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GS Paper: Indian Economy

  • Interrupted growth Industrial growth is still tied to government spends on infrastructure 

    Why in the News?

    India’s Index of Industrial Production (IIP) recorded a 10-month low growth of 1.5% in June, primarily due to a sharp decline in mining (–8.7%) and electricity output (–2.6%).

    What caused the IIP slowdown in June?

    • Sharp contraction in mining and electricity output: Mining activity declined by –8.7%, and electricity generation fell by –2.6%, significantly dragging overall growth. These two sectors jointly account for 22.3% of the IIP weightage.
    • Erratic monsoon and waterlogging in key mining belts: Early and uneven southwest monsoon caused flooding in mining areas of Odisha, Jharkhand, and West Bengal, disrupting production and logistics.
    • Damage to infrastructure and supply chain disruptions: Waterlogging led to damage in power distribution infrastructure and interrupted supply chains, resulting in subdued industrial activity and power demand.

    How did climate events contribute?

    • Disruption of mining activities: Heavy rainfall and waterlogging in mineral-rich regions like Jharkhand, Odisha, and West Bengal hindered extraction and transportation of key minerals. Eg: Jharkhand received 504.8 mm rainfall (against a normal of 307 mm), affecting coal and iron ore production.
    • Damage to power infrastructure: Flooding led to breakdowns in electricity distribution systems, especially in rural and semi-industrial belts. Eg: Widespread inundation disrupted power supply, lowering electricity output by –2.6% in June.
    • Supply chain interruptions: Climate irregularities caused logistical delays and increased input costs, hampering industrial flow.

    Why is India reluctant to link climate events with economic data like IIP or GDP?

    • Institutional hesitation and narrative control: Key agencies like the Ministry of Statistics and RBI prefer attributing economic fluctuations to factors like high base effects, global demand shifts, or input cost variations, avoiding politically sensitive climate linkages.
    • Complexity of climate attribution: Linking specific events (like heavy rain or drought) to climate change requires scientific modelling and probabilistic data, which are resource-intensive and not yet integrated into mainstream reporting.
    • Fear of politicisation and accountability: Acknowledging climate-linked economic slowdowns could invite policy criticism and demand for corrective action, making policymakers cautious.

    How do climate disruptions in mining and power affect industrial output?

    • Halted Mining Operations: Extreme rainfall leads to waterlogging and flooding in mining belts, making extraction unsafe and unviable. Eg: In June, mining activity contracted by –8.7% due to excessive rainfall in Odisha, Jharkhand, and West Bengal.
    • Damage to Power Infrastructure: Climate events like floods and storms disrupt power transmission lines and generation facilities, leading to reduced electricity output. Eg: Electricity production shrank by –2.6% in June, which lowered industrial productivity across sectors.
    • Supply Chain Disruptions: Delays in the supply of raw materials (like coal) due to climate-induced transport and logistical breakdowns affect the manufacturing cycle. Eg: Sluggish industrial output growth of 3.9% in June, despite some sectoral growth, was partly due to such disruptions.

    What can India learn from global practices in integrating climate risk into economic reporting?

    • Mainstream Climate Risk in Macroeconomic Analysis: Institutions like the European Central Bank (ECB) and Bank of England incorporate climate risk assessments into their economic forecasts and financial stability reports. Eg: The ECB uses climate stress tests to estimate the impact of extreme weather on GDP and inflation projections, helping shape responsive monetary and fiscal policies.
    • Develop Probabilistic Climate Attribution Models: Global agencies invest in scientific and data-driven models to link specific climate events to broader economic outcomes. Eg: The UK Met Office partners with economic bodies to assess how floods or heatwaves influence sectoral output and employment, ensuring better policy alignment and risk preparedness.

    Why is climate attribution important for informed economic policymaking?

    • Enables Targeted Risk Mitigation and Resource Allocation: Understanding the economic impact of specific climate events helps policymakers design sector-specific interventions, such as improved infrastructure in flood-prone mining regions or energy grid resilience plans.
    • Strengthens Long-term Economic Planning and Resilience: Integrating climate attribution allows for accurate forecasting and budgeting, ensuring that climate-linked disruptions (e.g., to power or mining) are factored into growth strategies, insurance frameworks, and industrial policies.

    Way forward: 

    • Integrate Climate Risk Frameworks into Economic Reporting: Agencies like the Ministry of Statistics and RBI should formally include climate-related variables in metrics like IIP and GDP, using probabilistic models and event attribution tools to capture the economic impact of extreme weather events.
    • Build Institutional Capacity for Climate-Economic Analysis: Establish a dedicated national climate-economic observatory or task force to monitor, assess, and publish regular reports on how climate disruptions affect different sectors, drawing inspiration from institutions like the European Central Bank.

    Mains PYQ:

    [UPSC 2021] Investment in infrastructure is essential for more rapid and inclusive economic growth.”Discuss in the light of India’s experience.

    Linkage: This question is highly relevant as it directly addresses the crucial role of “investment in infrastructure” for “economic growth.” The article explicitly states that “the robust growth in capital (3.5%), intermediate (5.5%) and infrastructure (7.2%) goods output, indicates that much of industrial growth continues to hinge on the government’s infrastructure spends”.

  • India’s FDI challenge: In a world of shrinking investment, rising competition, capital will chase confidence, clarity

    Why in the News?

