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Subject: Economics

  • Centre notifies key scheme to manufacture mobile phones

    Why in the News

    The Ministry of Electronics and Information Technology (MeitY) has notified the Mobile Phone Manufacturing Scheme (MPMS), a ₹62,500 crore programme incentivising domestic assembly of smartphones and greater local value addition. The Union Cabinet approved the scheme on 15 July 2026. It succeeds the Production Linked Incentive Scheme for Large Scale Electronics Manufacturing, which ran from 2020 to the last financial year and rewarded incremental handset output from any qualifying firm. The new scheme splits that single track in two, creating a separate and richer channel for brands owned by Indian citizens and holding their intellectual property in India. What is contested is whether incentive design alone can move India from assembling other countries’ brands to owning its own.

    Components of the Mobile Phone Manufacturing Scheme

    1. Two parts: The notification divides the scheme in two, one part incentivising mobile phone manufacturing and one part supporting Indian mobile phone brands.
    2. Part 1, the assembly incentive: A base incentive on assembly tapers from 2.75 per cent to 2.25 per cent across the five year tenure. Applicable rates run from 2.25 per cent to 5 per cent depending on the year and on incremental sales.
    3. The domestic sourcing add on: An additional 1.5 per cent is payable on domestic component sourcing, built up from individual component incentives ranging from 0.2 per cent to 0.5 per cent.
    4. Part 2, the Indian brand track: An Indian owned brand draws a flat 5 per cent incentive for the full tenure, plus a domestic design and research and development incentive of 3 per cent.

    How does a firm actually earn the incentive?

    1. Turnover gate: Mobile phone companies, including electronics contract manufacturers, need a turnover of ₹10,000 crore in 2025-26 to qualify. Electronics manufacturing services firms with 51 per cent Indian ownership qualify at ₹1,000 crore.
    2. Growth gate: Incentives are disbursed only on sales beyond 115 per cent of the previous financial year’s production. A unit that produced ₹10 crore worth of phones in the preceding year and ₹12 crore in the next draws incentive on ₹50 lakh alone.
    3. Sourcing condition: The 1.5 per cent additional incentive applies only where a firm sources domestically for at least a quarter of the phones it sells in that financial year.
    4. No earmarking: The corpus is fungible overall, so no amount is reserved for domestic players. Foreign phonemakers face a higher bar to draw incentive, and they draw it from the same pool.

    What does the scheme change for Indian brands?

    1. Ownership test: An Indian brand must be majority owned by Indian citizens and incorporated in India, with intellectual property and trademarks held locally.
    2. No sales floor: Indian brands are exempt from the minimum sales threshold that applies to other brands, and their baseline is fixed at 2025-26.
    3. Stated intent: The Union Minister for Electronics and Information Technology framed the shift as one of Indian brand, Indian design and Indian intellectual property.
    4. Discretionary channel: An empowered committee will make recommendations to the government on Indian brand applications for incremental incentives and for non fiscal support.

    What has the assembly led phase achieved, and where has it stopped?

    1. Import to export: Around 70 per cent to 75 per cent of phones sold in India were imports in 2014-15, and the country is now an exporter of finished handsets.
    2. Global position: India is the second largest phone manufacturer in the world, and practically all phones sold in the country are made in it.
    3. Shallow value: Domestic value addition in mobile phone manufacturing stands at 23 per cent, so most of the value in an Indian assembled handset is still created abroad.
    4. A ceiling exists: The benchmark set by Chinese phone assembly units is itself bounded, because components in electronics value chains crisscross the globe several times before a device is finished.

    What does the scheme set out to achieve by 2030-31?

    1. Production: Cumulative production, measured as the combined sale value of finished products, is targeted at ₹39 lakh crore by the end of the scheme.
    2. Exports: Cumulative exports over the same period are targeted at ₹5 lakh crore.
    3. Value addition: The stated goal is to double overall domestic value addition from a band of 18 per cent to 23 per cent up to a band of 35 per cent to 40 per cent.
    4. Employment: The Secretary of the Ministry of Electronics and Information Technology put direct job creation under the scheme at 60,000.

    Why does the government treat phone assembly as a gateway sector?

    1. Skill and technology spillover: Technology and skill transfer from handset lines is stated to enable adjacent hardware production, in laptops, tablets and smart watches.
    2. New device categories: The same capability base is expected to carry into gaming consoles, drone manufacturing and medical devices.
    3. Beyond electronics: Components and automobile windshields are named as further beneficiaries of the manufacturing ecosystem the sector builds.

    Challenges to the Mobile Phone Manufacturing Scheme

    1. Incentive concentrates in a few assemblers: A single fungible pool rewards volume, and volume already sits with a small set of contract manufacturers. Eg. Under the earlier electronics scheme, most disbursed incentive flowed to a handful of contract assemblers serving Apple and Samsung. Fix. Ring fence a defined tranche of the corpus for the Indian brand track instead of leaving the whole corpus open to competition.
    2. The turnover gate excludes the firms the scheme names: A ₹1,000 crore revenue floor sits above what the surviving Indian handset brands turn over. Eg. Micromax and Lava operate at a fraction of the revenue of the contract assemblers they would compete with for the same pool. Fix. Add a staged eligibility ladder with a lower entry threshold and a rising production commitment.
    3. The sourcing bonus has a thin supplier base to draw on: Displays, camera modules and application processors are not made in India at scale. Eg. Display panels and camera modules for handsets assembled in India are imported largely from China, South Korea and Vietnam. Fix. Sequence disbursement under the Electronics Component Manufacturing Scheme ahead of assembly incentive, so a supplier base exists before the bonus is claimed.
    4. A demand slump erases a year’s eligibility: Incentive accrues only above a fixed growth threshold over the prior year, so a flat year pays nothing. Eg. Covid disruption in 2020-21 left applicants under the earlier electronics scheme unable to meet their first year incremental production targets. Fix. Allow an unmet incremental target to be carried into the following year within the same tenure.
    5. Locally held intellectual property can be bought rather than built: The Indian brand test rests on registered ownership, which an assignment satisfies without design capability moving to India. Eg. Contract design houses in Shenzhen supply reference designs that brands across Asia rebadge as their own. Fix. Tie the design and research incentive to audited domestic engineering headcount and to patents filed from India.

    Conclusion

    The Mobile Phone Manufacturing Scheme has moved from Cabinet approval to notification, with operational guidelines issued on 21 August 2026 and a tenure running to 2030-31. The next milestone is the application round. Assemblers file against the turnover gate. Indian brands file separately for the brand track. Whether the second track becomes a genuine channel or a minority claim on a shared pool will be visible in the empowered committee’s first set of recommendations.

    “[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?”

  • The Gen Z that wasn’t at Jantar Mantar

    Why in the News

    The Gen Z visible at the Jantar Mantar protest was young, articulate and quotable, and drew wide attention online. A far larger part of the same cohort was absent from those photographs, working as delivery riders, security guards, warehouse packers and unemployed graduates. The gap between the two groups sets up the question of whether a generation that has been given aspiration has also been given the means to act on it.

    What is the demographic dividend?

    1. The concept: A demographic dividend is the growth advantage a country gains when the share of its working age population rises relative to its dependent population. The advantage arises from a temporary shift in age structure, not from population size.
    2. Why it is conditional: The advantage converts into output only where the additional working age population is employed at rising productivity. Absent that, a larger workforce raises the number of job seekers without raising income.
    3. How India has used the term: For two decades the demographic dividend has been described as an asset that pays out automatically. A young population is better understood as capital advanced against a future that has to be built to repay it, and unlike a dividend, it can default.

    What is a reference group?

    1. The concept: A reference group is the set of people against whom an individual measures their own life, as set out by sociologist Robert Merton. Satisfaction depends on the comparison, not on the absolute level of income.
    2. What changed the group: A farmhand can now compare himself with a Dubai apartment or a weekend in Silicon Valley, delivered more reliably than a crop forecast.

    What is the capacity to aspire?

    1. The concept: The capacity to aspire, as framed by anthropologist Arjun Appadurai, is not merely wanting a different future. It is knowing the routes that lead to it.
    2. The asymmetry it exposes: The capacity to imagine has been democratised at internet speed. The capacity to navigate has not.

    What is the gig or platform economy?

    1. The arrangement: Work is allocated by a digital platform on a task by task basis, and the worker is classified as an independent partner rather than an employee. The platform can deactivate a worker without ever meeting him.
    2. What it prices: The platform prices risk more precisely than labour, so incentives rise when it rains rather than when skill accumulates.

    Which Gen Z was absent from the protest?

    1. The delivery rider: A 22 year old delivering dinner to someone watching the protest on a phone, financing a motorcycle on debt he does not fully understand.
    2. The security guard: A worker stationed outside a building, protecting a lifestyle he can see but cannot enter.
    3. The village youth: A young man who can watch a Stanford lecture for free and has no idea what job he will do next year, whose imagination has migrated while his life chances have not.
    4. The three the category quietly merges: A liberal arts student in Delhi, a warehouse packer outside Gurugram and a UPSC aspirant in Bihar are treated as one cohort because they were born within the same 15 years.
    5. What they actually share: They share visibility without access, not a common set of opportunities.

    Why has inequality become harder to bear without becoming larger?

    1. The level is not the change: India has never lacked inequality. What has changed is the technology of experiencing it.
    2. Comparison is no longer rationed: The farmer knew the landlord lived better. He did not begin breakfast watching the landlord’s holiday in the Maldives.
    3. The comparison set is now global: The smartphone has given a young population the entire planet to measure itself against.
    4. Consumption has become identity: The sneaker, the café and the start up vocabulary function as signifiers of having arrived rather than as possessions.
    5. The mismatch of speeds: Desire now travels at the speed of a 5G network. Social mobility still moves at the pace of a passenger train.

    Why does the platform economy break the link between work and status?

    1. The old bargain was legible: Selling labour converted time into standing over a working life, through tenure, wage progression and recognised skill.
    2. The mechanism was removed, not replaced: The platform economy dropped that conversion and substituted the vocabulary of entrepreneurship for it.
    3. Hours convert into more hours: A worker classified as a partner finds that additional hours produce additional hours rather than advancement, described as autonomy.
    4. Deactivation replaces dismissal: Loss of livelihood arrives as an algorithmic status change, without a hearing, a notice period or an identified decision maker.
    5. The scaffolding is missing: Aspiration has been mass produced without the institutions that let a person act on it.

    If a salary cannot deliver status, what does?

    1. A second economy opens: When the economic route to status narrows, an economy of dignity opens in its place.
    2. The substitutes on offer: Religion, nationalism, caste and an online tribe can supply the standing a salary does not.
    3. The switching cost is near zero: A young man cannot change his salary. He can change his avatar.
    4. The consequence for politics: A society that cannot offer its young enough ladders should not be surprised when identity begins to function as one.
    5. What the protest actually demonstrated: The protesters possessed something rarer than anger, which is a vocabulary for it. Most anger never reaches that stage.

    Why should the demographic dividend be read as a loan rather than a payout?

    1. A dividend is unconditional, a loan is not: Treating youth as an asset that pays out automatically removes the obligation to build the employment and training system that repays it.
    2. The default condition is identifiable: Loans default when the future they were advanced against is not built, which in this case means a labour market that cannot absorb the graduates it produces.
    3. The window is finite: The favourable age structure lasts for a fixed period, after which the dependency ratio rises again and the opportunity closes.
    4. The test is not happiness: The operative question is whether a generation believes the future is negotiable, not whether it reports itself content.
    5. The distinction that matters: Every generation tolerates hardship that looks like a corridor. The trouble begins when it starts looking like a closed room.
    6. The unfinished journey: The protesters had travelled from disappointment to language and from anger to demand. Millions of their contemporaries are still between the first two.

    Challenges to realising India’s demographic dividend

    1. Employability lags enrolment: Degree attainment has risen faster than the skills employers price, so unemployment rises with education level rather than falling. Eg. Urban youth unemployment in the 15 to 29 age group stood at 13.6% even as the overall unemployment rate stayed at 3.1%.
    2. The workforce is concentrated in low productivity work: A large share of workers remains in self employment and casual labour, where earnings do not accumulate into savings or standing. Eg. Self employment accounted for 56.2% of employment and casual labour for 20.2%.
    3. Agriculture holds labour it cannot pay for: The sector employs a share of the workforce far above its contribution to output, which caps rural incomes. Eg. Agriculture employs about 43% of the workforce and contributes around 15% to 16% of output.
    4. Female participation limits the size of the dividend: A dividend calculated on the working age population is not realised where half of it stays outside the labour force. Eg. Female labour force participation stood at 40.0% against 79.1% for men.
    5. Social security does not follow the worker: Platform and informal workers move between employers and locations faster than benefit entitlements can be established. Eg. Portable benefits for gig workers were introduced only through the e-Shram linkage under the four labour codes effective 21 November 2025.
    6. The dividend is unevenly distributed across States: States that completed the demographic transition earlier are ageing while the working age surge continues elsewhere, so the labour surplus and the job supply sit in different places. Eg. Kerala’s multidimensional poverty rate of 0.55% sits alongside Bihar’s 33.76%, and the two States are at opposite ends of the age structure.
    7. Aspiration outruns the migration corridor: Young workers who move for work enter cities without housing, portable schooling or urban welfare registration. Eg. Migrant workers were excluded from ration entitlements outside their home State until One Nation One Ration Card portability was rolled out.

