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Subject: Economics

  • BS-III vehicles may require some modifications to use E20 fuel: govt.

    Why in the News

    The Union government told Parliament that some BS-III vehicles manufactured before 2016 may need rubber parts and gasket replacements to run on E20 fuel, even as the citizens’ advocacy group Team Bharat met the Petroleum Ministry demanding continued supply of E10 petrol and raised a conflict of interest allegation against a senior minister. The overlapping developments surface the same underlying dispute over who bears the cost of India’s ethanol blending programme.

    What is the Ethanol Blending Programme (EBP)?

    • The Ethanol Blending Programme (EBP) aims to blend ethanol with petrol to:
      • Reduce dependence on imported crude oil.
      • Lower vehicular emissions.
      • Support farmers by creating demand for sugarcane and other ethanol feedstocks.
      • Improve energy security and promote cleaner fuels.
    • India achieved the 20% ethanol blending (E20) target in 2025-26, ahead of schedule.

    Government Study on E20 Compatibility

    A study conducted by Indian Oil Corporation (IOC), Indian Institute of Petroleum (IIP), Society of Indian Automobile Manufacturers (SIAM) and Automotive Research Association of India (ARAI) found:

    • BS-III vehicles manufactured before 2016 may require replacement of Rubber hoses, Seals, and Gaskets.
    • The government stated that these replacements can generally be carried out during routine servicing.
    • No major engine modifications are required for most newer cars and two-wheelers compatible with E20.

    Why are Older Vehicles Affected?

    • Ethanol is more corrosive than petrol and can deteriorate older rubber and polymer components.
    • Older fuel systems were not designed for higher ethanol concentrations.
    • Some vehicle owners have reported: Engine misfiring, Fuel leakage, Starting problems, Performance issues (though some complaints may also be linked to contaminated fuel).

    [2025] Consider the following statements:
    Statement I: Of the two major ethanol producers in the world, i.e., Brazil and the United States of America, the former produces more ethanol than the latter.
    Statement II: Unlike in the United States of America where corn is the principal feedstock for ethanol production, sugarcane is the principal feedstock for ethanol production in Brazil.
    Which one of the following is correct in respect of the above statements?

    [A] Both Statement I and Statement II are correct and Statement II explains Statement I

    [B] Both Statement I and Statement II are correct but Statement II does not explain Statement I

    [C] Statement I is correct but Statement II is not correct

    [D] Statement I is not correct but Statement II is correct

  • ‘Oil price surge could be a strain for financing fiscal deficit & current account’

    Why in the News

    The Finance Ministry’s monthly economic review for July 2026 has flagged a renewed risk from global crude oil prices to India’s fiscal deficit and current account balance, even as it maintains that domestic fundamentals remain resilient. The review arrives amid a prolonged West Asia conflict and Ukrainian strikes on Russian energy infrastructure that have kept crude prices elevated through the month.

    Risks from Rising Crude Oil Prices

    • The Ministry warned that a sustained rise in crude oil prices could increase pressure on financing both the fiscal deficit and the current account balance.
    • Prices of industrial commodities, including critical minerals and rare earth elements, also remained elevated.
    • Flooding in Chile, a major copper supplier, highlighted India’s vulnerability to concentrated global supply chains.
    • India’s crude oil import bill rose by over 60% year-on-year during April-June FY27, despite slightly lower import volumes.
    • Partial pass-through of higher global crude prices increased fuel inflation in June: Diesel: 8.4%, Petrol: 7.5%, CNG: 6.2%

    Factors Supporting India’s Economic Resilience

    • Strong merchandise and services exports, along with robust remittance inflows, continue to support the external sector.
    • Structural reforms and infrastructure investments over the past decade have strengthened growth resilience.
    • India’s oil consumption-to-GDP and crude imports-to-GDP ratios have steadily declined between FY14 and FY26.
    • Electric Vehicle (EV) adoption crossed 8% of total vehicle registrations in 2026.
    • EV penetration reaching 20% by 2030 could reduce India’s annual crude oil import bill by nearly ₹1 lakh crore.

    Continuing Challenges

    • Crude oil prices remain elevated, though lower than the sharp spike seen during the initial phase of the West Asia conflict.
    • Pass-through to public transport fares has remained moderate, while airfare inflation eased in June after a sharp increase in May.
    • The Ministry acknowledged that India’s resilience is being continuously tested, stating that the coming years will continue to require strong economic preparedness.

    Monthly Economic Review

    • Published by: Department of Economic Affairs (DEA), Ministry of Finance
    • Frequency: Monthly
    • Nature: Government publication on macroeconomic developments
    • Purpose: Monitors trends in economic growth, inflation, fiscal position, external sector, and financial markets.
    • Significance: Provides an early assessment of emerging economic risks and policy challenges.

