The NITI Aayog has launched the Fiscal Health Index (FHI), 2025 to provide a comprehensive assessment of the fiscal performance of 18 major states in India.
What is the Fiscal Health Index (FHI)?
The FHI is an initiative by NITI Aayog to analyze the fiscal health of states and guide reforms for sustainable economic growth.
It evaluates states using a composite index derived from five key sub-indices:
Quality of Expenditure
Revenue Mobilization
Fiscal Prudence
Debt Index
Debt Sustainability
The report uses data from the Comptroller and Auditor General of India (CAG) for the fiscal year 2022-23, supplemented by trends from 2014-15 to 2021-22.
FHI covers states contributing significantly to India’s GDP, demographics, public expenditure, and revenues.
Key Highlights:
Top Performers:
Odisha: Ranked first (67.8), excelling in debt management and sustainability.
Chhattisgarh: Secured second position (55.2), showcasing strong fiscal prudence.
Goa: Achieved third place (53.6), reflecting balanced fiscal practices.
Underperformers:
Kerala: (29.7), struggling with poor debt sustainability and expenditure quality.
Punjab: (28.4), grappling with low revenue mobilization and high deficits.
West Bengal: (27.8), facing challenges in debt index and fiscal management.
Andhra Pradesh: (26.9), hindered by high fiscal deficits.
Regional Insights:
Southern States: Telangana leads (47.5), while Tamil Nadu (30.2), Kerala (29.7), and Andhra Pradesh (26.9) lag.
Developmental Expenditure: Top states allocate up to 73% of total expenditure to growth-focused activities.
Significance
Promotes fiscal discipline through data-driven insights.
Guides state-specific reforms to address disparities.
Encourages healthy competition among states.
Supports cooperative federalism, aligning with “Viksit Bharat @2047”.
Tracks fiscal health annually to ensure continuous improvement.
PYQ:
[2015] The Government of India has established NITI Aayog to replace the (2015)
The recent Supreme Court judgment in the Jet Airways case has highlighted several major problems in India’s insolvency system.
What is the Insolvency and Bankruptcy Code (IBC)?
The Insolvency and Bankruptcy Code (IBC), enacted in 2016, is a comprehensive legal framework in India aimed at consolidating the existing laws governing insolvency and bankruptcy.
It establishes a structured process for resolving insolvency for corporate entities, individuals, and partnership firms, promoting timely resolution and maximizing asset value.
What are the structural inefficiencies in the current Insolvency and Bankruptcy Code (IBC)?
Overburdened Tribunals: The National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) are tasked with handling both corporate insolvencies under the IBC and cases under the Companies Act. This dual burden leads to inefficiencies and delays in resolving insolvency cases.
Inadequate Institutional Capacity: The NCLT’s structure, established in 1999, is outdated and does not align with contemporary economic demands. With only 63 sanctioned members, many of whom split their time across multiple benches, the tribunal struggles to manage its caseload effectively, resulting in significant backlogs.
Lack of Domain Expertise: Members of the NCLT often lack the necessary domain knowledge to handle complex insolvency cases effectively. This deficiency hampers their ability to make informed decisions, as highlighted by the Supreme Court in the Jet Airways case.
Procedural Delays: The requirement for mandatory hearings for all applications contributes to lengthy delays. The average time for insolvency resolutions has increased, indicating that procedural inefficiencies are exacerbating the situation.
Ineffective Urgent Listings: There is no robust system for urgent listings before the NCLTs, leading to further delays in critical cases. The discretion given to registry staff regarding case listings can lead to inconsistencies and unpredictability in case management.
Judicial Discretion Issues: There is a growing tendency among NCLT and NCLAT members to ignore Supreme Court orders, undermining judicial authority and eroding trust in the system.
How can procedural innovations enhance the effectiveness of insolvency resolution?
Specialized Benches: Establishing specialized benches for different categories of insolvency cases could improve efficiency and ensure that cases are handled by members with relevant expertise.
Mandatory Mediation: Introducing mandatory mediation before filing insolvency applications could reduce the number of cases entering the formal insolvency process, alleviating pressure on tribunals.
Streamlined Hearing Processes: Revising the requirement for mandatory hearings on all applications could expedite processes, allowing for more efficient case management and resolution.
