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

  • What are the alternatives to the SWIFT payment system?

    Why in the News

    Countries in the Global South are looking for ways around the Belgium based Society for Worldwide Interbank Financial Telecommunication (SWIFT) network for inter country payments, driven by multiple wars and by the use of the dollar as an instrument of financial sanctions. The attempts so far have been patchy, and the felt need for other options is rising. The recent Summit of Brazil, Russia, India, China and South Africa (BRICS) in the national capital took up payments in national currencies, and a proposal to link central bank digital currencies for cross border payments did not survive into its declaration. The contested point is whether a set of national payment rails, each anchored to its builder’s currency, adds up to an alternative to a single global messaging network.

    What did the BRICS summit actually commit to?

    1. The Declaration’s resolve: The New Delhi Declaration resolved to increase trade between member countries and payments in national currencies.
    2. The proposal that was tabled: India was reported to be pushing at the summit to link central bank digital currencies (CBDCs) for cross border payments across BRICS nations.
    3. Why it was expected to be difficult: Political and technical hurdles could limit progress, and the limited global adoption of digital currencies could complicate implementation.
    4. The outcome: The proposal to link CBDCs was not part of the Declaration.

    What are the alternatives to SWIFT, and who runs them?

    1. Project mBridge: Project mBridge is a group comprising the Bank of Thailand, the Central Bank of the United Arab Emirates, the Digital Currency Institute of the People’s Bank of China, the Hong Kong Monetary Authority and the Saudi Central Bank.
    2. The Chinese system: The Cross Border Interbank Payment System (CIPS) is backed by the People’s Bank of China, which launched its clearing and settlement services in 2015 to internationalise use of the yuan.
    3. What CIPS changed: It lets global banks clear cross border yuan transactions directly onshore, instead of routing them through clearing banks in offshore yuan hubs.
    4. The Russian system: The System for Transfer of Financial Messages (SPFS) was developed by Russia in 2014 to bypass Western sanctions. Russian banks were cut off from SWIFT in 2022 and the SPFS was of help.
    5. The Iranian system: SEPAMA is Iran’s local interbank telecommunication system. The Central Bank of Iran said in 2023 that 52 branches of Iranian banks and four unnamed foreign banks connect with 106 banks using the SPFS.

    How is Project mBridge faring after the Bank for International Settlements exit?

    1. The withdrawal: The Bank for International Settlements (BIS), an institution owned by central banks to foster international monetary and financial cooperation, exited Project mBridge on 31 October 2024. It had supported the platform since 2019, when the Hong Kong Monetary Authority and the Bank of Thailand launched it.
    2. What the platform is: mBridge is a cross bloc multi CBDC platform with no Western bank on it. It attained minimum viability status in 2024.
    3. The design: It was envisaged for direct peer to peer CBDC settlement without going through correspondent banks. The project team built a new blockchain, the mBridge Ledger, designed by central banks for multi currency cross border payments in CBDCs.
    4. Why the exit drew attention: Media reports attributed the withdrawal to the platform offering a possible basis for a BRICS initiative to circumvent sanctions on Russia.
    5. What it became in practice: A Forbes report described mBridge by late 2025 as a wholesale settlement rail denominated in renminbi for trade between China and the Gulf, “running outside the dollar correspondent system”.

    How far has CIPS actually scaled?

    1. Reserve asset status helped: The renminbi’s inclusion in the basket of currencies making up the Special Drawing Right, an international reserve asset created by the International Monetary Fund (IMF), has increased acceptance of CIPS.
    2. Participation: CIPS now has participants in more than 120 countries, including every BRICS member except India.
    3. Daily throughput: CIPS processed 679.8 billion yuan of transactions on average per day in 2025.
    4. Scale against incumbents: It remains far smaller than established global systems such as the United States based Clearing House Interbank Payments System.
    5. Where Beijing is taking it: Beijing appears to be moving towards building CIPS into a global platform compliant with multi currency settlements and other foreign payment channels.

    How has the SPFS grown under sanctions?

    1. Growth in 2023: The SPFS grew at a record pace in 2023 as Moscow stepped up efforts to resolve financial shortcomings caused by sanctions over the Ukraine war.
    2. Participation: 50 new entities joined the system in 2023, taking the total to 440, of which more than 100 are non residents.

    How do India Russia trade settlements work now?

    1. The rouble rupee channel: Russia and India have built a functioning payments infrastructure using roubles and rupees, which now accounts for 96 per cent of bilateral trade.
    2. What gives it volume: India is the second largest importer of Russian oil, which is what supplies the channel with its throughput.
    3. Banks servicing it: 22 Russian banks and 17 Indian banks currently service bilateral trade. Sberbank, Russia’s largest lender, was tasked with developing the payments infrastructure.
    4. The stated assessment: Sberbank’s India head called it one of the best established mechanisms for Russia’s payments with other countries.

    Challenges to building an alternative to SWIFT

    1. Bilateral rails strand balances: A channel that settles only between two currencies leaves the surplus partner holding a currency it cannot spend elsewhere. Eg. Russia accumulated rupee balances under the rupee settlement route that it could not readily deploy outside India.
      The Fix: Attach an agreed reinvestment channel for the surplus partner’s balances, such as government securities or project equity, to every bilateral settlement arrangement.
    2. A national rail carries its builder’s politics: A system run by one central bank settles mainly in that country’s currency, so joining it shifts a dependence rather than removing one. Eg. A single BRICS currency has drawn a lukewarm response because members are unwilling to accept an instrument the renminbi would dominate.
      The Fix: Build interoperability at the messaging layer between national systems instead of migrating onto any one of them.
    3. Secondary sanctions reach the user, not the rail: A commercial bank using an alternative channel still risks losing its dollar clearing, which is what keeps large banks away from it. Eg. Indian refiners and banks scaled back Russian oil payments as United States designations widened.
      The Fix: Route sanctioned trade through designated institutions that hold no dollar exposure, so the risk sits inside a ring fenced entity.
    4. Invoicing does not move with settlement: Commodity contracts stay priced in dollars even where payment is made in another currency, so the dollar keeps its price setting role. Eg. Crude oil and most industrial metals are quoted in dollars on the benchmark exchanges.
      The Fix: Develop local currency denominated commodity contracts on domestic exchanges, so invoicing and settlement move together.

    Conclusion

    No single system has replaced the network the Global South is trying to route around. What exists instead is a set of national rails, each carrying the currency and the political exposure of the state that built it, which is why India has built a bilateral channel with Russia rather than joining one of them. The position that remains unreconciled is that cutting dependence on one currency by moving onto another country’s rail substitutes one dependence for another. The marker to watch is whether BRICS moves from a resolve on national currency payments to a working interoperability arrangement between the systems that already exist.

    Back2Basics: SWIFT

    1. What it is: A cooperative owned by its member financial institutions, established in 1973 to replace telex based messaging between banks.
    2. What it actually does: It carries standardised payment instructions between financial institutions. It does not hold accounts, move money or settle payments itself.
    3. Why exclusion bites: A bank cut off from the network loses the standard channel through which counterparties send and confirm instructions, so its correspondent relationships stop functioning.
    4. Why the alternatives look similar: Because the incumbent is a messaging layer, most alternatives are also messaging or clearing systems rather than new currencies.

    Matching Previous Year Question

    “[2023] With reference to the Central Bank digital currencies, consider the following statements: 1. It is possible to make payments in a digital currency without using US dollar or SWIFT system. 2. A digital currency can be distributed with a condition programmed into it such as time-frame for spending it. 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 Answer: (c)”

  • Fear of shift to cash due to merchant fee on UPI ‘100% misplaced’: Govt sources

    Why in the News

    A merchant discount rate of 0.4 per cent will apply to Unified Payments Interface (UPI) payments made to merchants above Rs 2,000 from 15 October, under a decision of the National Payments Corporation of India (NPCI). The government has called fears of a public shift back to cash “100% misplaced”, noting that a merchant fee already applies to credit and debit cards other than RuPay debit cards and that those cards continue to be used. A Goods and Services Tax (GST) of 18 per cent applies on the fee itself. The contested point is whether a charge levied on the seller stays with the seller, or reaches the buyer as a higher price.

    What is the merchant discount rate now applying to UPI?