    India is in the spotlight as recent UNCTAD data reveals a significant decline in net FDI inflows, falling to a 15-year low in FY24, even though gross inflows remain strong.

    What are the key reasons behind the global decline in FDI flows, particularly to EMDEs?

    • Geopolitical Instability: Rising geopolitical tensions such as the Russia-Ukraine war, Middle East conflicts, and US-China rivalries have weakened investor confidence, especially in Emerging Markets and Developing Economies (EMDEs) due to increased risk perception. Eg: After the Ukraine war, many European investors pulled out from Eastern European nations due to security concerns.
    • Protectionist Policies: Countries have adopted more protectionist measures, including tighter FDI regulations, screening laws, and withdrawal from bilateral investment treaties (BITs), limiting foreign investor access. Eg: India terminated several Bilateral Investment Treaties post-2016, including with the Netherlands and Germany, leading to investor uncertainty.
    • Supply Chain Realignment: Due to disruptions from the COVID-19 pandemic and rising geopolitical tensions, companies are shifting towards nearshoring and friend-shoring, bypassing many EMDEs. Eg: Several U.S. firms moved manufacturing from China to Mexico or Vietnam rather than to India or African countries.

    Why has India experienced a sharp fall in net FDI despite rising gross inflows?

    • High Repatriation of Earnings: While gross FDI inflows have increased, foreign investors are repatriating more profits, dividends, and disinvestments, leading to a decline in net FDI. Eg: In FY24, gross inflows were around $71 billion, but outflows (disinvestment/repatriation) rose sharply, reducing net FDI to $10.6 billion.
    • Increased Disinvestment by Foreign Investors: Foreign companies have sold off stakes or exited Indian ventures due to regulatory uncertainties or global consolidation strategies. Eg: Vodafone’s reduction in stake in Vodafone Idea and exits by foreign private equity firms.
    • Shift in Investment Strategy: There is a growing trend toward private equity and venture capital, which often involves short-term investments and quicker exits compared to traditional FDI. Eg: Start-up funding peaked in 2021–22 but many investors exited via IPOs or mergers within 2–3 years.

    How can trade agreements and FTAs boost India’s FDI inflows and global integration?

    • Market Access and Investor Confidence: Trade agreements and FTAs offer preferential market access, reduce tariff and non-tariff barriers, and provide a stable regulatory environment, encouraging foreign investors. Eg: The India-UAE CEPA (2022) led to a 34% rise in bilateral trade and boosted UAE investments in sectors like logistics and infrastructure.
    • Integration into Global Value Chains (GVCs): FTAs help India plug into regional and global supply chains, making it a more attractive hub for FDI in manufacturing and exports. Eg: The India-ASEAN FTA improved electronics and automobile component exports, drawing FDI from Japan and South Korea into India.
    • Legal and Dispute Resolution Frameworks: Comprehensive FTAs often include investment protection clauses and dispute resolution mechanisms, which reduce investor risk and boost inflows. Eg: India’s negotiation of Investment Protection Agreements (IPAs) with the EU has raised interest among European investors in clean energy and pharma.

    Why is state-level reform crucial in India’s strategy to enhance FDI inflows?

    • Ease of Doing Business at Ground Level: State-level reforms simplify land acquisition, labour regulations, and approval processes, making local environments more investor-friendly. Eg: Andhra Pradesh ranked top in the Business Reforms Action Plan (BRAP) 2020 for streamlining industrial approvals and digitizing services.
    • Sector-Specific Policy Innovation: States can tailor sectoral incentives, infrastructure, and skill policies to attract targeted FDI in areas like textiles, electronics, or renewable energy. Eg: Tamil Nadu’s Electric Vehicle Policy attracted investments from Ola Electric and Hyundai in the EV sector.
    • Healthy Inter-State Competition: Reform-oriented states create competitive pressure, encouraging others to improve investment climates, creating a national uplift in FDI appeal. Eg: Gujarat’s proactive approach in renewable energy prompted states like Rajasthan to fast-track their solar park approvals.

    Way forward: 

    • Institutionalize Competitive Federalism: Strengthen the ranking framework for states based on FDI-related reforms (like BRAP), and link a portion of central incentives or grants to reform performance.
    • Build State-Capacity for Investor Facilitation: Enhance training for state-level bureaucrats, establish single-window clearance systems, and promote public-private dialogue platforms to address investor concerns proactively.

    Mains PYQ:

    [UPSC 2014] Though 100 percent FDI is already allowed in non news media like a trade publication and general entertainment channel, the Government is mulling over the proposal for in creased FDI in news media for quite some time. What difference would an increase in FDI make? Critically evaluate the pros and cons.

    Linkage:  Evaluating the “pros and cons” necessitates an understanding of the challenges and opportunities associated with foreign investment inflows, reflecting a part of India’s FDI challenge in attracting and managing capital effectively. This question directly related to the implications of increasing FDI in a specific sector.

  • MoSPI to integrate 8th Economic Census with 16th Population Census

    Why in the News?

    The Ministry of Statistics and Programme Implementation (MoSPI) is preparing for India’s 8th Economic Census by integrating it with the upcoming 16th Population Census.