    Difference from the Economic Survey

    • Monthly Economic Review: Released every month and focuses on recent macroeconomic trends.
    • Economic Survey: Released annually before the Union Budget and provides a comprehensive review of the economy along with policy recommendations.

    Key Concepts for Prelims

    • Pass-through Effect: Refers to the transmission of changes in input costs (such as crude oil prices) to consumer prices. Example: Higher crude oil prices leading to higher transport fares and fuel prices.
    • Oil Intensity of the Economy: Measures the amount of crude oil required to produce one unit of GDP. Lower oil intensity indicates greater energy efficiency and reduced vulnerability to oil price shocks.
    • Current Account Deficit (CAD): Occurs when a country’s imports of goods, services, and transfers exceed its exports.

    [2020] With reference to the international trade of India at present, which of the following statements is/are correct?

    1.India’s merchandise exports are less than its merchandise imports.
    2.India’s imports of iron and steel, chemicals, fertilisers and machinery have decreased in recent years.
    3.India’s exports of services are more than its imports of services.
    4.India suffers from an overall trade/current account deficit.
    Select the correct answer using the code given below:
    a) 1 and 2 only
    b) 2 and 4 only
    c) 3 only
    d) 1, 3 and 4 only

  • May services growth halved to under 10%, data suggests

    Why in the News

    India’s services sector growth appears to have more than halved in May 2026, falling to about 9.5% from around 20.5% in April, according to the Ministry of Statistics and Programme Implementation’s (MoSPI) new experimental Index of Services Production (ISP). This is the first official monthly measure of services output, exposing a slowdown that no single earlier indicator could confirm.

    What is the Index of Services Production (ISP)?

    1. Purpose: The ISP is MoSPI’s new experimental monthly measure of output across 19 services sub-sectors, released for the first time this month.
    2. Base year: The index uses 2024-25 as its base year and remains at a trial stage.
    3. Gap it fills: Until the ISP, India had no official monthly measure of the services sector, which makes up more than half of GDP; only the private S&P Global services Purchasing Managers’ Index (PMI) existed.
    4. Counterpart index: The ISP is the services-sector counterpart to the long-existing Index of Industrial Production (IIP), which measures manufacturing and mining output.

    Highlights

    1. Headline decline: Calculations by The Indian Express show services growth fell from around 20.5% in April to approximately 9.5% in May.
    2. Comparison with industry: Even at 9.5%, May services growth remained almost double the 5% expansion recorded by industry under the IIP.
    3. Sub-sector spread: 16 of 19 sub-sectors grew in May, with eight recording double-digit growth, down from 17 growing sub-sectors and 14 in double digits in April.
    4. Leading sub-sector: Accommodation and food led services growth in May at 27.4%, though this was down from 37.2% in April.
    5. IT services slowdown: IT and computer-related services, the highest-weighted sub-sector at 22.47%, saw growth decline to 10.3% in May from 15.2% in April.
    6. Exceptions: Railway transport and air transport were the only sub-sectors that performed better in May than April, though air transport still contracted by 2.8%.

    Why did air transport underperform even as it improved?

    1. War-linked cost pressure: Air transport activity has been hurt by the war in West Asia, which raised fuel costs and pushed airlines to increase fares.
    2. Sequential improvement: Air transport’s May contraction of 2.8% was still an improvement over a 13.9% contraction in April.

    Back2Basics:

    Index of Services Production (ISP)

    • Released by: Ministry of Statistics and Programme Implementation (MoSPI)
    • Nature: Experimental monthly index
    • Base Year: 2024-25
    • Coverage: 19 services sub-sectors
    • Measures: Monthly output of the services sector
    • Purpose: Official high-frequency indicator of services sector performance
    • Counterpart: Index of Industrial Production (IIP)

    Key Facts

    • India’s first official monthly index for measuring services sector output.
    • Covers the largest contributor to India’s economy, accounting for over 55% of GDP.
    • IT & Computer Services has the highest weight (22.47%) in the index.
    • Compiled using actual production/output data, unlike survey-based indicators.

    ISP vs Services PMI

    • ISP
      • Official index compiled by MoSPI.
      • Measures actual services output.
      • Based on administrative and statistical data.
    • Services PMI
      • Published by S&P Global.
      • Measures business activity and sentiment through surveys.
      • Indicates expansion or contraction, not actual output.

    [2012] In India the overall Index of Industrial Production, the Indices of Eighth Core Industries have combined weight of 37.90%. Which of the following are among those Eight Core Industries?
    1. Cement
    2. Fertilizers
    3. Natural Gas
    4. Refinery products
    5. Textiles
    Select the correct answer using the codes given below:

    [A] 1 and 5 only

    [B] 2, 3 and 4 only

    [C] 1, 2, 3 and 4 only

    [D] 1, 2, 3, 4 and 5

  • [30th July 2026] The Hindu OpED: India’s refusal to uphold a global gig work law

    PYQ Relevance
    [UPSC 2024]     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?
    Linkage: The PYQ asks for an evaluation of the four Labour Codes, including the Code on Social Security, and their implementation progress. The article’s account of the un-operationalised gig worker fund under the Code on Social Security directly answers the “progress so far” component of this question.