    1. What the charge is: A merchant discount rate (MDR) is a fee paid by the seller on a payment accepted electronically. On UPI it has been set at 0.4 per cent of the transaction value.
    2. Where it applies: It applies to person to merchant UPI transactions of more than Rs 2,000, and takes effect on 15 October.
    3. Who receives it: The fee is split between the payments industry players that run the rail, which includes banks, payment gateways, UPI apps and other service providers.

    How narrow is the fee’s incidence?

    1. Share of transactions: Only 4 per cent of person to merchant UPI transactions are for more than Rs 2,000 and will attract the fee.
    2. Share of value: That small group of payments accounts for two thirds of person to merchant UPI payments measured by value.
    3. Merchants untouched: Around three fourths of India’s merchants accepting digital payments have never recorded a UPI transaction above the threshold, so they stay outside the fee altogether.
    4. Transfers stay free: All person to person UPI payments remain without any MDR.
    5. RuPay debit exempt: Payments made by RuPay debit card attract no MDR even above the threshold.

    Why does the government reject the fear of a shift back to cash?

    1. Card fees already exist: An MDR already applies to credit and debit cards other than RuPay debit cards, and users have not given those cards up.
    2. Merchants already absorb it: Merchants have always absorbed the MDR on credit cards while continuing to accept Visa, Mastercard and American Express.
    3. The comparison on rates: The merchant fee on debit and credit cards runs broadly in the range of 1 per cent to 3 per cent, significantly higher than the rate set for UPI.

    What is the stated purpose of charging for UPI?

    1. Cost of a free service: The stated ground is that a payment service cannot be supplied free indefinitely without exhausting the business that funds it.
    2. Reinvestment rather than full recovery: NPCI’s managing director and chief executive officer said the objective is not to recover the full cost of running UPI, but to generate enough revenue for banks and payment companies to keep investing in the ecosystem.

    What else decides how much of the fee reaches the buyer?

    1. The pass through concern: Shopkeepers may stop accepting UPI, and consumers expect sellers to pass the fee on by raising prices.
    2. A monitoring mechanism: The government is willing to talk to the Indian Banks’ Association (IBA) to set up a mechanism for monitoring whether shopkeepers pass the MDR to buyers.
    3. Talks with traders: The government will also speak to traders, including the Confederation of All India Traders (CAIT), about the issue.
    4. Tax on the fee: GST of 18 per cent applies on the MDR on person to merchant UPI payments, which lifts the seller’s cost above the notified rate.
    5. The stated hope on the tax: The position taken is that the GST Council will take a favourable view and be reasonable on the rate.
    6. The Council’s agenda: The GST Council meets on 7 October and is not expected to discuss the indirect tax rate on the MDR.

    Challenges to the UPI merchant discount rate

    1. Pass through is hard to police: A monitoring arrangement cannot observe a shopkeeper who quotes one price for cash and a higher one for UPI. Eg. Surcharging on card payments continues at small outlets even though the card rules bar it.
      The Fix: Require the acquiring bank to certify surcharge free acceptance as a condition of the merchant’s UPI acceptance agreement.
    2. A value threshold invites splitting: A fee that triggers above a transaction value gives the seller a reason to break one payment into two below the line. Eg. The fee applies only above Rs 2,000, so a bill just over that figure can be collected as two smaller payments.
      The Fix: Levy the fee on a merchant’s aggregate monthly person to merchant value rather than on the size of each transaction.
    3. The revenue split leaves acquirers last: The fee is divided among banks, gateways and app providers, so the share reaching the party that actually onboards a small shop may not cover that cost. Eg. Person to merchant acceptance among small merchants was built on zero MDR and on government incentive payouts to banks.
      The Fix: Fix a minimum acquirer share of the fee in the settlement rules so merchant onboarding stays funded.
    4. A priced rail can be repriced: A charge introduced administratively can be raised the same way, and the rail loses its universality if some sellers refuse the instrument above the threshold. Eg. The European Union caps interchange at 0.2 per cent on debit cards and 0.3 per cent on credit cards precisely to keep acceptance universal.
      The Fix: Notify a statutory ceiling on the person to merchant fee so the rate cannot be revised upward by the operator alone.

    Conclusion

    The charge is small and narrowly aimed, and it still changes what UPI is: a rail built on being free to use now carries a price for sellers above a value threshold. Whether that price stays with the seller is not settled by the fee’s design but by enforcement the government has yet to build. Two things are worth watching. The first is whether a monitoring arrangement with the banks is in place before the fee takes effect, and the second is whether the tax levied on the fee is revisited once the Council turns to it.

    Back2Basics: National Payments Corporation of India

    1. What it is: An umbrella organisation for retail payments and settlement systems in India, incorporated in 2008 as a not for profit company.
    2. Promoters and statutory basis: It was promoted by the Reserve Bank of India and the Indian Banks’ Association under the Payment and Settlement Systems Act, 2007.
    3. Systems it operates: UPI, RuPay, the Immediate Payment Service, the National Automated Clearing House, the Aadhaar Enabled Payment System and FASTag.

    Matching Previous Year Question

    “[2026] Which one of the following statements about Unified Payments Interface (UPI) and Central Bank Digital Currency (Digital Rupee) is NOT correct? (a) UPI is a real-time payment system but Digital Rupee is akin to sovereign paper currency (b) In case of UPI, settlement for end users happens instantly; in case of Digital Rupee, wallet balance gets transferred to another wallet (no traditional settlement) (c) UPI transactions are recorded by banks and reflected in bank statements; in case of Digital Rupee, no data is captured in bank statements (d) In both the cases (UPI and Digital Rupee), the liability lies with the users and their respective banks Answer: (d)”

  • ‘Make in India’ of 12 years shows patchy performance

    Why in the News

    Twelve years after the Make in India campaign was launched on 25 September 2014, an assessment across 12 metrics covering growth, investment, employment and exports shows the manufacturing sector has not materially raised its share in India’s economic growth, employment or global exports. The campaign’s later incentive schemes have produced some results. Those gains sit in a handful of sectors rather than across manufacturing as a whole. The contested point is whether the shortfall reflects too few incentives or a failure of private investment to broaden beyond the sectors an incentive already reaches.

    What is Make in India?

    1. Launch and objective: Make in India is a Union government campaign launched on 25 September 2014 to raise the manufacturing sector’s share in India’s economic growth, employment and exports.
    2. How performance is judged: Its record is read off 12 metrics spanning growth, investment, employment and exports, rather than off a single headline target.
    3. Two statistical series: The output figures exist in an old series and a new series of both the national accounts and the Index of Industrial Production (IIP). A 12 year comparison therefore runs across both.

    Has the manufacturing sector actually gained ground in the economy?

    1. Growth against the whole economy: Manufacturing grew faster than the overall economy in only half of the 12 years under consideration on the old series.
    2. The new series reading: On the new series manufacturing outpaced overall growth in all three years for which data exists, from the 2023 to 2024 financial year through the 2025 to 2026 financial year. That gap is shrinking fast.
    3. Industrial production: Within the IIP, manufacturing outpaced the overall index in only three of the 12 years on the old series of that index.
    4. The new IIP series: Manufacturing growth matched the overall index in the 2023 to 2024 financial year and was slower in each of the next two years.
    5. Share of output, old series: Gross Value Added (GVA) data on the older series shows manufacturing’s share in overall GVA is lower in the 2025 to 2026 financial year than it was when the campaign was launched in 2014.
    6. Share of output, new series: The new series shows the sector’s share rising marginally, from 14.6 per cent in the 2022 to 2023 financial year to 15.6 per cent in the 2025 to 2026 financial year.

    What do the export numbers actually show?

    1. Growth since the launch: Non petroleum goods exports grew 53 per cent to $388.3 billion in the 2025 to 2026 financial year, from $253.5 billion in the year the campaign was launched.
    2. The preceding 12 years: The same exports grew more than 400 per cent over the 12 years before the launch, on a much smaller base.
    3. Base effect is only part of it: The smaller starting base accounts for only some of the difference between the two periods.
    4. Share of world trade: United Nations Conference on Trade and Development (UNCTAD) data shows India’s share in global merchandise exports rose from around 0.8 per cent in 2002 to 1.7 per cent in 2013. It has remained at 1.7 per cent in the 2025 to 2026 financial year.

    Is private investment backing the manufacturing push?

