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GS Paper: GS3-14.Investment models

  • Justify the need for FDI for the developments of the Indian economy. Why there is gap between MOUs signed and actual FDIs? Suggest remedial steps to be taken for increasing actual FDIs in India.

  • Explain the meaning of investment in an economy in terms of capital formation. Discuss the factors to be considered while designing a concession agreement between a public entity and a private entity.

    Investment refers to the creation or addition of capital assets in an economy that enhance its productive capacity. It involves machinery, infrastructure, technology, and human skills.

    Meaning of Investment in Terms of Capital Formation

    Addition to Capital Stock- Eg- Samruddhi Expressway, Foxconn Plant in Chennai.

    Gross Capital Formation (GCF)- additions to fixed assets, inventories, valuables. Eg- Solar Plant in Rajasthan.

    Enhances Productive Capacity- Eg- Dedicated Freight Corridors boosting logistics efficiency.

    Savings and Investment Link- Higher savings enable greater capital formation. Eg- Sovereign Green Bonds funding renewable energy assets.

    Includes Physical, Human and Social Capital- Eg- Skill India Mission, Metro rail projects.

    Creates jobs, improves productivity, accelerates growth. Eg- Sagarmala driving port-led industrialisation.

    Factors to Consider While Designing a Concession Agreement (Public-Private)

    Political / Policy

    Clear Scope Definition- project components, performance standards, service quality benchmarks, and asset ownership.

    Model of partnership – Eg- Hybrid annuity model or BOT Model

    Concession Period based on asset life, investment size, and recovery period. Eg- 20-30 years for highways.

    Economic

    Risk Allocation between government and private entity

    Revenue Model- Eg- tariffs, user charges, annuity payments, or viability gap funding.

    Financial Structure- Terms on capital investment, debt-equity ratio, refinancing rules.

    Social

    Environmental & Social Safeguards- Compliance with EIA and land acquisition laws.

    Transparency and Accountability- Public disclosures, third-party audits, and periodic review.

    Technological

    Performance Metrics- KPIs, service standards, monitoring, penalties, incentives.

    Legal

    Dispute Resolution- arbitration method.

    Renegotiation Rules- framework for handling unforeseen demand or cost shocks.

    Termination Clauses- rules for default, compensation, and asset handback.

    Kelkar Committee recommendations

    Prioritizing service delivery over fiscal benefits in contracts

    Establishing independent sector regulators

    Better risk allocation between stakeholders

    Utilizing advanced risk management techniques

    A well-designed concession agreement ensures efficient public-private collaboration, ultimately leading to sustainable high-quality infrastructure delivery and realisation of a $40 Trillion economy by 2047.

  • Fully Accessible Route (FAR) of Investment

    Why in the News?

    In 2025, foreign investors have invested only about ₹69,000 crore ($7.8 billion) nearly half than expected, into Indian government bonds, even though the rules were made simpler and more flexible under the Fully Accessible Route (FAR) to attract more investment.

    What is Fully Accessible Route (FAR)?

    • Overview: A special investment framework launched by the Reserve Bank of India (RBI) in March 2020 to attract foreign investment in Indian government securities (G-secs).
    • Purpose: Aims to liberalise India’s debt market, enhance foreign participation, and integrate it with global financial systems.
    • Eligible Investors: Open to Foreign Portfolio Investors (FPIs), Non-Resident Indians (NRIs), and Overseas Citizens of India (OCIs) without investment caps.
    • Key Feature: Permits unlimited foreign investment in designated government bonds with free buy–sell access and no quantitative ceiling.
    • Liquidity & Integration: Designed to improve bond market depth, diversify funding sources, and boost India’s visibility in global debt indices.
    • Repatriation Freedom: Allows investors to repatriate capital and profits freely to their home countries.
    • Global Milestone: In June 2024, JP Morgan included 29 Indian G-secs under FAR in its Emerging Market Bond Index (EMBI), marking India’s debut in major global bond benchmarks.