    Mentor’s Comment

    On June 12, the International Labour Conference adopted Convention No. 193 on Decent Work in the Platform Economy by a vote of 406 to 8. India’s government delegate abstained even as India’s own employer and worker delegates voted in favour. The abstention exposes a gap between India’s stated commitment to gig worker welfare through its domestic Labour Codes and its long-standing refusal to accept binding international obligations that courts could enforce.

    What floor of rights does Convention No. 193 set that Indian law currently denies gig workers?

    1. Rights regardless of classification: The Convention extends minimum pay, on-time payment, occupational safety and social security to platform workers whatever a company calls them, whether “employee” or “independent partner.”
    2. Algorithmic management disclosure: Platforms must disclose significant automated decisions in writing and keep a human in the loop. Algorithmic management: the software that allocates work, sets pay, monitors performance and can deactivate accounts. No prior global labour standard has regulated this domain.
    3. Correct classification mandate: Article 9 requires governments to classify workers by the facts of the work performed, not by the label a platform assigns.
    4. Enforceability through ratification: A worker in a ratifying country can sue a platform for redress once the Convention is written into domestic law. India’s abstention forecloses that route.
    5. Limited but real floor: The Convention does not resolve every gig work dispute. It sets a minimum below which no ratifying country can fall.

    How large and precarious is India’s gig workforce today?

    1. Scale: India’s gig workforce stood at roughly 7.7 million in 2020-21. NITI Aayog projects it will reach 2.35 crore by 2029-30, about 6.7% of the non-agricultural workforce.
    2. Wage distribution: About 39% of gig workers earn ₹10,000-₹25,000 a month. Another 34% earn ₹25,000-₹40,000.
    3. Unpaid costs: Workers cover fuel costs themselves and work 12-hour shifts with no overtime. Overtime requires an employer to exist in law.
    4. Social security gap: Only about 15% of gig workers have any social security cover.
    5. Algorithmic exposure: An algorithm can deactivate a worker’s account and cut off income without explanation. Workers have no accident cover, sick pay or pension to fall back on.

    Does India’s Code on Social Security, 2020 already deliver what Convention No. 193 promises?

    1. Early definitional step: The Code on Social Security, part of the four Labour Codes in force from November 2025, was among the world’s first central laws to define “gig worker” and “platform worker.”
    2. Funding mechanism on paper: Aggregators must pay 1%-2% of annual turnover, capped at 5% of worker payouts, into a social security fund.
    3. Unspecified benefits: Neither the central law nor most state laws specify the nature, quantum or eligibility of benefits.
    4. Un-operationalised contribution: The contribution mechanism remains largely unimplemented. The schemes remain notional.
    5. Gap between claim and delivery: The law reads as leadership on paper. It functions as a promise that has not been converted into disbursed protection.

    Who is actually legislating gig worker protection: the Centre or the states?

    1. Rajasthan’s model: The Rajasthan Platform-Based Gig Workers Act, 2023 is a standalone state law establishing gig worker registration and welfare mechanisms.
    2. Karnataka and Telangana boards: Both states have drafted welfare boards for platform workers independent of central action.
    3. Federalism argument tested: The Centre cites labour as a concurrent subject to justify caution. States are already exercising that same concurrent jurisdiction.
    4. Centre-state asymmetry: The Centre abstains in Geneva while states legislate at home. This reverses the usual expectation that national commitments lead subnational implementation.

    Is India’s abstention a one-off caution or a settled institutional posture?

    1. Founding member, selective ratifier: India is a founding member of the ILO and has ratified six of eight core conventions. It has not ratified Convention 87 on Freedom of Association or Convention 98 on the Right to Organise and Collective Bargaining.
    2. Domestic rule conflict: India has not ratified Conventions 87 and 98 because they would grant government servants the right to strike. Domestic rules bar that right.
    3. Violence and harassment convention untouched: India has also not ratified Convention 190 on violence and harassment at work.
    4. Reversed sequence: India ratifies conventions only once domestic law is already in full conformity. This reverses the sequence in which ratification typically drives domestic reform.
    5. A settled choice: A founding member of the ILO that will not sign the ILO’s own guarantees is not acting out of unfamiliarity. It is exercising a settled choice to endorse principles without accepting enforceable obligations.

    What does the abstention cost gig workers and India’s global standing?