    Conclusion

    The visible Gen Z at Jantar Mantar had converted disappointment into a demand, and that conversion is what made it photographable. The larger part of the cohort holds the same grievance without the vocabulary or the platform to state it, which is why absence rather than presence is the more accurate measure of the generation. The demographic dividend framing has obscured this by treating a young population as a payout rather than as a claim that must be earned. What remains unaddressed is the machinery that converts aspiration into mobility, namely employable skills, formal jobs and portable social protection.

    What is Inclusive Growth?

    1. About: Inclusive growth is economic growth that raises the incomes and capabilities of every group in the population, not only aggregate output.
    2. Rationale: It exists because headline growth can rise while the bottom half of the distribution gains little, leaving poverty, unemployment and inequality intact alongside a rising gross domestic product.
    3. The three domains it is studied across: Overall inequality, poverty, and unemployment.
    4. The three dimensions in the framework of the Organisation for Economic Co-operation and Development (OECD):
    5. Participation: All groups are able to contribute to the growth process.
    6. Benefit sharing: All groups gain from growth in proportion to their contribution.
    7. Equity: Historical disadvantages are actively redressed through policy.
    8. Where it entered Indian planning: The Eleventh Five Year Plan (2007 to 2012) was titled “Rapid and More Inclusive Growth” and the Twelfth Five Year Plan (2012 to 2017) was titled “Faster, Sustainable, and More Inclusive Growth”.

    Key Concerns Regarding Inclusive Growth

    1. Trickle down has not operated: Headline expansion in gross domestic product has not translated into proportionate gains for the bottom half of the distribution.
    2. Growth has been jobless in composition: High informal employment shares and structural underemployment persist alongside robust manufacturing and services output.
    3. Regional disparity accumulates: Gains concentrate within urban clusters and industrialised States, widening per capita income divergence across regions.
    4. Redistribution capacity is weak: The effective tax burden on ultra high net worth individuals is often lower than on middle income households, which limits the fiscal space for welfare intervention.
    5. Wealth inequality compounds across generations: Wealth transfers through inheritance in a way income does not, so the wealth distribution is more concentrated than the income distribution and stays that way.
    6. Group based exclusion cuts across income: Gender, caste, region and rural or urban location each produce separate deprivation patterns that an income only measure does not capture.

    Key Facts about India’s Youth and Labour Market

    1. Labour force participation: The labour force participation rate stands at 59.3%, with 79.1% for men and 40.0% for women.
    2. Worker population ratio: The worker population ratio stands at 57.4%, with 76.6% for men and 38.8% for women.
    3. Unemployment: The overall unemployment rate is 3.1%, at 2.4% in rural areas and 4.8% in urban areas.
    4. Youth unemployment: Unemployment in the 15 to 29 age group is 9.9%, down from 10.3% in 2024, with urban youth unemployment at 13.6% against 14.3% earlier.
    5. Employment composition: Self employment accounts for 56.2%, casual labour for 20.2% and regular wage or salaried employment for 23.6%.
    6. Income concentration: The top 10% capture 58% of national income and the bottom 50% earn 15%, per the World Inequality Report 2026.
    7. Wealth concentration: The top 10% hold 65% of national wealth and the top 1% alone holds 40%.
    8. Human development: India ranked 130 of 193 on the Human Development Index with a value of 0.685, and inequality erases 30.7% of that value, bringing the Inequality adjusted Human Development Index to 0.475.
    9. Multidimensional poverty: The national multidimensional poverty headcount fell from 29.17% in 2013-14 to 11.28% in 2022-23, with 24.82 crore people moving out of multidimensional poverty.

    Laws and Rules Governing Gig and Platform Work in India

    1. Code on Social Security, 2020: Provides the first statutory definition of a gig worker and a platform worker in Indian law and empowers the Centre to frame welfare schemes for them.
    2. It provides for an aggregator contribution towards a social security fund, set as a share of the aggregator’s annual turnover subject to a ceiling linked to payments made to workers.
    3. The four labour codes, effective 21 November 2025: Consolidate the earlier labour statutes and introduce a universal minimum wage floor, extend social security to gig workers and provide portable benefits through the e-Shram registry.
    4. Rajasthan Platform Based Gig Workers (Registration and Welfare) Act, 2023: The first State law dedicated to platform workers, providing for a welfare board, mandatory registration of workers and aggregators and a welfare fee levied on transactions.
    5. Karnataka platform based gig workers welfare law, 2025: Establishes a welfare board and a transaction level welfare fee, and provides for notice and a reasoned order before a worker is terminated from a platform.
    6. Unorganised Workers’ Social Security Act, 2008: The earlier framework for welfare schemes for unorganised sector workers, operating through National and State Social Security Boards.

    Government Initiatives for Youth Employment and Skilling

    1. Pradhan Mantri Kaushal Vikas Yojana 4.0 (2022 to 2026): The flagship short term skilling scheme, under which 1.4 crore youth have been trained.
    2. National Apprenticeship Promotion Scheme: Supports stipend linked apprenticeships in establishments, with over 10 lakh registered apprentices.
    3. e-Shram: The national database of unorganised and platform workers, used as the registry through which portable social security benefits are delivered.
    4. Pradhan Mantri Mudra Yojana: Provides collateral free credit to micro enterprises, with disbursement across 43 crore loans since 2015, largely to micro entrepreneurs and women.
    5. PM SVANidhi: Provides working capital loans to street vendors, with 68 lakh loans disbursed.
    6. Viksit Bharat Gramin Rozgar Adhiniyam, 2025: Replaces the earlier rural employment guarantee with a 125 day wage guarantee together with skill and livelihood diversification components, effective 1 July 2026.
    7. Pradhan Mantri Jan Dhan Yojana: Provides the basic banking access on which wage, benefit and credit delivery to young and informal workers rests, with 58.63 crore accounts.

    Challenges in Achieving Inclusive Growth in India

    1. The informal economy absorbs most new entrants: Job creation happens largely outside registered enterprises, where wages, hours and safety are unenforced. Eg. Around 56% to 57% of workers remain self employed rather than in wage employment.
    2. Regional divergence is widening rather than closing: Poorer States add the most working age population while investment concentrates in already industrialised States. Eg. Bihar records a multidimensional poverty headcount of 33.76% and Jharkhand 28.81%, against Kerala at 0.55%.
    3. The rural and urban gap persists in deprivation, not only income: Access to health, schooling and sanitation remains structurally weaker in rural areas. Eg. Rural multidimensional poverty stands at 15.96% against urban at 5.27%.
    4. Caste concentrates assets independently of policy: Ownership of productive wealth remains skewed towards groups that already held it. Eg. Upper castes, at just over a quarter of the population, control 88.4% of billionaire wealth and own nearly 55% of total wealth.
    5. Women’s work is undercounted and underpaid: Unpaid care work keeps women out of measured employment and depresses earnings when they enter it. Eg. Women earn about 61% of men’s hourly earnings excluding unpaid work, and only 32% when unpaid work is included.
    6. The tax system does not redistribute at the top: Low effective tax burdens on the very wealthy constrain the fiscal room for public services that would raise mobility. Eg. The World Inequality Report 2026 finds the effective tax burden on the very wealthy often lower than on middle income households.
    7. Human development trails income growth: Gains in output have not translated into proportionate gains in health, education and gender outcomes. Eg. India’s Gender Inequality Index value is 0.403 with a rank of 102, and the country falls in Group 5 on the Gender Development Index.

    Way Forward

    1. Tie skilling to placement outcomes rather than enrolment counts: Fund training providers on verified employment retention at six and twelve months instead of on numbers trained.
    2. Extend the platform worker welfare model nationally: Convert the State level transaction fee and welfare board design into a uniform national mechanism under the Code on Social Security, 2020 so benefits do not stop at a State border.
    3. Make social protection portable by default: Link e-Shram registration to health, accident and pension entitlements that travel with the worker across employers, platforms and States.
    4. Create a formal job track in labour intensive manufacturing and construction: Direct incentives towards sectors that absorb workers with school level education, rather than towards capital intensive sectors that add output without adding jobs.
    5. Raise female labour force participation through care infrastructure: Expand crèche provision, safe transport and hostel capacity, which are the binding constraints on entry rather than willingness to work.
    6. Publish district level youth employment data: Report youth unemployment and employment composition at the district level so the mismatch between where young workers live and where jobs are created becomes visible to planners.
    7. Strengthen redistribution at the top of the distribution: Widen the base for capital and inheritance related taxation to fund the education, health and urban services that determine mobility.

    “[2014, GS3, 12.5] “While we flaunt India’s demographic dividend, we ignore the dropping rates of employ ability.” What are we missing while doing so? Where will the jobs that India desperately needs come from? Explain”

  • RWAs a barrier, Govt may let high-income households compile own spending data

    Why in the News

    The Ministry of Statistics and Programme Implementation (MoSPI) is considering a separate diary based method of recording expenditure for high income households living in gated societies. The proposal answers a refusal rate that has climbed fastest at the top of the income distribution. It also splits a single national survey across two different collection methods.

    What is the Household Consumption Expenditure Survey?

    1. What it measures: The Household Consumption Expenditure Survey (HCES) records how much a household spends on goods and services over a reference period. It covers rural and urban households across the country.
    2. Who runs it: The National Statistics Office under MoSPI conducts it as a sample survey using tablets to record responses.
    3. What the output is used for: The spending shares it produces fix the weights of the Consumer Price Index (CPI) basket, which forms the basis of headline retail inflation. The Reserve Bank of India (RBI) looks at that inflation measure while deciding on interest rates, against a CPI target of 4% within a band of 2% to 6%.
    4. How often it runs: It was earlier conducted every five years. Two back to back rounds ran in 2022-23 and 2023-24 after an overhaul of methods, and the ministry now intends a round every three years or so.

    What is diary based data collection?

    1. The method: The household itself notes down the information as and when the relevant activity occurs, instead of answering a field official at the door. For the HCES this means jotting down monthly spending on different goods and services, ranging from food items to haircuts.
    2. The form it may take: The record need not be a physical diary. The ministry may allow such households to enter consumption expenditure details on an online portal.

    What is recall error in survey data?

    1. The defect: Recall error is the gap between what a household actually spent and what a respondent remembers spending when asked later. It rises with the length of the reference period and the number of items being recalled.
    2. Why the diary reduces it: A household writing an entry at the moment of purchase is not relying on memory at all. The error the interview method introduces is therefore absent from the diary record.

    How far has participation in official surveys fallen?

    1. Urban non response: The overall urban non response rate during the 2022-23 HCES rose to 9.8%, from 2.8% in the 75th round of the National Sample Survey conducted from July 2017 to June 2018.
    2. Rural non response: The rural rate rose to 4.1% over the same period, from 1.5%.
    3. The most affluent respondents: For the most affluent urban and rural respondents, the non response rate stood at 11% and 3.9% respectively.
    4. The earlier baseline: In the 2011-12 survey the corresponding figures for those groups were 3.3% and 1.3%.
    5. The scale of the last round: The most recent HCES, conducted from August 2023 to July 2024, surveyed 2.6 lakh households across the country, barring a few inaccessible villages in the Andaman and Nicobar Islands. It sought responses for a total of 405 goods and services.
    6. The next round: The next edition is expected to begin in mid-2027 and continue for about a year, with the diary method proposed only for richer households in gated societies on a pilot basis.

    Why do affluent households refuse to be surveyed?

    1. Physical exclusion by the association: Resident Welfare Associations (RWAs) have cited security as the reason for not permitting survey staff inside gated societies. Field officers already inform the district collector, local bodies and the police station to obtain permission and support before entry.
    2. Objection to the questions themselves: RWAs have objected to the sensitive and private nature of some questions asked in government surveys.
    3. Fear of onward sharing: RWAs have voiced the apprehension that the details may be shared with other government departments. MoSPI has stated that data privacy is paramount and that the data is anonymised.
    4. Inability to remember: Households have cited the difficulty of recalling expenditure details accurately during a door to door interview.
    5. Discomfort within the family: Residents have cited unease at answering certain questions in front of family members, such as expenditure on alcohol and cigarette consumption.
    6. No perceived reason to participate: MoSPI has recorded a lack of awareness of why these surveys matter for policy, which often leads to outright refusal. Eg. Residents of an affluent society in Gurugram refused to take part in the Time Use Survey.

    Why does refusal concentrated at the top distort national estimates?

    1. The sample shrinks: A rise in non response rates curtails the achieved sample size of a survey.
    2. The sample changes shape: Non responses drawn from one segment leave the final composition of the sample different from what was intended, which produces incorrect estimates from the exercise.
    3. Substitution moves the problem, it does not solve it: Where access failed, the ministry substituted the original residential society with a similar one, so the households actually surveyed are not the households the design selected.
    4. The refusal is not confined to one survey: Similar incidents have been reported from high rises in Bengaluru, Kolkata, Udaipur, Mumbai and Bhopal for the HCES, the Periodic Labour Force Survey, the Annual Survey of Unincorporated Sector Enterprises and the Urban Frame Survey.
    5. Policy is built on these numbers: Government policy is increasingly data and evidence driven, so a biased estimate leads to inappropriate conclusions and decisions that do not produce the desired result.