    Comparison with Other Routes:

    1. Medium Term Framework (MTF): Allows foreign investment in G-secs but with limits and conditions on exposure and tenure.
    2. Voluntary Retention Route (VRR): Permits FPIs to invest in G-secs provided they retain investments for a minimum period, ensuring stable long-term inflows.

    Complementary Function: FAR, MTF, and VRR operate together, providing flexibility in investment terms and balancing market stability with foreign access.

    Why were higher inflows expected?

    • Projected Inflows: Index inclusion in 2024–25 was expected to attract $20–25 billion from global institutional and index-tracking investors.
    • Attractiveness Factors: India’s 7% stable yields, macroeconomic strength, and favourable risk–return ratio made it a promising destination for long-term capital.
    • Actual Outcome: Only $10.7 billion flowed in during 2024-25: well below expectations.
    • Key Reasons:
      • Global monetary uncertainty: investors awaited clarity on the US Federal Reserve’s rate policy.
      • Domestic caution: RBI removed 14- and 30-year bonds from FAR in 2024 to reduce volatility.
      • Geopolitical tensions and FPI withdrawals from equities reduced investor appetite.
    • Significance: Despite lower inflows, FAR remains a structural reform strengthening India’s position as a globally accessible and competitive bond market.
    [UPSC 2024] Consider the following statements:

    1. In India, Non-Banking Financial Companies can access the Liquidity Adjustment Facility window of the Reserve Bank of India.

    2. In India, Foreign Institutional Investors can hold the Government Securities (G-Secs).

    3. In India, Stock Exchanges can offer separate trading platforms for debts.

    Which of the statements given above is/are correct?

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

     

  • [2nd September 2025] The Hindu Op-ed: The rise and risks of health insurance in India

    PYQ Relevance

    [UPSC 2023] Examine the pattern and trend of public expenditure on social services in the post-reforms period in India. To what extent this has been in consonance with achieving the objective of inclusive growth?

    Linkage: The expansion of Pradhan Mantri Jan Arogya Yojana (PM-JAY) and State Health Insurance Programmes (SHIPs) shows rising public expenditure on health but largely towards insurance reimbursements rather than strengthening primary health infrastructure. This trend benefits private hospitals and tertiary care but fails to reduce out-of-pocket costs or enhance inclusivity, as utilisation remains low. Thus, the expenditure pattern reflects growth without true inclusiveness, misaligned with the objectives of inclusive growth.

    Mentor’s Comment

    The debate on health insurance in India has intensified in recent years, especially with the expansion of State-sponsored schemes like Pradhan Mantri Jan Arogya Yojana (PM-JAY). While these initiatives provide some relief, the core question remains: can insurance-driven models substitute for robust public health infrastructure? This article unpacks the illusion of universal health coverage (UHC) through insurance, its systemic risks, and the urgent need for course correction.

    Introduction

    The Bhore Committee Report (1946) defined UHC as guaranteed access to quality health care for every citizen irrespective of their ability to pay. Eight decades later, India still falls far short of this goal. Instead of strengthening public health infrastructure, India has leaned heavily on health insurance schemes like the PMJAY and State Health Insurance Programmes (SHIPs). Though they provide relief to some, these schemes have created new distortions, risks, and inequities in the health system.

    The Surge of Health Insurance Schemes

    1. PMJAY Launch (2018): Landmark scheme under Ayushman Bharat with ₹5 lakh annual cover per household for in-patient care.
    2. Massive Coverage: In 2023–24, PMJAY covered 58.8 crore individuals with an annual budget of ₹12,000 crore.
    3. Parallel SHIPs: State-level schemes cover a similar number with a budget of at least ₹16,000 crore.
    4. Rising Budgets: SHIP allocations grew at 8–25% annually (2018–19 to 2023–24) in States like Gujarat, Kerala, Maharashtra.

    Commercialisation of Healthcare under Insurance

    1. Two-thirds of the PMJAY budget flows to private hospitals, often profit-oriented.
    2. Study findings: Minimal change in hospitalisation rates, but rise in private hospital use.
    3. Weak regulation: India’s poorly regulated profit-seeking providers dominate the system.

