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GS Paper: GS3

  • Is the rupee back to the ‘fragile five’ days of 2013

    Why in the News?

    The Indian rupee has sharply depreciated to around ₹95 per US dollar, marking a ~12% fall over the last year-far steeper than its usual 3-4% annual decline. This sudden slide has revived concerns of a return to the 2013 ‘Fragile Five’ crisis, when India faced twin deficits and currency instability. The current situation is alarming because India is once again witnessing pressure on both current account and capital flows. This is a combination that historically triggered macroeconomic vulnerability.

    What defines the ‘Fragile Five’ and why was India included in 2013?

    1. Fragile Five Concept: Morgan Stanley identified five vulnerable emerging economies, India, Indonesia, Brazil, South Africa, Turkey, due to macroeconomic weaknesses.
    2. High Current Account Deficit: India imported more goods/services than it exported, creating external imbalance.
    3. Capital Flow Dependence: Heavy reliance on foreign investments made India vulnerable to global shocks.
    4. Quantitative Easing Impact: US Federal Reserve tapering reduced global liquidity, triggering capital outflows.
    5. Currency Depreciation Data:
      1. Indonesian Rupiah: Down 15.4%
      2. Brazilian Real: Down 17.6%
      3. South African Rand: Down 14.4%
      4. Turkish Lira: Down 19.9%

    How severe is the current rupee depreciation compared to historical trends?

    1. Sharp Depreciation: Rupee fell ~12% in 12 months vs normal 3-4% annual decline.
    2. Exchange Rate Movement: ₹60 per USD (2013) to ₹85 (2025) to ₹95+ (2026).
    3. Comparison with Peers:
      1. Indian Rupee: Down 12.09%
      2. Turkish Lira: Down 17.17%
      3. Indonesian Rupiah: Down 4.33%
    4. Contrasting Trends:
      1. Brazilian Real: Up 12.7%
      2. South African Rand: Up 9.98%
    5. Inference: India is among the worst-performing emerging market currencies currently.

    What role do current and capital account deficits play in currency weakness?

    1. Current Account Deficit (CAD): Imports exceed exports; net dollar outflow.
    2. Capital Account Deficit: Foreign investments decline or reverse; reduced dollar inflow.
    3. Twin Deficit Problem: Simultaneous CAD + capital outflow intensifies currency pressure.
    4. 2013 Scenario: India faced deficits in both accounts and hence it led to severe depreciation.
    5. 2025 Situation: Data indicates deficits emerging again in both accounts.
    6. Impact Mechanism:
      1. More dollars leaving than entering; rupee depreciation.
      2. Forex reserves used to stabilize currency; sustainability concerns.

    How does 2026 differ from the 2013 crisis despite similarities?

    1. Gradual vs Sudden Fall:
      1. 2013: Sharp fall within months
      2. 2026: Gradual but sustained depreciation
    2. Backloaded Weakness: Current fall spread across years rather than concentrated.
    3. Global Context:
      1. Then: US taper tantrum
      2. Now: Persistent global interest rate tightening
    4. Structural Improvements:
      1. Better forex reserves now
      2. Stronger inflation targeting framework

    Why is India again facing pressure on both external accounts?

    1. Export Weakness: Sluggish global demand affecting Indian exports.
      1. Goods exports fell 0.81% in February 2026, largely driven by a 40% drop in petroleum shipments.
    2. Import Dependence: High imports of oil and capital goods.
      1. India’s merchandise imports surged by 24.1% year-on-year to $63.71 billion in February 2026. This was primarily driven by a massive spike in gold and silver inflows and increased electronics demand. This widened the merchandise trade deficit for the fiscal year to over $333 billion.
    3. Manufacturing Competitiveness: Competition from China, Vietnam, Bangladesh.
      1. Competitiveness with China is impacted as it is specifically leveraging its supply chain to restrict key materials like solar inputs and rare earths (Gallium, Germanium).
    4. Capital Flight: Foreign investors reducing exposure to Indian markets.
    5. Negative FDI Trends: Indians investing abroad more than foreigners investing in India.

    What are the macroeconomic implications of sustained rupee depreciation?

