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Subject: Economics

  • First talks begin on retailing E10 petrol alongside E20 amid the blending row

    Why in the News

    Early exploratory discussions have begun within the government and the fuel industry on whether E10 petrol can be retailed alongside E20, which is currently the only standard petrol variant sold across the country. The trigger is a policy success that has produced a consumer problem: India reached 20 percent ethanol blending five years ahead of the original deadline, which pushed the entire retail network onto a fuel that most vehicles on the road were never certified for. The question now is whether a national fuel supply chain built for a single base grade can be reopened to two.

    What is the Ethanol Blended Petrol (EBP) Programme?

    1. About: The Ethanol Blended Petrol Programme requires oil marketing companies to blend ethanol into petrol at a mandated percentage before sale, so that a share of transport fuel demand is met from domestically produced ethanol.
    2. Administering ministry: Run by the Ministry of Petroleum and Natural Gas, with the Ministry of Road Transport and Highways on vehicle compatibility and the Department of Food and Public Distribution on feedstock supply.
    3. Policy basis: Formalised under the National Policy on Biofuels, 2018, which sets the indicative blending target and defines permitted feedstocks.
    4. Objectives: Reduce crude oil import dependence, cut foreign exchange outgo, provide an assured market for surplus sugarcane and foodgrain, and lower tailpipe carbon monoxide and hydrocarbon emissions.
    5. Beneficiaries: Sugarcane and maize farmers, sugar mills and distilleries, and vehicle owners through the retail fuel price.
    6. Achievement: India reached 20 percent ethanol blending in petrol in 2025, five years ahead of the original target, and the milestone has been credited with displacing about 310 lakh tonnes of crude and saving roughly Rs 1.9 lakh crore in foreign exchange.

    What is E20 petrol?

    1. Composition: E20 is a blend of 80 percent petrol and 20 percent ethanol by volume.
    2. Current status: It is the only standard petrol variant sold across the country, and a notification of 17 February 2026 requires all States and Union Territories to sell E20 at a minimum Research Octane Number of 95 from 1 April 2026.

    What is E10 petrol?

    1. Composition: E10 is a blend of 90 percent petrol and 10 percent ethanol by volume.
    2. Why it is at issue: Older vehicles, particularly two wheelers, were certified for E10 petrol, and E10 was the base retail grade until the network shifted entirely to E20.

    What are Bharat Stage 6 phase two norms?

    1. Definition: Bharat Stage 6 phase two is the second stage of India’s sixth generation vehicle emission standard, which tightened real driving emission and on board diagnostic requirements for vehicles manufactured from April 2023.
    2. Relevance here: Full E20 material compatibility was mandated under these norms, which is why April 2023 is the dividing line between compliant and non compliant vehicles.

    Components of the Ethanol Blended Petrol Programme, by lifecycle stage

    Component and official instrument (lifecycle stage)Intervention and official numbersPrimary stakeholder
    Permitted feedstock list under the National Policy on Biofuels, 2018 (feedstock and input)Allows ethanol from sugarcane juice, sugar and sugar syrup, B heavy molasses, C heavy molasses, damaged foodgrain, maize and surplus rice; no per unit figure attaches to this componentSugarcane and maize farmers, sugar mills
    Ethanol Interest Subvention Scheme (financing)Interest subvention on loans for setting up new distilleries and expanding existing molasses based and grain based capacity; the release states the subvention period, not a fixed outlay per plantDistilleries and sugar mills
    Pradhan Mantri JI-VAN Yojana (plant or asset build, advanced biofuels)Viability gap funding for second generation ethanol projects using lignocellulosic feedstock such as agricultural residueTechnology developers and oil marketing companies
    Administered ethanol procurement price (production and pricing)Differential ex mill prices fixed by the Cabinet Committee on Economic Affairs for each feedstock route, highest for the sugarcane juice route and lowest for the C heavy molasses routeSugar mills and distilleries
    Long term offtake agreements by oil marketing companies (distribution and evacuation)Assured purchase of tendered ethanol volumes for each ethanol supply year, which runs from November to OctoberOil marketing companies and distilleries
    E20 as the base retail grade (offtake and demand)20 percent blending achieved in 2025, five years ahead of the 2030 target; minimum Research Octane Number of 95 required for E20 sold from 1 April 2026Vehicle owners

    What has triggered the rethink on a lower blend?

    1. The consumer complaint: Opposition to E20 has come from several quarters, with claims of notable reduction in mileage and engine component wear in older vehicles whose engines were not designed for higher ethanol blends.
    2. The government’s position on mileage: The drop in mileage in older vehicles would be 3 to 5 percent at most, and would be outweighed by E20’s benefits as a superior fuel.
    3. The government’s position on engine damage: Claims that E20 could damage engine components have been consistently rejected.
    4. The parliamentary figure: A reduction in fuel economy of 2 to 6 percent depending on vehicle category and vintage has been stated in Parliament.
    5. The absence of choice: Questions have been raised on why motorists are not offered a choice between pure petrol, E10 and E20, and some Opposition leaders have taken up the same point.
    6. The first official break: A co authored opinion article published on 17 August 2026 by the Chief Economic Adviser called for a lower ethanol petrol blend such as E10 to be made available alongside E20. The views were personal, and it is the first instance of a high ranking government official publicly calling for more petrol options.
    7. The stated rationale for restoring E10: Restoring a lower blend at the pumps alongside the option to buy E20 would calm public concern, lower total ethanol use instead of raising it, and protect the existing fleet while the retrofit programme catches up.

    Which vehicles are actually affected?

    1. The compliance line: Petrol vehicles manufactured and sold after April 2023 are considered fully E20 compliant, since this was mandated under Bharat Stage 6 phase two emission norms.
    2. What that leaves out: All vehicles currently being sold are E20 compliant, but most vehicles sold prior to 2023 are not.
    3. The scale of the gap: Of about 310 million petrol vehicles in use, only about 70 million built after April 2023 carry factory certified E20 compatibility.
    4. How long the legacy fleet stays on the road: The permissible life of a petrol vehicle in the National Capital Region is 15 years, which means cars manufactured in 2022 can be in use until 2037 under current norms.
    5. The most exposed category: The discussions were initiated specifically with older vehicles, particularly two wheelers, that were certified for E10 petrol, in mind.

    Why is retailing E10 alongside E20 a logistical problem?

    1. A parallel supply chain: Retailing E10 and E20 simultaneously requires a complex, parallel supply chain stretching from refineries to pumps.
    2. The volume distinction: Two or three premium petrol variants already coexist with the base fuel, and their consumption is minuscule compared with base petrol, so offering small volumes alongside E20 is manageable. Retailing E10 in large volumes is a different problem, since the existing chain has shifted entirely to E20.
    3. Underground storage is the binding constraint: Most retail outlets use single or dual underground tanks, so adding E10 alongside E20 would require replacing them with a dual tank system for petrol at thousands of pumps.
    4. Dispensing equipment: Outlets would additionally need separate dispensers for the base fuel.
    5. The government’s July position: Offering multiple grades of base fuel across the country would create an “enormous logistical challenge”, raise costs and reduce operational efficiencies in India’s complex fuel retail network.
    6. The sunk investment argument: The shift to E20 required massive investments already made, and reverting to a lower blend would not be prudent.
    7. Where the talks stand: The discussions are described as “preliminary” and as “keeping the older vehicles in mind”, are being held on technical and non technical aspects of the fuel retail supply chain, and no concrete conclusions have been arrived at.

    Where does the blending success pull against the consumer?

    1. A target met is not a fleet protected: Reaching 20 percent blending five years early moved the entire retail network onto a fuel that roughly four fifths of the petrol fleet was never certified for.
    2. The choice question has no cheap answer: Restoring choice requires physical infrastructure at thousands of outlets, so the demand for choice and the cost of supplying it move in opposite directions.
    3. Lower blend means lower ethanol demand: Restoring E10 would lower total ethanol use, which cuts against the assured offtake that distilleries and sugar mills invested against.
    4. Retrofit is the alternative to reversal: Protecting the existing fleet through a retrofit programme leaves E20 intact but transfers the cost from the fuel network to the vehicle owner.
    5. The time horizon is fixed by vehicle life: With 2022 vehicles running until 2037, the mismatch persists for over a decade regardless of which route is chosen.

    Challenges to the Ethanol Blended Petrol Programme

    1. Legacy fleet incompatibility: The bulk of vehicles on the road predate the E20 mandate. e.g. of about 310 million petrol vehicles in use, only about 70 million built after April 2023 carry factory certified E20 compatibility.
    2. Fuel economy loss: Ethanol has lower energy density than petrol, so the same volume delivers fewer kilometres. e.g. the government puts the drop at 3 to 5 percent in older vehicles, and a range of 2 to 6 percent by category and vintage has been stated in Parliament.
    3. Water footprint of feedstock: Sugarcane based ethanol carries a heavy irrigation demand in water stressed regions. e.g. sugarcane in Maharashtra’s Marathwada draws heavily on groundwater while occupying a small share of the cropped area.
    4. Food versus fuel diversion: Grain routed to distilleries competes with food and feed use. e.g. surplus rice from the Food Corporation of India and maize have been diverted to ethanol, tightening maize supply for the poultry feed industry.
    5. Fuel quality disputes: Contamination claims undermine public confidence in the blend. e.g. chloride and moisture contamination claims were raised against E20 in 2026 and rejected by state oil marketing companies after pan India testing.
    6. Supply chain rigidity: The retail network has been optimised for a single base grade. e.g. restoring E10 would require dual underground tanks and separate dispensers at thousands of outlets.
    7. Geographic concentration of distillery capacity: Ethanol production clusters in a few States, requiring long haul movement. e.g. Uttar Pradesh, Maharashtra and Karnataka account for the bulk of capacity, so deficit States in the east and north east draw on long distance tanker movement.
    8. Material compatibility in older engines: Ethanol acts on certain elastomers and metals used in pre 2023 fuel systems. e.g. rubber fuel lines and aluminium components in older two wheelers were specified against E10, not E20.

    What do other countries’ dual grade fuel markets show?

    1. Brazil: Mandates a high anhydrous ethanol blend in gasoline, raised to 30 percent in 2025, and sells hydrous ethanol as a separate grade at the same forecourt for its flex fuel fleet. The design feature is that the vehicle fleet was converted to flex fuel first, and the fuel grade followed.
    2. United States: E10 is the de facto base gasoline, with E15 and E85 offered at selected stations rather than universally. The design feature is that higher blends are optional and geographically limited, so no station is forced to carry every grade.
    3. Thailand: Retails gasohol E10, E20 and E85 simultaneously through its state fuel retailer network. The design feature is a differential excise structure that prices higher blends below lower ones, so demand shifts by price rather than by mandate.
    4. Germany: Sells Super E10 alongside a Super E5 protection grade, retained specifically for vehicles not certified for the higher blend. The design feature is the legal obligation on larger stations to keep the lower blend available, which is the arrangement now being examined in India.
    5. France: Retails SP95-E10 alongside SP98, with the lower ethanol grade preserved for older vehicles, and publishes a vehicle compatibility list so owners can check before filling. The design feature is that consumer information was issued as a public compatibility register, not left to manufacturers.

    Conclusion

    India met its 20 percent blending target five years early, and the cost of that speed is a national retail network carrying a single fuel grade that most of the vehicle fleet was never certified for. Discussions on retailing E10 alongside E20 are at a preliminary stage with no conclusions reached, and the binding constraint is physical, being underground tank and dispenser capacity at thousands of outlets rather than ethanol availability. The next development to watch is whether the government converts the current exploratory talks into a formal feasibility study, since the mismatch persists until the pre 2023 fleet ages out around 2037.

  • Why corporate investment has not revived despite tax cuts and cheap credit

    Source: The Hindu, Page 10, Text & Context
    Published: 19 August 2026

    Why in the News

    Corporate investment as a share of Gross Domestic Product (GDP) has fallen to about 9 percent from a peak of 17.3 percent, and has not returned even to the low levels recorded during the Global Financial Crisis. A corporate tax cut from 30 percent to 22 percent and a sustained low interest rate regime failed to reverse the decline, which points to a constraint that cost side policy does not touch.

    What does corporate investment as a share of GDP measure?

    1. Definition: It measures the value of new fixed assets created by companies, such as plant, machinery and buildings, expressed as a proportion of the economy’s total output.
    2. Why the ratio is used: Expressing investment as a share of output strips out inflation and growth in the size of the economy, so a fall in the ratio means investment is growing slower than output.
    3. What it signals: Corporate investment builds the future productive capacity of the economy, so a sustained decline in the ratio caps the growth rate the economy can sustain later.
    4. Data source used here: The trend is drawn from the Database on Indian Economy maintained by the Reserve Bank of India (RBI).