    Hospitalisation Bias in Insurance Models

    1. Bias towards hospitalisation: Insurance covers only in-patient care, neglecting primary and outpatient care.
    2. Ageing challenge: Expanding coverage to elderly (70+) risks disproportionate spending on tertiary care.

    Challenges in Effective Utilisation of Coverage

    1. High theoretical coverage: 80% of the population enrolled under PMJAY + SHIPs.
    2. Low effective use: Only 35% of insured patients could utilise benefits (2022–23 HCES).
    3. Barriers: Lack of awareness, procedural hurdles, and discrimination by providers.

    Discrimination in Healthcare Delivery

    1. Private hospitals: Prefer uninsured patients for higher commercial charges.
    2. Public hospitals: Prefer insured patients for reimbursement incentives.
    3. Result: Discriminatory treatment and pressure on patients to enrol immediately.

    Financial Strains Leading to Hospital Withdrawals

    1. Pending dues: PMJAY arrears reached ₹12,161 crore, more than its annual budget.
    2. Provider dissatisfaction: Low reimbursement, long delays.
    3. Hospital exits: 609 hospitals opted out of PMJAY since inception.

    Corruption and Irregularities in PMJAY and SHIPs

    1. Fraudulent practices: NHA flagged 3,200 hospitals for irregularities.
    2. Common issues: Overcharging, denial of treatment, unnecessary procedures.
    3. Weak safeguards: No evidence of effective audits or transparency in scheme portals.

    The Systemic Risk of Insurance-Led Health Care

    1. Profit over patients: Insurance reinforces commercial medicine rather than correcting it.
    2. Underfunded public health: India spends only 1.3% of GDP on health (World Bank, 2022), vs world average of 6.1%.
    3. Comparative failure: Unlike Canada and Thailand, India’s schemes lack universal coverage and non-profit focus.
    4. Result: Insurance becomes a “painkiller”, not a cure for India’s broken public health system.

    Conclusion

    Health insurance in India has expanded rapidly, but it remains a fragile foundation for UHC. It fosters profit-driven medicine, neglects primary care, suffers from poor utilisation, and is riddled with corruption. Without massive investment in public health infrastructure, primary care, and regulation, India cannot hope to achieve universal health coverage. Insurance schemes, at best, provide temporary relief, not sustainable health security.

    Value Addition
    1. National Health Policy, 2017: Targets increasing government health expenditure to 2.5% of GDP by 2025, but current levels remain at ~1.3%.
    2. High Out-of-Pocket Expenditure (OOPE): As per NSSO 2017–18, OOPE in India still accounts for over 50% of total health expenditure, one of the highest in the world.
    3. Lancet Commission on Global Surgery (2015): Highlighted that nearly 5 billion people worldwide lack access to safe, affordable surgery, underscoring the gaps in India’s insurance-driven, hospitalisation-focused approach.
    4. WHO Recommendation: For effective Universal Health Coverage (UHC), countries need to strengthen primary health systems — India still lags here, with sub-centres and PHCs facing severe staff shortages.
    5. National Health Accounts (NHAI) 2019–20: Show that private sector spending dominates health financing in India, with households bearing the brunt, unlike in OECD nations where governments fund the majority.
    6. Insurance Penetration vs. Health Security: India’s insurance penetration (life + non-life) is about 4.2% of GDP, but penetration does not automatically translate to healthcare access or financial protection.
    7. Ayushman Bharat Health and Wellness Centres (AB-HWCs): Intended to provide comprehensive primary healthcare (preventive + promotive), yet remain underfunded compared to PMJAY, skewing priorities.
    8. Equity Gap – Rural vs. Urban: Rural populations face doctor-population ratio deficits, with most PMJAY empanelled hospitals concentrated in urban centres, worsening regional disparities.
    9. Digital Health Mission (NDHM 2020): Aims to create digital health IDs and improve transparency, but challenges include digital divide and privacy concerns.
    10. Economic Survey 2020–21: Stressed that public health investment has high multiplier effects on productivity and human capital formation — much higher than insurance subsidies.

  • What are Passively Managed Funds?

    Why in the News?

    Passively Managed Funds—those that track a market index without active stock selection—have become increasingly popular among investors seeking low-cost, predictable returns.

