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GS Paper: GS3

  • The rupee’s borrowed breathing space

    Why in the News

    Banks mobilised $52.3 billion in foreign currency inflows between 8 June and 13 August under the Reserve Bank of India (RBI) special swap facility, with Foreign Currency Non Resident Bank, or FCNR(B), deposits accounting for the bulk of the funds. The RBI closed the swap window a month earlier than scheduled, and the rupee fell to a 17 day low of 95.61 against the dollar the same day. A country can defend its currency by earning dollars or by borrowing them, and this stabilisation belongs to the second kind.

    How does the RBI special swap facility for FCNR(B) deposits work?

    1. The deposit: FCNR(B) deposits let non resident Indians hold foreign currency with Indian banks, free of rupee risk, with tax free interest and full repatriation.
    2. Step one, raising the money: Banks raise fresh deposits of three to five year maturity in foreign currency.
    3. Step two, the swap: Banks swap those dollars with the RBI in exchange for rupees.
    4. Step three, the subsidy: The central bank absorbs the hedging cost of that swap, which is the cost banks would otherwise pay to protect themselves against currency movement.
    5. The result for the depositor: Once the cost is lifted, banks can offer dollar rates near 6 to 7.5 per cent, and some add leverage of 9 to 19 times.
    6. The nature of the transaction: For a wealthy depositor borrowing abroad and placing the proceeds in India at a protected high yield, this is a carry trade with the currency risk removed by someone else.

    What is a carry trade?

    1. About: A carry trade is borrowing in a currency where interest rates are low and investing in an asset that pays a higher return, keeping the difference between the two rates.
    2. The risk it normally carries: The lender bears the exchange rate risk, since a fall in the investment currency can wipe out the interest gain.
    3. What is different here: The currency risk is removed by the central bank absorbing the hedging cost, so the investor keeps the yield without the exposure that usually pays for it.

    What is a hedging cost in a currency swap?

    1. About: A currency swap exchanges one currency for another today with an agreed reversal at a future date and a pre agreed rate.
    2. The cost: The hedging cost is the price of that future certainty, set mainly by the interest rate difference between the two currencies and by expectations of depreciation.
    3. Who pays it here: The RBI absorbs it, which is why the transaction is a subsidy rather than a market clearing price.

    What is an asset liability mismatch?

    1. About: An asset liability mismatch arises when a bank’s borrowings and its lending differ in currency, maturity or interest rate basis.
    2. The form it takes here: Banks raise three to five year foreign currency money and lend against it in rupees on different terms, so repayment obligations and asset returns do not move together.

    What did the swap window actually mobilise?

    1. The headline number: Banks mobilised $52.3 billion in foreign currency inflows between 8 June and 13 August under the facility.
    2. The composition: FCNR(B) deposits accounted for the bulk of the funds raised.
    3. Early closure: The RBI closed the FCNR(B) swap window a month earlier than originally scheduled.
    4. The immediate market reaction: The rupee depreciated 0.2 per cent to close at a 17 day low of 95.61 against the dollar, the worst performing currency in Asia that day despite a softer dollar.
    5. The added pressure: A rise in crude oil prices to nearly $90 a barrel compounded the fall, with importers rushing to take forward cover and exporters holding back dollar sales.
    6. The intervention: Intervention by the central bank prevented a sharper slide.

    Why did the money need such inducement?

    1. The prior position: Confidence had already left, since the rupee was Asia’s worst performing currency in the financial year 2025 to 2026.
    2. The portfolio exit: Foreign portfolio investors had pulled out billions from Indian markets over that period.
    3. The partial return: They turned net buyers in July, bringing in about $2.1 billion, a modest reversal relative to the scale of the preceding exodus.
    4. The reading that follows: It is too early to read this as investors rediscovering India.
    5. The revealing detail: The money recorded a sharp fall as soon as the inducement was withdrawn, which measures the incentive rather than belief in Indian assets.

    Why does a subsidy work when good data does not?

    1. The nature of currency markets: Currency markets move not only on fundamentals but on expectations about future movement.
    2. The trap of one way expectations: Once investors believe depreciation is one way, good data stops persuading them.
    3. The mechanism that breaks the loop: The way to break that loop is to make the bet against the rupee expensive, which is what the FCNR(B) window does.
    4. The price of the fix: Flows surged only after the subsidy appeared, so the pace of mobilisation measures the incentive.
    5. The conclusion drawn: Confidence that materialises only after the price is raised is not confidence, it is a purchase.

    What has India actually bought?

    1. The two ways to defend a currency: A country can earn more dollars or it can borrow them, and the two look alike when the money arrives.
    2. The category this falls into: India’s latest external sector stabilisation largely falls into the borrowing kind.
    3. What was purchased: India has bought time, and a quiet transfer of risk.
    4. The repayment obligation: These deposits will mature, and every dollar arriving now must be repaid in three to five years.
    5. The correct classification: The surge is best viewed as a balance of payments stabiliser rather than a durable source of dollars.
    6. The accounting reality: FCNR(B) deposits are ultimately a form of external borrowing and create future repayment and rollover obligations.

    Where does the risk actually sit?

    1. The scheme does not remove risk: The facility does not make the rupee’s risk disappear, it relocates it.
    2. The first relocation: When the RBI absorbs hedging costs, the exposure moves onto the public balance sheet.
    3. The second relocation: When banks raise three to five year money and lend against it, the risk resurfaces as an asset liability mismatch.
    4. The transformation over time: A visible currency problem today can become a less visible banking problem tomorrow.
    5. Who ultimately holds it: The depositor keeps a protected yield, and the currency exposure that yield was compensating for sits with the central bank and the banking system.

    What is genuinely not in crisis?

    1. Reserves: India’s foreign exchange reserves are large, giving the central bank room to intervene in the spot and forward markets.
    2. Invisible earnings: Services exports and remittances cushion the external account against a goods trade deficit.
    3. External factors: Part of the rupee’s weakness reflects the strength of the dollar rather than a domestic failure.
    4. The correct qualification: Being out of crisis is not the same as being secure.
    5. The deterioration that matters: India slipped into a current account deficit in May, which is the backdrop against which the FCNR(B) surge must be read.

    What should India do with a window it has paid to open?

    1. Treat it correctly: Treat the period as a purchased pause and spend it well, rather than as evidence that the external problem has been solved.
    2. Build export surplus sectors: Develop sectors that earn a durable dollar surplus rather than relying on capital inflows to balance the account.
    3. Attract foreign direct investment: Draw investment that takes a lasting stake, since it does not carry a fixed repayment date the way a deposit does.
    4. Cut energy import dependence: Reduce the largest single item of the import bill, which is also the most exposed to geopolitical shocks.
    5. Treat tourism as a foreign exchange industry: Recognise inbound tourism as an export earning activity and plan for it accordingly.
    6. The blunt limit: If India earns too few dollars, no better way of borrowing will solve it.

    Challenges in managing India’s external sector

    1. Rollover risk on maturing deposits: Large foreign currency deposits raised in one window fall due together and must be repaid or renewed at whatever rate then prevails. e.g. the $34 billion of FCNR(B) deposits raised under the 2013 swap window created a concentrated redemption in 2016 that the RBI had to manage in advance.
    2. Oil price exposure: India imports the overwhelming share of its crude oil, so the trade deficit moves with a price it does not set. e.g. crude near $90 a barrel in August 2026 directly widened the import bill and pressured the rupee.
    3. Gold import demand: Household demand for gold converts savings into imports and worsens the current account. e.g. gold has repeatedly been the second largest item in India’s import bill after crude oil.
    4. Volatility of portfolio flows: Foreign portfolio investment can reverse within weeks on a change in global interest rates. e.g. the taper announcement of 2013 triggered an exit that took the rupee past 68 to the dollar.
    5. Narrow export basket and market concentration: A few products and a few destinations carry a large share of merchandise exports. e.g. tariff action by a single large trading partner can hit textiles, gems and jewellery and shrimp exports simultaneously.
    6. Rising import intensity of exports: Electronics and refined petroleum exports require heavy imported inputs, so gross export growth adds less net foreign exchange. e.g. smartphone exports rely on imported displays, camera modules and cells.
    7. Sterilisation cost of intervention: Defending the rupee by selling dollars injects rupee liquidity that must then be absorbed at a cost. e.g. the RBI uses open market operations and the standing deposit facility to drain the liquidity created by intervention.
    8. External debt servicing: A rising stock of short term external debt raises the share of reserves committed to repayment. e.g. short term debt on residual maturity has at times exceeded a fifth of foreign exchange reserves.

    Conclusion

    The $52.3 billion mobilised under the swap window is borrowed rather than earned, and the currency risk that made it attractive has been moved onto the public balance sheet and into bank balance sheets. The central bank acted decisively and bought time, and every dollar of that time must be repaid within three to five years. What remains unresolved is the underlying position, since India slipped into a current account deficit in May and the flows arrived only after the price was raised. Rupee stability now rests increasingly on liabilities the country has paid to attract and must one day repay.

    What is the Balance of Payments?

    1. About: The balance of payments is the systematic record of all economic transactions between residents of a country and the rest of the world over a period.
    2. Rationale: It exists to show whether a country is paying its way through what it earns, or financing consumption and investment through borrowing and asset sales.
    3. Current account: Records trade in goods and services, primary income such as investment income, and secondary income such as remittances.
    4. Capital and financial account: Records foreign direct investment, portfolio investment, external commercial borrowing, banking capital including non resident deposits, and reserve movements.
    5. Errors and omissions: The residual balancing entry that reconciles the two accounts, since the sources for each side differ.
    6. The accounting identity: A current account deficit must be financed by a surplus on the capital account or by drawing down reserves.

    Key Concerns Regarding India’s External Sector Position

    1. Deficit financed by volatile capital: A current account deficit funded by portfolio flows and non resident deposits is more fragile than one funded by foreign direct investment.
    2. Dependence on invisibles: Services exports and remittances mask a persistent and large merchandise trade deficit.
    3. Reserve adequacy measured wrongly: A large absolute reserve stock can still be thin when measured against short term external liabilities on a residual maturity basis.
    4. Commodity price pass through: Oil, gold and fertiliser prices are set abroad, so a large part of the external position is outside domestic policy control.
    5. Rupee internationalisation lag: Almost all of India’s trade is invoiced in dollars, so every trade shock passes directly into demand for foreign exchange.
    6. Contingent liabilities of intervention: Forward market intervention creates future dollar delivery obligations that do not appear in the headline reserve figure.

    Statutory Framework Governing Foreign Exchange and External Borrowing

    1. Entry 36 of the Union List: Places currency, coinage and legal tender, and foreign exchange, exclusively with Parliament.
    2. Entry 37 of the Union List: Covers foreign loans, the constitutional basis for regulating external borrowing.
    3. Section 3 of the Foreign Exchange Management Act, 1999: Prohibits dealing in foreign exchange except through authorised persons.
    4. Section 6 of the Foreign Exchange Management Act, 1999: Governs capital account transactions, including non resident deposits and external borrowing.
    5. Section 47 of the Foreign Exchange Management Act, 1999: Empowers the RBI to make regulations to carry out the provisions of the Act.
    6. Sections 17 and 33 of the Reserve Bank of India Act, 1934: Govern the business the RBI may transact and the assets backing the note issue, including foreign securities.
    7. Preamble to the Reserve Bank of India Act, 1934: States the objective of operating the currency and credit system to the country’s advantage and maintaining price stability.

    Laws and Rules Governing Non Resident Deposits

    1. Reserve Bank of India Act, 1934: Establishes the central bank and its powers over currency, reserves and monetary operations.
    2. Section 45ZB: Provides for the Monetary Policy Committee, which sets the policy rate that shapes the interest differential behind a swap.
    3. Foreign Exchange Management Act, 1999: Replaced the Foreign Exchange Regulation Act, 1973 and shifted the regime from control to management of foreign exchange.
    4. Foreign Exchange Management (Deposit) Regulations, 2016: Govern the operation of Non Resident External, Non Resident Ordinary and FCNR(B) accounts.
    5. Banking Regulation Act, 1949: Governs the conduct of banking companies, including the reserve and liquidity requirements applicable to these deposits.
    6. Foreign Exchange Management (Borrowing and Lending) Regulations, 2018: Govern external commercial borrowing and the terms on which residents may borrow abroad.
    7. Prevention of Money Laundering Act, 2002: Applies customer due diligence and reporting requirements to non resident deposit accounts.
    8. Income Tax Act, 1961: Provides the exemption that makes interest on FCNR(B) and Non Resident External deposits tax free for a non resident.

    Back2Basics: Non Resident Deposit Accounts in India

    1. FCNR(B) account: A term deposit held in a permitted foreign currency with an Indian bank, with maturity from one to five years.
    2. Currency risk on FCNR(B): The deposit is denominated in foreign currency, so the depositor faces no rupee depreciation risk and the bank or the central bank carries it.
    3. Non Resident External (NRE) account: A rupee denominated account funded from abroad, fully repatriable, with tax free interest in India.
    4. Non Resident Ordinary (NRO) account: A rupee account for income earned in India such as rent, pension or dividends, with limited repatriation and taxable interest.
    5. Regulatory basis: All three are governed by the Foreign Exchange Management (Deposit) Regulations, 2016 under the Foreign Exchange Management Act, 1999.
    6. Policy use: The RBI periodically relaxes interest rate ceilings and reserve requirements on these deposits to attract dollar inflows when the rupee is under pressure.
    7. Balance of payments classification: Non resident deposits are recorded as banking capital under the capital account, not as current account earnings.

