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Subject: Economics

  • Trump’s unusual threat to US Federal Reserve and why it matters to India

    Why in the News

    The US President has warned the Federal Reserve (Fed) to cut interest rates, and has said the United States would otherwise stop trading with countries against which it runs a trade deficit. A central bank’s rate decision is not normally tied to a trade threat, which is what makes the statement unusual. It follows US government debt crossing a record $40 trillion and a trade deficit that has widened despite a slew of tariffs on trade partners. Pressure that begins as a US fiscal problem therefore arrives in India as demands on trade terms. India and the United States have been negotiating a bilateral trade agreement since February 2025, and the framework they announced for an Interim Agreement has already unsettled farmers.

    What is the US Federal Reserve?

    1. The central bank of the United States: It sets US policy interest rates and is charged with keeping prices stable and employment high.
    2. Rate decisions sit outside the executive: They are taken by a committee whose members hold fixed terms, which is the arrangement that separates monetary policy from the government of the day.
    3. Its rates set the price of money worldwide: The yield on the US 10 year government bond is the benchmark against which global borrowing costs are priced.

    Why is the United States pressing for lower interest rates now?

    1. The debt stock has crossed a record: US government debt has passed $40 trillion.
    2. Debt measured against output: The Council on Foreign Relations puts the US debt to gross domestic product (GDP) ratio at 125%.
    3. Interest now costs as much as defence: International think tanks estimate the US government will spend a little over $1 trillion this fiscal year servicing interest on the debt, which matches its national defence spending.
    4. Borrowing costs are rising, not falling: Rising oil prices from the US-Iran war have made investors warier of the debt, pushing the 10 year yield towards 5%. A rate cut is the cheapest available relief on the interest bill.
    5. Tariffs did not close the gap: The trade deficit widened even after tariffs were imposed across trade partners, which removes the argument that tariffs alone would correct it.

    How does US fiscal pressure reach India?

    1. The template is the China deficit: Washington has narrowed its trade deficit with China to the lowest in two decades, and has begun pressing partners such as India to deliver the same.
    2. First front, market access: Steep market access demands are being pressed through the trade deal negotiations.
    3. Second front, investment diversion: Investment is being drawn out of India and into the United States.
    4. Third front, input origin: India is under pressure to lower its dependence on inputs originating in China.
    5. The stated ground for the third front: The US position is that China operates a “shadow transhipment network”. On that reading, routing Chinese goods through third countries widens the effective US trade deficit, displaces US domestic production, reduces GDP growth and lowers federal tax receipts.

    What has India already conceded?

    1. Energy purchases: India has stepped up energy imports from the United States.
    2. Tariff cuts across consumer goods: Duties have been lowered on a broad range of products of US interest, from motorcycles to whiskey.
    3. Tax concessions: A tax holiday has been extended to datacentres and to items needed to expand nuclear power production in India.
    4. The LPG shift is already measurable: The US share of India’s liquefied petroleum gas (LPG) imports has crossed 50% in the six months since the West Asia crisis began.

    What does the trade framework put at risk for Indian farmers?

    1. A negotiation already long running: India and the United States have been negotiating a bilateral trade agreement since February 2025.
    2. An interim step was announced: The two countries announced a framework for an Interim Agreement in February this year.
    3. The named exposure: Trade experts warn that lower customs duties on US imports would put direct pressure on Indian growers of apples, cotton, grapes, oranges, soybeans and walnuts. Each is a crop where US output is price competitive at the Indian border, so the duty is what currently holds the domestic price.
    4. The tension is live before any cut: The framework has created considerable tension among farmers while the duty lines themselves remain unchanged.

    Why is accommodation raising Indian costs rather than lowering them?

    1. Cotton sourcing rules reach Indian mills: US restrictions on the use of cotton originating in China’s Uyghur region have made Indian spinners the preferred supply, and fear of US scrutiny is pushing cotton prices higher.
    2. The price move is large: The Apparel Export Promotion Council (AEPC) reports cotton yarn prices up around 60%, from about Rs 250 a kg in early 2026 to about Rs 400 a kg currently.
    3. Exporters are asking for restriction, not liberalisation: Indian apparel exporters approached the Commerce and Industry Ministry and the Textile Ministry last month seeking regulation of cotton yarn exports to arrest the surge.
    4. The contradiction: Accommodating the United States on input origin has raised the cost base of the export sector the market access is meant to serve.

    Challenges to India in absorbing US trade pressure

    1. Concessions are hard to reverse: A duty cut granted to win market access becomes the baseline from which the next round of demands starts. Eg. The motorcycle and whiskey duty lines already conceded.
      The Fix: Bind each concession to a stated reciprocal commitment with a review date, so it lapses where the counterpart obligation is not met.
    2. Diversified energy sourcing has narrowed into dependence: Buying more from one supplier to ease a trade dispute concentrates a supply that was diversified precisely to reduce risk. Eg. The LPG share shift noted above occurred inside a single half year.
      The Fix: Set a ceiling on the share of any single crude or gas supplier in the import basket, reviewed annually against the diversification target.
    3. Cutting Chinese inputs raises the input bill: Indian manufacturing depends on Chinese intermediates, so removing them substitutes a costlier input rather than removing a cost. Eg. China supplies a large majority of India’s imports of active pharmaceutical ingredients, for which comparable domestic capacity does not exist.
      The Fix: Stage any input substitution requirement behind a domestic capacity milestone, so the switch follows the capability rather than preceding it.
    4. Farm liberalisation has no compensation channel: A duty cut lowers the price the grower receives, and no mechanism transfers the consumer gain back to the grower. Eg. Edible oil duty cuts held retail prices down and left domestic oilseed growers facing imported palm and soya oil at a lower landed cost.
      The Fix: Attach a price deficiency payment to any agricultural tariff line opened under a trade agreement, funded from the revenue the agreement is projected to generate.
    5. Monetary policy abroad sets India’s borrowing cost: A US yield near 5% pulls capital away from emerging markets whatever India’s own policy rate does. Eg. Foreign portfolio investors withdrew from Indian debt during earlier episodes of rising US Treasury yields.
      The Fix: Lengthen the maturity profile of government borrowing while domestic rates are low, so a later rise in global yields reprices a smaller share of the stock each year.

    Conclusion

    The pressure India is managing originates in the American fiscal position rather than in any Indian trade practice. That makes it insensitive to what India offers, since a concession which does not shrink the US deficit invites the next demand. Accommodation on those terms has no natural stopping point, and each round narrows the room available for the next. What to watch is whether the agreement under negotiation settles the agricultural tariff lines or leaves them to a later round.