    About Passively Managed Funds:

    • Passively managed funds, commonly known as passive funds, are investment vehicles designed to replicate the performance of a specific market index, such as the Nifty Fifty or the Sensex.
    • Unlike actively managed funds, the fund manager in a passive fund does not select stocks or make frequent buy-and-sell decisions.
    • Instead, the fund holds the same stocks in the same proportion as the underlying index.
    • How Passive Funds Work?
      • These funds track a benchmark index by investing in all or a representative sample of the securities in that index.
      • The objective is to mirror the index’s returns, not to outperform it.
      • As a result, they incur lower management costs and have minimal portfolio turnover.

    Types of Passive Funds:

    1. Index Funds:
      • These are mutual funds that can be purchased or redeemed directly from the fund house.
      • Transactions are processed only once a day, based on the day’s closing Net Asset Value.
      • They offer ease of use and are suitable for systematic investment plans and long-term investors.
    1. Exchange Traded Funds:
      • These are funds listed on stock exchanges, like the National Stock Exchange or the Bombay Stock Exchange.
      • Investors buy or sell units during trading hours through brokers, just like stocks.
      • They require a dematerialised account and are suitable for investors seeking intraday trading flexibility.

    Advantages of Passive Funds:

    • Low Expense Ratios: Because no active research or trading is involved.
    • Transparency: Holdings closely follow a well-known index.
    • Diversification: Spreads investment risk across multiple securities.
    • No Human Bias: Avoids mistakes due to the fund manager’s poor decisions.

    Limitations:

    • No Outperformance: Returns will always be close to the index and cannot exceed it.
    • Tracking Error: Slight variation between the fund’s performance and the index due to operational reasons.
    • Limited Flexibility: Cannot adapt to sudden market downturns.
    [UPSC 2025] Consider the following statements:

    Statement I: As regards returns from an investment in a company, generally, bondholders are considered to be relatively at lower risk than stockholders.

    Statement II: Bondholders are lenders to a company, whereas stockholders are its owners.

    Statement III: For repayment purposes, bondholders are prioritised over stockholders by a company.

    Which one of the following is correct in respect of the above statements?

    (a) Both Statement II and Statement III are correct, and both of them explain Statement I *

    (b) Both Statement I and Statement II are correct, and Statement I explains Statement II

    (c) Only one of the Statements II and III is correct and that explains Statement I

    (d) Neither Statement II nor Statement III is correct

     

  • Why has net FDI inflow plummeted?

    Why in the News?

    The RBI Bulletin (May 2025) reports that India received a record-breaking $81 billion in gross FDI inflows in FY 2024-25, but retained only $353 million in net FDI, revealing a dramatic divergence in the investment narrative.

    What do gross and net FDI trends indicate about India’s investment climate?

    • Gross FDI inflows are high: India received a record $81 billion in gross FDI in 2024-25, indicating strong headline interest from foreign investors. Eg: Media and government reported this as a sign of a robust investment climate.
    • Net FDI is drastically low: Net FDI dropped to only $353 million, showing that much of the incoming investment is offset by capital outflows, weakening the real impact on the economy. Eg: Rising outward FDI and disinvestment reduced net foreign capital retained in India.
    • Declining FDI-to-GDP ratio: The gross inflow-to-GDP ratio fell from 3.1% (2020-21) to 2.1% (2024-25), and net FDI-to-GDP fell from 1.6% to near zero, reflecting a slowing domestic investment environment despite high gross inflows. Eg: This signals tepid corporate investment and cautious investor sentiment in India.

    What is  Private Equity (PE) and Venture Capital (VC)?

    • Private Equity (PE) refers to investment funds that buy existing companies or large stakes in businesses, often to improve their performance and later sell them for profit. PE typically invests in more mature companies.
    • Venture Capital (VC) is a type of financing that supports early-stage startups and small businesses with high growth potential. VC investors take higher risks in exchange for potentially high returns.

    Why is the rise in Private Equity (PE)/Venture Capital (VC) driven FDI a concern for long-term investment?