Improved Infrastructure: Investing in adequate courtrooms and permanent support staff is essential to enhance operational capacity and ensure that tribunals can function effectively within the broader economic framework.
What reforms are necessary to transform the IBC into a proactive economic tool?
Reassessment of Tribunal Structure: A comprehensive review of the NCLT and NCLAT structures is needed to align them with current economic realities and demands, potentially increasing their sanctioned strength and operational hours.
Focus on Domain Expertise in Appointments: Reforming the appointment process for tribunal members to prioritise candidates with relevant experience in insolvency matters will enhance decision-making quality.
Encouraging Alternative Dispute Resolution (ADR): Promoting alternative dispute resolution methods within the insolvency framework can help manage caseloads more effectively while providing quicker resolutions for stakeholders.
Legislative Amendments: Continuous legislative amendments should be made based on empirical data and stakeholder feedback to address emerging challenges within the IBC framework.
Cultural Shift Towards Credit Discipline: Encouraging a cultural shift that emphasizes credit discipline among borrowers will support a healthier economic environment conducive to investment and growth.
Way forward:
Strengthen Institutional Capacity and Expertise: Enhance the operational capacity of NCLT and NCLAT by increasing strength by appointing members with domain expertise, and providing adequate infrastructure and support staff to streamline case management and reduce delays.
Promote Alternative Dispute Resolution (ADR): Integrate mandatory mediation and other ADR mechanisms within the IBC framework to alleviate tribunal workload, ensure quicker resolutions, and foster a collaborative insolvency ecosystem.
Q) Explain the difference between 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 major issues like the methodology of India’s Gross Domestic Product (GDP) (2021) and steady GDP growth and low inflation (2019).
The real GDP growth of 6.4% in 2024-25, while slightly below the Reserve Bank of India’s forecast of 6.6% which should not be seen as disappointing. The growth rate is expected to improve in the second half, with manufacturing showing a significant slowdown, contributing to a decline from 8.2% growth in the previous year.
Today’s editorial highlights the growth rates of India in Nominal and real terms and what are the factors behind the low growth rate of India. This content can be used in mains answer GS paper 3 related to GDP of India.
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Let’s learn!
Why in the News?
The First Advance Estimates (FAE) of National Accounts for 2024-25 indicate a real GDP growth of 6.4% and a nominal GDP growth of 9.7%.
Note: The National Statistical Office (NSO) of the Ministry of Statistics and Programme Implementation (MOSPI) releases the FAE.
What is the difference between Real and Nominal GDP growth rates?
• Real GDP growth rate is the rate of change in the volume of goods and services produced, while nominal GDP growth rate is the rate of change in the total value of goods and services produced. • The nominal GDP growth rate includes the effects of inflation, while the real GDP growth rate does not.
What factors are contributing to the slowdown in India’s GDP growth?
• Decline in Government Investment: The Government of India’s capital expenditure growth has been negative at (-)12.3%, which has significantly impacted overall GDP growth. Limited capital expenditure, reaching only 46.2% of the budget target after eight months, is a primary reason for the slowdown. • Weak Manufacturing Sector Performance: The manufacturing sector has experienced a sharp decline in growth from 9.9% in 2023-24 to 5.3% in 2024-25, contributing to lower Gross Value Added (GVA) figures. • Global Economic Uncertainty: Anticipated uncertainties stemming from global economic conditions, including changes in leadership in major economies like the United States, may hinder India’s export performance and overall economic stability. • Lower Private Consumption Growth: Although Private Final Consumption Expenditure (PFCE) is projected to grow by 7.3%, this is still a potential concern if consumer confidence does not recover adequately. • Previous High Base Effect: The high GDP growth of 8.2% in 2023-24 creates a challenging comparison, leading to perceptions of slowdown even when current growth rates may be consistent with long-term potential.
How will different sectors of the economy perform in the upcoming fiscal year?
Agriculture and Allied Sectors: Growth in agriculture is expected to improve significantly, with estimates suggesting a rise to 3.8% compared to 1.4% in the previous year.
Manufacturing Sector Recovery: There is an expectation for recovery in manufacturing, although it remains uncertain given past performance trends.