    1. Lost legal recourse: Ratification would let a worker sue a platform for redress. Abstention forecloses that possibility inside India.
    2. Signal to aggregators: The abstention tells every aggregator operating in India that calling workers “partners” rather than employees remains a safe classification.
    3. Cross-country disparity: A delivery worker in China will have enforceable rights under the Convention. A worker in Chennai will not.
    4. A choice by default: The government chose neither the worker nor the platform in a forum where one side holds the app and the other holds the handlebars. That default functions as choosing the platform.
    5. Scale of the stake: The World Bank estimates 154-435 million people already earn through platforms worldwide. 2.35 crore of them will be Indian by 2030.

    Conclusion

    India’s abstention on Convention No. 193 is not an isolated diplomatic caution. It follows the same pattern as its non-ratification of Conventions 87, 98 and 190: endorse the principle in domestic law, withhold the obligation that would make it enforceable. Gig workers are left with a social security fund that exists on paper but not in disbursement, while individual states legislate protections the Centre will not commit to nationally. Until India converts stated intent into binding law, its 2.35 crore gig workers by 2030 will remain outside the floor of rights their counterparts elsewhere now hold.

  • IRDAI Unveils Reforms to Boost Insurance Sector and Improve Policyholder Protection

    Why in the News?

    The Insurance Regulatory and Development Authority of India (IRDAI) has approved a package of regulatory reforms covering investment norms, capital structure, policyholder protection and intermediary accountability. The reform bundle operationalises the Sabka Bima Sabki Raksha Act, 2025, which raised the foreign investment ceiling in insurers from 74% to 100%. It tests whether liberalisation and protection can be built in parallel rather than protection following liberalisation with a lag.

    Why has IRDAI introduced this reform package now?

    1. Legislative trigger: The Sabka Bima Sabki Raksha (Amendment of Insurance Laws) Act, 2025 amended insurance laws and raised the foreign investment ceiling in insurers to 100%, up from 74%.
    2. Implementation gap: The higher FDI ceiling needed a regulatory framework for capital infusion, corporate restructuring and share transfer to become operational.
    3. Statutory mandate: The SBSR Act inserted Section 16A into the IRDA Act, 1999. This created the legal basis for the Policyholders’ Education and Protection Fund, which needed dedicated regulations to function.
    4. Sequencing choice: The IRDAI board cleared amendments to five sets of regulations in a single meeting. Capital reform and protection reform were treated as one package, not as separate tracks.

    What liberalisation has been extended to insurers?

    1. Investment norms: Amendments to the actuarial, finance and investment regulations give insurers greater flexibility in deploying funds.
    2. Capital structure: Amended registration and capital structure regulations create a facilitative framework for capital infusion.
    3. Corporate restructuring: The same regulations streamline provisions for amalgamation of insurers.
    4. Share transfer: Procedures governing transfer of shares have been simplified. This eases entry and exit for investors.
    5. Actuarial oversight: The amendments strengthen actuarial and financial governance standards even as operational flexibility increases.

    How has the reform package sought to institutionalise policyholder protection?

    1. Statutory fund: The Policyholders’ Education and Protection Fund Regulations, 2026 operationalise the PEPF created under Section 16A of the IRDA Act, 1999.
    2. Awareness mandate: The fund is tasked with promoting insurance awareness and literacy.
    3. Grievance redressal: The regulations direct the fund to strengthen mechanisms for resolving policyholder grievances.
    4. Unclaimed amounts: The fund is required to trace and recover unclaimed insurance amounts on behalf of policyholders and beneficiaries.
    5. Technology mandate: The fund is expected to use technology to improve policyholder-facing services.

    How does the intermediary and enforcement architecture fix accountability gaps in distribution?

    1. Salesperson tagging: Every insurance proposal, policy and certificate of insurance must now carry the identity of the authorised salesperson who sold it.
    2. Traceability: Tagging makes individual accountability for mis-selling traceable at the point of sale.
    3. Registration reform: Intermediaries move from periodic renewal to perpetual registration, backed by an annual fee.
    4. Compliance alignment: The revised intermediary framework aligns with the SBSR Act and with Foreign Investment Rules.
    5. Penalty framework: The IRDAI (Manner and Procedure for Imposition of Penalties) Regulations, 2026 lay down a structured process of show-cause notices and reasoned orders under the Insurance Act, 1938 and the IRDAI Act, 1999.

    Can capital liberalisation and policyholder protection be pursued at the same pace, or does one inherently lag the other?

    1. Structural pairing: IRDAI bundled capital-side liberalisation with protection-side regulation in the same board meeting. The two are treated as inseparable, not sequential.
    2. Underlying risk: Liberalised investment norms and eased capital infusion widen the pool of entities and products in the market. This same expansion has historically outpaced grievance redressal capacity.
    3. Accountability lag: Salesperson tagging and the penalty framework are enforcement tools. Both depend on detection and adjudication capacity, which typically builds slower than capital inflow.
    4. Fund versus enforcement: The PEPF is an awareness and recovery mechanism, not a supervisory one. It does not by itself catch mis-selling before it occurs.
    5. Open question: Whether accountability infrastructure can scale at the same rate as the capital base, once 100% FDI is fully absorbed, remains untested.