    Back2Basics: Interim and early harvest trade agreements

    1. What it is: A partial trade agreement covering a limited set of tariff lines, concluded ahead of a full free trade agreement, so both sides bank early gains while the harder chapters continue.
    2. What it leaves out: Services, investment, government procurement and dispute settlement are typically deferred to the full agreement.
    3. The WTO condition: World Trade Organization (WTO) rules permit a preferential deal only where it covers substantially all trade between the parties, so an interim deal is defensible only as a stage in a wider agreement with a stated timetable.
    4. India’s use of the form: India signed the Economic Cooperation and Trade Agreement with Australia in 2022 as an interim deal ahead of a fuller Comprehensive Economic Cooperation Agreement.

    Matching Previous Year Question

    “[2025, GS3, 10 marks] What are the challenges before the Indian economy when the world is moving away from free trade and multilateralism to protectionism and bilateralism? How can these challenges be met?”

  • India climbs to 4th spot as forex reserves post record weekly gain

    Why in the News

    India’s foreign exchange reserves have reached a record $785.71 billion, and the country has moved past Russia into fourth place globally. The stock rose by $44.9 billion in the week to 4 September, the largest weekly gain the Reserve Bank of India (RBI) has recorded. The gain came from a special forex drive the RBI opened in June. That drive offered banks a concessional currency swap on foreign currency deposits raised from non residents. It filled fast enough for the RBI to shut its main window a month ahead of the announced closing date. The rank and the record therefore rest on borrowed money, since a non resident deposit is a liability that falls due.

    What is the RBI’s concessional swap scheme?

    1. The deposit it targets: An FCNR(B) account, meaning Foreign Currency Non Resident (Bank), holds a non resident’s money in foreign currency and repays it in that same currency, so the depositor carries no rupee risk.
    2. What the swap does: The bank hands the foreign currency to the RBI in exchange for rupees. It receives a commitment to reverse that exchange at a fixed rate on maturity, so it does not carry the exchange risk on the principal.
    3. Why it is concessional: The swap was priced below the market cost of buying that cover, which is what made this route cheaper for banks than raising the same money abroad on their own credit.

    How big is the jump, and where does it place India?

    1. A record stock: Reserves stood at $785.71 billion on 4 September, up $44.9 billion from 28 August.
    2. A record weekly gain: The previous largest weekly rise was $16.7 billion, in the week ended 27 August 2021, so this gain is over two and a half times that mark.
    3. Fourth place came partly from a Russian decline: Russia’s international reserves fell $20.7 billion in the same week, from $774.2 billion to $753.5 billion, which put India ahead of it.
    4. The three still above India: China holds $3.85 trillion, Japan $1.21 trillion and Switzerland $1.09 trillion.

    What drove the gain?

    1. One instrument accounts for it: FCNR(B) deposits under the concessional swap brought in $127.23 billion up to 31 August, an inflow the RBI had not anticipated at that scale.
    2. The window shut early because of it: The scheme was set to close on 30 September. The pace of deposits led the RBI to close it a month sooner.
    3. A deposit drive registers directly as reserves: Foreign currency handed to the RBI under the swap enters the reserve stock in the week it lands, which is why a mobilisation shows up as a single large weekly jump rather than a gradual build.

    What did the full forex drive raise across its three windows?

    1. When it ran: The RBI announced the drive on 5 June and it became operational on 8 June.
    2. The Overseas Foreign Currency Borrowings window: The swap facility for Overseas Foreign Currency Borrowings (OFCBs), meaning foreign currency loans Indian banks raise abroad, drew $5.26 billion.
    3. The External Commercial Borrowings window: The facility for External Commercial Borrowings (ECBs), meaning foreign currency debt raised abroad by Indian companies, drew $3.89 billion.
    4. The combined total: All three windows together brought in $136.38 billion up to 31 August.
    5. Two windows are still running: The OFCB and ECB swap windows stay open until 31 December, so the drive has not finished.

    What does a larger reserve stock let the RBI do?

    1. A sustained run of increases: Reserves have now risen for ten weeks in a row.
    2. Ammunition for the rupee: A larger stock lets the RBI sell dollars to slow a fall in the rupee without drawing the cover down to an uncomfortable level.
    3. Import cover is the standard test: Reserve adequacy is judged by the number of months of imports the stock can pay for, and a higher stock lengthens that cover.
    4. It prices external borrowing: Lenders and rating agencies read reserve adequacy as a measure of a country’s capacity to meet external obligations, so the stock affects the terms on which Indian borrowers raise money abroad.

    Challenges to building reserves through a concessional swap window

    1. The addition is debt creating: A non resident deposit counts within India’s external debt, so the reserve stock and the liability against it rise together. Eg. Non resident deposits are among the largest single components reported in the Finance Ministry’s quarterly external debt statement.
      The Fix: Report the debt creating share of any reserve addition alongside the headline reserve number, so the two are read together.
    2. Maturities bunch at one point: A window filled inside three months falls due inside three months, which turns a one off inflow into a one off outflow at redemption. Eg. The concessional FCNR(B) swap of 2013 raised about $34 billion and came up for redemption together in late 2016.
      The Fix: Vary the swap rate by tenor, so deposits spread across maturities instead of bunching at the cheapest one.
    3. The subsidy sits on the central bank’s books: Pricing the swap below the market cost of cover means the RBI absorbs the difference on the exchange risk it has taken on. Eg. Cover on a three to five year rupee dollar exposure runs to roughly 3% a year, which is the order of the spread a concessional rate gives away.
      The Fix: Publish the cost of the swap subsidy as a stated line item, so the price of the reserve build is visible alongside the reserve total.
    4. A ranking is not a buffer: The reserve table compares stock sizes across economies with very different import bills and external liabilities, so a place in it says nothing about adequacy. Eg. Switzerland holds reserves above a trillion dollars on an economy a fraction of India’s size.
      The Fix: Judge the stock against import cover and short term external debt rather than against other countries’ totals.
    5. Reserve building substitutes for adjustment: Drawing in deposits to steady the currency postpones the correction a persistent current account gap eventually forces. Eg. The rupee continued to depreciate through the years after the 2013 deposit drive ended.
      The Fix: Tie each window to a stated reserve adequacy target, so it closes as a one time step rather than becoming a standing instrument.

    Conclusion

    India’s place in the reserve table now rests on money that has to be repaid rather than on export earnings or durable capital inflow. That distinction decides whether the buffer holds once the deposits mature. The two borrowing windows still open will show whether banks keep taking the concessional rate after the deposit window has closed. The number to watch is not the reserve total but the share of it carrying a matching external liability.

