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Subject: Economics

  • Chipflation: Electronics see years of price hikes replicated in 6 mths

    Why in the News

    Consumer Price Index (CPI) data from the Ministry of Statistics and Programme Implementation (MoSPI) shows prices of a range of consumer electronics goods in July 2026 up 3 to 5 per cent against January 2026. The global artificial intelligence (AI) investment boom has created an acute shortage of the memory chips used in the manufacture of everyday consumer electronics. Manufacturers have raised the rates they charge to the point where price increases that took years for products such as smartphones and televisions have occurred in just six months of 2026. The movement in 2025 was far more sedate over the identical January to July window. The shortage runs in the opposite direction to the decades-long decline in memory chip prices that made consumer electronics steadily cheaper.

    What is chipflation?

    1. The term and its origin: Analysts at the American investment bank Morgan Stanley coined the term in June 2026. It describes how AI’s appetite for memory chips is boosting the cost of everything from data centres to smartphones, with consequences that may reach far beyond the technology industry.
    2. The chip at the centre of it: DRAM, or Dynamic Random Access Memory, is the working memory used in refrigerators, washing machines, air conditioners, smartphones, laptops, televisions and earphones. It is being displaced in fabrication capacity by the more advanced chips data centres demand.
    3. How a chip shortage becomes a retail price: Manufacturers facing a supply shortage of an essential component raise the rates they charge. Those increases pass into the retail price indices that MoSPI compiles.

    How much have Indian consumer electronics prices actually moved?

    1. The headline movement: Prices of a variety of consumer electronics goods in July 2026 were up 3 to 5 per cent against January 2026. The comparable movement over January to July 2025 was far smaller.
    2. Mobile handsets: The CPI price index for mobile handsets rose 4 per cent from January 2026 to July 2026. Over the same months of 2025 it declined by 0.7 per cent.
    3. Air conditioners: Air conditioner prices rose 4.8 per cent between January and July 2026 against 1.1 per cent over the same period of 2025. Air conditioners normally do see higher prices in the summer months.
    4. Televisions and the four-and-a-half year comparison: The CPI index of televisions is up 3.5 per cent since January 2026. Counting back from December 2025, matching that magnitude of increase took 54 months.
    5. The same comparison across five more categories: The number of months needed to match the 2026 increase was 46 for air conditioners, 45 for refrigerators and 41 for mobile phones. It was 32 for washing machines and 31 for computers and laptops.
    6. The series break behind the comparison: Increases over 2026 are calculated on the new CPI series with 2024 as the base year, and the earlier period on the old series with 2012 as the base year. Only consumer electronic items present in both baskets have been compared.

    Why has an AI investment boom raised the price of a refrigerator?

    1. Capacity has been redirected: Key chipmakers including TSMC, Samsung and SK Hynix are making the more in-demand advanced chips used in data centres. Those data centres are being built across the world at speed.
    2. What is being sacrificed: DRAM and other chips used in everyday electronics goods are what that redirection displaces. The result is a supply shortage of the chips essential to consumer electronics.
    3. Capacity cannot be added quickly: New memory capacity takes years to build, qualify and ramp up. Supply relief is a process rather than a switch, in the assessment of the Head of Morgan Stanley’s Europe and Asia Technology Team.
    4. A two-tier market has formed: Large AI and cloud buyers can sign long-term agreements, prepay and secure priority access to output. Traditional buyers, including personal computer makers, smartphone makers and industrial hardware companies, must compete for what remains.
    5. The scale of the projected shortfall: The shortfall in memory chips in 2027 is equivalent to what is needed to make 134 million phones. That estimate comes from the same Morgan Stanley technology team.

    Why is this a reversal rather than an ordinary price cycle?

    1. The historical direction of travel: DRAM prices fell 90 per cent every five years over the second half of the twentieth century and the first twenty or so years of the twenty-first. Falling component costs are what made each generation of consumer electronics cheaper than the last.
    2. What drove that decline: The fall was driven by Moore’s Law, the observation that the number of transistors on a chip doubles at regular intervals, so cost per unit of computing capacity falls steadily. Manufacturing scale converted that into lower prices for finished goods.
    3. The size of the reversal: DRAM prices will have risen more than 400 per cent from the start of 2024 to the end of 2026, on the estimate of JPMorgan Global Research. That is a price path with no precedent in the preceding five decades.
    4. Why the reversal is structural rather than seasonal: The demand shifting capacity is investment in AI data centre buildout, not a cyclical swing in consumer demand. It persists for as long as that buildout continues.

    What has the price rise done to demand?

    1. Global shipments have fallen: Global smartphone exports were down 11 per cent in the April to June quarter of 2026. That is their second-lowest level since 2013, on Counterpoint Research data.
    2. Indian sales have turned: Smartphone sales in India fell for three weeks in a row after the online promotional events of July 2026. The fall followed rather than preceded the promotional window.
    3. Consumers have become promotion-dependent: Rising device prices are making consumers increasingly value-conscious and more dependent on promotional offers, in the assessment of a Senior Analyst at Counterpoint Research. That trend has become more visible over the past few months.
    4. The pass-through is not optional for buyers: Memory is a non-substitutable component in every one of the affected categories. A household deferring a purchase is the only demand-side response available.

    Challenges to containing chipflation in India

    1. Import dependence in memory: India assembles consumer electronics without domestic fabrication capacity in memory chips, so the input price is set entirely offshore. Eg. Domestic smartphone assemblers competing for residual DRAM supply have no alternative source. Fix. Sequence the Semicon India Programme toward a memory fabrication line rather than only packaging and testing units.
    2. The measurement gap in a series break: Comparing 2026 movements against earlier years requires bridging two CPI series with different base years and baskets. Eg. Only items present in both the 2012-base and 2024-base baskets could be compared for this exercise. Fix. Publish an official back-cast series on the 2024 base so long-run comparisons do not depend on ad hoc bridging.
    3. Imported inflation escapes domestic policy tools: Interest rate changes cannot address a price rise originating in a global component shortage. Eg. Core inflation excluding food and energy is the segment monetary policy influences, and this shock sits inside it. Fix. Use tariff and input duty rationalisation on electronic components as the responsive instrument in place of rate action.
    4. Concentration among a handful of suppliers: A small group of firms controls advanced memory output, which gives buyers no bargaining position. Eg. TSMC, Samsung and SK Hynix set the allocation between data centre chips and consumer memory. Fix. Build long-term supply agreements through government-to-government channels, as the four-day commerce ministry delegation to Japan on semiconductors is designed to do.
    5. Downstream employment exposure: Falling handset volumes hit assembly and retail employment before they hit manufacturer margins. Eg. Three consecutive weeks of falling Indian smartphone sales followed the July promotional events. Fix. Link production-linked incentive disbursement to sustained volume rather than to value alone, so assemblers are not penalised for a component price shock.

    Conclusion

    An investment boom in one segment of the chip industry has reset the price of an input that every consumer electronics category depends on, and Indian retail price data has registered the effect within six months. Increases that historically took between 31 and 54 months have occurred since January 2026 across six product categories. Capacity for memory chips takes years to build and qualify, so the shortage does not resolve on a policy timetable. Demand has already turned in both global shipments and Indian sales, and the next test is whether volumes recover once the 2027 shortfall estimate is either met or confirmed.

    “[2021] With reference to the Indian economy, demand-pull inflation can be caused or increased by which of the following:

    1.Expansionary policies

    2.Fiscal stimulus

    3.Inflation-indexing of wages

    4.Higher purchasing power

    5.Rising interest rates

    Select the correct answer using the code given below:

    (a) 1, 2, and 4 only

    (b) 3, 4, and 5 only

    (c) 1, 2, 3, and 5 only

    (d) 1, 2, 3, 4, and 5

  • Measuring manufacturing growth afresh: Three questions

    Why in the News

    The new Gross Domestic Product (GDP) series of the Ministry of Statistics and Programme Implementation (MoSPI) shows the manufacturing Gross Value Added (GVA) deflator recording negative growth for nine consecutive quarters between 2023 and 2025. The same series places the level of real manufacturing GVA in 2025-26 at no less than 15 percentage points above the Index of Industrial Production (IIP) for manufacturing. When the new series was announced, the Chief Economic Advisor and the Secretary, MoSPI stated that the estimates rested on a new methodology. That methodology was said to have solved the measurement problems that had bedevilled the old series, including in manufacturing. MoSPI has not yet released the detailed standard document explaining the new calculations. Three specific anomalies in the manufacturing numbers therefore cannot be tested against the stated method, and the plausibility of the series has to be assessed from the numbers themselves.

    What is the manufacturing Gross Value Added deflator?

    1. Gross Value Added, defined: GVA for a sector is the value of its output minus the value of its intermediate inputs. It measures what producers in that sector actually added, before taxes on products are added and subsidies subtracted.
    2. What the deflator does: The sector deflator is the price index that converts nominal GVA at current prices into real GVA at base year prices. Real GVA equals nominal GVA divided by that deflator.
    3. What its movement signals: A deflator growing negatively means the sector’s own price level is falling. Real growth then runs ahead of nominal growth by the size of that fall.

    Why does confidence in manufacturing data matter now?

    1. The China Squeeze: The Chinese manufacturing export machine has again moved across world markets and threatens lower-skill manufacturing in poorer countries. The pressure this creates on Indian producers is what the data is being asked to measure.
    2. Two decades of stated ambition: The Union government set major ambitions for the sector, beginning with the flagship Make in India programme in 2014. The production-linked incentive (PLI) scheme followed several years later.
    3. The PLI’s dual purpose: The scheme was in part a response to the opportunities opened by the China-plus-one shift in global sourcing. It was also a response to the challenge of aggressive Chinese competition.
    4. Conflicting signals elsewhere: The wider economy is sending contradictory signals at present. Understanding manufacturing performance is the route to lifting some of that confusion.
    5. A recognised prior problem: Problems in manufacturing sector data under the previous series were widely recognised. MoSPI made strenuous efforts to address them in the new series.

    Why has the manufacturing deflator shown falling prices for nine straight quarters?

    1. The anomaly itself: The manufacturing GVA deflator records negative growth, meaning falling price levels, for nine consecutive quarters between 2023 and 2025. No comparable stretch of deflation appears anywhere else in the price data for that period.
    2. The core inflation test: The core Consumer Price Index (CPI), which excludes food and energy-related products, shows no sign of deflation across those quarters. Core CPI through December 2025 rests on the 2011-12 series and the March 2026 reading on the 2024 series.
    3. The wholesale price defence, and its limit: The wholesale price index (WPI) was negative for some of this period. It was not negative for nine consecutive quarters.
    4. Why WPI is the wrong benchmark anyway: The GVA deflator should not move in line with the WPI. The WPI is overly driven by input prices, and a value added deflator must reflect output prices net of inputs.