    What do early market signals suggest about the credibility of this dual-track reform?

    1. FDI uptake: Two insurers, one life and one general, have already raised foreign shareholding beyond the earlier 74% ceiling.
    2. New entry: ProTec General Insurance Ltd received a Certificate of Registration, the fourth new registration of calendar year 2026.
    3. Composition of entry: The four 2026 registrations span two general insurers, one health insurer and one reinsurer. This indicates diversified rather than concentrated investor interest.
    4. Regulator’s reading: IRDAI has framed the FDI uptake as a signal of investor confidence and of India’s attractiveness as a long-term investment destination.
    5. Unresolved test: Investor confidence confirms the liberalisation track is working. It does not yet confirm the protection track, since the PEPF and the penalty framework are too new to have generated measurable outcomes.

    Conclusion

    IRDAI’s reform package treats capital liberalisation and policyholder protection as a single, simultaneous exercise rather than a sequence, matching the SBSR Act’s 100% FDI opening with a statutory protection fund, salesperson-level traceability and a codified penalty process. Early investor response confirms the liberalisation track is working. Whether the protection track can scale at the same speed as capital inflow, particularly by detecting mis-selling before it happens rather than compensating for it afterward, is not yet tested.

    Back2Basics:

    Insurance Regulatory and Development Authority of India (IRDAI)

    1. Governing Act: IRDAI is governed by the Insurance Regulatory and Development Authority Act, 1999, along with the Insurance Act, 1938 and the General Insurance Business (Nationalization) Act, 1972.
    2. Jurisdiction: IRDAI performs both economic regulation (tariffs, solvency margins) and technical regulation (reserving norms, actuarial standards) for insurers, an integrated single-regulator model.
    3. Origin: IRDAI was established on the recommendation of the R.N. Malhotra Committee on comprehensive reforms of the insurance sector, which predates IRDAI’s own creation.
    4. Grievance route: The Insurance Ombudsman handles policyholder disputes; its award is binding on the insurer but not the policyholder, who can still approach a Consumer Commission.
    5. Appellate route: Appeals against IRDAI orders lie before the Securities Appellate Tribunal (SAT).

    What is the Sabka Bima Sabki Raksha (Amendment of Insurance Laws) Act, 2025?

    1. What it is: The Sabka Bima Sabki Raksha (Amendment of Insurance Laws) Act, 2025 (SBSR Act) is the legislative vehicle through which Parliament amended India’s insurance laws, including the Insurance Regulatory and Development Authority Act, 1999.
    2. What it introduced: The SBSR Act introduced Section 16A of the IRDA Act, 1999, establishing the statutory basis for the Policyholders’ Education and Protection Fund.

    PYQ Relevance

    [UPSC 2015] For achieving the desired objectives, it is necessary to ensure that the regulatory institutions remain independent and autonomous. Discuss in the light of the experiences in recent past.

    Linkage: The question asks what independence and autonomy regulatory institutions need to achieve their objectives. IRDAI’s new penalty and enforcement regulations attempt to build exactly this kind of structured, autonomous regulatory credibility.

  • PLI schemes drive ₹96,000 crore investment

    Why in the News

    The production-linked incentive scheme for large-scale electronics manufacturing (PLI-LSEM) has catalysed Rs 96,000 crore of investment in India’s mobile manufacturing ecosystem, Parliament was informed on 29 July 2026. Electronics production crossed Rs 3.11 lakh crore in FY 2025-26, and the Semicon India Programme has moved from policy announcement to actual commercial output for the first time.

    What is the PLI Scheme for Large-Scale Electronics Manufacturing (PLI-LSEM)?

    1. Launch and purpose: PLI-LSEM was launched in 2020 to boost indigenous production of mobile phones and reduce import dependence.
    2. Mechanism: The scheme pays eligible manufacturers a percentage incentive on incremental sales of India-made goods over a base year, tied to investment and production commitments.
    3. Scope expansion: The government followed it with PLI Scheme 2.0 for IT Hardware in 2023, covering laptops, tablets and servers.
    4. Semicon India Programme: A separate scheme approves fabrication and packaging projects to build domestic semiconductor manufacturing capacity.

    What does the data show about electronics manufacturing growth?

    1. Investment catalysed: PLI-LSEM has catalysed approximately Rs 96,000 crore of investment in the mobile manufacturing ecosystem.
    2. Production growth: Electronics production rose from Rs 1.32 lakh crore in FY 2024-25 to Rs 3.11 lakh crore in FY 2025-26, a year-on-year growth of 15.8%.
    3. Domestic value addition: An external evaluation study found domestic value addition (DVA) under PLI-LSEM increased to 23% in FY 2023-24.
    4. Export ranking: Smartphones, absent from India’s top 100 exported commodities in 2014, became India’s top exported individual commodity in FY 2025-26, surpassing petroleum and gems and jewellery.
    5. IT Hardware scheme: PLI Scheme 2.0 for IT Hardware has generated cumulative production of Rs 24,385.89 crore, cumulative investment of Rs 1,056.36 crore, and 5,216 direct jobs.