    Back2Basics: What foreign exchange reserves are made of

    1. Foreign currency assets: The largest component, held as deposits and securities denominated in currencies other than the rupee, and the part that moves most with valuation changes and market intervention.
    2. Gold: Bullion held by the RBI and valued at market prices, which is why the reserve total moves when the gold price moves.
    3. Special Drawing Rights: An international reserve asset created by the International Monetary Fund (IMF) and allocated to members in proportion to quota, exchangeable with other members for usable currency.
    4. Reserve tranche position: India’s own paid in quota holding at the IMF, which it can draw on without policy conditions attached.

    Matching Previous Year Question

    “[2013] Which one of the following groups of items is included in India’s foreign-exchange reserves? (a) Foreign-currency assets, Special Drawing Rights (SDRs) and loans from foreign countries (b) Foreign-currency assets, gold holdings of the RBI and SDRs (c) Foreign-currency assets, loans from the World Bank and SDRs (d) Foreign-currency assets, gold holdings of the RBI and loans from the World Bank ANSWER: (b)”

  • Small Hydro Power positioned as distinctive in the clean energy transition [MENTION]

    PIB class: Press Release. Ministry: Ministry of New and Renewable Energy.

    Why in News

    The renewable energy ministry stated that Small Hydro Power (SHP) holds a distinctive role in India’s clean energy transition.

    Static Context (the exam value sits here)

    1. Small Hydro Power (SHP) is defined by installed capacity up to 25 megawatts in India. The nodal ministry is the Ministry of New and Renewable Energy (MNRE).
    2. The capacity classes are standardised. Micro is up to 100 kilowatts. Mini is 100 kilowatts to 2 megawatts. Small is 2 to 25 megawatts.
    3. SHP is a run of river resource in most Indian sites. It needs no large reservoir, so its submergence and displacement footprint is small.
    4. SHP counts inside India’s non fossil capacity target. It supports decentralised generation in hill and remote areas.

    Prelims angle

    The 25 megawatt ceiling that defines SHP in India. The nodal ministry MNRE. SHP as a renewable source distinct from large hydro, which the power ministry handles. Run of river design.

    Mains angle

    GS3, infrastructure and energy. Role of decentralised renewable sources in the energy transition and in hill state electrification.

    Matching Previous Year Question

    “[2013, GS3, 5 marks] What do you understand by run of the river hydroelectricity project? How is it different from any other hydroelectricity project?”

  • National Statistical Office releases first ever district level output for the unincorporated non farm sector

    PIB class: Press Release. Ministry: Ministry of Statistics and Programme Implementation.

    Why in News

    The National Statistical Office (NSO) released, for the first time, output estimates for the unincorporated non farm sector at the district level.

    Core facts

    1. What it covers: The unincorporated sector means enterprises that are not registered as companies. It spans manufacturing, trade and other services run as household or proprietary units outside agriculture.
    2. Institution: The National Statistical Office (NSO) sits under the Ministry of Statistics and Programme Implementation (MoSPI). It compiles national accounts and conducts the large sample surveys.
    3. Significance stated in the headline: District level granularity is a new level of disaggregation. Earlier estimates for this sector stopped at the state and national level.
    4. Figures: Release specific counts and values were not verifiable this run and are therefore omitted.

    Static Context

    1. The unincorporated non farm segment is the statistical face of the informal economy. It employs the bulk of the non farm workforce and contributes a large share of jobs outside agriculture.
    2. The survey vehicle is the Annual Survey of Unincorporated Sector Enterprises (ASUSE). It records employment, output and value added for these units. It replaced the earlier periodic enterprise surveys of the erstwhile National Sample Survey Office.
    3. National accounts use these estimates. Value added from the unincorporated sector feeds the Gross Value Added computation for services and unregistered manufacturing.

    Prelims angle

    The parent body NSO and its ministry MoSPI. The distinction between incorporated and unincorporated enterprises. The survey name ASUSE. The place of unincorporated output inside Gross Value Added and Gross Domestic Product.

    Mains angle

    GS3, Indian economy, mobilization of resources, growth and employment. Better informal sector data supports district level planning and targeted formalisation. Frame around measurement gaps in the informal economy and the policy value of disaggregated data.

    Matching Previous Year Question

    No direct PYQ on unincorporated sector statistics was traced in the provided files. Closest tracked Microtheme is the manufacturing and micro, small and medium enterprise economy.

    “[2023, GS3, 10 marks] Faster economic growth requires increased share of the manufacturing sector in GDP, particularly of MSMEs. Comment on the present policies of the Government in this regard.”

  • Why India must rethink the way it values skills, jobs and productive work

    Why in the News

    India has become the world’s fourth largest economy and is treated as the next engine of global growth. The assessment now placed against that record is that the country is drifting toward the middle income trap, where an economy exhausts its gains from cheap labour and rapid catch up and fails to move to productivity led growth. Weak job creation, stagnant wages, sluggish private investment and low productivity are named as reinforcing one another. Youth protests across the country are read as the visible sign of that distress. The two standard explanations, another round of market reform and a larger public spending push, both treat this as a supply or a demand problem. The argument placed against both is that the binding constraint is institutional, meaning social norms that decide how the market prices skills and how the State allocates resources.

    Why do the standard explanations of the slowdown fall short?

    1. The pro market reading: Economists trained in market orthodoxy call for a second round of reform on the scale of 1991, covering labour flexibility, agricultural reform, deregulation and infrastructure investment.
    2. The Keynesian reading: Economists in the Keynesian tradition locate the problem in weak aggregate demand and prescribe higher public spending, redistribution and social protection.
    3. What both miss: Each treats the constraint as one of supply or of demand. Institutions shaped by social norms decide both how markets set incentives and prices and how the State allocates resources and supplies public goods.

    What does the present pattern of growth look like?

    1. Jobless growth: Productivity gains stay concentrated in narrow capital intensive and skill intensive enclaves that generate little employment.
    2. Weak domestic demand: Private investment remains sluggish, wage growth is stagnant and household consumption is weak.
    3. Manufacturing has not absorbed labour: The sector has failed to generate enough jobs for the workforce moving out of agriculture.
    4. An uneven recovery: Growth after the pandemic favoured large corporations and the digital economy and left the informal sector barely touched.
    5. Inequality and low productivity together: Rising inequality alongside low productivity is the specific combination that makes the trap dangerous, since neither corrects the other.

    How do social norms distort what the market and the State each do?

