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GS Paper: Indian Economy

  • [5th March 2025] The Hindu Op-ed: Little has changed in the Income-Tax Bill, 2025

    PYQ Relevance:

    Q) 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. (UPSC CSE 2019)

     

    Mentor’s Comment: UPSC mains have always focused on the Long-term Capital Gains Tax (2018) and indirect taxes (2019).

    In February 2025, the Union Finance Minister introduced the Income-Tax Bill, 2025, to replace the Income-Tax Act, 1961. The government claims it will simplify tax laws and reduce disputes. However, despite some structural changes, many complexities remain, and the Bill grants even more authoritarian powers than the current law.

    Today’s editorial discusses the newly introduced Income-Tax Bill, 2025, which is important for the GS III Mains paper.

    _

    Let’s learn!

    Why in the News?

    Recently, Finance Minister Nirmala Sitharaman introduced the Income Tax Bill, 2025, in the Lok Sabha, while opposition parties protested against it.

    What are the key objectives of the Income-Tax Bill, 2025? 

    • Simplifying Tax Laws: To make the tax code easier to understand for both taxpayers and professionals. Example: Replacing complex legal phrases like “notwithstanding anything contained to the contrary” with simpler terms like “irrespective of anything to the contrary”.
    • Reducing Litigation and Ambiguity: To minimize legal disputes by providing clearer definitions and reducing interpretative confusion. Example: Consolidating compliance timelines into tables and schedules to avoid multiple interpretations of deadlines.
    • Modernizing Tax Compliance: To align tax administration with technological advancements and changing business environments. Example: Allowing the use of a “risk management strategy” to identify tax evasion through data analysis.
    • Ensuring Policy Continuity with Structural Reform: To retain core tax policies while improving the law’s structure for better efficiency. Example: Definitions like “income” still refer to the 1961 Act but are presented in a more structured format.
    • Expanding Digital Oversight: To empower tax authorities to investigate digital transactions and virtual assets. Example: Permitting access to digital platforms (e.g., email servers and social media) during tax investigations.

    Why did the government previously amend the criteria for a reassessment of tax?

    The government previously amended the criteria for reassessment of tax through the Finance Act, 2021, which came into effect on April 1, 2021. This marked a significant shift in the reassessment framework under the Income Tax Act, 1961.

    • Shift from “Reason to Believe” to “Information”: The previous requirement for reassessment was based on the assessing officer having a “reason to believe” that income had escaped assessment. Example: After 2021, tax authorities could reopen assessments if they had “information” suggesting unreported income, including data from third-party reports.
    • Introduction of Risk Management Strategy: The amendment introduced the use of a “risk management strategy” as a basis for reopening tax assessments. Example: Tax authorities can now reopen cases based on algorithm-driven data analysis without needing detailed justification.
    • Time Limit Reduction for Reopening Assessments: The time limit for reassessment was reduced from 6 years to 3 years for most cases, with a 10-year limit for cases involving income above ₹50 lakh. Example: If concealed income exceeds ₹50 lakh, tax authorities can reopen cases up to 10 years later, enhancing scrutiny in high-value matters.
    • Legal Challenges and Judicial Interpretations: The vague definition of “information” and the undefined “risk management strategy” led to concerns over arbitrary use of power. Example: Courts have intervened to limit reassessment powers, demanding stricter adherence to procedural safeguards to protect taxpayer rights.

    What are the main concerns regarding their implementation?

    • Increased Administrative Burden: The new system requires detailed procedures and prior approvals, leading to delays and increased workload for tax authorities. Example: Obtaining approval from senior officers before issuing notices can slow down reassessment, especially in cases involving large volumes of data.
    • Ambiguity in “Information” Definition: The term “information” used to trigger reassessment is broad and vague, allowing subjective interpretations. Example: Data from social media activity or third-party reports can be used for reopening cases, raising concerns about the reliability and accuracy of such information.
    • Risk of Harassment and Overreach: Despite safeguards, there is concern that taxpayers may still face unwarranted scrutiny under the new rules. Example: Cases where income exceeds ₹50 lakh can be reopened for up to 10 years, leading to prolonged uncertainty for taxpayers.
    • Challenges in Data Privacy and Security: Accessing digital platforms and using technology-based triggers raises privacy concerns for individuals and businesses. Example: Tax authorities can now access electronic records from email servers and financial platforms, increasing the risk of data misuse.
    • Legal Uncertainty and Litigation: Despite reforms, there is still a risk of judicial challenges due to the interpretive flexibility in the law. Example: Taxpayers may challenge reassessment notices on the grounds of insufficient evidence or procedural lapses, leading to further litigation.