    1. Imported Inflation: Higher cost of oil and imports increases inflation.
      1. A 5% depreciation in the rupee is estimated to raise inflation by approximately 15-25 basis points on an annualized basis.
    2. External Debt Burden: Dollar-denominated debt becomes costlier.
      1. Indian companies and the government face a higher cost of servicing dollar-denominated debt (External Commercial Borrowings (ECBs)).
      2. As the rupee weakens, more currency is needed to repay the same amount of principal and interest in dollars, creating severe “balance sheet stress” and reducing funds available for investment.
    3. Forex Reserve Pressure: The Reserve Bank of India (RBI) actively intervenes in the foreign exchange market to manage volatility, selling billions of dollars to prevent a steeper decline. This sustained intervention reduces foreign exchange reserves, decreasing the country’s buffer against external shocks.
    4. Investment Sentiment: Currency instability deters foreign investors.
    5. Growth Impact: Higher import costs and inflation reduce consumption and investment.
    6. Wider Trade and Current Account Deficit (CAD): While a weak rupee usually helps exports, the high import dependence of Indian export-oriented sectors means that rising input costs often offset the competitive advantage. As a result, the trade deficit often widens rather than shrinks.

    Conclusion

    The rupee’s depreciation signals structural vulnerabilities in India’s external sector. While not identical to 2013, the re-emergence of twin deficits and capital flow volatility warrants policy vigilance. Strengthening exports, improving manufacturing competitiveness, and stabilizing capital flows remain critical.

    PYQ Relevance

    [UPSC 2018] How would the recent phenomena of protectionism and currency manipulations in world trade affect macroeconomic stability of India?

    Linkage: The PYQ links global protectionism and currency manipulation to capital flows, trade balance, and exchange rate volatility, which are core drivers of Current Account Deficit and rupee depreciation. The article explains how external shocks + domestic deficits can push India towards ‘Fragile Five’-like macro instability, exactly reflected in the current rupee slide.

  • Nilgiri Class Frigate Mahendragiri 

    Why in the News

    The Indian Navy has inducted INS Mahendragiri, the sixth ship of the Nilgiri class (Project 17A), strengthening India’s naval combat capability and indigenous defence manufacturing.

    Key Facts

    • Name: INS Mahendragiri
    • Class: Nilgiri class stealth frigate
    • Project: Project 17A
    • Built by: Mazagon Dock Shipbuilders Limited
    • Location: Mumbai
    • Designed by: Warship Design Bureau (India)

    Features of Project 17A Frigates

    • Advanced stealth technology
    • Multi mission capability:
      • Anti surface warfare
      • Anti air warfare
      • Anti submarine warfare
    • Equipped with:
      • Advanced sensors
      • Modern weapons systems

    Propulsion System

    • CODOG (Combined Diesel or Gas)
    • Allows:
      • Efficient cruising (diesel)
      • High speed operations (gas turbine)

    Indigenous Capability

    • Around 75 percent indigenous content
    • Involvement of: 200 plus MSMEs
    • Employment generated:
      • 4000 direct jobs
      • 10000 indirect jobs
    [2025] With reference to India’s defence, consider the following pairs: 
    Aircraft type : Description 
    1 Dornier-228 : Maritime patrol aircraft 
    2 IL-76 : Supersonic combat aircraft 
    3 C-17 Globemaster III : Military transport aircraft 
    How many of the pairs given above are correctly matched? 
    (a) Only one (b) Only two (c) All the three (d) None

  • India’s Power Demand, Solar Push and Coal Use amid El Niño 

    Why in the News

    India is preparing to meet rising summer power demand and possible El Niño conditions by relying on a mix of augmented solar capacity and coal based thermal power.

    Key Highlights

    • Peak power demand reached around 256 GW (April 2026)
    • Thermal power share: about 66.9 percent
    • Solar contribution increased to about 21.5 percent
    • Record addition of 44.61 GW solar capacity in 2025–26

    Role of Solar Energy

    • Rapid increase in installed capacity
    • Solar share in generation rising steadily:
      • Around 5.6 percent (2022)
      • Around 9 percent (2025)
    • Limitations:
      • Intermittent nature
      • Lack of sufficient battery storage
      • Grid stability concerns

    Role of Coal Based Thermal Power

    • Continues to be dominant source of electricity
    • Ensures base load supply during peak demand
    • Current coal stock: ~200 million tonnes
    • Sufficient for about 80 plus days

    What is El Niño?

    • A climate phenomenon involving warming of Pacific Ocean waters
    • Leads to:
      • Weaker monsoon in India
      • Longer dry spells and heatwaves
    [2023] Consider the following statements: 
    Statement-IIndia, despite having Uranium deposits, depends on coal for most of its electricity production. 
    Statement-II:Uranium, enriched to the extent of at least 60%, is required for the production of electricity. 
    Which one of the following is correct in respect of the above statements 
    [A] Both Statement-I and Statement – II are correct and Statement- II is the correct explanation for Statement- I 
    [B] Both Statement I and Statement II are correct and Statement-II is not the correct explanation for Statement-I. 
    [C] Statement- I is Correct but Statement-II is incorrect. 
    [D] Statement-I incorrect but Statement-II is correct.