    Government and RBI Initiatives on External Stability

    1. Special swap facility for FCNR(B) deposits: Absorbs the hedging cost of bank dollar deposits to attract diaspora funds during periods of currency pressure.
    2. Special Rupee Vostro Accounts: Allow settlement of international trade in rupees with partner countries, reducing dollar demand for those transactions.
    3. Gold Monetisation Scheme: Brings idle domestic gold into the financial system to cut fresh import demand.
    4. Sovereign Gold Bonds: Provide a paper substitute for physical gold, reducing the import component of gold demand.
    5. Liberalised Remittance Scheme: Sets the annual limit within which resident individuals may remit funds abroad, a control on outflows.
    6. External Commercial Borrowing framework: Sets maturity, cost ceiling and end use conditions for corporate borrowing abroad.
    7. Foreign exchange reserve management: Reserves are held in foreign currency assets, gold, Special Drawing Rights and the reserve tranche position with the International Monetary Fund.

    Key Facts about India’s External Sector

    1. Reserve composition: India’s foreign exchange reserves comprise foreign currency assets, gold, Special Drawing Rights and the reserve tranche position with the IMF.
    2. Remittance rank: India is the largest recipient of inward remittances in the world.
    3. Services strength: India is among the top ten exporters of commercial services globally, led by software and business services.
    4. Import composition: Crude oil and gold are consistently the two largest items in India’s merchandise import bill.
    5. The 2013 precedent: A similar concessional swap window in 2013 raised about $34 billion through FCNR(B) deposits and bank capital during that year’s currency crisis.
    6. Exchange rate regime: India follows a managed float, where the rate is market determined and the RBI intervenes to contain volatility rather than to defend a level.
    7. Convertibility status: The rupee is fully convertible on the current account and only partially convertible on the capital account.

    Way Forward

    1. Sequence the repayment: Publish a maturity profile of the deposits raised and build forward cover ahead of the redemption window rather than at it.
    2. Shift the financing mix: Prioritise foreign direct investment and long term equity flows over interest sensitive deposits as the source of external financing.
    3. Expand export capability: Target sectors with high domestic value addition so export growth adds net foreign exchange rather than gross turnover.
    4. Reduce energy import intensity: Accelerate renewable capacity, ethanol blending and electrification of transport to shrink the crude oil bill.
    5. Widen rupee trade settlement: Extend Special Rupee Vostro arrangements to more trade partners so a larger share of trade avoids dollar intermediation.
    6. Treat tourism as an export sector: Fund visa facilitation, connectivity and destination infrastructure with the same seriousness as merchandise export promotion.
    7. Report the contingent position: Disclose the forward book and swap obligations alongside headline reserves so the true net position is visible.

    Matching Previous Year Question

    “[2015, GS3, 12.5 marks] Craze for gold in Indians have led to a 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.”

  • From price taker to price setter: India’s commodity market gains clout

    Why in the News

    The Securities and Exchange Board of India (SEBI) is soliciting public views on allowing Foreign Portfolio Investors (FPIs) into non agricultural, physically settled commodity derivatives covering bullion, energy and base metals. India is a major importer of crude oil, gold and industrial metals, yet it takes prices set on foreign exchanges rather than setting them. The proposal tests whether deeper liquidity turns India into a price setter or imports the volatility of global markets.

    What are physically settled commodity derivatives?

    1. About: A commodity derivative is a contract whose value is derived from an underlying commodity, traded as a future or an option on an exchange.
    2. Physical settlement: A physically settled contract is closed by actual delivery of the underlying goods at expiry, rather than by paying the cash difference between the contract price and the market price.
    3. Why the distinction matters: Physical settlement ties the exchange price to the real warehouse and delivery market, which is what makes a contract usable as a benchmark.
    4. The categories in question: The proposal covers bullion meaning gold, silver and their derivatives, energy meaning crude oil and natural gas, and base metals meaning aluminium, copper, lead, nickel and zinc.
    5. The present bar: Overseas investors are at present not allowed to participate in contracts linked to crude, natural gas, gold or silver that are settled by actual delivery of the underlying goods.

    What is a Foreign Portfolio Investor (FPI)?

    1. About: An FPI is a non resident investor registered with SEBI to invest in Indian securities and financial instruments without acquiring management control.
    2. Distinguishing feature: Portfolio investment is liquid and can exit quickly, unlike foreign direct investment which takes a lasting interest in an enterprise.
    3. Present count: More than 11,000 FPIs are currently registered in India.

    What does price taker versus price setter mean?

    1. Price taker: A market participant large enough to buy in volume, yet whose own trading does not influence the reference price at which the commodity is quoted globally.
    2. Price setter: A market whose exchange price becomes the reference benchmark that buyers and sellers elsewhere quote against.
    3. The stake for India: A price setting market retains benchmark authority, transaction value and hedging activity inside the country instead of exporting them.

    What is Average Daily Turnover (ADT)?

    1. About: Average Daily Turnover is the average notional value of contracts traded per trading day over a stated period, used as the standard measure of an exchange’s activity.
    2. Use here: It is the figure by which the Multi Commodity Exchange (MCX) is compared against global commodity exchanges for depth.

    Why is India a price taker despite being a major importer?

    1. Import weight without market weight: India is a major importer of crude oil, gold and industrial metals, and still has no proportionate influence on how those commodities are priced.
    2. Hedging happens offshore: Domestic commodity risk is currently hedged largely through London, New York, Chicago and Singapore rather than on Indian exchanges.
    3. Missing institutional depth: MCX has strong retail and domestic participation and relatively limited institutional depth compared with global exchanges.
    4. The missing precondition: For India to become a price setter, its domestic commodity market needs integration with the global financial architecture.
    5. The consequence of the gap: Indian users of these commodities accept a price discovered abroad and pay the transaction and collateral cost of using a foreign venue.

    What exactly is SEBI proposing?

    1. The consultation: SEBI is proposing to allow access to foreign portfolio investors into non agricultural derivatives and is seeking public views on the design.
    2. The stated objective: The aim is to bring global commodity risk management into India.
    3. The expected byproduct: Increased depth and liquidity in commodity derivative markets, enabling the country to serve as a global benchmark.
    4. The product scope: Participation is proposed in physically settled contracts in bullion, energy and base metals, the segments that are either imported or globally priced.
    5. The safeguard already stated: SEBI has mandated that such participants square off positions before the delivery period.
    6. The stated challenge: The design problem is to ensure that greater liquidity does not become greater volatility.

    How would onshore hedging change India’s foreign exchange position?

    1. Margin retention: Margin money posted against contracts stays within the country instead of moving to a foreign clearing house.
    2. Brokerage retention: Brokerage paid on the trade remains domestic revenue.
    3. Lower collateral demand on banks: Banks would need less foreign currency for collateral purposes when hedging moves onshore.
    4. What is not saved: India cannot avoid paying dollars for demand inelastic imported commodities, so the total import bill does not fall.
    5. What is saved: The country saves on offshore collateral, transaction costs and financial outflows.
    6. The precise gain: The result is a reduction in the volatility of India’s foreign exchange requirement, not a large reduction in total foreign exchange outflow.

    What multiplier effect do FPIs bring to the domestic market?

    1. The liquidity function: FPIs can create a multiplier effect by providing the liquidity that domestic hedgers need on the other side of their trades.
    2. The hedgers who benefit: Airlines, oil marketing companies (OMCs) and industrial users would be able to hedge efficiently on Indian exchanges.
    3. The scale even at low participation: Of the more than 11,000 registered FPIs, even a tenth participating on a conservative estimate would bring in considerable liquidity.
    4. Benchmark influence: By attracting global capital, Indian exchanges can gradually become more influential in regional price discovery.
    5. Reduced benchmark dependence: A deeper market also cuts India’s dependence on overseas benchmarks for the same commodities.

    What does the MCX data show about the market’s current depth?

    1. Combined turnover: MCX recorded a combined futures and options Average Daily Turnover of Rs 10.5 lakh crore as of the first quarter of FY27.
    2. Rate of growth: The combined futures and options ADT of MCX rose by 238 per cent in the first quarter of FY27.
    3. What the growth reflects: The rise reflects growing investor adoption of commodity derivatives for both hedging and trading.
    4. Client base: The active client base almost doubled year on year to 13.72 lakh in the review period.
    5. Registered foreign investors: More than 11,000 FPIs are already registered in India across asset classes.
    6. Composition advantage: MCX is dominated by commodities that are either imported or globally priced, which is why the proposal is expected to benefit it most.
    7. The positioning goal: The change is expected to expand MCX’s addressable market and strengthen its position as an Asian commodity trading hub.

    How did the present proposal evolve from earlier reform?

    1. The origin: The seeds of the present proposal were sown in 2015, at the time of the merger of the Forward Markets Commission with SEBI.
    2. The approach since: SEBI has taken measured steps in developing the commodity derivatives market in an orderly manner.
    3. The products introduced: SEBI introduced futures on commodity indices, options on commodity futures, and options in goods.
    4. The stated purpose of those products: To attract broad based participation, enhance liquidity, facilitate hedging and bring more depth to the commodity derivatives market.
    5. Who took them up: The products launched by the exchanges are witnessing substantial trading volumes, driven by mutual funds, alternate investment funds and portfolio management services.
    6. The earlier foreign access route: Eligible Foreign Entities (EFEs) were initially allowed to participate only for hedging, and only if they had direct exposure to Indian physical commodities.
    7. Why that route failed: The response of eligible foreign entities was woefully low, due to operational complexities in the eligibility and compliance design.

    What does the single international precedent cited actually establish?

    1. The one study relied upon: SEBI cites a study of China, which found a jump in volume and in the number of deals after internationalisation of its futures markets.
    2. The cost finding: That study also found trading cost was largely unaffected by the entry of foreign participants.
    3. The inference drawn: SEBI reasoned from this evidence for the entry of FPIs into Indian commodity derivatives.
    4. The limit of the evidence: A single country study of volume and cost does not establish that benchmark authority shifted, which is the outcome India is actually seeking.
    5. The offshore venues that matter: The benchmarks India competes against sit in London, New York, Chicago and Singapore, and none of those cases is examined in the proposal.

    Does deeper liquidity buy price setting power or imported volatility?

    1. The reform is significant: Widening access for FPIs into non farm commodity derivatives is a significant step towards market depth.
    2. The speculation risk: Speculation may amplify price movements in an already charged geopolitical environment, with currency fluctuations and supply disruptions.
    3. Position concentration: Large international commodity trading houses and hedge funds could accumulate significant positions and influence short term prices.
    4. The partial safeguard: SEBI has mandated such participants to square off positions before the delivery period, which limits delivery squeezes but not price influence during the contract’s life.
    5. Contagion channel: Indian commodity markets may sway to Federal Reserve policy and dollar movements once foreign capital is a large presence.
    6. Financialisation risk: Excessive financialisation of commodities may create a discord between futures prices and physical market realities.
    7. The central trade off: The same foreign capital that gives India benchmark weight also transmits foreign monetary policy into domestic commodity prices.

    Challenges to opening commodity derivatives to foreign portfolio investors

    1. Volatility transmission to consumer prices: Commodity futures prices feed into fuel and metal costs that households and industry pay. e.g. a spike in crude futures during the Strait of Hormuz disruption of 2026 pushed the Indian crude basket towards $90 a barrel.
    2. Warehousing and delivery infrastructure: Physical settlement needs accredited warehouses, assaying and quality certification at scale. e.g. the National Spot Exchange Limited payment crisis of 2013 arose from unverified underlying stocks in warehouses.
    3. Regulatory arbitrage with offshore venues: Participants can shift between Indian and foreign contracts to exploit margin and tax differences. e.g. Indian single stock and index derivative volumes migrated to Singapore before the exchanges restructured their offshore licensing.
    4. Currency convertibility limits: The rupee is not fully convertible on the capital account, which constrains how freely foreign hedgers can move funds. e.g. offshore participants continue to use non deliverable forward markets for rupee exposure.
    5. Concentration and manipulation risk: A few large global houses dominate physical trade in several of these commodities. e.g. global metal trading is concentrated among a small number of houses whose positions can move benchmark prices.
    6. Retail exposure to a wholesale market: Indian commodity exchanges have unusually high retail participation for a risk transfer market. e.g. the active client base at MCX almost doubled to 13.72 lakh in a single year.
    7. Agricultural spillover through sentiment: Even with farm contracts excluded, financialisation shapes expectations across commodity classes. e.g. futures trading in seven agricultural commodities was suspended in 2021 over inflation concerns and the suspension was extended repeatedly.

    Conclusion

    India buys crude oil, gold and base metals in global volume and still accepts a price discovered on exchanges abroad, and the proposal to admit FPIs is an attempt to relocate that price discovery onshore. The measurable gain is narrower than the framing suggests, since it lowers the volatility of India’s foreign exchange requirement and retains margin, brokerage and collateral, without reducing the dollar bill for demand inelastic imports. What remains unresolved is whether the same foreign capital that supplies depth also imports Federal Reserve policy and dollar movements into Indian commodity prices. The proposal is at the public consultation stage, and the design question SEBI must answer is how to ensure greater liquidity does not become greater volatility.

    Commodity Derivatives Market in India

    1. About: A commodity derivatives market allows producers, importers and consumers to lock in a future price for a commodity, transferring price risk to participants willing to bear it.
    2. The two functions: The market performs price discovery, by aggregating expectations into a single quoted price, and risk management, by allowing hedging against adverse price movement.
    3. Regulatory history: Commodity derivatives were regulated by the Forward Markets Commission under the Forward Contracts (Regulation) Act, 1952 until the Commission merged with SEBI in 2015.
    4. The exchanges: MCX dominates non agricultural commodities, while the National Commodity and Derivatives Exchange (NCDEX) is the principal agricultural commodity exchange.
    5. India’s scale: India is the world’s largest consumer of gold after China, the third largest consumer and importer of crude oil, and a leading consumer of silver and base metals.
    6. The structural weakness: Institutional and foreign participation is thin, so Indian contracts track international benchmarks rather than generating them.
    7. The newer venue: The India International Bullion Exchange at GIFT City was created to route bullion imports through an organised exchange platform.