    Why is real GVA growth almost twice IIP growth?

    1. The size of the gap: In 2025-26 the level of real manufacturing GVA exceeded the IIP by no less than 15 percentage points. Both series are measured on the 2022-23 base.
    2. The growth gap it implies: Annual average real growth of manufacturing between 2022-23 and 2025-26 measured by GVA is about twice that measured by the IIP. The two figures are about 11 per cent against about 6 per cent.
    3. The informal sector explanation, and why it fails: Real GVA includes the informal sector and the IIP excludes it, so faster informal growth could in principle open a gap. For the most recent two years informal sector performance has been proxied by formal sector data, which makes the explanation mechanically impossible.
    4. The volumes versus value added explanation: The IIP measures output volumes rather than value added. A widely held perception holds that real GVA can grow faster than real output when input prices fall.
    5. Why that perception is wrong: Real GVA is calculated at constant prices, not at changing prices, so falling input prices cannot lift it. Real value added can grow faster than output volumes only where productivity improves, that is where firms become more efficient in using intermediate inputs.

    Why has the link between the two series broken down?

    1. The pre-2011 benchmark: Before the 2011-12 methodology changes, GVA and IIP moved closely together. The correlation between their growth rates over June 2005 to that break was 0.8.
    2. The post-2011 divergence: The two series diverged after the 2011-12 methodology changes. That divergence has been exacerbated in the new series rather than corrected by it.
    3. The recent segment: Since September 2022 the two series move very differently. The comparison excludes the Covid quarters from June 2020 to March 2022.
    4. The character of the difference: The real GVA series bounces around a great deal across quarters. The IIP series over the same stretch is fairly stable.

    What do the three questions together say about the new series?

    1. None is individually decisive: No one of the three issues is dispositive about the quality of the new series. Each is an unexplained pattern rather than a demonstrated error.
    2. The missing document is the binding constraint: The detailed standard document explaining the new calculations has not been released. Independent researchers therefore cannot check the anomalies against the method that produced them.
    3. The methodology claim raises the bar, it does not lower it: The new series was presented as the fix for exactly the manufacturing measurement problems of the old series. Anomalies concentrated in manufacturing are the hardest place for that claim to sit unexplained.
    4. What plausible explanations would buy: Explanations would engender confidence in the new GDP figures. They would also allow an assessment of the state of Indian manufacturing and of the impact of recent government actions to revive it.

    Challenges to the new GDP series’ manufacturing estimates

    1. Deflator choice drives the real number: Real GDP requires choosing a deflator, and the production side deflator is heavily influenced by the WPI. Eg. In FY23 a global commodity price surge pushed the WPI into double digits, and the high deflator suppressed measured real growth. Fix. Complete the WPI base revision so the deflator basket reflects the current price structure.
    2. No producer price index exists: India deflates goods sectors with a wholesale index built for trade flows rather than for producer output. Eg. Services sectors are deflated using CPI components because no dedicated producer price series covers them. Fix. Introduce a Producer Price Index on the model used across advanced statistical systems and retire WPI-based deflation.
    3. Transparency lags the release: The estimates reach the public well before the sources and methods behind them. Eg. The new series arrived with a stated methodology claim and without the standard explanatory document. Fix. Publish the sources and methods volume alongside the series so verification is concurrent with release.
    4. Informal output is still partly extrapolated: Informal sector performance for recent years is proxied from formal sector data, which cannot capture divergence between the two. Eg. The old series extrapolated large-company filings to the whole informal economy and stayed blind to the sharper hit small firms took after demonetisation. Fix. Shorten the lag on the Annual Survey of Unincorporated Sector Enterprises so proxying is not required for two full years.
    5. Statistical independence has been questioned: Resignations from the National Statistical Commission and withheld survey results have raised concerns about the autonomy of official statistics. Eg. Two members of the Commission resigned in 2019 over the handling of employment data. Fix. Constitute an independent statistical commission with a statutory mandate, as recommended by the Rangarajan Commission in 2001.

    Conclusion

    The new GDP series was presented as the answer to the manufacturing measurement problems of the old one, and its manufacturing numbers now carry three patterns that the stated methodology does not obviously produce. A deflator falling for nine quarters, a 15 percentage point level gap against the IIP and a correlation that has weakened since 2005-2012 are each testable claims that cannot be tested without the sources and methods document. Releasing that document is the precondition for confidence in the figures. Whether and how Indian manufacturing has stood up to Chinese competition is a question only reliable data can answer.

    “[2021, GS3, 10 marks] Explain the difference between computing methodology of India’s Gross Domestic Product(GDP) before the year 2015 and after the year 2015.”

  • Investment question has a political answer

    Why in the News

    Private corporate investment in India remains considerably lower than the peak seen in the mid 2000s, even as large corporates hold substantial cash. Firms are deploying funds in financial assets rather than building physical assets such as factories, and are taking money out of the country rather than investing it here. The standard explanations offered for this are subdued domestic demand and global uncertainty. A political economy explanation is now advanced instead, locating the cause in how political power structures affect investment decisions. Centralisation of political power has been unmistakable after 2014, accompanied by fiscal centralisation and a reconfiguration of federal structures. The contested claim is that market concentration around a handful of “national champions” is not an accident of policy but is politically useful, which would make an investment revival costly to the current political settlement.

    What are “national champions”?

    1. Definition: A national champion is a large domestic business group that a government treats as the preferred vehicle for building strategic capacity, and that is favoured in policy design as a result.
    2. How the status is conferred: Preference operates through the terms of auctions, tariffs, incentive eligibility, clearances and access to public contracts rather than through an announced designation.
    3. The economic consequence: A handful of such groups now command far greater sway over the economy than before, which raises the entry barrier facing any firm attempting to compete with them.

    What does the investment slowdown actually look like?

    1. Cash-rich firms are not building: Large corporates hold funds but are not committing them to new capacity in India.
    2. Capital is leaving: Companies are taking money out of the country rather than investing it domestically.
    3. Investment is below its own peak: Private corporate investment remains considerably lower than the level reached in the mid 2000s.
    4. Financial assets over physical assets: Corporate India is more keen to deploy funds in financial assets than to use them for factories and plant.
    5. The standard explanations are incomplete: Subdued domestic demand and global uncertainty have been put forward, and neither accounts for why firms with the means to invest choose not to.

    Why does the concentration of political and market power deter private investment?

    1. Political and fiscal centralisation: Centralisation of political power after 2014 has been accompanied by greater fiscal centralisation and a reconfiguration of federal structures, including attempts to restrict the powers of states and, as a consequence, of regional parties. Eg. The Mines and Minerals (Development and Regulation) Amendment Act, 2026, amending the 1957 law under which the State owns the mineral and signs the lease while the Centre sets the rules and the royalty rate.
    2. Market concentration has moved in step: The rise of a handful of large companies, aided by policy, has given them far greater sway over the economy than ever before.
    3. One, patronage for smaller firms has dried up: The concentration of political power and the decline in the relative power of regional parties has ended the patronage and protection that were afforded to smaller and regional firms, who could rise up and become national players.
    4. Two, policy uncertainty and an uneven playing field: Higher barriers to entry and terms tilted towards larger corporates make it harder for new players to emerge, and firms will not invest if they fear the rules of the game can be arbitrarily changed or that they can be caught on the wrong side of policies. Policy credibility is what is at stake.
    5. Three, the fear of being muscled out: Investors fear that business success will be met by a hostile takeover by a national champion, so the question is not whether they are allowed to operate but whether they can stay in business and remain competitive over the next 10 to 20 years.

    Why would dispersing economic power be politically costly?

    1. Competition requires a rethink of the strategy: For the larger corporate sector to ramp up investment and for competition to emerge, the strategy of relying on a few national champions needs to be reconsidered.
    2. Dispersed economic power funds political opposition: A larger number of big private players would disperse rather than concentrate economic power, which would in turn increase the funding avenues available to Opposition parties.
    3. Economic competition feeds political competition: Weakening the concentration of economic power would possibly weaken the concentration of political power, so greater economic competition could lead to greater political competition.
    4. The two open questions: It is unsettled whether the current political structure creates the space for new players to safely invest and emerge as competitors to the national champions, or whether market concentration is itself politically useful.

    Why do the ingredients of an investment boom not produce one?

    1. The macroeconomic conditions are present: An undervalued exchange rate, depressed real wages and sustained public sector investment in infrastructure are all in place, alongside the demographic dividend.
    2. The same mix powered East Asia: This combination powered the rise of countries such as China and South Korea, where firms responded to it with large capacity additions.
    3. India’s firms are not responding: Firms are likely to remain hesitant and unsure about investing without a change in the approach, despite those conditions.
    4. Confidence, not capability, is binding: Investment decisions are taken only when investors think they have a fair chance of benefiting from them.
    5. The end state if nothing changes: The consequent absence of competition raises the possibility of an uncompetitive, high-cost economy.

    Challenges to the national champions strategy

    1. Concentration raises consumer and input costs: Dominant firms in a sector face little pressure to hold prices down, which raises costs for every downstream user. Eg. Telecom tariffs rose sharply after the sector consolidated into three private operators. Fix. Use the deal value threshold introduced by the Competition (Amendment) Act, 2023 to review acquisitions that current turnover tests miss.
    2. Policy-created advantage is hard to withdraw: Once a group builds capacity on the strength of an incentive, removing the incentive becomes a shock the government is reluctant to deliver. Eg. Most approved incentive under the Production Linked Incentive scheme for large-scale electronics manufacturing has flowed to a small group of mobile phone assemblers. Fix. Publish sunset dates and firm-level disbursement data with each incentive scheme so withdrawal is scheduled rather than negotiated.
    3. Concentrated bank exposure transmits firm risk to the system: Lending concentrated in a few large groups converts a single group’s distress into a banking problem. Eg. The corporate loan losses that produced the non-performing asset build-up of the 2010s were concentrated in a handful of infrastructure and metals groups. Fix. Enforce large exposure limits at group rather than borrower level and publish group-wise banking exposure.
    4. Bidding rules can favour incumbents: Net worth, prior experience and bank guarantee conditions in auctions and tenders can exclude new entrants before price is considered. Eg. Critical mineral block auctions have repeatedly failed for want of qualified bidders. Fix. Set qualification thresholds proportionate to block or contract size and allow consortium bidding for first-time entrants.
    5. Competition enforcement is slow relative to market speed: Investigations concluded years after conduct occurs cannot restore a market that has already tipped. Eg. Appeals against Competition Commission of India orders routinely run for several years before finality. Fix. Fund a dedicated appellate bench for competition matters with statutory disposal timelines.