    About the Economic Census:

    • Conducting Body: Ministry of Statistics and Programme Implementation (MoSPI).
    • Purpose: Creates a detailed database of non-agricultural economic establishments in India.
    • Key Data Captured: Covers location, clustering, ownership, employment size, and type of economic activity.
    • Unorganised Sector Inclusion: Includes informal units, vital for understanding employment dynamics.
    • Historical Background:
      • Economic Enquiry Committee: Proposed by Visvesvaraya Committee (1925); Setup by Bowley-Robertson Committee (1934).
      • Outcome: Led to the creation of the Central Statistical Office (CSO) in 1951 and national statistical systems.
      • First Census: Conducted in 1977 (excluding Lakshadweep), targeting non-agricultural units with at least one hired worker.
    • Timeline of Economic Censuses:
      • Years Conducted: 1980, 1990, 1998, 2005, 2013, and 2019–21 (7th Census).
      • Integration with Population Census: 2nd and 3rd rounds were aligned with the 1981 and 1991 Population Censuses.
      • 7th Census Status: Completed in 2021, but results pending due to COVID-related data quality issues.
      • Execution Support: MoSPI partnered with the CSC (Common Service Centre) network for grassroots-level implementation.

    Integration with the 16th Population Census:

    • Objective: Improve efficiency and reduce costs by leveraging shared field operations.
    • Data Collection: Enumerators will note household-based economic activity for MoSPI processing.
    • Census Schedule:
      • Oct 1, 2026: Snow-bound and remote regions (e.g., Ladakh, J&K, HP, Uttarakhand).
      • Mar 1, 2027: Rest of the country.
    • Preparatory Work: State and district committees have been formed to plan the 8th Census.
    [UPSC 2018] As per the NSSO 70th Round “Situation Assessment Survey of Agriculture Households”, consider the following statements:

    1.Rajasthan has the highest percentage share of agriculture households among its rural households.

    2.Out of the total households in the country, a little over 60 percent being to OBCs.

    3.In Kerala, a little over 60 percent of agriculture households reported to have received maximum income from sources other than agriculture activities.

    Which of the statements given above is/are correct?

    Options: (a) 2 and 3 only (b) 2 only (c) 1 and 3 only* (d) 1, 2 and 3

     

  • Inflation Hits 77-Month Low

    Why in the News?

    India’s inflation indicators have shown a significant downward trend, with the Consumer Price Index (CPI) dropping to a 77-month low of 2.1% in June 2025, and the Wholesale Price Index (WPI) contracting by -0.13%, marking its first decline in 20 months.

    Key Highlights on Inflation (June 2025):

    • Consumer Price Index (CPI) inflation dropped to 2.1%, the lowest in 77 months (since January 2019).
    • Wholesale Price Index (WPI) contracted by -0.13%, marking its first decline in 20 months.
    • Food and Beverages (CPI component) registered deflation of 0.2%, after being at 8.4% in June 2024.
    • WPI Food Articles saw a sharp fall of 3.75%, compared to 11.1% inflation in June 2024.
    • Crude Petroleum and Natural Gas (WPI) prices contracted by 12.3%, the 10th straight month of decline.
    • Inflation in Fuel and Light (CPI) eased to 2.55% (from 2.8% in May 2025).
    • Housing inflation increased marginally to 3.24%, while Pan, Tobacco and Intoxicants stayed stable at 2.4%.

    Back2Basics: Consumer Price Index (CPI) vs. Wholesale Price Index (WPI)

    Consumer Price Index (CPI) Wholesale Price Index (WPI)
    Definition Measures the change in retail prices of goods and services consumed by households Measures the change in wholesale prices of goods traded between businesses
    Compiled By National Statistical Office (NSO), Ministry of Statistics and Programme Implementation (MoSPI) Office of Economic Adviser, Ministry of Commerce and Industry
    Base Year 2012 (CPI-Industrial Workers has 2016 as base year) 2011–12
    Coverage Goods and Services Only Goods
    Data Collection Prices from 1,181 villages & 1,114 urban markets across India Prices collected from wholesale markets, factories, and mandis
    Purpose/Use Measures retail inflation, used for the RBI’s inflation targeting and monetary policy decisions Measures producer-level inflation, used as a GDP deflator
    Users Consumers, RBI, Government (for social welfare schemes like DA/DR) Policymakers, manufacturers, and financial markets
    Publication Frequency Monthly Monthly
    Number of Items 299 items 697 items
    Components – Food & Beverages (45%)
    – Housing (10%)
    – Fuel & Light (6.8%)
    – Miscellaneous (services, etc.) (28.3%)
    – Clothing & Footwear (6.5%)
    – Pan, Tobacco & Intoxicants (2.4%)    		 – Primary Articles (22.6%)
    – Fuel & Power (13.2%)
    – Manufactured Products (64.2%)
    Weight of Food Items High (~45%) Lower (~24.4%)
    Impact on Economy Direct impact on consumer purchasing power and cost of living Indicates trends in production costs and supply chain
    Volatility More volatile due to food and fuel price changes Less volatile due to base price considerations
    Use in Policy Directly used by RBI for inflation targeting (e.g., 4% CPI target) Used for GDP deflation, price policy formation
    Criticism May not reflect production-side price pressures Does not capture consumer-level inflation or services
    Inflation Indicator Preferred indicator for common people More relevant to manufacturers and wholesale traders

     

    [UPSC 2021] With reference to the Indian economy, demand-pull inflation can be caused or increased by which of the following:

    1. Expansionary policies 2.Fiscal stimulus 3.Inflation-indexing of wages 4.Higher purchasing power 5.Rising interest rates

    Select the correct answer using the code given below:

    Options: (a) 1, 2, and 4 only* (b) 3, 4, and 5 only (c) 1, 2, 3, and 5 only (d) 1, 2, 3, 4, and 5

     

  • Cease the cess Low GST collections speak to the need for structural reforms

    Why in the News?