    1. Competitiveness through cost cutting: Private capital, freer from regulation than at any earlier point, competes by cutting costs rather than by innovating.
    2. Knowledge does not travel: Firms have failed to absorb the knowledge that arrives with foreign direct investment (FDI). Productivity has risen neither through movement between sectors nor through innovation inside them.
    3. Capital is priced below labour: Heavy subsidy to capital lowers its price relative to labour in an economy with surplus labour, which pushes firms toward machines over workers.
    4. Innovation is thin: Research and development spending stands at 0.65% of GDP, and technology adoption remains weak rather than spontaneous.
    5. State capacity is low despite size: Government has grown in size, and the ability to deliver basic services such as health centres and schooling remains among the lowest anywhere.
    6. Spending is tilted toward the privileged: Mass education has been historically underfunded. Higher education for elites was subsidised.
    7. The elite bias carried into the growth pattern: That same bias produced service sector heavy growth after the reforms, letting upper castes monopolise better occupations and relegating low productivity work to others.

    What does India’s vocational training record show?

    1. Almost no formal skilling: Fewer than 3% of the workforce has any formal vocational education.
    2. Seats go unfilled: Roughly 14,000 Industrial Training Institutes (ITI) offer about 25 lakh seats, and actual intake is only about 48%.
    3. Placement is weak even for those who finish: The employment rate among graduates is 63%, against over 90% in many other countries.
    4. The system is badly run: Vocational training remains poorly managed and chronically underfunded, which follows from the long neglect of mass education.

    Why does the social valuation of skills decide productivity?

    1. Useful knowledge drives modern growth: Sustained growth rests on the coevolution of science, technology and the spread of “useful knowledge”, meaning the practical skills that let a society innovate, adapt and raise productivity. Eg. The economic historian Joel Mokyr, a Nobel laureate in economics, treats the diffusion of such knowledge as the taproot of entrepreneurial success.
    2. India privileged the abstract: University degrees command prestige. Courses training electricians, welders, machinists and carpenters do not.
    3. The hierarchy has a source: That ranking reflects centuries of caste based occupational stratification in which manual and artisanal work was systematically undervalued despite its role in industrial development.
    4. The visible result: Skilled manufacturing workers are chronically short even as millions of educated young people fail to find decent work.
    5. Valuation shapes choices before markets do: Social premiums attached to some occupations, visible in the marriage market, shape educational choices and occupational aspirations and therefore the allocation of labour.
    6. Official advice runs against the norm: The Chief Economic Adviser has urged young people to take up trades such as welding and plumbing rather than software jobs or management degrees.
    7. Labour intensity is falling: Data show a persistent decline in the labour intensity of production technology across sectors, including traditionally labour intensive ones, and artificial intelligence is expected to accelerate the trend.

    What separates the countries that escaped the trap from those that did not?

    1. South Korea: Escape came from building institutions capable of creating and diffusing useful knowledge across domains, not from building factories alone.
    2. China: Early state led industrialisation was paired with large investment in technical education, local manufacturing capability and technological learning, and earlier interventions in education and health laid the productive base.
    3. Brazil, Argentina, Thailand and the Philippines: All four failed to build or sustain such institutions and remain stuck in the middle income trap.
    4. The shared symptom of failure: In those four, as in India, large sections of the population depend on public transfers and handouts for the basic requirements of a decent living.

    What does productivism propose instead?

    1. The core shift: Productivism, proposed by the economist Dani Rodrik, moves policy attention from redistribution after the fact to the creation of productive employment.
    2. Where it parts from market orthodoxy: It gives government a leading role over markets in shaping economic opportunity rather than leaving that to prices alone.
    3. Its stated priorities: It places the real economy above finance, jobs above redistribution and production above consumption.
    4. Dignity as an economic output: An inclusive economy on this reading gives people social recognition as productive members of society, which requires changing the norms underpinning institutions rather than only the policy framework.

    Challenges to escaping the middle income trap

    1. Industrial policy without skilled labour stalls: Incentives for manufacturing cannot be used if the plants receiving them cannot staff skilled lines. Eg. Electronics units in India remain concentrated in final assembly rather than component fabrication.
      The Fix: Tie incentive disbursement to verified apprenticeship and skilling numbers at the receiving plant.
    2. Training is disconnected from employers: Curricula and equipment in public training institutes lag the technology used on the shop floor, so a certificate does not signal usable skill. Eg. Many public institutes still train on machine tools several generations behind those in contract manufacturing plants.
      The Fix: Give industry associations a decisive voice in course content and equipment upgrades at each institute, with annual revision.
    3. Skilling is measured as enrolment, not as employment: Targets reward seats filled and certificates issued rather than wages earned afterwards. Eg. Short duration certification under national skilling programmes has repeatedly recorded low conversion into formal jobs.
      The Fix: Shift reporting to wage outcomes after training, tracked through provident fund records.
    4. Cheap capital keeps displacing labour: Accelerated depreciation, concessional credit and duty exemptions lower the effective price of machinery against workers, so firms automate ahead of demand. Eg. Garment units have moved to automated cutting and spreading, with employment in the sector staying flat.
      The Fix: Rebalance the incentive structure toward employment linked support rather than capital linked support.
    5. State capacity limits the very services the strategy needs: Schooling and primary health are the inputs into a productive workforce and are delivered most thinly where they are needed most. Eg. Teacher and doctor vacancies persist across the districts with the youngest populations.
      The Fix: Fill sanctioned posts in the lowest performing districts first rather than distributing recruitment evenly.

    Conclusion

    The diagnosis places the binding constraint outside the familiar argument about how much the State should spend and how far markets should be freed. What follows from it is that a skilling target or a manufacturing incentive will not move productivity for as long as the social ranking of occupations stays where it is. The difficulty is that a norm of that kind is not amenable to a budget line or a notification. Whether policy can change the standing of skilled manual work, and not only its supply, is what decides where the economy settles.

    Back2Basics: Industrial Training Institutes

    1. What they are: Post school vocational institutions that train candidates in designated trades such as fitter, electrician, welder and machinist.
    2. Who runs them: They function under the Directorate General of Training in the Ministry of Skill Development and Entrepreneurship, and are set up by State governments and by private promoters.
    3. The qualification awarded: Trainees who clear the All India Trade Test receive the National Trade Certificate.
    4. Statutory anchor: Trade training and apprenticeship in these institutes operate within the framework of the Apprentices Act, 1961.

    Matching Previous Year Question

    “[2022, GS3, 15 marks] “Economic growth in the recent past has been led by increase in labour productivity.”Explain this statement. Suggest the growth pattern that will lead to creation of more jobs without compromising labour productivity.”