    Statutory Framework Governing Commodity Derivatives

    1. Entry 48 of the Union List: Places stock exchanges and futures markets exclusively within Parliament’s legislative competence.
    2. Securities Contracts (Regulation) Act, 1956, Section 2(bc): Defines a commodity derivative, brought in by the Finance Act, 2015.
    3. SEBI Act, 1992, Section 11: Sets out SEBI’s duty to protect investors and to regulate the securities market, extended to commodity derivatives after the merger.
    4. Finance Act, 2015: Repealed the Forward Contracts (Regulation) Act, 1952 and transferred regulation of commodity derivatives to SEBI.
    5. Foreign Exchange Management Act, 1999, Section 6: Governs capital account transactions, the route through which foreign participation and collateral flows are controlled.
    6. Essential Commodities Act, 1955: Empowers the Union to regulate production, supply and trade in notified essential commodities, including suspension of futures trading.

    Laws and Rules Governing Commodity Market Participation

    1. Securities Contracts (Regulation) Act, 1956: Governs recognition of stock exchanges and the legality of contracts in securities and commodity derivatives.
    2. Section 2(bc): Introduced the statutory definition of a commodity derivative in 2015.
    3. SEBI Act, 1992: Establishes SEBI with powers of investigation, adjudication and penalty across securities and commodity derivative markets.
    4. SEBI (Foreign Portfolio Investors) Regulations, 2019: Set out registration categories, eligibility and investment conditions for foreign portfolio investors.
    5. Foreign Exchange Management Act, 1999: Governs the cross border movement of funds, margins and collateral by foreign participants.
    6. Foreign Exchange Management (Debt Instruments) Regulations, 2019: Regulate FPI access to Indian debt, the parallel route to their equity access.
    7. Warehousing (Development and Regulation) Act, 2007: Establishes the Warehousing Development and Regulatory Authority and the negotiable warehouse receipt system that underpins physical settlement.
    8. Essential Commodities Act, 1955: Provides the power under which futures trading in specific commodities has been suspended.
    9. Prevention of Money Laundering Act, 2002: Applies know your customer and reporting obligations to intermediaries handling foreign participant funds.

    Back2Basics: Multi Commodity Exchange of India (MCX)

    1. What it is: MCX is India’s largest commodity derivatives exchange, dealing mainly in bullion, energy and base metals.
    2. Regulator: Regulated by SEBI under the Securities Contracts (Regulation) Act, 1956 since the 2015 transfer of commodity market regulation.
    3. Year of operations: Began operations in 2003 and became India’s first listed commodity exchange.
    4. Product range: Offers futures and options in gold, silver, crude oil, natural gas, aluminium, copper, lead, nickel, zinc, cotton and other commodities.
    5. Index products: Operates commodity indices such as iCOMDEX, on which index futures are traded.
    6. Settlement types: Runs both cash settled and physically settled contracts, with delivery through accredited warehouses and vaults.
    7. Current scale: Combined futures and options average daily turnover reached Rs 10.5 lakh crore in the first quarter of FY27, with an active client base of 13.72 lakh.

    Government Initiatives Related to Commodity Markets

    1. Merger of the Forward Markets Commission with SEBI: Unified regulation of securities and commodity derivatives under a single regulator from 2015.
    2. India International Bullion Exchange at GIFT City: Created to channel bullion imports through a regulated exchange and build a domestic gold price benchmark.
    3. Gold Monetisation Scheme: Mobilises idle household and institutional gold into the banking system to reduce fresh import demand.
    4. Sovereign Gold Bonds: Offer a paper alternative to physical gold holding, reducing import linked demand.
    5. Electronic Negotiable Warehouse Receipts: Issued under the Warehousing Development and Regulatory Authority framework to make stored commodities financeable and deliverable.
    6. Electronic National Agriculture Market (eNAM): Creates a unified electronic spot market for agricultural produce across regulated mandis.
    7. International Financial Services Centres Authority: Regulates the unified financial services centre at GIFT City, including commodity and bullion derivatives available to non residents.

    Key Facts about India’s Commodity Market

    1. Regulator: SEBI, since the Forward Markets Commission merged into it on 28 September 2015.
    2. Repealed statute: The Forward Contracts (Regulation) Act, 1952 was repealed through the Finance Act, 2015.
    3. Principal exchanges: MCX for non agricultural commodities and NCDEX for agricultural commodities.
    4. Gold consumption: India is among the two largest gold consuming countries in the world, with imports a major component of its current account deficit.
    5. Crude dependence: India imports well over 85 per cent of its crude oil requirement, which is why energy contracts dominate hedging demand.
    6. Institutional access built in stages: Mutual funds, alternate investment funds and portfolio management services were allowed into commodity derivatives before foreign portfolio investors.
    7. Physical settlement mandate: SEBI moved several non agricultural contracts to compulsory delivery based settlement to align futures prices with physical markets.

    Challenges in India’s Commodity Derivatives Market

    1. Shallow institutional participation: Banks, insurers and pension funds are largely absent from commodity hedging. e.g. Indian banks are not permitted to take proprietary positions in commodity derivatives the way global banks do.
    2. Fragmented physical markets: Spot markets remain dispersed and unstandardised, weakening the link between futures and delivery. e.g. agricultural produce market committee mandis quote different grades and prices for the same crop within one State.
    3. Policy reversals: Sudden suspension of contracts undermines confidence in the market as a hedging venue. e.g. futures trading in seven agricultural commodities including wheat, mustard and chana was suspended in December 2021.
    4. Tax and transaction cost: Commodity transaction tax and stamp duty raise the cost of trading relative to offshore venues. e.g. Indian participants have historically routed positions through Dubai and Singapore for cost reasons.
    5. Quality assaying and standardisation: Delivery requires reliable and uniform quality certification. e.g. bullion delivery requires refiners accredited to internationally recognised good delivery standards, which few Indian refiners hold.
    6. Investor protection in a leveraged market: Retail participants trade leveraged contracts they may not fully understand. e.g. the negative settlement of crude oil futures in April 2020 imposed large losses on Indian retail participants holding long positions.
    7. Weak farmer linkage: The agricultural segment does not reach the producers it is meant to protect. e.g. participation by farmer producer organisations in agricultural futures remains a very small share of turnover.

    Way Forward

    1. Phase the entry with position limits: Admit foreign portfolio investors in stages with commodity wise position limits, so liquidity builds without allowing concentrated control of a contract.
    2. Strengthen surveillance: Build cross market surveillance linking futures positions with warehouse stocks and physical trade data to detect manipulation early.
    3. Deepen delivery infrastructure: Expand accredited warehouses, vaults and assaying laboratories so physical settlement scales with volume.
    4. Allow domestic institutional hedgers: Permit banks, insurers and pension funds calibrated access, so foreign capital is not the only source of institutional depth.
    5. Stabilise policy: Commit to a rule based framework for suspending a contract, so intervention is predictable rather than discretionary.
    6. Rationalise transaction cost: Review the commodity transaction tax and stamp duty structure to remove the incentive to hedge offshore.
    7. Extend hedging to the producer: Support aggregation through farmer producer organisations and small industry associations so hedging reaches beyond large firms.

    Matching Previous Year Question

    “[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?
    (a) 1, 2 and 3
    (b) 3 only
    (c) 2 and 4
    (d) 1 and 4
    Answer: (a)”

  • CERC lets RE developers retain grid connectivity despite project delays

    Why in the News

    The Central Electricity Regulatory Commission (CERC), the central power sector regulator, replaced the automatic revocation of grid connectivity for delayed renewable energy projects with a compensation based mechanism. Developers who miss project milestones can now retain transmission access by paying a daily charge, which converts a binary penalty into a priced extension. At least 5.3 gigawatts (GW) of renewable capacity was facing revocation up to October for failure to achieve the commercial operation date.

    What is grid connectivity under the General Network Access Regulations?

    1. About: Grid connectivity is the regulatory right of a generating station to connect to and inject power into the inter State transmission system.
    2. Why it is scarce: Transmission corridors are built years in advance at public cost, and granting connectivity to one project blocks that corridor capacity for every other applicant.
    3. The milestone conditions: A developer holding connectivity must submit land ownership documents, achieve financial closure, and commission the project by its stated date.
    4. The earlier consequence: Failure on any of these three milestones led to automatic revocation of connectivity and forfeiture of the associated bank guarantees.
    5. Governing instrument: These milestones sit under the General Network Access Regulations, which govern access to the inter State transmission network.

    Who is the Central Transmission Utility of India Limited (CTUIL)?

    1. About: CTUIL is the central transmission utility, carved out of Power Grid Corporation of India Limited, which plans the inter State transmission system and grants connectivity and general network access.
    2. Role here: CTUIL issues the notices of revocation to developers who miss milestones, and its data records the capacity at risk.

    What is financial closure?

    1. About: Financial closure is the stage at which all financing agreements for a project are signed and the conditions precedent to the first drawdown of funds are satisfied.
    2. Why it is a milestone: A project without financial closure has no committed money to build with, so it is treated as unlikely to use the connectivity it holds.

    What is the commercial operation date?

    1. About: The commercial operation date is the date from which a generating unit is declared ready to supply power commercially after successful trial operation.
    2. Regulatory use: It is the point from which tariffs, transmission charges and contractual obligations of a project become operative.

    What are Monthly Transmission Charges under the Sharing Regulations, 2020?

    1. About: Monthly Transmission Charges are the pooled cost of the inter State transmission system, recovered from all users in proportion to their use.
    2. Governing instrument: The Sharing of Inter State Transmission Charges and Losses Regulations, 2020 set the formula by which this pooled cost is allocated among users.

    Why did the regulator have to intervene?

    1. Scale of the problem: CTUIL data showed at least 5.3 GW of renewable energy capacity was expected to face connectivity revocation up to October for failure to achieve the commercial operation date.
    2. Developers approached the Commission: Several developers who had received notices from CTUIL sought additional time to achieve the milestones.
    3. Stage of the affected projects: The Commission recorded that entities seeking time are at various stages of implementation, including some at an advanced stage.
    4. Case by case disposal: The Commission had already disposed of several such cases individually, granting additional time on payment of compensation.
    5. Need for uniformity: The order records an immediate requirement to handle such cases uniformly rather than through separate individual rulings.

    What does the new compensation mechanism provide?

    1. Core change: Projects that miss key implementation deadlines retain grid connectivity and receive additional time, instead of facing automatic revocation of transmission access.
    2. Charge for land and financial closure: Developers pay Rs 1,000 per megawatt per day to obtain extra time for land documents and financial closure.
    3. Charge for delayed commissioning: Developers pay Rs 3,000 per megawatt per day for delays in starting commercial operations.
    4. Graded escalation: Compensation is levied by the specific milestone sought, with rates generally increasing over time to push early compliance.
    5. Reasons made irrelevant: The order allows additional time on payment of compensation irrespective of the reasons for the delay.
    6. The stated justification: The Commission recorded that such entities have been holding on to connectivity, described as a scarce resource, which is why the extension is priced.

    What must a developer show to qualify for an extension?

    1. Timing condition: An entity must demonstrate project progress at least 15 working days before the original milestone deadline.
    2. Land threshold for the first two milestones: For land documentation and financial closure, the developer must furnish land documents for at least 20 per cent of the required land.
    3. Land threshold for commissioning: For an extension of the commercial operation date, the developer must furnish land documents for 50 per cent to 75 per cent of the required land, depending on the project type.
    4. Extension lengths: Developers can get up to three additional months for land requirements, six months for financial closure and up to 12 months to commission the project.
    5. Consequence of a second failure: Projects that still miss the extended deadlines risk losing both grid connectivity and the associated bank guarantees.

    Where does the compensation money go?

    1. Full pass through for commissioning delay: 100 per cent of the compensation collected for delays in commercial operations is used to reduce Monthly Transmission Charges for other users.
    2. Half pass through for the other two milestones: 50 per cent of the compensation collected for additional time on land documents and financial closure is applied the same way.
    3. The governing regulation: This reduction operates under the Sharing Regulations, 2020.
    4. The economic logic: The cost of an idle transmission corridor is otherwise socialised across all users, and the charge shifts part of that cost back to the developer causing the delay.
    5. What it does not do: The transfer compensates users financially and does not release the blocked corridor capacity for another project.

    Does pricing the delay protect the grid or entrench the hoarding of a scarce resource?

    1. The case for pricing: Revoking connectivity from a project at an advanced stage destroys sunk investment and returns the corridor to a queue that may take years to reallocate.
    2. The case against: A developer who can pay the daily charge can retain a corridor for up to a further twelve months, which keeps a scarce resource locked with the least prepared applicant.
    3. The design compromise: The land thresholds of 20 per cent and 50 to 75 per cent exist to separate genuinely progressing projects from speculative applications.
    4. The unaddressed gap: Compensation is payable irrespective of the reason for delay, so a developer delayed by a land dispute and one delayed by inaction are treated identically.
    5. The underlying constraint: The real bottleneck is that transmission capacity is built ahead of generation, and neither revocation nor compensation adds a single new corridor.