    1. Private capital formation: Gross fixed capital formation (GFCF) by the private sector, meaning its spending on real asset creation, formed a lower share of gross domestic product (GDP) in the 2023 to 2024 financial year, the latest on the old series, than it did in the 2014 to 2015 financial year.
    2. The new series trend: On the new series GFCF as a percentage of GDP has been falling since the 2022 to 2023 financial year.
    3. Foreign investment into factories: Foreign direct investment (FDI) into manufacturing grew slower than overall FDI in 7 of the 12 years. Its share in overall FDI rose from nearly 48 per cent in the 2014 to 2015 financial year to 55 per cent in the 2025 to 2026 financial year.
    4. Capacity utilisation: Reserve Bank of India (RBI) data on how intensively factories are being used shows the metric rising slowly over recent years. It remains below the 80 per cent mark treated as the level above which companies invest in fresh capacity.
    5. Credit without output: Bank credit to industry has grown strongly, led by credit to micro, small and medium enterprises. In the absence of sustained rapid growth in output, this points to borrowing for working capital rather than for new investment.

    How concentrated are the incentive gains?

    1. Scale of the schemes: The 14 Production Linked Incentive (PLI) schemes, launched across 2020 and 2021, have drawn a cumulative investment of Rs 2.4 lakh crore as of March 2026.
    2. Concentration in five sectors: Solar modules, pharmaceutical drugs, automobiles and their components, specialty steel and large scale electronics manufacturing together account for nearly 83 per cent of all investment under the schemes.
    3. Everything else in the schemes: The remaining covered sectors share a little over one sixth of the investment between them.

    Challenges to Make in India

    1. Tariff protection raises input costs: Duties placed on intermediate goods raise the cost of inputs for the assembly the same policy is trying to attract. Eg. The Phased Manufacturing Programme for mobile phones raised duties on imported components such as chargers and printed circuit board assemblies.
      The Fix: Hold intermediate inputs at low duty rates and apply protection only at the final assembly stage.
    2. Incentive design favours large incumbents: A subsidy paid on incremental sales above a threshold can only be claimed by firms already operating at scale. Eg. Under the PLI scheme for large scale electronics manufacturing, most approved incentive has flowed to a small group of mobile phone assemblers.
      The Fix: Add a lower turnover tier with simpler claim documentation so first time manufacturers can enter the scheme.
    3. Assembly without deepening: Incentives reward final assembly, so domestic value addition stays low where components continue to be imported. Eg. India’s electronics exports have risen alongside rising imports of components and sub assemblies.
      The Fix: Tie each incentive tranche to a rising domestic value addition threshold verified at the component level.
    4. Factor market constraints outlast incentives: Land, power reliability and labour regulation decide where a plant is built, and a subsidy changes none of them. Eg. The four labour codes passed in 2019 and 2020 took years to be brought into force.
      The Fix: Publish State level readiness on serviced industrial land, power availability and single window clearance timelines so investors can compare locations.

    Conclusion

    The instruments changed and the structural shares did not. A campaign judged on manufacturing’s place in output, employment and global exports has moved none of the three, and the one instrument that did pull investment pulled it into a narrow group of sectors. What has not been achieved is broad private capacity creation, and that is the condition the next phase has to meet rather than another incentive line. The marker to watch is whether private capital formation turns up as a share of output, since that is what builds new factories.

    Back2Basics: Gross Value Added

    1. What it measures: GVA is output minus the value of the intermediate goods and services consumed in producing it. It isolates the value added by each sector, which is why sectoral shares are read off GVA rather than off GDP.
    2. Relation to GDP: GDP at market prices equals GVA at basic prices plus product taxes minus product subsidies.
    3. Why the series matters: National accounts are periodically rebased on a more recent base year, so the same indicator in an old series and a new series is not directly comparable.

    Matching Previous Year Question

    “[2025, GS3, 15 marks] Discuss the rationale of the Production Linked Incentive (PLI) scheme. What are its achievements? In what way can the functioning and outcomes of the scheme be improved?”

  • New GDP series: 28 out of 30 mfg categories used double deflation

    Why in the News

    The Ministry of Statistics and Programme Implementation (MoSPI), the ministry that compiles India’s national accounts, has released its Sources and Methods for Compilation of National Accounts Statistics document. It records that the new Gross Domestic Product series applied double deflation in 28 of 30 manufacturing categories. The new series, with 2022-23 as its base year, was released in February, so the methodology document followed seven months later, the shortest turnaround MoSPI has managed. Until this series, double deflation was used only for agriculture and for mining and quarrying, which was among the most cited criticisms of Indian growth data. The tension is that a methodological upgrade making real growth more accurate has arrived alongside a downward revision of nominal output that critics read as flattering the current growth print.

    What is double deflation?

    1. Gross Value Added: The value added by a sector is the value of its output minus the value of the inputs it uses. Measured at current prices, this is nominal Gross Value Added (GVA).
    2. The adjustment: To reach real GVA, the output value and the input value are each adjusted by their own inflation rate. Adjusting the two separately is what makes the method double deflation.
    3. Single deflation, the alternative: Under single deflation both input and output values are adjusted by the same price index, so the method assumes input and output prices move together.

    Why did single deflation distort India’s real growth estimates?

    1. The earlier practice: MoSPI applied double deflation only to agriculture and to mining and quarrying. Every other sector was deflated using a single number drawn from the Wholesale Price Index or the Consumer Price Index.
    2. Where the assumption breaks: Single deflation misstates real growth whenever input prices and output prices change at different rates, which is exactly what happens in a commodity price shock.
    3. The direction of the error: A manufacturer whose input costs fall faster than its selling prices shows an inflated real value added under single deflation, because the saving on inputs is not being deflated separately.
    4. Why this was the standing criticism: India’s growth estimates were repeatedly questioned on this ground, since the country was measuring real manufacturing growth by a method the major statistical systems had already moved past.

    Why do two manufacturing categories remain outside double deflation?

    1. The two exceptions: Double deflation was not applied to production, processing and preservation of meat, fish, fruit, vegetables, oils and fats, and to manufacture of pharmaceutical, medicinal chemicals and botanical products.
    2. The stated reason: In both categories the share of imported inputs is high, which makes it challenging to map input items directly to their item level Producer Price Index.
    3. The status: MoSPI has stated that work is under way so that double deflation can be extended to the remaining two categories as well.

    What does the new series say about the size of India’s informal sector?

    1. Household sector as the proxy: National accounts split output across the household, private and public sectors, and the household share is the working proxy for the informal economy.
    2. The revision: Nominal GVA attributed to households in 2022-23 was reduced by Rs 2.9 lakh crore against the old series, a decline of 2.7 percent.
    3. Construction drove the cut: The household share in construction GVA fell to 59 percent from 79 percent under the old series, which reads as construction being more formal than earlier estimated.
    4. The offsetting movement: Trade and repair services, hotels and restaurants, and road transport are recorded as more informal than the old series estimated, so the revision redistributes informality rather than uniformly reducing it.

    Why does the methodology document matter for confidence in the series?

    1. Speed of release: The document came seven months after the new series. Earlier full documents have taken up to three years after a new series was published, during which the methodology behind a live growth number was not publicly checkable.
    2. What it contains: It sets out the concepts, definitions, data sources, methodologies and compilation practices of the new series. It carries no new data.
    3. Its source material: It consolidates three reports of sub committees of the Advisory Committee on National Accounts Statistics, covering methodological improvement for the base revision, constant price estimates, and the incorporation of new data sources, rates and ratios. Those three were published in February.
    4. The live criticism: The new series has been attacked for revising nominal GDP downward for earlier years, which reduces the measured size of the economy. A lower nominal base for April to June 2025 is read by some as the reason the 7.8 percent real growth print for April to June 2026 looks faster than expected.