    What are animal spirits?

    1. Definition: Animal spirits, a term used by John Maynard Keynes, refers to the level of confidence with which firms hold their expectations about future profits.
    2. How it acts: High confidence pushes the expected profitability schedule outward and raises investment at every level of cost, and pessimism about the future pulls it inward.

    What is the principle of increasing risk?

    1. Definition: The principle of increasing risk, proposed by Michal Kalecki, holds that the cost of borrowing rises as a firm takes on more loans in proportion to its own funds committed to a project.
    2. Its consequence: The system is rigged against small capitalists even where small and large firms hold the same blueprint of a technology, because access to capital begets more capital.

    What is the Prowess database?

    1. Definition: Prowess is a firm level database of Indian companies compiled from their audited annual accounts, used for panel studies of corporate performance.
    2. Use in this analysis: The study draws a balanced panel of listed manufacturing firms from Prowess to compare profitability and interest costs across firm sizes.

    What is autonomous expenditure?

    1. Definition: Autonomous expenditure is spending that does not depend on the current level of income or profit in the economy, so it can rise when private demand is falling.
    2. Why it matters here: Government expenditure is the principal autonomous component, which is why it can create demand actively rather than merely responding to demand that already exists.

    How has corporate investment moved since 2000?

    1. The take off: Corporate investment took off in 2004, jumping almost four percentage points from 6.5 percent to 10.3 percent of GDP.
    2. The peak: It rose further during the growth years to a peak of 17.3 percent.
    3. The crisis fall: It fell during the Global Financial Crisis, then began a steady revival.
    4. The break point: The revival ran until demonetisation hit the economy in 2016, after which the decline has been continuous.
    5. Where it stands: The share is now about 9 percent, and has not returned even to the low levels recorded during the Global Financial Crisis.

    Why is demonetisation treated differently from the other shocks?

    1. Nature of the shock: The global economic crisis was an external shock beyond India’s control, and demonetisation was a self inflicted shock.
    2. Depth of the fall: The post 2016 decline has taken the share below the crisis era floor, which the external shock itself never did.
    3. Covid is not the explanation: Covid arrived in 2020-21 as another external shock, and the decline in investment had started a few years earlier.
    4. Two channels of damage: Demonetisation pushed the expected profitability schedule inward both because immediate profitability declined and because the credibility of future policy steps became suspect.
    5. The casualty at the margin: The fall was severe enough to push small firms below the cost of credit curve altogether, forcing many out of business, which is what happened to many micro, small and medium enterprises (MSMEs) in this period.

    What three factors determine a firm’s investment decision?

    1. Expected profitability: The profit a firm expects from selling the goods the new factory will produce, assessed over the whole life of the asset.
    2. Confidence in that expectation: The certainty with which the firm can predict those profit rates over the factory’s lifetime, which sets the position of the profitability schedule.
    3. Cost of credit: The price of borrowing, which matters once the planned investment exceeds the firm’s own available funds.
    4. How profitability varies with size: Most industries have economies of scale, so larger equipment, factories and workspaces carry higher profit rates than smaller ones, and expected profitability rises with the size of the investment.
    5. Where that stops: Each firm has an upper limit to how much it can sell, set by its share in the total market, and investment beyond that point leaves part of the factory idle.
    6. Two channels for the interest rate: A firm that does not build can park its funds in an interest bearing asset, so expected profitability must exceed the market interest rate, and a firm that borrows faces a cost of credit that is flat up to its own capital and rises steadily thereafter.

    Why does firm size change what constrains investment?

    1. Small firms: With very low levels of own capital the cost of credit curve starts rising far sooner, and it cuts the upper portion of the profitability curve.
    2. Their binding constraint: Investment by such firms is constrained by the availability of credit, and their interest costs are correspondingly high.
    3. Large firms: Their own capital is high enough that the cost curve cuts the profitability curve on its vertical portion.
    4. Their binding constraint: Such firms are limited by the market rather than by finance, and interest costs are not consequential for them.
    5. The structural implication: The same technology blueprint yields different investment outcomes purely because of the firm’s existing access to capital.

    What does the firm level data show?

    1. The sample: A balanced panel of 1,224 listed manufacturing firms between 2000 and 2024, drawn from the Prowess dataset and grouped into three sizes.
    2. Size definition: Median capital stock is Rs 14.5 crore for small firms, Rs 156.8 crore for medium firms and Rs 1,745.9 crore for large firms, all measured in 2011-12 prices.
    3. The profitability gradient: Smaller firms have lower profitability than larger firms, with the median rate of profit rising across the three size classes.
    4. The interest cost gradient: Smaller firms carry higher interest costs than larger firms, with median interest costs falling as size rises.
    5. What it confirms: The asymmetry predicted by the theory, that small firms are credit constrained and large firms are demand constrained, holds by and large for the Indian manufacturing sector.

    Why did a tax cut and cheap credit fail to revive investment?

    1. The tax cut: The corporate tax rate was cut from 30 percent to 22 percent, alongside a low interest rate regime followed by the Reserve Bank of India.
    2. No effect on small firms: A fall in the interest rate does not revive investment among smaller firms once their expected profitability has collapsed below the cost of credit.
    3. No effect on large firms: A large firm is not constrained by credit in the first place, so cheaper credit has no impact on its investment decision.
    4. The general result: Cost side policy interventions, including tax cuts, do not have much expansionary impact on investment, because neither group’s binding constraint is the cost of funds.
    5. What the failure reveals: Both groups are ultimately held back by expected demand, and cheapening the supply of capital does nothing to create that demand.

    What would shift expected profitability outward?

    1. The required direction: What is needed is to push the profitability curve outward, which raises investment by both small and large firms simultaneously.
    2. The only instrument that does it: This can be achieved only if government expenditure acts as an autonomous stimulus.
    3. The mechanism: Such expenditure creates demand actively, and rising demand pushes the profitability curves outward for firms of every size.
    4. The fiscal implication: It requires giving up on being a fiscal hawk, since the stimulus has to be sustained rather than symbolic.
    5. The political signal being read: The same conclusion is drawn from the youth protesting on the streets asking for gainful employment.

    Challenges to reviving corporate investment in India

    1. Weak capacity utilisation: Firms do not add capacity while existing plants run below their rated output. e.g. manufacturing capacity utilisation tracked by the Reserve Bank of India has hovered around the mid seventies in percentage terms for extended periods.
    2. Credit constraint on small firms: Formal lenders price small borrowers out or lend against collateral they lack. e.g. the credit gap for micro, small and medium enterprises runs into lakhs of crores against their assessed requirement.
    3. Policy uncertainty: Abrupt changes damage the confidence component of investment decisions independently of the direct cost. e.g. the retrospective amendment to tax cross border share transfers after the Vodafone ruling deterred investors until it was withdrawn in 2021.
    4. Weak household demand: Consumption growth caps the sales any firm can plan for. e.g. the collapse in employment generation under the rural employment guarantee programme in April to July 2026 cut rural purchasing power directly.
    5. Land and clearance delays: Project timelines stretch well beyond the investment appraisal horizon. e.g. large steel and refinery projects in Odisha and Maharashtra have taken over a decade from announcement to commissioning.
    6. Legacy stressed assets: Bank and corporate balance sheets recovering from earlier defaults limit fresh risk appetite. e.g. the twin balance sheet problem of the mid 2010s suppressed both credit supply and corporate borrowing for years.
    7. Import competition in inputs: Cheaper imported inputs and finished goods reduce the return on domestic capacity creation. e.g. domestic solar module manufacturers competed against imported cells until duties and incentives were introduced.

    Conclusion

    Corporate investment has fallen to about 9 percent of GDP from a peak of 17.3 percent and remains below its Global Financial Crisis floor, with the decline dating from 2016 rather than from Covid. A corporate tax cut from 30 percent to 22 percent and a low interest rate regime failed because neither addresses the binding constraint, since small firms are held back by credit access and large firms by the size of the market. Pushing expected profitability outward requires government expenditure acting as an autonomous stimulus, which means abandoning fiscal hawkishness rather than repeating cost side concessions.

    Foundational Context: What is Capital Formation?

    1. About: Capital formation is the addition to the stock of physical assets in an economy in a given period, measured in the national accounts as Gross Fixed Capital Formation (GFCF).
    2. Rationale: It exists as a distinct measure because current output can either be consumed or used to create productive capacity, and only the second raises future output.
    3. Named typology, by the investing sector:
    4. Public sector capital formation: Investment by the Central and State governments and by public sector enterprises, largely in infrastructure.
    5. Private corporate sector capital formation: Investment by registered companies in plant, machinery and structures, which is the measure this item tracks.
    6. Household sector capital formation: Investment by households and unincorporated enterprises, dominated by residential construction.
    7. Related measure: The investment rate is Gross Fixed Capital Formation expressed as a share of Gross Domestic Product, and the incremental capital output ratio measures how much investment is needed to produce one additional unit of output.

    Key Concerns Regarding Capital Formation in India

    1. Private investment has not replaced public investment: Central capital expenditure has risen sharply while private corporate investment has stagnated, so the recovery rests on one leg.
    2. Household investment is concentrated in real estate: A large share of household capital formation is residential construction, which adds less to productive capacity than plant and equipment.
    3. Financing depth for small firms: The corporate bond market is accessible only to highly rated large issuers, leaving small firms dependent on bank credit at high spreads.
    4. Crowding out concern: Sustained government borrowing to fund the stimulus can raise interest rates and reduce private investment, which is the standard counter argument to an expenditure led revival.
    5. Measurement lag: Private corporate investment is estimated with a significant lag and revised substantially, which delays the recognition of a turning point in the cycle.

    Statutory Framework Governing Fiscal Policy and Public Investment

    1. Article 112: Requires the Annual Financial Statement of estimated receipts and expenditure to be laid before Parliament for every financial year.
    2. Article 266: Establishes the Consolidated Fund of India and the Public Account, from which expenditure may be made only under authority of law.
    3. Article 292: Empowers the Union to borrow upon the security of the Consolidated Fund of India within limits fixed by Parliament.
    4. Article 293: Governs State borrowing and requires the consent of the Union where a State is indebted to it.
    5. Article 280: Provides for the Finance Commission, whose recommendations determine the vertical and horizontal sharing of Union taxes.
    6. Fiscal Responsibility and Budget Management Act, 2003: Sets statutory fiscal targets and requires the government to lay fiscal policy statements before Parliament.
    7. Section 4: Prescribes the fiscal deficit and debt targets and the grounds on which they may be deviated from.
    8. Section 7: Requires the Finance Minister to review and report on the trends in receipts and expenditure to Parliament.

    Laws and Rules Governing Corporate Finance and Small Firm Credit

    1. Companies Act, 2013: Governs incorporation, capital raising, disclosure and audit obligations of companies, which is the source of the accounts used in firm level databases.
    2. Micro, Small and Medium Enterprises Development Act, 2006: Defines the three enterprise categories and provides for delayed payment remedies for small suppliers.
    3. Section 15 and Section 16: Require payment to a micro or small enterprise within a specified period and provide for compound interest on delay.
    4. Insolvency and Bankruptcy Code, 2016: Provides a time bound resolution process for corporate debtors, which determines how quickly stressed capital is redeployed.
    5. Factoring Regulation Act, 2011, amended in 2021: Widened the set of lenders permitted to undertake factoring, easing receivables financing for small firms.
    6. Reserve Bank of India Act, 1934: Provides the statutory basis for monetary policy, including the inflation targeting framework that governs the interest rate regime.
    7. Fiscal Responsibility and Budget Management Rules, 2004: Prescribe the formats and the quarterly review obligations under the parent Act.

    Back2Basics: Demonetisation of 2016

    1. What it was: The withdrawal of legal tender status from the existing Rs 500 and Rs 1,000 currency notes, announced on 8 November 2016.
    2. Legal basis: Effected through a notification under Section 26(2) of the Reserve Bank of India Act, 1934, on the recommendation of the Central Board of the Reserve Bank of India.
    3. Stated objectives: Curbing unaccounted money, countering counterfeit currency and terror financing, and accelerating the shift to digital payments.
    4. Replacement currency: New Rs 500 and Rs 2,000 notes were introduced, and the Rs 2,000 note was later withdrawn from circulation in 2023.
    5. Return of notes: The Reserve Bank of India subsequently reported that the overwhelming majority of the demonetised currency was returned to the banking system.
    6. Judicial position: A Constitution Bench of the Supreme Court upheld the decision by a 4 to 1 majority in January 2023, holding that the process followed did not suffer from a legal infirmity.
    7. Economic effect recorded here: It marks the point after which corporate investment as a share of Gross Domestic Product began a continuous decline, and it pushed many micro, small and medium enterprises out of business.