Construction and Services Sectors: The construction sector is projected to grow at around 8.6%, while financial services are expected to see growth of approximately 7.3%, indicating resilience and potential for expansion.
Private Consumption: Continued growth in private consumption is anticipated which is driven by rural demand and government spending initiatives.
What are the implications of these growth forecasts for policy and investment?
Need for Sustained Government Capital Expenditure: The government must prioritize capital expenditure to stimulate economic growth and encourage private investment, targeting at least a 20% increase based on revised estimates.
Focus on Structural Reforms: Policymakers should consider structural reforms that enhance productivity across sectors, particularly in manufacturing and agriculture, to support sustainable growth.
Investment in Infrastructure: Increased investment in infrastructure projects can provide a multiplier effect on the economy, fostering job creation and boosting demand.
Monitoring Global Economic Trends: Given the potential impact of global economic conditions on domestic growth, India should remain vigilant and adaptable to external shocks while focusing on strengthening domestic demand.
Long-Term Growth Strategies: With a potential long-term real GDP growth rate of around 6.5%, strategies should be developed to ensure that this target is met consistently over the next five years through innovation and investment in human capital.
Way forward:
Accelerate Infrastructure Investment: The government should prioritize and fast-track capital expenditure, especially in infrastructure, to stimulate economic activity, enhance private sector participation, and create jobs, aiming for at least 20% growth in capital investment for the upcoming fiscal year.
Enhance Sectoral Productivity through Reforms: Implement structural reforms in key sectors like manufacturing, agriculture, and services to boost productivity, reduce bottlenecks, and ensure sustainable long-term growth, focusing on innovation and skill development.
The Reserve Bank of India (RBI), along with the Central government, has reviewed the rules under the Foreign Exchange Management Act 1999 (FEMA) to make it easier to carry out cross-border transactions in Indian rupees (INR) according to a statement by the RBI.
What are the recent changes made in FEMA regulations by RBI?
Opening Rupee Accounts for Non-Residents: Overseas branches of authorized dealer (AD) banks can now open rupee accounts for non-residents, enabling them to conduct current and capital account transactions with Indian residents.
Settlement of Transactions: Non-residents can use their balances in repatriable rupee accounts, including Special Non-Resident Rupee Accounts (SNRAs) and Special Rupee Vostro Accounts (SRVAs), to settle transactions with other non-residents abroad.
Investment Opportunities: Balances in these accounts can be utilized for foreign investments, including Foreign Direct Investment (FDI) in non-debt instruments, thereby promoting rupee-based investments.
Flexibility for Exporters: Indian exporters are now permitted to open foreign currency accounts overseas to receive export proceeds and use these funds for import payments, enhancing operational flexibility.
Support for Local Currency Transactions: The new guidelines support cross-border transactions in local currencies, reducing reliance on dominant foreign currencies like the US Dollar
What is Internationalisation of Rupee?
The internationalization of the rupee refers to the process of increasing the use and acceptance of the Indian rupee (INR) in global trade, investment, and cross-border transactions. This initiative aims to promote the rupee as a viable alternative to dominant currencies like the US dollar in international markets.
What are the key features of the Internationalisation of Rupee?
Cross-Border Transactions: The primary goal is to facilitate more cross-border transactions in rupees, allowing businesses and individuals to conduct trade and investments without relying on foreign currencies.
Current and Capital Account Transactions: Initially focused on promoting the rupee for import and export trade, the process will extend to other current account transactions and eventually capital account transactions, enabling investments in rupee-denominated assets.
Full Convertibility: Achieving full capital account convertibility is essential for internationalization, meaning there would be no restrictions on converting rupees into foreign currency or vice versa for investments and loans.
Strengthening Economic Sovereignty: Reducing reliance on foreign currencies enhances India’s economic sovereignty and minimizes exposure to currency fluctuations, thereby stabilizing trade relations.
Enhancing Global Trade: By allowing direct transactions in rupees, internationalization can simplify cross-border trade processes, eliminate currency conversion needs, and reduce transaction costs.
What are the significance of Internationalisation of Rupee?
Reducing Exchange Rate Risks: By promoting INR usage in international trade, India can mitigate exchange rate risks associated with reliance on major currencies like the USD.