    On July 1, 2025, India marked eight years since the launch of the Goods and Services Tax (GST), but the occasion came with worrying signs for the economy. GST collections in June dropped to ₹1.85 lakh crore, the lowest in four months, and grew by just 6.2% year-on-year, the slowest growth in four years.

    What do low GST collections reveal about the economy and system efficiency?

    • Sluggish Economic Activity: As GST is a consumption-based tax, low collections indicate reduced demand and consumption, reflecting a slowdown in economic growth.
    • Tax System Inefficiencies: The marginal growth in net collections (just 3.3% after refunds) points to loopholes in compliance, delayed refunds, and inefficiencies in enforcement and administration.
    • Weak Revenue Buoyancy: Revenue from domestic transactions rose only 4.6%, barely outpacing inflation, showing limited buoyancy in the tax system despite a stable tax base.

    Why is the exclusion of fuel from GST debated?

    • Revenue Autonomy for States: Fuel taxes are a major independent revenue source for State governments. Including fuel under GST would shift this revenue to the GST pool, which is shared with the Centre, reducing the States’ financial autonomy.  
    • Undermines ‘One Nation, One Tax’ Goal: Excluding key commodities like petrol and diesel creates fragmentation in the GST system, violating the principle of tax uniformity. Eg: A truck transporting goods across states pays different fuel taxes, adding to logistics costs and compliance burden.
    • Public Demand for Price Rationalisation: Including fuel under GST could reduce retail prices, as GST rates are lower than the combined excise + VAT. This is especially crucial during inflationary periods. Eg: If petrol (currently taxed ~100%) comes under the 28% GST slab, it could make fuel significantly cheaper for consumers.

    What does “fewer GST slabs” mean?

    • It means merging some of these tax rates to move toward a simpler, more uniform GST system, such as: Possibly combining 12% and 18% into a single standard rate.
    • Current GST Structure: India has multiple GST slabs: 5%, 12%, 18%, 28%. Plus 0% (exempt) and special rates on certain goods/services.

    How will fewer GST slabs improve tax efficiency?

    • Simplifies Compliance for Businesses: Fewer slabs reduce confusion, errors in tax calculation, classification, and filing, especially for small businesses. Eg: A product like packaged snacks currently attracts different GST rates depending on branding, merging slabs avoids such disputes.
    • Reduces Tax Evasion and Litigation: Multiple slabs create room for misclassification and disputes over applicable rates. Fewer rates lead to clearer guidelines and fewer loopholes. Eg: Footwear priced above ₹1,000 is taxed at 18%, while below ₹1,000 it’s 5%—leading to price manipulation.
    • Boosts Consumption and Revenue Predictability: A simplified rate structure improves consumer confidence, reduces cascading effects, and encourages spending, improving overall collections. Eg: Countries like Singapore (7%) or New Zealand (15%) with uniform GST systems report higher compliance and stable revenue.

    What is the future of the GST Compensation Cess?

    • Originally meant to compensate States for GST losses for 5 years, extended till March 2026 to repay COVID-related borrowings. With its purpose served, it should be phased out rather than absorbed into GST rates.
    • Removing the cess will restore trust, reduce tax burden, and may stimulate urban consumption.

    Why is fiscal responsibility crucial for GST reforms?

    • Ensuring fiscal sustainability: Sustainable subsidies and managing the compensation burden are essential for maintaining healthy public finances. Eg: During COVID-19, the Centre had to borrow extensively to compensate States, leading to a rise in debt levels.
    • Strengthening Centre–State trust: Responsible fiscal conduct by both the Centre and States builds trust, which is critical for cooperative federalism. The GST Council functions best when transparency is ensured and non-shareable cesses are minimized to allow a higher share of central taxes to States.
    • Enabling long-term tax reforms: Fiscal prudence enables the government to invest in long-term reforms such as rationalising GST slabs, strengthening IT infrastructure, and introducing compliance incentives. These efforts can improve tax buoyancy and offset short-term revenue losses.

    How can the Centre–State balance be ensured? (Way forward)

    • Enhancing States’ Share in Central Taxes: The Centre should increase devolved funds under the Finance Commission framework to compensate for GST-linked revenue losses, especially if fuel and alcohol are brought under GST. Eg: Raising the tax devolution share beyond the current 41% can empower States financially.
    • Strengthening GST Council’s Cooperative Mechanism: Regular, consensus-based decision-making in the GST Council can improve Centre-State trust and ensure shared ownership of reforms. Eg: Joint committees for rate rationalisation or revenue monitoring can enhance transparency and equity.

    Mains PYQ:

    [UPSC 2020] 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?