    • PE/VC-driven FDI focuses on brownfield investments: These funds mainly acquire existing firms rather than creating new production capacity, limiting contributions to capital formation and technology acquisition. Eg: Investments by Blackstone in Care Hospitals and ChrysCapital in Lenskart.
    • Short investment horizon: PE/VC funds typically have a 3-5 year exit strategy, often selling holdings during stock market booms, which leads to disinvestment rather than sustained growth. Eg: The spike in disinvestment in FY25 was partly due to PE/VC funds liquidating their positions.
    • Limited impact on long-term industrial growth: Since these funds focus on services like fintech and retail rather than manufacturing or infrastructure, they contribute less to enhancing India’s productive capacity. Eg: The declining share of FDI in greenfield projects shows limited greenfield capital formation.

    How does outward FDI suggest India is used for tax arbitrage?

    • High correlation between inward and outward FDI: India shows a strong link between the money flowing in and out, suggesting that funds often enter and exit quickly rather than being invested long-term. Eg: Similar volumes of FDI both coming into and going out of India.
    • Use of tax havens as intermediaries: A significant portion of both inward and outward FDI involves countries like Singapore and Mauritius, known for tax concessions and treaty benefits. Eg: Many Indian companies route investments through these jurisdictions to reduce tax liabilities.
    • ‘Treaty shopping’ for tax benefits: Global investors move capital through India to exploit variations in tax laws, a practice called tax arbitrage, which may not contribute to domestic economic growth. Eg: Research shows India ranked 6th among emerging markets for such correlated FDI flows, indicating use as a conduit for tax optimization.

    What are the effects of declining FDI-to-GDP and GFCF ratios?

    • Reduced contribution to economic growth: Declining FDI-to-GDP and FDI-to-GFCF (Gross Fixed Capital Formation) ratios indicate that foreign investments are becoming a smaller part of India’s overall economy and capital investment, potentially slowing down industrial expansion and technology adoption. Eg: Gross FDI inflows peaked at 7.5% of GFCF in FY21 but have declined sharply since then.
    • Weakening investor confidence: The downward trend signals tepid domestic corporate investment and reduced foreign investor interest, which can affect job creation and long-term economic stability. Eg: Net FDI relative to GDP has declined from 1.6% in 2020-21 to nearly zero in 2024-25, showing declining investor enthusiasm.

    Why should India reform its foreign capital regulations?

    • To curb tax arbitrage and ‘hot money’ flows: Current regulations allow large volumes of inward and outward FDIthrough tax havens, enabling tax optimization rather than genuine investment, which undermines domestic economic goals. Eg: High FDI flows involving Singapore and Mauritius reflect such practices.
    • To promote long-term, productive investments: Reform is needed to encourage FDI that contributes to capital formation, technology acquisition, and industrial growth rather than short-term PE/VC-driven disinvestment. Eg: The rising share of alternative investment funds in FDI has led to increased disinvestment, affecting sustainable growth.

    Way forward: 

    • Strengthen Regulatory Frameworks: Implement stricter rules to curb tax arbitrage and limit quick inflows and outflows via tax havens, ensuring FDI supports genuine, long-term economic growth.
    • Promote Greenfield and Productive Investments: Encourage FDI in new capacity building, manufacturing, and technology sectors over short-term PE/VC deals to boost capital formation, industrial growth, and sustainable development.

    Mains PYQ:

    [UPSC 2013] Though India allowed Foreign Direct Investment (FDI) in what is called multi-brand retail through the joint venture route in September 2012, the FDI, even after a year, has not picked up. Discuss the reasons.

    Linkage: The net FDI-to-GDP ratio has steadily fallen from 1.6% in 2020-21 to zero in 2024-25. This ongoing decline is worrying, even though policymakers continue to make optimistic claims.

  • Short Selling and Associated Risks

    Why in the News?

    The Securities and Exchange Board of India (SEBI) is considering a proposal to ease restrictions on short selling in most stocks.

    SEBI’s January 2024 proposal to bar short-selling in stocks that are not in the futures and options segment had caused uncertainty.

    What is Short Selling?

