losses

    Strengthening the fiscal framework, improving tax buoyancy, and enhancing transparency in compensation mechanisms are essential to restore trust in India’s cooperative federalism.

  • Define potential GDP and explain its determinants. What are the factors that have been inhibiting India from realizing its potential GDP?

    Potential GDP refers to the maximum sustainable output an economy can produce without generating inflationary pressure, when all resources are fully and efficiently employed.

    Determinants of Potential GDP

    Labour Force & Human Capital – Size, skill, and productivity of the workforce.

    Capital Formation – Investment in infrastructure, machinery, and technology.

    Technology & Innovation – R&D and digital transformation driving productivity.

    Institutional Quality – Governance, regulatory efficiency, and property rights.

    Total Factor Productivity (TFP) – Efficiency in using labour and capital together.

    Prevailing Inflation Rate – Persistent inflation distorts real GDP from its potential level.

    Global Conditions – Protectionism, trade restrictions, and geopolitical tensions. Eg- Tariff Wars

    Factors Inhibiting India from Realizing Potential GDP

    Low Female Labour Force Participation – FLFPR only 41.7% (PLFS) against global average of 48%

    Slow Capital Formation – GFCF at ~29.6% of GDP (2024) vs 34% in 2023.

    Skill Mismatch & Education Gaps – Only 4.7% of workforce formally skilled (NSDC).

    Infrastructure Bottlenecks – Logistics cost ~13% of GDP vs 8% in USA

    Weak Productivity Growth – Low TFP and informal sector dominance. (83% informal sector)

    Regulatory Cholesterol – Delays, compliance burden, weak contract enforcement.

    Way Forward

    Enhance Human Capital – Invest in education, healthcare, and skill development

    Accelerate Investment & Infrastructure Growth through faster project execution under PPP.

    Create safe workplaces, flexible jobs, and childcare support to tap women’s economic potential.

    Increase R&D spending to 2.5% of GDP (currently <1% of GDP) for productivity gains.

    To realize its potential GDP and Viksit Bharat 2047, India must shift from factor accumulation to productivity-driven growth

  • Do you agree that the Indian economy has recently experienced V- shapes recovery? Give reasons in support of your answer.

  • Explain the difference between computing methodology of India’s Gross Domestic Product(GDP) before the year 2015 and after the year 2015.

    Gross Domestic Product (GDP) is the total monetary value of all final goods and services produced within a country’s borders in a given period. GDP in India is calculated by the National Statistical Office (NSO).

    The post-2015 GDP methodology aims to provide a more accurate, data-rich, and globally comparable picture of India’s economy. To improve reliability, there is a need for greater transparency.

  • The increase in life expectancy in the country has led to newer health challenges in the community. What are those challenges and what steps need to be taken to meet them?

    India’s life expectancy has increased to 72.4 years (2025) due to better healthcare and nutrition. However, an ageing population brings new epidemiological, economic and social health challenges.

    Newer Health Challenges Emerging from Higher Life Expectancy

    Rise in Non-Communicable Diseases (NCDs) – Higher prevalence of diabetes, hypertension, heart disease, cancer, dementia cause over 65% of total deaths in India.

    Geriatric Health Issues

    Increase in frailty, vision/hearing loss, arthritis.

    Growing burden of neurodegenerative disorders like Alzheimer’s and Parkinson’s.

    Multi-morbidity – Elderly increasingly suffer from multiple chronic conditions, requiring continuous care.

    Mental Health Challenges

    Rising cases of depression, loneliness, anxiety.

    Lack of community-based mental health services.

    Treatment of chronic and age-related conditions increases out-of-pocket expenditure.

    Weak Elderly Care Infrastructure – Limited geriatric wards, rehabilitation centres, home-care services and trained geriatric nurses.

    Feminization of aging – women face greater economic insecurity, inadequate pensions, elder abuse, and social isolation.

    Steps Needed to Address These Challenges

    Strengthen Geriatric Healthcare – Establish geriatric wards in district hospitals and train geriatric specialists

    Community-Based Care

    Promote home healthcare and caregiver support services.

    Incentivise care economy (eldercare workers, physiotherapists).

    National NCD Prevention Strategy

    Screen population for hypertension, diabetes, cancers through HWCs.

    Promote lifestyle interventions: yoga, diet counselling, tobacco control.

    Strengthen Mental Health Services

    Expand Tele-MANAS, district mental health programmes.

    Senior citizen counselling and social engagement platforms.

    Social Protection – Expand pension coverage by strengthening PM-SYM.

    Promote Active and Healthy Ageing through Fit India Movement.

    Data and Technology Integration – Use telemedicine, remote monitoring, and AI-based early diagnosis.

    A forward-looking strategy that integrates healthcare, community support, and the silver economy will ensure that longer lives translate into healthier, dignified, and economically meaningful lives.

  • “Economic growth in the recent past has been led by increase in labour productivity.”Explain this statement. Suggest the growth pattern that will lead to creation of more jobs without compromising labour productivity.