    Conclusion

    The reluctance of cash-rich Indian firms to invest is being read as a political economy problem rather than a demand or global uncertainty problem. Concentrated political power, an uneven playing field and the fear of being displaced by a national champion together deny new entrants confidence in a 10 to 20 year horizon. Reversing that requires dispersing economic power, which carries political costs the current settlement has no incentive to accept. What remains unresolved is whether market concentration will be treated as a cost to growth or retained as a political asset.

    Industrial Policy and Private Investment in India

    1. What industrial policy does: It is the set of state interventions that shape which industries expand, through licensing, tariffs, incentives, public investment and ownership rules.
    2. The arc since Independence: The Industrial Policy Resolutions of 1948 and 1956 built a mixed economy with reserved public sector schedules, the licensing regime of the 1960s and 1970s restricted private entry, and the New Industrial Policy of 1991 abolished licensing for most sectors.
    3. India’s scale: Manufacturing contributes around 17 per cent of Gross Domestic Product against a 25 per cent target, and India accounts for about 2.8 per cent of global manufacturing output against China’s roughly 29 per cent.
    4. The current gap: Weak domestic private capital formation persists even as foreign investment rises, with cumulative Foreign Direct Investment crossing about $1.14 trillion between April 2000 and December 2025.

    Laws Governing Industry and Competition in India

    1. Industries (Development and Regulation) Act, 1951: The parent law for central regulation of scheduled industries, and the statutory basis of the industrial licensing regime.
    2. Monopolies and Restrictive Trade Practices Act, 1969: Regulated large business houses through asset thresholds to prevent economic concentration, and was repealed after those thresholds were removed post-1991.
    3. Competition Act, 2002: Replaced the 1969 Act, prohibits anti-competitive agreements and abuse of dominance, and establishes the Competition Commission of India to regulate combinations.
    4. Competition (Amendment) Act, 2023: Introduces a deal value threshold for merger review, a settlement and commitment framework, and shorter approval timelines.

    Government Initiatives for Industry and Investment

    1. Make in India (2014): Aims to raise manufacturing’s share of Gross Domestic Product towards 25 per cent, largely through ease of doing business measures.
    2. Production Linked Incentive scheme (2020): Covers 14 sunrise and strategic sectors with outcome-linked financial incentives paid on incremental output.
    3. National Manufacturing Mission: Announced in the 2025-26 Budget, targeting a 25 per cent Gross Domestic Product share and 143 million jobs by 2035, with a focus on solar photovoltaics, electric vehicle batteries, green hydrogen and wind.
    4. National Single Window System: Consolidates central and state clearances into a single application interface for investors.
    5. Invest India: The dedicated investment facilitation agency created after the Foreign Investment Promotion Board was abolished in 2017.

    Challenges in Industrial Policy and Private Investment

    1. Logistics and infrastructure costs: Power, transport and cluster gaps raise the operating cost of a new plant and lengthen its payback period. Eg. Logistics costs remain close to 8 per cent of Gross Domestic Product. Fix. Front-load the National Infrastructure Pipeline in states with the weakest evacuation and port connectivity.
    2. Land acquisition risk: Title complexity and local resistance delay projects long enough to destroy their business case. Eg. The POSCO steel project in Odisha was shelved after prolonged land disputes. Fix. Build titled and pre-cleared land banks with plug-and-play utilities before inviting investment.
    3. Tariff and trade shocks: External trade measures can remove an export market after capacity has been built for it. Eg. The 50 per cent United States tariff imposed in August 2025 hit roughly 55 per cent of India’s United States-bound exports. Fix. Diversify market access through trade agreements and deepen participation in global value chains.
    4. Workforce readiness for Industry 4.0: Adopting automation and artificial intelligence systems requires reskilling at a scale current training capacity cannot deliver. Eg. Only about 4.7 per cent of India’s workforce has formal skill training, against roughly 96 per cent in South Korea. Fix. Fund employer-led reskilling through the re-skilling fund created under the Industrial Relations Code, 2020.
    5. Import dependence in strategic inputs: Heavy reliance on imported electronics, semiconductors and pharmaceutical inputs exposes downstream manufacturers to supply shocks. Eg. Electronics assembly in India depends on imported display and chip components. Fix. Extend performance-linked incentives to component and materials manufacture rather than final assembly alone.

    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?”

  • What young want, and why creating good jobs is no longer optional

    Why in the News

    Almost 70 per cent of urban job seekers surveyed in Delhi said they were looking for a job that would place them on their ideal career path from the start, instead of settling for any job. The survey covered over 3,000 randomly sampled men and women, 24 years of age on average, living in middle-class residential areas of the capital, and was conducted in the summer of 2023. Their stated career goal was predominantly salaried or formal-sector employment. The Periodic Labour Force Survey (PLFS) for the same year records an urban labour market that cannot supply that goal, with less than 50 per cent of the urban workforce in salaried jobs. A follow-up experiment then exposed a random subset of the same job seekers to real-world job openings and salaries, and re-surveyed them a year later. Correcting their information lowered their expectations and left their aspirations untouched, so the contest is over who adjusts, the young or the labour market.

    What is the Periodic Labour Force Survey (PLFS)?

    1. Purpose: The PLFS is the official household survey that estimates how many people are working, seeking work or outside the labour force, and in what kind of work they are engaged.
    2. Nodal body: The National Sample Survey Office under the Ministry of Statistics and Programme Implementation conducts it and is the principal source of employment estimates in India.
    3. Activity status measures: Usual Status classifies a person by activity over the preceding 365 days, while Current Weekly Status treats a person as unemployed if they did not work even one hour in the reference week.

    What do young urban job seekers actually want from work?

    1. A career path, not a job: Almost 70 per cent said they wanted an opening that put them on their ideal career path from the start rather than any available job, and more men said this than women.
    2. Formal salaried work is the goal: The stated career goal was predominantly salaried or formal-sector employment rather than casual or own-account work.
    3. Women lean harder towards salaried jobs: More women job seekers aspired to salaried positions than men did.
    4. Only 14 per cent of women prefer self-employment: Just 14 per cent of the women interviewed said they would rather work for themselves.
    5. A third of men want to run enterprises: More than a third of the men wanted to start their own businesses.
    6. Public sector preference is a myth: A comparable share of these men and women were looking for private-sector salaried jobs, which cuts against the dominant narrative of a strong preference for government jobs.

    How far does the urban labour market fall short of those preferences?

    1. Salaried work is a minority outcome: Less than 50 per cent of India’s urban workforce holds a salaried job.
    2. It is scarcer still for the young: Merely one in every three employed 24-year-olds holds a salaried job, a lower share than for the workforce as a whole.
    3. Government jobs are a tenth of the market: No more than 10 per cent of the urban workforce is in the public sector or government jobs.
    4. The formal private sector is barely larger: Only about 15 per cent of the urban workforce is in the formal private sector.
    5. Self-employment is the largest single category: Of those working, 40 per cent are self-employed.
    6. Most self-employment is subsistence, not enterprise: An overwhelming majority of these businesses hire no worker at all and report an annual turnover of less than Rs 10 lakh, so the aspiration to build a firm meets a market of one-person shops.

    Why do salary expectations diverge from what these jobs actually pay?

    1. The occupations tested: Respondents were asked what they expected to earn as an accounts keeper, a primary school teacher, a data entry operator, a hospital attendant and an electrician, and each expectation was measured against actual PLFS earnings for the same occupation.
    2. Expectations run up to 40 per cent above reality: Job seekers expect up to 40 per cent higher salary than the earnings the PLFS records for the same work.
    3. Men are the more over-optimistic: Male job seekers expect almost Rs 8,000 more per month than the actual average earnings for these jobs.
    4. The gap widens for salaried work: For salaried jobs specifically, male job seekers expect Rs 8,500 more per month than actual earnings.
    5. The aggregate divergence exceeds 30 per cent: Taken together, salary expectations sit more than 30 per cent above reality, and the skew is sharper still among job seekers below 25 years of age, especially young men.
    6. Information and inexperience explain the gap: A lack of information or outright misinformation about openings and pay, combined with inexperience of the job market, are the two obvious sources of the misalignment.

    What did correcting job seekers’ information change, and what did it leave untouched?

    1. The design: A random subset of the 3,000 job seekers was informed about real-world job opportunities and salaries, and both the informed and the non-informed groups were re-surveyed twelve months later.
    2. Expectations fell: Accurate information significantly dampened labour-market expectations of landing the ideal job, relative to those who were not informed.
    3. Men disengaged first: Men in particular became less likely to report that they were on their ideal career path.
    4. Search effort fell with belief: That disillusionment was accompanied by a decline in men’s job-search intensity.
    5. The two exits from a failed search: As preferred job offers fail to materialise, job seekers adjust expectations downwards and either remain in the same jobs or leave the labour market and enrol at educational institutions.
    6. Aspirations did not move: The answer on whether aspirations changed is a clear no, since these men and women continued to aim for formal-sector jobs or dynamic entrepreneurship a year later, because aspirations are long-term goals and not easily malleable.
    7. High education costs make the expectation rational: Good-quality education is increasingly bought from private institutions at rising cost, so a high expected salary is not only aspirational but necessary to recover that outlay.

    Challenges to the Periodic Labour Force Survey

    1. Informal work is under-captured: Household surveys do not fully record home-based, gig and platform work in a workforce that is about 90 per cent informal. Eg. Delivery and ride-hailing riders working across two aggregators are frequently recorded as ordinary self-employed workers. Fix. Align the activity definitions with International Labour Organization and System of National Accounts practice so multi-job holders, freelancers and platform workers are counted separately.
    2. No skill mapping against job requirements: The survey does not match worker skills to the requirements of available jobs, so structural unemployment cannot be measured from it. Eg. The India Skills Report finding that only about half of graduates are employable has no counterpart in official survey data. Fix. Add a skills and job-requirement module so mismatch is measured rather than inferred.
    3. Rural data has been low frequency: Rural estimates were historically produced only once a year, so rural distress is visible with a long lag. Eg. A monsoon failure that pushes workers back into farm labour shows up only in the following annual round. Fix. Extend high-frequency quarterly or monthly rounds to rural areas rather than confining them to towns.
    4. Urban bias in the high-frequency rounds: The quarterly bulletins have been confined to urban areas, which under-measures the larger rural workforce. Eg. Quarterly urban unemployment rates are debated publicly while comparable rural numbers are unavailable. Fix. Publish a single integrated quarterly series covering both sectors on the same reference period.
    5. New job categories are missing: Gig, digital, start-up and green jobs are not adequately represented in the occupational classification the survey uses. Eg. Solar installation and battery recycling roles have no distinct occupational code. Fix. Integrate Employees’ Provident Fund Organisation, National Career Service and PLFS records so emerging job creation is tracked from administrative data as well.