    Way forward: 

    • Enhancing Clarity and Transparency: Clearly define terms like “information” and “risk management strategy” to prevent subjective interpretation and ensure uniform application. Example: Establish detailed guidelines on acceptable data sources and the procedure for using digital evidence.
    • Strengthening Safeguards and Oversight: Implement independent reviews for high-value reassessments and ensure data privacy through robust security protocols. Example: Mandate third-party audits to monitor the use of digital platforms and safeguard taxpayer rights.

  • What is the ‘Quality of Public Expenditure’ Index?

    Why in the News?

    The Quality of Public Expenditure (QPE) Index, developed by the RBI, evaluates how efficiently government funds are used, focusing on expenditure composition and its long-term impact on economic growth.

    About the QPE Index

    • The QPE Index by the Reserve Bank of India (RBI) measures how effectively government funds are utilized.
    • It focuses on fiscal discipline, capital investment, and efficient allocation of public resources for long-term growth.
    • Key Indicators of the QPE Index:
    1. Capital Outlay to GDP Ratio: Measures government spending on infrastructure as a percentage of GDP. Higher ratio = better quality expenditure.
    2. Revenue Expenditure to Capital Outlay Ratio: Lower ratio preferred, as excessive spending on salaries & subsidies reduces funds for development.
    3. Development Expenditure to GDP Ratio: Tracks spending in education, healthcare, infrastructure, improving human capital & productivity.
    4. Development Expenditure as % of Total Expenditure:  Higher share indicates better resource allocation.
    5. Interest Payments to Total Expenditure Ratio:  Lower ratio = better debt management & fiscal sustainability.

    Key Findings from RBI’s QPE Index Analysis:

    • 1991-2003: Post-liberalization, focus on reducing fiscal deficit led to a decline in public investment.
    • 2003-2008:  FRBM Act (2003) improved fiscal discipline, increasing capital spending & state revenues.
    • 2008-2013: Global Financial Crisis (GFC) led to higher government spending, increasing fiscal deficits but supporting recovery.
    • 2013-2017: 14th Finance Commission (2015) increased states’ share in central taxes, boosting development expenditure.
    • 2017-2020:  GST implementation challenges affected the Centre’s revenues, but states benefited from higher tax shares.
    • 2020-Present:  Record capital expenditure boosted infrastructure & economic recovery, improving public expenditure quality.

    PYQ:

    [2014] With reference to Union Budget, which of the following, is/are covered under Non-Plan Expenditure?

    1. Defence-expenditure

    2. Interest payments

    3. Salaries and pensions

    4. Subsidies

    Select the correct answer using the code given below:

    (a) 1 only

    (b) 2 and 3 only

    (c) 1, 2, 3 and 4

    (d) None

     

  • Rupee-Dollar Swap Auction

    Why in the News?

    The Reserve Bank of India (RBI) will conduct a $10 billion dollar-rupee swap auction on February 28, 2025, aimed at injecting durable rupee liquidity into the banking system.

    This 3-year forex swap is expected to inject ₹86,000 crore into the banking system at a time when there is a liquidity deficit of ₹1.7 lakh crore in the financial sector.

    What is the RBI’s Forex Swap Auction?

    • Forex swap auctions are a tool used by the RBI to manage liquidity and stabilize financial markets.
    • In return, the RBI will inject rupee liquidity into the banking system.
      • Buy-Sell Swap: RBI buys dollars now and sells them back later (liquidity injection).
      • Sell-Buy Swap: RBI sells dollars now and buys them back later (liquidity absorption).
    • After 3 years, the transaction will be reversed, with the RBI selling dollars back to banks and absorbing rupee liquidity from the system.

    How does it work?

    • Auction Process:
      • Banks bid in the swap auction by quoting the swap rate (forward premium).
      • The lowest premium bids are accepted first (similar to G-sec auctions).
    • Liquidity Injection:
      • Banks sell US dollars to the RBI at the prevailing exchange rate.
      • The RBI provides rupees in exchange, boosting liquidity in the banking system.
    • Reverse Swap After Three Years:
      • On March 6, 2028, the swap will be reversed.
      • The RBI will return US dollars to the banks and absorb the equivalent amount of rupees.
    • This allows the RBI to control liquidity over a longer period without permanently altering its forex reserves.

    Significance of this move

    • Reduces Borrowing Costs: More liquidity in the system lowers short-term interest rates. Bond yields and corporate borrowing costs decline, benefiting businesses and NBFCs.
    • Stabilizes Foreign Exchange Markets: The rupee’s availability increases, reducing pressure on exchange rates. Lower hedging costs for companies with foreign liabilities.
    • Enhances RBI’s Monetary Policy Toolkit: This approach provides a temporary boost to liquidity, while ensuring a controlled reversal in the future.