    What does international practice show about diary based expenditure surveys?

    1. United Kingdom: The Office for National Statistics runs the Living Costs and Food Survey, in which each adult in a selected household keeps a two week spending diary. The results feed the weights of the United Kingdom consumer price indices.
    2. United States: The Bureau of Labor Statistics runs the Consumer Expenditure Surveys in two parts, a quarterly interview component and a separate diary component in which households record purchases for two consecutive one week periods.
    3. Japan: The Statistics Bureau runs the Family Income and Expenditure Survey using a household account book kept by the household over a fixed period rather than a single recall interview.
    4. Australia: The Australian Bureau of Statistics collects a two week personal expenditure diary from household members in its Household Expenditure Survey, alongside a face to face interview.
    5. The limit of the evidence here: The proposal is defended on the ground that the diary method is used in other countries, without naming a country or a comparability finding from any of them.

    Can one survey run on two collection methods without breaking its own comparability?

    1. Two data sets, one estimate: The practical problem is how data compiled through two different methods will be stitched together into a single national estimate.
    2. The error is asymmetric by design: Data collected door to door from poorer households would carry higher recall error than diary based data supplied by richer households. The difference in the numbers would then reflect the method as much as the spending.
    3. The asymmetry runs the wrong way: India's survey samples are dominated by the low income group, so the method with the larger error would apply to most of the sample.
    4. Literacy sets the boundary: Lower literacy rates in the low income group mean only higher income households can be expected to follow the diary method correctly.
    5. The department's own position: MoSPI has stated that the integration of diary compiled data with the main survey is still being worked out and that the proposal is at a planning stage.

    Challenges to the diary based collection proposal

    1. No legal compulsion behind participation: Voluntary compliance is what has broken down, and a change of instrument does not create an obligation to respond. Eg. Residents of gated societies have simply stated that they do not want to participate in a survey, with no consequence following.
    2. Self reporting understates socially sensitive spending: Items respondents are reluctant to declare in front of family are also the items most likely to go unrecorded in a self kept diary. Eg. Expenditure on alcohol and cigarette consumption was named by RWAs as a category respondents avoid.
    3. A portal shifts the burden to the respondent: An online entry system asks an unpaid household to do the work a trained investigator was paid to do, which raises the risk of partial and abandoned records. Eg. The ministry already uses tablets for field recording, so the enumerator side of the process is not the bottleneck.
    4. A pilot on one income class cannot be validated: Without running both methods on the same households, there is no way to separate a method effect from a real difference in spending. Eg. The 2017-18 consumption expenditure survey was junked in November 2019 after its results were questioned on data quality grounds, showing how a contested method destroys the entire round.
    5. Privacy assurance rests on administrative practice: Anonymisation has been promised as a departmental assurance rather than as an enforceable statutory guarantee against onward sharing. Eg. RWAs specifically raised the fear that details would travel to other government departments.
    6. Class segregated methods invite challenge to the inflation number itself: A CPI weight derived from two collection systems can be contested on the ground that the two halves are not measuring the same thing. Eg. The food group weight in the CPI was cut sharply on the basis of the 2023-24 HCES, a revision that depends entirely on the survey being internally consistent.

    Conclusion

    The proposal is at the planning stage, with a diary based pilot intended for high income households in gated societies before the 2027-28 consumption expenditure survey begins. The problem it addresses is real, since non response among the most affluent urban respondents has reached 11% against 3.3% in 2011-12. The unresolved question is the one the ministry itself has flagged, namely how a diary record and a door to door interview can be combined into one estimate when they carry different recall error. Until that is settled, the fix repairs coverage at the cost of comparability.

    About India's Consumption and Price Statistics System

    1. What the Consumer Price Index measures: It captures the price change experienced by the average urban and rural household across food, housing, transport, healthcare, education, clothing and services. It is the closest approximation to the cost of living for a typical household.
    2. How the basket is organised: The CPI is built on 12 divisions of the Classification of Individual Consumption According to Purpose, 2018 (COICOP-2018), covering food and non-alcoholic beverages, pan, tobacco and narcotics, clothing and footwear, housing, water, electricity, gas and other fuels, furnishings and routine household maintenance, health, transport, information and communication, recreation, sport and culture, education, restaurants and accommodation services, and personal care, social protection and miscellaneous items.
    3. The weight of food: Food and non-alcoholic beverages carry a weight of about 36.75% in the CPI, revised down from 45.86%.
    4. The food price index: The Consumer Food Price Index (CFPI) is derived from Division 1 of COICOP-2018 and is published separately for rural, urban and combined series. Its sub components include cereals, milk, meat and fish, oils and fats, vegetables, fruits, pulses, spices and sugar.
    5. Headline against core: Headline inflation includes every item in the basket and swings with monsoons, global crude and supply disruptions. Core inflation strips out food and fuel to give a cleaner read of demand driven, sticky inflation.
    6. The wholesale index: The Wholesale Price Index (WPI), on a 2011-12 base, measures what the economy produces and trades at wholesale. Manufacturing alone accounts for about 64% of the WPI, and food articles at the farm gate together with food manufacturing account for only about 24%.
    7. How the two indices enter national accounts: Goods producing sectors such as agriculture, mining and manufacturing are deflated using the WPI, since their transactions occur at the wholesale level. Services sectors are deflated using CPI components or dedicated services price indices.
    8. Where consumption data feeds employment and enterprise statistics: The Periodic Labour Force Survey (PLFS), launched in 2017-18, tracks employment, workforce participation and unemployment. The Annual Survey of Unincorporated Sector Enterprises (ASUSE) captures output, employment, wages and value added in the informal business economy.

    Laws and Rules Governing Official Statistics in India

    1. Collection of Statistics Act, 2008: Provides the legal framework for the collection of statistics on economic, demographic, social, scientific and environmental matters by the Centre, States and local bodies.
    2. It empowers a statistics officer to require information and penalises wilful refusal or supply of false information.
    3. The Collection of Statistics (Amendment) Act, 2017 extended the framework to the erstwhile State of Jammu and Kashmir and clarified the Centre's powers over subjects in the Union and Concurrent Lists.
    4. Collection of Statistics Rules, 2011: Lay down the procedure for notification of a statistical survey, appointment of statistics officers, service of notices and the handling of returns.
    5. Census Act, 1948: Governs the conduct of the decennial Census and the appointment of census officers.
    6. It makes information given to a census officer confidential and inadmissible as evidence, a confidentiality guarantee the Collection of Statistics framework does not replicate in the same terms.
    7. Registration of Births and Deaths Act, 1969: Provides the civil registration system that supplies vital statistics independent of survey estimates.
    8. Digital Personal Data Protection Act, 2023: Governs the processing of digital personal data and shapes how identifiable household records collected in surveys may be stored and shared.
    9. Right to Information Act, 2005: Provides the route through which unit level survey data and methodology notes are sought from statistical agencies.

    Government Initiatives

    1. National Statistical Commission: Constituted in 2005 on the recommendation of the Rangarajan Commission, it advises on statistical priorities, standards and the release calendar of official statistics.
    2. eSankhyiki portal: A MoSPI platform that brings macro indicators and survey outputs into a single searchable data lake for public and departmental use.
    3. National Data and Analytics Platform: A NITI Aayog initiative to standardise and publish government datasets in machine readable form for researchers and administrators.
    4. Data Governance Quality Index: Scores ministries and departments on the quality of their administrative data systems, aimed at raising the reliability of data generated outside sample surveys.
    5. Revamped Periodic Labour Force Survey: From January 2025 the survey shifted to the calendar year, expanded its sample and moved to monthly reporting of key labour market indicators.
    6. Sustainable Development Goals National Indicator Framework: Maintained by MoSPI, it fixes the national indicators against which progress on the Sustainable Development Goals is reported.

    Key Facts about India's Statistical System

    1. National Statistics Day: Observed on 29 June, the birth anniversary of Prasanta Chandra Mahalanobis, recognised as the architect of India's sample survey system.
    2. World Statistics Day: Observed on 20 October, designated by the United Nations Statistical Commission.
    3. Origins of the survey system: The National Sample Survey was set up in 1950 on Mahalanobis's initiative, making India one of the earliest large scale household survey systems in the developing world.
    4. Institutional merger: The Central Statistics Office and the National Sample Survey Office were merged into the National Statistical Office in May 2019.
    5. International standards: India was among the first countries to subscribe to the International Monetary Fund's Special Data Dissemination Standard, in 1996.

    Back2Basics: National Sample Survey

    1. What it is: A nationwide, large scale sample survey system that collects household and enterprise data through successive rounds, each round running for a fixed period.
    2. Who runs it: The National Statistical Office under MoSPI, through a field operations wing with offices across the country.
    3. How rounds work: Each round carries a principal subject, such as consumption expenditure, employment and unemployment, health, education or land and livestock holdings, with subjects rotating across rounds.
    4. Design: It uses a stratified multi stage sample design covering rural and urban areas, with villages and urban blocks as first stage units and households as ultimate units.
    5. Why the round number matters: Round numbers identify the survey period, so the 75th round refers to the survey conducted from July 2017 to June 2018.

    Challenges in India's Official Statistical System

    1. The sampling frame ages between Censuses: Village lists and urban blocks used to draw samples are anchored to the last Census, so the frame drifts from reality as migration and new construction accumulate. Eg. The decennial Census due in 2021 was deferred, leaving the 2011 Census as the frame for over a decade of surveys.
    2. Base years lag the structure of the economy: An index built on an old base assigns weights drawn from a consumption or production pattern that no longer exists. Eg. The Wholesale Price Index still uses 2011-12 as its base year.
    3. Comparability breaks at every methodological revision: A redesigned questionnaire produces a series that cannot be compared with its own predecessor, which destroys the ability to measure change. Eg. The 2011-12 and 2022-23 consumption rounds used different questionnaire designs, so poverty change between them cannot be read off directly.
    4. Contested releases erode trust in the system: A withheld or discarded round leaves policy without a number and invites the charge that inconvenient results are suppressed. Eg. Two members of the National Statistical Commission resigned in January 2019 over the withholding of employment survey results.
    5. No updated official poverty line: Welfare targeting continues on a threshold fixed against a consumption pattern from an earlier decade. Eg. No official poverty line has been revised since the estimates based on 2011-12 data.
    6. Administrative data sits outside the statistical system: Rich transaction records held by other departments are not routinely used to validate or supplement survey estimates. Eg. Goods and Services Tax returns, e-Shram registrations and direct benefit transfer records are maintained in separate systems from the household survey series.
    7. Privacy law raises the cost of collection: Stricter obligations on identifiable personal data increase the compliance burden on an agency that collects household level detail at scale. Eg. The Digital Personal Data Protection Act, 2023 applies to digital personal data held by government bodies with limited carve outs.

    Way Forward

    1. Run both methods on the same households first: Conduct a calibration study in which a subset of households is covered by interview and diary together, so the method effect can be measured and adjusted before the two data sets are combined.
    2. Give the survey a statutory response obligation with a privacy guarantee: Invoke the notification powers under the Collection of Statistics Act, 2008 for the HCES, paired with a published confidentiality and anonymisation protocol that binds onward sharing.
    3. Shorten reference periods rather than change the respondent's job: Use shorter recall windows and item specific reference periods to cut recall error for the interview sample instead of relying on the diary alone.
    4. Publish non response by income group with every release: Report achieved sample and non response rates decile wise alongside each estimate, so users can see where the sample is thin.
    5. Negotiate access through housing federations rather than society by society: Build standing memoranda with apex RWA federations and municipal bodies so that field access does not depend on a fresh permission at every gate.
    6. Refresh the sampling frame on the 2027 Census: Rebuild urban blocks and rural village lists on the new Census the moment enumeration closes, so the diary pilot is drawn from a current frame.
    7. Use administrative data as a cross check: Validate high income consumption estimates against Goods and Services Tax turnover, card and digital payment aggregates and vehicle and property registration data, without linking them to individual households.

    Matching Previous Year Question

    “[2020] Consider the following statements: 1. The weightage of food in Consumer Price Index (CPI) is higher than that Wholesale Price Index (WPI). 2. The WPI does not capture changes in the prices of services, which CPI does. 3. Reserve Bank of India has now adopted WPI as its key measure of inflation and to decide on changing the key policy rates. Which of the statements given above is/are correct? (a) 1 and 2 only (b) 2 only (c) 3 only (d) 1, 2 and 3 | Answer: (a)”

  • Export payments in rupees get trade policy benefits

    Why in the News

    Two paragraphs of the Foreign Trade Policy 2023 were amended on 20 August 2026 so that exporters invoicing overseas sales in Indian rupees receive the same trade policy benefits as those realising payment in foreign currency. Rupee invoicing has been permitted for years without carrying equal benefit, and removing that mismatch shifts the constraint from India's own rulebook to whether foreign buyers will hold and pay in rupees.

    What is the Foreign Trade Policy 2023?