Enhancing Trade Competitiveness: Facilitating rupee transactions can improve India’s trade competitiveness by lowering transaction costs and simplifying payment processes for exporters and importers.
Strengthening Economic Sovereignty: Greater acceptance of the INR in global markets can enhance India’s economic sovereignty and reduce vulnerability to external economic shocks and geopolitical tensions.
Encouraging Foreign Investment: The ability to conduct transactions in INR may attract more foreign investors looking for stable investment opportunities in India
Way forward:
Strengthen Global Agreements: Expand bilateral and multilateral trade agreements to encourage invoicing and settlement in rupees, promoting its global acceptability.
Enhance Domestic Financial Infrastructure: Improve financial systems to support seamless cross-border rupee transactions, including achieving full capital account convertibility and increasing trust in the INR.
Mains PYQ:
Q How would the recent phenomena of protectionism and currency manipulations in world trade affect macroeconomic stability of India? (UPSC IAS/2018)
In the last week of December 2024, the rupee dropped below 85 against the U.S. dollar, hitting a new low of 85.81. The rupee fell by about 3% in 2024, continuing its long-term decline against the dollar.
What has caused the currency to depreciate?
Exit of Foreign Investors: A significant driver of the rupee’s depreciation has been the exit of foreign portfolio investors (FPIs) from Indian markets. In 2024, FPIs pulled out substantial amounts from equities, leading to increased selling pressure on the rupee.
Widening Trade Deficit: India’s trade deficit has widened due to high imports, particularly of crude oil and gold, compared to its exports. This increased demand for foreign currencies (like the U.S. dollar) to pay for these imports has contributed to the rupee’s weakening.
Monetary Policy Differences: The Reserve Bank of India’s relatively looser monetary policy compared to the U.S. Federal Reserve has resulted in higher inflation rates in India. This inflation differential makes Indian assets less attractive to foreign investors, further reducing demand for the rupee.
Global Economic Factors: Geopolitical tensions, such as the Russia-Ukraine war and rising global crude oil prices, have created volatility in the markets, leading to capital outflows from emerging markets like India.
The other reason is that the strengthening U.S. dollar amid higher U.S. bond yields has made investments in the U.S. more attractive compared to India.
What could be the impact of Rupee depreciation?
Increased Import Costs: A weaker rupee raises the cost of imports, particularly for essential goods such as crude oil, fertilizers, and edible oils. This increase in import bills can lead to a higher overall trade deficit, which reached an all-time high of $37.8 billion in November 2024, exacerbating economic vulnerabilities.
Inflationary Pressures: The rising costs of imported goods contribute to inflation, making everyday goods more expensive for consumers. This can lead to higher living costs and reduced purchasing power, as seen with the increased prices of food and fuel due to higher import expenses.
Impact on Economic Growth: The combination of rising inflation and increased costs can dampen economic growth. Higher import bills can create upward pressure on interest rates, making borrowing more expensive and potentially slowing down investment and consumption.
Why made the central bank to intervene?
Stabilizing Currency Value: The Reserve Bank of India (RBI) intervened in the forex market to stabilize the rupee and prevent excessive volatility that could disrupt economic stability. By selling dollars from its reserves, the RBI aimed to support the rupee’s value against the dollar.
Preventing Inflationary Pressures: A depreciating rupee increases the cost of imports, particularly essential commodities like crude oil, which can exacerbate inflation domestically. The RBI’s intervention seeks to mitigate these inflationary pressures by maintaining a more stable exchange rate.
Maintaining Investor Confidence: By actively managing the currency’s value, the RBI aims to instill confidence among investors regarding India’s economic stability and attractiveness as an investment destination. This is crucial for sustaining foreign investment inflows and supporting economic growth.
Way forward:
Diversify Export Markets and Reduce Dependence on Imports: India should focus on enhancing its exports to non-traditional markets while exploring alternatives to reduce dependence on high-cost imports, especially crude oil and gold.
Monetary Policy Coordination and Strengthening Fundamentals: The RBI should work towards aligning its monetary policy with global trends while ensuring domestic inflation remains under control.