    What is the state of the Semicon India Programme?

    1. Projects approved: 12 projects have been approved under the Semicon India Programme, entailing a committed investment of Rs 1.64 lakh crore.
    2. Commercial production: 3 of the 12 approved projects have already started commercial production.
    3. Private follow-on investment: Semiconductor firm Marvell Technology has separately announced a $250 million investment in India, citing the country’s growing role as an engineering hub.

    Challenges to India’s PLI and semiconductor manufacturing push

    1. Import dependence on components: India’s electronics assembly still relies heavily on imported chips and displays, keeping true domestic value addition below finished-goods value.
    2. Technology gap: India’s semiconductor fabrication projects remain at trailing-edge nodes, far behind the sub-10 nanometre technology used by global leaders such as Taiwan.
    3. Fiscal cost of incentives: The PLI outlay across sectors runs into tens of thousands of crores, raising questions about cost per job created against alternative uses of the same fiscal space.
    4. Sunset risk: PLI incentives are time-bound, and companies that scale up during the incentive period face uncertainty about competitiveness once the subsidy period ends.
    5. Tariff exposure: Sharp increases in United States tariffs on electronics exports could squeeze the margins that make India-based assembly viable for global companies.

    Conclusion

    The PLI-LSEM and Semicon India Programme disclosures show incentive-linked manufacturing has moved from policy design to measurable investment and production gains, with smartphones now India’s top exported commodity. The next milestone is whether the remaining nine approved semiconductor projects reach commercial production and whether domestic value addition rises beyond assembly-level gains.

    Back2Basics:

    Production-Linked Incentive (PLI) Scheme

    1. Launch: The PLI framework was launched in 2020 across multiple sectors to boost domestic manufacturing and cut import dependence.
    2. Mechanism: The government pays selected manufacturers a financial incentive, typically 4-6% of incremental sales over a base year, contingent on investment and production commitments.
    3. Nodal ministry: The Ministry of Electronics and Information Technology administers PLI-LSEM and IT Hardware; other sectors are administered by their respective ministries.
    4. Sectoral spread: PLI schemes cover 14 sectors including mobile manufacturing, pharmaceuticals, telecom equipment, textiles, food processing and semiconductors.

    The Semicon India Programme

    1. It is a national initiative backed by financial outlays and implemented through the India Semiconductor Mission to build a complete domestic semiconductor and display manufacturing ecosystem

    Financial Outlay and Phases

    1. Phase 1 (Semicon 1.0): Approved in December 2021 with an initial fiscal outlay of ₹76,000 crore to incentivize silicon fabs, display units, and packaging.
    2. Phase 2 (Semicon 2.0): Approved in July 2026 with an expanded outlay of ₹1,27,500 crore to widen the scope of domestic manufacturing and supply chains.

    Core Focus Pillars

    1. Semiconductor Fabs: Fiscal backing covering up to 50% of project costs for silicon CMOS fabrication units.
    2. ATMP/OSAT: Support for assembly, testing, marking, and packaging facilities.
    3. Design & R&D: Incentives for chip design infrastructure, raw materials, equipment, and talent development.

    PYQ Relevance

    [UPSC 2025] 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?
    Linkage: The PYQ examines government policies to promote manufacturing, industrial growth and global competitiveness. The article evaluates how PLI-LSEM and the Semicon India Programme are strengthening electronics manufacturing, exports and domestic value addition while highlighting the remaining challenges in semiconductor self-reliance.

  • Does the RBI believe rupee is ‘undervalued’?

    Why in the News

    Reserve Bank of India (RBI) Governor has repeated, across two separate settings, that the rupee is undervalued in both nominal and real effective exchange rate (REER) terms. The remark is unusual because central bankers rarely comment on whether their own currency is priced fairly, and it comes as the rupee has depreciated 5.8% year-to-date against the US dollar.

    What is Real Effective Exchange Rate (REER) and why does it matter here?

    1. Definition: The real effective exchange rate (REER) measures a country’s currency value against a basket of trading partner currencies, adjusted for inflation.
    2. Contrast with nominal rate: The nominal exchange rate measures the rupee’s value against a single currency such as the US dollar, while REER captures relative price changes across multiple trading partners.
    3. Why economists prefer it: Economists rely on REER to assess overvaluation or undervaluation because it accounts for inflation differentials rather than only bilateral currency movements.

    What did the Governor actually say?