    Government Initiatives

    1. Production Linked Incentive schemes: Pay incentives on incremental sales of goods manufactured in India across sectors including electronics, pharmaceuticals and automobiles, aimed at drawing private capital into manufacturing capacity.
    2. National Infrastructure Pipeline and the National Monetisation Pipeline: Set out a project pipeline for public infrastructure investment and a route to recycle operating public assets into fresh capital expenditure.
    3. PM Gati Shakti National Master Plan: Coordinates infrastructure planning across ministries to reduce logistics cost and project delay, both of which enter the investment appraisal of private firms.
    4. Emergency Credit Line Guarantee Scheme: Provided fully guaranteed collateral free credit to micro, small and medium enterprises to keep credit constrained firms solvent.
    5. Credit Guarantee Fund Trust for Micro and Small Enterprises: Guarantees collateral free bank lending to small firms, addressing the security requirement that keeps them off formal credit.
    6. Trade Receivables Discounting System (TReDS): An electronic platform allowing small suppliers to discount invoices owed by large buyers, easing the working capital squeeze.
    7. Corporate tax rate reduction: The concessional rate regime introduced for domestic companies, and a lower concessional rate for new manufacturing companies, intended to raise post tax returns on new capacity.

    Key Facts about Investment in the Indian Economy

    1. Peak investment rate: India’s overall gross fixed capital formation rate peaked in the years before the Global Financial Crisis, in step with the corporate investment peak of 17.3 percent recorded here.
    2. Corporate tax rates: The headline domestic corporate tax rate was reduced from 30 percent to 22 percent, with a lower concessional rate offered to new manufacturing companies.
    3. Monetary framework: India adopted flexible inflation targeting in 2016, with the target set at 4 percent and a tolerance band of plus or minus 2 percentage points.
    4. Micro, small and medium enterprises: The sector accounts for roughly 30 percent of Gross Domestic Product and about 45 percent of exports.
    5. Crowding out effect: The proposition that government borrowing raises interest rates and thereby reduces private investment, which is the standard objection to an expenditure led revival.
    6. Data sources: The Database on Indian Economy of the Reserve Bank of India for macro aggregates, and firm level databases such as Prowess for company accounts.

    Challenges in Reviving the Investment Cycle

    1. Demand uncertainty: Firms will not commit to long lived assets without visibility on sales. e.g. consumer durables makers deferred capacity additions through successive years of weak rural demand.
    2. Fiscal space for the stimulus: A sustained expenditure push runs against the statutory deficit path. e.g. the Fiscal Responsibility and Budget Management Act, 2003 targets constrain the size of a discretionary stimulus.
    3. Transmission of rate cuts: Policy rate reductions reach small borrowers slowly and incompletely. e.g. lending rates for small firms have historically moved far less than the repo rate in the same period.
    4. Skill and labour mismatch: New capacity requires skilled workers who are not available at scale. e.g. semiconductor and electronics assembly investments have flagged shortages of trained technicians.
    5. Land acquisition cost and delay: Assembling contiguous land for large plants remains the slowest step. e.g. industrial projects across several States have stalled for years at the land acquisition stage.
    6. Global trade uncertainty: Export oriented capacity decisions are hostage to tariff shifts abroad. e.g. punitive tariffs of 50 percent on Indian goods disrupted the export calculus for entire product lines.
    7. Concentration of profitability: Profits accrue disproportionately to large firms, which are the very firms not constrained by finance. e.g. the firm level panel shows median profitability rising and interest costs falling as firm size increases.

    Way Forward

    1. Use expenditure as the lead instrument: Direct sustained public expenditure at demand creating heads so that expected profitability rises for firms of every size rather than only for the largest.
    2. Target employment intensive spending: Prioritise programmes that put income directly in the hands of households, since that is what converts stimulus into the sales firms plan around.
    3. Fix credit access rather than credit price: Expand guarantee backed and receivables based lending to small firms, whose constraint is availability rather than the interest rate.
    4. Restore policy predictability: Avoid abrupt, economy wide interventions, since the confidence component of the investment decision recovers far slower than the immediate profitability component.
    5. Complete the public capital expenditure pipeline: Convert announced infrastructure projects into commissioned assets on schedule, so that the demand impulse is actually delivered.
    6. Report investment data faster: Shorten the lag and revision cycle in private corporate investment estimates so that a turning point is identified in time to act on it.

    Matching Previous Year Question

    “[2026] Which one of the following best describes the ‘Crowding Out Effect’ in the context of fiscal policy?
    (a) A situation where private investment increases due to increased Government spending
    (b) A situation where Government borrowing leads to higher interest rates, which reduces private investment
    (c) A situation where an increase in taxes leads to increased private sector investment
    (d) A situation where Government spending has no impact on aggregate demand
    Answer: (b)”

  • New PNG Connections Get a Gas Boost: Extra 200 SCM Allocation

    Why in the News

    From 1 September, eligible City Gas Distributors (CGDs) will receive an additional 200 Standard Cubic Metres (SCM) of cheaper Administered Price Mechanism (APM) gas for every new billed domestic Piped Natural Gas (PNG) connection.

    APM Natural Gas

    • Administered Price Mechanism (APM): Domestic gas from nomination fields of national oil companies, priced by the government.
    • Generally cheaper than imported Liquefied Natural Gas (LNG).
    • Piped Natural Gas (PNG) and Compressed Natural Gas (CNG) receive priority allocation.
    • Price is linked to the Indian crude basket, with a floor and ceiling.

    City Gas Distribution

    • City Gas Distribution (CGD): Pipeline network supplying gas to households, industries, commercial users and vehicles.
    • Geographical areas are awarded through competitive bidding by the Petroleum and Natural Gas Regulatory Board (PNGRB).

    Piped Natural Gas

    • Piped Natural Gas (PNG): Natural gas supplied directly through pipelines and metered like a utility.
    • Provides an alternative to Liquefied Petroleum Gas (LPG) cylinders for households.

    New Incentive

    • 200 SCM of APM gas for every incremental billed domestic PNG connection.
    • Effective 1 September.
    • Aims to reduce LNG sourcing costs and accelerate household PNG adoption.
    • Benefit is linked to actual billed connections, not merely network expansion.

    Key Challenges

    • Right-of-way and road-cutting permissions
    • High household connection costs
    • Competition from subsidised LPG
    • Limited domestic APM gas availability
    • Volatile imported LNG prices
    • Natural gas remains outside Goods and Services Tax (GST)
    • Low viability in remote and low-demand areas

    Foundational Context: The Natural Gas Sector in India

    1. Share in the energy mix: Natural gas accounts for roughly 6 percent of India’s primary energy mix, against a stated national target of raising it to 15 percent by 2030.
    2. Import dependence: India imports about half of its natural gas requirement in the form of liquefied natural gas, delivered through regasification terminals on the west and east coasts.
    3. Two price regimes: Domestically produced gas from nomination fields is sold at the administered price, while gas from deepwater, ultra deepwater and high pressure high temperature fields and imported gas are sold at market linked prices.
    4. Allocation priority: Domestic piped natural gas for households and compressed natural gas for transport hold first priority in the allocation of administered price gas.
    5. Network build out: Successive bidding rounds by the sector regulator have authorised city gas distribution networks covering the overwhelming majority of India’s population across more than 300 geographical areas.
    6. National gas grid: Trunk transmission pipelines are being extended into the eastern and north eastern regions to create a single national gas grid with a unified tariff.

    Statutory Framework Governing the Gas Sector

    1. Petroleum and Natural Gas Regulatory Board Act, 2006: Establishes the sector regulator and gives it authority over downstream refining, processing, storage, transportation, distribution and marketing of petroleum products and natural gas.
    2. Section 16 of the Petroleum and Natural Gas Regulatory Board Act, 2006: Provides for authorisation of entities to lay, build, operate or expand city gas distribution networks.
    3. Section 32 of the Petroleum and Natural Gas Regulatory Board Act, 2006: Provides that appeals against the regulator’s decisions lie to the Appellate Tribunal for Electricity, with a statutory disposal timeline of 90 days.
    4. Oilfields (Regulation and Development) Act, 1948: Governs the regulation of oilfields and the grant of mining leases for petroleum and natural gas.
    5. Petroleum and Natural Gas Rules, 1959: Prescribe the terms for grant of exploration licences and mining leases for petroleum and natural gas.
    6. Petroleum Act, 1934 and the Petroleum Rules, 2002: Govern the import, transport, storage and production of petroleum and the safety conditions attached to them.

    Back2Basics: Petroleum and Natural Gas Regulatory Board (PNGRB)

    1. Governing Act: The Petroleum and Natural Gas Regulatory Board Act, 2006.
    2. Established: Constituted in 2007 under that Act, functioning under the Ministry of Petroleum and Natural Gas.
    3. Jurisdiction: Regulates downstream activities only, covering refining, processing, storage, transportation, distribution, marketing and sale of petroleum products and natural gas.
    4. Exclusion from its remit: It does not regulate upstream exploration or production, which falls to the Directorate General of Hydrocarbons and the Ministry directly.
    5. Core functions: Protecting consumer interest, ensuring competitive markets for gas, authorising city gas distribution networks and pipelines, and fixing transportation tariffs.
    6. First instance adjudication: The Board is the first instance forum for disputes on tariffs, access and authorisation.
    7. Appellate forum: Appeals lie to the Appellate Tribunal for Electricity (APTEL) under Section 32 of the Act.

    Government Initiatives

    1. City Gas Distribution bidding rounds: Successive rounds conducted by the regulator to authorise distributors for new geographical areas, with minimum work programme commitments on domestic connections, compressed natural gas stations and pipeline length.
    2. Pradhan Mantri Urja Ganga: The Jagdishpur to Haldia and Bokaro to Dhamra pipeline project extending the gas grid to eastern India.
    3. North East Gas Grid: A capital grant supported trunk pipeline network connecting the eight north eastern States to the national gas grid.
    4. Sustainable Alternative Towards Affordable Transportation (SATAT): Promotes compressed biogas production and its sale through the existing fuel retail network as a substitute for compressed natural gas.
    5. Unified tariff for natural gas pipelines: A zonal tariff structure that lowers the delivered cost of gas for consumers located far from the source, aiding the eastern and southern build out.
    6. Hydrocarbon Exploration and Licensing Policy and Open Acreage Licensing Policy: Provide a uniform licence for all hydrocarbons and allow bidders to carve out their own exploration blocks, aimed at raising domestic production.

    Key Facts about India’s Gas Sector

    1. Nodal ministry: The Ministry of Petroleum and Natural Gas.
    2. Regulator: The Petroleum and Natural Gas Regulatory Board, constituted in 2007.
    3. Upstream technical arm: The Directorate General of Hydrocarbons, which oversees exploration and production.
    4. Administered price basis: Since April 2023 the administered price has been set at a fixed percentage of the Indian crude basket price, subject to a floor and a ceiling, following the recommendations of the Kirit Parikh Committee.
    5. Gas in the primary energy mix: About 6 percent, against the target of 15 percent by 2030.
    6. Compressed natural gas and domestic piped gas: Both receive 100 percent of their requirement from administered price gas under the priority allocation policy.

    “[2019] Consider the following statements:
    1. Petroleum and Natural Gas Regulatory Board (PNGRB) is the first regulatory body set up by the Government of India.
    2. One of the tasks of PNGRB is to ensure competitive markets for gas.
    3. Appeals against the decisions of PNGRB go before the Appellate Tribunals for Electricity.
    Which of the statements given above are correct?
    (a) 1 and 2 only
    (b) 2 and 3 only
    (c) 1 and 3 only
    (d) Neither 1 nor 2

  • Government explores routing gold monetisation through jewellers after bank scheme’s weak record

    Why in the News

    The government is in talks with jewellers on a gold monetisation route in which jewellers accept household gold and the deposit is held in a demat account, with interest paid on the value deposited. The bank based Gold Monetisation Scheme of 2015 mobilised only 38 tonnes by March 2025 against household holdings placed well upwards of 20,000 tonnes, so the redesign turns on who households trust with their gold rather than on the return offered.

    How would the proposed jeweller led gold monetisation route work?

    1. Point of deposit: A depositor would take physical gold to the nearest jeweller rather than to a bank branch.
    2. Record of holding: The scheme would be implemented through demat accounts, in the same way as shares, and the gold deposit would be reflected in the depositor’s demat account.
    3. Return to the depositor: The depositor would earn interest on the value of the gold deposited.
    4. Role of the jeweller: Jewellers would assume a key role in mobilising gold, becoming the contact point that banks occupy in the existing scheme.
    5. Stage of the proposal: Discussions with large industry players have been constructive and a scheme could be announced soon.

    What is a demat account?