    Conclusion

    Young urban job seekers want formal salaried careers and dynamic enterprise, and correcting their information about the market lowers what they expect to earn without changing what they want. That asymmetry places the burden of adjustment on the economy rather than on the young, and realising these aspirations requires a structural transformation that creates jobs with regular pay and benefits. The four Labour Codes are a step in that direction, and creating good jobs and genuine career paths, rather than jobs alone, is no longer optional. Failure carries a specific cost, which is the squandered potential of an entire generation.

    Employment and Unemployment in India

    1. What is measured: An unemployed person is of working age, that is 15 years and above, without work, currently available for work and actively seeking it in a reference period.
    2. Structure of the workforce: The Labour Force Participation Rate stood at 59.3 per cent in 2025, about 90 per cent of the workforce is informal, and nearly 58 per cent of salaried workers still lack a written contract.
    3. The absorption problem: Services drive most output growth but employ under 30 per cent of the workforce, while manufacturing contributes only about 16 to 18 per cent of Gross Domestic Product against roughly 26 per cent in China.
    4. Types of unemployment tested: Frictional, structural, cyclical, seasonal, disguised, voluntary and chronic unemployment are distinguished, with disguised unemployment concentrated in agriculture where marginal productivity approaches zero.

    Laws and Rules Governing Employment in India

    1. Code on Wages, 2019: Consolidates four wage laws, sets a statutory floor wage, and extends minimum wage cover beyond the roughly 30 per cent of workers it earlier reached.
    2. Industrial Relations Code, 2020: Merges three laws, raises the closure and retrenchment approval threshold from 100 to 300 workers, and gives fixed-term workers parity and gratuity after one year.
    3. Code on Social Security, 2020: Merges nine laws, defines gig and platform workers for the first time, and requires aggregators to contribute 1 to 2 per cent of turnover to a welfare pool.
    4. Occupational Safety, Health and Working Conditions Code, 2020: Consolidates 13 laws into one licence, one registration and one return, and caps hours at 8 to 12 daily and 48 weekly.
    5. Commencement of the four Codes: All four came into force on 21 November 2025, replacing a fragmented body of central labour legislation.
    6. Mahatma Gandhi National Rural Employment Guarantee Act, 2005: Guarantees 100 days of wage employment per rural household in a financial year.

    Government Initiatives for Employment Generation

    1. PM Viksit Bharat Rozgar Yojana: An employment-linked incentive approved in July 2025 with a Rs 99,446 crore outlay, targeting 3.5 crore jobs over two years.
    2. e-Shram Portal: A national database issuing Universal Account Numbers to unorganised workers and integrating access to more than 14 central schemes.
    3. PM Internship Scheme: Launched in 2024 to offer 1 crore internships in top companies over five years.

    Challenges in Employment Generation in India

    1. Lopsided structural change: India moved from agriculture to services without a job-rich manufacturing phase, so the sector that absorbs low-skilled labour elsewhere never scaled here. Eg. Manufacturing’s share of output has been stuck near 17 per cent against a 25 per cent policy target. Fix. Direct incentives to textiles, leather, food processing and electronics assembly, which absorb low and semi-skilled workers at scale.
    2. Capital-intensive investment bias: Investment flows to information technology and infrastructure rather than to labour-intensive activity, so output growth outruns job growth. Eg. Under the Production Linked Incentive scheme, most disbursed incentive has gone to large scale electronics assembly and pharmaceuticals, both capital intensive lines. Fix. Weight incentive schemes by jobs created per rupee of assistance rather than by output alone.
    3. Firms stay small to avoid compliance: Threshold-linked obligations reward staying under the size limit, which caps productivity and formal hiring. Eg. Micro, small and medium enterprises face more than 1,450 annual compliances costing Rs 13 to 17 lakh. Fix. Extend the Jan Vishwas approach of decriminalising minor compliance offences, which already covered 183 provisions across 42 central Acts.
    4. Skill deficit at both ends: Only about 4.7 per cent of the workforce has formal skill training, against roughly 96 per cent in South Korea, so employers and applicants describe different jobs. Eg. The Annual Status of Education Report 2023 found a quarter of rural youth aged 14 to 18 unable to read a Class 2 text. Fix. Tie curricula to Industry 4.0 and green job roles through mandatory industry-academia apprenticeship linkages.
    5. Women are kept out of paid work: Caregiving, domestic duties and mobility barriers hold female participation far below male participation. Eg. Urban female Labour Force Participation Rate stood at 25.8 per cent against 75.6 per cent for men in 2024. Fix. Enforce creche provision and workplace safety obligations already carried in the Codes.

    Matching Previous Year Question

    “[2023, GS3, 15 marks] Most of the unemployment in India is structural in nature. Examine the methodology adopted to compute unemployment in the country and suggest improvements.”

  • Pakistan factor: Why West Asia war hurt Indian airlines more than foreign ones

    Why in the News

    International air passenger traffic to and from India fell 9.1 per cent year on year in April to June 2026, to 1.72 crore, after the West Asia conflict closed large parts of Gulf airspace. The decline was driven entirely by Indian carriers, whose combined international traffic fell 26.6 per cent. Foreign airlines carried 6 per cent more passengers than a year earlier. India has barred its own carriers from Pakistani airspace since late April 2025, and Pakistan’s reciprocal closure applies only to them. The result is that a shared shock produced an asymmetric outcome, transferring market share on India’s own international routes to airlines that could still fly the short way west.

    How does an airspace ban change an airline’s operating economics?

    1. The right involved: A carrier overflies a third country under the International Air Services Transit Agreement of 1944 or under a bilateral permission, and either can be withdrawn at short notice.
    2. The detour cost: A closure forces a longer track, which adds block hours, fuel burn and crew duty time to every affected departure.
    3. The payload penalty: A longer sector makes the aircraft trade revenue payload for fuel, or forces a technical stop, and either outcome erodes the margin on the route.

    What does the passenger data show?

    1. Total volume: Total international air passenger volume to and from India fell 9.1 per cent year on year in April to June, from 1,89,12,598 to 1,72,00,140, in an analysis of Directorate General of Civil Aviation (DGCA) data.
    2. Indian carriers: Their combined international passenger numbers fell 26.6 per cent, from 87,34,038 to 64,14,896.
    3. Foreign carriers: Their cumulative passenger base rose 6 per cent, from 1,01,78,560 to 1,07,85,244.
    4. Market share shift: Foreign operators expanded their share of India’s international traffic to 62.7 per cent from 53.8 per cent, and domestic carriers dropped to 37.3 per cent from 46.2 per cent.

    Why did the loss fall on Indian carriers alone?

    1. Their biggest market closed: Flights to the United Arab Emirates and other West Asian markets, the largest destinations for Indian airlines, were heavily curtailed.
    2. The damage spread beyond West Asia: Indian carriers were forced to cut flights to destinations well outside the region, under war related financial pressure and the standing ban on flying over Pakistan since late April 2025.
    3. The route economics broke first: Air India and IndiGo curtailed their west bound network because the unavailability of Pakistani airspace made some services financially and operationally unviable to run.
    4. The pressure predated the war: Both leading carriers were already taking longer routes and adding refuelling halts on west bound services from their Delhi hub before the conflict began in late February, and some routes had been suspended outright.

    How did foreign carriers turn the same shock into share?

    1. They kept the short way west: Foreign carriers faced the same surging jet fuel prices, and many held one decisive advantage in the continued availability of Pakistani airspace.
    2. Spare capacity was redeployed: Once the war began, carriers from Europe and other regions west of India increased operations to and from the country using aircraft freed by their own curtailed West Asia flying.

    Which Indian airlines lost most?

    1. IndiGo: Remained the largest Indian carrier on international routes with a 15.4 per cent decline to 33.4 lakh international flyers, and an international market share slipping to 19.4 per cent from 20.9 per cent.
    2. Air India: Fell 27.2 per cent to 19.3 lakh passengers, with its international market share contracting to 11.2 per cent from 14 per cent.
    3. Air India Express: Its footfall halved to 8.34 lakh, since its network is highly concentrated in West Asia, and its share fell to 4.8 per cent from 8.9 per cent.
    4. The Air India group: Combined international traffic fell 36.3 per cent year on year to 27.61 lakh in the quarter.
    5. SpiceJet: Recorded the sharpest percentage fall at 56 per cent, to 1.38 lakh international flyers, with share contracting to 0.8 per cent from 1.7 per cent.
    6. Akasa Air: The only Indian airline to register higher international passenger numbers, growing on a low base through an expanding fleet.

    Challenges to Indian carriers on international routes

    1. Gulf hubs capture the through fare: Foreign carriers connect Indian cities to the West over their own hubs and book the full journey revenue. Eg. Emirates, Qatar Airways and Etihad carry a large share of India to Europe and North America traffic over Dubai, Doha and Abu Dhabi. Fix. Build a domestic transfer hub with matched arrival and departure banks, and price transfer charges to reward connecting traffic.
    2. Wide body fleet shortage: Non stop long haul flying needs aircraft Indian carriers do not have in sufficient number. Eg. Air India’s wide body cabin refit programme has run behind schedule because of queues at overseas retrofit facilities. Fix. Expand domestic maintenance, repair and overhaul capacity so heavy checks and retrofits are not queued abroad.
    3. Fuel taxation: Aviation turbine fuel sits outside the goods and services tax and carries high state value added tax, so the largest cost line is not creditable. Eg. Fuel accounts for about 40 per cent of an Indian airline’s operating cost. Fix. Bring aviation turbine fuel under the goods and services tax with input tax credit for carriers.
    4. Ageing bilateral entitlements: Traffic rights negotiated years ago cap Indian carriers in some markets. The same rights leave foreign carriers entitlements they can deploy at short notice. Eg. India’s bilateral seat entitlement with the United Arab Emirates has been unchanged for over a decade. Fix. Renegotiate bilaterals with entitlement tied to actual utilisation and reciprocal hub access.
    5. Financing and leasing sit offshore: Most aircraft are leased through foreign lessors, so rentals and repossession law lie outside Indian jurisdiction. Eg. The aircraft leasing framework at Gujarat International Finance Tec-City (GIFT City) remains small relative to the fleet on lease. Fix. Deepen the domestic leasing regime and fully operationalise the Protection of Interests in Aircraft Objects Act, 2025 giving effect to the Cape Town Convention.