    Linkage: The article explicitly states that the GST Compensation Cess was extended until March 2026 to repay loans taken by the Centre to compensate States, specifically due to COVID-19 having disrupted revenues. The question directly delves into the compensation mechanism, its impact due to the pandemic, and the resulting “federal tensions”, which aligns perfectly with the source’s discussion on the Centre-State fiscal relationship regarding GST.

  • GST reform and unfinished business in tobacco control

    Why in the News?

    As India completes eight years of implementing the Goods and Services Tax (GST), the focus has moved from its economic benefits to its problems, especially in public health, like the poor taxation of tobacco.

    What are GST’s major achievements and gaps after eight years?

    Achievements: 

    • Unified Tax System: Replaced multiple indirect taxes with one national tax, promoting the “One Nation, One Tax” concept.
    • Increased Revenue Collection: GST collections reached ₹22.08 lakh crore in 2024–25, showing consistent growth.
    • Improved Ease of Doing Business: Simplified compliance through harmonised tax rates and digital processes.
    • Boosted Logistics Efficiency: Removal of inter-State checkpoints reduced transport time and costs.
    • Reduced Tax Cascading: The Input Tax Credit mechanism lowered production costs for businesses and prices for consumers.

    Gaps:

    • Ineffective Public Health Taxation: Tobacco taxation remains weak under GST, despite high health and economic burdens.
    • Decline in Specific Excise Duties: Over-reliance on ad valorem GST weakened price control on harmful products like bidis and cigarettes.
    • Inadequate Tax on Bidis: Bidis, widely consumed by low-income groups, are under-taxed and not covered under the GST compensation cess.
    • Loss of Revenue Post-Cess Expiry: The GST compensation cess (a major source of tobacco tax) will expire in 2026, risking affordability and public health.
    • Weak Deterrent Against Tobacco Use: Unlike pre-GST years, tax stagnation has failed to reduce tobacco consumption, ignoring WHO’s 75% tax recommendation.

    Why is GST ineffective in curbing tobacco use?

    • Lack of Significant Tax Hikes Post-GST: Since the introduction of GST in 2017, there have been no major tax increases on tobacco products. In contrast, during the pre-GST era (2009–17), regular hikes in excise and VAT contributed to a 17% decline in tobacco use.
    • Low Overall Tax Burden: The total tax on tobacco remains below the WHO-recommended 75% of retail price — only 22% for bidis, 54% for cigarettes, and 65% for smokeless tobacco. This allows tobacco products to remain affordable, especially for youth and low-income groups.
    • Under-Taxation of Harmful Products like Bidis: Bidis, the most consumed smoked tobacco product, are exempt from the GST compensation cess. Despite causing harm similar to cigarettes, they generate very low tax revenue and are widely used by low-income populations, reducing the deterrent effect of taxation.
    • Reduced Price Deterrence:  After GST, the share of excise duty fell sharply (e.g., from 54% to 8% for cigarettes), weakening the price-based disincentive for tobacco use.
    • Industry Manipulation of Ad Valorem Taxes: GST relies heavily on ad valorem taxes (based on product price), which are easier for the tobacco industry to manipulate through pricing strategies. Without specific excise duties, companies can keep prices low, making harmful products like bidis and cheap cigarettes affordable to the masses.

    What reforms can align tobacco taxes with health goals? (Way forward)

    • Introduce or Increase Specific Excise Duties: Add a fixed per-unit tax (specific excise) on tobacco products along with GST. Eg: Countries like the Philippines combine ad valorem and specific taxes, leading to higher prices and lower consumption.
    • Raise GST and Cess to Statutory Limits: Increase GST on tobacco to the legal ceiling of 40% and expand the GST Compensation Cess to include under-taxed products like bidis. Eg: Bidis, used by the poor and causing major health harm, are not covered under the cess, reducing their tax burdenand health deterrence.
    • Link Tax Policy with Inflation and Income Growth: Regularly update tobacco taxes to offset rising incomes and inflation, preventing increased affordability over time. Eg: WHO recommends adjusting taxes annually so that tobacco doesn’t become more affordable even if incomes rise.

    Mains PYQ:

    [UPSC 2019] 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.

    Linkage: The article talks about the GST replaced many older taxes like VAT and excise duty, helping create a single national market. Although GST collections have steadily grown—reaching ₹22.08 lakh crore in 2024–25—the revenue from tobacco (about ₹551 billion a year) is much less than the huge cost of tobacco-related health problems, which is ₹2,340 billion every year.

  • [23rd June 2025] The Hindu Op-ed: Steering the Indian economy amidst global troubles 

    PYQ Relevance:

    [UPSC 2019] The economy is in a state of crisis due to global inflation. Critically examine whether this crisis and high inflation have left the Indian economy in good shape? Give reasons in support of your arguments.

    Linkage: This PYQ directly mentions a specific global economic “trouble” – global inflation – and asks about its impact on the Indian economy. This article talks about the “monetary policy should continue to remain accommodative” and that “inflation currently under control and projected to be lower” can help “propel growth,” indicating that managing inflation is a key part of steering the economy amidst global challenges.

     

    Mentor’s Comment:  The global trade order is witnessing a seismic shift amid renewed trade wars, evolving tariff regimes, and accelerating bilateral negotiations. In this flux, India’s exports of nearly one-fifth of its merchandise to the U.S., finds itself vulnerable, especially in sectors dominated by MSMEs like apparel, gems, and electronics. The uncertainty surrounding U.S. reciprocal tariffs, potential dumping threats, and the instability in trade negotiations pose a structural challenge. However, India also faces a rare geopolitical opportunity—to integrate into the reconfigured global supply chains, reduce dependency on traditional partners, and assert itself as a global manufacturing and export hub.