    1. Definition: A dematerialised, or demat, account holds securities in electronic form with a depository, removing the need for a physical certificate.
    2. Application here: Holding a gold deposit in a demat account makes the claim transferable and tradable in electronic form, which physical gold in a bank vault is not.

    Why is the government revisiting gold monetisation now?

    1. Currency pressure: The exchange rate is under pressure from several factors at once.
    2. Fuel prices: Elevated fuel prices following the West Asia crisis have widened the import bill.
    3. Equity market sentiment: Investor concerns about the domestic stock market have weighed on capital inflows.
    4. Gold imports: Elevated gold imports are the third source of pressure, with imports reaching $71.98 billion in 2025-26 against about $35.02 billion in 2022-23, per Ministry of Commerce and Industry data.
    5. Industry signal: The chairman of the All India Gems and Jewellery Domestic Council stated that the government has communicated that it is serious about the proposal and has assured implementation as swiftly as it can be done.

    What did the bank based scheme of 2015 achieve?

    1. Mobilisation record: The scheme launched in 2015 mobilised just 38 tonnes of gold by March 2025, according to government data.
    2. Scale of the untapped stock: There is no official estimate of gold held by Indian households, and experts place the figure significantly upwards of 20,000 tonnes.
    3. The identified failure point: Families are more comfortable dealing with their family jewellers on matters concerning gold and silver, and that comfort is missing when banks play that role.
    4. The stated design change: The big shift in the current proposal is moving the collection point beyond banks, per the President of the India Bullion and Jewellers Association.

    Components of the Gold Monetisation Scheme, 2015, along the deposit lifecycle

    Component (lifecycle stage)Intervention and official termsPrimary stakeholder served
    Collection and Purity Testing Centre (input and assaying)Depositor’s raw gold is tested for purity at a Bureau of Indian Standards certified centre and converted into a standard equivalent before the deposit is acceptedHousehold depositor
    Short Term Bank Deposit (financing, short tenure)Tenure of 1 to 3 years, accepted by the bank on its own account, with the interest rate decided by the bank itselfDepositor and the accepting bank
    Medium Term Government Deposit (financing, medium tenure)Tenure of 5 to 7 years, accepted by banks on behalf of the Central government, at an interest rate of 2.25 percent per annumCentral government and the depositor
    Long Term Government Deposit (financing, long tenure)Tenure of 12 to 15 years, accepted on behalf of the Central government, at an interest rate of 2.50 percent per annumCentral government and the depositor
    Refinery and deployment (use of mobilised gold)Mobilised gold is refined and lent to jewellers as metal loans or used to reduce fresh import demandJewellery manufacturers and the external account
    Tax treatment (redemption)Deposits are exempt from capital gains tax, wealth tax and income tax on the interest and the appreciationHousehold depositor
    Current status of the componentsThe medium and long term government deposit components were discontinued from 26 March 2025, leaving only the short term bank deposit at the discretion of banksCentral government

    What would monetisation at scale do for the economy?

    1. Value of a partial mobilisation: Monetising just 10 percent of the gold held would be worth around $400 billion, according to a part time member of the Economic Advisory Council to the Prime Minister (EAC-PM).
    2. Comparison with foreign capital: India’s gross foreign direct investment is about $80 billion, so that gold would be equivalent to five years of foreign direct investment inflows.
    3. External account effect: Locked up gold, once monetised, can make India a trade account surplus nation.
    4. Consumption and investment effect: The change would increase domestic consumption and force companies to invest more.
    5. Savings channel: Investment depends on either domestic or global savings, and adding frozen domestic savings to liquid savings alongside continuing foreign capital would make a much larger pool available for investment.

    Why does routing gold through jewellers solve one problem and create another?

    1. The trust problem is real: Households deal with a family jeweller across generations, and the bank counter never acquired that standing, which is the single clearest explanation for 38 tonnes in ten years.
    2. The proposal is described as a win-win only in theory: The depositor earns interest and the system unlocks idle metal, and both outcomes depend on the intermediary honouring the deposit.
    3. Supervision moves to a lightly regulated node: A bank accepting a deposit is a regulated entity under banking law, and a jeweller accepting gold is not supervised in the same way.
    4. Purity assessment shifts: In the bank route, purity is established at a certified Collection and Purity Testing Centre, and a jeweller led route puts assaying and the customer relationship in the same hands.
    5. The demat layer is the safeguard being relied on: Holding the claim electronically creates a record of the deposit, and it does not by itself secure the physical metal held by the collecting jeweller.

    Challenges to gold monetisation in India

    1. Sentimental and social value of gold: Household gold is largely ornamental and passed down, so melting it for a deposit is resisted regardless of the interest offered. e.g. wedding jewellery in most Indian households is treated as inalienable rather than as a financial asset.
    2. Competing use as loan collateral: Households increasingly pledge gold rather than deposit it, since a loan preserves ownership of the ornament. e.g. gold backed loans reached about Rs 5.4 lakh crore by June 2026.
    3. Low return relative to price appreciation: Interest of a little over two percent is negligible against expected gold price gains. e.g. the Medium Term Government Deposit paid 2.25 percent while gold prices rose several fold over the scheme’s life.
    4. Fear of tax scrutiny: Depositing undeclared gold exposes the holder to questions on the source of the holding. e.g. income tax rules on unexplained investments deter deposits of inherited and undocumented holdings.
    5. Thin collection infrastructure: The number of certified collection and purity testing centres and refiners is small relative to the geography. e.g. large parts of rural India have no Bureau of Indian Standards certified assaying centre within reach.
    6. Loss of the ornament itself: The deposit requires the ornament to be melted into standard gold, which is irreversible. e.g. antique and regionally distinctive designs cannot be recovered once assayed and melted.
    7. Bank incentive problem: Banks earn little from accepting and deploying gold deposits, so branch level effort has been minimal. e.g. the medium and long term components were discontinued from 26 March 2025 after weak uptake.

    Conclusion

    The government is in talks with jewellers on a monetisation route in which household gold is deposited with a jeweller, held in a demat account and paid interest, after the bank based scheme of 2015 mobilised only 38 tonnes by March 2025 against holdings placed above 20,000 tonnes. The redesign correctly identifies trust in the family jeweller, rather than the return on the deposit, as the binding constraint, and it moves the collection point to an intermediary that is not supervised like a bank. Discussions are described as constructive and a scheme could be announced soon; the source states no announcement date.

    Foundational Context: Gold in India’s Economy

    1. Consumption scale: India is among the world’s two largest consumers of gold, alongside China, and imports almost all the gold it consumes.
    2. Household stock: Indian households are estimated to hold upwards of 20,000 tonnes of gold, which is larger than the official reserves of most central banks.
    3. External account weight: Gold is consistently among the top items in India’s import bill after crude oil, and gold imports reached $71.98 billion in 2025-26.
    4. Duty sensitivity: Import duty changes on gold move the split between formal imports and smuggling, which is why duty rates are treated as a customs enforcement issue as much as a revenue one.
    5. Financialisation objective: Public policy on gold has one consistent aim, which is to shift household savings out of physical metal into financial instruments backed by gold.

    Laws and Rules Governing Gold in India

    1. Bureau of Indian Standards Act, 2016: Provides the statutory basis for standardisation and for mandatory hallmarking of precious metal articles.
    2. Hallmarking Regulations and the HUID: Require every hallmarked gold article to carry a six digit alphanumeric unique identification number, traceable to the certified hallmarking centre.
    3. Foreign Trade (Development and Regulation) Act, 1992: Empowers the Central government to set the import policy for gold, including the channels and agencies through which it may be imported.
    4. Customs Act, 1962 and the Customs Tariff Act, 1975: Provide for the levy of import duty on gold and for confiscation and penalty in cases of smuggling and misdeclaration.
    5. Foreign Exchange Management Act, 1999: Governs the permissible modes of gold import and the treatment of gold in cross border transactions.
    6. Securities and Exchange Board of India (Vault Managers) Regulations, 2021: Regulate the vault managers who store the underlying gold against Electronic Gold Receipts traded on stock exchanges.
    7. Gold (Control) Act, 1968: Restricted private holding of gold bullion and was repealed in 1990, which is what allowed the later deposit and monetisation schemes to be built.
    8. Income-tax Act, 1961: Governs the treatment of unexplained investments and the tax exemptions specifically extended to deposits under the Gold Monetisation Scheme.

    “[2016] What is/are the purpose/purposes of Government’s ‘Sovereign Gold Bond Scheme’ and ‘Gold Monetization Scheme’?
    1. To bring the idle gold lying with Indian households into the economy.
    2. To promote FDI in the gold and jewellery sector
    3. To reduce India’s dependence on gold imports
    Select the correct answer using the code given below.
    (a) 1 only
    (b) 2 and 3 only
    (c) 1 and 3 only
    (d) 1, 2 and 3

  • RBI to close FCNR(B) concessional swap window a month early on August 31

    Why in the News

    The Reserve Bank of India (RBI) will close its concessional Foreign Currency Non-Resident Bank (FCNR(B)) deposit swap facility on 31 August, ahead of the original 30 September deadline. The facility has already mobilised $52.3 billion.

    How does the facility work?

    • Dollar-rupee swap: Banks exchange foreign currency for rupees with RBI and reverse the transaction later at a pre-agreed rate.
    • RBI absorbs the hedging cost, making FCNR(B) deposits more attractive.
    • Helps banks manage exchange-rate risk while adding foreign currency resources to India.

    What is FCNR(B)?

    • Foreign Currency Non-Resident Bank deposit: Term deposit held by a Non-Resident Indian (NRI) in a permitted foreign currency.
    • Principal and interest are repaid in the same foreign currency, so the depositor bears no exchange-rate risk.

    Why was the facility closed early?

    • Announced on 5 June and operational from 8 June.
    • Mobilised $52.3 billion by 13 August.
    • Banks expect around $20 billion more by month-end.
    • RBI considered the response sufficient and further mobilisation unnecessary.

    Key Risks

    • Asset-liability mismatch: Deposits may mature together while assets have different maturities.
    • Rollover risk: Banks need foreign currency when deposits mature.
    • Reversibility: FCNR(B) deposits are debt creating and can leave at maturity.
    • Currency risk: RBI assumes the hedging risk under the concessional swap.
    • Deployment mismatch: Foreign currency raised must find suitable foreign currency assets or be swapped.
    • Underlying external imbalance: Such inflows can temporarily ease pressure without addressing structural current account pressures.

    “[2021] Consider the following:
    1. Foreign currency convertible bonds
    2. Foreign institutional investment with certain conditions
    3. Global depository receipts
    4. Non-resident external deposits
    Which of the above can be included in Foreign Direct Investments?
    (a) 1, 2 and 3
    (b) 3 only
    (c) 2 and 4
    (d) 1 and 4

  • [19th August 2026] The Hindu OpED: Time to push back: On India and the continuing U.S. pressure

    Question (2025, GS2): “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?
    Linkage: This is the most direct parallel. The US tariffs on China and the subsequent report accusing India of “enabling” evasion are prime examples of the move toward protectionism and the resulting challenges for India’s trade policy.

    Mentor Comment

    A recent White House report naming around 40 countries places India among the top enablers of China’s evasion of United States tariffs. The charge lands at the moment when the composition of India’s imports from China is shifting from finished products to intermediate goods, which points to genuine domestic assembly rather than cosmetic relabelling. India’s record of granting tariff concessions ahead of negotiations is what makes the accusation consequential.

    What is the tariff evasion India is accused of enabling?

    1. The alleged route: The accusation is that India and the other named countries import Chinese goods, make minor modifications to them, and re-export them to the United States.
    2. The gain being alleged: Goods routed this way enter the United States at lower tariffs than Chinese origin goods would have faced.
    3. Why origin matters: A minor modification does not change the country of origin of a good, so the practice is treated as circumvention rather than manufacturing.
    4. Status of the charge: The United States has not yet announced punitive action on the basis of this assessment.

    What are intermediate goods?

    1. Definition: Intermediate goods are inputs, parts and components bought by a producer and used up in making a finished good, rather than sold directly to the final consumer.
    2. What their share signals: A rising share of intermediate goods in imports indicates that the assembly and manufacturing stages are happening domestically, since the buyer is importing parts and not products.

    What is the e-commerce inventory model?

    1. Definition: Under the inventory model, an online retail platform owns the stock it sells and sells it directly to consumers, in contrast to the marketplace model where the platform only connects third party sellers to buyers.
    2. The Indian restriction: Foreign direct investment in the inventory based model of e-commerce was long barred in India, and that restriction was diluted recently.

    What does the White House report allege, and how wide is its net?