Mains PYQ:
Q How would the recent phenomena of protectionism and currency manipulations in world trade affect macroeconomic stability of India? (UPSC IAS/2018)
The current state of cross-border insolvency laws is poor, with rules that cannot be enforced and slow progress in making necessary changes. This situation needs to be fixed.
How did the evolution of the cross-border insolvency framework in India?
Post-Independence Legal Framework: After Independence, India’s insolvency laws focused on domestic cases and did not address cross-border insolvency, leaving a significant gap in the legal framework.
Committee Recommendations and IBC Drafting: In the 2000s, committees like the Eradi, Mitra, and Irani Committees recommended adopting the UNCITRAL Model Law, leading to the drafting of the Insolvency and Bankruptcy Code (IBC) in 2015, which initially focused on domestic insolvencies.
Incorporation of Cross-Border Provisions: Sections 234 and 235 were introduced in 2016 to facilitate cross-border insolvency, allowing reciprocal agreements and assistance from foreign courts, though their effectiveness was limited by the lack of implementation and reciprocal arrangements.
What are the key challenges in adopting a cross-border insolvency framework in India?
Outdated Framework: Current legal provisions, such as Sections 234 and 235 of the Insolvency and Bankruptcy Code (IBC), remain non-notified and unenforceable, rendering them ineffective. Reliance on ad hoc protocols like in the Jet Airways case increases judicial burden, delays resolutions, and reduces asset value.
Jurisdictional Issues: Section 60(5) of the IBC limits the jurisdiction of civil courts over insolvency matters, leaving the National Company Law Tribunal (NCLT) as the sole authority. However, the NCLT lacks the power to recognize or enforce foreign judgments.
Lack of Reciprocal Arrangements: The absence of reciprocal agreements between India and other nations for cross-border insolvency resolution creates barriers to effective cooperation.
Inefficient Court Communication: Outdated communication methods between Indian and foreign courts hinder transparency and efficiency in handling cross-border insolvency matters.
Legislative Gaps: The delay in adopting structured frameworks, such as the UNCITRAL Model Law, highlights a critical regulatory gap in managing cross-border insolvencies.
How does India’s proposed legislation align with international standards, such as the UNCITRAL Model Law?
India’s proposed amendments to the IBC aim to incorporate elements of the UNCITRAL Model Law on Cross-Border Insolvency, which provides a structured framework for international cooperation and coordination in insolvency matters.
By adopting this model, India seeks to enhance its legal framework to better manage cross-border insolvencies and align with global best practices.
The recommendations from various expert committees, including the Insolvency Law Committee and the Parliamentary Standing Committee, emphasize the need for a comprehensive approach that includes provisions for recognizing foreign insolvency proceedings and facilitating smoother communication between jurisdictions.
What implications do these reforms have for foreign investment and economic growth in India?
Attracting Foreign Investment: A robust cross-border insolvency framework will enhance investor confidence by ensuring that their rights are protected in case of insolvency. This predictability is crucial for attracting foreign direct investment (FDI) into India, as investors seek assurance that their interests will be managed effectively across borders.
Facilitating Corporate Restructuring: Improved legal mechanisms for cross-border insolvency will enable Indian companies operating internationally to restructure more efficiently when faced with financial difficulties. This can lead to better asset recovery and preservation of business value, ultimately contributing to economic stability and growth.
Strengthening Economic Ties: By aligning its insolvency laws with international standards, India can foster stronger economic relationships with other nations, facilitating smoother trade and investment flows. This alignment is essential as India’s economic integration with global markets continues to grow.
Way forward:
Adopt UNCITRAL Model Law: Expedite the implementation of the UNCITRAL Model Law on Cross-Border Insolvency to establish a predictable, structured framework for managing international insolvency cases, fostering investor confidence and global integration.
Enhance NCLT Capacity: Strengthen the National Company Law Tribunal (NCLT) with expanded jurisdiction and training to effectively handle cross-border insolvency cases, alongside modernizing judicial coordination mechanisms through international guidelines like JIN.
In just eight years, UPI now handles nearly 80% of India’s digital transactions which valued at ₹20.60 lakh crore in August, despite challenges like PhonePe and Google Pay’s market dominance.
What are the implications of market concentration in the UPI ecosystem?