  • RBI’s New Bad Loan Norms (ECL Framework) 

    Why in the News

    The Reserve Bank of India has introduced a new framework based on Expected Credit Loss (ECL) for provisioning of bad loans, which may lead to a short term increase in costs for banks.

    What is Expected Credit Loss (ECL)

    • A forward looking approach to estimate loan losses
    • Considers future risk of default rather than past defaults
    • Aligns with global standard IFRS 9

    Key Features of New Norms

    Three Stage Classification of Loans

    • Stage 1: Low or no credit risk
      • Provision based on 12 month ECL
    • Stage 2: Significant increase in credit risk
      • Provision based on lifetime ECL
    • Stage 3: High credit risk or default
      • Provision based on lifetime ECL

    Important Changes

    • Borrower Level NPA Classification: If one loan becomes NPA, all loans of the borrower become NPA
    • NPA Definition: Loan classified as NPA if overdue for more than 90 days
    • Upgrade Rule: Borrower must repay all dues to become a standard asset again

    Impact on Banks

    • Possible increase in provisioning requirements
    • Short term reduction in profits
    • Impact on capital (CET 1 ratio)
    • Higher impact on:
      • Microfinance lending
      • Unsecured retail loans

    Key Terms

    • Non Performing Asset (NPA): Loan where repayment is overdue beyond 90 days.
    • Provisioning: Setting aside funds by banks to cover potential loan losses.
    • CET 1 (Common Equity Tier 1): Core capital of banks used to absorb losses.
    [2021] Consider the following statements: 
    1.Capital Adequacy Ratio (CAR) is the amount that banks have to maintain in the form of their own funds to offset any loss that banks incur if any account-holders fail to repay dues. 
    2.CAR is decided by each individual bank. 
    Which of the statements given above is/are correct? 
    [A] 1 only [B] 2 only [C] Both 1 and 2 [D] Neither 1 nor 2

  • Blue Button (Porpita porpita) 

    Why in the News

    Large numbers of Porpita porpita, commonly called Blue Button, were recently found washed ashore at Girgaon Chowpatty. This phenomenon is often observed before the onset of the monsoon.

    What is Blue Button

    • A marine organism found floating on the sea surface
    • Not a single organism but a colonial species
    • Composed of multiple zooids working together as one unit
    • Often mistaken for jellyfish

    Key Characteristics

    • Small, disc shaped body with tentacles
    • Free floating organism
    • Each zooid performs specific functions: Feeding, Digestion, and Movement

    Comparison with Similar Species

    • Blue Button (Porpita porpita)
      • Harmless to humans
      • Mild or no sting
    • Portuguese Man o’ War
      • Venomous
      • Can cause painful stings

    Why They Appear on Shores

    • Linked to monsoon onset
    • Caused by:
      • Changes in sea temperature
      • Shifts in ocean currents
      • Strong winds pushing them ashore
    [2021] Which of the following have species that can establish symbiotic relationship with other organisms? 
    1. Cnidarians 
    2. Fungi 
    3. Protozoa 
    Select the correct answer using the code given below. 
    [A] 1 and 2 only [B] 2 and 3 only [C] 1 and 3 only [D] 1, 2 and 3

  • FDI Inflows in India 

    Why in the News?

    India’s Foreign Direct Investment (FDI) inflows are expected to cross 90 billion dollars in FY 2025–26, according to the Department for Promotion of Industry and Internal Trade (DPIIT).

    Key Facts

    • FDI inflows (April–February 2025–26): 88 billion dollars
    • Expected total for FY 2025–26: over 90 billion dollars
    • Indicates strong investor confidence in India

    What is Foreign Direct Investment (FDI)

    • Investment by a foreign entity in:
      • Business operations
      • Assets in another country
    • Involves long term interest and control

    Key Drivers of Rising FDI

    • Economic reforms by the government
    • Expansion of Free Trade Agreements (FTAs)
    • Strong economic growth prospects
    • Improved ease of doing business

    Types of FDI

    • Greenfield Investment: Setting up new business operations
    • Brownfield Investment: Investment in existing companies or assets

    Role of DPIIT

    • Works under the Ministry of Commerce and Industry
    • Responsible for:
      • FDI policy formulation
      • Promotion of industrial development
      • Facilitating investment inflows

    Significance

    • Boosts economic growth and employment
    • Brings technology and expertise
    • Strengthens infrastructure and manufacturing
    • Improves balance of payments position
    [2020] With reference to Foreign Direct Investment in India, which one of the following is considered its major characteristic? 
    (a) It is the investment through capital instruments essentially in a listed company. 
    (b) It is a largely non-debt creating capital flow. 
    (c) It is the investment which involves debt-servicing. 
    (d) It is the investment made by foreign institutional investors in the Government securities.