    PYQ:

    [2015] Convertibility of rupee implies:

    (a) Being able to convert rupee notes into gold

    (b) Allowing the value of rupee to be fixed by market forces

    (c) Freely permitting the conversion of rupee to other currencies and vice versa

    (d) Developing an international market for currencies in India

     

  • [21st February 2025] The Hindu Op-ed: Is consumption enough to drive growth?

    PYQ Relevance:

    Q) Explain the difference between the computing methodology of India’s Gross Domestic Product (GDP) before the year 2015 and after the year 2015. (UPSC CSE 2021)

     

    Mentor’s Comment: UPSC mains have always focused on India’s Gross Domestic Product  (2021), and India from realizing its potential GDP (2020).

    An economy grows through two key factors: supply (production of goods and services) and demand (spending on these goods and services). Among demand sources, investment is crucial as it creates a multiplier effect, boosting jobs and income. Consumption follows growth but cannot drive it alone, as sustainable expansion requires strong investment and production.

    Today’s editorial talks about India’s GDP growth factors based on demand and supply. This content would help in GS Paper 3 mains Paper.

    _

    Let’s learn!

    Why in the News?

    An economy’s growth is like navigating two interconnected boats—one representing the supply or production of goods and services.

    Is consumption enough to drive growth?

    Consumption plays a crucial role in driving economic growth, but it is not sufficient on its own for sustainable long-term growth.

    • Consumption-Led Growth is Slower: While consumption boosts demand, it does not create long-term productive capacity. Example: India’s GDP growth in recent years has been driven by consumption (60.3% of GDP in 2023), but it lags behind China’s investment-driven growth.
    • Limited Multiplier Effect: Unlike investment, increased consumption has a weaker impact on overall income and job creation. Example: If people buy more smartphones, it benefits retailers but does not significantly boost domestic production if phones are imported.
    • Investment is Crucial for Sustainable Growth: Higher investment in infrastructure, industries, and technology leads to job creation and productivity gains. Example: China’s high investment rate (41.3% of GDP in 2023) has helped it achieve rapid economic growth and higher per capita income than India.

    Why is economic growth dependent on two factors?

    • Balanced Growth Requires Both Supply & Demand: Economic growth happens when goods and services are produced (supply) and purchased (demand) in a balanced manner.
      • Example: A country increasing factory production (supply) must also have enough consumers to buy the products (demand), ensuring sustainable growth.
    • Mismatch Leads to Economic Problems
      • If demand > supply, inflation rises due to excessive spending with limited goods.
      • If supply > demand, businesses suffer from unsold stock, leading to job losses.
      • Example: Post-pandemic, supply chain disruptions led to high demand but low supply, causing inflation.
    • Investment Drives Long-Term Growth: Investment in infrastructure, industries, and technology increases production capacity (supply) while also creating jobs, which boosts spending power (demand).
      • Example: China’s high investment in infrastructure and manufacturing led to rapid economic growth by expanding both supply and demand.
    • Government Policies Impact Both Sides: Fiscal and monetary policies help balance supply-side growth (e.g., industrial incentives) and demand-side expansion (e.g., tax cuts or subsidies).
      • Example: India’s Production-Linked Incentive (PLI) scheme boosts manufacturing (supply), while government social schemes increase purchasing power (demand).
    • Exports and Imports Affect Domestic Growth: A strong export sector increases supply, bringing foreign exchange, while controlled imports ensure domestic industries remain competitive.
      • Example: India’s IT exports generate revenue (supply), while consumer imports like electronics influence domestic demand.

    What role does investment play in economic growth?

    • Boosts Production Capacity: Investment in factories, infrastructure, and technology increases the ability to produce goods and services, leading to higher GDP. Example: China’s heavy investment in manufacturing and infrastructure helped it become the world’s largest exporter.
    • Creates Employment Opportunities: New industries and infrastructure projects generate jobs, increasing income and overall demand in the economy. Example: India’s road and metro projects have created millions of direct and indirect jobs, boosting economic activity.
    • Multiplier Effect on Demand & GDP: Investment leads to increased income, which in turn increases consumption and demand, further driving growth. Example: A ₹100 investment in building highways can create ₹125 in overall economic output due to increased business activities along the route.
    • Encourages Private Sector Confidence: When the government invests in key sectors, it builds confidence among private businesses to invest further. Example: India’s Production-Linked Incentive (PLI) scheme for electronics manufacturing has attracted global tech firms to set up production units.
    • Leads to Technological and Industrial Development: Investments in research, innovation, and new industries enhance productivity and global competitiveness. Example: South Korea’s investment in R&D and technology made it a leader in electronics and automobile industries.