    Conclusion

    The quarter’s traffic decline was distributed by airspace access rather than by exposure to the war, so Indian carriers absorbed the whole of a shock both sides faced. The share transferred to foreign operators is not automatically reversible, since network presence and slot use tend to persist once established. Recovery depends on the reopening of Pakistani airspace to Indian carriers and on the restoration of West Asian capacity, neither of which is within the sector’s control.

    “[2024, GS3, 15 marks] What is the need for expanding the regional air connectivity in India? In this context, discuss the government’s UDAN Scheme and its achievements.”

  • Indigenous N-reactors top pick for companies in nuclear power expansion

    Why in the News

    The indigenous Pressurised Heavy Water Reactor (PHWR) is emerging as the preferred technology for new entrants into India’s civil nuclear power sector, as the tightly regulated strategic sector opens to private players. Representatives of the National Thermal Power Corporation (NTPC), Adani Atomic Energy and Jindal Steel said at a panel discussion at the BloombergNEF Summit in New Delhi that the existing 700 megawatt electric (MWe) PHWR is the right starting point, given established design standards, a mature domestic supply chain and an existing ecosystem of vendors. The discussion followed the release of the draft rules under the Sustainable Harnessing and Advancement of Nuclear Energy for Transforming India Act, 2025 (SHANTI Act, 2025), about a week earlier. The choice is revealing: entrants are picking the reactor with the least regulatory and supply risk rather than the one that scales fastest, and that reactor alone cannot deliver the 100 gigawatt electric target set for 2047.

    What is a Pressurised Heavy Water Reactor?

    1. Design: A pressurised heavy water reactor uses heavy water as both moderator and coolant, which lets it run on natural uranium without any enrichment step.
    2. Why it suited India: Natural uranium fuelling matched a country with limited enrichment capacity that long stood outside international fuel supply arrangements.
    3. Place in the programme: It is Stage 1 of the three stage nuclear programme designed by Homi Bhabha, producing plutonium 239 as a by product for the fast breeder stage that follows.
    4. The Indian standard unit: The 700 MWe variant is the largest indigenous design in the series.

    What is a Small Modular Reactor?

    1. Definition: A small modular reactor (SMR) is an advanced reactor of up to 300 MWe, built as factory made modules and transported to site for assembly.
    2. Use case: The smaller unit size suits captive industrial power and the replacement of retiring coal units on existing sites.

    Why are private entrants choosing the 700 MWe PHWR?

    1. Design certainty: The 700 MWe design is standard, approved, operational and already carries regulatory clearance, in the assessment of the business head of Adani Atomic Energy.
    2. Supply chain depth: The supply chain for that design in India is almost fully indigenised, at 90 per cent to 95 per cent.
    3. What the sector is short of: The two major constraints named for the sector are the availability of a robust supply chain and the lack of standardised reactor designs, and the 700 MWe unit is the one design that resolves both.
    4. A second entrant agrees: Jindal Steel plans to go with 700 MWe PHWRs in its initial phase for the same reason, moving to other technologies in later phases as clarity emerges on supply chains, regulatory approvals and standardisation.

    What capacity are the new entrants targeting?

    1. The national target: India aims to scale domestic civil nuclear capacity to 100 gigawatt electric (GWe) by 2047.
    2. Corporate targets: NTPC’s capacity target is 30 GWe, the Adani group’s is 10 GWe, and Jindal Steel’s is 18 GWe in the coming years.

    What has opened the sector to private entrants?

    1. Statutory replacement: The SHANTI Act, 2025 supersedes the Atomic Energy Act, 1962 and the Civil Liability for Nuclear Damage Act, 2010.
    2. End of the state monopoly: It permits private and foreign firms to build, own and operate reactors, which no earlier law allowed.
    3. Regulator strengthened: It gives the Atomic Energy Regulatory Board independent statutory status for safety oversight.
    4. Liability rewritten: It removes statutory supplier liability and sets tiered damage caps, with a Nuclear Damage Claims Commission to adjudicate compensation after an incident.
    5. What the Centre keeps: Enrichment, reprocessing and uranium and thorium exploration remain with the Union government.
    6. What the draft rules cover: The rules released in August 2026 set out the framework for private participation, captive generation, licensing, safety oversight and nuclear liability.

    Why will the PHWR alone not deliver 100 GWe?

    1. The stated limit: PHWRs alone will not be sufficient to reach 100 GWe by 2047, in the assessment of the Adani Atomic Energy business head.
    2. The intended sequence: Deploy 700 MWe PHWRs in fleet mode first, follow with pressurised water reactors (PWRs), and bring in small modular reactors at a later point.
    3. Where foreign designs fit: Foreign reactor technologies and SMRs are expected to play a role only at a later stage, once the sector matures.
    4. The phasing is deliberate: Later phases are contingent on clarity around supply chains, regulatory approvals and design standardisation, not on a fixed date.

    What will decide whether imported designs work in India?

    1. Localisation is the condition: Global reactor technologies, including PWRs and SMRs, would need to maximise localisation in India to stay commercially viable.
    2. Cost sets the ceiling: Cost matters a great deal in the Indian market, and any technology has to reach a price the buyer of the electricity will commit to.
    3. The buyer decides: For a project to make commercial sense the consumer has to accept the tariff, which puts affordability ahead of technology preference in the selection.

    Challenges to India’s 100 GWe nuclear target

    1. The heavy component vendor base is shallow: Only a handful of Indian firms can forge and supply large reactor components, so a fleet order queues behind them. Eg. Larsen and Toubro and Bharat Heavy Electricals supply most large forgings and steam generators for the domestic programme. Fix. Qualify a second tier of suppliers through advance purchase commitments tied to the sanctioned fleet order book.
    2. No certified standard design outside the heavy water line: A project without a frozen design spends years in negotiation before construction. Eg. The Jaitapur project with the European Pressurised Reactor has been under negotiation since 2010 without first pour of concrete. Fix. Certify one design per technology class through the regulator before any commercial order is placed.
    3. Tariff acceptance by distribution utilities: Nuclear power has to clear the price a distribution company will sign a purchase agreement at. Eg. Around 42 gigawatts of renewable capacity currently sits without a power purchase agreement on price grounds. Fix. Create a separate payment for firm, dispatchable low carbon power so the grid pays for reliability rather than for energy alone.
    4. Insurance capacity is thin: Liability caps do not create the underwriting capacity a reactor needs. Eg. The India Nuclear Insurance Pool formed in 2015 carries a capacity of ₹1,500 crore. Fix. Expand the pool with reinsurance from global nuclear insurance pools, now that supplier liability has been removed.
    5. Licensed operator manpower: A fleet of reactors needs certified control room staff that only one training system currently produces. Eg. Operator training runs almost entirely through the Department of Atomic Energy’s own training schools. Fix. Accredit private and university training programmes against a regulator certified curriculum and examination.

    Conclusion

    Private entry into nuclear power has reached the point where entrants are naming capacity targets and choosing a reactor, and all three have chosen the indigenous 700 MWe pressurised heavy water reactor over imported designs. The regulatory framework is at the draft rules stage under the SHANTI Act, 2025, released by the Department of Atomic Energy, with comments closing on 4 September 2026. Whether the 100 GWe target is reachable turns on the technologies after the first fleet, and on whether foreign designs localise enough to reach a tariff a distribution utility will sign.

    “[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.”

  • The Silver Bullet: Why everyone loves a Metro

    Why in the News

    Around 200 residents of Greater Noida West tied ropes to the last Metro pillar at the Sector 71 intersection in April and pulled, in a protest organised by the Noida Extension Flat Owners Welfare Association to demand a Metro line for an area it calls underserved by public transport. Days earlier the Central government had rejected the proposal for the Noida to Greater Noida West Metro corridor. Meerut became the latest city to get a Metro in February 2026, with an interchange to the Regional Rapid Transit System (RRTS), India’s first semi high speed intercity rail service. The tension the two scenes expose is that demand for a Metro is now generated by politics and property. The ridership, fares and feeder transport that would justify one are generated by city planning that has not happened.

    What is the Metro Rail Policy, 2017?

    1. Purpose: It sets the conditions the Union government applies before it will approve or fund a metro rail project proposed by a state.
    2. Alternatives test: A state must evaluate cheaper options, including buses, bus rapid transit and trams, before committing to a metro, because metro rail is the costliest urban transport mode to build.
    3. Viability emphasis: It places greater weight on the financial viability of a project than earlier practice did.
    4. Appraisal method: It requires appraisal through economic and social cost benefit analysis, treating urban rail as a public project that delivers a public good.

    What is a Detailed Project Report?

    1. Definition: A Detailed Project Report (DPR) is the blueprint that lays out a metro project’s design, its costs, its ridership projection and its financial viability.
    2. Function: It is the document the Union government appraises the proposal against, and the document later audits measure actual performance against.

    How large has India’s Metro network become?

    1. Fourfold growth: The network has gone from around 250 km a decade ago to more than 1,100 km across 26 megacities and Tier 2 cities, with another 900 km under construction.
    2. Rate of sanction: The government is sanctioning 6 km of Metro lines every month.
    3. A young network: More than three fourths of the current network was conceived, constructed and operationalised less than 10 years ago.
    4. Aggregate ridership: Daily ridership across the country has crossed the 1 crore mark and is expected to exceed 1.25 crore in a year or two.
    5. The capacity argument: Some Delhi Metro corridors handle more than 50,000 passengers in the peak hour in the peak direction, and the Ministry of Housing and Urban Affairs calculated in January 2024 that serving that demand by bus would need 715 buses an hour in one direction, roughly one every five seconds.

    Which cities run a Metro, and how do the systems compare?