    1. About: The Foreign Trade Policy is the framework issued by the Directorate General of Foreign Trade setting out the rules, entitlements and obligations governing India's exports and imports.
    2. What its benefits are: Policy benefits include duty remission and duty exemption entitlements that lower the cost of inputs used in exported goods, claimed against realised export proceeds.
    3. Export obligation: Several of these entitlements are conditional on the exporter fulfilling a stated export obligation, measured against the value of realised proceeds.
    4. The 2023 version: The current policy has no end date and is amended continuously by notification rather than being replaced every five years.

    What is the Asian Clearing Union?

    1. About: The Asian Clearing Union is a regional payment arrangement established in 1974 to facilitate trade settlements and reduce repeated transfers of foreign exchange by periodically settling the net obligations of its members.
    2. Membership: It has nine members, Bangladesh, Bhutan, India, Iran, Maldives, Myanmar, Nepal, Pakistan and Sri Lanka, represented by their central banks or monetary authorities.

    What is a Special Rupee Vostro Account?

    1. About: A Special Rupee Vostro Account is a rupee account opened in an Indian bank by a correspondent bank of a partner country, through which international trade is invoiced, paid for and settled in rupees.
    2. Its purpose: The framework was implemented in view of the evolving dynamics of India's international trade, and it lets a foreign buyer pay in rupees without either side converting through a third currency.

    What exactly has changed in the Foreign Trade Policy?

    1. The stated purpose of the amendment: Two paragraphs of the Foreign Trade Policy 2023 were amended to align the provisions on denomination of export contracts and eligibility for policy benefits in respect of export realisation in Indian rupees with the Foreign Exchange Management (Manner of Receipt and Payment) Regulations, 2023.
    2. Denomination freed outside the Asian Clearing Union: For countries outside the Asian Clearing Union, export contracts and invoices may now be denominated in any foreign currency or in Indian rupees.
    3. Coverage: The amendments cover exports to all countries, with the applicable rules varying by destination.
    4. Two countries excepted: Eligible rupee payments for exports to any country other than Nepal and Bhutan will now qualify for trade policy benefits and count towards fulfilment of export obligations.
    5. Parity with foreign currency realisation: Rupee earnings received through approved banking channels are to be treated on par with export payments received in foreign currency.
    6. Lines of credit included: Exports financed through the Export-Import Bank of India or through Government of India lines of credit may also be invoiced in Indian rupees.

    Why were rupee realisations treated differently until now?

    1. Two rulebooks had drifted apart: The exchange control regulations permitted receipt in rupees while the trade policy did not extend the same benefit eligibility to those receipts, so the exporter chose the currency and lost the entitlement.
    2. The export obligation problem: An exporter claiming a duty exemption against an export obligation needed the realisation to count, and a rupee realisation that did not count left the obligation unfulfilled on paper.
    3. The Asian Clearing Union carve-out: Settlement among the nine members runs through the Union's own netting mechanism, which is why denomination rules for those destinations differ from the rest.
    4. The effect on behaviour: Faced with the risk of losing entitlements, exporters defaulted to dollar invoicing even where the counterparty was willing to pay in rupees.

    What does rupee invoicing do for India's external position?

    1. Reduces demand for foreign exchange in settlement: Every transaction invoiced in rupees is one that does not require the exporter or the buyer to source dollars, easing pressure on reserves.
    2. Removes a layer of conversion cost: Trade settled directly between two currencies avoids the spread paid twice when a third currency intermediates.
    3. Insulates counterparties under sanctions pressure: Rupee settlement lets trade continue with partners whose access to dollar clearing is restricted, which is why several Asian Clearing Union members matter here.
    4. Supports lines of credit as an export instrument: Invoicing Export-Import Bank of India and Government of India credit lines in rupees keeps both the financing and the payment inside one currency.
    5. Builds a rupee balance abroad: Settlement in rupees creates rupee holdings with foreign banks, which is the first condition for the currency being used beyond bilateral trade.

    Why does a rulebook change not by itself internationalise the rupee?

    1. Willingness sits with the counterparty: India can permit rupee invoicing and cannot make a foreign buyer accept payment in a currency it has no independent use for.
    2. A trade deficit limits the mechanism: Rupee settlement works most easily where flows are balanced, and India's persistent goods trade deficit means partners accumulate rupees faster than they can spend them.
    3. Idle balances need an investment outlet: A rupee balance held abroad is only attractive if it can be deployed in Indian government securities or corporate paper at a return the holder accepts.
    4. Currency weakness discourages holding: A depreciating currency is a poor store of value between invoice and use. Eg. The rupee was quoted at 95.71 to the dollar on the day the notification was issued.
    5. Convertibility remains partial: The rupee is convertible on the current account and only partially on the capital account, which limits what a foreign holder can do with a rupee balance.

    What challenges does rupee-denominated trade settlement face?

    1. Accumulated balances with no deployment route: Partners that sell more to India than they buy build rupee balances they cannot spend. Eg. Rupee balances held under vostro arrangements with Russia accumulated well beyond what Russian buyers could absorb in Indian goods.
    2. Exchange rate risk shifts to the foreign counterparty: A buyer paying in rupees carries the depreciation risk that the exporter previously bore. Eg. The rupee has weakened steadily against the dollar, having breached the 91 mark during 2025-26 and traded near 95.7 in August 2026.
    3. Thin rupee hedging markets offshore: A foreign counterparty cannot cheaply hedge a rupee exposure in the way it hedges a dollar one. Eg. Offshore non-deliverable forward markets in the rupee developed precisely because onshore hedging access is restricted for non-residents.
    4. Correspondent banking and compliance frictions: Opening and operating vostro accounts requires approvals and sanctions screening that smaller banks avoid. Eg. Trade with Asian Clearing Union member Iran has repeatedly stalled on the willingness of banks to handle the settlement leg.
    5. Interest rate and return disadvantage: Rupee balances earn less than the holder can obtain in reserve currency instruments unless a specific investment window is opened. Eg. Permission to invest surplus vostro balances in Indian government securities was extended precisely to address this gap.
    6. Documentation mismatch across regulations: Exporters must satisfy both exchange control and trade policy requirements, and any divergence between them creates a compliance risk. Eg. The present amendment exists only because eligibility rules under the Foreign Trade Policy had drifted from the Foreign Exchange Management (Manner of Receipt and Payment) Regulations, 2023.
    7. Uneven customer experience at the bank counter: Documentation demands and delays at authorised dealer banks slow cross-border remittances regardless of the currency chosen. Eg. A supervisory review found multiple documentation requirements and cases of delay in executing cross-border remittances, and banks were advised to publish a clear policy on documentation, charges, timelines and grievance redress.

    Conclusion

    The amendment removes an internal inconsistency rather than creating a new entitlement, since it makes a rupee realisation earn the same trade policy benefit and count towards the same export obligation as a dollar realisation. That closes the reason exporters had for avoiding rupee invoicing even where the buyer was willing. The notification has been issued by the Directorate General of Foreign Trade and is in effect, and the measure that follows is whether the Special Rupee Vostro Account framework generates enough deployable rupee balances abroad for foreign buyers to choose rupee settlement on their own account.

    India's External Sector

    1. What it covers: The external sector comprises merchandise and services trade, investment flows in both directions, external borrowing, remittances, foreign exchange reserves and the exchange rate that links them.
    2. Two accounts: The current account records trade in goods and services, primary income and transfers. The capital and financial account records investment and borrowing flows.
    3. Direct investment position: India held fifth position globally in foreign direct investment inflows with $28 billion in 2024, fourth position in announced greenfield projects, and fifth position in international project finance deals.
    4. Recent direction of flows: Net foreign direct investment turned negative for three consecutive months during 2025, with gross inflows staying strong while outward investment and repatriation rose.
    5. Currency pressure: The rupee breached the 91 mark against the dollar during 2025-26 and emerged as Asia's worst performing currency amid trade uncertainty.
    6. Energy in the import bill: India depends on imports for over 88% of its crude oil requirement and about half of its natural gas consumption, so the trade balance moves with global energy prices.
    7. Global backdrop: Global foreign direct investment fell 11% in 2024, and the share of foreign direct investment in global Gross Domestic Product fell from 5% in 2007 to under 1% in 2023-24.

    Laws and Rules Governing Foreign Trade and Payments in India

    1. Foreign Trade (Development and Regulation) Act, 1992: Provides for the development and regulation of foreign trade and is the statute under which the Foreign Trade Policy and the office of the Director General of Foreign Trade exist.
    2. Empowers the Central government to formulate and announce the export and import policy and to amend it by notification.
    3. Foreign Exchange Management Act, 1999: Governs all foreign exchange transactions, replacing a control-based regime with a management-based one and treating contraventions as civil rather than criminal.
    4. Foreign Exchange Management (Manner of Receipt and Payment) Regulations, 2023 prescribe the currencies and channels through which export proceeds may be received, the regulations the present amendment aligns the trade policy to.
    5. Customs Act, 1962: Governs the levy of customs duty, valuation, clearance of goods and the operation of duty exemption and remission schemes at the border.
    6. Customs Tariff Act, 1975: Prescribes the rates of import and export duty and provides for anti-dumping and countervailing measures.
    7. Special Economic Zones Act, 2005: Governs the establishment and operation of zones treated as outside the customs territory for duty purposes.
    8. Reserve Bank of India Master Directions on Export of Goods and Services: Prescribe realisation and repatriation periods, documentation and the role of authorised dealer banks in export transactions.

    Government Initiatives for Export Promotion

    1. Remission of Duties and Taxes on Exported Products: Refunds embedded central, state and local duties and taxes that are not otherwise rebated, at notified rates by tariff line.
    2. Rebate of State and Central Taxes and Levies: Provides rebate of embedded taxes specifically for exports of garments and made-ups.
    3. Advance Authorisation and Duty Free Import Authorisation: Allow duty free import of inputs physically incorporated in an export product, against a stated export obligation.
    4. Export Promotion Capital Goods scheme: Permits import of capital goods at zero duty against an export obligation linked to the duty saved.
    5. Interest Equalisation Scheme: Provided interest subvention on pre-shipment and post-shipment rupee export credit, particularly for micro, small and medium enterprises and for identified sectors.
    6. Districts as Export Hubs: Identifies products with export potential in each district and builds district-level export action plans and institutional support.
    7. Market Access Initiative: Funds participation in international trade fairs, buyer-seller meets and market studies to open new destinations.
    8. Trade Connect e-Platform: Brings exporters, Indian missions abroad, export promotion councils and banks onto a single digital interface for market and regulatory information.

    Back2Basics: Directorate General of Foreign Trade (DGFT)

    1. What it is: The agency responsible for formulating, implementing and amending India's Foreign Trade Policy.
    2. Parent ministry: It functions under the Department of Commerce in the Ministry of Commerce and Industry.
    3. Statutory basis: It operates under the Foreign Trade (Development and Regulation) Act, 1992.
    4. Core function: It issues the Importer Exporter Code, without which no person may import or export except as exempted.
    5. Entitlement administration: It grants authorisations and scrips under the duty exemption and duty remission schemes and monitors fulfilment of export obligations.
    6. Instrument of change: It amends the Foreign Trade Policy and the Handbook of Procedures through notifications, public notices and circulars.
    7. Trade facilitation role: It runs the online platform through which authorisations are applied for and issued, and it handles quality complaints and trade disputes involving Indian exporters and importers.

    Challenges in India's External Sector

    1. Structural merchandise trade deficit: Import demand for energy, electronics and gold consistently exceeds export earnings, which keeps the current account in deficit. Eg. Net oil and gas imports rose 43.4% in value to $57.8 billion in April to July of 2026-27 from $40.3 billion a year earlier.
    2. Concentration of imports in a few commodities: A price shock in one commodity transmits directly to the trade balance. Eg. Every one dollar per barrel increase in oil prices raises India's annual oil import bill by up to $2 billion, on annual imports of 1.8 to 2 billion barrels.
    3. Protectionism and tariff shocks in destination markets: Export access can be withdrawn by unilateral action outside any trade agreement. Eg. Tariffs on key goods surged to 50% in August 2025, disrupting exporter planning.
    4. Competition from alternative manufacturing destinations: Rivals offer faster approvals and wider free trade agreement networks to firms relocating supply chains. Eg. Vietnam, Indonesia and Mexico compete directly for near-shoring investment that India seeks.
    5. Volatility of portfolio capital: Portfolio flows reverse quickly and transmit directly to the exchange rate. Eg. Foreign portfolio investors recorded an outflow of Rs 1.66 lakh crore, equivalent to $18.9 billion, in 2025, the largest since such investment began.
    6. Rising outward investment and repatriation: Indian firms investing abroad and foreign firms repatriating profits both reduce net inflows even when gross inflows hold up. Eg. Foreign companies operating in India repatriated about $5 billion in October 2025, of which $3.3 billion followed a single initial public offering.
    7. Round-tripping and financialisation of investment flows: A large share of inflows originates from a few jurisdictions and increasingly arrives through funds rather than as direct industrial equity. Eg. Inflows routed through Mauritius and Singapore reflect tax arbitrage rather than fresh industrial capital.
    8. Exchange rate depreciation raising the external debt burden: A weaker rupee raises the rupee cost of servicing external liabilities without any new borrowing. Eg. The rupee emerged as Asia's worst performing currency during 2025-26 amid trade uncertainty.