  • Rude lessons

    Why in the News

    Trade relations between the United States (US) and Canada have fallen to a new low despite decades of deep integration. Canada pulled out of negotiations over a new tariff deal, citing last minute insertions by the US side, and the US has made the same allegation in return. Statements by the US President have not been conciliatory. The breakdown raises the question of what a signed trade agreement is actually worth to a partner such as India.

    How deep was the integration that has now broken down?

    1. Automobile trade: Free trade in automobiles and their parts was established between the two countries in 1965.
    2. Free Trade Agreement: A comprehensive free trade agreement followed in 1989.
    3. NAFTA: That agreement was expanded into the North American Free Trade Agreement (NAFTA) about five years later.
    4. Mutual benefit: Integration continued steadily and by most accounts served both economies well.
    5. Economies of scale: Canada’s aim was to achieve economies of scale by producing very large volumes of a few products.

    What does Canada’s place in US supply chains show about the stakes?

    1. Crude oil supply: Canada accounts for 70% of the oil refined in the American Midwest, on an estimate by the Nobel laureate economist Paul Krugman.
    2. Aluminium supply: Canada supplies 60% of American aluminium requirements.
    3. Lumber supply: Canada supplies nearly all the types of lumber used in American residential construction.

    How far has the relationship actually been rolled back?

    1. Reciprocal tariffs: Canada levied reciprocal tariffs of up to 50% in answer to the 50% tariffs the US imposed on imports from Canada.
    2. Outright import bans: From 29 September the US will ban certain Canadian alcoholic spirits, some dairy goods and motorcycles.

    What are the three lessons the episode holds for India?

    1. No assured preference: The country being treated this way is a neighbour, an alliance member and a trade partner of long standing, so India has no stronger claim to preferential handling.
    2. Speed of negotiation: Malaysia backed out of an agreement it had already signed with the US, arguing that once the reciprocal tariff system was held illegal, the gains no longer covered the cost of opening its market.
    3. Reversal after signature: A concession is only as durable as the other side’s continuing willingness to honour it.

    Why is an agreed tariff number not the end of the pressure?

    1. The February 2026 agreement: The February 2026 agreement set tariffs of 18% on imports from India, and the US has pressed on with forced labour and excess capacity investigations that could take the effective level past it.
    2. India’s negotiating condition: India’s stated position is that no deal will be struck until its advantage over competing suppliers is clear.
    3. Record of other pacts: India’s recent trade pacts have worked, and the same weighing of gains against costs still has to be applied to this partner.

    Challenges to India’s bilateral trade strategy with the United States

    1. Trade remedy investigations sit outside the deal: A negotiated tariff line does not restrain separate inquiries that can raise the effective duty on the same goods. Eg. Antidumping and countervailing duty cases against Indian steel and shrimp exports have run independently of tariff talks.
      The Fix: Insist on a standstill clause covering fresh investigations for the life of any agreed tariff schedule.
    2. Agriculture and dairy access is the concession India cannot give: Opening those markets touches a very large number of small producers, so what the other side wants most is the hardest thing to offer. Eg. Dairy market access was the sticking point that kept India out of the Regional Comprehensive Economic Partnership in 2019.
      The Fix: Offer tariff rate quotas on a narrow list of products instead of broad access, so the exposure stays bounded and measurable.
    3. No working appellate remedy: A bilateral dispute has nowhere binding to go for as long as the multilateral appeal mechanism stays non functional. Eg. The World Trade Organization’s Appellate Body has been unable to hear appeals since 2019 for want of members.
      The Fix: Write a standing bilateral arbitration panel with fixed timelines into the text of every new agreement.
    4. Concentration in one market magnifies a reversal: A large share of exports going to a single destination turns one tariff decision there into an economy wide shock. Eg. The US is India’s largest single destination for merchandise exports.
      The Fix: Front load market access negotiations with other large blocs, so the export base is not hostage to one partner’s politics.

    Conclusion

    The durability of a trade agreement rests on the other party’s continuing interest in it rather than on its text. For India that argues for negotiating slowly, keeping concessions reversible, and measuring any offer against what a competing supplier is being given. The tension stays unresolved, because a deal is the only route to predictable access and the deal itself has become the least predictable part of the arrangement. The thing to watch is whether the investigations still running against Indian goods close within the tariff level already conceded.

    Back2Basics: North American Free Trade Agreement

    1. Formation: NAFTA came into force in 1994 among the United States, Canada and Mexico.
    2. Mandate: It removed trade barriers and eased the cross border movement of goods and services among the three.
    3. No institutional seat: It is a trade agreement rather than an organisation, so it has no permanent headquarters.
    4. Successor: It was replaced by the United States Mexico Canada Agreement (USMCA) in 2020.

    Matching Previous Year Question

    “[2025, GS3, 10 marks] What are the challenges before the Indian economy when the world is moving away from free trade and multilateralism to protectionism and bilateralism? How can these challenges be met?”

  • Elephant in the room in meetings with Xi, Putin: India’s manufacturing challenges

    Why in the News

    India’s manufacturing base, and not its diplomacy, is the binding constraint on the economic agenda of this weekend’s BRICS summit in New Delhi. The Prime Minister meets the Russian President ahead of the summit and the Chinese President over the weekend, and the consequential part of both conversations is bilateral and economic. India’s difficulty in each case is not the size of its trade deficit. It is the narrowness of what India is able to sell.

    What does the trade profile with Russia reveal about what India can sell?

    1. Exports are a fraction of imports: India’s exports to Russia remain below $5 billion against imports of $63.8 billion in the year to March 2025.
    2. The gap and its composition: The deficit is nearly $59 billion, and Russian oil and other natural resources dominate what India buys.
    3. The market is not the limitation: Russia is a substantial market for manufactured goods, so the shortfall lies on the supply side.
    4. Industrial promotion is under way: The first India Russia international industrial trade fair was held in Delhi this week, and both leaders are to visit it.

    What does China’s export record to Russia show about the size of the gap?

    1. The scale of the comparison: China exported about $103 billion of goods to Russia in 2025.
    2. The composition is the real point: Those exports run from cars and machinery to electronics and industrial equipment, which are exactly the categories India cannot supply at comparable scale.

    How does the same weakness appear in the trade with China?

    1. A larger deficit on a larger base: Bilateral trade reached about $151 billion in the year to March 2026, and India’s deficit rose to roughly $112 billion.
    2. The asymmetry is reversed: China sells manufactured goods, and increasingly the intermediate and capital goods that Indian manufacturers themselves need.
    3. The policy response so far: Delhi is responding to Beijing’s demand that India end its restrictions on commerce with China.