    Challenges to renewable energy grid connectivity in India

    1. Transmission lagging generation: Renewable capacity is commissioned faster than the evacuation lines that must carry it. e.g. wind and solar capacity in Rajasthan and Gujarat has repeatedly outpaced the completion of the associated Green Energy Corridor lines.
    2. Land aggregation delay: Utility scale solar and wind need large contiguous parcels assembled from many private owners. e.g. projects in Rajasthan have stalled over common land and grazing land claims that block the required land documentation.
    3. Curtailment risk: Even connected projects are backed down when the grid cannot absorb their output. e.g. wind generators in Tamil Nadu have faced curtailment during high wind season for want of evacuation capacity.
    4. Weak counterparty balance sheets: Distribution companies delay payment, which raises the cost of financial closure for developers. e.g. accumulated distribution company dues to generators ran into tens of thousands of crores before the late payment surcharge rules were tightened.
    5. Storage deficit: Solar output peaks at midday while demand peaks after sunset, so firm supply needs storage that remains costly. e.g. battery energy storage tenders have repeatedly been undersubscribed or repriced upward.
    6. Module and cell supply concentration: Domestic content requirements collide with the concentration of cell manufacturing abroad. e.g. approved list of models and manufacturers requirements have forced project timeline extensions when domestic module supply fell short.
    7. Speculative bidding: Aggressive tariff bids won without the ability to execute lock up corridors and tender capacity. e.g. several record low solar tariff bids were followed by unsigned power purchase agreements and stalled projects.

    Conclusion

    Grid connectivity is a scarce public asset built ahead of demand, and the regulator has moved from confiscating it on default to pricing its continued use. The order gives projects at an advanced stage a route to survive a missed milestone, and it transfers part of the cost of the delay from all transmission users back to the delaying developer. The mechanism is now in force with rates of Rs 1,000 and Rs 3,000 per megawatt per day and defined land thresholds. The next milestone is the treatment of the 5.3 GW facing revocation up to October, which will show whether the compensation route clears the backlog or extends it.

    Renewable Energy Sector in India

    1. About: The renewable energy sector covers solar, wind, small hydro, biomass, waste to energy and, in policy terms, large hydro and nuclear are counted within the wider non fossil category.
    2. Scale: India ranks among the top five countries globally in installed renewable energy capacity, and is placed in the top four in both solar and wind capacity.
    3. Milestone achieved: Non fossil sources crossed 50 per cent of India’s total installed electricity generation capacity in 2025, ahead of the timeline pledged under the Paris Agreement.
    4. Stated target: India has committed to 500 GW of non fossil fuel based installed capacity by 2030 and to net zero emissions by 2070.
    5. Geographic concentration: Rajasthan, Gujarat, Karnataka, Tamil Nadu and Andhra Pradesh account for the bulk of installed solar and wind capacity.
    6. Structural feature: Renewable generation is variable and location bound, which makes transmission planning and storage central to the sector rather than incidental.
    7. Institutional structure: The Ministry of New and Renewable Energy frames policy, SECI acts as the central nodal agency for tenders, and CERC regulates inter State transmission and tariffs.

    Statutory Framework Governing Electricity and Grid Access

    1. Entry 38 of the Concurrent List: Places electricity in the concurrent domain, so both Parliament and State legislatures can legislate on it.
    2. Section 79 of the Electricity Act, 2003: Sets out the functions of the Central Electricity Regulatory Commission, including regulation of inter State transmission.
    3. Section 38 of the Electricity Act, 2003: Provides for the Central Transmission Utility and its duty to provide non discriminatory open access.
    4. Section 61 of the Electricity Act, 2003: Lays down the principles the regulator must follow while determining tariffs.
    5. Section 86 of the Electricity Act, 2003: Gives State Electricity Regulatory Commissions the power to fix renewable purchase obligations.
    6. Section 63 of the Electricity Act, 2003: Allows adoption of tariffs discovered through a transparent competitive bidding process.

    Laws and Rules Governing Renewable Energy and Transmission

    1. Electricity Act, 2003: The parent statute governing generation, transmission, distribution, trading and use of electricity.
    2. Open access provision: Sections 39, 40 and 42 create the right of non discriminatory open access to transmission and distribution networks.
    3. Energy Conservation Act, 2001: Provides for energy efficiency standards and designated consumers.
    4. Energy Conservation (Amendment) Act, 2022: Introduced the carbon credit trading scheme and a renewable consumption obligation for designated consumers.
    5. CERC (Connectivity and General Network Access to the inter State Transmission System) Regulations, 2022: Govern grant, milestones and revocation of connectivity, the framework this order operates under.
    6. CERC (Sharing of Inter State Transmission Charges and Losses) Regulations, 2020: Set the method for pooling and allocating transmission charges among users.
    7. Electricity (Promoting Renewable Energy Through Green Energy Open Access) Rules, 2022: Allow consumers above a threshold to buy renewable power directly through open access.
    8. Electricity (Late Payment Surcharge and Related Matters) Rules, 2022: Impose a graded surcharge on distribution company dues to generators and restrict access on default.
    9. Electricity (Rights of Consumers) Rules, 2020: Set service standards including timelines for new connections and metering.

    Back2Basics: Central Electricity Regulatory Commission (CERC)

    1. Governing Act: Constituted under the Electricity Regulatory Commissions Act, 1998 and now functions under the Electricity Act, 2003.
    2. Year established: 1998.
    3. Headquarters: New Delhi.
    4. Composition: A Chairperson and up to three other Members, with the Chairperson of the Central Electricity Authority as an ex officio Member.
    5. Jurisdiction: Regulates tariffs of central generating stations, inter State transmission, inter State trading licences and the national grid.
    6. Mandate: Sets grid standards, regulates the power market, adjudicates disputes among inter State licensees and generating companies, and advises the Union government on tariff policy.
    7. Appeal route: Its orders are appealable to the Appellate Tribunal for Electricity and thereafter to the Supreme Court on a question of law.

    Government Initiatives in the Renewable Energy Sector

    1. PM Surya Ghar Muft Bijli Yojana: Provides central financial assistance for rooftop solar installations on residential houses, targeting one crore households.
    2. PM KUSUM: Supports solarisation of agricultural pumps and installation of decentralised solar plants on barren farmland for farmers.
    3. National Green Hydrogen Mission: Aims to build green hydrogen production capacity and associated electrolyser manufacturing, with incentives under the SIGHT programme.
    4. Green Energy Corridor: Funds dedicated transmission infrastructure to evacuate renewable power from generation rich States to demand centres.
    5. Waiver of inter State transmission charges: Exempts qualifying renewable and storage projects from inter State transmission charges for a defined period to improve project viability.
    6. PLI National Programme on High Efficiency Solar Photovoltaic Modules: Supports integrated domestic manufacturing of polysilicon, ingots, wafers, cells and modules.
    7. Solar Park and Ultra Mega Solar Power Projects Scheme: Provides pre acquired land and ready evacuation infrastructure to reduce developer risk.
    8. Viability Gap Funding for Battery Energy Storage Systems: Supports grid scale storage to address the evening peak and firm up variable renewable supply.

    Key Facts about India’s Renewable Energy Sector

    1. Nodal ministry: Ministry of New and Renewable Energy, the only dedicated renewable energy ministry of its kind when created.
    2. Non fossil milestone: India reached the 50 per cent non fossil installed capacity mark five years ahead of its Paris Agreement commitment.
    3. International Solar Alliance: Headquartered at Gurugram in India, jointly initiated by India and France in 2015.
    4. Largest solar parks: Bhadla in Rajasthan and Pavagada in Karnataka are among the largest solar parks in the world.
    5. Hybrid policy: India was among the first to notify a dedicated wind solar hybrid policy to improve capacity utilisation of a single grid connection.
    6. Renewable purchase obligation: State regulators fix a minimum share of renewable power that obligated entities must buy each year.
    7. Nodal tender agency: Solar Energy Corporation of India Limited conducts the largest share of central renewable capacity auctions.

    Challenges in India’s Renewable Energy Sector

    1. Grid integration and stability: High variable renewable penetration strains frequency and voltage management. e.g. States with high solar share face a steep evening ramp when solar output drops and demand peaks.
    2. Distribution company finances: Weak buyers delay payments and refuse to sign power purchase agreements at discovered tariffs. e.g. thousands of megawatts of auctioned capacity remained without signed agreements for want of buyers.
    3. Land and environmental conflict: Large projects compete with grazing land, wildlife habitat and community rights. e.g. transmission lines in the Thar region were litigated over Great Indian Bustard mortality.
    4. Manufacturing import dependence: Cells, wafers and polysilicon remain concentrated in a few countries. e.g. India continues to import a large share of solar cells despite module capacity expansion.
    5. Storage cost: Firm and dispatchable renewable supply needs storage that is still expensive at scale. e.g. round the clock renewable tenders have discovered tariffs well above plain solar tariffs.
    6. Skilled workforce and operation and maintenance: Remote plants need trained technicians for module cleaning, inverter servicing and blade repair. e.g. offshore wind, newly tendered off Gujarat and Tamil Nadu, has almost no domestic trained workforce.
    7. Recycling and waste: End of life modules and batteries carry a hazardous waste burden not yet planned for. e.g. India has no large scale commercial solar module recycling capacity.

    Way Forward

    1. Plan transmission ahead of generation: Commission evacuation corridors on a fixed lead over auctioned capacity so connectivity ceases to be the binding constraint.
    2. Tighten entry screening: Raise land and financial readiness thresholds at the connectivity application stage rather than only at the extension stage.
    3. Differentiate causes of delay: Provide a lower compensation rate for delays caused by force majeure or by transmission side readiness, and a higher rate for developer inaction.
    4. Scale storage procurement: Expand viability gap funding and mandate storage linked capacity in new renewable tenders to smooth the evening peak.
    5. Fix the buyer side: Enforce payment security mechanisms and time bound signing of power purchase agreements after auction.
    6. Build domestic supply chains: Extend manufacturing support upstream to wafers, polysilicon and battery grade materials.
    7. Create a module and battery recycling framework: Notify extended producer responsibility for solar modules and grid batteries before the first large retirement wave.

    Matching Previous Year Question

    “[2022, GS3, 15 marks] Do you think India will meet 50 percent of its energy needs from renewable energy by 2030 ? Justify your answer. How will the shift of subsidies from fossil fuels to renewables help achieve the above objective? Explain.”

  • Can SHANTI Act override court on compensation for nuclear disasters, asks SC

    Why in the News

    A three judge Bench of the Supreme Court issued notice to the Union government and the Atomic Energy Regulatory Board (AERB) on whether the Sustainable Harnessing and Advancement of Nuclear Energy for Transforming India (SHANTI) Act, 2025 can bar constitutional courts from awarding fair compensation to victims of a nuclear accident. The Act caps operator and government liability and exempts suppliers, which sets a statutory ceiling against the constitutional power to award damages for a legal wrong. The Bench also asked whether Section 17(4), which lets the government appoint the AERB Chairperson and Members, creates a conflict of interest.

    What is the SHANTI Act, 2025?

    1. About: The Sustainable Harnessing and Advancement of Nuclear Energy for Transforming India (SHANTI) Act, 2025 is the statute that replaced the Civil Liability for Nuclear Damage Act, 2010 as the law governing liability for nuclear damage in India.
    2. Core function: It fixes who pays for a nuclear accident, how much they pay, and the outer financial limit of that obligation.
    3. Operator ceiling: Liability of the largest plant operator in India is capped at Rs 3,000 crore.
    4. Government residual liability: The Union government’s residual liability is capped at 300 million Special Drawing Rights, stated in the proceedings as about Rs 4,500 crore.
    5. Supplier position: Suppliers, manufacturers and similar entities are exempted from liability under the Act.
    6. Regulatory provision: Section 17(4) vests in the government the power to appoint the Chairperson and Members of the AERB.

    What are Special Drawing Rights (SDRs)?

    1. About: Special Drawing Rights are an international reserve asset created by the International Monetary Fund (IMF), whose value is set by a basket of major currencies.
    2. Use here: Nuclear liability ceilings are expressed in SDRs because international nuclear liability conventions use the unit, which keeps the ceiling insulated from movement in any single national currency.

    What is the doctrine of absolute liability?

    1. About: Absolute liability holds an enterprise carrying on a hazardous activity fully liable for harm caused by that activity, with no exceptions and no ceiling on the amount.
    2. Origin: The Supreme Court laid it down in the oleum gas leak case, M.C. Mehta v Union of India (1987), rejecting the older English rule that allowed defences such as an act of a stranger.
    3. Relevance to the case: The petitioners argue that capping the liability of a nuclear operator directly contradicts this settled principle.

    What is channelling of liability?

    1. About: Channelling means directing all legal liability for a nuclear accident to one named party, the operator, so that victims sue a single identified entity instead of tracing fault across the supply chain.
    2. The trade off: Channelling gives victims a quick and certain defendant, and it simultaneously insulates equipment suppliers from any claim for a defective part.

    Who is the Atomic Energy Regulatory Board (AERB)?

    1. About: The AERB is the national regulator for radiation and nuclear safety, constituted in 1983 under the powers of the Atomic Energy Act, 1962.
    2. Mandate: It frames safety codes, licenses nuclear installations and enforces radiation safety across nuclear and non nuclear users of radioactive material.
    3. Structural feature: It is a body created by executive notification rather than by a standalone statute, and it reports to the Atomic Energy Commission.

    What exactly did the Supreme Court ask?

    1. The compensation question: The Bench asked whether the statutory thresholds in the SHANTI Act preclude constitutional courts from determining a fair and just compensation after a nuclear mishap.
    2. The reasoning offered: The Chief Justice of India observed that a constitutional court can always grant suitable compensation against a legal tort, and that a cap imposed by Parliament does not by itself bar the courts.
    3. The regulator question: The Bench separately asked whether the power under Section 17(4) to appoint the AERB Chairperson and Members creates a conflict of interest.
    4. Parties noticed: Notice was issued to the Union government and the AERB on both issues.
    5. The petition: The challenge is to the provisions limiting the liability of operators, suppliers and manufacturers of nuclear installations.

    Why do the petitioners say the caps are inadequate?