    1. Scale of the exercise: The report names around 40 countries in all, so the finding is a global mapping of tariff circumvention rather than a charge framed against India alone.
    2. India’s placement: India is placed among the top enablers of Chinese evasion of United States tariffs within that list.
    3. The economic stake: The accusation has the potential to be the most harmful to the Indian economy among the recent charges levelled, because it targets export access rather than a single product line.
    4. Escalation risk: Punitive action based on the assessment is a conceivable next step, and the absence of action so far is not an assurance.

    Why does the changing composition of India’s imports from China cut against the accusation?

    1. The dependence is not disputed: Chinese imports form a significant pillar of Indian manufacturing, and the government itself has admitted they are an important part of the Make in India story.
    2. The composition has shifted: India is moving away from importing finished products, making cosmetic changes and selling them.
    3. What is rising instead: The share of intermediate goods in Indian imports from China has been steadily rising.
    4. What that means in practice: India is doing much of its own assembly and manufacturing in several sectors, relying on China and other countries only for the parts required.
    5. Direction of travel: This shift is a step towards full scale manufacturing in India, which is the opposite of the relabelling the report describes.

    What does India’s record of tariff concessions to the United States show?

    1. High end motorcycles, first cut: After criticism of India’s tariffs during the first term of the United States President, India cut these tariffs to 50 percent in 2018 from the earlier band of 60 percent to 75 percent.
    2. High end motorcycles, second cut: India cut the same tariff further to 40 percent in February 2025, before trade deal talks had even started.
    3. Shrimp feed: Import duties on shrimp feed and its components were slashed in the February 2024 Budget, a key ask of the United States.
    4. Poultry: Tariffs on frozen duck and turkey were reduced in the same way.
    5. E-commerce: Allowing foreign direct investment in the inventory model of e-commerce met a demand that a large American platform had lobbied for over a decade, and diluted a long held Indian position.

    How did the punitive tariffs reshape India’s oil sourcing?

    1. The instrument: Punitive United States tariffs of 50 percent were imposed on India, and the pressure pushed India to diversify away from Russian oil.
    2. The measured shift: Russia’s share in India’s oil imports fell below 20 percent in January 2026, from nearly double that level when the tariffs were imposed six months earlier.
    3. What was set aside: The shift happened despite India’s strident claims of energy sovereignty and despite the discount it was receiving on Russian crude.
    4. A prior instance: The same pattern had played out with Venezuelan oil in 2019.
    5. The partial reversal: The West Asia crisis and a temporary United States reprieve are what turned India back towards Russian oil, not a change in the underlying pressure.

    Why does each concession make the next demand more likely?

    1. The concessions were rational in isolation: The United States can wield immense pressure, which makes each individual concession understandable on its own terms.
    2. The cumulative effect runs the other way: That record of accommodation has emboldened the United States to make increasing demands.
    3. Pre-emptive timing compounds it: Cutting motorcycle tariffs before trade talks had started surrendered a bargaining chip without obtaining anything in exchange.
    4. The present charge is the test: A charge aimed at India’s manufacturing imports would, if conceded, hit the input base of Indian industry rather than a single tariff line.
    5. The required break: India needs to start pushing back, since resisting on this issue is what stops the sequence of concessions from continuing.

    Challenges to India resisting United States trade pressure

    1. Export market concentration: The United States is India’s largest single export destination, so retaliation carries asymmetric cost. e.g. gems and jewellery and textile exporters in Surat and Tiruppur face immediate order cancellations when tariffs move.
    2. Input dependence on China: Resisting the transshipment charge while deepening reliance on Chinese parts is politically difficult. e.g. solar cell and module assembly in India still draws heavily on imported Chinese cells and wafers.
    3. Weak rules of origin enforcement: Establishing that value addition is genuine requires documentation Indian exporters often cannot produce. e.g. the Customs (Administration of Rules of Origin under Trade Agreements) Rules, 2020 were introduced precisely because origin claims under trade agreements were being made without supporting cost data.
    4. Energy exposure: Oil sourcing decisions can be reversed by sanctions pressure faster than supply contracts can be rewritten. e.g. Russia’s share of India’s oil imports fell below 20 percent by January 2026 within six months of the punitive tariffs.
    5. Limited retaliation capacity: India’s counter tariff options are small relative to the size of the American market. e.g. India’s retaliatory duties on American apples and almonds were eventually withdrawn as part of a dispute settlement.
    6. Multilateral fallback weakened: The dispute settlement route is unavailable while the appellate mechanism remains non functional. e.g. the World Trade Organization Appellate Body has been without a quorum since December 2019.
    7. Investment signalling: A public trade confrontation can deter the foreign investment India is simultaneously courting for manufacturing. e.g. electronics assembly investment decisions track tariff certainty as closely as they track incentive outlays.

    Conclusion

    The transshipment charge misreads a real change in India’s trade with China, since the rising share of intermediate goods shows domestic assembly rather than cosmetic modification of finished Chinese products. The deeper problem is India’s record of conceding on motorcycles, shrimp feed, poultry, e-commerce and oil sourcing ahead of or under pressure, which has invited larger demands each time. Conceding on manufacturing inputs would strike at the base of domestic production itself, and that is where the pattern has to stop.

    Foundational Context: India United States Trade

    1. Scale of the relationship: The United States is India’s largest trading partner in goods and its single largest export destination, and India has run a goods trade surplus with it for many years.
    2. Composition: India’s exports are concentrated in engineering goods, gems and jewellery, pharmaceuticals, textiles and petroleum products, while imports are led by crude oil, aircraft, machinery and defence equipment.
    3. Services and remittances: The relationship extends beyond goods into information technology services exports and the largest single source of inward remittances to India.
    4. Preference withdrawal: India was removed from the United States Generalised System of Preferences in 2019, ending duty free access for a set of Indian exports.
    5. Structural asymmetry: India’s dependence on the American market for demand is larger than the American economy’s dependence on Indian supply, which sets the bargaining balance.

    Laws and Rules Governing India’s Trade Policy and Origin Rules

    1. Foreign Trade (Development and Regulation) Act, 1992: Empowers the Central government to make provisions for the development and regulation of foreign trade and to formulate the Foreign Trade Policy.
    2. Directorate General of Foreign Trade: Created under this Act as the authority that issues import and export authorisations and notifies policy changes.
    3. Customs Act, 1962: Provides the framework for levy and collection of customs duty, valuation, and confiscation for misdeclaration of goods.
    4. Customs Tariff Act, 1975: Carries the tariff schedules and the enabling provisions for anti dumping, countervailing and safeguard duties.
    5. Customs (Administration of Rules of Origin under Trade Agreements) Rules, 2020: Place the burden on the importer to hold and produce origin and value addition information when claiming preferential duty under a trade agreement.
    6. Foreign Exchange Management Act, 1999: Governs the foreign direct investment regime, including the conditions applicable to e-commerce entities.

    Back2Basics: Make in India

    1. Launched: 25 September 2014, as a national programme to raise the share of manufacturing in output and employment.
    2. Nodal agency: The Department for Promotion of Industry and Internal Trade (DPIIT) under the Ministry of Commerce and Industry.
    3. Original coverage: 25 sectors spanning automobiles, electronics, defence manufacturing, textiles, pharmaceuticals and renewable energy.
    4. Stated objective: Raising the manufacturing share of Gross Domestic Product to 25 percent and creating large scale industrial employment.
    5. Four pillars: New processes through ease of doing business, new infrastructure through industrial corridors, new sectors opened to foreign direct investment, and a new mindset treating government as a facilitator.
    6. Second phase: Make in India 2.0 extended the programme across 27 sectors, covering both manufacturing and services.

    Government Initiatives

    1. Production Linked Incentive schemes: Outlay linked incentives on incremental sales across sectors including electronics, pharmaceuticals, automobiles and solar modules, targeted at domestic and export oriented manufacturers.
    2. Remission of Duties and Taxes on Exported Products (RoDTEP): Refunds embedded central, State and local duties that are not otherwise rebated, available to exporters across most tariff lines.
    3. Districts as Export Hubs: Identifies a product with export potential in each district and builds an institutional mechanism to support producers there.
    4. Trade Infrastructure for Export Scheme (TIES): Funds export linked infrastructure such as testing laboratories, cold chains and border haats through State agencies.
    5. Interest Equalisation Scheme: Provides a subvention on pre and post shipment rupee export credit, targeted at labour intensive sectors and micro, small and medium enterprises.
    6. PM Gati Shakti National Master Plan: A multimodal connectivity plan intended to reduce logistics cost, which is a direct determinant of export competitiveness.

    Key Facts about India’s Trade Architecture

    1. Foreign Trade Policy 2023: Notified without a fixed end date, replacing the earlier five year policy cycle.
    2. World Trade Organization: India is a founding member from 1 January 1995 and was earlier a contracting party to the General Agreement on Tariffs and Trade from 1948.
    3. Appellate Body paralysis: The World Trade Organization’s Appellate Body has been unable to hear appeals since December 2019 for want of quorum.
    4. Generalised System of Preferences: India’s beneficiary status under the United States programme was withdrawn in 2019.
    5. Rules of origin: Preferential origin under India’s trade agreements is normally established through a combination of change in tariff heading and a minimum domestic value addition requirement.

    Challenges in India’s External Trade

    1. Narrow export basket: A few sectors carry a disproportionate share of export earnings. e.g. petroleum products, gems and jewellery and pharmaceuticals together account for a large share of merchandise exports.
    2. High logistics cost: Delivered cost erodes tariff advantages won at the negotiating table. e.g. turnaround time at Indian ports remains higher than at Singapore or Colombo transshipment hubs.
    3. Non tariff barriers abroad: Standards and certification requirements block market access even at zero duty. e.g. European Union restrictions on Indian shrimp and basmati consignments over residue limits.
    4. Trade deficit with China: Manufacturing growth deepens the input dependence that the deficit reflects. e.g. active pharmaceutical ingredient imports from China underpin India’s own formulation exports.
    5. Currency and commodity exposure: Import bills move with global oil and gold prices regardless of export performance. e.g. gold imports of $71.98 billion in 2025-26 widened the current account pressure.
    6. Weak participation in global value chains: India remains outside the large regional production networks that set input sourcing rules. e.g. India stayed out of the Regional Comprehensive Economic Partnership in 2019.

    Way Forward

    1. Document value addition: Build a verifiable, firm level record of domestic value addition in export sectors so that transshipment allegations can be answered with data rather than assertion.
    2. Negotiate rather than pre-empt: Hold tariff concessions until a reciprocal commitment is on the table, since unilateral cuts before talks forfeit bargaining value.
    3. Deepen component manufacturing: Extend incentives from final assembly to components and sub assemblies so that the intermediate goods share shifts from imports to domestic supply.
    4. Diversify export destinations: Use the concluded trade agreements to shift a measurable share of exports away from a single dominant market.
    5. Strengthen origin administration: Equip customs with certification and audit capacity under the origin rules so that genuine Indian manufacturing is distinguishable from routing.
    6. Secure energy optionality: Maintain diversified term contracts for crude so that sourcing decisions are not dictated by tariff threats.

    “[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?”

  • Why India is finding it difficult to buy critical mineral assets abroad

    Why in the News

    A Parliamentary panel report has highlighted the limited success of Khanij Bidesh India Limited (KABIL) in acquiring critical mineral assets overseas. So far, KABIL has completed acquisitions only in Argentina, while bids in Australia and Chile have failed or lapsed.

    The issue highlights India’s challenge of securing critical minerals abroad without a sufficiently strong financial and domestic processing ecosystem.

    What is KABIL?

    • Established: 2019
    • Purpose: Acquire and develop critical mineral assets overseas.
    • PSUs involved:
      • National Aluminium Company Limited (NALCO)
      • Hindustan Copper Limited (HCL)
      • Mineral Exploration and Consultancy Limited (MECL)
    • Ministry: Ministry of Mines
    • Major success: Five lithium brine blocks in Catamarca, Argentina, acquired in January 2024.

    Key Terms

    Spodumene Concentrate

    • Concentrated hard-rock lithium ore.
    • Must be processed into lithium carbonate or lithium hydroxide for battery applications.

    Lithium Brine

    • Lithium dissolved in underground saltwater.
    • Extracted by pumping brine to the surface and concentrating it, traditionally through evaporation.

    Non-Binding Offer

    • Indicative offer that does not legally commit the bidder to complete the transaction.
    • Allows access to the seller’s data room and due diligence stage.

    Why did KABIL struggle?

    1. Limited financial capacity: KABIL cannot independently match large international bids.
    2. No domestic processing ecosystem: India lacks sufficient commercial-scale lithium conversion capacity.
    3. Price volatility: Lithium prices fluctuate sharply, making valuation difficult.
    4. Slow consortium decisions: Multiple PSUs can delay due diligence and bidding.
    5. Strong global competition: Integrated companies can pay more because they already possess refining and battery-making capacity.
    6. Exploration risk: Acquiring mineral acreage does not guarantee commercially viable reserves.