    Today’s editorial analyses the impact of new trade rules and ongoing political tensions between countries. This content would help in GS Paper II (International Relations) and GS Paper III (Indian Economy) in the mains Paper.

    _

    Let’s learn!

    Why in the News?

    The global economy is changing in a big way, mainly due to new trade rules and ongoing political tensions between countries.

    Why are current global trade dynamics creating uncertainty for Indian exporters?

    • Rise in protectionism and trade wars: Many countries are reviewing tariffs and adopting protectionist measures. This creates unpredictability in global trade flows, making it harder for Indian exporters to plan pricing and market strategies. Eg: The U.S. imposing or revising tariffs on Indian goods affects sectors like garments and pharmaceuticals.
    • Geopolitical tensions: Conflicts like the U.S.-China trade war or the Russia-Ukraine war are disrupting supply chains and altering trade alliances, impacting Indian exporters’ access to global markets and increasing costs. Eg: Indian exporters face delays or higher freight costs due to changes in trade routes.
    • Uncertain tariff regimes: Indian exporters face difficulty in decision-making due to fluctuating U.S. trade policies and lack of clarity on future duty structures, impacting pricing and margins. Eg: Sectors such as auto components and gems & jewellery, heavily reliant on the U.S., face profitability issues.
    • Losing competitive advantage: Competing countries like Bangladesh and Vietnam may benefit from early trade deals with the U.S., while India’s relative tariff advantage remains unclear. Eg: Indian textile exports could become costlier compared to Bangladesh’s duty-free access.
    • Planning uncertainty: Exporters hesitate to invest or plan for the long term in the absence of stable trade rules and policies. This impacts capacity expansion and export contracts, particularly for MSMEs. Eg: Indian MSMEs may cancel new orders or delay shipments due to lack of tariff clarity.

    What challenges do Indian MSMEs face due to potential U.S. tariff changes?

    • Profit Margin Erosion: Increased U.S. tariffs make Indian goods costlier, reducing profit margins for MSMEs and making their exports uncompetitive. Eg: A carpet-exporting MSME in Uttar Pradesh may struggle to maintain orders if buyers shift to cheaper alternatives from Bangladesh.
    • Order Uncertainty and Planning Delays: Fluctuating tariff policies create hesitation among U.S. buyers, affecting long-term contracts and production planning for small businesses. Eg: An MSME manufacturing leather goods may face cancelled or delayed orders due to uncertainty over final landed prices.
    • Limited Ability to Absorb Costs: Unlike large firms, MSMEs lack the financial cushion to absorb increased costs from tariffs, logistics, or compliance. Eg: A small pharmaceutical exporter may not afford sudden freight hikes or additional duties, making exports unviable.

    How can bilateral and free trade agreements help India navigate global trade disruptions?

    • Ensure Preferential Market Access: FTAs allow Indian exporters to access foreign markets with lower or zero tariffs, making their goods more competitiveeven amid global disruptions. Eg: An FTA with the UK can benefit Indian apparel exporters by reducing tariff barriers, boosting exports.
    • Diversify Export Destinations: Bilateral trade deals reduce dependency on a single market like the U.S., helping India shift exports to Europe, Australia, or ASEAN during crises. Eg: The India-EU FTA under negotiation could open up multiple markets for Indian electronics and auto components.
    • Address Non-Tariff Barriers (NTBs): FTAs help resolve issues like customs delays, quality standards, or licensing hurdles, ensuring smooth trade flowduring uncertain times. Eg: A mutual recognition agreement (MRA) under a BTA with the U.S. could simplify pharmaceutical exports by accepting Indian drug certifications.

    What policies can boost India’s economic resilience?

    • Strengthening Public Capital Expenditure: Increased government spending on infrastructure boosts domestic demand, generates employment, and crowds in private investment during global slowdowns. Eg: The PM Gati Shakti scheme accelerates infrastructure development, improving logistics and economic stability.
    • Expanding Production-Linked Incentive (PLI) Schemes: Enhancing PLI coverage to include more sectors like IoT devices or battery raw materials promotes domestic manufacturing, attracts FDI, and reduces import dependency. Eg: PLI in electronics has boosted mobile phone exports and created supply chain resilience.
    • Maintaining Accommodative Monetary Policy: Ensuring low interest rates and easy liquidity through monetary support helps businesses manage costs and stimulate investment during global headwinds. Eg: RBI’s repo rate cuts post-COVID helped MSMEs access cheaper credit, aiding recovery.

    Why should India focus on foreign investment and PLI expansion?

    • Diversify Global Supply Chains: Global companies are looking to reduce dependency on China and Southeast Asia. India can attract them by offering stable policies and incentives. Eg: Apple has shifted part of its iPhone manufacturing to India due to the PLI scheme and policy support.
    • Boost Manufacturing and Employment: Expanding PLI coverage to sectors like wearables, batteries, and semiconductors can enhance local production, reduce imports, and generate jobs. Eg: The PLI for electronics has helped create thousands of direct jobs and increased exports.
    • Strengthen Export Competitiveness: Foreign investments bring technology transfer, better quality standards, and improved productivity, which are crucial for export growth. Eg: Investments in the automobile and pharma sectors under PLI have enhanced India’s global competitiveness.