    Way Forward

    1. Open deployment routes for accumulated rupee balances: Allowing surplus vostro balances into Indian government securities, corporate bonds and project financing gives foreign holders a reason to accept rupees.
    2. Expand bilateral local currency settlement arrangements: Agreements with major trading partners, negotiated alongside the vostro framework, are what convert a permission into actual volumes.
    3. Deepen onshore rupee hedging access for non-residents: A foreign buyer that can hedge a rupee payable onshore no longer needs a dollar invoice to manage currency risk.
    4. Keep the trade policy and exchange control rulebooks synchronised: A standing reconciliation between the Foreign Trade Policy and the exchange management regulations would prevent the mismatch this amendment had to correct.
    5. Fix the customer experience at authorised dealer banks: Publishing documentation requirements, charges, timelines and escalation routes on bank websites and at branches removes a practical barrier that no notification reaches.
    6. Diversify the export basket and destinations: Reducing dependence on a small number of markets and product lines is the durable answer to unilateral tariff action.
    7. Reduce the energy component of the import bill: Faster domestic oil and gas output, refining efficiency and electrification of transport address the largest single driver of the trade deficit.

    Matching Previous Year Question

    “No direct PYQ traced in the provided files (closest microtheme: Foreign Exchange,Currency Devaluation)”

  • Centre’s fiscal outlook faces geopolitical, revenue risks

    Question (2025, GS2): “Examine the evolving pattern of Centre-State financial relations in the context of planned development in India. How far have the recent reforms impacted the fiscal federalism in India?”
    Linkage: The Centre’s reliance on new cesses and duties to meet its budget goals, rather than expanding the core tax base itself, directly impacts fiscal federalism. Cesses and surcharges do not go into the divisible pool shared with states, altering Centre-State financial dynamics.

    Mentor comment

    Controller General of Accounts data show the Centre’s gross tax revenues growing only 3.7% in the first quarter of 2026-27, with Goods and Services Tax collections contracting and Union excise duties falling more than a fifth. The fiscal arithmetic is being held near its budgeted position by a larger nominal Gross Domestic Product denominator, by non-tax receipts led by the Reserve Bank of India dividend, and by new cesses and duties, rather than by the tax base itself.

    What is the divisible pool of central taxes?

    1. About: The divisible pool is that part of the Centre’s gross tax revenue which is shared with the States, arrived at after deducting collection costs, cesses and surcharges.
    2. The States’ share: The Sixteenth Finance Commission retained the share of States in the divisible pool of central taxes at 41%.
    3. From gross to net: The Centre’s net tax revenue is what remains after devolution, and a factor of 65% of gross tax revenue reflects the ratio of net to gross tax revenues in 2025-26 and in the 2026-27 Budget Estimates.
    4. Why cesses matter to it: A cess levied for a specified purpose sits outside the divisible pool, so the same rupee raised through a cess rather than a tax does not reach the States as devolution.

    What is tax buoyancy?

    1. About: Tax buoyancy measures how far tax revenue grows for each unit of growth in nominal Gross Domestic Product, capturing both the natural response of the tax base and the effect of policy changes.
    2. What zero buoyancy means: Personal income tax revenue growth in 2025-26 was only 0.037%, which implies a buoyancy of zero, so the tax raised nothing extra despite the economy expanding.

    What is the Implicit Price Deflator?

    1. About: The Implicit Price Deflator is the ratio of nominal to real Gross Domestic Product, and it captures the average price change across everything the economy produces rather than a fixed consumption basket.
    2. How it is used here: An Implicit Price Deflator based inflation of 5% to 5.5% is what converts an expected real growth of about 7% into nominal Gross Domestic Product growth of 12.5% to 13% in 2026-27.

    What is a cess?

    1. About: A cess is a levy imposed for a specified purpose, collected over and above the base tax, and its proceeds are meant to be applied only to that stated purpose.
    2. Its fiscal effect: Cess proceeds are not shareable with the States, so a shift from taxes to cesses reduces the shareable pool while leaving gross collections unchanged.

    Why did the Centre’s gross tax revenues grow only 3.7%?

    1. Two large taxes were rationalised: Personal income tax and Goods and Services Tax were both subjected to substantive modifications in 2025-26, with extensive rate rationalisation in both cases and a substantive rate reduction in the case of the Goods and Services Tax.
    2. The stated expectation: Those reforms were expected to entail an initial revenue sacrifice, with subsequent expansion of the tax base offsetting the loss over time.
    3. The carry-forward into this year: Personal income tax showed growth of 6.8% in the first quarter of 2026-27, and Goods and Services Tax revenues contracted 11%.
    4. The 2025-26 baseline: Goods and Services Tax revenue growth for the second half of 2025-26 was 4.67%, and personal income tax growth over the same year was effectively nil.
    5. The excise duty cut: As retail fuel prices rose on the West Asian crisis, the government reduced excise duties to ease the burden on consumers, and revenue from Union excise duties contracted 22.4% in the first quarter of 2026-27.

    What three remedial measures has the government taken?

    1. A new cess replacing a discontinued one: A Health Security and National Security Cess was introduced with effect from 1 February 2026, even as the Goods and Services Tax Compensation Cess was discontinued.
    2. A higher windfall tax on fuel exports: The windfall tax on exports of diesel, petrol and aviation turbine fuel was increased with effect from 3 August 2026.
    3. Higher import duties on precious metals: Import duty rates were raised on gold and silver bullion and on other specific precious metal articles, sweepings and clad metals.

    How does a higher nominal GDP change the fiscal picture?

    1. The budgeted assumption is being exceeded: The Budget assumed nominal Gross Domestic Product growth of 10.04%, well short of the growth now expected for the year.
    2. The consistency check: That deflator range is consistent with Consumer Price Index inflation at 3.9% and Wholesale Price Index inflation at 9.3% in the first quarter of 2026-27.
    3. The level, not the growth rate, is lower: On the 2022-23 base series, nominal Gross Domestic Product is estimated at Rs 391 lakh crore, below the budgeted level of Rs 393 lakh crore.
    4. The net effect on revenue: Taken together, estimated gross tax revenue would be realised or fall short by a small margin.

    What has happened to transfers to the States?

    1. A sharp contraction in the first quarter: Tax devolution to the States contracted 19.5% in the first quarter of 2026-27, with an expectation of higher assignment of central tax revenues in subsequent months.
    2. The shareable pool narrows at the margin: The introduction of the non-shareable Health Security and National Security Cess produces a marginal reduction in the shareable pool, though some part of its revenues may reach the States as grants outside the Finance Commission route.
    3. Finance Commission grants are budgeted lower: Based on the Sixteenth Finance Commission’s recommendation, Finance Commission grants for the States are budgeted to contract by Rs 23,556 crore in 2026-27.
    4. The devolution share itself is unchanged: The contraction is in the amounts flowing, not in the entitlement, since the States’ share in the divisible pool stays at 41%.

    What is holding the revenue account together?

    1. The central bank dividend: The Reserve Bank of India transferred dividends to the Centre in May 2026, so 77% of the budgeted dividends and profits for the full year were already covered in the first three months.
    2. Weight of non-tax revenue: The Centre’s non-tax revenues contributed 37% of its net revenue receipts in the first quarter of 2026-27.
    3. Other receipts on track: The budgeted amounts for non-tax and non-debt capital receipts are expected to be realised.
    4. Subsidy pressure on the other side: Major subsidies had to be increased 37.4% in the quarter because of the unexpected rise in global crude oil prices.
    5. Revenue expenditure held down: Growth in revenue expenditure was contained at 7.4% over the same quarter.
    6. Capital expenditure front-loaded: Capital expenditure grew 23.7% in the first quarter of 2026-27, against a contraction of 23.3% in the fourth quarter of 2025-26.
    7. The full-year subsidy overshoot: Extrapolating first-quarter subsidies to the year, realised subsidies are expected to exceed the budgeted amount by about Rs 50,000 crore.

    Where do the deficit numbers stand, and what could push them off track?

    1. First-quarter deficit position: The fiscal deficit accounted for 18.2% of the annual budgeted magnitude in the first quarter, and the corresponding share of the revenue deficit was 0.4%.
    2. Why the revenue account looks strong: The revenue account balance is held up mainly by the contribution of non-debt receipts, not by tax collections.
    3. The full-year estimates: Fiscal deficit calculated as the increment in debt is estimated at Rs 18.16 lakh crore, giving a fiscal deficit-to-Gross Domestic Product ratio of 4.6% on the new series, with the debt-to-Gross Domestic Product ratio at 55.8%.
    4. Three named slippage risks: A shortfall in tax revenues, an unbudgeted increase in revenue expenditure arising from additional subsidies, and a slightly higher external debt amid sustained pressure on the Indian rupee.
    5. The overriding risk: An escalation of the war in West Asia would deliver a major jolt to the economy and to central finances.
    6. The unwound measure: The reduction in excise duty on fuel must be restored at some suitable time, since it is a temporary relief carried at a permanent revenue cost.

    What challenges does the Centre’s fiscal consolidation path face?

    1. Rate rationalisation without base expansion: A tax cut delivers the revenue sacrifice immediately and the base expansion only over an uncertain horizon. Eg. Personal income tax delivered a buoyancy of zero in 2025-26, the year its rationalisation took effect.
    2. Subsidy exposure to imported energy prices: Subsidy outgo is set by global crude prices rather than by a domestic policy decision. Eg. Major subsidies rose 37.4% in the first quarter of 2026-27, putting the full year on course to overshoot its budgeted provision.
    3. Reliance on a single large non-tax transfer: A dividend from the central bank is a discretionary, year-specific receipt that cannot be assumed to repeat. Eg. 77% of the full year’s budgeted dividends and profits were covered in the first three months of 2026-27.
    4. Revenue relief that is politically hard to withdraw: An excise duty cut given when fuel prices rise is difficult to reverse when they fall. Eg. Union excise duties contracted 22.4% in the first quarter of 2026-27 following the cut.
    5. Deficit ratios improved by a denominator effect: A higher nominal Gross Domestic Product lowers the deficit ratio without any change in borrowing. Eg. Nominal growth running ahead of the budgeted 10.04% flatters the 4.6% fiscal deficit ratio.
    6. Interest burden crowding out capital spending: A debt-to-Gross Domestic Product ratio near 56% commits a large share of revenue receipts to interest before any programme is funded. Eg. Capital expenditure was front-loaded 23.7% in the first quarter after contracting 23.3% in the preceding quarter, a pattern that shifts rather than raises the annual total.
    7. Exchange rate pressure raising external liabilities: A weaker rupee raises the rupee cost of external debt service without any new borrowing. Eg. Sustained pressure on the rupee is named as one of the three sources of possible slippage from budgeted outcomes.

    Conclusion

    The Centre’s 2026-27 outcomes are likely to stay close to budgeted levels, and the reasons are a larger nominal Gross Domestic Product, front-loaded non-tax receipts and three new revenue measures, not a tax base that is delivering. Gross tax revenue growing at barely a third of the pace of nominal output is the number that has to change, since the rate rationalisations of 2025-26 were justified on the promise of base expansion that has not yet appeared. The immediate unresolved decisions are when the excise duty cut on fuel is restored and how far an escalation in West Asia pushes subsidies beyond the overshoot already projected.

    What is Fiscal Federalism?

    1. About: Fiscal federalism is the division of taxation powers, expenditure responsibilities and transfer arrangements between the Union and the States in a federal system.
    2. Rationale: Revenue-raising powers concentrate at the Centre because major tax bases are mobile, while expenditure responsibilities concentrate at the States because services are delivered locally. Transfers exist to close that gap.
    3. Vertical fiscal imbalance: The mismatch between the Union’s revenue capacity and the States’ expenditure responsibilities, addressed through devolution of a share of central taxes.
    4. Horizontal fiscal imbalance: The mismatch across States in revenue capacity and expenditure need, addressed through the Finance Commission’s distribution formula among States.
    5. Third tier imbalance: The mismatch between the functions devolved to panchayats and municipalities and the revenue sources available to them, addressed through State Finance Commissions and grants.
    6. The transfer instruments: Tax devolution from the divisible pool, Finance Commission grants, and centrally sponsored schemes with a matching State contribution.

    Key Concerns Regarding Fiscal Federalism

    1. Shrinking divisible pool through cesses and surcharges: Levies outside the divisible pool raise Union revenue without expanding what is shared, so the effective transfer falls below the headline share.
    2. Erosion of State taxation autonomy under the Goods and Services Tax: States surrendered independent rate-setting on most indirect taxes, and rate decisions now require a collective decision in a council.
    3. Weak third tier finances: Local bodies depend on transfers rather than own revenue, and State Finance Commissions are constituted irregularly in several States.
    4. Contested horizontal distribution criteria: Weighting population, income distance and demographic performance sets States that have controlled population growth against those with larger populations.
    5. Conditionality attached to central transfers: Centrally sponsored schemes tie State spending to Union priorities, reducing the discretion that devolution is meant to confer.
    6. Off-budget and contingent liabilities: Borrowing routed through State-owned entities and guarantees sits outside the headline deficit at both levels, obscuring the true fiscal position.