    Why does the goal of economic security collide with what Indian industry needs?

    1. Chinese inputs are embedded in Indian production: They run through electronics, machinery, chemicals, auto components and pharmaceutical inputs, and they feed India’s own exports of manufactured goods.
    2. The two objectives pull apart: The political aim of cutting dependence runs against the commercial need for cheap and increasingly sophisticated inputs at scale.
    3. One weakness, two symptoms: Limited manufacturing strength shows up as an inability to export to a large market in one relationship, and as import dependence in the other.

    Can diplomacy compensate for weak manufacturing?

    1. What negotiation can actually deliver: Payment mechanisms, investment targets and trade agreements are all negotiable, and political warmth cannot substitute for competitive products.
    2. The older ambition against the present agenda: India’s call to democratise the global economic order dates to the Cold War years. The immediate bilateral ask is that Russia and China buy more, invest more and help build Indian productive capacity.
    3. What closing the gap requires: Sustained economic reform, simpler regulation, greater competitiveness, less corruption, deeper domestic supply chains and a stronger manufacturing ecosystem.
    4. Investment follows attractiveness, not persuasion: The world is not short of capital or technology, and India is not near the top of the destinations they go to.
    5. Why the bilateral overshadows the multilateral: BRICS, like the Shanghai Cooperation Organisation (SCO), has become a venue for high level political engagement and bilateral problem solving.

    Challenges to widening India’s manufacturing base

    1. Firms stay small, and stay small for long: A size distribution dominated by tiny units leaves few producers able to take on a large export order. Eg. Most registered manufacturing units in India employ fewer than ten workers.
      The Fix: Make support conditional on growth in employment and turnover rather than on staying below a small unit threshold.
    2. Duties on inputs tax the exporter: Tariffs on intermediate goods raise the cost of the components a finished goods exporter has to buy. Eg. Duties on electronic components have been cut in successive Budgets precisely because they raised assembly costs.
      The Fix: Move to a single low duty band on intermediate and capital goods, and reserve protection for finished goods alone.
    3. Logistics cost eats the margin: Dependence on road freight and long dwell time at ports raise the delivered price of Indian goods. Eg. The National Logistics Policy of 2022 was framed around bringing logistics cost as a share of output closer to competitor levels.
      The Fix: Tie port and freight corridor funding to published turnaround and transit time targets.
    4. Assembly has grown faster than component making: Incentives have drawn in final assembly without a domestic base in parts, so import content stays high. Eg. Mobile phone exports have risen sharply, with display panels and battery cells still largely imported.
      The Fix: Condition incentive payouts on a rising schedule of domestic value addition rather than on output value alone.

    Conclusion

    The agenda for this week is bilateral, and the constraint on it is domestic. Persuasion can open a market, and it cannot supply the goods that would fill one. What India’s economic diplomacy is worth therefore turns on decisions taken by its own economic policymakers rather than on commitments extracted from partners. The test worth watching is whether the industrial reform agenda moves at all once the summit season ends.

    Matching Previous Year Question

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

  • At 78%, Telangana district Nirmal on top in women’s share in informal workers

    Why in the News

    The Ministry of Statistics and Programme Implementation (MoSPI) has released the first district level estimates of India’s informal sector drawn from a large scale national survey. They come from the Annual Survey of Unincorporated Sector Enterprises (ASUSE) of 2025, which covers enterprises outside the corporate sector and outside agriculture. Women are 78% of all informal workers in Nirmal district of northern Telangana, the highest share recorded for any district. Female participation in informal work turns out to vary far more between districts than any national figure suggests. The districts where women dominate this workforce are also among the lowest paying, which is the tension the new granularity exposes.

    What does the Annual Survey of Unincorporated Sector Enterprises cover?

    1. The universe surveyed: It covers unincorporated establishments in manufacturing, trade and other services, which is the part of the economy usually described as the informal sector.
    2. What it leaves out: Agriculture is outside its scope, as are enterprises incorporated as companies.
    3. Coverage of this round: The report carries estimates for 757 districts.
    4. A caveat on district identity: MoSPI notes that the districts covered may not match the present administrative map, because boundaries, names and new districts have changed since.

    How wide is the spread between districts?

    1. The national benchmark: Across India women are 29% of informal workers.
    2. The bottom of the list: In Rudraprayag in Uttarakhand women are 6.7% of informal workers.
    3. A state boundary makes the difference: Nanded in Maharashtra, immediately across the border from the top ranked district, sits 288th with women at 31%.

    What regional pattern do the district numbers reveal?

    1. The top ten are regionally clustered: All ten districts with the highest female share lie in south India or the north east, in Telangana, Manipur, Meghalaya and Mizoram.
    2. Parity is rare: Women are at least half the informal workforce in only 25 districts, 22 of them in the south or the north east, with three in the east including Pakur in Jharkhand and Deogarh in Odisha.
    3. A third is a wider club: Women account for at least 33% of the informal workforce in 237 districts.

    Does a high female share come with better pay?

    1. The best payer among high share districts is modest: South West Khasi Hills in Meghalaya pays Rs 1.7 lakh per hired worker, about 35% above the national average of around Rs 1.3 lakh.
    2. The top paying district has few women: Dehradun pays Rs 4.6 lakh per hired worker, and women are 19% of its informal workforce.
    3. The pattern that follows: High female participation coincides with low earnings per worker rather than with better paid work.

    What do the ownership and concentration numbers add?

    1. Participation tracks ownership: Districts with the greatest female participation also carry the highest share of female owned proprietary establishments, and the leading district reaches almost 80% on that measure.
    2. Scale sits elsewhere: North 24 Parganas in West Bengal has the most informal workers, at 21.3 lakh, and the most establishments, at 16.6 lakh.
    3. Output is concentrated: The ten districts with the most establishments account for around 11% of total Gross Value Added (the value of output less the cost of inputs bought in, which is how a sector’s contribution is measured), and the top fifty for almost a third of it.
    4. The stated purpose of the release: MoSPI’s position is that the diversity of activity and local conditions makes granular statistics necessary for evidence based policymaking.