    Challenges to double deflation in India’s national accounts

    1. No official Producer Price Index: India deflates using the Wholesale Price Index and the Consumer Price Index, neither of which measures prices received by producers for their own output. Eg. The two categories left out of double deflation were left out precisely because item level producer price mapping was not possible.
      The Fix: Complete the transition to a full Producer Price Index series with item level coverage, so deflation rests on producer prices rather than on wholesale transaction prices.
    2. Imported input prices are not captured: Domestic price indices do not track the cost of imported inputs, so an import intensive sector is deflated by prices it does not actually pay. Eg. Bulk drug intermediates for Indian pharmaceutical manufacturing are largely imported.
      The Fix: Build an import unit value index at the same item level and use it to weight the input deflator for import intensive categories.
    3. Base revisions move the level, not only the method: A revision that improves method and changes the measured size of the economy at the same time makes the two effects impossible for a user to separate. Eg. The Rs 2.9 lakh crore reduction in household GVA for 2022-23 arrived together with the deflation change.
      The Fix: Publish a back series on the new methodology for a decade of prior years, so the level effect and the method effect can be read apart.
    4. Survey frames lag the economy: The household and enterprise surveys that feed value added estimates are conducted at long intervals, so structural shifts are picked up only at a base revision. Eg. The construction sector’s formalisation was recorded only when the base year moved to 2022-23.
      The Fix: Move the enterprise survey to a rolling annual panel so sectoral shares are updated continuously rather than once a decade.
    5. Documentation is not the same as data access: A document setting out sources and methods still leaves external researchers unable to reproduce the estimates without the underlying unit level data. Eg. The document explicitly contains no new data.
      The Fix: Release anonymised unit level datasets for the corporate and enterprise sources on a fixed lag, so the published estimates are independently replicable.

    Conclusion

    India has moved its manufacturing accounts onto the deflation method the criticism had been demanding, and it has published the reasoning faster than it ever has. The upgrade stops short of the import intensive categories, and it still rests on price indices that were never built to measure producer prices. The thing to watch is whether the remaining categories are brought in and whether the Producer Price Index transition is completed, since both decide whether the improvement holds at the next base revision.

    Back2Basics: Producer Price Index

    1. What it measures: A Producer Price Index tracks the change in prices received by domestic producers for their output at the first point of sale, before taxes and trade margins are added.
    2. Difference from the Wholesale Price Index: The Wholesale Price Index tracks transaction prices in wholesale markets and includes imported goods, so the same item can be counted at several stages. A Producer Price Index covers only domestic production and avoids that multiple counting.
    3. Status in India: India officially publishes the Wholesale Price Index and the Consumer Price Index. A shift to a Producer Price Index has been recommended by an official working group and remains under development.

    Matching Previous Year Question

    “[2021, GS3, 10 marks] Explain the difference between computing methodology of India’s Gross Domestic Product(GDP) before the year 2015 and after the year 2015.”

  • India’s real rate moment, the cost of delay

    India’s real rate moment, the cost of delay

    Mentor comment

    The Reserve Bank of India (RBI) has held the repo rate at 5.25% as Consumer Price Index (CPI) inflation rose to 4.82% in August from 4.45% in July, the third consecutive month above the 4% target. Food inflation stands higher at 5.95%, and core inflation has risen to around 4.2%, which places price pressure beyond food alone. The August policy kept a neutral stance and projected inflation for the financial year 2026 to 2027 at around 5%. The latest reading has already moved past that projected trajectory for the year. The tension is that a repo rate which looks restrictive in nominal terms is delivering steadily less restraint in real terms, and it is doing so at a point when credit growth and output growth are both strong rather than weak.

    What is the ex ante real policy rate?

    1. Definition: The ex ante real policy rate is the repo rate less the inflation the economy expects over the period ahead, not the inflation already recorded in the last print.
    2. Why the distinction matters: Monetary policy operates through expected inflation, so subtracting yesterday’s inflation from today’s policy rate gives a number the economy is not actually responding to.
    3. The zero point: A repo rate of 5.25% held while inflation expectations move toward 5.25% leaves an ex ante real policy rate of approximately zero.
    4. What zero changes: A comfortably positive real policy rate and a zero real policy rate are two different monetary environments, even where the nominal rate on the screen has not moved.

    How close is India to a zero real rate?

    1. Headline drift above target: Inflation at 4.82% in August, up from 4.45% in July, is the third straight month above the RBI’s 4% target.
    2. Food and core moving together: Food inflation at 5.95% sits well above the headline, and core inflation at around 4.2% shows the pressure is broadening rather than concentrating in one basket.
    3. Projection already overtaken: The RBI projected inflation for the financial year 2026 to 2027 at around 5% at the August policy, and the latest print has moved beyond that average trajectory within weeks.
    4. Market expectations of tightening: The one year Overnight Indexed Swap (OIS) rate, the fixed rate at which market participants exchange a floating overnight rate over a year and therefore a direct read of expected future policy rates, is around 6%.
    5. The conditional statement: Sustained momentum in domestic prices combined with an external shock takes India into a zero real interest rate environment.

    What external pressures are pushing inflation up?

    1. West Asian conflict: Renewed conflict in West Asia has disrupted shipping through the Strait of Hormuz, the channel through which a large share of seaborne crude moves out of the Gulf.
    2. Crude above $100: Brent crude has moved above $100 a barrel with prices approaching $110.
    3. Currency channel: A weaker rupee raises the domestic price of every imported input irrespective of the dollar price.
    4. Global commodity prices: Elevated commodity prices worldwide compound the oil effect across the import basket.
    5. Monsoon uncertainty: The monsoon remains an independent source of risk to the food component, which is already the fastest rising part of the index.

    Why are rising inflation and negative real returns on bank deposits influencing household financial savings and gold demand?

    • Gold as an inflation hedge: Gold is often viewed as a store of value during periods of high inflation and economic uncertainty. Eg: If households expect inflation to remain high, they may increase purchases of gold jewellery or gold ETFs.
    • Higher inflation expectations reinforce the shift: If households expect prices to rise further, they may prefer holding assets whose value they believe can better preserve purchasing power. Eg: Reduce excess cash holdings.
    • Evidence from India: RBI research on the 2010-13 high-inflation period found that real returns on household financial savings weakened while demand for gold increased. The study estimated a 0.83 correlation between gold imports and household inflation expectations during the period.

    Should a supply driven price rise trigger a monetary response?

    1. The case against acting: A central bank should not raise rates simply because oil prices have increased, since a supply shock raises measured prices without excess demand behind it.
    2. The case for acting: A temporary price rise becomes permanent once it is embedded in expectations, wages, prices and credit, and that is the risk a central bank cannot leave untested.
    3. Demand is not weak: Gross Domestic Product (GDP) growth is running at 7.8%, so the standard argument that a falling real rate simply revives a slack economy does not describe current conditions.
    4. Amplification rather than neutralisation: A falling real rate stimulates demand and credit where the economy is operating below capacity. With demand already healthy and the shock coming from supply and expectations, the same mechanism amplifies inflation instead.

    Why does a near zero real rate not reach borrowers and savers alike?

    1. Credit growth: Bank credit grew 19.1% year on year at the end of August and remains exceptionally strong.
    2. Deposit growth and its composition: Deposits grew 17.8% at the end of August, the fastest pace in a decade, and much of that reflects foreign currency inflows under the RBI’s special Foreign Currency Non Resident Bank, or FCNR(B), mobilisation scheme, under which banks raise dollar denominated deposits from non residents on concessional terms. It does not establish that domestic households have become more willing to hold conventional deposits.
    3. Credit deposit ratio: The ratio stood at around 80.3% at the end of August, so banks face strong credit demand while competing for stable domestic deposits.
    4. Savers have exits: Households hold alternatives to bank deposits in mutual funds and equities, and a falling real return on deposits shifts them toward market linked assets, gold and other inflation hedges.
    5. The recorded precedent: RBI research on the earlier inflation episode found that rising inflation and inflation expectations cut the real return on household financial savings. Real returns on savings instruments turned negative across 2010 to 2013, household financial savings weakened, and gold demand rose, with the correlation between gold imports and household inflation expectations estimated at 0.83 over that period.

    Challenges to the ex ante real policy rate as a policy guide

    1. Expectations are estimated, not observed: The ex ante real rate rests on an inflation expectation that no market price reports directly, so the rate the committee acts on is itself a judgement. Eg. The RBI’s Inflation Expectations Survey of Households has run persistently above realised inflation.
      The Fix: Publish a single headline expectations series alongside each policy statement, so the real rate the committee is acting on is visible to the market.
    2. Supply shocks distort the signal: An imported price rise lifts measured inflation with no excess demand behind it, so a rate response tightens domestic activity that did not cause the problem. Eg. The 2022 conflict in Ukraine pushed Indian headline inflation past 7% on energy and edible oil alone.
      The Fix: State the persistence test on core inflation separately from the headline print in the policy rationale, and act on the former.
    3. Transmission lags defeat timing: A repo change reaches lending and deposit rates over several quarters, so a move calibrated to today’s reading lands on a different economy. Eg. The external benchmark linked lending rate regime was introduced in October 2019 because pass through under the marginal cost of funds based lending rate was slow and partial.
      The Fix: Extend external benchmark linking to the loan categories still priced off the marginal cost of funds based lending rate.
    4. Fiscal borrowing sets a competing rate: Heavy government issuance holds the term structure up, so the policy rate is not the only rate deciding the cost of credit. Eg. Benchmark ten year government securities have traded above the policy corridor irrespective of the stance the RBI announced.
      The Fix: Anchor annual borrowing to the announced debt to GDP path, so that the policy rate rather than issuance volume drives the cost of longer term credit.