    Constitutional Framework Governing Union Finances

    1. Article 265: No tax shall be levied or collected except by authority of law.
    2. Article 266: Establishes the Consolidated Fund and the Public Account of India and of each State.
    3. Article 267: Provides for the Contingency Fund of India, placed at the disposal of the President for unforeseen expenditure.
    4. Article 112: Requires the annual financial statement of estimated receipts and expenditure to be laid before Parliament.
    5. Article 246 and the Seventh Schedule: Distribute legislative and taxation powers between the Union and the States through the Union, State and Concurrent Lists.
    6. Article 246A: Confers concurrent power on Parliament and State legislatures to make laws on the Goods and Services Tax.
    7. Article 269A: Provides for the levy and collection of the Goods and Services Tax on inter-State supply and its apportionment between the Union and the States.
    8. Article 270: Provides for the distribution of taxes levied and collected by the Union between the Union and the States, and excludes cesses and surcharges from that distribution.
    9. Article 271: Empowers Parliament to levy a surcharge on specified taxes for the purposes of the Union, the proceeds of which accrue wholly to the Union.
    10. Article 275: Provides for grants-in-aid from the Union to States in need of assistance.
    11. Article 279A: Provides for the constitution of the Goods and Services Tax Council.
    12. Article 280: Provides for the constitution of a Finance Commission every fifth year to recommend the distribution of taxes and the principles governing grants-in-aid.
    13. Article 282: Permits the Union or a State to make any grant for any public purpose, the provision under which centrally sponsored schemes are funded.
    14. Article 292 and Article 293: Govern borrowing by the Union and by the States, with State borrowing subject to Union consent where the State is indebted to the Union.
    15. Article 360: Provides for a proclamation of financial emergency.

    Laws Governing Government Budgeting in India

    1. Fiscal Responsibility and Budget Management Act, 2003: Requires the Centre to limit the fiscal deficit and to lay medium-term fiscal policy statements before Parliament.
    2. Amended in 2018 to shift the primary anchor from the revenue deficit to a debt-to-Gross Domestic Product target, with an escape clause for specified circumstances.
    3. Fiscal Responsibility and Budget Management Rules, 2004: Prescribe the form of the disclosure statements and the quarterly review requirement.
    4. Comptroller and Auditor General’s (Duties, Powers and Conditions of Service) Act, 1971: Provides the basis for audit of Union and State accounts and for the reports laid before the legislatures.
    5. State fiscal responsibility legislation: Every State has enacted its own fiscal responsibility law setting deficit and debt limits, complementing the Union statute.
    6. Appropriation and Finance Acts: The Appropriation Act authorises withdrawal from the Consolidated Fund, and the Finance Act gives effect to the taxation proposals for the year.

    Government Initiatives in Public Financial Management

    1. Public Financial Management System: An end-to-end platform tracking fund release and utilisation from the Union to the last implementing agency, reducing float in the system.
    2. Direct Benefit Transfer: Routes subsidy and benefit payments to bank accounts directly, cutting duplication and leakage in the transfer chain.
    3. Single Nodal Agency mechanism: Requires each centrally sponsored scheme in a State to operate through one designated account, so unspent balances are visible.
    4. Special Assistance to States for Capital Investment: Provides fifty-year interest free loans to States tied to capital expenditure and to specified reforms.
    5. National Monetisation Pipeline: Raises resources by leasing operating public assets while retaining ownership, supplementing tax revenue for capital spending.
    6. Goods and Services Tax Network: The common technology platform for registration, return filing and invoice matching that generates the data underlying indirect tax collections.

    Back2Basics: Sixteenth Finance Commission

    1. What it is: A constitutional body constituted under Article 280 to recommend the distribution of net tax proceeds between the Union and the States, the allocation among States, and the principles governing grants-in-aid.
    2. Constitution: Constituted in December 2023, chaired by a former Vice Chairman of NITI Aayog.
    3. Award period: Its recommendations cover the five years beginning 2026-27.
    4. Advisory Council: The Commission is assisted by an Advisory Council of economists and public finance specialists.
    5. Status of recommendations: Its report is laid before Parliament along with an explanatory memorandum on the action taken, and the recommendations are advisory rather than binding.
    6. Additional terms of reference: Beyond devolution, the Commission examines disaster management financing and the review of State fiscal positions.

    Challenges in India’s Public Finances

    1. A low tax-to-Gross Domestic Product ratio: India’s combined tax collection relative to output remains below that of comparable middle-income economies, which caps what can be spent without borrowing. Eg. Gross tax revenue in the first quarter of 2026-27 grew at less than a third of the nominal output growth expected for the year.
    2. Narrow direct tax base: A small share of the population files and pays income tax, so any rate change transmits through a thin base. Eg. Personal income tax raised no more in 2025-26 than in the year before, despite nominal output expanding through that year.
    3. Rigidity of committed expenditure: Interest, salaries, pensions and statutory transfers consume most revenue receipts before discretionary spending begins. Eg. The debt-to-Gross Domestic Product ratio is estimated at 55.8% for 2026-27.
    4. Exposure to imported commodity prices: Fuel and fertiliser subsidies move with global prices rather than with domestic policy. Eg. Major subsidies rose 37.4% in the first quarter of 2026-27 on the unexpected rise in global crude oil prices.
    5. Volatility of non-tax receipts: Dividends, disinvestment proceeds and spectrum receipts are lumpy and cannot be relied on across years. Eg. Non-tax revenues contributed 37% of net revenue receipts in the first quarter of 2026-27.
    6. State-level fiscal stress and guarantees: Contingent liabilities from State-owned distribution companies and guaranteed borrowings sit outside headline deficits. Eg. Tax devolution to the States contracted 19.5% in the first quarter, tightening State cash positions in the same period.
    7. Weak link between capital spending and outcomes: Front-loading capital expenditure raises the quarterly number without ensuring project completion. Eg. Capital expenditure grew 23.7% in the first quarter of 2026-27 after contracting 23.3% in the preceding quarter.

    Way Forward

    1. Restore the excise duty on fuel on a stated schedule: Announcing the timing in advance converts a politically difficult reversal into a pre-committed step, as the analysis itself recommends.
    2. Publish base expansion metrics alongside rate rationalisation: Reporting the change in the number of filers and in registered taxpayers would test the premise on which the 2025-26 rationalisation was justified.
    3. Cap the share of revenue raised through cesses and surcharges: A ceiling would stop the divisible pool narrowing through instruments that bypass Article 270.
    4. Insulate subsidy budgeting from a single price assumption: Building a price band and a contingency provision into the subsidy estimate would prevent an overshoot of this size appearing mid-year.
    5. Treat central bank dividends as a windfall, not a base receipt: Directing above-trend transfers to debt reduction rather than to recurring expenditure would stop a one-off receipt becoming a structural assumption.
    6. Smooth capital expenditure across quarters: Front-loading followed by contraction disrupts contractor payment cycles and project execution, so a steady release profile serves outcomes better than a strong first quarter.
    7. Bring off-budget and guaranteed borrowing into the disclosure statements: Consolidated reporting at both Union and State levels is the precondition for the debt path to mean what it states.

    “[2019, GS3, 10] The public expenditure management is a challenge to the Government of India in context of budget making during the post liberalization period. Clarify it.”

  • Derivatives trader base falls for first time in four years in FY26

    Why in the News

    The number of individual traders participating in the equity derivatives market fell 19% to 78.6 lakh in 2025-26 from 98.1 lakh a year earlier, according to data released by the Securities and Exchange Board of India (SEBI) on 20 August 2026. A smaller market has not turned into a safer one, since the average loss carried by each loss-making trader rose to its highest level since the analysis began.

    What are equity derivatives?

    1. About: Equity derivatives are contracts whose value is derived from an underlying share or share index, settled at or before a stated expiry date rather than by delivery of the underlying at the time of trade.
    2. Futures and options: A futures contract obliges both sides to transact at an agreed price on expiry. An option gives the buyer the right without the obligation, in exchange for a premium paid upfront.
    3. Why losses concentrate here: A small premium controls a large notional exposure, so a modest adverse price move can erase the entire amount committed.
    4. Contract value: Each contract carries a minimum notional value fixed by the regulator, which sets the smallest position an individual can take.

    What is the extreme loss margin?

    1. About: The extreme loss margin is an additional margin collected over and above the standard margin, calibrated to cover losses outside the range that normal margining assumes.
    2. How it was used here: SEBI increased the extreme loss margin for expiry-day trading by 2%, raising the cost of holding a position on the day price movement is sharpest.

    What is a weekly expiry?

    1. About: A weekly expiry is a contract that settles at the end of a given week rather than at the end of a month, which multiplies the number of short-dated, low-premium contracts available to trade.
    2. How it was restricted: SEBI limited weekly expiries to one index per exchange, cutting the number of high-turnover expiry events in a week.

    What do SEBI’s two studies show about participation and losses?

    1. Participation: The individual trader base fell 19% to 78.6 lakh in 2025-26 from 98.1 lakh in 2024-25, the first fall in four years, against 42.74 lakh in 2021-22 when the analysis began.
    2. Share of losing traders: The proportion of traders who incurred losses declined marginally to 87.7% in 2025-26 from 90.9% in 2024-25, the lowest level recorded since 2021-22.
    3. Aggregate losses: Aggregate losses fell 18% year-on-year to Rs 91,685 crore in 2025-26, and still remained higher than the levels recorded between 2021-22 and 2023-24.
    4. Loss per trader: The average loss per loss-making trader rose to Rs 1.16 lakh from Rs 1.13 lakh in 2024-25, the highest average loss recorded since 2021-22.
    5. Who remains the largest cohort: Individual traders continued to account for the largest cohort in the derivatives market despite the decline in participation.
    6. What the studies are: The two studies cover the profitability and the trading behaviour of individual derivatives traders, and were released on 20 August 2026 by SEBI’s Department of Economic and Policy Analysis II.

    Why does a smaller trader base not amount to a safer market?

    1. The averages moved in opposite directions: Aggregate losses fell 18% while the average loss per loss-making trader rose to a five-year high, so the burden concentrated rather than eased.
    2. The improvement in the loss ratio is marginal: A fall from 90.9% to 87.7% still leaves close to nine in ten participants losing money.
    3. The remaining participants are the more exposed ones: Those who stayed after the curbs are the traders willing to meet a higher minimum contract value and a higher expiry-day margin.
    4. Aggregate losses are still above the pre-boom level: Even after an 18% decline, losses in 2025-26 exceeded the levels recorded between 2021-22 and 2023-24.

    What explains the fall in participation?

    1. Fewer weekly expiry events: SEBI limited weekly expiries to one index per exchange, removing several of the short-dated contracts that carried the highest retail turnover.
    2. A higher entry ticket: The minimum contract value was raised to Rs 15 lakh to Rs 20 lakh, which prices out the smallest participants.
    3. A costlier expiry day: The extreme loss margin for expiry-day trading was increased by 2%, raising the capital required to hold the most volatile positions.
    4. The regulator’s own caveat: SEBI cautioned against attributing the decline entirely to the regulatory measures, stating that participation had already begun moderating before their implementation.

    What does the persistence data reveal about trader behaviour?

    1. Losses do not by themselves deter continuation: The second study found that incurring losses did not necessarily discourage traders from continuing to participate in derivatives.
    2. Persistence weakened this year: Only about 57% of the traders who formed the 2024-25 cohort continued trading in 2025-26, against a long-term average of around 65%.
    3. Nearly half stopped: 43% of that cohort stopped trading during the year.
    4. Experience does not improve outcomes: In 2023-24, 91.6% of traders who had reported losses in both 2021-22 and 2022-23 also reported losses in 2023-24.
    5. The probability holds across the experience range: The probability of making losses remained above 90% across traders with one to five years of experience.

    What challenges does retail investor protection in the derivatives market face?

    1. Curbs raise the entry price without changing the odds: A higher minimum contract value screens out small participants rather than improving the outcomes of those who remain. Eg. The probability of making losses stayed above 90% across traders with one to five years of experience.
    2. Losses do not teach: Repeated loss-making does not reliably drive exit, so a behavioural remedy cannot be assumed. Eg. 91.6% of traders who lost money in both 2021-22 and 2022-23 lost money again in 2023-24.
    3. Unregistered advisers and finfluencers: Trading advice reaches retail participants through channels outside the registered investment adviser framework. Eg. SEBI has issued repeated orders against unregistered persons offering stock recommendations on social media platforms.
    4. Migration to unregulated venues: Tightening a regulated segment can push activity to opaque alternatives rather than out of speculation altogether. Eg. SEBI and the Reserve Bank of India have repeatedly warned against unauthorised electronic trading platforms offering leveraged contracts.
    5. Exchange revenue tied to the volumes being curbed: Transaction charges and the derivatives segment are a significant part of exchange income, which creates a tension with tighter product rules. Eg. Weekly index expiries generated the highest turnover days on Indian exchanges before being limited to one index per exchange.
    6. Investor grievance redress capacity: Losses from a legitimate but unsuitable product are not a grievance, so the redress machinery does not reach the harm being measured. Eg. Aggregate losses of Rs 91,685 crore in 2025-26 arose from lawful transactions on regulated exchanges.
    7. Measurement lag on a fast-moving market: Behaviour is analysed a full financial year after it occurs, so remedies address a market that has already changed. Eg. The studies released in August 2026 report on the year ended March 2026.