    How have India and China experienced changes in per capita income?

    • Similar Per Capita Incomes in the Early 1990s: In the early 1990s, India and China had nearly equal per capita incomes, with both countries being 1.5% of the U.S. average. Example: In 1992, both nations were considered low-income economies with similar economic structures.
    • China’s Investment-Led Growth Model: China prioritized high investment rates, focusing on infrastructure, state-owned enterprises, and manufacturing. Example: In 1992, China’s investment rate was 39.1% of GDP, much higher than India’s 27.4%.
    • Diverging Growth Post-2000s: India’s investment rate rose to 35.8% in 2007, almost matching China’s, but declined after 2012 due to policy uncertainty and global economic slowdown.Example: By 2013, China’s investment rate increased to 44.5%, while India’s fell to 31.3%.
    • China’s Faster Rise in Per Capita Income: By 2023, China’s per capita income was 5 times India’s in nominal terms and 2.4 times higher in purchasing power parity (PPP). Example: As a percentage of U.S. per capita income in 2023: China: 15%, India: 3%.
    • India’s Consumption-Driven Growth Model: India’s economic growth has been mainly driven by domestic consumption, while China maintained higher investment levels. Example: In 2023, consumption was 60.3% of India’s GDP, compared to 39.1% in China.
    • Long-Term Impact on Growth and Inequality: India’s lower investment and trade deficits have led to slower per capita income growth, affecting job creation and economic equality. Example: China’s investment rate in 2023 was 41.3%, whereas India’s was only 30.8%, limiting economic expansion.

    What measures has the Indian government taken to promote investment in India?

    • Infrastructure Development: The government has launched massive infrastructure projects to boost investment and improve connectivity. Example: PM Gati Shakti (National Master Plan) aims to integrate multi-modal transport networks and reduce logistics costs.
    • Production-Linked Incentive (PLI) Scheme: Introduced to boost manufacturing and attract foreign and domestic investments in key sectors. Example: PLI schemes for electronics, pharmaceuticals, and renewable energy have encouraged global firms to set up production in India.
    • Corporate Tax Reforms: India reduced corporate tax rates to make the investment climate more competitive. Example: In 2019, the corporate tax rate was slashed to 22% for existing companies and 15% for new manufacturing firms.
    • Ease of Doing Business & FDI Reforms: Simplified regulatory processes, digital approvals, and single-window clearances to attract investments. Example: 100% FDI allowed in sectors like defense, telecom, and insurance under automatic route.

    Way forward: 

    • Enhancing Investment-Led Growth: India should focus on increasing capital formation by boosting infrastructure, industrial productivity, and R&D investments. Strengthening public-private partnerships (PPPs) and expanding the PLI scheme to emerging sectors can accelerate long-term economic growth.
    • Balancing Consumption and Supply-Side Expansion: While consumption remains a key driver, policies should encourage domestic manufacturing and export competitiveness to reduce reliance on imports. Strengthening skill development and labour market reforms will enhance productivity and job creation.

  • What is Deposit Insurance?

    Why in the News?

    The Centre is actively considering increasing the deposit insurance cover beyond the current ₹5 lakh limit, as confirmed by Financial Services Secretary.

    What is Deposit Insurance?

    • Deposit Insurance is a financial protection mechanism for depositors if a bank fails or faces restrictions imposed by the RBI.
    • It ensures compensation up to a set limit, even if the bank cannot return the money.
    • It is provided by Deposit Insurance and Credit Guarantee Corporation (DICGC), a subsidiary of RBI.
    • Coverage & Exclusions:
      • Covers: Savings accounts, fixed deposits (FDs), recurring deposits (RDs), current accounts (both principal & interest).
      • Does NOT cover: Deposits from foreign governments, central/state governments, inter-bank deposits, and primary cooperative societies.

    History of Deposit Insurance in India:

    • 1962: First in Asia to introduce Deposit Insurance Corporation (DIC), covering ₹1,500 per depositor.
    • 1978: Merged with the Credit Guarantee Corporation to form DICGC.
    • 1993: Deposit limit raised to ₹1 lakh.
    • 2020: After the PMC Bank crisis in Pune, the limit was increased from ₹1 lakh to ₹5 lakh.
    • 2021: Law amended to ensure insured payouts within 90 days of a bank facing restrictions.