    Conclusion

    The direction of the next move is settled. Inflation is rising toward the policy rate while growth and credit both remain strong, which leaves the policy rate doing less real work each month it is held. Timing is the instrument still in the RBI’s hands, and a timely 25 basis point adjustment ultimately costs less than a delayed 50 basis point correction. What to watch is whether the Monetary Policy Committee acts on the expectations reading or waits for a further headline print to confirm it.

    What is Monetary Policy?

    1. About: Monetary policy is the process by which the RBI controls money supply, interest rates and credit to achieve price stability, growth and financial stability.
    2. Statutory framework: The Monetary Policy Framework Agreement of 2015 made inflation targeting the primary objective, and the CPI Combined series compiled by the National Statistical Office is the target measure.
    3. Target and committee: The 4% target with a band of plus or minus 2 percentage points has been retained for the April 2026 to March 2031 period, and a six member Monetary Policy Committee sets the repo rate.
    4. Accountability trigger: A breach of the 2% to 6% band for three consecutive quarters obliges the RBI to submit a report to the government explaining the failure and the corrective action.

    Matching Previous Year Question

    [2024] What are the causes of persistent high food inflation in India? Comment on the effectiveness of the monetary policy of the RBI to control this type of inflation.

  • A homegrown innovation ecosystem is taking root

    A homegrown innovation ecosystem is taking root

    Why in the News

    Three institutional foundations of an innovation economy are advancing together in India for the first time: public research, corporate research and development (R&D), and deep technology entrepreneurship. Technologies that once arrived through imports are increasingly being invented at home, in research institutions, in industry and in startups. Gallium Nitride (GaN) semiconductor technology, critical for advanced radar, space systems and next generation communications, is now being developed domestically in a tightly export controlled field. Affordable immunotherapies developed in India are expanding access to advanced cancer care at the same time. The tension is between volume and value. Patent filings are rising sharply, while the number of patents actually in force, the rate of commercialisation and national R&D spending remain far below those of the economies India is measured against.

    What are the three major institutional pillars shaping India’s emerging innovation ecosystem?

    1. Public Research Institutions: Government-supported institutions conduct foundational and long-gestation research. Eg: DRDO developed indigenous Gallium Nitride (GaN) technology.
    2. Corporate R&D: Private-sector industries increasingly invest in research and development. Eg:Jio Platforms has made significant patent filings in 5G and 6G technologies.
    3. Deep-Tech Entrepreneurship: Startups convert advanced research into commercial applications. Eg:AGNIT Semiconductors is commercialising indigenous GaN technology developed through IISc’s research ecosystem.

    What do the patent and R&D numbers actually show?

    1. Filing growth: Patent filings rose from just over 1,10,000 in 2024-25 to more than 1,43,000 in 2025-26, an increase of 30.2%.
    2. Domestic ownership of filings: Domestic applicants now account for almost seven in ten filings, so the growth is not driven by foreign applicants seeking protection in the Indian market.
    3. Patents in force, which is the real test: Patents in force in India stood at just over 2,40,000 in 2025, against 5.7 million in China, 3.5 million in the United States and 2.1 million in Japan on 2024 data. Patents in force counts rights that were granted and are still being maintained, so a wide gap against filings points to low grant rates, high abandonment, or both.
    4. The spending floor beneath all of it: India spends just under 1% of GDP on research and development, against about 2.4% in China and 3.5% in the United States.

    What is gallium nitride (GaN) and why is it strategic?

    1. What it is: Gallium Nitride is a semiconductor material that handles higher voltage, higher frequency and higher temperature than silicon, which is why it is used where power density and signal strength matter more than cost.
    2. Where it is used: It underpins monolithic microwave integrated circuits (MMICs), the single chip radio frequency circuits inside advanced radar, satellite links and next generation wireless equipment, and it is subject to export control for that reason.

    What does the GaN breakthrough show about the public research pillar?

    1. The breakthrough and where it happened: Scientists of the Defence Research and Development Organisation (DRDO) at the Solid State Physics Laboratory (SSPL) in Delhi and the Gallium Arsenide Enabling Technology Centre (GAETEC) in Hyderabad announced a breakthrough in making GaN MMICs in March 2023.
    2. Why it had to be built at home: The technical know how for these circuits was, by widely reported accounts, refused to India under the offset provisions of the Rafale fighter jet purchase from France.
    3. The club it joined: India is now one of seven countries to have mastered this technology, alongside China, France, Germany, Russia, South Korea and the United States.
    4. Transfer out of defence: DRDO is actively transferring GaN High Electron Mobility Transistor (HEMT) based MMIC technology, a transistor design that carries current through a very thin high mobility layer, for use in 5G and 6G wireless infrastructure, electric vehicle on board chargers and renewable energy inverter systems.
    5. The commercial end of the pipeline: AGNIT Semiconductors, a spin off from the Centre for Nano Science and Engineering (CeNSE) at the Indian Institute of Science, Bengaluru, is translating homegrown GaN technology into commercial applications.

    Is India moving from standard implementer to standard setter?

    1. The alliance and its target: The Bharat 6G Alliance (B6GA) has stated an aim of contributing 10% of global 6G patents by 2030.
    2. The filing base so far: Alliance members have made more than 7,700 patent filings across 5G and 6G technologies, including over 4,400 foreign filings.
    3. The caveat on those numbers: These are applications, not grants, and not declared standard essential patents, which are the patents a technical standard cannot be implemented without and which earn licensing revenue from every implementer.
    4. Participation in the standards body: Indian contributors made almost 3,000 technical contributions to the 3rd Generation Partnership Project (3GPP), the body that writes mobile communication standards, in the last year, a 15 fold increase over 2020.
    5. International filing rank: The World Intellectual Property Organization (WIPO) 2025 Patent Cooperation Treaty (PCT) rankings, which track a single international application route that reserves rights across member countries, placed Jio Platforms Limited 19th overall among international filers, a rise of more than 300 places and its first entry into the top 20.

    What has changed in the startup ecosystem?

    1. The capital commitment behind it: Members of the India Deep Tech Alliance (IDTA) have made deep technology commitments of more than $2.5 billion, alongside the central government’s Research, Development and Innovation (RDI) financing.
    2. Earth observation: Pixxel Space, founded by two alumni of the Birla Institute of Technology and Science, Pilani, has six satellites in orbit in hyperspectral imaging, which captures hundreds of narrow wavelength bands so materials can be identified rather than merely seen, with a full constellation of 18 to 24 planned.
    3. Launch vehicles: Skyroot Aerospace flew the Vikram-1 low earth orbit launch, and the Indian Institute of Technology Madras nurtured Agnikul Cosmos is working toward fully reusable launch vehicles.
    4. Affordable advanced medicine: ImmunoACT, incubated at the Indian Institute of Technology Bombay with the Tata Memorial Centre, developed NexCAR19, India’s first indigenous CAR-T cell therapy, in which a patient’s own immune cells are re engineered to attack cancer cells, delivered at a tenth of typical treatment costs.
    5. Preventable blindness: Bengaluru based Remidio Innovative Solutions, supported at early stage by the Biotechnology Industry Research Assistance Council (BIRAC), screens for diabetic retinopathy and glaucoma through smartphone enabled retinal imaging with artificial intelligence.