    “[2025] Consider the following statements:

    I. India accounts for a very large portion of all equity option contracts traded globally, thus exhibiting a great boom.

    II. India’s stock market has grown rapidly in the recent past, even overtaking Hong Kong’s at some point in time.

    III. There is no regulatory body either to warn small investors about the risks of options trading or to act on unregistered financial advisors in this regard.

    Which of the statements given above are correct?

    (a) I and II only

    (b) II and III only

    (c) I and III only

    (d) I, II and III

  • Transaction fees on UPI in 2 weeks

    Why in the News

    A merchant discount rate of 0.3% on Unified Payments Interface (UPI) transactions of Rs 2,000 and above is expected to be announced within two weeks. Six years of zero pricing built a network that now carries most of India’s digital payment volume without generating the revenue to maintain it, and restoring a fee moves that cost onto merchants while keeping the transaction free for consumers.

    What is the merchant discount rate?

    1. About: The merchant discount rate (MDR) is a fee paid by businesses to payment processors for accepting digital payments, deducted from the amount the merchant receives.
    2. Who it is shared among: The fee funds the banks, payment service providers and network operators that carry a transaction between the payer and the merchant.
    3. Its history on UPI: An MDR of up to 0.3% of the transaction value applied to UPI person-to-merchant transactions until December 2019.
    4. Zero MDR: Zero MDR was introduced in January 2020 to accelerate digital payment adoption and encourage a shift from cash to digital payments.

    What is the UPI and Services Steering Committee?

    1. About: It is the body headed by the National Payments Corporation of India that will determine the merchant discount rate on UPI, its scope and its structure.

    What is Section 10A of the Payment and Settlement Systems Act, 2007?

    1. About: Section 10A is the provision granting statutory protection from charges to specified electronic payment modes, which is what prevented a fee being levied on UPI.
    2. What changed: The Taxation and Other Laws (Amendment) Bill, 2026 amended Section 10A to pave the way for an MDR on UPI transactions above a certain threshold.

    How will the fee actually be brought into effect?

    1. Step one, the gazette notification: The Department of Financial Services will likely issue a gazette notification within a week specifying which electronic payment modes continue to receive statutory protection from charges.
    2. Step two, the rate decision: The UPI and Services Steering Committee will then determine the MDR, its scope and its structure.
    3. The consumer assurance: The government assured during the parliamentary debate on the amending Bill that UPI transactions will remain free for consumers.

    Why is a fee being restored after six years of zero pricing?

    1. Volume outgrew the funding model: UPI transactions jumped sharply after the Covid-19 pandemic, and banks and payment intermediaries ramped up investment in payment infrastructure to carry that load.
    2. Industry pressure for sustainability: The scale of that investment produced industry calls for the restoration of charges to make the system financially sustainable.
    3. The interim substitute was a subsidy: The government introduced an incentive scheme providing banks and other ecosystem participants an incentive equivalent to 0.15% MDR on UPI transactions up to Rs 2,000.
    4. The parliamentary committee’s warning: The Parliamentary Standing Committee on Finance called for early implementation of a tiered MDR framework, warning that delays could leave payment service providers dependent on inadequate government subsidies and weaken investment in payment infrastructure.

    How does 0.3% compare with the cost of other payment instruments?

    1. Credit cards: The prevailing MDR on credit card transactions is 1% to 3% of transaction value.
    2. Debit cards: The prevailing MDR on debit card transactions runs up to 0.9%.
    3. UPI at the proposed rate: A reintroduced MDR of 0.3% above a threshold would still be substantially lower than either.
    4. The subsidy benchmark: The proposed rate is double the implicit rate the exchequer already bears through the incentive scheme on small-value payments.
    5. The volume the rate applies to: UPI processed 241.62 billion transactions worth Rs 314.23 lakh crore in 2025-26, so even a fraction of a percent applied above a threshold is a large revenue pool.

    Why does a free-to-consumer network still have to be paid for by someone?

    1. The cost does not disappear when the price is zero: Switching, settlement, fraud monitoring and dispute resolution have running costs, and zero MDR moved them from merchants onto banks and the exchequer.
    2. Subsidy funding is discretionary and can lapse: An incentive scheme depends on an annual budgetary allocation, which is what the Parliamentary Standing Committee on Finance identified as inadequate and unreliable.
    3. Merchants now bear what consumers do not: Keeping the consumer free means the fee lands on the acceptance side, on the same small merchants whose adoption zero MDR was designed to secure.
    4. The threshold is doing the distributive work: Applying the fee only at Rs 2,000 and above protects the low-value transactions that dominate UPI by count, and captures the higher-value transactions that dominate by value.

    What challenges does reintroducing MDR on UPI face?

    1. Merchant resistance at the acceptance point: Small merchants may refuse UPI above the threshold or steer customers to cash to avoid the fee. Eg. Cash-on-delivery persists across Indian e-commerce despite a decade of digital payment incentives.
    2. Transaction splitting to stay below the threshold: A hard cut-off gives both sides a reason to break one payment into two. Eg. A payment of Rs 2,500 broken into two of Rs 1,250 falls below the threshold and carries no fee.
    3. Erosion of the adoption gains zero MDR bought: The zero-price regime was introduced specifically to shift users from cash, and reversing it risks reversing part of that shift. Eg. Zero MDR was introduced in January 2020 for the stated purpose of accelerating digital payment adoption.
    4. Concentration risk in the underlying network: A small number of third-party applications carry most UPI volume, so pricing decisions transmit through a narrow set of intermediaries. Eg. The National Payments Corporation of India has repeatedly deferred its own market share cap on third-party application providers.
    5. Outage and reliability exposure at national scale: A single network carrying most retail payments makes any downtime a systemic event rather than a service failure. Eg. UPI accounted for 85% of India’s digital payment transactions by volume in 2025-26.
    6. Fraud and mule account misuse growing with volume: Higher-value transactions attract more sophisticated fraud, and the cost of investigation falls on the same intermediaries the fee is meant to fund. Eg. The Reserve Bank of India has repeatedly directed banks to tighten controls on accounts used to route proceeds of digital payment fraud.
    7. Cross-subsidy questions across instruments: Pricing UPI below cards while both run on shared bank infrastructure distorts the choice of instrument at the counter. Eg. Credit card MDR at 1% to 3% funds reward programmes that UPI cannot match at 0.3%.

    Conclusion

    Zero MDR delivered adoption at a scale no other retail payment system has reached, and it did so by placing the cost of the network on banks and on the exchequer rather than on its users. Restoring a 0.3% fee above Rs 2,000 converts that subsidy into a price, keeps consumers unaffected and tests whether merchants will absorb the cost at the acceptance point. The measure currently stands at the stage where Section 10A of the Payment and Settlement Systems Act, 2007 has been amended, and the next milestones are a gazette notification from the Department of Financial Services within a week and the rate decision by the UPI and Services Steering Committee within two weeks.

    “[2026] Which one of the following statements about Unified Payments Interface (UPI) and Central Bank Digital Currency (Digital Rupee) is NOT correct?

    (a) UPI is a real-time payment system but Digital Rupee is akin to sovereign paper currency

    (b) In case of UPI, settlement for end users happens instantly; in case of Digital Rupee, wallet balance gets transferred to another wallet (no traditional settlement)

    (c) UPI transactions are recorded by banks and reflected in bank statements; in case of Digital Rupee, no data is captured in bank statements

    (d) In both the cases (UPI and Digital Rupee), the liability lies with the users and their respective banks

  • Panel to review nuclear liability caps every 5 years

    Why in the News

    Draft rules released by the Department of Atomic Energy on 14 August 2026 require an expert group to review the graded caps on nuclear operators’ civil liability once every five years. The review reaches only the operator’s cap, and leaves untouched the removal of the supplier’s statutory liability that is now the subject of a challenge in the Supreme Court.

    What is the Sustainable Harnessing and Advancing Nuclear Energy for Transitioning India (SHANTI) Act, 2025?

    1. About: The SHANTI Act, 2025 replaces both the Atomic Energy Act, 1962 and the Civil Liability for Nuclear Damage Act, 2010 (CLNDA) in a single unified statute, and is the first comprehensive overhaul of India’s nuclear power regime since independence.
    2. What it opens: The Act allows private entities to own and operate nuclear power plants for the first time, covering construction, transport, storage, import, export and handling of nuclear material, with mandatory authorisation from the Atomic Energy Regulatory Board for every activity.
    3. What it retains for the State: The government keeps an exclusive monopoly over enrichment, isotope separation, spent fuel reprocessing and radioactive waste management, so the fuel cycle remains entirely in the public sector.
    4. What it changed on liability: The Act’s Second Schedule introduced graded liability caps based on the size of a nuclear installation, replacing the earlier flat cap of Rs 1,500 crore under the CLNDA.

    What is an operator’s right of recourse?

    1. About: A right of recourse is the operator’s ability, after paying compensation for nuclear damage, to recover that amount from another party responsible for the incident.
    2. Why it is contested: The scope of this right decides whether the financial consequence of a defective component rests with the plant operator or travels back to the equipment supplier.

    What does Rule 78 of the draft rules provide?

    1. A standing review, not an occasional one: Rule 78 requires the Central government to constitute a group of experts to review the maximum limits of the operator’s civil liability for nuclear damage once every five years.
    2. Composition of the expert group: The group draws from nuclear science and engineering, actuarial science, insurance and law, together with public-interest representatives.
    3. What it can recommend: The group may propose amendments to the Second Schedule of the Act, which is where the graded caps sit.
    4. How this differs from the earlier law: Section 6 of the now-repealed CLNDA also allowed the Centre to periodically review the operator’s liability and notify a higher amount. The draft rules add a defined time period within which that review must happen.

    What are the graded liability caps under the Second Schedule?

    1. Above 3,600 Megawatt-electric (MWe): Operators of reactors above 3,600 MWe face a maximum liability of Rs 3,000 crore. MWe measures the electrical output of a reactor as distinct from its thermal output.
    2. 1,500 MWe to 3,600 MWe: Operators in this band face a cap of Rs 1,500 crore.
    3. 750 MWe to 1,500 MWe: The cap falls to Rs 750 crore.
    4. 150 MWe to 750 MWe: The cap falls to Rs 300 crore.
    5. Up to 150 MWe and other facilities: For reactors up to 150 MWe, for fuel-cycle facilities other than spent-fuel reprocessing plants, and for the transportation of nuclear material, liability is capped at Rs 100 crore.

    How has the operator’s right of recourse against suppliers changed?

    1. The three grounds under the old law: Section 17 of the CLNDA gave the operator a right of recourse where the right was expressly provided for in a written contract, where the incident resulted from an act of the supplier or the supplier’s employee including supply of equipment or material with patent or latent defects or sub-standard services, and where the incident resulted from an act or omission of an individual done with intent to cause nuclear damage.
    2. What survives: The new law retains the contractual ground and the intentional damage ground.
    3. What has been dropped: The supplier defect ground has been omitted, and it was the provision that exposed nuclear equipment vendors to long-term and uncertain liability risk in the event of an accident.
    4. What replaces it: Operators may now seek recourse from suppliers only through what they negotiate into a contract, which moves the question from statute to bargaining power.
    5. What it unblocks: Removing the statutory supplier exposure directly addresses the objection that kept foreign vendors out of Indian projects for over a decade.

    Why is the liability framework being challenged in the Supreme Court?

    1. The grounds pleaded: A petition challenges the Act for allowing private sector and foreign companies to operate nuclear power plants in India, for capping the liability of these operators at what it calls an absurdly low level, and for exempting the supplier from any liability, in violation of the Constitution.
    2. The accountability objection: Opening the sector to private operators while capping their exposure shifts residual risk from the operator to the exchequer and ultimately to victims.
    3. The five-yearly review does not answer it: Rule 78 allows the operator’s cap to be revised upward over time. It creates no mechanism to restore a supplier’s statutory liability, which the Act has removed from the framework entirely.
    4. The competing objective: Liability certainty is the precondition foreign vendors set for entering Indian projects, so the same provision that draws the petition is the one that makes the capacity expansion arithmetic feasible.

    What challenges does India’s civil nuclear liability framework face?