    1. Kolkata, 1984: The country’s first Metro system, and the only one run by the Indian Railways.
    2. Delhi, 2002: The Delhi Metro Rail Corporation (DMRC) now runs 416 km with an average daily ridership of about 64 lakh, the largest network in the country.
    3. Bengaluru, 2011: Namma Metro runs 96 km, the second largest operating system outside the National Capital Region.
    4. Meerut, 2026: The newest system runs 23 km with an average daily ridership of about 1 lakh, a figure that includes RRTS ridership at the shared station.
    5. The rest of the map: Gurgaon opened in 2013, Chennai in 2015, Hyderabad, Kochi and Lucknow in 2017, Ahmedabad and Nagpur in 2019, Noida in 2019, Kanpur in 2021, Pune in 2022, Navi Mumbai in 2023, Agra in 2024, and Bhopal, Indore and Patna in 2025.

    Why does every city want a Metro?

    1. Density of unserved demand: The Greater Noida West association puts around 10 lakh residents and at least 80 societies in the area it says has no rapid transit.
    2. A visible proof of development: Local administrations and politicians want a Metro network in their constituency to demonstrate development, in the assessment of a rail and Metro consultant and former country head of Bombardier Transportation India.
    3. It has entered the manifesto: In five of the last six state elections, in West Bengal, Tamil Nadu, Kerala, Assam, Bihar and Delhi, at least one major party promised Metro projects, their expansion, or fare concessions.
    4. Party specific claims: The Dravida Munnetra Kazhagam (DMK) claimed credit for bringing Metro Rail service to Chennai. The Bharatiya Janata Party (BJP) in Bihar promised Metro trains in Muzaffarpur, Gaya, Bhagalpur and Darbhanga.

    Why does ridership fall so far short of projection?

    1. The systemic gap: Most Metro systems are meeting just 25 per cent to 35 per cent of their projected ridership, in a 2023 analysis by professors at the Indian Institute of Technology Delhi. Delhi at 47 per cent and Kolkata at 38 per cent fared relatively better.
    2. Bengaluru: Namma Metro was projected to carry 18.54 lakh passengers a day by 2020-21, as recorded by the Standing Committee on Housing and Urban Affairs in a 2022 report, and carries around 10 lakh in 2026.
    3. Kochi: The 28 km system should have reached 5.39 lakh daily riders by now under its DPR and averages around a lakh, with the projection since revised to 1.5 lakh a day, a target the operator hopes to meet in the next 10 months.
    4. Jaipur: Average daily ridership was 51,000 in the inaugural month of June 2015 and stood at 53,000 in June 2026, and the Union Cabinet approved a second phase in April for ₹13,037 crore.
    5. Nagpur: A 2022 Comptroller and Auditor General report found the New Airport station averaged 47 passengers a day over 18 months from the start of commercial operation in March 2019, against 5,474 a day envisaged in the DPR.

    Why does the Metro not fit the way Indian cities actually travel?

    1. Trip length mismatch: Research at the Transportation Research and Injury Prevention Centre finds the Metro efficient only for commutes beyond 10 km. Most city commutes are shorter than 5 km, and even in Delhi only 15 per cent of trips exceed 10 km and 7 per cent exceed 20 km.
    2. What the short trip costs: For a short journey a passenger has to add the time taken to reach the station, the stops en route and the last mile at the other end, which other modes avoid.
    3. Alignments miss the destinations: The Ahmedabad Metro does not serve SG Highway, the commercial hub holding the city’s offices and malls, nor the university area.
    4. Last mile decides the mode: A commuter with neither home nor office near a station finds public transport more expensive than a personal scooter or a hired cab.

    What in the city’s own design keeps people out of the Metro?

    1. Driving is not priced: Low or non existent parking charges make private vehicle use cheaper than it should be, and poor footpaths make the walk to a station unattractive.
    2. Feeder networks are not built: Last mile connections and integration across modes rarely materialise once a line opens, in the assessment of a Metro consultant, so a passenger reaches the station on his own or not at all.
    3. The city is not shaped to feed the line: The Mumbai Metro struggles to perform because the city was not planned in a way that channels trips into it, in the assessment of a transportation researcher at the Indian Institute of Management Ahmedabad.

    Why are fares high, and who does that exclude?

    1. Fares follow the viability test: Metros are obliged to keep fares high mainly to make both ends meet, a consequence the first Managing Director of DMRC attributes to the emphasis the 2017 policy places on financial viability.
    2. Who is priced out: High fares keep out a section of the population. That section turns to less dependable but cheaper public transport.
    3. The pricing only works on some trips: A Lucknow resident finds the 23 km city Metro worth ₹70 for an airport trip against ₹400 by auto, and uses an auto or two wheeler for every daily commute.

    What do other countries’ networks show about where India stands?

    1. Absolute scale: India at 1,100 km is set to overtake the 1,400 km subway system of the United States, and remains far behind China’s 10,000 km network.
    2. Financing and operating culture: The Delhi Metro was funded by the Japan International Cooperation Agency through flexible loans. It adopted a Japanese operating ethic centred on punctuality and queue discipline, giving Indian cities a template for dignified urban transit.
    3. When to start planning: The developed country model is to begin planning a Metro when a city’s population crosses 10 lakh and to have the system running by the time it reaches 20 lakh, on which basis the Metros in Patna, Jaipur, Bhopal and Lucknow are justified.
    4. Networks are built over generations: Tokyo, Hong Kong and Paris were not built in a day, so a large infrastructure investment has to begin well ahead of the demand it will eventually serve.
    5. Optimism is not an Indian trait: Large infrastructure projects globally overestimate initial projections and underestimate costs, and the shortfall is routinely overlooked on the ground of greater public good.

    Who decides whether a city needs a Metro?

    1. The decision precedes the study: The process typically begins with a state government deciding it wants a Metro, an idea that crystallises quickly and often before any formal study is done.
    2. The assessor is the beneficiary: State governments create a Metro authority and then ask that same body, which stands to run the project, to assess whether the city should build a Metro at all.
    3. What that produced in Jaipur: A 2017 Comptroller and Auditor General report found the city, with a population of 2.3 million, was not eligible for a metro rail project, and concluded that defective planning and hasty decision making introduced a financially unviable Metro system in Jaipur.
    4. Accountability is thin: Queries to the Metro systems in Delhi, Lucknow, Ahmedabad, Hyderabad, Bengaluru, Nagpur, Jaipur and Chennai went unanswered.

    Is the Metro over built, or is it under fed?

    1. For some riders it is the only option: A 21 year old hospital intern living in a central Delhi slum reaches work 17 km away in Noida in 45 minutes by Metro, against a 6 am start at a bus stop to arrive at 9 am, and returns after 9 pm because the Metro feels safe.
    2. The cost of waiting is higher: It is easier and cheaper to build a Metro in a smaller city before it grows and congests, and cities that do not start now will face the situation their larger counterparts already face.
    3. The objection is to the trade off, not the mode: The problem is not that governments promote the Metro but that they do so at the cost of other public transport, so a city must still depend on a reliable road based system alongside it.
    4. The official defence: Ridership projections account for a city’s Master Plan and its future development potential, ridership is significantly influenced by network density and extent, and ridership on many DMRC lines has exceeded the projections made in their DPRs.

    Challenges to metro rail expansion in India

    1. Debt service migrates to the state budget: A corporation borrows against ridership that does not arrive, and repayment then falls on the exchequer. Eg. Kochi Metro Rail has run operating losses since 2017 and depends on continuing state support. Fix. Fund a defined share of operations from a dedicated urban transport levy on fuel and parking rather than from the farebox alone.
    2. No unified metropolitan transport authority: Bus, metro, suburban rail and para transit run as separate agencies with separate fares and no common timetable. Eg. Delhi’s Metro, cluster buses and Delhi Transport Corporation services operated for years without a single ticket. Fix. Constitute statutory Unified Metropolitan Transport Authorities with fare setting and route rationalisation powers, as the National Urban Transport Policy, 2006 envisaged.
    3. The land value the line creates is not captured: Property owners along a corridor capture the price rise that public investment produced. Eg. Land values near Delhi Metro corridors rose sharply with no betterment levy accruing to the operator. Fix. Levy a betterment charge along corridors and grant development rights over station land to the metro corporation.
    4. Fare revision is politically blocked: Costs rise annually and fares are revised only when a government is willing to absorb the reaction. Eg. Delhi Metro fares went unrevised for years after the 2017 revision despite rising energy and staff costs. Fix. Make revision automatic through an indexed formula operated by a statutory Fare Fixation Committee.
    5. Signalling and rolling stock depend on a few suppliers: Core train control technology is supplied by a small set of foreign vendors, which raises cost and lengthens delivery. Eg. Communications based train control systems on Indian metros are supplied largely by three global vendors. Fix. Use the domestic content requirement in metro procurement to qualify Indian signalling suppliers through a guaranteed order pipeline.

    Conclusion

    India is adding metro rail faster than it is adding the ridership, fares and feeder transport that would make the network work, because the demand being satisfied is political and territorial rather than a measured transport demand. Nothing in the record suggests the mode is wrong for the corridors that genuinely carry the volume, and the record does show that the appraisal deciding which corridors those are is conducted by the body that stands to build them. The unresolved question is whether appraisal will be separated from execution, and whether bus and road based transport will be funded alongside the Metro rather than after it.

    “[2014, GS3, 12.5 marks] National Urban Transport Policy emphasises on ‘moving people’ instead of ‘moving vehicles’. Discuss critically the success of the various strategies of the Government in this regard.”

  • On interest rates, can’t be both dovish & hawkish

    Why in the News

    The Monetary Policy Committee of the Reserve Bank of India (RBI) voted unanimously at its last meeting to hold the benchmark repo rate at 5.25 per cent, in a policy read as more dovish than expected. The minutes of that same meeting, released a few days ago, point the other way. Members drawn from the central bank displayed a distinct hawkishness, and the Bank’s own inflation projections imply negative real interest rates on a forward basis. The divergence is the problem: a stance described as neutral cannot be reconciled with projections that would stimulate activity, nor with a growth assessment the Bank itself calls resilient.

    What is a monetary policy stance?

    1. What it signals: The stance states the direction of the committee’s next expected move on the policy rate. That signal is separate from the rate set on the day.
    2. Accommodative: The committee signals that the next move is a cut, or that liquidity will stay supportive of demand.
    3. Neutral: The committee commits to no direction and keeps both a cut and a hike open at the following meeting.
    4. Tightening or withdrawal of accommodation: The committee signals that the next move is a hike, or the removal of surplus liquidity from the system.

    What is the real interest rate?