    • Definition: Short selling is a strategy where an investor sells a stock first and buys it later, aiming to profit from a price drop.
    • Opposite of Normal Trade: Unlike regular buying (buy low, sell high), short selling works on selling high and buying low.
    • How It Works: You borrow the stock from a broker, sell it at the market price, and later buy it back at a lower price to return it.
    • Example: If a stock is sold at ₹2,100 and later bought at ₹1,900, the profit is ₹200. If the price rises to ₹2,300 instead, the loss is ₹200.

    Types of Short Selling:

    1. Short Selling in the Spot Market (Cash Segment):
    • Shorting is allowed only for intraday trading (buying and selling financial instruments (like stocks) on the same day).
    • You must square off the position (buy back the stock) before 3:30 p.m. on the same day.
    • If not squared off, it leads to short delivery, where the exchange settles the trade through an auction.
    • There may be heavy penalties if the position is not closed on time.
    1. Short Selling in the Futures Market:
    • Here, you can hold your short position overnight or even roll it over to the next month.
    • You must deposit margin money, which is generally higher.
    • Futures shorting is riskier and is mostly used by experienced traders.
    • This type allows more flexibility but involves greater financial commitment.

    Risks Associated with Short Selling:

    • Unlimited Losses: If the stock price rises sharply, losses are unlimited.
    • Short Delivery Risk: Failing to buy back in the spot market can lead to penalties.
    • Liquidity Risk: Hard-to-trade stocks may lead to delayed buybacks and losses.
    • Margin Requirements: High margin costs in futures trading limit retail participation.
    • Market Volatility: Sudden movements may cause unexpected losses.
    • Not for Beginners: Due to complexity and high risk, short selling is unsuitable for new investors.
    [UPSC 2025] Consider the following statements:

    Statement I: As regards returns from an investment in a company, generally, bondholders are considered to be relatively at lower risk than stockholders.

    Statement II: Bondholders are lenders to a company whereas stockholders are its owners.

    Statement III: For repayment purpose, bondholders are prioritized over stockholders by a company.

    Which one of the following is correct in respect of the above statements?

    (a) Both Statement II and Statement III are correct and both of them explain Statement I

    (b) Both Statement I and Statement II are correct and Statement I explains Statement II

    (c) Only one of the Statements II and III is correct and that explains Statement I

    (d) Neither Statement II nor Statement III is correct

     

  • RBI revises rules for investment in Alternative Investment Funds (AIFs)

    Why in the News?

    The RBI has released revised draft guidelines for investments made by Regulated Entities (REs) in Alternative Investment Funds (AIFs) to ensure better regulatory oversight, prevent misuse of funds, and align with the rules already set by SEBI.

    What are Alternative Investment Funds (AIFs)?

    • Definition: They are unique investment vehicles that are privately pooled and invested in alternative asset classes such as venture capital, private equity, hedge funds, commodities, real estate, and derivatives.
    • Regulation: They are governed by SEBI under the SEBI (Alternative Investment Funds) Regulations, 2012.
    • Working: It can be formed as a trust, company, Limited Liability Partnership (LLP), or any other SEBI-permitted structure.
    • Legal Structure: They can be set up as trusts, companies, Limited Liability Partnership (LLP), or other legally permitted forms.
    • Investor Base:
      • AIFs are meant for High Net-Worth Individuals (HNIs) and institutional investors, NOT small retail investors.
      • Resident Indians, NRIs, and foreign nationals can invest.
    • Minimum Investment Requirement:
      • The minimum investment size is ₹1 crore (SEBI, May 2024), except for accredited investors as defined by SEBI.
      • For employees or directors of the AIF or its manager, the minimum investment is ₹25 lakh.
      • An AIF must have a minimum corpus of ₹20 crore (₹10 crore for Angel Funds).

    Types of AIFs: 

    1. Category I: These funds invest in early-stage unlisted companies in the form of equity or debt (venture capital). These alternative asset funds can also invest in infrastructure-based projects or social ventures.
    2. Category II: These types of funds invest in equity or debt of unlisted companies that are in the mid or late stage of growth and are known as private equity or pre-IPO, respectively.
    3. Category III: This category of funds invests in the shares of listed companies. These alternative strategy funds can be for any period, long only or a combination of long and short.
    [UPSC 2014] What does Venture Capital mean?