Systemic Vulnerability: The dominance of two Third Party App Providers (TPAPs) for online transactions like UPI PhonePe and Google Pay, which together control over 85% of the market share, creates a risk of systemic failure.
Any disruption in their services could significantly impact the entire UPI ecosystem, given that nearly 80% of transactions occur through these platforms.
Reduced Competition and Innovation: The high market concentration discourages competition, leading to fewer incentives for innovation among existing players. Smaller or new entrants face significant barriers to entry due to the scale and resources of the dominant TPAPs, stifling diversity in service offerings.
Foreign Dominance Risks: Both leading TPAPs are foreign-owned, raising concerns about data security and sovereignty. This foreign dominance can lead to potential vulnerabilities in terms of data protection and access to sensitive information about Indian users.
How effective are regulatory measures in addressing duopoly issues?
Regulatory Challenges: The National Payments Corporation of India (NPCI) has attempted to address market concentration by capping TPAP market shares at 30%. However, this measure has not been effectively enforced, with extensions granted that allow dominant players to maintain their substantial market positions.
Limited Impact of Existing Regulations: Despite regulatory intentions, the continued growth of PhonePe and Google Pay indicates that existing measures have not sufficiently mitigated the risks associated with a duopoly. The potential increase in market share cap from 30% to 40% may further entrench the dominance of these platforms rather than promote a competitive landscape.
What strategies can smaller players adopt to compete in this landscape?
Innovation and Niche Services: Smaller players can focus on niche markets or specialized services that cater to specific user needs, differentiating themselves from larger competitors. This could include unique features or localised services that appeal to underserved populations.
Collaboration and Partnerships: Forming alliances with banks, fintech companies, or other service providers can help smaller players leverage resources and technology to enhance their offerings and reach a broader audience.
User Education and Trust Building: Investing in user education about digital payments and building trust through transparent practices can attract users who may be hesitant to switch from established platforms. Emphasizing security features and customer support can also enhance user confidence.
What should the Indian Government do to reduce the dependency? (Way forward)
Enforce and Strengthen Regulatory Caps: Mandate strict enforcement of market share caps for TPAPs and ensure timely compliance to prevent excessive concentration. Introduce penalties for non-compliance and avoid extensions to foster a competitive ecosystem.
Promote Indigenous Development: Provide financial incentives, subsidies, and grants to Indian TPAPs to enhance their competitiveness. Encourage innovation through dedicated programs and regulatory frameworks that support startups in the payments space.
Mains PYQ:
Q Is inclusive growth possible under market economy? State the significance of financial inclusion in achieving economic growth in India. (UPSC IAS/2021)
At a New Delhi panel, economist Thomas Piketty proposed taxing India’s super-rich to fund health and education, while Chief Economic Advisor Anantha Nageswaran cautioned against potential fund outflows from higher taxes.
What are the potential benefits of reinstating a wealth tax?
Funding Public Services: A wealth tax could provide significant revenue that could be allocated to critical sectors such as health and education, addressing inequalities in access to these services. This funding could help create a more educated and healthier workforce, ultimately benefiting the economy.
Addressing Wealth Inequality: With wealth concentration at historically high levels, a wealth tax could serve as a tool to mitigate inequality, which is increasingly viewed as a fundamental development issue that affects opportunities for many individuals.
Encouraging Productive Investments: By taxing unproductive assets like real estate and gold while promoting investments in productive assets such as equities and bonds, a wealth tax could potentially shift capital towards more economically beneficial uses.
What challenges and criticisms exist regarding the implementation of a wealth tax?
Measurement Difficulties: Accurately measuring wealth poses significant challenges. The complexities of defining what constitutes wealth and ownership can lead to loopholes and evasion, as individuals may shift their assets to avoid taxation.
Capital Flight Concerns: There is apprehension that high taxation on the wealthy could lead to capital outflows, as individuals may relocate their assets or themselves to countries with lower tax burdens. This concern is particularly pronounced in India, where the public infrastructure may not be sufficient to retain high-net-worth individuals.
Historical Ineffectiveness: Previous implementations of wealth tax in India resulted in low collection rates (less than 1% of gross tax collections). The high cost of collection and the challenges of enforcement contributed to its abolishment in 2016-17.