    1. Definition: The real interest rate is the nominal policy rate less expected inflation, so it measures what a lender actually earns once prices have risen.
    2. Why the sign matters: A negative real rate makes money cheaper than the rate at which prices are rising, which pushes households and firms toward borrowing and spending.

    What did the last policy decision signal?

    1. The stance retained: The committee kept the stance neutral alongside that hold.
    2. The tone: The policy read as more dovish than many analysts had expected at the time.
    3. The inference drawn: Analysts concluded that rate hikes were not imminent, even with inflation projected above target.

    How do the minutes of the same meeting read differently?

    1. A reversal in signal: The minutes suggest the current situation is unlikely to be maintained over the near term, and the divergence from the policy statement is striking.
    2. The internal members hardened: That hawkishness came from the members drawn from the central bank, not from the committee as a whole.
    3. How far each went: An assessment by economists at the State Bank of India reads the Governor’s minutes statement as showing an inclination toward policy tightening, records a Deputy Governor calling for a possible rate hike later in the year, and notes an Executive Director stopping just short of the same call.
    4. A different objection from outside: External members of the committee drew attention instead to the real interest rate.

    Can a neutral stance sit with negative real interest rates?

    1. The projections: The Bank has pegged inflation at 5.9 per cent in the third quarter, 5.5 per cent in the fourth quarter, and 5.3 per cent in the first quarter of the next financial year.
    2. What they imply: Against a repo rate of 5.25 per cent, those projections put real interest rates in negative territory on a forward basis.
    3. What negative real rates do: They stimulate economic activity, which is a different setting from the stance the committee has adopted.
    4. What neutral is supposed to mean: The Governor has previously stated that a neutral stance implies no support for economic activity and no support for controlling inflation.
    5. The growth assessment compounds it: The Bank describes growth as resilient, supported by domestic demand, sustained expansion in manufacturing and services activity, and robust exports, which removes the case for a stimulative real rate.

    What does the same uncertainty look like at other central banks?

    1. A shared condition: Central banks across the world are grappling with uncertainty over inflation and over the course of monetary policy.
    2. The United States: The Federal Reserve maintained interest rates in July, and the path of policy after that remains unclear.
    3. The same gap between decision and minutes: The minutes of that Federal Reserve meeting record that several participants favoured an increase of 25 basis points in the target range.

    What will decide the next move?

    1. The October meeting: By the time the committee meets next in October, there should be more clarity on agriculture and on the trajectory of inflation.
    2. The projections as the signal: The Bank’s revised inflation projections will show what it expects of underlying price pressures going forward.
    3. The consequence: Those expectations are what would produce an adjustment in the policy rate.

    Challenges to India’s flexible inflation targeting framework

    1. A headline target moved by food: Food and beverages carry close to half the weight in the Consumer Price Index, so the target responds to harvests that no policy rate can influence. Eg. Vegetable price spikes pushed headline inflation above the upper tolerance band in 2023 and 2024. Core inflation stayed subdued through the same period. Fix. Publish an explicit core inflation reference alongside the headline target, so the committee’s tolerance for supply shocks is visible in advance.
    2. An ageing consumption basket: The index in use rests on a consumption pattern captured years ago, so the measured basket drifts from what households actually buy. Eg. Services such as data, health insurance and education are underweighted relative to current household spending. Fix. Fix a statutory revision cycle for the index base year so the measure and the target are reset together.
    3. Exchange rate pressure competes with the target: Rate decisions taken for domestic prices collide with the management of capital flows. Eg. Record foreign portfolio outflows in 2025-26 forced heavy intervention to steady the rupee. Fix. State an explicit order of priority between the inflation target and exchange rate smoothing in the policy statement.
    4. No fiscal counterpart to the target: The framework binds the central bank alone, with no matching commitment on borrowing. Eg. Heavy government borrowing keeps longer tenor yields elevated regardless of where the repo rate is set. Fix. Pair each five year target reset with a stated debt to gross domestic product path under the Fiscal Responsibility and Budget Management Act, 2003.
    5. Accountability stops at a report: A sustained breach obliges a report and nothing further. Eg. The report on a target breach goes to the Central Government and is not laid before Parliament. Fix. Require the report to be tabled in Parliament with a stated corrective path and a review date.

    Conclusion

    A unanimous hold read as dovish now sits alongside minutes that record internal calls for tightening and projections that imply negative real rates. The policy statement, the stance and the projections are describing three different settings, and only one of them can be the policy. The October meeting, with clearer information on agriculture and on the inflation trajectory, is where that inconsistency has to be resolved into either a rate move or a change of stance.

    “[2023] Consider the following statements :

    Statement-I: In the post-pandemic recent past, many Central Banks worldwide had carried out interest rate hikes.

    Statement-II: Central Banks generally assume that they have the ability to counteract the rising consumer prices via monetary policy means.

    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 is incorrect but Statement-II is correct

  • Keep UPI free. Fund it from the savings it generates

    Why in the News

    Parliament has passed the Taxation and Other Laws (Amendment) Bill, 2026, rewriting Section 10A of the Payment and Settlement Systems Act, 2007. That section barred any charge on Unified Payments Interface (UPI) and RuPay transactions. The amendment replaces the bar with an enabling provision, letting the government notify in future which payment modes may carry a charge. No charge is imposed today. The tension is that the cost of running UPI is real and the state’s compensating outlay is shrinking. The only fee instrument available for recovering that cost would be levied on the smallest transactions in the economy.

    What is the Merchant Discount Rate?

    1. Definition: The Merchant Discount Rate (MDR) is the percentage of a transaction value that a merchant pays for accepting a digital payment, deducted before the money reaches the merchant’s account.
    2. Card world origin: It is an inheritance from card payments, with the card issuer, the acquiring bank and the network each taking a slice. A physical card, a terminal and credit default risk give the fee something real to recover.

    What has the amendment to Section 10A actually changed?

    1. From prohibition to permission: A statutory bar on charging has been converted into a discretionary power to allow charging on notified modes.
    2. The trigger moves to the executive: Imposing a charge no longer needs Parliament, only a notification.
    3. The status quo is unchanged today: No charge has been imposed on any mode as of the amendment.
    4. Why it still matters: A right protected by statute and a right held at executive discretion are different guarantees for a merchant deciding whether to accept digital payment.

    What has UPI become?

    1. Volume and value: In 2025-26 UPI carried over 24,000 crore transactions, roughly 66 crore a day, worth about ₹314 lakh crore.
    2. Share: It accounts for some 85 per cent of India’s digital retail payments and nearly half of the world’s real time payments.
    3. Ticket size: The average transaction is about ₹1,300, and 86 per cent of merchant payments are below ₹500.
    4. Who transacts: Payments at that size are made to the vegetable seller, the auto driver and the kirana shop, so a charge is a levy on the smallest transactions of the poorest rather than on commerce in the abstract.
    5. What was achieved: No other country has made real time digital payment free, instant and universal, and the transition pulled hundreds of millions of Indians into the formal economy.

    Why is UPI treated as public infrastructure rather than a company’s product?

    1. Most used digital public good: After Aadhaar gave every Indian a digital identity, UPI is the most visible piece of digital public infrastructure, and the citizen reaches for it many times a day rather than once.
    2. A protocol, not a platform: It is an open, protocol based public good, a shared language for money instead of any single firm’s product.
    3. What the protocol did to banking: Before UPI each bank ran its own closed application. UPI asked banks only to open their programming interfaces to a shared protocol, so any application can move money between any two accounts at any two banks.
    4. External validation: The model is being studied and adopted by other countries.

    Why is the Merchant Discount Rate the wrong instrument for UPI?

    1. The recoverable costs do not exist: The point of sale machine is the customer’s own phone, running on data he has already paid for. There is no card, no terminal, no credit risk, and settlement is instant.
    2. The work done test: Telecom interconnection regulation pays a network only for the work it actually performs, and the same test applies to a payment rail.
    3. The work actually performed: When A pays B, A’s bank makes a debit entry, the National Payments Corporation of India (NPCI) issues a settlement instruction, and B’s bank makes a credit entry. No cash moves at any point.
    4. What that work costs: NPCI runs the entire switch for about ₹500 crore a year, which is some two paise a transaction.

    The funding gap is real even where the fee is wrong

    1. Providers earn nothing directly: Banks and payment providers bear real costs, and under zero MDR they receive nothing from a UPI transaction itself.
    2. The bridge is being withdrawn: The government has covered the gap with an incentive, and the outlay is projected to fall to about ₹437 crore from about ₹3,631 crore two years ago.
    3. Traffic is moving the other way: The volume the incentive supports is multiplying and the incentive itself is shrinking. The shortfall widens each year without any policy decision being taken.

    Who actually captures the savings digitisation creates?

    1. Currency printing: The Reserve Bank spends some ₹5,000 crore to ₹6,400 crore a year merely printing currency notes, which is more than the government spends keeping UPI free, before storage and movement of cash is counted.
    2. Channel cost at the bank: A counter transaction costs a bank ₹40 to ₹50 and an automated teller machine (ATM) withdrawal costs ₹19 in interchange alone. A UPI transaction costs a small fraction of either.
    3. The float: By making an account as usable as cash, UPI keeps money in accounts rather than idle in pockets, and that low cost float is what banks earn a spread on and lend against.
    4. The mismatch: The beneficiary of digitisation is the state and the bank, and the party a merchant fee would tax is the merchant, so the instrument does not follow the benefit.

    What would a Merchant Discount Rate cost the transition?

    1. Price sensitivity: India is intensely price sensitive, and a digital payment costing even a rupee more than cash sends many users back to cash.
    2. Pass through at the counter: A merchant charged MDR passes it on as a stated surcharge for digital, or refuses digital payment altogether.
    3. Scale of the extraction: Even 0.3 per cent on merchant payments would take some ₹27,000 crore a year out of a thin margin retail economy.
    4. Reversal risk: Telling a hundred crore users that what was always free now costs money is the surest way to slow, and even reverse, a transition still forming, collecting a little and losing a great deal.
    5. A large merchant carve out will not hold: Confining the charge to large merchants offers no lasting protection, because thresholds slip and definitions widen.

    What funding model could cover the cost without charging the user?

    1. Return a share of the savings: The state, as steward of the public good and no longer obliged to print and move the cash UPI displaces, should return a small, defined share of its savings to those who run the rails.
    2. Formula, not discretion: The support should be transparent and formula based, funded specifically from savings in currency management.
    3. Not a subsidy: It is payment for value delivered, on the same principle by which the state pays a transmission company to carry electricity.
    4. The price stays off the citizen: The design keeps the charge out of sight of the user, so no price tag ever appears in front of the person paying.