    Challenges to district level informal sector measurement

    1. Boundary churn breaks comparability: A district measured once cannot be tracked over time once it is split, merged or renamed before the next round. Eg. Telangana raised its district count from 10 to 33 in 2016.
      The Fix: Publish every round against a frozen reference map alongside the current one, so a district series survives reorganisation.
    2. Excluding agriculture removes most rural informal work: The survey frame leaves out the sector that still employs the largest number of informal workers. Eg. Agriculture remains the single largest employer in the Periodic Labour Force Survey’s distribution of workers.
      The Fix: Release the unincorporated estimates together with the labour force survey’s agricultural numbers as one district profile.
    3. A high female share can record distress rather than progress: Unpaid family labour and home based piece work enter the count as participation with no wage attached to it. Eg. Beedi rolling and garment stitching in home units are recorded as enterprise work paid at piece rates.
      The Fix: Report unpaid family helpers separately from hired workers for every district.
    4. Enterprise surveys miss the smallest and most mobile units: Vendors and units without fixed premises are hard to list, so they are undercounted at source. Eg. The survey and registration of street vendors required by the Street Vendors Act, 2014 remains incomplete in many towns.
      The Fix: Use municipal vending registers and welfare board rolls as a supplementary listing frame for mobile units.

    Conclusion

    The release turns a state level statistic into a district one, and that changes what an administrator can act on. The pattern it exposes is that where women work most in the informal economy, that work pays least, which is a question about the kind of enterprise available locally rather than about willingness to work. The milestone to watch is whether these estimates are repeated on the same frame, because a single snapshot cannot show whether participation and earnings are moving together or apart.

    Back2Basics: MoSPI and the National Sample Survey

    1. The ministry: MoSPI is the nodal body for India’s official statistical system and releases the national income and price statistics.
    2. The survey arm: The National Statistical Office conducts large sample surveys through the National Sample Survey, which began in 1950.
    3. The companion employment survey: The Periodic Labour Force Survey supplies employment and unemployment estimates, and it counts workers rather than enterprises.
    4. The advisory body: The National Statistical Commission, set up in 2005 on the Rangarajan Commission’s recommendation, advises on statistical priorities and standards.

    Matching Previous Year Question

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

  • FCNR(B) deposits: Understanding who finally bears the foreign exchange risk

    Why in the News

    The Reserve Bank of India (RBI) opened a special swap facility in June to draw money from non resident Indians into FCNR(B) deposits. The full name is Foreign Currency Non Resident (Bank), and such a deposit is held and repaid in foreign currency rather than in rupees. The step answered pressure on the rupee from high oil prices and an aim of building up foreign exchange reserves. The facility protects banks against exchange rate loss on the principal. It does not cover the interest, which is owed in dollars and has to be arranged by the banks themselves. That split is what decides who finally carries the currency risk.

    What is an FCNR(B) deposit and what did the special swap facility offer?

    1. A deposit denominated in foreign currency: A non resident places dollars or another permitted currency with an Indian bank, and the bank repays in that same currency, so the depositor carries no rupee risk.
    2. The term of the money: These deposits typically run for three to five years, which is when the principal and the accumulated interest fall due.
    3. What the swap added: The bank passes the foreign currency to the central bank for rupees and receives a commitment to reverse the exchange at an agreed rate on maturity.
    4. The window is shut: Fresh deposits under the facility stopped on 31 August 2026.

    Why was the window opened, and what did it actually raise?

    1. The response overshot the target: Banks mobilised more than $127 billion through these deposits against an initial target of about $50 billion.
    2. Funding turned cheap: The scheme gave banks foreign currency at a lower cost than borrowing abroad on their own credit would have carried.
    3. Reserves rose with it: The foreign currency handed to the central bank added substantially to India’s reserve stock.

    What does protecting the principal cost the central bank?

    1. The hedging bill sits with the central bank: It bears the cost of covering the currency exposure on the principal, put at up to 3% a year by BofA Securities Research and taken at about 3% a year by SBI Research.
    2. The annual and cumulative numbers: On an assumed mobilisation of $65 billion to $70 billion at that rate, SBI Research calculated a notional cost of about $2.1 billion a year and about $10.5 billion over five years.
    3. Measured against the reserve stock: Against reserves of around $700 billion, the five year cost works out to 1.45% of the stock.

    What offsets that cost?

    1. The reserves themselves earn a return: BofA Securities Research estimated a yield of around 4.5% to 5% on the reserves generated, enough to more than cover the hedging cost across a five year holding.
    2. Placement is chosen for yield: Part of the money may be invested in United States government securities because those yields are higher.
    3. Part of the outgo is already recovered: SBI Research said the central bank had rebuilt $31.2 billion of its foreign currency assets by 7 August 2026, equal to 55% of the amount mobilised to that point.

    Why have most banks left the interest leg unhedged?

    1. The swap stops at the principal: Banks have to source the dollars for interest payments and manage that exposure on their own books.
    2. The split runs by ownership type: Foreign banks are largely hedging this exposure. Most state run banks and several private sector Indian lenders have left it open.
    3. Cost is the stated reason: Bankers cite the price of cover on a three to five year exposure, which is of the same order as the cost the central bank carries on the principal.
    4. The payment timing invites the gamble: Interest on these deposits is paid only at maturity, so some banks plan to buy dollars in the spot market when the payment actually falls due.

    What happens to an unhedged bank if the rupee weakens?

    1. The arithmetic of one payment: Interest of $1 million costs Rs 9.5 crore at Rs 95 to the dollar, and Rs 10 crore if the dollar reaches Rs 100 at maturity.
    2. Cover decides who absorbs it: A hedged bank is protected against that movement, and a lender that left the exposure open bears the higher rupee cost.
    3. The risk is correlated across lenders: A sharp fall in the rupee would push many banks to buy dollars at the same time, adding to dollar demand and to pressure on the currency.
    4. The exposure has not gone away: The scheme moved currency risk between parties rather than removing it from the system.

    Challenges to the FCNR(B) swap route to reserve building

    1. Reserves built this way are borrowed reserves: Non resident deposits count within India’s external debt, so the reserve stock rises with a matching liability against it. Eg. Non resident deposits are among the largest components in the Finance Ministry’s quarterly external debt statement.
      The Fix: Publish the debt creating share of any reserve addition alongside the headline reserve figure.
    2. Maturities bunch at one point in time: A window opened over a single quarter falls due over a single quarter, which concentrates the outflow. Eg. The concessional swap window of 2013 raised about $34 billion and came up for redemption together in late 2016.
      The Fix: Stagger the maturities permitted under a window across quarters rather than letting the market settle on one tenor.
    3. The open exposure sits with the thinnest buffers: Public sector lenders hold less capital against a valuation loss than the foreign banks that are covering the same risk. Eg. Several public sector banks required recapitalisation from the Union Budget through the second half of the 2010s.
      The Fix: Set a supervisory ceiling on the share of foreign currency interest liability a bank may leave uncovered.
    4. The facility substitutes for adjustment: Attracting deposits to steady the currency postpones the correction that a persistent current account gap eventually forces. Eg. The rupee continued to depreciate through the years after the 2013 defence of the currency ended.
      The Fix: Tie any such window to a stated reserve adequacy target, so it closes as a one time step instead of becoming a standing instrument.