    Options: (a) A short-term capital provided to industries. (b) A long-term start-up capital provided to new entrepreneurs* (c) Funds provided to industries at times of incurring losses. (d) Funds provided for replacement and renovation of industries.

     

  • “China Plus One” Strategy

    Why in the News?

    Japanese companies, along with other global players, are increasingly turning to India under the China Plus One strategy, aiming to diversify supply chains and reduce overdependence on China.

    About China Plus One Strategy:

    • It is a global business model introduced in 2013 to reduce dependence on China by adding another country to the manufacturing or sourcing base.
    • It emerged due to concerns about geopolitical risks, trade tensions, and regulatory unpredictability in China.
    • The strategy gained momentum after the US–China trade war, China’s Zero-Covid policy, and increasing labour and compliance costs.
    • Its goal is to create resilient and diversified supply chains by operating in China and one or more alternative countries.
    • Vietnam, Mexico, and Taiwan have become early beneficiaries in sectors like machinery, electronics, and transport.

    Benefits for India:

    • India offers a large market, skilled labor, and cost advantages, making it an attractive destination for diversification.
    • The growing digital infrastructure and industrial corridors support the relocation of manufacturing, with government schemes like PLI and Make in India aligning with the China Plus One goals.
    • Challenges:
      • India faces limited integration into global value chains, logistics inefficiencies, and regulatory bottlenecks.
      • Historical protectionist trade policies and lack of participation in trade agreements like RCEP hinder its full potential.
      • To compete with nations like Vietnam or Mexico, India needs labour reforms, improved ease of doing business, and better trade facilitation.
    [UPSC 2021] Consider the following:

    1.Foreign currency convertible bonds 2.Foreign institutional investment with certain conditions 3.Global depository receipts 4.Non-resident external deposits Which of the above can be included in Foreign Direct Investments?

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

     

  • [18th April 2025] The Hindu Op-ed: Are Indian startups not scaling up on innovation?

    PYQ Relevance:

    [UPSC 2024] What are the challenges in the commercialisation and diffusion of indigenously developed technologies? Although India is second in the world in filing patents, still only a few have been commercialised. Explain the reasons behind this less commercialisation.

    Linkage: The challenge of scaling up the impact of innovation by focusing on the commercialisation of patents, which is a crucial aspect for startups aiming to grow.

     

    Mentor’s Comment:  Startups in India have seen significant growth, especially with government initiatives like Startup India. However, Union Minister highlighted that many of these startups are focusing on repetitive ideas, like grocery delivery, rather than pushing the boundaries of innovation. He emphasized the need for more groundbreaking, science-based solutions to address broader challenges and drive sustainable growth.

    Today’s editorial looks at startups in India, focusing on factors that help them grow, challenges like lack of innovation and funding, and the need to move beyond grocery delivery for long-term success.. This content would help in GS paper 3 mains.

    _

    Let’s learn!

    Why in the News?

    Recently, at the Startup Mahakumbh in New Delhi, Union Commerce and Industry Minister Piyush Goyal said that many startups are not focusing enough on real innovation and are mostly sticking to ideas like grocery delivery.

    What challenges do deep tech startups in India face when it comes to scaling up?

    • High Initial Capital Requirement: Deep tech startups, especially in sectors like AI, biotech, or semiconductors, require significant funding in the early stages for R&D and prototyping. Eg: A startup working on quantum computing may need years of research before any commercial product is viable.
    • Lack of Follow-up Funding: Government seed funds like the Startup India Seed Fund provide limited support (~₹50 lakh), but large-scale funding is often unavailable, especially from domestic sources. Eg: A robotics startup may struggle to find Series A or B investors willing to back them after the seed stage.
    • Longer Time-to-Market and Uncertain Returns: Deep tech innovations take longer to reach the market and generate revenue, which deters many investors focused on quick returns. Eg: Healthtech firms developing diagnostic devices may take years to pass regulatory approvals before commercialization.