    Challenges to India’s homegrown innovation ecosystem

    1. Patent examination capacity: A grant depends on examiner throughput, so filings rising faster than examiner strength lengthen the wait rather than produce enforceable rights. Eg. The Controller General of Patents, Designs and Trade Marks administers patents, designs, trade marks and geographical indications through a single office.
      The Fix: Ring fence recruitment of technically qualified examiners to the patent stream and publish disposal data by technology field.
    2. The cost of keeping a patent in force: A granted patent lapses unless a renewal fee is paid every year, so a holder with no paying customer lets it go. Eg. The Patents Act, 1970 requires renewal fees annually from the third year across the twenty year term.
      The Fix: Defer renewal fees for publicly funded institutions and recognised startups until the patent earns its first revenue.
    3. Non standard transfer terms for publicly funded intellectual property: Each laboratory negotiates its own royalty and exclusivity terms, so a licensee faces a fresh negotiation at every institution. Eg. The Protection and Utilisation of Public Funded Intellectual Property Bill, 2008, drafted to settle exactly those terms, was never enacted.
      The Fix: Issue one standard licensing template with published royalty bands for every publicly funded laboratory.
    4. No public first customer for unproven technology: Procurement rules reward the lowest price and a record of prior supply, which a first time deep technology supplier cannot show. Eg. The Public Procurement (Preference to Make in India) Order, 2017 sets local content thresholds but creates no route for a technology with no supply history.
      The Fix: Reserve a share of ministry procurement for first of a kind indigenous technology with a relaxed prior experience condition.

    Conclusion

    India’s innovation constraint has moved. The question is no longer whether homegrown technology can be created, since a full pipeline from government laboratory to academic institution to commercial venture now exists in at least one strategic field. The open question is whether a right on paper can be turned into a product with a buyer, which is where filings, grants and revenue currently part company. The marker to watch is the share of filings that survive to become patents in force, because that one ratio tests grant capacity, commercial intent and maintenance funding at the same time.

    Government Initiatives for India’s research and innovation ecosystem

    1. Anusandhan National Research Foundation (ANRF): Established under the Anusandhan National Research Foundation Act, 2023 to seed and grow research in universities, colleges and research laboratories, with the larger share of its funding intended to come from non government sources.
    2. Startup India: Launched in 2016 under the Department for Promotion of Industry and Internal Trade, it gives recognised startups tax exemptions, self certification under labour and environment laws, and fast tracked patent examination with fee rebates.
    3. Fund of Funds for Startups: Operated by the Small Industries Development Bank of India (SIDBI), it invests in Alternative Investment Funds rather than in startups directly, so capital reaches ventures through professional fund managers.
    4. Atal Innovation Mission: Runs Atal Tinkering Labs in schools and Atal Incubation Centres in host institutions, working on the supply of innovators rather than on the funding of firms.
    5. Technology Development Board: Set up under the Technology Development Board Act, 1995 to provide loans and equity to companies commercialising indigenous technology.

    Back2Basics: Research, Development and Innovation (RDI) Scheme

    1. What it is: A central financing window for private sector led research in sunrise and strategic sectors, aimed at the stage private capital avoids.
    2. Size: A corpus of Rs 1 lakh crore was approved for it by the Union Cabinet in 2025.
    3. How the money moves: Funds flow through a special purpose fund to second level fund managers, who extend long tenure low or nil interest loans or take equity, rather than paying out direct grants.
    4. Who steers it: It is guided by the Governing Board of the Anusandhan National Research Foundation, so research financing and research promotion sit under one apex structure.

    [2026, GS3, 15] How are startups in India promoting entrepreneurship, innovation and employment? Discuss the global and domestic challenges in their working and suggest suitable measures to overcome these challenges.”

  • Creative Economy: India’s Next Growth Frontier

    Creative Economy: India’s Next Growth Frontier

    Why in the News?

    The creative economy is emerging as a major source of employment, entrepreneurship and innovation in India. The AVGC sector is expected to require nearly 2 million skilled professionals by 2030, creating new opportunities for India’s youth.

    Key Highlights

    • Creative economy is driven by: Ideas and imagination, Culture, Innovation, Intellectual Property (IP)
    • Major sectors include: Film, Music, Gaming, Animation, Design, Publishing, Advertising, and Digital content

    Economic Significance

    • Creative economy contributes 3.1% of global GDP.
    • Accounts for 6.2% of global employment.
    • Around 57 million Indians are already working in cultural and creative occupations.
    • India’s media and entertainment economy: ₹2.5 trillion.

    AVGC Sector

    AVGC = Animation, Visual Effects, Gaming and Comics

    • Expected skilled-professional requirement by 2030: nearly 2 million.
    • Creates opportunities in: Animation, Gaming, Visual effects, Digital content, and Creative technology

    Government Initiatives

    • Indian Institute of Creative Technologies: The government is supporting the Indian Institute of Creative Technologies to build specialised capabilities and future-ready skills in the creative sector.

    AVGC Creator Labs

    • Planned in 15,000 schools
    • Planned in 500 colleges
    • Aim to equip young people with skills relevant to the emerging creative economy.

    Policy and Regulatory Issues

    • Growth of the creative economy requires appropriate frameworks relating to:
      • Copyright protection
      • Fair compensation for creators
      • Intellectual Property Rights
      • Responsible use of Artificial Intelligence (AI)

    Prelims Quick Revision

    • Creative economy is based on creativity, culture, innovation and intellectual property.
    • Global contribution: 3.1% of GDP.
    • Global employment share: 6.2%.
    • Around 57 million Indians work in cultural and creative occupations.
    • Indian media and entertainment economy: ₹2.5 trillion.
    • AVGC skilled workforce requirement by 2030: nearly 2 million.
    • AVGC Creator Labs: 15,000 schools + 500 colleges.

  • After US Fed and others, will RBI also raise interest rates in Oct?

    Why in the News

    The Federal Open Market Committee (FOMC), the rate setting panel of the US central bank, has raised the federal funds rate target range by 25 basis points to 3.75% to 4%, its first increase in three years. The decision reversed the expectation that a new Chair at the helm of the Federal Reserve would push forward the US President’s agenda of lower interest rates, and all 12 FOMC members, including the new Chair, voted for the increase. The move is one of several, with the European Central Bank, the UAE and Bahrain all raising rates within days. The tension now sits with India. The Reserve Bank of India (RBI) is mandated to hold consumer price inflation at 4%, retail inflation has run above target for three straight months, and its Monetary Policy Committee (MPC) meets from 5 to 7 October.

    What is the Monetary Policy Committee (MPC)?

    1. What it is: The statutory committee of the Reserve Bank of India that decides the repo rate, the rate at which the central bank lends to commercial banks against government securities.
    2. Its mandate: It is required to target consumer price inflation of 4%, within a tolerance band of 2% to 6%.
    3. How the rate works: A higher repo rate raises the cost of funds for banks, which passes into lending rates and is intended to compress demand and with it price pressure.

    Why did the US Federal Reserve raise rates?

    1. The stated inflation reason: The FOMC said “inflation remains elevated” and that the decision to increase rates will support a “timelier return” to the 2% inflation target, closing with the line that the Committee “will deliver price stability”.
    2. The growth reading behind it: The FOMC described US economic activity as expanding at a “solid” pace, with domestic spending resilient, productivity growth strong and capital investment robust.
    3. The labour market reading: Job gains have kept pace with the workforce and the unemployment rate has changed little, which removes the usual argument against tightening.
    4. The political objection: The White House called the decision “rather unfortunate” and said it was not backed by a “particularly compelling economic case”, which the unanimous vote nonetheless overrode.

    What does the wider round of rate decisions show?

    1. The Gulf economies: The central banks of the UAE and Bahrain both raised their main interest rates by 25 basis points, to 3.9% and 4.5% respectively, mirroring the US decision.
    2. Japan at a three decade high: The Bank of Japan is widely expected to raise interest rates to 1.25%, the highest in 31 years, on the reading that risks to Japanese inflation are skewed to the topside.
    3. The drivers named for Japan: A weak yen raising import prices, no resolution in sight to the West Asia conflict or to traffic through the Strait of Hormuz, and strong artificial intelligence demand adding to goods and services prices.
    4. The euro area: The European Central Bank raised interest rates by 25 basis points, noting that upward price pressures caused by the West Asia conflict are set to keep inflation “well above target for an extended period”.
    5. The exception: The Bank of England left its policy rate unchanged at 3.75%, so the tightening round is broad rather than universal.

    What is happening to prices in India?

    1. Across every measure: In August, inflation for households, wholesalers and producers all increased, so the pressure is not confined to the retail basket.
    2. The headline number: The Consumer Price Index (CPI) rose 4.82% in August, the third straight month above the 4% target, though still inside the tolerance band.
    3. The near term projection: Some economists see CPI inflation jumping to 5.7% in September.
    4. The central bank’s own path: The RBI expects CPI inflation to average 4.7% in July to September, 5.9% in October to December, 5.5% in January to March 2027 and 5.3% in April to June 2027, so its own forecast breaches the upper tolerance band in the current quarter.