    With 7% growth in 2025-26, India is one of the fastest-growing major economies and a bright spot on the global economy (IMF). A major driver of this performance has been the expansion in labour activity.

    Economic growth attributed to labour activity

    Demographic dividend – Median age of 28 and 65% working-age population (65%) has increased labour supply and productive capacity.

    Shift towards labour-intensive sectors: Growth in construction, retail, transportation, tourism, gig and platform economy

    Surge in self-employment – from 52% (2017) to 58% in 2024 (PLFS data)

    The government’s skilling push through Kaushal Vikas Yojana and the Skill India Mission improved workforce capabilities.

    India becoming the 3rd largest start-up ecosystem has generated new entrepreneurship-led employment.

    Rise of gig economy- Platform-based work has widened job opportunities.

    Labour Code reforms- consolidation of labour laws has improved hiring flexibility and EoDB.

    Other reasons

    GST reforms

    Ease of Doing Business reforms

    IBC

    PLI schemes

    However, this growth pattern is problematic due to

    Low productivity trap: Most new jobs are in informal, low-wage, low-productivity sectors.

    Disguised employment rising: Higher labour supply masks underemployment.

    Limited wage growth: High labour participation has not translated into better wages.

    Structural transformation incomplete: Manufacturing’s share in jobs and GDP remains stagnant.

    Suggested Growth Pattern to Create More Jobs Without Compromising Productivity

    Manufacturing-led, technology-enabled growth

    Expand labour-intensive manufacturing such as textiles, toys, leather, electronics assembly. Eg: PLI schemes for electronics, textiles.

    Use AI, robotics, lean production to improve productivity while expanding scale.

    MSME upgradation – Enable cluster-based development, digitalisation, easier credit. Eg: MSME Champions Scheme, ONDC for market linkages

    Skill-based job creation through programs like Skill India, PMKVY 4.0.

    Boost food processing, millets, horticulture, and FPO-based value chains.

    Employment in solar manufacturing, EV ecosystem, recycling, energy efficiency can raise both jobs and productivity.

    Strengthen urban employment ecosystems – Invest in urban infrastructure, housing, logistics, and city industrial clusters.

    Improve FLFPR through childcare support, flexible work, safety, and skilling.

    India’s recent growth has been driven more by labour mobilisation than by labour productivity. A shift towards manufacturing-led, technology-driven, and green growth is essential for Viksit Bharat 2047.

  • Most of the unemployment in India is structural in nature. Examine the methodology adopted to compute unemployment in the country and suggest improvements.

    Structural unemployment occurs when workers lack the skills, education, or geographic mobility required to match available jobs. In India, it reflects a mismatch between the workforce’s capabilities and the evolving needs of a modern economy.

    Why Unemployment is Structural in India

    Skill Mismatch – Majority of workforce is low-skilled; only ~4.7% formally skilled (NSDC).

    Agriculture Dependence – 49% workforce in agriculture producing 16-17% of GDP

    Slow Growth of Labour-Intensive Industries – Manufacturing unable to absorb labour at scale.

    Automation and Digitalisation – Eg- AI, Robotics leading to job losses

    Low Female Labour Participation – FLFPR at 41.7% (PLFS 2023-24) due to social norms, skill gaps, and lack of suitable jobs.

    Regional Imbalances – Job clusters in southern/western India vs labour concentration in BIMARU states.

    Informalization of economy – 89% of workforce in informal sector.

    Methodology to Compute Unemployment in India

    NSSO (under MOSPI) is the principal body responsible for estimating unemployment.

    Periodic Labour Force Survey (PLFS) – NSO measures unemployment through three indicators:

    Usual Status (US/PS+SS) – Based on activity over 365 days

    Current Weekly Status (CWS) – If not worked for 1 hour in the last 7 days.

    Current Daily Status (CDS) – Records activity for each day of last week – best for informal/underemployment.

    Household Surveys – Annual (rural + urban) and quarterly (urban) surveys.

    Establishment Surveys

    QES for formal sector

    ASI for organised manufacturing

    Administrative Data – EPFO, ESIC, NPS payrolls used to estimate formal job creation.

    Unemployment rate = No. of unemployed persons / Total labour force

    Issues with Current Methodology

    Underestimation of Informal Sector – ~90% workforce informal. PLFS & enterprise surveys do not capture home-based, gig, or platform work fully.

    Surveys don’t map job requirements vs worker skills, essential for assessing structural unemployment.

    Low Frequency – Eg- PLFS rural data is measured annually

    Urban Bias – Quarterly surveys are confined to urban areas. Rural distress is under-measured.

    Limited Coverage – Gig economy, digital services, start-ups, and EV/green jobs not adequately represented.

    Way Forward

    Use Big Data Analytics to gather real-time analysis.

    Incorporate ‘underemployment’ into the definition of unemployment.

    Timely release of data.

    Increase Frequency – Monthly or quarterly surveys for rural areas

    Align with International Standards (ILO + SNA 2025)- Update definitions to include multi-job holders, remote workers, freelancers, and platform-based workers.

    Improving methodology is essential to generate accurate employment estimates and design stronger job creation policies.