    About DICGC & Its Functions

    • DICGC was established in 1961, a wholly-owned RBI subsidiary under the DICGC Act, 1961.
    • It covers all commercial banks, regional rural banks, foreign banks in India, and cooperative banks.
    • Banks pay the insurance premium; depositors do not pay any charges.
    • It ensures timely compensation within 90 days of a bank’s collapse.

    How does Deposit Insurance work?

    • DICGC insures deposits up to ₹5 lakh per depositor per bank.
    • The ₹5 lakh limit includes both principal and interest amounts.
    • If a bank is facing financial distress or RBI-imposed restrictions, depositors are eligible to claim insurance under Section 18A of the DICGC Act, 1961.
    • Payout Timeline:
      • Within 45 days: The troubled bank must submit a list of depositors to DICGC.
      • Within 90 days: DICGC processes and pays depositors up to ₹5 lakh.
    • If a bank goes into liquidation, DICGC pays the insured amount within two months of receiving a claim list from the bank’s liquidator.
    • When RBI restricts withdrawals from a bank, depositors are eligible to receive their insured deposits.

    PYQ:

    [2013] Which of the following grants/grant direct credit assistance to rural households? (2013)

    1. Regional Rural Banks
    2. National Bank for Agriculture and Rural Development
    3. Land Development Banks

    Select the correct answer using the codes given below:

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

     

  • Economic Capital Framework (ECF) of the RBI

    Why in the News?

    The Reserve Bank of India (RBI) has initiated an internal review of its Economic Capital Framework (ECF) to assess the contingency risk buffer (CRB) and overall capital reserves.

    What is Economic Capital Framework (ECF)?

    • The ECF is the risk management policy used by the RBI to determine:
    1. How much capital and reserves the central bank should maintain for financial stability.
    2. How much surplus the RBI can transfer to the government under Section 47 of the RBI Act, 1934.
    • Key Components
    1. Contingency Risk Buffer (CRB): A financial safeguard for monetary, fiscal, credit, and operational risks.
    2. Total Economic Capital: Includes capital, reserves, risk provisions, and revaluation balances.
    • Surplus Transfers:
      • FY24: ₹2.11 lakh crore (highest-ever surplus).
      • FY23: ₹87,416 crore | FY22: ₹30,307 crore | FY21: ₹99,122 crore.

    Review of ECF and Its Significance

    • The Bimal Jalan Committee’s recommendations (valid till June 2024) required a periodic reassessment.
    • As of March 31, 2024, the CRB stands at 6.5%, and the RBI is evaluating whether changes are needed.
    • Potential Impact
      • Higher CRB → More financial stability, but lower surplus transfers to the government.
      • Lower CRB → More funds available for government spending, but with potential financial risks.
    • Impact on Budget: RBI’s surplus plays a major role in fiscal planning for infrastructure & welfare programs.
    • The RBI must ensure financial resilience while also supporting economic development.

    About Bimal Jalan Committee (2018)

    • Objective: To review RBI’s reserve management and surplus transfer policy.
    • Key Recommendations:
      • CRB should be between 5.5% – 6.5% of the balance sheet.
      • Periodic ECF review every 5 years.
      • Only realized surplus (net income) should be transferred to the government.
      • Revaluation reserves should not be used for operational losses.
    • Impact:
      • Led to higher surplus transfers and a structured capital policy.
      • Strengthened transparency & financial governance in RBI’s operations.

     

    PYQ:

    [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

     

  • SEBI proposed Retail Algo Trading Framework

    Why in the News?

    Initially exclusive to institutional investors, Securities and Exchange Board of India (SEBI) now has proposed to allow retail participation in Algorithmic trading (algo trading) to ensure market stability and allow retail participation.

    What is Algo Trading?

    • Algo Trading, or Algorithmic Trading, is the process of using computer programs and pre-defined rules to execute financial market trades at high speed and efficiency.
    • It eliminates human intervention and emotions, allowing trades based on mathematical models, historical data, and market conditions.
    • How Does Algo Trading Work?
      • It follows pre-coded algorithms to identify trading opportunities and execute orders.
      • It uses technical indicators, price movements, volume, and other data to determine trade entry and exit points.
      • The system can scan multiple markets simultaneously and execute trades in milliseconds.
      • High-Frequency Trading (HFT) is a subset of algo trading that involves executing thousands of trades per second.
      • It reduces market impact, transaction costs, and slippage compared to manual trading.