    Has price pressure become generalised, and does the MPC accept that?

    1. The MPC’s August reading: The Committee said in August that there were “little signs of” a generalisation of price pressures, which is the reading that supported holding the rate.
    2. The contrary assessment: The Group Chief Economic Adviser of the State Bank of India holds that the process of generalisation of price pressures has already started.
    3. The projected peak on that view: CPI inflation may cross the 6.5% mark before dropping to less than 6% in early 2027, which places it outside the tolerance band rather than merely above target.
    4. The prescription that follows: A 25 basis point increase at each of the October and December MPC meetings, followed by a pause to take stock against incoming data.

    Challenges to a rate hike by the RBI

    1. Supply driven price pressure: The increase is coming through imported energy and the West Asia conflict, and a policy rate acts on domestic demand rather than on an external supply shock. Eg. Retail inflation in India spiked in 2022 after crude and edible oil prices rose, and the repo rate was raised by 250 basis points over the following year without the shock itself abating.
      The Fix: Pair the rate action with supply measures on the affected commodities, such as duty adjustments and buffer releases, so the instrument matches the source of the pressure.
    2. Transmission lag: Policy rate changes reach lending and deposit rates over several quarters, so an October increase acts on prices well after the projected peak has passed. Eg. Banks repriced external benchmark linked loans within a quarter during the 2022 tightening while deposit rates moved far more slowly.
      The Fix: Expand the share of loans linked to an external benchmark so the increase reaches borrowers in the quarter it is announced.
    3. Cost to growth and to borrowers: A higher repo rate raises the cost of housing and working capital loans at a time when the price shock is already compressing household budgets. Eg. Home loan instalments rose across banks through the 2022 to 2023 tightening cycle.
      The Fix: Sequence the increase in two smaller steps with a stated pause, so borrowers and firms can price the path rather than the level alone.
    4. Limited currency benefit: Raising rates while major central banks are raising theirs leaves the interest differential roughly unchanged, so the rupee gains little support from the move. Eg. The rupee weakened through 2022 despite repeated repo rate increases, because the Federal Reserve was tightening faster.
      The Fix: Rely on reserve management and rupee settlement arrangements for exchange rate support, rather than loading that job onto the policy rate.

    Conclusion

    The question is no longer whether India is an exception to a global tightening round, since every major central bank except one has moved in the same direction within a week. It is whether the MPC accepts that price pressure has generalised, which is the reading it rejected in August and which its own forecast for October to December now strains. The decision window is 5 to 7 October, and a 25 basis point increase would be the first in three and a half years and would take the repo rate to 5.5%.

    Back2Basics: Federal Open Market Committee (FOMC)

    1. What it is: The monetary policy body of the US Federal Reserve System, which sets the target range for the federal funds rate.
    2. Composition: Twelve voting members, comprising the seven members of the Board of Governors, the President of the Federal Reserve Bank of New York, and four other regional Reserve Bank presidents serving on rotation.
    3. Frequency: It holds eight scheduled meetings a year and issues a statement with each decision.
    4. What the federal funds rate is: The rate at which US banks lend reserve balances to each other overnight, which anchors short term borrowing costs across the dollar system.

    Matching Previous Year Question

    “[2017] Which of the following statements is/are correct regarding the Monetary Policy Committee (MPC)? 1. It decides the RBI’s benchmark interest rates. 2. It is a 12-member body including the Governor of RBI and is reconstituted every year. 3. It functions under the chairmanship of the Union Finance Minister. Select the correct answer using the code given below: (a) 1 only (b) 1 and 2 only (c) 3 only (d) 2 and 3 only Answer: (a)”

  • PM pitches India as trusted base for chip manufacturing

    Why in the News

    The Prime Minister has said the world needs “new and trusted locations” for semiconductor manufacturing and that India is readying itself to meet that requirement, while inaugurating SEMICON India 2026 in New Delhi. He said India has entered the second phase of its semiconductor journey, moving beyond policy announcements and plant construction toward commercial production of chips. The pitch answers a specific market condition, that chip companies are looking to diversify their global supply chains away from a narrow set of manufacturing locations. The tension is between the pitch and the base it rests on. India’s semiconductor demand is projected at $110 billion by FY30, while domestic manufacturing remains at a nascent stage and imports have grown at a compound annual rate of 23%.

    What is the India Semiconductor Mission?

    1. What it does: It is the central programme that provides fiscal support to semiconductor projects in India, covering fabrication, packaging and other parts of the chip value chain.
    2. Phase one scale: Twelve semiconductor projects were approved under the first phase, spanning fabrication, packaging and other value chain segments.
    3. Phase two scope: The programme has moved to Semicon 2.0, a Rs 1.27 lakh crore programme that widens the focus beyond large chip factories.

    Why is India pitching itself as a trusted location now?

    1. Supply chain diversification: Chip companies are looking to spread manufacturing across more countries, which creates an opening for a location that is not already in the established set.
    2. The trust framing: The pitch was made as a claim about reliability rather than cost, on the stated ground that the world’s trust in India is increasing alongside its economic growth.
    3. The supporting economic markers: The claim was anchored on 7.8% quarterly GDP growth, a recent sovereign rating upgrade by a Japanese credit rating agency, and the New Delhi Declaration adopted at the BRICS Summit India hosted this month.
    4. The stated pace: India has achieved in about four years what generally takes countries around a decade to build, though semiconductor manufacturing was described as a journey with no end point.

    What has the first phase actually delivered?

    1. Projects in production: Five of the twelve approved projects have already started commercial production, which is the marker separating phase one from phase two.
    2. Memory output from Gujarat: Micron Technology has begun shipping DRAM (Dynamic Random Access Memory) and NAND memory products to customers globally from its Sanand facility in Gujarat.
    3. The scale up path there: The plant is expected to assemble and test tens of millions of chips this year, scaling to hundreds of millions next year.
    4. Design and engineering presence: Infineon Technologies, a German chipmaker, now has over 2,800 employees in India, and has said India has potential to strengthen its position across the global semiconductor value chain as its domestic market and technology capabilities expand.

    What does Semicon 2.0 change about the approach?

    1. Beyond the fab: The programme extends support to semiconductor equipment, materials, design, research and development, supply chains and skilled manpower, rather than to large chip factories alone.
    2. The ecosystem logic: A fabrication plant depends on a surrounding base of tool makers, chemical and gas suppliers and trained engineers, which the first phase did not fund directly.
    3. Project count: The next phase is expected to see the number of approved projects increase further.

    How large is the demand gap the mission is chasing?

    1. Projected demand: India’s semiconductor demand is projected to reach $110 billion by FY30 and to exceed $200 billion by FY35.
    2. The import bill so far: The country spent almost $150 billion on semiconductor product imports between FY17 and FY25.
    3. The trajectory if nothing changes: Imports grew at a compound annual growth rate of 23% over that period, and on the same trend annual imports could reach $240 billion by 2035.
    4. The policy conclusion drawn: Building a comprehensive semiconductor ecosystem has been identified as an urgent national priority on the strength of that gap.

    Challenges to the India Semiconductor Mission

    1. Utility reliability at fab sites: A fabrication plant needs continuous ultrapure water and uninterrupted power, and an interruption of either scraps the wafers in process. Eg. Taiwan’s chip plants cut water use and trucked in supplies during the 2021 drought when the island’s reservoirs fell to record lows.
      The Fix: Ring fence dedicated water recycling plants and captive power capacity for each approved site as a condition of disbursal.
    2. Fabrication workforce depth: India’s semiconductor engineers sit in design centres rather than in fabrication and process engineering, which is a different skill base. Eg. Design centres of global chipmakers have operated in Bengaluru and Hyderabad for over two decades without a commercial fabrication plant alongside them.
      The Fix: Tie a share of the incentive to process engineer placements trained through partnerships with operating fabs abroad.
    3. Equipment and materials import dependence: The tools and high purity inputs a fab consumes come from a handful of global suppliers, so domestic assembly does not by itself reduce external exposure. Eg. Extreme ultraviolet lithography machines are produced by a single company, ASML of the Netherlands.
      The Fix: Anchor equipment and materials suppliers in India through long term purchase commitments from the approved plants rather than through subsidy alone.
    4. Competition at mature nodes: India’s approved capacity targets older process nodes, where large capacity additions elsewhere can push prices below the level a new entrant needs. Eg. Sustained capacity expansion in China at 28 nanometre and older nodes has driven down prices for legacy chips.
      The Fix: Condition support on secured long term offtake contracts rather than on installed capacity alone.