    1. The Chernobyl comparison: The loss from the Chernobyl nuclear disaster has been estimated at between $235 billion and $700 billion.
    2. The Fukushima comparison: Cleanup costs at the Fukushima Daiichi nuclear power plant accident of 2011 in Japan have been estimated at approximately $400 billion to $445 billion.
    3. The mismatch: Against these magnitudes, the Act caps the largest Indian operator’s liability at Rs 3,000 crore.
    4. The residual cap: The government’s residual liability of 300 million Special Drawing Rights was described as ensuring that victims of death, injury or property damage cannot recover even a small fraction of actual losses.
    5. The supplier exemption: Exempting suppliers from any liability is argued to encourage manufacturers and suppliers to maximise profit without bearing accident risk.

    How does a liability cap change operator behaviour?

    1. The moral hazard argument: A known ceiling converts an unlimited risk into a budgeted cost, so the incentive to spend beyond that ceiling on safety falls away.
    2. The submission made: Petitioners argued that unless the court states that the liability of operators, suppliers and the government will be judicially determined regardless of the cap, operators and suppliers will cut corners that endanger lives.
    3. The precedent invoked: Indian law has held that a person running a hazardous industry bears absolute and unlimited liability for an accident arising from it.
    4. The claimed violation: Petitioners submitted that this principle has been clearly violated by the statutory ceiling.
    5. Concentration of exposure: With suppliers exempt and the operator capped, the residual cost of a large accident falls on the exchequer and on victims.

    Why is the regulator’s independence in question?

    1. Appointment power: Section 17(4) gives the government the power to appoint the Chairperson and Members of the AERB, and the government is also the promoter of nuclear power in India.
    2. Operator and regulator overlap: The AERB itself has a role connected to nuclear plants while also playing a significant role in regulating them.
    3. International benchmark: Petitioners submitted that this arrangement violates the principle of independence of the regulatory body laid down in international conventions.
    4. Long standing criticism: The absence of a statutorily independent nuclear regulator has been flagged in India for over a decade, including by the Comptroller and Auditor General.
    5. Consequence: A regulator dependent on the promoter for appointments has weaker authority to halt or penalise a plant it supervises.

    Does a liability cap serve investment or does it shift risk to victims?

    1. The investment rationale: The court observed that the limit may exist only to make the nuclear project more attractive to foreign investors.
    2. The counter position: Petitioners argued that investment should not come at the cost of the safety of thousands of lives.
    3. The design logic of caps: Nuclear vendors demand a liability ceiling because unlimited exposure makes an insurance market for the risk impossible to build.
    4. The distributional effect: A cap does not reduce the cost of an accident, it decides who absorbs the part of the cost above the ceiling.
    5. The constitutional question this raises: The dispute is whether Parliament can, by fixing a financial ceiling, foreclose the remedy a constitutional court can grant under Article 32 or Article 226.

    What alternative did the petitioners place before the court?

    1. Solar potential: The government’s own assessment puts India’s solar power potential at 3,343 gigawatts (GW) using 6 per cent of wasteland.
    2. Scale comparison: That potential is 14 times India’s peak power demand of 256 GW.
    3. Build time: Solar capacity can be built in about three months, against the multi year construction cycle of a nuclear plant.
    4. Cost comparison: The per unit cost of solar power was stated as one fifth that of nuclear energy.
    5. Risk comparison: Solar generation carries no comparable accident hazard, so it raises no liability question at all.

    Challenges to the SHANTI Act, 2025 framework

    1. Insurance market depth: The Indian Nuclear Insurance Pool has limited capacity, so even the capped liability may not be fully insurable domestically. e.g. the pool set up in 2015 was capitalised at only about Rs 1,500 crore at inception.
    2. Supplier exemption and quality control: Removing supplier liability weakens the commercial incentive to guarantee component quality. e.g. the supplier recourse clause of the 2010 law was the reason foreign vendors stayed away from Jaitapur and Kovvada for over a decade.
    3. Claims administration capacity: A nuclear claims process needs medical registries and long term follow up that India has struggled to sustain. e.g. Bhopal gas leak claims took decades of adjudication and revision of the settlement figure.
    4. Absence of a statutory regulator: The AERB derives authority from executive notification rather than its own Act. e.g. the Nuclear Safety Regulatory Authority Bill, 2011 lapsed and was never re enacted.
    5. Land acquisition and local consent: New reactor sites face sustained local opposition that liability caps do not address. e.g. the protests at Kudankulam delayed commissioning of the first unit by several years.
    6. Radioactive waste management: India has no operating deep geological repository for high level waste. e.g. spent fuel from operating reactors is stored on site in pools and in away from reactor storage facilities.
    7. Private entry and accountability: Opening the sector to private operators multiplies the number of entities whose safety culture the regulator must supervise. e.g. the sector so far has been run almost entirely by the Nuclear Power Corporation of India Limited and its joint ventures.

    Conclusion

    The dispute is whether a statutory financial ceiling can displace the constitutional power of a court to award compensation for a legal wrong. The Act does not reduce the cost of a nuclear accident, it decides who bears the part of that cost above the ceiling, and at present that is the victim and the exchequer. The measure has reached the stage of an enacted and operating law facing a constitutional challenge, having already replaced the Civil Liability for Nuclear Damage Act, 2010. The next milestone is the response of the Union government and the AERB to the notice issued on the compensation and Section 17(4) questions.

    Nuclear Energy in India

    1. About: Nuclear energy is generated by fission of heavy nuclei such as uranium 235 and plutonium 239, releasing heat that raises steam to drive a turbine.
    2. Three stage programme: India follows a three stage programme designed by the founder of its atomic energy programme, moving from pressurised heavy water reactors, to fast breeder reactors, to thorium based reactors.
    3. Resource logic: The design exists because India has modest uranium reserves and among the world’s largest thorium reserves, concentrated in the monazite sands of Kerala, Tamil Nadu and Odisha.
    4. Installed base: India operates around 24 nuclear power reactors with an installed capacity of about 8.18 GW, contributing roughly 3 per cent of total electricity generation.
    5. Stated target: The government has set a target of 100 GW of nuclear capacity by 2047 as part of the energy transition plan.
    6. Institutional structure: The Department of Atomic Energy administers the sector, NPCIL builds and operates plants, and the AERB regulates safety.
    7. Global position: India is among the few countries operating a closed fuel cycle with reprocessing, and it operates outside the Nuclear Non Proliferation Treaty while holding a safeguards agreement with the International Atomic Energy Agency.

    Constitutional and Statutory Framework Governing Nuclear Liability

    1. Entry 6 of the Union List: Places atomic energy and mineral resources necessary for its production exclusively with Parliament.
    2. Article 21: Guarantees the right to life, read to include a right to compensation for violation caused by a hazardous activity.
    3. Article 32: Empowers the Supreme Court to issue writs and award compensation for violation of fundamental rights.
    4. Article 226: Gives High Courts a parallel and wider writ power, including the award of compensation in public law.
    5. Article 48A and Article 51A(g): Direct the State and citizens respectively to protect and improve the environment.
    6. Article 253: Enables Parliament to legislate to implement international conventions, the basis for aligning Indian liability law with the Convention on Supplementary Compensation.
    7. Article 246 with Entry 13 of the Union List: Covers participation in international conferences and implementation of decisions taken there.

    Laws and Rules Governing Nuclear Energy in India

    1. Atomic Energy Act, 1962: Gives the Union exclusive control over atomic minerals, production and use of atomic energy, and the licensing of nuclear installations.
    2. Atomic Energy (Radiation Protection) Rules, 2004: Set radiation dose limits and licensing conditions for radiation facilities.
    3. Atomic Energy (Factories) Rules, 1996: Govern safety in factories handling radioactive material.
    4. Civil Liability for Nuclear Damage Act, 2010: Created a no fault liability regime channelled to the operator, with a right of recourse against the supplier.
    5. Section 17(b): Allowed the operator recourse against a supplier for a patent or latent defect, the clause foreign vendors objected to.
    6. Sustainable Harnessing and Advancement of Nuclear Energy for Transforming India (SHANTI) Act, 2025: Replaced the 2010 Act, capped operator and government liability and exempted suppliers.
    7. Draft rules under the Act: Released by the Department of Atomic Energy for public comment, with the comment window closing on 4 September 2026.
    8. Environment (Protection) Act, 1986: Provides the environmental clearance and pollution control regime applicable to nuclear installations.
    9. Disaster Management Act, 2005: Places nuclear and radiological emergencies within the national disaster response framework.
    10. Convention on Supplementary Compensation for Nuclear Damage: Ratified by India in 2016, providing a tier of international funds after national compensation is exhausted.

    Back2Basics: Atomic Energy Regulatory Board (AERB)

    1. Governing Act: Constituted under the powers conferred by the Atomic Energy Act, 1962.
    2. Year established: 1983, by an executive order of the Government of India.
    3. Headquarters: Mumbai.
    4. Reporting line: Reports to the Atomic Energy Commission, and its Chairperson is appointed by the government.
    5. Jurisdiction: Covers nuclear power plants, research reactors, fuel cycle facilities, and every industrial and medical user of radiation sources in India.
    6. Mandate: Frames safety codes and standards, grants consent at each stage from siting to decommissioning, conducts regulatory inspections and enforces compliance.
    7. Enforcement powers: Can suspend or cancel authorisation and direct shutdown of a facility that violates safety conditions.

    Government Initiatives in the Nuclear Sector

    1. Nuclear Energy Mission for Viksit Bharat: Announced with an outlay of about Rs 20,000 crore for research and development of small modular reactors, targeting five indigenously designed reactors by 2033.
    2. Bharat Small Reactors: Compact reactors planned for captive use by energy intensive industry, to be set up in partnership with private players on their own land.
    3. Three Stage Nuclear Programme: The long term plan to use natural uranium, then plutonium in fast breeder reactors, and finally the domestic thorium reserve.
    4. Prototype Fast Breeder Reactor at Kalpakkam: The stage two demonstration project built by Bharatiya Nabhikiya Vidyut Nigam Limited.
    5. Joint venture route: ASHVINI, the joint venture of NPCIL and NTPC, was created to add nuclear capacity using public sector balance sheets.
    6. Indian Nuclear Insurance Pool: Formed by general insurers with GIC Re to provide insurance cover for operator and supplier liability.
    7. Fleet mode construction: Bulk approval of ten pressurised heavy water reactors of 700 MW each to build in series and cut per unit cost.

    Key Facts about Nuclear Energy in India

    1. First reactor: Apsara, commissioned in 1956 at Trombay, was Asia’s first research reactor.
    2. First power station: The Tarapur Atomic Power Station in Maharashtra, commissioned in 1969, is India’s oldest nuclear power plant.
    3. Largest station: Kudankulam in Tamil Nadu, built with Russian cooperation, is India’s largest nuclear power station by capacity.
    4. Indigenous workhorse: The 700 MW pressurised heavy water reactor, first at Kakrapar in Gujarat, is the indigenous standard design.
    5. Fuel type: Indian pressurised heavy water reactors use natural uranium as fuel and heavy water as moderator and coolant.
    6. Safeguards status: India signed a safeguards agreement with the International Atomic Energy Agency in 2009 after the civil nuclear cooperation waiver.
    7. Sector regulator: AERB, with the Directorate of Radiation Safety in some States handling medical radiation sources.

    Challenges in India’s Nuclear Energy Sector

    1. Slow capacity addition: Nuclear capacity has grown far slower than the targets repeatedly announced. e.g. installed capacity remains near 8 GW against a 2047 target of 100 GW.
    2. Fuel supply constraint: Domestic uranium is limited and of low grade, forcing dependence on imports. e.g. India imports uranium from Kazakhstan, Russia, Canada, France and Uzbekistan under bilateral agreements.
    3. Cost and time overruns: Long gestation and heavy civil works push project costs well beyond estimates. e.g. the Prototype Fast Breeder Reactor at Kalpakkam has slipped many years past its original commissioning date.
    4. Public opposition and land acquisition: Communities near proposed sites resist acquisition and fear radiation exposure. e.g. the Jaitapur project in Maharashtra has faced sustained local opposition since 2010.
    5. Waste management gap: No permanent disposal route exists for high level radioactive waste. e.g. spent fuel remains in interim storage rather than a deep geological repository.
    6. Regulatory independence: The safety regulator lacks statutory autonomy from the promoter of the sector. e.g. the Comptroller and Auditor General flagged the AERB’s dependence on the Department of Atomic Energy in a 2012 performance audit.
    7. Liability and vendor hesitation: Uncertainty over the liability regime has stalled foreign built projects. e.g. the Kovvada and Jaitapur projects agreed with United States and French vendors have not reached financial close.
    8. Human resource pipeline: Reactor operations need specialised health physicists and reactor engineers trained over years. e.g. a fleet mode expansion to 100 GW would require a multiple of the current trained workforce.

    Way Forward

    1. Enact a statutory nuclear regulator: Replace the executive constituted AERB with an authority created by its own Act, with fixed tenure and financial autonomy.
    2. Index and review the liability ceiling: Provide a statutory mechanism to revise the operator and government caps periodically, so the figures do not lose meaning with inflation.
    3. Preserve judicial remedy expressly: Clarify that the statutory ceiling governs the no fault claim route and does not oust the writ jurisdiction of constitutional courts.
    4. Deepen the insurance pool: Expand the Indian Nuclear Insurance Pool with reinsurance support so the capped liability is genuinely backed by paid capacity.
    5. Build a claims administration system: Establish standing medical registries and a claims commissioner framework in advance rather than after an accident.
    6. Commit to a waste repository programme: Begin site characterisation for a deep geological repository with a published timeline.
    7. Balance the energy mix: Pair nuclear expansion with the far faster and cheaper solar build out, treating nuclear as firm baseload rather than the primary route to the clean energy target.