    1. First statement: It would be reasonable to think the rupee is not overvalued, and that “one could argue the rupee has become undervalued both in nominal and in REER terms.”
    2. Walk-back attempt: He initially disagreed that he had made such a statement, before again saying, “It is reasonable to think that it [Rupee] may not be overvalued.”
    3. No exchange rate target: He reiterated that the RBI does not target any specific exchange rate or band for the rupee.
    4. Market interpretation: Financial markets read the remarks as an indication that the central bank believes the rupee has weakened beyond what economic fundamentals justify.

    What is driving the rupee’s depreciation despite the RBI’s undervaluation claim?

    1. External pressure factors: Higher crude oil prices, geopolitical tensions, a stronger US dollar and intermittent foreign portfolio outflows from emerging markets have pressured the rupee.
    2. Capital outflows: Foreign portfolio investors have drained billions from the Indian stock market, increasing dollar demand while reducing capital inflows.
    3. Domestic fundamentals cited: The RBI points to over 6% annual growth, moderating inflation and forex reserves covering 11 months of imports as evidence the depreciation does not reflect domestic conditions.

    Can a Market-Determined Exchange Rate Be Undervalued?

    1. Non-intervention position: The RBI maintains it does not seek either a permanently strong or a permanently weak currency, and that its exchange rate policy is market-determined.
    2. Limited intervention purpose: The RBI’s foreign exchange interventions aim only to curb excessive volatility and ensure orderly market conditions, not to defend a fixed rupee value.
    3. The tension: By publicly labelling the rupee undervalued while disclaiming any exchange rate target, the Governor signals a view on fair value without committing to any corrective policy action, leaving markets to price in the central bank’s assessment without a stated mechanism to act on it.

    Conclusion

    The RBI Governor’s repeated undervaluation remark distinguishes short-term currency market pressure from India’s underlying macroeconomic fundamentals, without indicating any change in the central bank’s non-intervention stance. Whether the rupee corrects toward this “fair value” will depend on crude oil prices, US monetary policy and capital flows rather than any RBI trigger.

    Back2Basics:

    Real Effective Exchange Rate (REER)

    1. Definition: REER measures a currency’s value against a trade-weighted basket of partner currencies, adjusted for relative inflation.
    2. Custodian: The RBI publishes REER indices for the rupee using 6-currency and 40-currency trade-weighted baskets.
    3. Reading the index: A REER value above 100 relative to the base year typically signals overvaluation; below 100 signals undervaluation.

    Nominal Effective Exchange Rate (NEER)

    1. Definition: NEER measures a currency’s value against a trade-weighted basket of partner currencies, without adjusting for inflation.
    2. Core Concept: It shows the pure external value of the rupee against a group of foreign currencies based purely on market exchange rates.

    Key Differences: NEER vs REER

    1. Inflation Adjustment: NEER ignores inflation completely, while REER adjusts the NEER value for inflation differences between India and its trading partners.
    2. Economic Meaning: NEER tracks simple currency price movements, whereas REER reflects the actual price competitiveness of Indian goods in the global market.
    3. Formula Relationship: REER X (Domestic Inflation Index/Foreign Inflation Index)
    4. Policy Focus: If India’s inflation is higher than its partners, REER will rise faster than NEER, signaling that Indian exports are becoming more expensive despite a stable nominal exchange rate.

    PYQ Relevance

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

    Linkage: It examines the impact of exchange rate movements on India’s macroeconomic stability and external sector. It extends the PYQ by explaining RBI’s REER-based assessment of the rupee’s valuation under a market-determined exchange rate regime.

  • Industrial growth hits 23 month high of 7.3% in June, IIP data shows

    Why in News?

    The Index of Industrial Production (IIP) recorded 7.3% growth in June, a 23 month high, driven by manufacturing, electricity and capital goods, per Ministry of Statistics and Programme Implementation (MoSPI) data.

      Key Highlights

      1. Headline growth: Industrial growth reached 7.3% in June, its highest in 23 months.
      2. Sectoral drivers: Manufacturing grew 7.8%, electricity 10.6%, and capital goods 14.2%.
      3. Breadth: 19 of 23 manufacturing groups posted growth.
      4. Risk flags: Analysts cite a weak monsoon and the West Asia war as risks to sustaining this growth pace.

      What is the Index of Industrial Production (IIP)?

      1. The IIP is a monthly indicator measuring the volume of industrial production in the economy.
      2. It is compiled and released by the National Statistics Office (NSO) under MoSPI.
      3. It reflects the performance of the mining, manufacturing and electricity sectors.
      4. Base Year: 2022-23.