    Conclusion

    The swap changed the address of the currency risk without retiring it. The central bank now holds an exposure that depositors were unwilling to take, and lenders hold the portion the central bank declined. Whether that is prudent rests on a rupee path nobody can commit to. The supervisory question to watch is whether banks will be required to cover the foreign currency leg they have chosen to leave open.

    Back2Basics: Non resident deposit accounts

    1. NRE account: A Non Resident External account is held in rupees, and both principal and interest are freely repatriable.
    2. NRO account: A Non Resident Ordinary account is held in rupees for income earned in India, and repatriation out of it is capped.
    3. Where the currency risk sits: In a rupee denominated non resident account the depositor bears the exchange risk, which is the reverse of a foreign currency denominated account.

    Matching Previous Year Question

    “[2019] Consider the following statements: 1. Most of India’s external debt is owed by governmental entities. 2. All of India’s external debt is denominated in US dollars. Which of the statements given above is / are correct? (a) 1 only (b) 2 only (c) Both 1 and 2 (d) Neither 1 nor 2 ANSWER: (d)”

  • SEBI, RBI launch Demat 2.0 pilot for corporate bond tokenisation

    Why in the News

    The Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) have jointly launched a pilot named Demat 2.0. It tokenises corporate bonds and settles them in central bank digital currency (CBDC), which is sovereign money issued by the central bank in digital form. The stated purpose is to test whether distributed ledger technology can bring the security leg and the settlement leg of a bond trade closer together. The same test covers faster settlement and the automation of parts of asset servicing. Ownership records and cash movement sit on two separate systems today, and the gap between them is what carries settlement risk. The pilot puts both on one ledger.

    How does the Demat 2.0 tokenisation pilot work?

    1. Tokenised security: A corporate bond is issued as a token on a shared electronic ledger instead of as an entry in a single depository’s own database.
    2. Digital settlement asset: The cash leg moves as CBDC on that same ledger, so payment and the transfer of ownership complete in one step.
    3. Smart contracts: Coded instructions carry out servicing steps automatically once their conditions are met, for example a coupon payment on its due date.
    4. Legal certainty of ownership: The design keeps the legal title of the holder intact during the experiment with new infrastructure.

    Why does moving the security leg and the cash leg onto one ledger matter?

    1. The 1996 reform only removed paper: Demat 1.0 converted shares held in paper form into electronic entries and left the payment leg on a separate banking rail.
    2. The gap is where the risk lives: A delay between delivery of the security and receipt of the money leaves one counterparty exposed until both are done.
    3. Part of the debt market already runs this way: Commercial papers and certificates of deposit trade in tokenised form on the unified markets interface and settle in CBDC.

    Who is running the pilot, and what has it put through so far?

    1. Depositories hold the tokenised paper: Central Depository Services Ltd (CDSL) and National Securities Depositories Ltd (NSDL) are leading the depository side of the exercise.
    2. Exchanges and banks complete the chain: The BSE and the National Stock Exchange (NSE) are participants, alongside HDFC Bank and ICICI Bank.
    3. The payments layer is inside the pilot: The National Payments Corporation of India is part of the participating group.
    4. Three issuances have gone through: One is a Rs 500 crore issue by Larsen and Toubro, taken up by investors including the State Bank of India, Axis Bank and SBI Mutual Fund.

    How far can tokenisation travel beyond corporate bonds?

    1. Equity, mutual funds and gold are named next: The exercise can be extended to those asset classes once the bond leg is proven.
    2. Collateral is the larger prize: A holding that settles within the day can be pledged and released the same day, which shortens the funding cycle for a bond holder.
    3. The debt market was a deliberate choice: Secondary trading in corporate bonds is thin, so a failed experiment there does not disturb the settlement system the equity market depends on.

    Challenges to Demat 2.0

    1. Thin secondary trading limits what speed can deliver: Most corporate bonds in India are bought and held to maturity, so settlement time is not the binding constraint on liquidity. Eg. The bulk of corporate bond issuance is by private placement to a small group of institutional investors.
      The Fix: Pair the tokenised segment with market making obligations, so there is continuous two way quoting for faster settlement to act on.
    2. Two depositories must interoperate or the market splits: A token created in one depository has to be recognised and transferable in the other, or holders end up in two separate pools. Eg. Moving securities between the existing depositories already requires an inter depository transfer instruction.
      The Fix: Fix a common token standard and a single transfer protocol before the pilot widens beyond its present cohort.
    3. Settlement in central bank money reaches few investors: Only participants holding CBDC balances can settle this way, which leaves out most holders of corporate debt. Eg. The wholesale CBDC pilot started in 2022 with a narrow set of banks in the government securities segment.
      The Fix: Extend CBDC access to mutual funds and insurers, which together hold the largest share of outstanding corporate debt.
    4. Coded instructions fail silently: A defect in a smart contract executes as written rather than as intended, and an automated coupon or redemption error propagates instantly. Eg. Automated liquidation logic on decentralised lending platforms has repeatedly triggered cascading sales on a single faulty price feed.
      The Fix: Require an independent code audit and a manual override for every servicing action before a token series goes live.

    Conclusion

    The pilot is a controlled test, confined to one instrument and a named set of participants, and it does not yet change how the wider bond market settles. Its value lies in whether the legal position of a holder on the ledger proves as secure as that of a holder in the present system. The marker to watch is the regulatory decision on whether the token becomes the record of ownership or remains a mirror of it. That choice, rather than the technology, decides how far the exercise can be extended.

    Back2Basics: Depositories in India

    1. Legal basis: The Depositories Act, 1996 gives statutory backing to holding and transferring securities in electronic form.
    2. What a depository does: It maintains the ownership record for securities and effects a transfer by book entry rather than by physical delivery.
    3. Access is intermediated: An investor does not deal with a depository directly and operates through a registered depository participant, usually a bank or a broker.
    4. Supervision: Both the depository and its participants are registered with and regulated by SEBI.

    Matching Previous Year Question

    “[2026, GS3, 10 marks] What do you mean by Digital Rupee? In this context, explain the working and progress of India’s Central Bank Digital Currency (CBDC).”