    Matching Previous Year Question

    “[2018, GS3, 15 marks] With growing energy needs should India keep on expanding its nuclear energy programme? Discuss the facts and fears associated with nuclear energy.”

  • IT Ministry okays Rs 7,877-cr worth projects under ECMS

    Why in the News

    The Ministry of Electronics and Information Technology (MeitY) approved 31 more applications worth Rs 7,877 crore under the Electronics Components Manufacturing Scheme (ECMS), spread across 10 States. Cumulative approved investment under the scheme has crossed Rs 69,548 crore against an original target of Rs 59,350 crore, while committed employment stands at about 75,000 against a target of 91,600.

    What is the Electronics Components Manufacturing Scheme (ECMS)?

    1. About: ECMS is a MeitY scheme that gives incentives for manufacturing passive and active electronic components and sub assemblies inside India, rather than finished devices.
    2. Objective: It targets the segment of the electronics value chain that India still imports, such as capacitors, connectors, enclosures and display modules.
    3. Incentive structure: Approved projects receive turnover linked or capex linked incentives released only on achieving stated milestones.
    4. Original targets: The scheme set an investment target of Rs 59,350 crore, a production target of Rs 4.56 lakh crore and an employment target of 91,600 jobs.
    5. Approval cadence: Approvals are cleared in weekly or ten day cycles by an approval meeting, making it one of the fastest moving programmes of the Ministry.

    What is a turnover linked and a capex linked incentive?

    1. Turnover linked incentive: The payout is calculated as a percentage of incremental sales of the manufactured component, so support flows only after the plant actually produces and sells.
    2. Capex linked incentive: The payout is a share of eligible capital expenditure on plant and machinery, which lowers the upfront cost of building a component fabrication line.

    What are optical transceivers?

    1. About: An optical transceiver is a module that converts electrical signals into light pulses for transmission through optical fibre and converts them back at the receiving end.
    2. Why it matters: These modules are the core hardware of data centres and telecom backhaul networks, and India has so far imported almost all of its requirement.

    What are copper clad laminates?

    1. About: A copper clad laminate is a sheet of insulating resin material bonded with copper foil, and it is the base substrate on which every printed circuit board (PCB) is etched.
    2. Strategic value: Without domestic laminate capacity, a PCB plant remains an assembly operation dependent on imported substrate.

    What does the latest tranche of approvals contain?

    1. Volume: 31 applications involving proposed investment of Rs 7,877 crore were cleared, spread across 10 States.
    2. States covered: The tranche covers Himachal Pradesh, Uttarakhand, Uttar Pradesh, Haryana, Gujarat, Maharashtra, Goa, Karnataka, Tamil Nadu and Telangana, with Tamil Nadu taking the highest share at seven project approvals.
    3. Product range: Approvals span capital goods, camera and display modules, anode materials, enclosures, connectors, rare earth permanent magnets, optical transceivers, speakers and microphones, antennas, capacitors, coils and filters.
    4. First time products: Several parts have never been manufactured in India before, including electrolyte additives, hermetic terminals used for defence grade sealed assemblies, metalised films for capacitors and coils.
    5. An enhancement, not a new plant: Wipro Global’s copper clad laminates project accounted for a Rs 11,033 crore increase in project value, leaving about Rs 6,844 crore in approvals for genuinely fresh projects.
    6. Expected output: The tranche is expected to lead to production worth Rs 82,243 crore and close to 10,000 direct jobs.

    Where does the scheme stand against its own targets?

    1. Applications cleared: 106 applications have now been approved, covering around 30 product categories across 15 States.
    2. Investment overshoot: Cumulative proposed investment has reached Rs 69,548 crore, crossing the original target of Rs 59,350 crore.
    3. Production overshoot: Expected production from approved projects stands at Rs 5.34 lakh crore against an original target of Rs 4.56 lakh crore.
    4. Employment shortfall: Selected companies have committed close to 75,000 jobs against the scheme’s total target of 91,600.
    5. Official position on the gap: The IT Secretary stated that the employment target has not yet been reached and would be reached shortly.

    How complete is the claim of atmanirbharta in components?

    1. Fully covered segments: The IT Minister stated that approved projects make India atmanirbhar in planned supplies of enclosures for devices, relays, anode material and optical transceivers.
    2. Relays as an export line: Relays under the approved projects are already being exported, not merely substituting imports.
    3. Partial coverage in laminates: Laminates are being produced at 80 per cent of domestic demand.
    4. Partial coverage in connectors and cells: Domestic production stands at 75 per cent for connectors, 60 per cent for lithium ion cells and 55 per cent for transducers.
    5. Reading the numbers: Self reliance has been claimed for four narrow product lines, while the higher value and higher volume segments remain partially import dependent.

    Which approved projects have actually reached production?

    1. Operational plants: ATL’s lithium ion cell facilities at Rewari and Sohna and Tata Electronics’ enclosure plant at Hosur are currently operational.
    2. Nearing commissioning: Kaynes Circuits’ PCB plant near Chennai is expected to start operations within about a month.
    3. Two to three month horizon: Motherson’s enclosure facility at Kanchipuram and Wipro Global’s copper clad laminate plant are expected to start in the next two to three months.
    4. Four month horizon: Dixon’s display and camera module facility at Noida is expected to go live within four months.
    5. Approval versus asset: Most of the Rs 69,548 crore approved remains a commitment on paper, since only three plants are producing today.

    Why is investment running ahead of employment under ECMS?

    1. Capital intensity of components: Component fabrication uses automated deposition, winding and moulding lines, so output scales with machinery rather than with headcount.
    2. Incentive design: Both the turnover linked and the capex linked routes reward sales and capital spending, and neither makes disbursal conditional on the jobs actually created.
    3. Nature of the products: Enclosures, laminates and magnets are process industries, unlike mobile phone assembly under earlier programmes where manual assembly lines absorbed large workforces.
    4. Skill mismatch: Component plants need process technicians and materials engineers, and the shortage of that specific pool caps hiring even where capacity exists.
    5. The policy consequence: Import substitution in value terms is being achieved faster than the employment objective the scheme was also sold on.

    Challenges to the Electronics Components Manufacturing Scheme

    1. Dependence on imported inputs one layer down: Localising a component often shifts import dependence to its raw material rather than removing it. e.g. domestic lithium ion cell plants at Rewari still import cathode active material and separators.
    2. Rare earth supply concentration: Permanent magnet manufacturing approved under the scheme depends on rare earth feedstock controlled by a single supplier country. e.g. China’s April 2025 export controls on seven rare earth elements disrupted Indian and global automotive magnet supply.
    3. Slow conversion of approvals into plants: A large approval pipeline can stall at land, power and clearance stages. e.g. only three ECMS plants are operational while 106 applications stand approved.
    4. Thin margins in passive components: Capacitors, connectors and coils are low margin commodity items where scale determines survival. e.g. global capacitor pricing is set by high volume producers in Japan, South Korea and Taiwan, leaving little room for a new entrant.
    5. Design capability gap: Manufacturing incentives do not create intellectual property, so the high value design layer stays offshore. e.g. India assembles and now fabricates components, while chip design ownership for most consumer devices sits with firms in the United States, South Korea and Taiwan.
    6. Employment target risk: A shortfall in the jobs commitment weakens the political case for continuing the outlay. e.g. committed jobs stand at about 75,000 against the scheme target of 91,600.
    7. Testing and certification infrastructure: Components need qualification testing before global original equipment manufacturers accept them. e.g. automotive grade and defence grade parts such as hermetic terminals need long reliability qualification cycles that Indian labs are only now building.

    Conclusion

    ECMS has crossed its investment and production targets well ahead of schedule, while its employment target remains unmet. The scheme has proved that capital will come to component manufacturing when the incentive is priced correctly, and that value addition in this segment is capital intensive rather than labour intensive. The next test is conversion, since only three approved plants are producing today against 106 approved applications. The Ministry expects further approvals in weekly cycles and states that the employment target will be reached shortly.

    Electronics Manufacturing in India

    1. About: Electronics manufacturing covers the making of finished devices, sub assemblies such as display and camera modules, and discrete components such as capacitors, connectors, resistors and printed circuit boards.
    2. Scale: India’s electronics production has crossed Rs 11 lakh crore in recent years, with mobile phones forming the single largest segment.
    3. Global standing: India is the second largest mobile phone manufacturer in the world by volume, after China.
    4. Structural weakness: Value addition remains concentrated in final assembly, with components and sub assemblies contributing the bulk of the import bill.
    5. Trade position: Electronic goods have become one of India’s fastest growing export categories, driven mainly by smartphone exports.
    6. Employment profile: The sector is a large formal sector employer for semi skilled workers, with contract electronics manufacturers operating the largest plants.

    Constitutional and Statutory Framework Governing Electronics Manufacturing

    1. Article 246 with Entry 52 of the Union List: Empowers Parliament to regulate industries declared by law to be expedient in the public interest, the constitutional basis for central industrial policy.
    2. Entry 41 of the Union List: Covers trade and commerce with foreign countries and import and export across customs frontiers, the basis for tariff action on components.
    3. Entry 33 of the Concurrent List: Covers trade and commerce in, and production and supply of, products of controlled industries.
    4. Article 265: Bars any levy of tax except by authority of law, the basis for customs duty structures used in the phased manufacturing approach.
    5. Article 282: Permits the Union to make grants for any public purpose, the source of authority for incentive disbursals under a scheme.

    Laws and Rules Governing Electronics Manufacturing

    1. Information Technology Act, 2000: Provides the legal framework for electronic records and cyber security, and is the parent statute for rules governing electronic hardware security.
    2. Information Technology (Information Security Practices and Procedures for Protected System) Rules, 2018: Set security obligations for designated protected systems.
    3. Bureau of Indian Standards Act, 2016: Enables compulsory registration of electronic products and mandatory conformity to Indian standards before sale.
    4. Electronics and Information Technology Goods (Requirements for Compulsory Registration) Order: Brings notified electronic goods under mandatory BIS registration.
    5. Customs Act, 1962 with the Customs Tariff Act, 1975: Provide the duty structure used to raise the cost of imported finished goods relative to components.
    6. Environment (Protection) Act, 1986: Parent statute for the rules governing hazardous inputs and end of life electronics.
    7. Electronic Waste (Management) Rules, 2022: Impose extended producer responsibility targets on producers of electrical and electronic equipment.
    8. Legal Metrology Act, 2009: Governs declarations on packaged electronic goods, including country of origin.
    9. Foreign Trade (Development and Regulation) Act, 1992: Provides the power to restrict or license imports of specified electronic items.

    Back2Basics: Production Linked Incentive (PLI) Scheme

    1. Administering authority: Individual PLI schemes are run by their respective line ministries, with overall coordination by NITI Aayog and the Department for Promotion of Industry and Internal Trade.
    2. Launch year: The first PLI scheme, for Large Scale Electronics Manufacturing, was announced in 2020, and the framework was later extended to 14 sectors.
    3. Aim: To raise domestic manufacturing output and exports by paying an incentive on incremental sales of goods manufactured in India over a base year.
    4. Sectors covered: Sectors include mobile phones and electronic components, pharmaceuticals, automobiles and auto components, telecom, food processing, white goods, textiles, drones, advanced chemistry cell batteries and specialty steel.
    5. Design feature: Support is outcome linked, since disbursal follows achievement of stated investment and incremental sales thresholds rather than mere project approval.
    6. Targeted beneficiaries: Large anchor manufacturers and their supplier ecosystems, including contract manufacturers and component vendors.

    Government Initiatives for Electronics Manufacturing

    1. Semicon India Programme: Provides fiscal support for semiconductor fabrication units, display fabs, assembly and testing units and compound semiconductor facilities.
    2. PLI for Large Scale Electronics Manufacturing: Incentivises incremental sales of mobile phones and specified electronic components by large manufacturers.
    3. Scheme for Promotion of Manufacturing of Electronic Components and Semiconductors (SPECS): Offered capital expenditure support for the electronic component ecosystem.
    4. Modified Electronics Manufacturing Clusters Scheme (EMC 2.0): Funds common infrastructure and ready built factory sheds for electronics clusters.
    5. National Policy on Electronics, 2019: Sets the policy goal of positioning India as a global hub for electronics system design and manufacturing.
    6. Phased Manufacturing Programme: Uses a calibrated duty structure over time to move production from imported finished units to domestically made sub assemblies and components.
    7. Design Linked Incentive Scheme: Supports domestic companies in integrated circuit and chipset design, targeting the intellectual property layer.

    Key Facts about Electronics Manufacturing in India

    1. Nodal ministry: Ministry of Electronics and Information Technology.
    2. Second largest producer: India is the second largest producer of mobile phones globally by volume.
    3. Component share: Components and sub assemblies account for the largest share of the electronics import bill.
    4. First semiconductor unit: India’s first commercial semiconductor assembly and packaging units were approved under the Semicon India Programme in Gujarat and Assam.
    5. Cluster geography: Tamil Nadu, Uttar Pradesh, Karnataka and Andhra Pradesh host the largest concentration of electronics manufacturing capacity.
    6. Export status: Electronic goods have entered India’s top three export categories by value.