    Key Highlights of Regulatory Framework:

    • Broker Responsibility: Only registered brokers can offer algo trading services to retail investors. Direct retail algo trading without broker approval is not permitted.
    • Market Surveillance: Exchanges must monitor algorithmic trades to prevent market manipulation and excessive order placement.
    • Latency and Co-location Rules: SEBI has set rules to ensure fair access to low-latency trading infrastructure and avoid unfair advantages.
    • Risk Management: Traders must maintain adequate margins, and there are circuit breakers to prevent excessive market volatility.
    • Pre-Approval for Strategies: Algo trading strategies must be tested and approved before deployment to minimize market disruption.
    • Algo vs. Non-Algo Identification: SEBI mandates separate tagging of algo trades for better transparency and oversight.
    • Ban on Self-Trading: Algorithms must not execute self-trades to manipulate market prices.

    PYQ:

    [2019] Which of the following is issued by registered foreign portfolio investors to overseas investors who want to be part of the Indian stock market without registering themselves directly?

    (a) Certificate of Deposit

    (b) Commercial Paper

    (c) Promissory Note

    (d) Participatory Note

     

  • Gold Investments in India Surge by 60% in 2024: World Gold Council Report

    Why in the News?

    According to the World Gold Council, Gold investments in India increased by 60% in 2024, reaching $18 billion (around Rs 1.5 lakh crore), compared to the previous year.

    What are the Key highlights of the Report?

    • The World Gold Council (WGC) was founded in 1987 by leading gold mining companies. Its purpose is to stimulate and sustain demand for gold. 
    • It aims to promote gold as a strategic asset and to advance a responsible, transparent, and accessible gold supply chain. 
    • The WGC has 32 members with mining operations in over 45 countries and is headquartered in London, UK.
    • Best Price Performance Since 2010: Gold recorded its strongest annual price rise since 2010, driven by geopolitical uncertainties and interest rate expectations.
    • Global demand: It grew by 25% whereas investment demand increased by 29% (2023). 
    • Global Supply: It increased by 1% mainly on account of mine production and recycling.  
      • India accounted for 20% of the global gold investment demand, which stood at 1,180 tonnes in 2024.
    • Outlook for 2025: Central banks and Gold Exchange Traded Funds are likely to drive demand.
    • India: RBI added 73 tonnes of gold to its forex reserves, raising gold’s share to a record 11%. 

     

    What are the reasons for the Increase in Gold Demand in India?

    • Cultural Significance: Gold is deeply ingrained in Indian culture, and its purchase is considered auspicious during festivals and weddings. For example, bridal jewelry alone accounts for at least half of the gold jewelry market share in India.
    • Investment and Hedge Against Uncertainty: Gold is seen as a safe haven investment, especially during times of economic and geopolitical instability. For instance, geopolitical tensions, such as the conflict between Israel and Hezbollah, have increased demand for gold as investors seek a safe-haven asset.
    • Inflation Hedge: Gold is considered a hedge against inflation, preserving wealth when the purchasing power of fiat currencies declines. For every 1% increase in inflation, gold demand increases by 2.6%.
    • Central Bank Buying: Central banks, including the Reserve Bank of India (RBI), increase their gold holdings to diversify forex reserves and hedge against external uncertainties. The RBI bought 19 tonnes of gold in the first quarter of 2024, already surpassing the 16 tonnes purchased in all of 2023.
    • Weakening Dollar: When the US dollar weakens, it becomes cheaper for investors holding other currencies to buy gold, increasing demand and driving prices up. A weaker dollar boosts demand, as seen with the US dollar easing by 0.2% and leading to an increase in gold prices.

    What is the present Status of Gold Resources?

    • In November 2024, central banks globally added 53 tonnes to their gold reserves. This indicates a continued recognition of gold as a stable and secure asset, particularly in emerging markets.
    • As of November 2024, the United States holds the largest gold reserves in the world, with 8,133.5 tonnes. India is among the top 10 countries in the world with the highest gold reserves.
    • As of April 1, 2015, India had an estimated 501.83 million tonnes of gold ore reserves. Approximately 17.22 million tonnes were categorized as reserves, with the remainder classified as remaining resources. 
      • The largest reserves of gold ore are located in Bihar (44%), followed by Rajasthan (25%), Karnataka (21%), West Bengal (3%), Andhra Pradesh (3%), and Jharkhand (2%). 
      • The remaining 2% of reserves are distributed among Chhattisgarh, Madhya Pradesh, Kerala, Maharashtra, and Tamil Nadu. 
    • The Geological Survey of India (GSI) is actively involved in geological mapping and mineral exploration to identify potential mineral-rich zones. 
    • To encourage private sector participation, the Indian government has amended the Minerals Evidence of Mineral Contents Rules for the exploration and mining of deep-seated minerals, including gold.