  • FII Outflows and Rupee Depreciation 

    Why in the News

    Foreign investors have withdrawn ₹60,847 crore from Indian equity markets in April 2026, leading to a sharp depreciation of the Indian rupee, which touched nearly ₹95 per dollar.

    Foreign Institutional Investor (FII)

    While the terms FPI and FII are often used interchangeably, there is a technical distinction based on the 2014 SEBI regulations which merged several categories into the FPI regime.

    • Definition: FIIs are large entities (like Pension Funds, Mutual Funds, Investment Trusts) registered in a country outside India that propose to invest in Indian financial markets.
    • Consolidation: Previously, there were FIIs and QFIs (Qualified Foreign Investors). To simplify the process, SEBI introduced the Foreign Portfolio Investor (FPI) Regulations, 2014, effectively making FIIs a part of the broader FPI category.
    • Key Distinction: FPI is the investment, whereas FII is the institutional entity that performs the investment.
    FeatureFDIFPIFII
    Primary GoalManagement control & long-term growthCapital gains & dividendsInstitutional portfolio diversification
    Investment AssetPhysical assets (factories, land)Financial assets (stocks, bonds)Financial assets (stocks, bonds)
    DurationLong-termShort to Medium-termShort to Medium-term
    ComplexityHigh (involves legal & operational setup)Low (easy to trade via exchanges)Low (but requires regulatory registration)
    VolatilityVery LowHighHigh
    Who Invests?Multinational corporationsIndividuals or InstitutionsLarge organizations (e.g., Pension Funds)
    [2022] Consider the following statements: 
    1 Tight monetary policy of US Federal Reserve could lead to capital flight. 
    2 Capital flight may increase the interest cost of firms with existing External Commercial Borrowings (ECBs). 
    3 Devaluation of domestic currency decreases the currency risk associated with ECBs. 
    Select the correct answer using the code given below: 
    (a) 1 and 2 only (b) 2 and 3 only (c) 1 and 3 only (d) 1, 2 and 3

  • India’s First Green Methanol Plant 

    Why in the News

    India is set to establish its first green methanol plant at Kandla using the invasive plant Prosopis juliflora as feedstock. The project aims to produce clean marine fuel and support India’s transition to green shipping.

    About Prosopis juliflora

    • A Mexican-origin invasive species
    • Known locally as:
      • Vilayati Keekar (North India)
      • Gando Baval (Gujarat)
    • Introduced in India:
      • 1920s by British
      • Later in 1961 in Gujarat to check desertification
    • Problem:
      • Replaces native grasses
      • Harms biodiversity in Banni grasslands (Kutch)

    About Green Methanol

    • Methanol produced using renewable biomass instead of fossil fuels
    • Used as marine fuel replacing bunker oil
    • Helps reduce emissions significantly

    Key Features of the Project

    • Location: Deendayal Port Authority
    • Production capacity: 5 tonnes per day
    • Developed by: Thermax and Ankur Scientific
    • Feedstock:
      • Prosopis juliflora
      • Other biomass like bagasse and cotton stalk
    [2018] Why is a plant called Prosopis juliflora often mentioned in news? 
    (a) Its extract is widely used in cosmetics. 
    (b) It tends to reduce the biodiversity in the area in which it grows. 
    (c) Its extract is used in the synthesis of pesticides. 
    (d) None of the above.

  • Revenue Deficit and Fiscal Stress in States 

    Why in the News

    The Ministry of Finance in its Monthly Economic Review (April 2026) has warned that several Indian States with revenue deficits and high debt burdens may face fiscal stress, especially during economic shocks.

    What is Revenue Deficit

    • Occurs when revenue expenditure exceeds revenue receipts
    • Revenue expenditure includes:
      • Salaries
      • Pensions
      • Subsidies
      • Interest payments
    • Revenue receipts include:
      • Taxes
      • Fees
      • Non tax revenues

    Key Findings

    • Out of 18 major States analysed:
      • 9 States projected to have revenue deficit
      • 7 States projected to have revenue surplus
      • 1 State in revenue balance

    States with Revenue Deficit (Important)

    • Himachal Pradesh, Punjab, Kerala, Andhra Pradesh, Rajasthan, Haryana, Karnataka, Maharashtra, and Chhattisgarh.
    • Punjab has highest interest burden (22.8 percent of revenue receipts)

    States with Revenue Surplus

    • Odisha, Jharkhand, Uttar Pradesh, Goa, Gujarat, Uttarakhand, Telangana, and Bihar