    Challenges in India’s Electronics Manufacturing Sector

    1. Component import dependence: Domestic value addition stays low when only final assembly happens in India. e.g. a smartphone assembled in India still uses an imported display, camera module and battery cell.
    2. Scale disadvantage against incumbents: Global component makers operate at volumes that Indian entrants cannot match on cost. e.g. Vietnam attracted large display and camera module plants before India entered the segment.
    3. Logistics and clearance cost: Electronics inputs move by air on tight cycles and are sensitive to port and customs delay. e.g. component consignments cleared through Chennai and Bengaluru air cargo face longer dwell time than Shenzhen or Ho Chi Minh City.
    4. Power quality and reliability: Component fabrication needs uninterrupted, clean power, and outages destroy an entire process batch. e.g. semiconductor and laminate lines require captive backup because a momentary voltage dip scraps work in progress.
    5. Shortage of process engineering talent: India trains software engineers in far greater numbers than materials and process engineers. e.g. semiconductor fabrication units in Gujarat have had to plan overseas training programmes for their first operating cohorts.
    6. Geopolitical supply concentration: Critical inputs and processing capacity sit in a small number of countries. e.g. China processes the overwhelming majority of the world’s rare earths and battery grade graphite.
    7. Incentive dependence: Competitiveness that rests on fiscal support weakens when the incentive window closes. e.g. several PLI beneficiaries in other sectors missed year one thresholds and forfeited that year’s incentive.

    Way Forward

    1. Move incentives down the value chain: Extend support to materials such as electronic grade chemicals, substrates and battery grade active materials, so localisation does not stop at the assembled component.
    2. Link disbursal partly to employment: Introduce a jobs component in the incentive formula so the employment target does not remain an aspiration detached from payout.
    3. Build testing and certification capacity: Fund accredited reliability and qualification laboratories so Indian components clear automotive, defence and telecom grade approvals domestically.
    4. Secure critical inputs through overseas assets: Use long term offtake agreements and equity in rare earth and graphite assets abroad to insulate magnet and cell manufacturing.
    5. Create a components skilling pipeline: Run dedicated process technician programmes with industrial training institutes located inside electronics clusters.
    6. Compress project timelines: Provide single window land, power and environmental clearance for approved ECMS projects to convert approvals into operating plants faster.
    7. Support design ownership: Expand the Design Linked Incentive Scheme so domestic firms hold intellectual property rather than only manufacturing capacity.

    Matching Previous Year Question

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

  • Meghalaya Still Has No Mine Closure Policy, 10 Years After Rat-Hole Mining Ban

    Why in the News

    The 39th interim report of the Justice B.P. Katakey Committee has flagged Meghalaya’s failure to adopt a comprehensive policy for closing and fencing abandoned rat-hole coal mines. The issue has shifted from merely stopping illegal extraction to managing the dangerous legacy of thousands of abandoned mine pits.

    What is Rat-Hole Mining?

    • A manual coal mining method involving a vertical pit and narrow horizontal tunnels.
    • Tunnels may extend 150 to 300 metres underground.
    • Side cutting: Tunnels follow exposed coal seams along hill slopes.
    • Box cutting: A vertical pit is dug first, followed by horizontal tunnels.
    • Meghalaya’s thin coal seams made this method economically attractive.

    Why is Meghalaya’s Mine Closure Issue Important?

    • The NGT banned rat-hole coal mining in April 2014.
    • The Supreme Court in 2019 upheld the prohibition and held that the MMDR Act, 1957 applies to Meghalaya.
    • Thousands of abandoned pits remain uncovered and unfenced, creating risks to people and livestock.
    • East Jaintia Hills alone is reported to have around 60,000 mines across 360 villages.
    • Sulphur-rich coal contributes to acid mine drainage, affecting rivers such as the Lukha and Myntdu.

    What is Mine Closure?

    Mine closure means planned decommissioning of a mine after extraction, including:

    • Sealing and fencing mine openings
    • Backfilling and slope stabilisation
    • Land restoration
    • Water treatment
    • Revegetation
    • Post-closure monitoring

    Indian mining regulations provide for both progressive closure during the life of a mine and final closure after mining ends. Financial assurance is maintained through an escrow mechanism for eligible mines.

    Why is Meghalaya Different?

    Meghalaya comes under the Sixth Schedule. Land and mineral resources are substantially associated with private and community ownership, creating a distinct governance framework compared with conventional state-leased mining.

    Constitutional provisions to remember

    • Article 244(2): Administration of tribal areas under the Sixth Schedule.
    • Entry 23, State List: Regulation of mines and mineral development, subject to Entry 54.
    • Entry 54, Union List: Union regulation of mines and mineral development when Parliament declares it in public interest.
    • Article 21: Right to life includes the right to a clean and healthy environment.
    • Article 48A: State duty to protect the environment.
    • Article 51A(g): Fundamental duty to protect the environment.

    Important Laws and Institutions

    • MMDR Act, 1957: Parent legislation governing mineral concessions, leases and mining regulation.
    • Mineral Conservation and Development Rules, 2017: Provide for progressive and final mine closure plans and financial assurance.
    • Mines Act, 1952: Deals with health, safety and working conditions in mines. The Directorate General of Mines Safety (DGMS) is the safety regulator.
    • National Green Tribunal Act, 2010: Created the National Green Tribunal (NGT), a specialised statutory environmental tribunal. Its 2014 order banned rat-hole mining in Meghalaya.
    • District Mineral Foundation: A non-profit trust in mining districts, funded through a levy on mining lessees, for the benefit of communities affected by mining.

    “[2025, GS3, 15 marks] Mineral resources are fundamental to the country economy and these are exploited by mining. Why is mining considered an environmental hazard? Explain the remedial measures required to reduce the environmental hazard due to mining.”

  • Odisha’s Coastline Is Shrinking: 28% Under Erosion Threat

    Why in the News

    A reply tabled in the Rajya Sabha by the Union Minister for Ports, Shipping and Waterways stated that about 28.3 percent of Odisha’s 564 km coastline is undergoing erosion. The figure sits alongside a second one that complicates it, since 54.1 percent of the same coastline is gaining land, which means the state faces not a uniformly retreating coast but a redistribution of sand that destroys some villages while building others.

    What is a geotextile tube embankment?

    1. About: A geotextile tube is a large cylindrical container fabricated from high strength, porous synthetic fabric and filled with a sand slurry to form an artificial coastal structure.
    2. Material: The fabric is a woven synthetic such as polypropylene, which retains the sand fill while allowing water to drain out through the pores.
    3. Function: Rows of such tubes are laid to form a sea wall that absorbs the impact of incoming waves at the shoreline. The energy loss at the structure reduces the scouring of the beach behind it.
    4. Deployment in Odisha: One such embankment is being developed at Pentha village in Kendrapara district, one of the worst affected stretches of the Odisha coast.
    5. Why it is preferred: The tubes are filled with locally dredged sand rather than imported rock armour, which lowers cost and allows the structure to settle with the seabed.

    What is shoreline change?

    1. About: Shoreline change is the dynamic process in which the boundary between land and water shifts over time.
    2. Drivers: The shift is produced by natural forces such as waves, tides and storms, and by human activity such as port construction and sand mining.

    What is coastal accretion?

    1. About: Accretion is the seaward growth of the shoreline when sediment carried by waves and currents is deposited faster than it is removed.
    2. Why it matters: A coastline can record accretion in aggregate while individual stretches erode, because the same longshore current that starves one beach feeds another.

    What is the National Centre for Coastal Research?

    1. About: The National Centre for Coastal Research (NCCR) is the national institution that monitors long term shoreline change across the Indian coastline.
    2. The Odisha study: It carried out a comprehensive assessment and mapping of shoreline change analysis along the Odisha coast from 1990 to 2022, and identified several stretches in the affected districts as vulnerable stretches.

    How does erosion vary across Odisha’s six coastal districts?

    1. The state level split: Of the 564 km coastline, 28.3 percent is eroding, 17.6 percent is stable with no significant shoreline change, and 54.1 percent is undergoing accretion.
    2. Jagatsinghpur: The most erosion prone district, with 47.6 percent of its 55.8 km coastline facing erosion.
    3. Ganjam: Erosion affects 45.7 percent of its 60.18 km shoreline.
    4. Kendrapara: Erosion affects 45 percent of its 149.36 km shoreline, the longest coastline among the six districts.
    5. Balasore: Erosion affects 23.8 percent of its 88 km coastline.
    6. Puri: Erosion affects 10.2 percent of its 138 km coastline.
    7. Bhadrak: Erosion affects 4.6 percent of its 72 km coastline, the lowest share among the six.

    What drives shoreline change along the Odisha coast?

    1. Natural marine forces: Waves, tides and storms continuously redistribute sediment along the coast.
    2. Coastal structures: A 2021 study on shoreline change along the Odisha coast, published in the Journal of Earth System Science, records that sea walls, breakwaters and jetties modify both the shoreline and the beach morphology.
    3. Ports and harbours: The effect is more significant where hard structures are raised for port and harbour development, which interrupts the longshore movement of sand.
    4. Extreme events: Tsunamis and cyclonic storms produce drastic shoreline changes, and Odisha is the most cyclone prone state along the Indian coast.
    5. Human extraction and construction: Sand mining and unplanned infrastructure development along the coast remove or block sediment supply.
    6. Sea level rise: Global sea level rise driven by climate change adds a permanent upward baseline to every storm surge and tidal cycle.

    What has coastal erosion already cost Odisha’s communities?

    1. Villages lost in Kendrapara: Rising sea level and coastal erosion have already submerged 16 villages in Kendrapara district, displacing several hundred people.
    2. Loss beyond land: The affected villagers lost not only their land but also their livelihoods, since fishing and cultivation both depend on proximity to the lost shoreline.
    3. Podampeta in Ganjam: A village of nearly 500 households has been deserted as the sea swept inland.
    4. Ramayapatna and other settlements: Several other coastal villages in Ganjam are witnessing the sea advance towards the landmass, rendering residents homeless.

    What measures has Odisha taken to protect its coast?

    1. Geotextile tube embankment: A geotextile tube sea wall is being developed at Pentha in Kendrapara to absorb wave impact on one of the most exposed stretches.
    2. Sea wall cum service roads: These are being developed across parts of Balasore district and at Ramayapatna beach in Ganjam.
    3. How the dual structure works: The outer tier acts as a defensive barrier against strong tidal waves and erosion. The inner tier operates as a service road for local transport and public access.
    4. Planned relocation: The state has developed a resettlement colony, described as India’s first climate resettlement colony, to accommodate people displaced by coastal erosion.
    5. Vulnerability mapping: The NCCR has identified specific vulnerable stretches within the six districts on the basis of long term shoreline analysis, which allows protection works to be prioritised.

    “[2022, GS3, 15 marks] Explain the causes and effects of coastal erosion in India. What are the available coastal management techniques for combating the hazard?”

  • Claude AI Gets Global Watermarks to Prove What’s AI-Generated

    Why in the News

    Content generated by Claude will carry a machine readable marking, after Anthropic signed the transparency Code of Practice under Article 50(2) of the European Union Artificial Intelligence Act. The change extends watermarking from images and video to text itself, where the mark travels with copied text and detection is not reliable. The obligation arises from one regional law but the rollout is global.

    What is Anthropic’s new watermarking system?

    1. Trigger: The policy was introduced after Anthropic signed the EU AI Act’s Article 50(2) Code of Practice on Transparency of AI Generated Content.
    2. Two forms of marking: Watermarks are embedded in text content produced by Claude. Signed provenance metadata is attached to supported files in formats such as .svg, .png and .jpg.
    3. Applied at the model level: The text watermark is invisible to users. Anthropic has confirmed that it will not affect Claude’s response.
    4. Persistence: The watermark is part of the text, so it travels with the text when it is copied and pasted elsewhere, and may persist through some editing.
    5. Coverage of surfaces: Output from the Claude Platform (API), Claude, Claude Code, Claude Cowork and Claude Tag is set to carry the embedded watermarks. The same applies when Claude models are accessed through AWS, Google Cloud and Microsoft Foundry.
    6. Detection still incomplete: Anthropic is still working on letting external parties detect the markings, and the rollout announcement did not reveal full technical details.

    What is Article 50(2) of the European Union Artificial Intelligence Act?

    1. Substance: It requires providers of AI systems that generate synthetic text, audio, image or video to mark their outputs in a machine readable format and make them detectable as artificially generated.
    2. Code of Practice route: Signing the associated Code of Practice is the voluntary compliance instrument through which providers demonstrate that they meet the transparency duty.

    What is signed provenance metadata?

    1. About: It is a cryptographically signed record attached to a file that states the file’s origin and the tool that produced it, so a later viewer can verify where it came from.
    2. Weak point: The record is stripped when the file format is converted, which breaks the chain of verification.

    Why does watermarking text change the stakes for ordinary users?

    1. Everyday written work is now in scope: Professional emails, personal messages, school assignments and workplace deliverables that could once pass as human made may carry an AI watermark.
    2. Marginal AI involvement still marks the file: The mark can attach even where Claude’s involvement was close to negligible.
    3. Second hand exposure: A human made file that is proofread, translated, summarised or converted by someone else using Claude can still carry a mark in the final output.
    4. Non users are exposed: A person who never uses the tool can end up holding marked text produced by a collaborator, which has put non users on edge alongside users.
    5. Workflow effect: Millions of customers are reconsidering their use of AI tools and debating at what point human content becomes AI content.

    Why does the mark not settle the question of authorship?

    1. Both error types admitted: Detecting a Claude mark does not confirm that the work was created by AI. The absence of a mark does not confirm that the work was fully human made.
    2. Short text: Short text lengths can throw off the result, since a watermark needs sufficient text to be carried.
    3. Post processing edits: Content changes made after Claude processed the text can degrade the signal.
    4. Format conversion: Metadata is stripped when a file format is converted, removing the provenance record for images and documents.
    5. Unsupported surfaces: Use of a Claude offering that does not yet support AI marking leaves the output unmarked.

    What new risks has the announcement itself created?

    1. A removal market: Multiple dubious websites offering watermark “removal” or “clean up” services came online within days of the announcement.
    2. A repeat of the detector cycle: The earlier rise of AI text detectors was followed by AI text humanisers built to deceive those same detectors.
    3. Reputational damage already recorded: Detector outputs have been involved in cases leading to cancelled book deals and social media trolling for authors and bloggers.
    4. Tool quality: AI text detection tools remain experimental, fallible and prone to errors, yet are treated as evidence.
    5. Credential risk: Users now face the prospect that their own tool damages their professional credentials.