     

    What are the negatives of buying physical gold for the country? 

    • Increases Trade Deficit & Current Account Deficit (CAD): Countries with high gold imports, like India, see a widening trade deficit, as more foreign exchange is spent on gold rather than productive assets. Example: In 2023, India’s gold imports surged to over $43 billion, contributing to a rising CAD (Current Account Deficit) and putting pressure on the rupee.
    • Encourages Smuggling & Black Market Activities: High demand and import duties often lead to illegal gold smuggling, fueling the underground economy. Example: In 2022, 1,000+ kg of gold was smuggled into India, bypassing import duties and causing tax revenue losses for the government.
    • Non-Productive Asset & Storage Risks: Unlike stocks or bonds, gold does not generate income and remains idle in lockers, reducing capital available for economic growth. Example: In Turkey, during economic crises, citizens hoarded gold instead of investing in businesses, slowing economic recovery.

    Way forward: 

    • Promote Gold-Backed Financial Instruments: Encourage investments in Sovereign Gold Bonds (SGBs), Gold ETFs, and Digital Gold to reduce reliance on physical gold while ensuring capital appreciation and interest earnings.
    • Implement Smarter Import Policies & Monetization Schemes: Rationalize import duties to curb smuggling and expand gold monetization schemes to bring idle gold into the formal financial system, boosting liquidity and economic growth.

    Mains PYQ:

    Q Craze for gold in Indian has led to surge in import of gold in recent years and put pressure on balance of payments and external value of rupee. In view of this, examine the merits of Gold Monetization scheme.(UPSC IAS/2015)

  • Why the tax cuts are a one way gamble?

    Why in the News?

    The Union Budget offers a major tax cut, benefiting taxpayers earning above ₹7 lakh. Rebates and exemptions have increased to reduce liabilities, though it may lead to an estimated ₹1 lakh crore revenue loss.

    What is the logic behind the tax rebates?

    • Boosting Household Consumption: Taxpayers earning ₹7–12 lakh/year now qualify for a full rebate (earlier limited to sub-₹7 lakh earners), saving ₹70,000–₹1.1 lakh annually.
      • This exemption limit was raised from ₹3 lakh to ₹4 lakh for those earning above ₹12 lakh, reducing tax burdens across income groups.It will Increase disposable income to drive consumption, savings, and private investment.
      • With weak private investment and uncertain global demand, tax rebates are aimed at stimulating domestic consumption.
    • Leveraging Tax Buoyancy for Revenue Growth: Despite an 8% tax rate reduction, the government anticipates a 14% rise in direct tax revenue (₹14.3 lakh crore), requiring a 24% income growth among taxpayers. It Simplified tax slabs and phased out the old regime to improve compliance and widen the taxpayer base.
    • Focus on Middle-Class Welfare: The overarching goal of these tax rebates is to support the middle class, which constitutes a significant portion of the electorate and plays a vital role in the economy. By alleviating their tax burden, the government seeks to enhance their financial well-being and foster a more equitable economic environment.

    What are the implications if tax buoyancy does not work out?

    • Revenue Shortfalls: A failure in tax buoyancy would lead to lower than expected tax revenues, resulting in budget deficits. This could force the government to cut essential services and social programs, negatively impacting the welfare of vulnerable populations.
    • Pro-Cyclical Fiscal Policy: Insufficient tax revenue may compel the government to adopt a pro-cyclical fiscal policy, reducing public spending during economic downturns instead of stimulating growth. This can exacerbate economic slowdowns and hinder recovery efforts.
    • Increased Tax Burden on Compliant Taxpayers: To compensate for revenue shortfalls, the government might increase taxes on those who continue to pay taxes, placing a heavier burden on compliant taxpayers and potentially discouraging further compliance and economic activity.

    Is it ‘Fiscal Consolidation’ or ‘Fiscal Contraction’?

    • The current approach appears to lean more towards fiscal contraction rather than fiscal consolidation. The Finance Minister has set a lower deficit target of 4.4% for 2025-26, down from 4.8% in the previous year. This suggests a tightening of fiscal policy rather than an expansion aimed at stimulating growth.
    • Critics argue that such contractionary measures are ill-timed given the current economic slowdown, as they limit the government’s ability to invest in growth-promoting initiatives. The expectation seems to hinge on corporate investment and export growth to drive recovery, which may not be sufficient if domestic demand remains weak due to reduced government spending.
    Aspect Consolidation Argument Contraction Criticism
    Deficit Target Lowered to 4.4% of GDP (from 4.8% in FY24), aiming for 3% by FY29 Aggressive deficit cuts during slowing growth (projected 10.1% nominal GDP) risk stifling recovery
    Revenue Strategy Bank on ₹28.37 trillion net tax receipts (+11% YoY) via compliance gains and income growth No compensatory taxes for high earners (30% slab unchanged) or wealth assets, risking ₹1.26 lakh crore shortfall
    Expenditure Focus Capital expenditure raised to ₹11.2 lakh crore (+17.4% YoY) for infrastructure multipliers Social sector allocations remain stagnant, with FY24 revised spending 15% below initial estimates.