    Way forward:

    • Accelerate FTA Negotiations and Ensure Tariff Stability: India should fast-track bilateral and multilateral trade agreements (e.g., with the EU, Australia) to ensure stable market access and reduce uncertainty for exporters.
    • Expand and Streamline PLI Schemes: Broaden the Production-Linked Incentive (PLI) schemes to include high-potential sectors (e.g., semiconductors, IoT), and simplify procedures to attract more foreign investment and boost domestic manufacturing.

  • What is Merchant Discount Rate (MDR)?

    Why in the News?

    The Finance Ministry has firmly denied recent online rumours suggesting that the government is planning to impose Merchant Discount Rate (MDR) charges on UPI transactions.

    About Merchant Discount Rate (MDR):

    • Overview: MDR refers to the fee charged to merchants by banks or payment service providers for processing digital payments made via credit cards, debit cards or other digital modes.
    • Purpose: It serves to compensate multiple stakeholders involved in a digital transaction, including the issuing bank, acquiring bank, payment gateway, and network operator.
    • Fee Structure: MDR is typically calculated as a percentage of the total transaction amount, usually ranging from 1% to 3%, depending on the transaction and merchant type.
    • RBI Regulation: The Reserve Bank of India (RBI) regulates MDR, and merchants are NOT permitted to pass this fee onto customers.
    • Discontinuation: To promote cashless payments, the government waived MDR on UPI and RuPay card transactions in 2020, benefiting small merchants and consumers.

    How does it work?

    • Transaction Flow: When a customer pays digitally, the payment amount is credited to the merchant’s account after deducting the MDR fee.
    • Example: If a customer pays ₹1,000 and the MDR is 2%, the merchant receives ₹980, while the remaining ₹20 is distributed among the banks and service providers.
    • Automatic Deduction: The MDR amount is automatically deducted by the settlement system at the time of transaction processing.
    • Variable Rates: The MDR rate may vary depending on factors such as the type of card used, nature of business, monthly transaction volume, and average transaction value.
    • Merchant Agreements: Merchants are required to sign MDR agreements with their payment service providers before they begin accepting digital payments.
    • Operational Cost: MDR is treated as a part of the merchant’s operational costs when offering customers the convenience of digital payment options.
    [UPSC 2017] Which one of the following best describes the term “Merchant Discount Rate” sometimes seen in news?

    Options: (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.

     

  • Why govts revise GDP base year and methodology, why the proposed 2026 revision matters for India’s global standing

    Why in the News?

    India will update the base year for calculating GDP to 2022–23, and the new data is expected by February 2026. This change, confirmed by Saurabh Garg from the Ministry of Statistics, is an important step to improve the accuracy and trust in India’s economic data both in the country and around the world.

    Why is the base year for GDP being revised to 2022-23?

    • To Reflect Structural Changes in the Economy: India’s economy has shifted significantly from agriculture to services and digital sectors. Revising the base year captures these structural shifts more accurately. Eg: The rise of digital platforms, fintech, and gig economy post-2015 needs to be incorporated into GDP estimates.
    • To Incorporate Improved and Updated Data Sources: New datasets such as the Periodic Labour Force Survey (PLFS) and administrative records like MCA-21 provide more comprehensive and timely data for accurate GDP computation. Eg: PLFS helps capture employment trends better than the older Employment-Unemployment surveys.
    • To Ensure Compatibility with International Standards and Better Inflation Adjustment
      Regular base year revisions align with UN and IMF guidelines and help in more precise estimation of real GDPby adjusting for price changes. Eg: Without a revision, outdated price structures (like 2011-12) may overstate or understate real growthdue to inflation distortions.

    What challenges delayed the previous GDP base year revision in 2017-18?

    • Data Quality Concerns in Key Surveys: The government raised concerns about the credibility of the Consumer Expenditure Survey (CES) and Periodic Labour Force Survey (PLFS) conducted in 2017-18. Eg: CES showed a decline in consumer spending, suggesting rising poverty — a politically sensitive finding that was never officially released.
    • Economic Disruptions during the Reference Year: Major policy shocks such as demonetisation (2016) and the introduction of Goods and Services Tax (GST) in 2017 led to economic volatility, making 2017-18 an unsuitable “normal” year for baseline calculations. Eg: GDP growth fell from 8.3% in 2016-17 to below 4% by 2019-20, reflecting prolonged economic slowdown post these disruptions.
    • Delayed Acceptance and Use of Survey Results: While the PLFS findings were eventually accepted after the 2019 elections, the CES was rejected, causing a gap in key inputs required for GDP revision. Eg: Without reliable consumption and employment data, the GDP estimation would lack accuracy, forcing the government to drop 2017-18 as the base year.

    Which other economic indicators are also undergoing base year revisions?

    • Index of Industrial Production (IIP): Base year to be revised to 2022-23.
    • Consumer Price Index (CPI): Base year to be revised to 2023-24.
    • National Accounts (GDP): Base year to be revised to 2022-23, effective February 27, 2026.

    How does base year revision affect the credibility of India’s economic data globally?