    Challenges to keeping UPI free

    1. The support is a Budget line, not an entitlement: An annual allocation can be cut without any change in law, so the guarantee is only as durable as one fiscal year. Eg. The incentive allocation has been cut sharply across two consecutive Budgets. Fix. Convert the support into a formula linked to measured currency management savings, so the amount tracks the service rather than the fiscal cycle.
    2. Two applications carry most of the volume: Concentration lets a handful of private applications set the terms of access for banks and merchants. Eg. Two private applications account for roughly 80 per cent of UPI volume, and the market share cap on them has been deferred repeatedly. Fix. Fund interoperable merchant acquisition through smaller banks and the Bharat Interface for Money application to widen the base.
    3. Charged rails already run beside the free ones: Credit products routed over the same interface carry a fee, so the free character of the system is already partial. Eg. From June 2026 a merchant discount rate applies to large value RuPay credit on UPI transactions. Fix. Publish a single schedule stating exactly which flows carry a charge, so a merchant sees the boundary before accepting a payment.
    4. Fraud losses sit outside the pricing debate: The system’s real cost includes reimbursing victims, which no fee structure currently funds. Eg. Digital payment fraud losses have crossed ₹22,000 crore. Fix. Build a lagged credit window for high risk first time transfers, so a fraudulent transfer can be reversed before withdrawal.
    5. Downtime carries no consequence: Bank side outages take users off the network at peak hours with no compensation obligation. Eg. Server downtime at major banks has repeatedly disrupted time sensitive payments. Fix. Set a published per bank uptime standard with penalties credited directly to affected users.

    Conclusion

    The statutory prohibition on charging for UPI is gone and the power to permit a charge now sits with the executive, even though no charge exists today. The cost of running the rails is genuine and the compensating outlay is falling, so the funding question cannot be deferred much longer. The unresolved choice is between recovering that cost from the merchant, which taxes the smallest transactions and risks reversing adoption, and recovering it from the currency management savings the state already books because UPI exists.

    “[2018] Which one of the following best describes the term “Merchant Discount Rate” sometimes seen in news?

    (a) The incentive given by a bank to a merchant for accepting payments through debit cards pertaining to that bank.

    (b) The amount paid back by banks to their customers when they use debit cards for financial transactions for purchasing goods or services.

    (c) The charge to a merchant by a bank for accepting payments from his customers through the bank’s debit cards.

    (d) The incentive given by the Government to merchants for promoting digital payments by their customers through Point of Sale (PoS) machines and debit cards.

  • FDI policy rejig for border nations spur Rs 5k cr investment: DPIIT

    Why in the News

    A relaxation in India’s rules on investment from land bordering countries has drawn 29 foreign direct investment (FDI) proposals worth ₹4,895.65 crore up to 20 August 2026. The relaxation was notified in March 2026. It permits a foreign entity carrying non controlling beneficial ownership of up to 10 per cent from a land bordering country to invest through the automatic route. Press Note 3 of 2020 had required prior government approval for any such investment, however small that land border shareholding was. What is now tested is whether a shareholding threshold can separate incidental Chinese exposure inside a global fund from Chinese strategic control of an Indian asset.

    What is Press Note 3 of 2020?

    1. The restriction: Imposed in April 2020, it made government approval mandatory for investment from any country sharing a land border with India.
    2. Stated purpose: It was aimed at preventing opportunistic takeovers of Indian firms during the Covid-19 pandemic, and stayed in force amid heightened national security concerns after the Galwan clash later that year.
    3. Country neutral drafting: The framework named no country, and China is the largest source of investment among India’s land neighbours.
    4. Uneven bite: Entities of Bangladesh and Pakistan can invest only through the government route. Flows from Nepal, Myanmar, Bhutan and Afghanistan are very small as a share of India’s total foreign investment.

    What conditions does the relaxed route carry?

    1. Indian control retained: The majority shareholding and control of the investee entity must rest at all times with resident Indian citizens, or with resident Indian entities that are themselves owned and controlled by resident Indian citizens.
    2. Threshold is a ceiling, not a waiver: A land border holding above 10 per cent still routes the investment through government approval, so the automatic route covers only diluted exposure.
    3. Time bound clearance for named goods: A 60 day deadline was approved for clearing proposals from land bordering countries, including China, in capital goods, electronic capital goods, electronic components, polysilicon, and ingot wafer for solar cells.

    Where has the relaxed route drawn money from?

    1. Sectors: The proposals span information technology, artificial intelligence, information and communication, manufacturing, pharmaceuticals, data centres and transport services.
    2. Jurisdictions: They were reported by investors and entities based in Mauritius, the United States, the Republic of Korea, Japan, Singapore, Luxembourg and the Cayman Islands, among others.
    3. Stated gain: The government’s own assessment is that the reform gives investors greater certainty, cuts transaction time and strengthens ease of doing business in India.

    Where has the Centre gone further than the ownership threshold?

    1. A strategic sector joint venture: In July 2026 the Centre cleared a joint venture between Dixon Technologies (India) Limited and Vivo Mobile India Limited for manufacturing electronic devices and smartphones, one of the first major approvals to Chinese investment in a strategic sector.
    2. Entry into power tenders: The Finance Ministry in July allowed four Chinese power equipment manufacturers with factories in India to bid for government tenders on critical power projects.
    3. A procurement exemption: TBEA Energy, Nanjing Electric India, New Northeast Electric India and Taikai Electric (India) were exempted from the public procurement rule requiring entities from land bordering countries to register with the relevant Indian authority before bidding.
    4. What is at stake in that equipment: The four firms make transformers, wires, high voltage switchgear and gas insulated switchgear used in transmission lines. New Northeast Electric India lists at least 11 transmission line projects across India.

    Challenges to the revised land border investment framework

    1. Beneficial ownership is hard to trace through layers: A 10 per cent test presumes the ultimate holder is visible, which layered holding structures defeat. Eg. Several of the reported proposals came through Mauritius and the Cayman Islands. The ultimate holder is not on the local register in either jurisdiction. Fix. Require a declaration of the ultimate beneficial owner at every layer, verified against the significant beneficial ownership register maintained under the Companies Act, 2013.
    2. A shareholding cap does not bound influence: Control travels through contracts as much as through equity. Eg. A minority holder with board nomination rights or a sole technology licence can direct a joint venture without owning a majority. Fix. Test control by board composition and contractual veto rights, not by shareholding percentage alone.
    3. Screening capacity is spread thin: No single body owns the security review of an inbound proposal. Eg. Screening runs across the Department for Promotion of Industry and Internal Trade, the Ministry of Home Affairs and the administrative ministry, each with its own timeline. Fix. Constitute a standing inbound investment security review committee with a statutory disposal deadline.
    4. Technology dependence persists in the sectors being opened: Approval eases entry without changing who owns the process knowledge. Eg. India imports most of its polysilicon and ingot wafer requirement for solar cells. Fix. Tie approval in those goods to a phased technology transfer and a rising domestic sourcing commitment.
    5. The government route stays slow for everyone else: Only the notified goods got a deadline, so other proposals still face open ended review. Eg. Land border proposals outside the notified list have historically taken well over a year to clear. Fix. Extend the 60 day discipline to every proposal on the government route, with reasons recorded for any extension.

    Conclusion

    The relaxed framework has been operative since March 2026 and has produced 29 reported proposals in five months. Press Note 3 itself stays on the books for any land border holding above the threshold, so the restriction has been narrowed rather than withdrawn. The next milestone is disposal of proposals under the 60 day window for the notified goods, and whether the Dixon and Vivo clearance becomes a template for a wider, sector by sector opening.

    Foreign Direct Investment in India

    1. About: Foreign direct investment is cross border investment that establishes a lasting interest in an enterprise abroad, in the definition used by the Organisation for Economic Cooperation and Development.
    2. Routes: Most sectors permit 100 per cent foreign investment through the automatic route, and the remainder require prior government approval.
    3. Cumulative scale: India’s cumulative inflows crossed about $1.14 trillion between April 2000 and December 2025, with nearly 70 per cent of that arriving in the last decade.
    4. Recent flows: Gross inflows reached a three year high of $81 billion in 2024-25, led by services and manufacturing.

    Laws and Rules Governing Foreign Investment

    1. Foreign Exchange Management Act, 1999: The parent statute governing cross border transactions and capital account flows into and out of India.
    2. Foreign Exchange Management (Non-debt Instruments) Rules, 2019: Notified by the Finance Ministry, these fix sectoral caps, entry routes and pricing guidelines for equity investment.
    3. Consolidated FDI Policy Circular: A single compiled statement of sectoral policy, which Press Notes amend between editions.
    4. Competition Act, 2002: Acquisitions above notified thresholds need Competition Commission of India clearance.

    Challenges in Attracting Foreign Direct Investment

    1. Policy unpredictability: Rules that change mid cycle force investors to restructure entities already built. Eg. Repeated shifts in e-commerce foreign investment norms forced marketplace operators to redraw their seller structures. Fix. Publish a standstill period between the notification of a sectoral rule change and its taking effect.
    2. Land acquisition: Site control is the binding constraint on greenfield manufacturing. Eg. POSCO abandoned its Odisha steel project after a decade of unresolved land disputes. Fix. Build titled, pre cleared land banks held by state industrial corporations and offered on long lease.
    3. Geographic concentration: Inflows cluster in services and a few urban states. Eg. A handful of states absorb the bulk of equity inflows reported each year. Fix. Offer differential incentives for greenfield investment in aspirational districts.
    4. Intellectual property enforcement: Weak enforcement raises the risk premium on technology intensive investment. Eg. India remains on the United States Priority Watch List on intellectual property enforcement. Fix. Create dedicated commercial intellectual property benches with fixed disposal timelines.
    5. Clearance friction across governments: A central approval does not deliver the state permissions a project actually needs. Eg. The National Single Window System still does not carry every state level clearance. Fix. Make full state onboarding to the single window a condition for central infrastructure co-funding.

    Back2Basics: Department for Promotion of Industry and Internal Trade

    1. Parent ministry: It sits under the Ministry of Commerce and Industry. It was the Department of Industrial Policy and Promotion until internal trade was added in 2019.
    2. Policy mandate: It frames and administers the Consolidated FDI Policy and issues the Press Notes that amend it.
    3. Programmes run: It runs Startup India and Make in India, and maintains the National Single Window System.

    “[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.