Misallocation of Resources: Critics argue that simply imposing a wealth tax does not guarantee effective use of the revenue generated. There are concerns about whether additional funds would improve sectors like education, which already face management inefficiencies.
How would a wealth tax impact India’s economy and social structure?
Economic Growth vs. Redistribution: Proponents argue that addressing inequality through a wealth tax can enhance overall economic growth by expanding opportunities for disadvantaged groups.
However, opponents maintain that focusing on growth alone is more beneficial, suggesting that redistribution efforts may not lead to improved outcomes for the economy.
Social Cohesion: A wealth tax could potentially foster greater social cohesion by addressing stark disparities in wealth and opportunity.
However, if perceived as punitive or ineffective, it might exacerbate tensions between different socioeconomic groups.
Investment Climate: A wealth tax could change how people invest in India. Some investors might hesitate because of higher costs, but if the money is used well for public services. It could improve living standards and infrastructure, making India a better place for investment over time.
Case study:
Norway is often cited as a successful case study for wealth tax implementation. Norway imposes a wealth tax on individuals with a net worth exceeding a certain threshold, which includes various asset classes such as real estate, stocks, and bonds.
For 2022, a new step for the state rate is introduced. For net wealth in excess of NOK 20 million (NOK 40 million for married couples), the rate is 0.4%. Thus, the maximum wealth tax rate is 1.1%.
Way forward:
Efficient Tax Design and Implementation: Develop a clear and transparent framework for wealth taxation to minimize evasion, ensure equitable enforcement, and balance revenue generation with economic growth.
Focus on Public Infrastructure: Prioritize effective allocation of tax revenue to critical sectors like health and education, addressing inefficiencies to build trust and maximize social and economic benefits.
Mains question for practice:
Q “Reinstating a wealth tax in India could be a tool for reducing inequalities and funding critical public services. However, its implementation poses several economic and administrative challenges.” Critically analyse this statement in the context of India’s socio-economic landscape. (250 words) 15M
Mains PYQ:
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 IAS/2019)
The Finance Minister describes the slowdown in Q2 growth as a “temporary blip,” while the RBI has revised its GDP growth forecast for 2024-25 downward, from 7.2% to 6.6%.
Why RBI has revised its GDP growth forecast for 2024-2025 downward, from 7.2% to 6.6%?
Economic Slowdown: The RBI’s downgrade reflects concerns over a cyclical downturn, with GDP growth in Q2 FY25 at 5.4%, indicating fundamental challenges hindering growth prospects.
Fundamental challenges: Declining corporate investments, sliding consumption growth, and “softness” in urban demand have weakened the investment climate, prompting a downward revision in growth expectations.
Inflationary Pressures: Persistent inflation near double digits complicates monetary policy, forcing the RBI to consider prolonged high interest rates, which could further suppress growth and investments.
What are the expected growth rates for major economies in 2025?
India: Projected to achieve a growth rate of 6.5% over the next five years, maintaining its status as the fastest-growing major economy globally, despite a recent dip in economic output in 2024.
China: Growth is expected to stabilize around 4-5%, lower than its historical rates due to structural challenges like demographic shifts and a cooling property sector.
United States: Growth is projected at 1.5-2%, as the Federal Reserve maintains a tight monetary policy to counter inflation.
Eurozone: Growth is forecasted at around 1%, reflecting a sluggish recovery from the energy crisis and geopolitical uncertainties.
Japan: Expected growth rate of 1-1.5%, supported by fiscal stimulus but constrained by aging demographics.
Emerging Markets (excluding China and India): Growth is expected to range from 3-4%, depending on commodity prices and fiscal discipline.
How will inflation and monetary policy evolve?
Inflation Persistence: Inflation in India remains at the upper end of the permissible range, with food prices nearing double digits. This persistent inflation strengthens the argument for maintaining high interest rates, complicating the Reserve Bank of India’s (RBI) monetary policy decisions as they balance growth with inflation control.
Monetary Policy Adjustments: The RBI may need to reconsider its previous projections of GDP growth, which could lead to adjustments in interest rates. If inflation continues to be a concern, the RBI might maintain or even increase rates longer than necessary which impacts investment and economic activity.
Investment and Economic Recovery: A slowdown in corporate investments and a decline in household financial savings have been observed, which could hinder economic recovery.