    1. A cap fixed in nominal terms erodes with inflation: A rupee figure written into a Schedule loses real value between revisions, so the five-year cycle sets the pace at which protection decays. Eg. The flat cap under the Civil Liability for Nuclear Damage Act, 2010 stood unrevised from 2010 until the SHANTI Act, 2025 replaced it with graded caps.
    2. Caps far below the actual cost of a severe accident: Graded caps measured in thousands of crores do not approach the cost of a major release. Eg. Cleanup and compensation costs after the 2011 Fukushima accident in Japan ran to tens of trillions of yen, orders of magnitude above any cap in the Second Schedule.
    3. Thin domestic insurance capacity for nuclear risk: Operators must place cover for the capped amount in a market with few underwriters willing to carry nuclear exposure. Eg. The India Nuclear Insurance Pool was created in 2015 precisely because individual insurers would not write the risk alone.
    4. Contractual recourse depends on bargaining power: With the statutory supplier ground removed, a smaller operator negotiating with a global vendor has little leverage to secure recourse in the contract. Eg. Jaitapur negotiations with the French vendor stalled for years over tariff and liability terms even while the statutory provision was in force.
    5. Regulatory independence still being built out: The Atomic Energy Regulatory Board has only now received statutory authority, having previously reported to the Department of Atomic Energy it was meant to regulate. Eg. The SHANTI Act, 2025 grants the Board statutory status for the first time and places its expenditure under the Comptroller and Auditor General.
    6. Claims machinery untested at scale: A dedicated claims commission exists on paper without a demonstrated record of settling mass claims quickly. Eg. The Act establishes a Nuclear Damage Claims Commission with appeals to the Electricity Appellate Tribunal, neither of which has adjudicated a nuclear damage claim.
    7. Public acceptance and siting resistance: Liability caps read as a transfer of risk to communities near installations, which hardens local opposition to siting. Eg. Sustained local protest at Kudankulam in Tamil Nadu delayed commissioning of the first units for years.

    Conclusion

    The five-yearly expert review converts a static Schedule of liability caps into a periodically revisable one, which is a real improvement on a flat figure left unrevised for fifteen years. It does not address the change that drew the litigation, since the supplier’s statutory exposure has been removed rather than capped, and no review clause can restore it. The measure currently stands at the draft rules stage, and the source states no date for the close of the comment window or for notification of the final rules, with the constitutional challenge to the Act pending before the Supreme Court.

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

  • Core industrial sector growth slows to 5.4% in July as fertilizer, steel, iron ore, oil output falls

    Why in the News

    Growth in India’s nine core industrial sectors slowed to 5.4% in July 2026 from 6% in June, according to official data released on 20 August 2026. The headline number is being held up by cement, electricity and a low-base rebound in iron ore and coal, at a time when the input industries feeding manufacturing and the domestic energy producers are contracting.

    What is the Index of Core Industries?

    1. About: The Index of Core Industries (ICI) measures the combined production performance of nine industries that supply inputs and energy to the rest of the economy, and is released monthly by the Ministry of Commerce and Industry.
    2. The nine sectors: Coal, crude oil, natural gas, refinery products, fertilizers, steel, iron ore, cement and electricity.
    3. New series: A new series of the index was released in July 2026 with 2022-23 as the base year, replacing the 2011-12 base year, and July’s reading is the second print of the revamped index.
    4. Break in comparability: Because of the base year change, a historical comparison on the new series is possible only up to June 2025.

    How did each of the nine sectors perform in July 2026?

    1. Cement: Growth hit 13.1% in July, a seven-month high, up from 11.1% growth in July of last year.
    2. Iron ore: Growth slowed to 29.5% in July from 44.5% in June, the biggest shift among the nine sectors.
    3. Electricity: The sector grew 9% in July, slower than the 11.4% recorded in June.
    4. Coal: Growth reached 7.6% in July 2026, an eleven-month high, against a contraction of 12.3% in July last year.
    5. Steel: Growth slowed to 2.9% in July, the lowest in the 14 months for which data exists on the new series, down from 5.6% in June.
    6. Refinery products: The sector grew 2.7% in July, snapping a three-month streak of contractions and delivering its best performance in nine months.
    7. Natural gas: The sector contracted 3.7% in July 2026, part of an unbroken run of contractions across all 14 months for which data exists.
    8. Crude oil: The sector contracted 5.3% in July 2026, also contracting continuously across the same 14 months.
    9. Fertilizers: The sector contracted 8% in July against a contraction of 3.3% in June, having grown 1.9% in July of last year.

    Why does the headline growth rate overstate the underlying recovery?

    1. The fastest growing sector is rebounding off a collapse: Iron ore’s 29.5% growth sits on a base in which the sector contracted 16.4% in June and 7.1% in July of last year.
    2. Coal’s eleven-month high has the same explanation: The 7.6% reading follows a 12.3% contraction in July last year, so the level of output has not necessarily exceeded its earlier peak.
    3. A truncated series hides the longer trend: With comparison possible only back to June 2025, a fourteen-month record is the longest statement the data supports about any sector.
    4. Composite growth masks divergence: July’s 5.4% was still the second-fastest reading in seven months, even as three of the nine sectors were in contraction.

    What explains the contraction in fertilizers and in domestic energy output?

    1. Monsoon transmission into fertilizer demand: The 8% fertilizer contraction is attributed to a deficient and patchy monsoon and the resultant lower levels of sowing, which cut the demand fertilizer plants produce for.
    2. A structural decline in domestic hydrocarbons: Natural gas and crude oil have contracted in every one of the 14 months for which data exists, which is a production trend rather than a monthly disturbance.
    3. Refining recovered while extraction did not: Refinery products returned to growth in July even as the crude oil that feeds refineries kept contracting, which widens the gap filled by imports.
    4. Steel weakness alongside cement strength: Steel growth fell to a fourteen-month low in the same month that cement growth hit a seven-month high, so construction activity is not translating into metal demand.

    “[2015] In the ‘Index of Eight Core Industries’, which one of the following is given the highest weight?

    (a) Coal Production

    (b) Electricity generation

    (c) Fertilizer production

    (d) Steel production

  • In a 5-4 ruling, Supreme Court for tweaking the definition of industry, exempts pending matters

    Why in the News

    A nine-judge Bench of the Supreme Court held on 20 August 2026, by a 5:4 margin, that the expansive 1978 interpretation of the term industry will not govern the Industrial Relations Code, 2020. The ruling preserves that interpretation for disputes already pending under the Industrial Disputes Act, 1947 and withdraws it from every case that follows.

    What is the ‘triple test’ laid down in Bangalore Water Supply (1978)?

    1. Origin: A seven-judge Constitution Bench in Bangalore Water Supply and Sewerage Board v. A. Rajappa (1978), authored by Justice V.R. Krishna Iyer, read Section 2(j) of the Industrial Disputes Act, 1947 expansively.
    2. The three conditions: An undertaking qualifies as an industry where there is systematic activity, organised by cooperation between employer and employee, for the production or distribution of goods or services calculated to satisfy human wants and wishes.
    3. What the test ignores: Profit motive is irrelevant to the classification. Purely spiritual or religious activity stays outside the definition.
    4. Reach: The test brought hospitals, educational institutions and municipalities within the fold of industry, exempting only core sovereign activities such as the judiciary, law and order and defence, in order to protect the state’s functional autonomy.

    What is the Industrial Relations Code, 2020?

    1. About: The Industrial Relations Code, 2020 consolidates the law on trade unions, standing orders and the settlement of industrial disputes into a single statute, and came into force in November 2025.
    2. The operative provision: Section 2(p) of the Code carries its own definition of industry, taking over the function that Section 2(j) of the 1947 Act performed for 48 years.

    What did the Supreme Court actually hold on the reach of the 1978 definition?

    1. A clean slate for the new Code: The majority held that industry under Section 2(p) of the Industrial Relations Code, 2020 would not be burdened by the 1978 interpretation of Section 2(j) of the 1947 Act.
    2. No sheet anchor: The Chief Justice of India stated that the 1978 judgment and its conclusion would not act as the sheet anchor or the foundation for any future interpretation of Section 2(p).
    3. A refinement, not a reversal: The majority found that the essential framework of the 1978 interpretation had withstood the test of time, and that some of its constituent elements could have been articulated differently to better reflect the scope and contours of Section 2(j).
    4. Prospective operation: The refined triple test evolved in the opinion of the Chief Justice of India will operate prospectively, and the modified definition will not apply to pending cases.
    5. Pending disputes protected: All matters presently pending before courts, tribunals and labour authorities under the Industrial Disputes Act, 1947 are to be adjudicated in accordance with the triple test as laid down in Bangalore Water Supply.
    6. Maintainability settled: The majority held that the reference questioning the correctness of the 1978 ruling was maintainable.
    7. Text still awaited: The fine print of the ruling prescribing the new formulation of the definition has not yet been released.

    Why was the 1978 definition sent to a nine-judge Bench at all?

    1. Docket explosion: Later Benches found that the 1978 definition produced what they called a docket explosion, bringing far more cases to the labour courts.
    2. A failed legislative narrowing: Parliament attempted to narrow the definition through the Industrial Disputes (Amendment) Act, 1982, excluding several organisations from its scope.
    3. The 2005 admission: The Centre told the Court in 2005 that no alternative dispute resolution mechanism existed for employees who would fall outside the amended definition, so the 1978 position continued to hold.
    4. Divergent readings: Subsequent rulings interpreted the 1978 judgment differently, and the case was referred to a nine-judge Bench for reconsideration.

    What three questions did the reference place before the Bench?

    1. Correctness of the test: Whether the test laid down in Bangalore Water Supply remains the correct interpretation of industry, and whether later legislative developments have any bearing on it.
    2. Welfare schemes: Whether welfare schemes run by the government count as an industrial activity.
    3. Sovereign function: What constitutes a sovereign function of the state, and whether such functions fall outside the ambit of labour law altogether.
    4. When framed: The Court identified these three broad questions for consideration in February 2026.

    Why does preserving the 1978 test only for pending cases divide the workforce in two?

    1. Two regimes running side by side: A dispute already filed under the 1947 Act is decided on the wide 1978 definition. An identical dispute arising under the Code is decided on a definition that has not yet been written out.
    2. The Court’s own reason: The majority stated that it did not intend to displace the governing legal position on pending proceedings, since doing so would create artificial discrimination.
    3. What the wide net secured: The 1978 definition enabled workers across a wide range of jobs to obtain legal recourse on wages, working hours, strikes, collective bargaining and protection against arbitrary dismissal.
    4. What the clean slate removes: Workers whose disputes arise after the Code’s commencement lose the settled presumption that their workplace is an industry, and must establish it afresh under Section 2(p).

    What does the dissent argue about the State as an employer?

    1. Reference itself questioned: Justice B.V. Nagarathna found the reference against the 1978 verdict unwarranted and not maintainable, and held that the ruling required no interference or modification.
    2. Identity of the employer is irrelevant: The dissent held that merely because a function is performed by the State, it cannot be exempted from the definition of industry, so the test of who carries out the activity is not relevant.
    3. Nature of the activity governs: Social welfare activities and schemes undertaken by government departments or their instrumentalities can be construed as industrial activities for the purpose of Section 2(j), depending on the nature of the activity and all other relevant factors.
    4. Why it matters now: The dissent held that it was important, now more than ever, to retain the inclusive definition of industry to safeguard workers’ rights.
    5. Split within the majority side: Justice Joymalya Bagchi recorded disagreement with the majority on the reformulation of the triple test, and Justices Dipankar Dutta and Ujjal Bhuyan wrote dissenting opinions.

    What challenges follow from redefining ‘industry’ under the new Code?

    1. Coverage uncertainty until the operative text arrives: The modified formulation was pronounced without the wording that prescribes it being available, so adjudicating authorities have no text to apply. Eg. The hour-long pronouncement on 20 August 2026 ended with the fine print of the new formulation still awaited.
    2. Identical workplaces treated differently by filing date: The cut-off is the date of the proceeding, not the nature of the work, so two workers in the same undertaking can face different definitions. Eg. A dispute in a municipal water supply undertaking filed under the 1947 Act is decided on the triple test, and one arising afterwards is not.
    3. No fallback forum for excluded categories: Narrowing the definition removes workers from the industrial adjudication machinery without putting anything in its place. Eg. The Centre itself told the Court in 2005 that no alternative dispute resolution mechanism existed for employees who would fall outside a narrowed definition.
    4. Threshold effects that discourage firms from growing: The Code applies its stricter obligations only above stated headcounts, which gives firms a reason to stop hiring below the line. Eg. Standing orders now apply at 300 employees and prior approval for layoff, retrenchment and closure applies at 300 workers, both raised from far lower thresholds.
    5. The sovereign function boundary left to case-by-case litigation: The Court has framed the question of what a sovereign function is without settling a workable test for it. Eg. Whether a government-run welfare scheme is an industrial activity was one of the three questions placed before the Bench in February 2026.
    6. A definition built for a standard employment relation: The triple test turns on cooperation between employer and employee, which platform-mediated work does not fit. Eg. Gig and platform workers are addressed through the Code on Social Security, 2020 rather than through the industrial dispute machinery.

    Conclusion

    The Court has separated the past from the future of a single statutory term, keeping Justice Krishna Iyer’s wide definition alive for disputes already in the system and denying it any authority over the Code that now governs Indian industrial relations. The substantive contest has therefore moved from the judiciary to the text of Section 2(p) and to whoever interprets it first. The Industrial Relations Code, 2020 has been in force since November 2025, and the next milestone is the release of the full text of the judgment carrying the refined formulation of the triple test.

    “[2024, GS3, 15] Discuss the merits and demerits of the four ‘Labour Codes’ in the context of labour market reforms in India. What has been the progress so far in this regard?”