    Australia: Why India Lost the Bid

    • Indian consortium initially offered $184 million.
    • Revised offer: $233 million.
    • South Korea’s POSCO eventually offered $765 million.
    • POSCO’s integrated mining and processing ecosystem allowed it to justify a much higher valuation.
    • Core lesson: Mine ownership without processing capacity provides less strategic value.

    Chile: Why the Opportunity Lapsed

    • KABIL’s proposed Chilean lithium investment required a large financial commitment. A joint bid with other PSUs could not complete due diligence within the available timeline.
    • This exposed two weaknesses:
    • Limited capital + slow decision-making = missed strategic opportunities.

    How Other Countries Approach Critical Minerals

    • Japan: JOGMEC provides equity support and loan guarantees to Japanese companies.
    • China: Combines overseas mining acquisitions with strong domestic refining capacity.
    • South Korea: Vertically integrated companies such as POSCO connect mining with processing.
    • EU: Critical Raw Materials Act targets domestic extraction, processing and recycling.
    • USA: Minerals Security Partnership promotes joint financing of critical mineral projects.

    Why Domestic Value Chain Matters

    • India’s strategy needs to follow:
      • Overseas mine → Concentrate → Domestic refining → Battery materials → Batteries → Manufacturing
    • At present, the missing midstream processing stage reduces the economic value India can derive from an overseas mine.

    “[2025] Consider the following statements:
    I. India has joined the Minerals Security Partnership as a member.
    II. India is a resource-rich country in all the 30 critical minerals that it has identified.
    III. The Parliament in 2023 has amended the Mines and Minerals (Development and Regulation) Act, 1957 empowering the Central Government to exclusively auction mining lease and composite license for certain critical minerals.
    Which of the statements given above are correct?
    (a) I and II only
    (b) II and III only
    (c) I and III only
    (d) I, II and III

  • Vizhinjam International Seaport begins full-scale EXIM operations

    Why in the News

    Kerala’s Vizhinjam International Seaport began full scale export and import operations, moving India’s first dedicated deepwater transshipment terminal from handling mother ship calls to regular cargo work. The shift tests whether a domestic deepwater port can pull back the transshipment cargo that Colombo, Singapore and Salalah have historically handled for India.

    What is the Vizhinjam International Seaport?

    1. About: Vizhinjam is India’s first dedicated deepwater container transshipment port, located near Thiruvananthapuram on the southern tip of Kerala.
    2. Ownership model: It is developed on the landlord port model, with the Government of Kerala owning the asset and a private concessionaire building and operating the terminal.
    3. Concession: The concession agreement was signed in August 2015 for a period of 40 years, with provision for extension.
    4. Status in law: It is a non major port under the Government of Kerala, unlike the twelve major ports administered by the Union government.
    5. Automation: It is India’s first port to use a fully automated container handling system with remotely operated ship to shore cranes.
    6. Operational milestones: The first mother ship called in July 2024, commercial operations began in December 2024, and the port was formally dedicated in May 2025.

    What is transshipment?

    1. About: Transshipment is the transfer of containers from one vessel to another at an intermediate port before they reach their final destination.
    2. Why it exists: Very large mainline vessels call only at a few deep draft hubs, and smaller feeder vessels then distribute the boxes to shallower regional ports.
    3. The commercial value: The hub port earns handling charges twice on the same container, once on discharge from the mother vessel and once on loading to the feeder.

    What is natural draft and why does it matter?

    1. About: Draft is the depth of water a vessel needs beneath its keel, and natural draft is the depth a harbour has without dredging.
    2. Vizhinjam’s advantage: The site has a natural depth of about 20 metres close to the shore, deep enough to take the largest container vessels in service.
    3. The cost effect: A naturally deep harbour avoids the recurring capital and maintenance dredging bill that shallow Indian ports carry every year.
    4. The sedimentation factor: The site has minimal littoral drift, so the channel does not silt up at the rate seen at river mouth ports.

    What is Viability Gap Funding?

    1. About: Viability Gap Funding is a one time or deferred grant given by the government to a public private partnership project that is economically justified but not commercially viable on its own.
    2. Use here: Central and State assistance under this route covered part of the capital cost of the first phase of the port.

    Why has India depended on foreign transshipment hubs?

    1. Scale of leakage: A large majority of India’s transshipment containers have historically been handled outside the country.
    2. The dominant hub: Colombo in Sri Lanka has handled the single largest share of India’s transshipped boxes, aided by its position on the same shipping lane.
    3. Other hubs: Singapore and Salalah in Oman handle much of the remainder, along with Port Klang in Malaysia.
    4. The reason: Indian ports lacked the natural draft and the crane capacity to receive the largest mainline vessels, so mother ships called at neighbouring hubs instead.
    5. The cost: Routing a container through a foreign hub adds an extra handling charge and transit time on every box, and the associated revenue leaves the country.
    6. The strategic exposure: Dependence on a foreign port for the movement of national trade is a vulnerability during a diplomatic or economic dispute.

    What makes the Vizhinjam site suitable for a hub?

    1. Proximity to the shipping lane: The port lies about 10 nautical miles from the international east and west shipping route linking the Suez Canal to the Strait of Malacca.
    2. Minimal deviation cost: A short deviation from the mainline route means a mother ship loses little time by calling, which is the decisive commercial factor for a hub.
    3. Deep water close to shore: The natural draft of about 20 metres is available near the coast, which shortens the approach channel.
    4. Low maintenance dredging: Limited sedimentation keeps the recurring dredging requirement low compared with other Indian container ports.
    5. Southern position: Its location at the southern tip of the peninsula makes it the natural first and last Indian call on the route.

    What does the move to full scale export and import operations add?

    1. From transshipment to trade: The port moves from handling mother ship calls and transfers to handling India’s own export and import containers.
    2. Direct connectivity for shippers: Exporters in Kerala and neighbouring States can load on a mainline vessel without an intermediate feeder leg through a foreign hub.
    3. Time and cost saving: Removing a feeder leg cuts transit days and one round of handling charges from the door to door cost.
    4. Revenue retention: Handling charges, customs revenue and ancillary services are retained domestically rather than paid to a foreign hub operator.
    5. Feeder network effect: Regular export and import volume gives the port a base load that makes it more attractive for shipping lines to add services.
    6. Economic linkage: Full operations activate customs, warehousing, logistics and bunkering activity in the port’s hinterland.

    Challenges to the Vizhinjam International Seaport

    1. Hinterland connectivity: A hub needs rail and road links to move export and import cargo inland at scale. e.g. the dedicated rail link and the road connectivity to the national highway network for Vizhinjam are still being completed.
    2. Competition from an established hub: Shipping lines change hub calls only when the switch is commercially compelling. e.g. Colombo has long established feeder networks, bunkering and repair services that a new port must match.
    3. Fisher community livelihood: Port construction alters the coastline and affects traditional fishing grounds. e.g. the Vizhinjam project faced sustained protests by the local fishing community over shoreline erosion and loss of fishing access.
    4. Coastal erosion and shoreline change: Breakwaters interrupt the natural movement of sand along the coast. e.g. erosion at nearby Kerala coastal settlements has been attributed by residents to the breakwater and has required protective works.
    5. Concentration risk in a single operator: Container handling capacity concentrated with one private group reduces competitive pressure on tariffs. e.g. a single group already operates a large share of India’s private container terminal capacity.
    6. Cyclone and monsoon exposure: The Arabian Sea coast faces intensifying cyclonic activity that halts port operations. e.g. Cyclone Ockhi in 2017 caused heavy loss of life among fishers off the Kerala and Tamil Nadu coast.
    7. Capacity ramp up risk: Later phases depend on demand materialising at the pace assumed in the concession. e.g. the full build capacity target depends on winning transshipment volume currently committed to competing hubs.

    Conclusion

    India has for decades paid a foreign hub to handle its own transshipment containers, and Vizhinjam is the first Indian facility with the natural draft and route position to change that. The port has now moved from the transshipment calls it began with in December 2024 to full scale export and import operations from 18 August 2026, which gives it a domestic cargo base alongside transfer volumes. The next milestone is the completion of the later development phases and the dedicated rail and road connectivity that will decide whether the hinterland can feed the quay.

    Ports and Maritime Sector in India

    1. About: India’s port system handles the overwhelming share of the country’s external trade, moving bulk, break bulk, liquid and containerised cargo.
    2. Trade dependence: Around 95 per cent of India’s trade by volume and about 70 per cent by value moves through sea ports.
    3. Port structure: India has 12 major ports administered by the Union government and around 200 notified non major ports under State governments.
    4. Coastline: India has a coastline of about 11,098 kilometres across nine coastal States and four Union Territories, with an exclusive economic zone of about 2.37 million square kilometres.
    5. Location advantage: The peninsula sits astride the east and west shipping lane connecting the Suez Canal to the Strait of Malacca, through which a large share of world trade passes.
    6. Structural weakness: Indian ports have historically lacked deep draft berths, so mainline vessels called at foreign hubs and Indian ports were served by feeders.
    7. Institutional structure: The Ministry of Ports, Shipping and Waterways administers the sector, with State Maritime Boards governing non major ports.

    Constitutional Framework Governing Ports

    1. Entry 27 of the Union List: Covers ports declared by or under law made by Parliament to be major ports, including their delimitation and the powers of port authorities there.
    2. Entry 25 of the Union List: Covers maritime shipping and navigation, and provision of education and training for the merchant marine.
    3. Entry 31 of the Concurrent List: Covers ports other than those declared to be major ports, the basis of State jurisdiction over ports such as Vizhinjam.
    4. Entry 32 of the Concurrent List: Covers shipping and navigation on inland waterways as regards mechanically propelled vessels.
    5. Article 297: Vests in the Union all lands, minerals and other things of value underlying the territorial waters, continental shelf and exclusive economic zone.
    6. Entry 41 of the Union List: Covers trade and commerce with foreign countries and import and export across customs frontiers.

    Laws and Rules Governing Ports and Shipping

    1. Indian Ports Act, 1908: The long standing statute governing port limits, port dues, pilotage and safety of shipping at ports.
    2. Indian Ports Act, 2025: Enacted to replace the 1908 statute, updating port administration, State Maritime Boards, pollution control and dispute resolution.
    3. Major Port Authorities Act, 2021: Replaced the Major Port Trusts Act, 1963 and gave the twelve major ports autonomy in tariff setting and land management through Port Authority Boards.
    4. Tariff autonomy: The Act removed tariff fixation from the Tariff Authority for Major Ports for new projects, allowing market based rates.
    5. Merchant Shipping Act, 1958: Governs registration of Indian vessels, seafarer welfare, safety and marine pollution obligations.
    6. Customs Act, 1962: Governs clearance of imported and exported goods and the designation of customs ports and bonded warehouses.
    7. Marine Aids to Navigation Act, 2021: Replaced the Lighthouse Act, 1927 and modernised the framework for navigational aids and vessel traffic services.
    8. Coastal Regulation Zone Notification, 2019: Issued under the Environment (Protection) Act, 1986, regulating construction and port development along the coast.
    9. Inland Vessels Act, 2021: Provides a uniform national regime for registration and safe operation of inland vessels, relevant to port hinterland movement by waterway.

    Back2Basics: Sagarmala Programme

    1. Administering ministry: Ministry of Ports, Shipping and Waterways.
    2. Launch year: Approved in 2015 as the flagship programme for port led development.
    3. Aim: To reduce the logistics cost of export and import and domestic cargo by using India’s coastline and inland waterways more intensively.
    4. The four pillars: Port modernisation and new port development, port connectivity enhancement, port linked industrialisation, and coastal community development.
    5. Targeted beneficiaries: Exporters and importers, coastal shipping operators, port linked industrial clusters and coastal communities including fishers.
    6. Design feature: Projects are implemented by ports, State governments, central ministries and special purpose vehicles, with the Sagarmala Development Company providing funding support.
    7. Coastal community component: Funds fishing harbours, fish landing centres and skill development for coastal populations.

    Government Initiatives in the Maritime Sector

    1. Maritime India Vision 2030: Sets out the ten year blueprint for port capacity, connectivity, shipbuilding and inland waterways.
    2. Maritime Amrit Kaal Vision 2047: Extends the roadmap to 2047 with targets for port capacity, transshipment share and green shipping.
    3. PM Gati Shakti National Master Plan: Integrates port, rail, road and waterway projects on a common geographic platform to remove last mile connectivity gaps.
    4. Harit Sagar Green Port Guidelines: Set targets for reducing carbon intensity at ports, including shore power and alternative fuel bunkering.
    5. Maritime Development Fund: Announced to provide long term low cost finance for shipbuilding, ship acquisition and port infrastructure.
    6. Shipbuilding Financial Assistance Policy: Provides assistance to Indian shipyards to compete with subsidised foreign shipbuilders.
    7. Cabotage relaxation: Allows foreign flagged vessels to carry transshipment containers between Indian ports, a measure intended to make Indian hub ports viable.
    8. Jalvahak Scheme and National Waterways development: Encourages cargo movement on inland waterways to reduce road congestion to and from ports.