    Conclusion

    The pitch is that trust and diversification, rather than cost, are what bring chip manufacturing to India. The measurable claim behind it is narrower, five plants in commercial production against a demand curve heading for $200 billion. Semicon 2.0’s widening into equipment, materials and skills is the part that decides whether the fabs have a supply base around them, and the count of projects approved under it is the next thing to watch.

    Matching Previous Year Question

    “[2025, GS3, 15] India aims to become a semiconductor manufacturing hub. What are the challenges faced by the semiconductor industry in India? Mention the salient features of the India Semiconductor Mission.”

  • Who has to pay MDR on UPI and who stands to gain the most?

    Why in the News

    The National Payments Corporation of India (NPCI) has released a circular allowing a Merchant Discount Rate (MDR) to be levied on certain Unified Payments Interface (UPI) payments from 15 October. The charge falls on person to merchant (P2M) payments above Rs 2,000 and is paid by merchants to payment processors and banks rather than by consumers. The circular follows a long public argument over whether UPI would be charged at all, which the Ministry of Finance answered with a press release saying banks have been advised to ensure merchants do not pass the charge on to customers, and that UPI application providers are expressly prohibited from imposing platform fees or hidden charges on users. The tension is over incidence. The Opposition argues the charge will raise prices for consumers, while the government argues it will not, and that even the impact on merchants will be minimal.

    What is the Merchant Discount Rate (MDR)?

    1. Definition: MDR is a fee for using UPI that is paid by the merchant to the payment processors and the banks that carry the transaction. Consumers do not pay it directly.
    2. Who it is collected from: It is deducted from the merchant’s receipts, so the merchant receives less than the amount the customer sent.
    3. Coverage on UPI: It applies only to person to merchant payments above a value threshold, not to transfers between two individuals.

    What does a merchant actually pay, and on which transactions?

    1. The standard rate: Mid to large sized merchants receiving UPI payments in excess of Rs 2,000 per transaction pay 0.4% of the transaction value.
    2. The absolute cap: For transactions of Rs 75,000 and above, the MDR is capped at Rs 300 per transaction, so the charge stops rising with the ticket size.
    3. Essential and thin margin sectors: Transactions of Rs 2,000 or more in railways, telecommunications, insurance, fuel and agricultural inputs attract a flat Rs 5 per transaction. The stated purpose is cost certainty for critical public services and for businesses operating on narrow margins.
    4. Capital market payments: Payments to mutual funds, stockbrokers, dealers and for equities attract 0.02%, capped at Rs 300 per transaction, a lower rate justified as support for retail participation in formal financial markets.

    How much of UPI escapes the charge altogether?

    1. Person to person transfers: All P2P transactions remain free regardless of amount, under the specification that no transaction fee, platform fee or other charge may be imposed on individuals for sending or receiving money through UPI. P2P is about 37% of total UPI transaction volume.
    2. Small ticket merchant payments: Payments to merchants of up to Rs 2,000 remain free of MDR, and these are another 60.5% of all UPI transactions by volume.
    3. The combined exemption: Taken together, 97.5% of all UPI transactions remain free, since P2M payments above Rs 2,000 are just 2.5% of volume.
    4. Small merchants and street vendors: Merchants receiving up to Rs 1 lakh per month through UPI QR codes under the Person to Person Merchant (P2PM) category are exempt, which pushes the charged share below 2.5%.

    How large is the revenue pool, and how is it divided?

    1. Value concentration: P2M transactions above Rs 2,000 are only 2.5% of volume but 20% of all UPI transactions by value.
    2. The monthly ceiling: Of the Rs 29.8 lakh crore transacted over UPI in August 2026, P2M payments above Rs 2,000 were Rs 5.99 lakh crore, so the absolute maximum collectible is about Rs 2,400 crore a month. The caveats, exemptions, flat rates and caps mean the actual receipts will be lower.
    3. The split: The payer’s bank takes about 40%, because it holds the customer’s account and bears the core authorisation, security and settlement costs. The merchant’s bank takes 30% for managing the merchant relationship, QR code deployment and merchant settlements.
    4. The technology layers: The UPI app or Third Party Application Provider (TPAP) receives 20%, and the Payment Service Provider that links the technology partner bank to the central network switches receives the final 10%.
    5. The promotion fund: A dedicated fund to promote UPI adoption among small merchants will receive an amount equal to 5% of total MDR collections. The circular does not specify which payment system player contributes that 5%.

    Which institutions stand to gain the most?

    1. Yes Bank on both legs: It is the payer bank in more than 50% of all UPI transactions and the payee bank in about 55%, so it collects the largest share of both the 40% and the 30% pools.
    2. The next largest banks: ICICI Bank is the second largest payer bank at 18.3%, and Axis Bank is the second largest payee bank at about 19%.
    3. The two dominant apps: PhonePe accounts for about 46% of UPI transactions by volume and Google Pay another 32%, so the TPAP pool flows overwhelmingly to two applications.

    Challenges to the MDR on UPI

    1. Pass through to consumers: The instruction that merchants must not recover the fee from customers is an advisory rather than an enforceable term, so the cost can surface as a higher listed price. Eg. Surcharging on card payments continued at fuel outlets and small retailers for years after similar advisories were issued.
      The Fix: Write the no pass through condition into the merchant onboarding agreement of the acquiring bank, with a customer complaint route attached to it.
    2. Structuring below the threshold: A hard cut off at Rs 2,000 rewards splitting a single large payment into several smaller ones, which costs the payment system volume without collecting revenue. Eg. Cash dealings were routinely broken up below the Rs 2 lakh limit introduced under Section 269ST of the Income Tax Act, 1961 in 2017.
      The Fix: Charge on the merchant’s monthly aggregate receipts above a threshold rather than on each transaction, so splitting yields no saving.
    3. The cliff at the small merchant limit: The P2PM exemption ends abruptly once monthly receipts cross Rs 1 lakh, so a marginal increase in turnover removes the exemption from the whole of a merchant’s qualifying receipts. Eg. A vendor receiving Rs 1.05 lakh a month loses the exemption entirely rather than on the excess alone.
      The Fix: Taper the charge above the limit so only receipts beyond Rs 1 lakh attract MDR.
    4. Reinforcement of app concentration: A revenue stream keyed to transaction share rewards the applications that already hold most of the market. Eg. NPCI’s cap limiting any third party application to 30% of UPI volume has been deferred repeatedly since it was first framed in 2020.
      The Fix: Weight the small merchant promotion fund toward applications below a defined market share, so the subsidy runs against concentration rather than with it.

    Conclusion

    The charge is deliberately narrow in reach and wide in value. Almost all of UPI stays free, yet the fifth of transaction value that is charged sits with a small set of banks and two applications, which is where the revenue will settle. Whether the advisory against pass through holds is the thing to watch once the framework takes effect on 15 October.

    Back2Basics: National Payments Corporation of India (NPCI)

    1. What it is: An umbrella organisation for retail payments and settlement systems in India, incorporated in 2008.
    2. Legal and institutional basis: It was set up as a not for profit company under the guidance of the Reserve Bank of India and the Indian Banks’ Association, and operates under the Payment and Settlement Systems Act, 2007.
    3. Systems it runs: UPI, RuPay, the Immediate Payment Service, the National Automated Clearing House, FASTag and the Aadhaar Enabled Payment System.
    4. Rule making role: It sets the operating circulars, pricing rules and participation norms that member banks and third party applications must follow on these systems.

    Matching Previous Year Question

    “[2018] Which one of the following best describes the term “Merchant Discount Rate” sometimes seen in news? (a) The incentive given by a bank to a merchant for accepting payments through debit cards pertaining to that bank. (b) The amount paid back by banks to their customers when they use debit cards for financial transactions for purchasing goods or services. (c) The charge to a merchant by a bank for accepting payments from his customers through the bank’s debit cards. (d) The incentive given by the Government to merchants for promoting digital payments by their customers through Point of Sale (PoS) machines and debit cards. Answer: (c)”