    Key Concept

    • Golden Rule of Fiscal Policy
      • Governments should borrow only for capital expenditure
      • Revenue deficit should ideally be zero

    Fiscal Concerns

    • High interest payments reduce fiscal flexibility
    • Revenue deficit States may:
      • Cut productive expenditure (capital spending)
      • Seek higher central transfers
    • Limited ability to respond to economic shocks
    [2025] Suppose the revenue expenditure is ₹ 80,000 crores and the revenue receipts of the Government are ₹ 60,000 crores. The Government budget also shows borrowings of ₹ 10,000 crores and interest payments of ₹ 6,000 crores. Which of the following statements are correct? 
    I. Revenue deficit is ₹ 20,000 crores. 
    II. Fiscal deficit is ₹ 10,000 crores. 
    III. Primary deficit is ₹ 4,000 crores. 
    Select the correct answer using the code given below. 
    [A] I and II only [B] II and III only [C] I and III only [D] I, II and III

  • Increasing coverage, growing distress

    Why in the News?

    Recent NSS 80th Round (2025) data reveals a striking contradiction: health insurance coverage has increased significantly since 2017-18, yet hospitalisation rates have not improved and out-of-pocket expenditure has sharply increased, especially in private hospitals. This is significant because, for the first time, empirical evidence shows that government-funded insurance schemes are not delivering financial protection, and may even be benefiting relatively better-off groups.

    Why has increased insurance coverage not improved healthcare utilisation?

    1. Stagnant hospitalisation rates: NSS data shows hospitalisation rates remain below 2014 levels in rural areas and only marginally higher in urban areas.
    2. Shift to private care: Public hospital usage declined, while private sector reliance increased.
    3. Access barriers: Unavailability of medicines, diagnostics, and high transport costs reduce public healthcare utilisation.
    4. Inefficiency in coverage translation: Coverage expansion does not ensure actual service delivery or utilisation.

    Why is out-of-pocket expenditure increasing despite insurance schemes?

    1. Rising private sector costs: OOP expenditure increased >70% (rural) and ~80% (urban).
    2. Partial coverage: Insurance schemes often exclude diagnostics, medicines, and indirect costs.
    3. Additional charges: Despite coverage, patients are frequently charged extra in private hospitals.
    4. Low reimbursement rates: Below-market rates under PMJAY incentivise informal billing practices.

    Why are insurance schemes disproportionately benefiting the better-off?

    1. Urban bias: Only 13% of urban beneficiaries belong to the poorest class.
    2. Awareness gap: Poor households have lower awareness and utilisation capacity.
    3. Private sector access: Better-off groups are more capable of accessing empanelled private hospitals.
    4. Structural inequality: Insurance design fails to address social determinants of access.

    What fiscal and systemic challenges are emerging from insurance-led healthcare?

    1. State fiscal stress: Increased hospitalisation under schemes leads to budgetary pressure on states.
    2. Delayed reimbursements: States like Haryana report delays in payments to private providers.
    3. Dependence on private sector: Weak public infrastructure leads to over-reliance on private providers.
    4. Market distortion: Insurance subsidies indirectly support private healthcare expansion.

    Is insurance-based Universal Health Coverage (UHC) viable for India?

    1. Profit-driven incentives: Private providers focus on high-margin treatments, undermining equity.
    2. Limited preventive care: Insurance model emphasises hospitalisation, not primary care.
    3. Weak regulation: Insufficient oversight leads to overcharging and unnecessary procedures.
    4. Public system neglect: Investment in primary healthcare remains inadequate.

    What alternative model is suggested for effective healthcare delivery?

    1. Strengthening public healthcare: Emphasis on universal, tax-funded public health systems.
    2. Primary care focus: Initiatives like Ayushman Arogya Mandir (AAM) offer comprehensive primary care, including NCDs.
    3. Integrated approach: Combining preventive, promotive, and curative care
    4. Regulation of the private sector: Ensures accountability and cost control.

    Conclusion

    India’s health insurance expansion highlights a structural paradox: coverage without care and protection without affordability. A shift from insurance-led to system-strengthening approaches, especially in primary healthcare, is essential for achieving equitable and sustainable Universal Health Coverage.

    PYQ Relevance

    [UPSC 2022] Is inclusive growth possible under market economy? State the significance of financial inclusion in achieving economic growth in India.

    Linkage: The PYQ highlights the gap between coverage expansion (financial inclusion) and actual welfare outcomes, similar to health insurance failing to ensure real protection. This is directly relevant to analysing whether insurance-led healthcare promotes inclusive growth or deepens inequality.