    Key Facts about Vizhinjam and India’s Ports

    1. First of its kind: Vizhinjam is India’s first dedicated deepwater container transshipment port and its first semi automated container terminal.
    2. Location: Thiruvananthapuram district, Kerala, on the Arabian Sea coast near the southern tip of the Indian peninsula.
    3. Natural draft: About 20 metres close to shore, among the deepest at any Indian port.
    4. Distance from the shipping lane: About 10 nautical miles from the international east and west shipping route.
    5. Concession model: Landlord model public private partnership with the Government of Kerala, signed in 2015 for 40 years.
    6. Major ports: India’s twelve major ports include Deendayal (Kandla), Mumbai, Jawaharlal Nehru, Mormugao, New Mangalore, Cochin, Chennai, Kamarajar (Ennore), V.O. Chidambaranar (Tuticorin), Visakhapatnam, Paradip and Syama Prasad Mookerjee (Kolkata).
    7. Busiest container port: Jawaharlal Nehru Port in Maharashtra handles the largest container volume among Indian ports.
    8. Newest major port: Vadhavan in Maharashtra was approved as a deepwater major port to add mainline capacity on the west coast.

    Challenges in India’s Port and Maritime Sector

    1. Transshipment leakage: A large share of India’s container transshipment is still handled at foreign hubs. e.g. Colombo has historically handled the biggest single share of India’s transshipped boxes.
    2. Hinterland connectivity gaps: Rail and road links to ports lag behind quay side capacity. e.g. dedicated freight corridor connectivity reached some ports years after their capacity expansion was complete.
    3. Low draft at legacy ports: Older river and estuary ports cannot take the largest vessels without continuous dredging. e.g. Kolkata port requires sustained maintenance dredging on the Hooghly to keep its channel usable.
    4. Turnaround time and dwell time: Container dwell time at Indian ports remains higher than at competing hubs. e.g. Indian container dwell time has been benchmarked unfavourably against Singapore and Colombo in trade facilitation assessments.
    5. Small national fleet: Indian flagged tonnage carries only a small share of the country’s own trade, so freight payments go abroad. e.g. Indian ships carry a small fraction of India’s export and import cargo, with the rest on foreign flagged vessels.
    6. Weak shipbuilding base: India holds a marginal share of global shipbuilding orders. e.g. global shipbuilding is dominated by China, South Korea and Japan, which together hold the overwhelming majority of the order book.
    7. Coastal environment and livelihood conflict: Port expansion collides with fishing livelihoods and coastal ecology. e.g. the Vizhinjam project saw prolonged protests over erosion and loss of fishing grounds.
    8. Climate and disaster exposure: Ports are exposed to cyclones, storm surge and sea level rise. e.g. Cyclone Fani and Cyclone Amphan forced extended shutdowns at east coast ports.

    Way Forward

    1. Complete port connectivity projects on schedule: Finish the dedicated rail spur and highway links so hinterland cargo can reach the quay without road congestion.
    2. Consolidate transshipment volume: Use cabotage relaxation, competitive tariffs and customs facilitation to make an Indian hub call cheaper than a Colombo call.
    3. Invest in feeder shipping capacity: Build an Indian flagged feeder fleet so the distribution leg of transshipment is also domestically earned.
    4. Institutionalise coastal community compensation: Provide time bound rehabilitation, alternative livelihood and shoreline protection commitments as part of every port concession.
    5. Monitor shoreline change scientifically: Mandate independent long term shoreline and sediment monitoring around breakwaters, with published results.
    6. Diversify operators: Encourage more than one terminal operator across the national container network to keep tariffs competitive.
    7. Green the port: Deploy shore power, alternative fuel bunkering and electrified handling equipment in line with the green port guidelines.
    8. Digitise clearance: Extend single window clearance and port community systems to cut dwell time to the levels prevailing at competing hubs.

    Matching Previous Year Question

    “[2026] In what way(s) does the Vizhinjam International Seaport represent a structural shift in India’s maritime trade and logistics policy?
    1. By functioning exclusively as a domestic cargo hub to reduce reliance on coastal shipping and eliminate the need for foreign collaborations.
    2. By focusing primarily on passenger cruise tourism and heritage shipping to increase Kerala’s profile as a maritime heritage destination.
    3. By leveraging its natural deep draft and strategic location to reduce dependence on foreign trans-shipment ports, enhance revenue retention, and reposition India in regional maritime trade.
    Select the answer using the code given below:
    (a) 1 only
    (b) 1 and 2
    (c) 2 and 3
    (d) 3 only
    Answer: (d)”

  • The rupee’s borrowed breathing space

    Why in the News

    Banks mobilised $52.3 billion in foreign currency inflows between 8 June and 13 August under the Reserve Bank of India (RBI) special swap facility, with Foreign Currency Non Resident Bank, or FCNR(B), deposits accounting for the bulk of the funds. The RBI closed the swap window a month earlier than scheduled, and the rupee fell to a 17 day low of 95.61 against the dollar the same day. A country can defend its currency by earning dollars or by borrowing them, and this stabilisation belongs to the second kind.

    How does the RBI special swap facility for FCNR(B) deposits work?

    1. The deposit: FCNR(B) deposits let non resident Indians hold foreign currency with Indian banks, free of rupee risk, with tax free interest and full repatriation.
    2. Step one, raising the money: Banks raise fresh deposits of three to five year maturity in foreign currency.
    3. Step two, the swap: Banks swap those dollars with the RBI in exchange for rupees.
    4. Step three, the subsidy: The central bank absorbs the hedging cost of that swap, which is the cost banks would otherwise pay to protect themselves against currency movement.
    5. The result for the depositor: Once the cost is lifted, banks can offer dollar rates near 6 to 7.5 per cent, and some add leverage of 9 to 19 times.
    6. The nature of the transaction: For a wealthy depositor borrowing abroad and placing the proceeds in India at a protected high yield, this is a carry trade with the currency risk removed by someone else.

    What is a carry trade?

    1. About: A carry trade is borrowing in a currency where interest rates are low and investing in an asset that pays a higher return, keeping the difference between the two rates.
    2. The risk it normally carries: The lender bears the exchange rate risk, since a fall in the investment currency can wipe out the interest gain.
    3. What is different here: The currency risk is removed by the central bank absorbing the hedging cost, so the investor keeps the yield without the exposure that usually pays for it.

    What is a hedging cost in a currency swap?

    1. About: A currency swap exchanges one currency for another today with an agreed reversal at a future date and a pre agreed rate.
    2. The cost: The hedging cost is the price of that future certainty, set mainly by the interest rate difference between the two currencies and by expectations of depreciation.
    3. Who pays it here: The RBI absorbs it, which is why the transaction is a subsidy rather than a market clearing price.

    What is an asset liability mismatch?

    1. About: An asset liability mismatch arises when a bank’s borrowings and its lending differ in currency, maturity or interest rate basis.
    2. The form it takes here: Banks raise three to five year foreign currency money and lend against it in rupees on different terms, so repayment obligations and asset returns do not move together.

    What did the swap window actually mobilise?

    1. The headline number: Banks mobilised $52.3 billion in foreign currency inflows between 8 June and 13 August under the facility.
    2. The composition: FCNR(B) deposits accounted for the bulk of the funds raised.
    3. Early closure: The RBI closed the FCNR(B) swap window a month earlier than originally scheduled.
    4. The immediate market reaction: The rupee depreciated 0.2 per cent to close at a 17 day low of 95.61 against the dollar, the worst performing currency in Asia that day despite a softer dollar.
    5. The added pressure: A rise in crude oil prices to nearly $90 a barrel compounded the fall, with importers rushing to take forward cover and exporters holding back dollar sales.
    6. The intervention: Intervention by the central bank prevented a sharper slide.

    Why did the money need such inducement?

    1. The prior position: Confidence had already left, since the rupee was Asia’s worst performing currency in the financial year 2025 to 2026.
    2. The portfolio exit: Foreign portfolio investors had pulled out billions from Indian markets over that period.
    3. The partial return: They turned net buyers in July, bringing in about $2.1 billion, a modest reversal relative to the scale of the preceding exodus.
    4. The reading that follows: It is too early to read this as investors rediscovering India.
    5. The revealing detail: The money recorded a sharp fall as soon as the inducement was withdrawn, which measures the incentive rather than belief in Indian assets.

    Why does a subsidy work when good data does not?

    1. The nature of currency markets: Currency markets move not only on fundamentals but on expectations about future movement.
    2. The trap of one way expectations: Once investors believe depreciation is one way, good data stops persuading them.
    3. The mechanism that breaks the loop: The way to break that loop is to make the bet against the rupee expensive, which is what the FCNR(B) window does.
    4. The price of the fix: Flows surged only after the subsidy appeared, so the pace of mobilisation measures the incentive.
    5. The conclusion drawn: Confidence that materialises only after the price is raised is not confidence, it is a purchase.

    What has India actually bought?

    1. The two ways to defend a currency: A country can earn more dollars or it can borrow them, and the two look alike when the money arrives.
    2. The category this falls into: India’s latest external sector stabilisation largely falls into the borrowing kind.
    3. What was purchased: India has bought time, and a quiet transfer of risk.
    4. The repayment obligation: These deposits will mature, and every dollar arriving now must be repaid in three to five years.
    5. The correct classification: The surge is best viewed as a balance of payments stabiliser rather than a durable source of dollars.
    6. The accounting reality: FCNR(B) deposits are ultimately a form of external borrowing and create future repayment and rollover obligations.

    Where does the risk actually sit?

    1. The scheme does not remove risk: The facility does not make the rupee’s risk disappear, it relocates it.
    2. The first relocation: When the RBI absorbs hedging costs, the exposure moves onto the public balance sheet.
    3. The second relocation: When banks raise three to five year money and lend against it, the risk resurfaces as an asset liability mismatch.
    4. The transformation over time: A visible currency problem today can become a less visible banking problem tomorrow.
    5. Who ultimately holds it: The depositor keeps a protected yield, and the currency exposure that yield was compensating for sits with the central bank and the banking system.

    What is genuinely not in crisis?

    1. Reserves: India’s foreign exchange reserves are large, giving the central bank room to intervene in the spot and forward markets.
    2. Invisible earnings: Services exports and remittances cushion the external account against a goods trade deficit.
    3. External factors: Part of the rupee’s weakness reflects the strength of the dollar rather than a domestic failure.
    4. The correct qualification: Being out of crisis is not the same as being secure.
    5. The deterioration that matters: India slipped into a current account deficit in May, which is the backdrop against which the FCNR(B) surge must be read.

    What should India do with a window it has paid to open?

    1. Treat it correctly: Treat the period as a purchased pause and spend it well, rather than as evidence that the external problem has been solved.
    2. Build export surplus sectors: Develop sectors that earn a durable dollar surplus rather than relying on capital inflows to balance the account.
    3. Attract foreign direct investment: Draw investment that takes a lasting stake, since it does not carry a fixed repayment date the way a deposit does.
    4. Cut energy import dependence: Reduce the largest single item of the import bill, which is also the most exposed to geopolitical shocks.
    5. Treat tourism as a foreign exchange industry: Recognise inbound tourism as an export earning activity and plan for it accordingly.
    6. The blunt limit: If India earns too few dollars, no better way of borrowing will solve it.

    Challenges in managing India’s external sector

    1. Rollover risk on maturing deposits: Large foreign currency deposits raised in one window fall due together and must be repaid or renewed at whatever rate then prevails. e.g. the $34 billion of FCNR(B) deposits raised under the 2013 swap window created a concentrated redemption in 2016 that the RBI had to manage in advance.
    2. Oil price exposure: India imports the overwhelming share of its crude oil, so the trade deficit moves with a price it does not set. e.g. crude near $90 a barrel in August 2026 directly widened the import bill and pressured the rupee.
    3. Gold import demand: Household demand for gold converts savings into imports and worsens the current account. e.g. gold has repeatedly been the second largest item in India’s import bill after crude oil.
    4. Volatility of portfolio flows: Foreign portfolio investment can reverse within weeks on a change in global interest rates. e.g. the taper announcement of 2013 triggered an exit that took the rupee past 68 to the dollar.
    5. Narrow export basket and market concentration: A few products and a few destinations carry a large share of merchandise exports. e.g. tariff action by a single large trading partner can hit textiles, gems and jewellery and shrimp exports simultaneously.
    6. Rising import intensity of exports: Electronics and refined petroleum exports require heavy imported inputs, so gross export growth adds less net foreign exchange. e.g. smartphone exports rely on imported displays, camera modules and cells.
    7. Sterilisation cost of intervention: Defending the rupee by selling dollars injects rupee liquidity that must then be absorbed at a cost. e.g. the RBI uses open market operations and the standing deposit facility to drain the liquidity created by intervention.
    8. External debt servicing: A rising stock of short term external debt raises the share of reserves committed to repayment. e.g. short term debt on residual maturity has at times exceeded a fifth of foreign exchange reserves.