      Components of IIP

      1. Manufacturing: Largest contributor with about 77% weight.
      2. Mining: Around 14% weight.
      3. Electricity: Around 8% weight.
      4. Use-Based Classification: Primary Goods, Capital Goods, Intermediate Goods, Infrastructure/Construction Goods, Consumer Durables, and Consumer Non-Durables

      [2012] In India the overall Index of Industrial Production, the Indices of Eighth Core Industries have combined weight of 37.90%. Which of the following are among those Eight Core Industries?
      1. Cement
      2. Fertilizers
      3. Natural Gas
      4. Refinery products
      5. Textiles
      Select the correct answer using the codes given below:

      [A] 1 and 5 only

      [B] 2, 3 and 4 only

      [C] 1, 2, 3 and 4 only

      [D] 1, 2, 3, 4 and 5

    1. Rupee’s Real Effective Exchange Rate turns undervalued, more so than the yuan

      Why in the News

      India’s Real Effective Exchange Rate (REER) has moved from overvalued, above 100 until mid-2025, to undervalued at around 91 in June 2026. The rupee is now more undervalued than China’s yuan, a shift driven by oil price volatility and the West Asia war.

      What is the Real Effective Exchange Rate (REER)?

      1. Definition: REER measures a currency’s value against a trade weighted basket of other currencies, adjusted for inflation differentials, with 100 as the base year benchmark.
      2. Above 100: A REER above 100 signals overvaluation, meaning the currency is more expensive than its trade weighted fair value, hurting export competitiveness.
      3. Below 100: A REER below 100 signals undervaluation, meaning exports become cheaper and more competitive in foreign markets.
      4. Current reading: The rupee’s REER at around 91 in June 2026 places it firmly in undervalued territory, a reversal from above 100 as recently as mid-2025.

      Why does rupee undervaluation matter now?

      1. Export competitiveness: An undervalued rupee makes Indian exports cheaper relative to competitors, a potential offset to the tariff pressure Indian exporters face from the United States.
      2. Oil price link: Volatility from the West Asia war affects oil import costs, which in turn move the rupee’s value against the dollar and the wider currency basket.
      3. Comparative position: The rupee being more undervalued than the yuan reverses a longstanding pattern where China’s currency was seen as the more actively managed, undervalued one.
      4. Policy dilemma: Sustained undervaluation aids exporters but raises import costs, including for oil, creating a trade off the Reserve Bank of India must weigh in its currency management.

      Conclusion

      The rupee’s shift from overvalued to undervalued reflects oil price and West Asia conflict volatility more than a deliberate policy choice. Whether this undervaluation becomes a durable export advantage or reverses with oil price stabilisation remains the open question.

    2. India’s Record Exports in FY 2025-26

      Why in News?

      India recorded its highest-ever exports of US$ 863.1 billion in FY 2025-26, driven by strong merchandise and services exports and growing benefits from recent Free Trade Agreements (FTAs), particularly with the UAE, UK, Australia, Oman and EFTA.

      Key Highlights

      • Record exports: India’s total exports reached US$ 863.1 billion in FY 2025-26.
        • Merchandise exports: US$ 441.8 billion
        • Services exports: US$ 421.3 billion
      • Top FTA export destinations:
        • ASEAN: US$ 38.4 billion
        • UAE (CEPA): US$ 37.4 billion
        • SAFTA: US$ 25.8 billion
        • UK (CETA): US$ 13.4 billion
        • Singapore (CECA): US$ 11.9 billion
      • Recent FTAs boosted exports:
        • UAE CEPA: 4.45 lakh Certificates of Origin issued; export tariff lines increased from 7,546 to 8,053.
        • Australia ECTA: Certificates of Origin rose from 1,482 (FY21) to an average 45,500+ annually after implementation.
        • Mauritius CECPA: Export tariff lines increased by 20.9%.
        • Oman CEPA: June 2026 exports grew 54.7% month-on-month and 189.6% year-on-year.
        • India-EFTA TEPA: Over 7,885 Certificates of Origin issued since October 2025.
      • Labour-intensive sectors benefited most: Textiles & apparel, Leather & footwear, Gems & jewellery, Marine products, Carpets, Handicrafts, Agricultural products
      • Trade facilitation initiatives:
        • Trade e-Connect: Provides market intelligence, tariff information, Rules of Origin guidance and FTA advisory.
        • Trade Intelligence & Analytics (TIA) Portal: Offers commodity-wise trade analytics and real-time export monitoring.

      Significance

      • Diversifies export markets and products.
      • Enhances global value chain integration.
      • Boosts manufacturing and employment in labour-intensive industries.
      • Improves India’s competitiveness through preferential tariff access.

      [2023] Consider the following statements:
      Statement-I: India accounts for 3.2% of global export of goods.
      Statement-II: Many local companies and some foreign companies operating in India have taken advantage of India’s Production-linked Incentive’ scheme.
      Which one of the following is correct in respect of the above statements?

      [A] Both Statement-I and Statement-II are correct and Statement-ll is the correct explanation for Statement-I.

      [B] Both Statement-I and Statement-II are correct and Statement-l is not the correct explanation for Statement-I.

      [C] Statement-l is correct but Statement-II is incorrect.

      [D] Statement-I is incorrect but Statement-II is correct.