The RBI’s ability to stimulate growth through monetary policy will depend on addressing these investment challenges and ensuring that fiscal measures effectively support economic activity without exacerbating inflation.
What are the key risks and uncertainties facing the global economy?
Investment Slowdown: A significant challenge is the sluggish performance of corporate investments, exacerbated by high food inflation and muted urban demand. This trend poses risks for growth and job creation.
Savings-Investment Gap: A decline in household financial savings down to 5.3% of GDP from 7.3% coupled with rising household debt (5.8% of GDP) presents a risk to economic stability1.
Credit Growth Decline: Falling credit growth, particularly in household borrowing for home purchases and limited industrial appetite for new projects, indicates a tightening economic environment.
Fiscal Challenges: Increased state expenditures on subsidies may strain fiscal resources, potentially affecting overall economic sustainability and growth prospects.
What should be done by the government? (Way forward)
Balanced Fiscal and Monetary Coordination: Governments should prioritize targeted fiscal measures to stimulate investment and demand while ensuring fiscal discipline, complemented by a flexible monetary policy that carefully balances inflation control with growth stimulation.
Boosting Household Savings and Investments: Implement policies to encourage higher household financial savings and incentivize corporate investments through tax reforms, reduced regulatory barriers, and support for credit access in productive sectors.
Mains PYQ:
Q The nature of economic growth in India in recent times is often described as jobless growth. Do you agree with this view? Give arguments in favour of your answer. (UPSC IAS/2015)
According to the RBI report on state finances, India’s fiscal deficit has increased from 2.8% of GDP in FY22 to a projected 3.2% in FY24, signaling that fiscal consolidation is being side-lined in favor of increasing expenditure.
Capital expenditure (capex) has risen from 2.2% of GDP in FY23 to a budgeted 3.2% in FY24, indicating increased investment in assets for future growth.
Fiscal position of the States as per the Report
Fiscal Deficit:
The Gross Fiscal Deficit (GFD) of states is projected to rise from 2.7% of GDP in FY2022-23 to 2.9% of GDP in FY2023-24.
This rise indicates that fiscal consolidation has been put on hold, with states continuing to spend more than their revenues.
Many states have budgeted for fiscal deficits above the 3% of GSDP mark, including Andhra Pradesh, Himachal Pradesh, Madhya Pradesh, and West Bengal, among others.
Revenue Expenditure:
Revenue Expenditure is expected to increase to 14.6% of GDP in FY2025, up from 13.5% in FY2024, indicating a rise in the current expenditure of states.
Capital Expenditure (Capex):
States have ramped up their capital expenditure (spending on creating assets), which has increased from 2.2% of GDP in FY2023 to 3.2% of GDP in FY2024.
This increase is in line with the government’s focus on infrastructure and long-term growth.
State Revenue:
State revenues are projected to increase from 13.3% of GDP in FY2024 to 14.3% in FY2025, driven by improved tax collections.
There has been a marked improvement in own tax revenue buoyancy compared to the pre-Covid period.
Debt-to-GDP Ratio:
The debt-to-GDP ratio for states has increased slightly to 28.8% in FY2024, from 28.5% in FY2023.
States with high fiscal deficits tend to have debt-to-GDP ratios above the national average, which suggests they have been sustaining deficits for a longer time.
Borrowing Trends:
States have shifted significantly towards market borrowings.
The share of market borrowings in financing the fiscal deficit has increased from 17% in 2005-06 to 79% in FY2024-25.
Recommendations:
The report suggests prudent management of subsidies, rationalization of centrally sponsored schemes, debt consolidation, and the adoption of climate and outcome budgeting to improve state fiscal health.
PYQ:
[2018] Consider the following statements:
The Fiscal Responsibility and Budget Management (FRBM) Review Committee Report has recommended a debt to GDP ratio of 60% for the general (combined) government by 2023, comprising 40% for the Central Government and 20% for the State Governments.
The Central Government has domestic liabilities of 21% of GDP as compared to that of 49% of GDP of the State Governments.
As per the Constitution of India, it is mandatory for a State to take the Central Government’s consent for raising any loan if the former owes any outstanding liabilities to the latter.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3