    Why do watermarks work for images but not yet for text?

    1. Images and video are the solved case: Watermarks give regulators, fact checkers and journalists a reliable way to verify the origin of an image or video and trace it to a specific provider.
    2. Text is not: Accurately detecting AI generated text remains uncharted territory, so the same verification logic does not transfer.
    3. Circulation outruns labelling: AI generated content is circulated thousands of times on social media unchecked, as content moderation rules have been loosened across the Meta family of apps and X.
    4. Users do not look: The average internet user scrolling on a phone misses even visible AI watermarks, and an invisible mark is weaker still.
    5. Regulator dependence: A tangible reduction in misinformation and deepfakes requires technology providers and regulators to act together, not a marking standard alone.

    Challenges to AI content watermarking

    1. Adversarial removal: Paraphrasing, translation and dedicated stripping tools defeat statistical text watermarks. e.g. the removal and clean up websites that appeared within days of the Anthropic announcement.
    2. No interoperable standard across providers: A mark from one model tells nothing about content from another, so an unmarked file proves nothing. e.g. the Coalition for Content Provenance and Authenticity (C2PA) standard is adopted by some providers and open source models remain outside it.
    3. False accusation of students and writers: Detector outputs are used as disciplinary evidence despite admitted error rates. e.g. OpenAI withdrew its own AI Text Classifier in July 2023 citing low accuracy.
    4. Open weight models cannot be compelled: A provider level obligation does not reach models that run on a user’s own machine. e.g. freely downloadable open weight models can generate unmarked text offline.
    5. Jurisdictional mismatch: A duty created by one region’s law governs the provider, not the harm suffered elsewhere. e.g. an Indian user injured by unmarked synthetic content depends on a European regulator’s enforcement.
    6. Labelling does not stop the harm: A deepfake remains persuasive even when correctly labelled, because the first viewing shapes belief. e.g. the November 2023 deepfake video of an Indian film actor circulated widely before any advisory was issued.

    Conclusion

    A transparency duty designed for synthetic images and video has been extended to text, where detection is unreliable and the mark attaches to work that may be substantially human. The result is a signal that users cannot see, verify or contest, carrying real reputational consequences. Labelling will reduce misinformation only if detection tools become accurate and platforms act on the marks, neither of which is settled.

    Artificial Intelligence Governance in India

    1. About: AI governance covers the rules on how AI systems are built, trained, deployed and labelled, and who is liable when they cause harm.
    2. No dedicated statute: India regulates AI through existing law and subordinate rules rather than a single AI Act, unlike the European Union’s risk tiered model.
    3. Scale: India has one of the largest AI talent pools and developer bases globally and is among the largest markets for consumer AI applications.
    4. Institutional anchor: The Ministry of Electronics and Information Technology (MeitY) is the nodal ministry, working through the IndiaAI Mission and advisories to intermediaries.
    5. Global positioning: India hosted the AI Impact Summit in New Delhi in February 2026, the successor to the AI Safety Summit series, and is a founding member of the Global Partnership on Artificial Intelligence (GPAI).

    Laws and Rules Governing AI Generated Content in India

    1. Information Technology Act, 2000: The parent statute for electronic records, intermediary liability and cyber offences.
    2. Section 79 grants intermediaries safe harbour subject to due diligence, which is the hook for content labelling duties.
    3. Section 66D penalises cheating by personation using a computer resource, used against deepfake impersonation.
    4. Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021: Impose due diligence, grievance redress and takedown timelines on intermediaries and significant social media intermediaries.
    5. Amendment Rules on synthetically generated information, 2026: Require platforms to label synthetically generated information prominently and to obtain user declarations on whether uploaded content is synthetic.
    6. Digital Personal Data Protection Act, 2023: Governs processing of personal data, including data used to train and prompt AI models, with consent and purpose limitation duties.
    7. Bharatiya Nyaya Sanhita, 2023: Covers forgery, defamation and obscenity offences that synthetic media can constitute.
    8. Copyright Act, 1957: Governs authorship and infringement questions raised by training data and machine generated output.

    Back2Basics: European Union Artificial Intelligence Act

    1. What it is: The world’s first comprehensive horizontal law on artificial intelligence, adopted by the European Union.
    2. Entry into force: 1 August 2024, with obligations applying in phases.
    3. Approach: A risk based classification into unacceptable risk, high risk, limited risk and minimal risk, with duties scaled to the tier.
    4. Prohibited practices: Social scoring by public authorities, untargeted scraping of facial images and manipulative techniques exploiting vulnerabilities.
    5. Article 50: Sets transparency obligations for AI systems that interact with people or generate synthetic content, including machine readable marking of outputs.
    6. Extraterritorial reach: It binds providers placing systems on the EU market irrespective of where they are established, which is why compliance measures are rolled out globally.

    Government Initiatives

    1. IndiaAI Mission: Approved in March 2024 with an outlay of about Rs 10,371.92 crore, built on seven pillars covering compute capacity, innovation centre, datasets platform, application development, future skills, startup financing and safe and trusted AI.
    2. Safe and Trusted AI pillar: Funds work on deepfake detection, algorithmic bias audits and AI governance frameworks, and underpins the proposed AI Safety Institute.
    3. National Strategy for Artificial Intelligence, 2018: NITI Aayog’s framework identifying healthcare, agriculture, education, smart mobility and smart cities as focus sectors under the AI for All approach.
    4. Bhashini: The National Language Translation Mission building open speech and translation datasets across Indian languages.
    5. Responsible AI for Youth: A skilling programme for government school students to build AI literacy at scale.
    6. Digital India Act consultations: Proposed successor to the Information Technology Act, 2000, intended to address emerging technologies including AI and deepfakes.

    Key Facts about AI Content Provenance

    1. C2PA: The Coalition for Content Provenance and Authenticity is the main cross industry technical standard for attaching tamper evident provenance to media files.
    2. SynthID: Google’s watermarking system for AI generated images, audio, video and text.
    3. Deepfake: Synthetic media in which a person’s likeness or voice is replaced or generated, typically using generative adversarial networks or diffusion models.
    4. Turing Test: The 1950 benchmark for machine indistinguishability from a human, now inverted by the problem of detecting machine authorship.
    5. GPAI: The Global Partnership on Artificial Intelligence was launched in June 2020 with India as a founding member, and India held its chair in 2024.

    Challenges in AI Governance in India

    1. No binding statutory framework: India governs AI through advisories and subordinate rules that carry weaker enforceability than a statute. e.g. the March 2024 MeitY advisory on under tested AI models was revised within weeks after industry objections.
    2. Compute dependence: Frontier model training depends on imported accelerators and foreign cloud capacity. e.g. the IndiaAI Mission empanelled over 18,000 graphics processing units in its first round in January 2025 to close this gap.
    3. Data protection enforcement capacity: The Data Protection Board must supervise a very large volume of processors with limited staff. e.g. the Digital Personal Data Protection Act, 2023 rules were notified only in November 2025, years after enactment.
    4. Copyright and training data disputes: Ownership of material used to train models is unresolved in Indian law. e.g. the news agency ANI’s suit against OpenAI in the Delhi High Court filed in November 2024.
    5. Election integrity: Synthetic audio and video can be deployed at scale during compressed campaign periods. e.g. AI generated voice clips of political leaders circulated during the 2024 Lok Sabha campaign.
    6. Algorithmic bias in public service delivery: Models trained on unrepresentative data misclassify beneficiaries. e.g. facial authentication failures for manual workers under Aadhaar based attendance systems.
    7. Skill and audit gap: India lacks a trained cadre of independent AI auditors to test high risk deployments. e.g. no statutory conformity assessment body exists comparable to the notified bodies under the EU AI Act.

    Way Forward

    1. Enact a risk tiered statute: Replace advisory based governance with a law that classifies AI uses by risk and fixes provider and deployer liability.
    2. Mandate interoperable provenance: Require adherence to a common content credential standard so a mark from one provider is readable by all platforms.
    3. Build public detection capacity: Fund an independent testing facility to benchmark deepfake and text detectors and publish accuracy rates.
    4. Protect against false accusation: Bar educational institutions and employers from acting on detector output alone, and require corroborating evidence.
    5. Expand sovereign compute: Scale domestic graphics processing unit capacity and public datasets so Indian models are not fully dependent on foreign infrastructure.
    6. Strengthen platform duties: Require prominent labelling at the point of display, not only in file metadata, and fix takedown timelines for unlabelled synthetic media.
    7. Invest in digital literacy: Run sustained public campaigns so users check provenance labels rather than react to content at first sight.

    “[2023, GS3, 10 marks] Introduce the concept of Artificial Intelligence (AI). How does AI help clinical diagnosis? Do you perceive any threat to privacy of the individual in the use of AI in healthcare?”

  • 25,000 Ex-Agniveers to Enter CAPFs Under 50% Quota

    Why in the News

    The armed forces will provide lists of eligible Agniveers to CAPFs for recruitment under the 50% reservation for former Agniveers. The first batch of around 25,000 Army Agniveers is expected to exit by December.

    What is Agnipath?

    • Agniveers are recruited for a fixed 4-year tenure, including training.
    • Up to 25% are retained in the regular armed forces based on merit and organisational requirements.
    • The remaining 75% exit with a Seva Nidhi package.
    • They do not receive pension or gratuity.

    What are CAPFs?

    • Central Armed Police Forces operate under the Ministry of Home Affairs, unlike the Armed Forces under the Ministry of Defence.
    • They include: BSF, CRPF, CISF, ITBP, SSB, Assam Rifles, and NSG

    CAPF Recruitment for Former Agniveers

    • 50% of Constable (GD) vacancies reserved for former Agniveers.
    • Eligible personnel will be identified through lists furnished by the Armed Forces.
    • Written examination, Physical Standard Test and Physical Efficiency Test are waived for former Agniveers.
    • Remaining 50% vacancies are filled through open recruitment.
    • Unfilled reserved vacancies are carried forward to open recruitment.

    Why is it Important?

    • The framework provides Agniveers a pathway to a longer career, as CAPF personnel can serve up to 60 years, compared with the shorter service period in the armed forces.

    Key Concerns

    • Eligibility depends on service-prepared lists, rather than direct application.
    • Criteria for inclusion in these lists are not clearly specified.
    • 50% of CAPF Constable GD vacancies are reserved.
    • Former Agniveers enter at the entry grade without seniority/pay protection for military service.
    • Different States have adopted different reservation and age-relaxation policies.

    Prelims Quick Facts

    • Agnipath tenure: 4 years
    • Retention: Up to 25%
    • Exit: Seva Nidhi, no pension/gratuity
    • CAPF quota: 50% of Constable GD vacancies
    • CAPFs: Under MHA
    • Armed Forces: Under Ministry of Defence
    • First Army Agniveer batch: About 25,000 expected to exit by December

    “[2023] With reference to Home Guards, consider the following statements:
    1. Home Guards are raised under the Home Guards Act and Rules of the Central Government.
    2. The role of the Home Guards is to serve as an auxiliary force to the police in maintenance of internal security.
    3. To prevent infiltration on the international border/coastal areas, the Border Wing Home Guards Battalions have been raised in some States.
    How many of the above statements are correct?
    (a) Only one
    (b) Only two
    (c) All three
    (d) None

  • 76% of India’s Honey Exports Depend on One Market

    Why in the News

    India is the 2nd largest honey producer and 3rd largest exporter by value. However, around 76% of exports go to the U.S., while India’s honey has a relatively low unit value of about $1,858/tonne.

    What is Apiculture?

    • Apiculture is the scientific rearing of honey bees in artificial hives for honey, hive products and pollination.
      • Apis mellifera: Italian bee
      • Apis cerana indica: Indian hive bee
      • Apis dorsata: Rock bee
      • Apis florea: Little bee
    • Products include honey, beeswax, propolis, royal jelly, pollen and bee venom.

    Key Facts

    • Production: ~76,000 tonnes (2013-14) → ~1.51 lakh tonnes (2025-26)
    • India: 2nd largest producer globally
    • ~70% production exported
    • U.S.: ~76% of India’s honey exports
    • Pollination: Bees contribute to 87 of 115 major food crops.
    • Domestic consumption: only ~37 g/person/year

    What is NMR Testing?

    • Nuclear Magnetic Resonance (NMR) testing analyses the molecular profile of honey to detect: Added sugar syrups, Botanical origin, and Geographical origin. It is increasingly important for accessing premium export markets.

    Major Challenges

    • Adulteration: Sugar syrup contamination
    • Limited NMR testing infrastructure
    • Pesticide and antibiotic residue concerns
    • Heavy dependence on the U.S. market
    • Low-value bulk exports
    • Weak traceability and branding
    • Competition from China and premium brands such as New Zealand’s Manuka honey

    Way Forward

    • Expand NMR-capable laboratories
    • Develop cluster-based processing and packaging
    • Promote GI-tagged honey
    • Strengthen Farmer Producer Organisations (FPOs)
    • Diversify into beeswax, propolis and royal jelly
    • Strengthen the National Beekeeping and Honey Mission
    • Promote domestic honey consumption
    • Protect bee health through scientific beekeeping and pesticide management

    “[2018, GS3, 15 marks] Assess the role of National Horticulture Mission (NHM) in boosting the production, productivity and income of horticulture farms. How far has it succeeded in increasing the income of farmers?”

    [2023] Which of the following organisms perform waggle dance for others of their kin to indicate the direction and the distance to a source of their food?

    [A] Butterflies

    [B] )Dragonflies

    [C] Honeybees

    [D] Wasps