    Way forward: 

    • Balanced Fiscal Approach – Instead of aggressive fiscal contraction, the government should adopt a gradual deficit reduction strategy while maintaining targeted public spending, especially in infrastructure and social sectors, to sustain domestic demand and economic growth.
    • Enhancing Revenue without Burdening Taxpayers – Strengthen tax compliance through digital tracking, rationalize subsidies, and explore progressive taxation on wealth and high-income segments to ensure fiscal stability without increasing the burden on the middle class.

    Mains PYQ:

    Q  Comment on the important changes introduced in respect of the Long-term Capital Gains Tax (LCGT) and Dividend Distribution Tax (DDT) in the Union Budget for 2018-2019. (UPSC IAS/2018)

  • A pragmatic picture: Economic Survey

    Why in the News?

    The Budget session of Parliament has started at a time when India’s economic situation is shifting. After four years of strong growth following the pandemic, the economy is slowing down.

    What are the key projections for India’s economic growth in FY 2024-25?

    • Projected GDP Growth: The National Statistical Office (NSO) has estimated that India’s GDP will grow by 6.4% in FY 2024-25. This figure marks a decline from the 8.2% growth recorded in FY 2023-24 and is lower than earlier forecasts which ranged from 6.5% to 7%.
    • Sectoral Performance: The slowdown is attributed to weaker performance in sectors such as manufacturing and services. The first half of FY 2024-25 is expected to see a growth rate of around 6%, necessitating a stronger performance of 6.8% in the second half to meet the annual target.
    • Comparative Estimates: While the NSO’s estimate stands at 6.4%, other organizations like the International Monetary Fund (IMF) have projected a slightly higher growth rate of 7%, reflecting differing outlooks on economic recovery and consumer demand.

    How does the Economic Survey address challenges such as inflation and global uncertainties?

    • Food Inflation Concerns: Despite the overall decline in inflation, food inflation remains a challenge, rising from 7.5% in FY24 to 8.4% in the same period due to supply chain disruptions and adverse weather conditions. 
      • The survey emphasizes the need for improved agricultural practices and climate-resilient crops to manage these risks effectively.
    • Inflation Trends: The survey reports a reduction in retail inflation from 5.4% in FY24 to 4.9% during April-December 2024, indicating a positive trend towards achieving the RBI’s target of around 4% by FY26, contingent on stable global commodity prices and favorable domestic agricultural output.
    • Global Economic Uncertainties: The survey highlights that ongoing geopolitical tensions and global trade risks pose significant challenges to inflation management, necessitating careful policy interventions to mitigate potential impacts on the domestic economy.
    • Policy Recommendations: To address these challenges, the Economic Survey advocates for strategic policy measures, including enhancing supply chain resilience, improving data collection for better price monitoring, and fostering an environment conducive to investment and growth.

    What structural reforms are recommended to enhance long-term economic stability?

    • Deregulation and Ease of Doing Business: The Economic Survey advocates for significant deregulation to foster a more conducive business environment. It stresses that the government should “get out of the way” of businesses by minimizing micro-management and enhancing accountability among regulators.
    • Empowering Small Firms: Recommendations include empowering small enterprises, enhancing economic freedom, and ensuring a level playing field across sectors to stimulate growth and investment.
    • Focus on Domestic Demand: The budget is expected to prioritize boosting domestic demand through increased government spending, particularly in infrastructure and capital projects, as a countermeasure against global uncertainties and inflationary pressures.

    Way forward: 

    • Strengthen Domestic Resilience – Focus on boosting domestic consumption and investment through targeted fiscal measures, infrastructure expansion, and support for MSMEs to counter global uncertainties.
    • Enhance Inflation Management – Implement climate-resilient agricultural policies, improve supply chain efficiency, and strengthen monetary-fiscal coordination to maintain stable inflation and ensure sustainable growth.

    Mains PYQ:

    Q Is inclusive growth possible under market economy? State the significance of financial inclusion in achieving economic growth in India.(UPSC IAS/2022)