    • Improves Accuracy and International Comparability: A timely base year revision ensures that GDP estimates reflect current economic structures, making India’s data more credible and aligned with international standards (like those of IMF and UN). Eg: Including digital economy or renewable energy sectors helps match the metrics used by other G20 nations.
    • Builds Investor Confidence: Transparent and methodologically sound revisions enhance global investor trust, which is crucial for foreign direct investment (FDI) and sovereign credit ratings. Eg: A credible GDP estimate influences decisions by agencies like Moody’s or Fitch, and reassures multinational corporations evaluating India’s market.
    • Reduces Skepticism from Global Analysts: Past controversies—like the 2015 revision which some experts claimed overstated growth—have raised doubts on India’s data integrity. A robust 2022-23 revision can restore credibility. Eg: Even former Chief Economic Advisor Arvind Subramanian questioned past data quality; accurate revisions now can counteract such reputational damage.

    Way forward: 

    • Institutionalise Regular Data Revisions: Establish a fixed 5-year cycle for revising base years of GDP and other macroeconomic indicators, in line with National Statistical Commission recommendations, to ensure timeliness, consistency, and credibility.
    • Enhance Data Transparency and Accessibility: Improve the quality, frequency, and public availability of key datasets like Consumer Expenditure Survey (CES), PLFS, and Census, to build trust among researchers, investors, and global institutions.

    Mains PYQ:

    [UPSC 2021] What are the main features of the estimation of India’s Gross Domestic Product(GDP) before the year 2015 and after the year 2015.

    Linkage: The changes in GDP estimation around the 2015 revision, which is a prime example of the process of revising the base year and methodology. The “India’s GDP: Revising the Economic Base” source provides extensive details on this very topic, explaining the rationale and significance of such revisions, including the upcoming 2026 revision and its importance for India’s global standing.

  • RBI’s Monetary Policy Committee (MPC) Decisions

    Why in the News?

    The RBI, in its Monetary Policy Committee (MPC) meeting, cut the Cash Reserve Ratio (CRR) by 1% to release ₹2.5 lakh crore into the banking system by November 2025.

    Key Changes Announced:

    • Cash Reserve Ratio (CRR) reduced by 1% in four tranches, bringing it down to 3% by November 29, 2025.
    • This CRR cut will release ₹2.5 lakh crore liquidity into the banking system by December 2025.
    • Statutory Liquidity Ratio (SLR) remains unchanged at 18% of Net Demand and Time Liabilities (NDTL).

    Key terms related to the MPC instruments:

    Explanation
    Cash Reserve Ratio (CRR)
    • CRR is the percentage of a bank’s total deposits that must be maintained as liquid cash with the RBI.
    • Banks cannot use this amount for lending or investment. No interest is earned on CRR.
    • It is used to control liquidity and inflation in the economy.
    • Increasing CRR reduces bank lending capacity; decreasing it increases liquidity.
    • Current CRR is 4.5% of Net Demand and Time Liabilities (NDTL).
    Statutory Liquidity Ratio (SLR)
    • SLR is the minimum percentage of NDTL that banks must maintain in liquid form.
    • It includes cash, gold, or approved government securities, kept with the bank itself.
    • It helps ensure bank solvency and restricts excessive credit growth.
    • Raising SLR reduces funds available for lending; lowering it boosts credit and growth.
    • It also helps the government ensure demand for its securities.
    Net Demand and Time Liabilities (NDTL)
    • It includes public deposits and balances held with other banks.
    • It excludes deposits the bank itself has with other banks.
    • Demand liabilities include current accounts and demand drafts.
    • Time liabilities include fixed deposits and recurring deposits.
    • CRR and SLR are calculated as a percentage of NDTL.
    Repo Rate
    • The repo rate is the rate at which the RBI lends short-term funds to commercial banks against government securities.
    • Banks sell securities to RBI with an agreement to repurchase them later.
    • Lower repo rate makes borrowing cheaper and boosts liquidity.
    • Higher repo rate makes borrowing costlier, reducing liquidity.
    • It is a key monetary policy tool to regulate inflation and money supply.
    Variable Rate Repo (VRR) Auction
    • VRR auction is a method where RBI conducts repo operations at variable interest rates.
    • Interest rate is determined through competitive bidding by banks.
    • It reflects real-time demand and supply of liquidity.
    • Enables more flexible and efficient liquidity management by RBI.
    Standing Deposit Facility (SDF)
    • SDF allows banks to deposit surplus funds with the RBI without providing any collateral.
    • Banks earn interest at a rate set by the RBI.
    • It is used to absorb excess liquidity from the system.
    • Part of RBI’s liquidity management framework.
    Weighted Average Call Rate (WACR)
    • WACR is the weighted average interest rate at which banks borrow and lend overnight funds in the interbank call money market.
    • It is an important indicator of short-term liquidity conditions.
    • RBI monitors WACR to guide monetary policy decisions.

     

    [UPSC 2020] If the RBI decides to adopt an expansionist monetary policy, which of the following would it not do?

    1. Cut and optimise the Statutory Liquidity Ratio.

    2. Increase the Marginal Standing Facility Rate.

    3. Cut the Bank Rate and Repo Rate.

    Select the correct answer using the code given below:

    Options: (a) 1 and 2 only (b) 2 only* (c) 1 and 3 only (d) 1, 2 and 3