    Why is private sector follow-up funding considered crucial after initial government support for startups?

    • Bridges the Capital Gap: Government funds are limited and mainly support early-stage needs. Scaling requires much higher investment. Eg: A biotech startup receiving ₹50 lakh from a seed fund may need ₹10 crore for clinical trials.
    • Enables Long-Term Growth: Startups need sustained funding over multiple stages (Series A, B, etc.) to expand, hire talent, and enhance products. Eg: An electric mobility startup may require continuous investment to build charging infrastructure.
    • Signals Market Validation: Private investment shows that the startup idea has commercial potential, encouraging more stakeholders to engage. Eg: A deep tech startup attracting VC funding is more likely to gain customer and partner interest.
    • Brings Strategic Guidance and Networks: Private investors often provide mentorship, access to global markets, and business connections. Eg: A startup funded by a top VC firm might get access to international accelerator programs.
    • Reduces Dependence on Government: Encourages a self-sustaining innovation ecosystem and reduces reliance on public funds. Eg: Startups backed by private capital scale faster without waiting for bureaucratic processes.

    How do venture capitalists define innovation while deciding to invest in a startup?

    • User Impact and Experience: VCs assess whether the product/service offers a significant improvement in user experience or solves a real problem. Eg: A fintech app that reduces loan approval time from days to minutes is seen as innovative.
    • Market Potential and Demand: Innovation must address a need in a large or fast-growing market to be attractive to investors. Eg: An edtech startup targeting affordable online education in Tier-II/III cities taps into a large unmet demand.
    • Sustainable Competitive Advantage: Startups should have something unique that competitors can’t easily copy, like patents or proprietary tech. Eg: A healthtech startup with patented diagnostic AI software has a stronger edge.
    • Commercial Viability: Innovation must eventually lead to profitability and returns. VCs look for feasible business models. Eg: A SaaS platform with recurring revenue from subscriptions is more viable than a one-time product sale model.
    • Scalability and Replicability: The innovation should be scalable across geographies or customer segments. Eg: A logistics startup using AI route optimization can be scaled across different cities and industries.

    Which factors have contributed to the rise in the number of startups under the Startup India initiative?

    • Policy Support and Government Incentives: Multiple ministries and state governments have launched startup-friendly policies, funding schemes, and incubation support. Eg: The Startup India Seed Fund Scheme provides up to ₹50 lakh for early-stage startups.
    • Improved Access to Funding: Capital inflow through both equity and debt has increased, with growing interest from banks and private investors. Eg: SIDBI’s Fund of Funds supports venture capital firms that, in turn, invest in Indian startups.
    • Changing Mindset and Entrepreneurial Culture: A cultural shift among youth toward entrepreneurship, driven by success stories and digital exposure. Eg: Companies like Flipkart and Freshworks have inspired a new generation to build their own ventures.

    Where does India lag behind in comparison to countries like China and the U.S. in building a thriving startup ecosystem?

    • Lower Per Capita Income and Consumption Capacity: India’s lower GDP per capita limits domestic consumer spending, which affects the growth of digital and tech-driven startups. Eg: India’s per capita GDP is around $3,500, while China’s is over $12,000—boosting China’s digital economy faster.
    • Limited Domestic Risk Capital Availability: India relies heavily on foreign capital for startup funding, unlike the U.S. or China, which have strong domestic investor bases. Eg: Most VC funding in India comes from the U.S., while China has state-backed venture funds.
    • Bureaucratic Hurdles and Complex Regulations: Regulatory bottlenecks and lack of smooth implementation hinder startup operations and scalability. Eg: Despite policy support, startups still face delays in government clearances and compliances.

    Way forward: 

    • Strengthen Domestic Funding Ecosystem: Promote domestic VC funds, corporate venture arms, and pension fund investments in startups to reduce dependency on foreign capital. Eg: Incentivize Indian institutional investors to back deep tech ventures.
    • Simplify Regulatory Processes: Establish single-window clearances and reduce compliance burdens to foster ease of doing business for startups. Eg: Fast-track approvals for sectors like biotech, fintech, and healthtech.