    Conclusion

    The $52.3 billion mobilised under the swap window is borrowed rather than earned, and the currency risk that made it attractive has been moved onto the public balance sheet and into bank balance sheets. The central bank acted decisively and bought time, and every dollar of that time must be repaid within three to five years. What remains unresolved is the underlying position, since India slipped into a current account deficit in May and the flows arrived only after the price was raised. Rupee stability now rests increasingly on liabilities the country has paid to attract and must one day repay.

    What is the Balance of Payments?

    1. About: The balance of payments is the systematic record of all economic transactions between residents of a country and the rest of the world over a period.
    2. Rationale: It exists to show whether a country is paying its way through what it earns, or financing consumption and investment through borrowing and asset sales.
    3. Current account: Records trade in goods and services, primary income such as investment income, and secondary income such as remittances.
    4. Capital and financial account: Records foreign direct investment, portfolio investment, external commercial borrowing, banking capital including non resident deposits, and reserve movements.
    5. Errors and omissions: The residual balancing entry that reconciles the two accounts, since the sources for each side differ.
    6. The accounting identity: A current account deficit must be financed by a surplus on the capital account or by drawing down reserves.

    Key Concerns Regarding India’s External Sector Position

    1. Deficit financed by volatile capital: A current account deficit funded by portfolio flows and non resident deposits is more fragile than one funded by foreign direct investment.
    2. Dependence on invisibles: Services exports and remittances mask a persistent and large merchandise trade deficit.
    3. Reserve adequacy measured wrongly: A large absolute reserve stock can still be thin when measured against short term external liabilities on a residual maturity basis.
    4. Commodity price pass through: Oil, gold and fertiliser prices are set abroad, so a large part of the external position is outside domestic policy control.
    5. Rupee internationalisation lag: Almost all of India’s trade is invoiced in dollars, so every trade shock passes directly into demand for foreign exchange.
    6. Contingent liabilities of intervention: Forward market intervention creates future dollar delivery obligations that do not appear in the headline reserve figure.

    Statutory Framework Governing Foreign Exchange and External Borrowing

    1. Entry 36 of the Union List: Places currency, coinage and legal tender, and foreign exchange, exclusively with Parliament.
    2. Entry 37 of the Union List: Covers foreign loans, the constitutional basis for regulating external borrowing.
    3. Section 3 of the Foreign Exchange Management Act, 1999: Prohibits dealing in foreign exchange except through authorised persons.
    4. Section 6 of the Foreign Exchange Management Act, 1999: Governs capital account transactions, including non resident deposits and external borrowing.
    5. Section 47 of the Foreign Exchange Management Act, 1999: Empowers the RBI to make regulations to carry out the provisions of the Act.
    6. Sections 17 and 33 of the Reserve Bank of India Act, 1934: Govern the business the RBI may transact and the assets backing the note issue, including foreign securities.
    7. Preamble to the Reserve Bank of India Act, 1934: States the objective of operating the currency and credit system to the country’s advantage and maintaining price stability.

    Laws and Rules Governing Non Resident Deposits

    1. Reserve Bank of India Act, 1934: Establishes the central bank and its powers over currency, reserves and monetary operations.
    2. Section 45ZB: Provides for the Monetary Policy Committee, which sets the policy rate that shapes the interest differential behind a swap.
    3. Foreign Exchange Management Act, 1999: Replaced the Foreign Exchange Regulation Act, 1973 and shifted the regime from control to management of foreign exchange.
    4. Foreign Exchange Management (Deposit) Regulations, 2016: Govern the operation of Non Resident External, Non Resident Ordinary and FCNR(B) accounts.
    5. Banking Regulation Act, 1949: Governs the conduct of banking companies, including the reserve and liquidity requirements applicable to these deposits.
    6. Foreign Exchange Management (Borrowing and Lending) Regulations, 2018: Govern external commercial borrowing and the terms on which residents may borrow abroad.
    7. Prevention of Money Laundering Act, 2002: Applies customer due diligence and reporting requirements to non resident deposit accounts.
    8. Income Tax Act, 1961: Provides the exemption that makes interest on FCNR(B) and Non Resident External deposits tax free for a non resident.

    Back2Basics: Non Resident Deposit Accounts in India

    1. FCNR(B) account: A term deposit held in a permitted foreign currency with an Indian bank, with maturity from one to five years.
    2. Currency risk on FCNR(B): The deposit is denominated in foreign currency, so the depositor faces no rupee depreciation risk and the bank or the central bank carries it.
    3. Non Resident External (NRE) account: A rupee denominated account funded from abroad, fully repatriable, with tax free interest in India.
    4. Non Resident Ordinary (NRO) account: A rupee account for income earned in India such as rent, pension or dividends, with limited repatriation and taxable interest.
    5. Regulatory basis: All three are governed by the Foreign Exchange Management (Deposit) Regulations, 2016 under the Foreign Exchange Management Act, 1999.
    6. Policy use: The RBI periodically relaxes interest rate ceilings and reserve requirements on these deposits to attract dollar inflows when the rupee is under pressure.
    7. Balance of payments classification: Non resident deposits are recorded as banking capital under the capital account, not as current account earnings.

    Government and RBI Initiatives on External Stability

    1. Special swap facility for FCNR(B) deposits: Absorbs the hedging cost of bank dollar deposits to attract diaspora funds during periods of currency pressure.
    2. Special Rupee Vostro Accounts: Allow settlement of international trade in rupees with partner countries, reducing dollar demand for those transactions.
    3. Gold Monetisation Scheme: Brings idle domestic gold into the financial system to cut fresh import demand.
    4. Sovereign Gold Bonds: Provide a paper substitute for physical gold, reducing the import component of gold demand.
    5. Liberalised Remittance Scheme: Sets the annual limit within which resident individuals may remit funds abroad, a control on outflows.
    6. External Commercial Borrowing framework: Sets maturity, cost ceiling and end use conditions for corporate borrowing abroad.
    7. Foreign exchange reserve management: Reserves are held in foreign currency assets, gold, Special Drawing Rights and the reserve tranche position with the International Monetary Fund.

    Key Facts about India’s External Sector

    1. Reserve composition: India’s foreign exchange reserves comprise foreign currency assets, gold, Special Drawing Rights and the reserve tranche position with the IMF.
    2. Remittance rank: India is the largest recipient of inward remittances in the world.
    3. Services strength: India is among the top ten exporters of commercial services globally, led by software and business services.
    4. Import composition: Crude oil and gold are consistently the two largest items in India’s merchandise import bill.
    5. The 2013 precedent: A similar concessional swap window in 2013 raised about $34 billion through FCNR(B) deposits and bank capital during that year’s currency crisis.
    6. Exchange rate regime: India follows a managed float, where the rate is market determined and the RBI intervenes to contain volatility rather than to defend a level.
    7. Convertibility status: The rupee is fully convertible on the current account and only partially convertible on the capital account.

    Way Forward

    1. Sequence the repayment: Publish a maturity profile of the deposits raised and build forward cover ahead of the redemption window rather than at it.
    2. Shift the financing mix: Prioritise foreign direct investment and long term equity flows over interest sensitive deposits as the source of external financing.
    3. Expand export capability: Target sectors with high domestic value addition so export growth adds net foreign exchange rather than gross turnover.
    4. Reduce energy import intensity: Accelerate renewable capacity, ethanol blending and electrification of transport to shrink the crude oil bill.
    5. Widen rupee trade settlement: Extend Special Rupee Vostro arrangements to more trade partners so a larger share of trade avoids dollar intermediation.
    6. Treat tourism as an export sector: Fund visa facilitation, connectivity and destination infrastructure with the same seriousness as merchandise export promotion.
    7. Report the contingent position: Disclose the forward book and swap obligations alongside headline reserves so the true net position is visible.

    Matching Previous Year Question

    “[2015, GS3, 12.5 marks] Craze for gold in Indians have led to a surge in import of gold in recent years and put pressure on balance of payments and external value of rupee. In view of this, examine the merits of Gold Monetization Scheme.”

  • From price taker to price setter: India’s commodity market gains clout

    Why in the News

    The Securities and Exchange Board of India (SEBI) is soliciting public views on allowing Foreign Portfolio Investors (FPIs) into non agricultural, physically settled commodity derivatives covering bullion, energy and base metals. India is a major importer of crude oil, gold and industrial metals, yet it takes prices set on foreign exchanges rather than setting them. The proposal tests whether deeper liquidity turns India into a price setter or imports the volatility of global markets.

    What are physically settled commodity derivatives?

    1. About: A commodity derivative is a contract whose value is derived from an underlying commodity, traded as a future or an option on an exchange.
    2. Physical settlement: A physically settled contract is closed by actual delivery of the underlying goods at expiry, rather than by paying the cash difference between the contract price and the market price.
    3. Why the distinction matters: Physical settlement ties the exchange price to the real warehouse and delivery market, which is what makes a contract usable as a benchmark.
    4. The categories in question: The proposal covers bullion meaning gold, silver and their derivatives, energy meaning crude oil and natural gas, and base metals meaning aluminium, copper, lead, nickel and zinc.
    5. The present bar: Overseas investors are at present not allowed to participate in contracts linked to crude, natural gas, gold or silver that are settled by actual delivery of the underlying goods.

    What is a Foreign Portfolio Investor (FPI)?

    1. About: An FPI is a non resident investor registered with SEBI to invest in Indian securities and financial instruments without acquiring management control.
    2. Distinguishing feature: Portfolio investment is liquid and can exit quickly, unlike foreign direct investment which takes a lasting interest in an enterprise.
    3. Present count: More than 11,000 FPIs are currently registered in India.

    What does price taker versus price setter mean?

    1. Price taker: A market participant large enough to buy in volume, yet whose own trading does not influence the reference price at which the commodity is quoted globally.
    2. Price setter: A market whose exchange price becomes the reference benchmark that buyers and sellers elsewhere quote against.
    3. The stake for India: A price setting market retains benchmark authority, transaction value and hedging activity inside the country instead of exporting them.

    What is Average Daily Turnover (ADT)?

    1. About: Average Daily Turnover is the average notional value of contracts traded per trading day over a stated period, used as the standard measure of an exchange’s activity.
    2. Use here: It is the figure by which the Multi Commodity Exchange (MCX) is compared against global commodity exchanges for depth.

    Why is India a price taker despite being a major importer?

    1. Import weight without market weight: India is a major importer of crude oil, gold and industrial metals, and still has no proportionate influence on how those commodities are priced.
    2. Hedging happens offshore: Domestic commodity risk is currently hedged largely through London, New York, Chicago and Singapore rather than on Indian exchanges.
    3. Missing institutional depth: MCX has strong retail and domestic participation and relatively limited institutional depth compared with global exchanges.
    4. The missing precondition: For India to become a price setter, its domestic commodity market needs integration with the global financial architecture.
    5. The consequence of the gap: Indian users of these commodities accept a price discovered abroad and pay the transaction and collateral cost of using a foreign venue.

    What exactly is SEBI proposing?

    1. The consultation: SEBI is proposing to allow access to foreign portfolio investors into non agricultural derivatives and is seeking public views on the design.
    2. The stated objective: The aim is to bring global commodity risk management into India.
    3. The expected byproduct: Increased depth and liquidity in commodity derivative markets, enabling the country to serve as a global benchmark.
    4. The product scope: Participation is proposed in physically settled contracts in bullion, energy and base metals, the segments that are either imported or globally priced.
    5. The safeguard already stated: SEBI has mandated that such participants square off positions before the delivery period.
    6. The stated challenge: The design problem is to ensure that greater liquidity does not become greater volatility.

    How would onshore hedging change India’s foreign exchange position?

    1. Margin retention: Margin money posted against contracts stays within the country instead of moving to a foreign clearing house.
    2. Brokerage retention: Brokerage paid on the trade remains domestic revenue.
    3. Lower collateral demand on banks: Banks would need less foreign currency for collateral purposes when hedging moves onshore.
    4. What is not saved: India cannot avoid paying dollars for demand inelastic imported commodities, so the total import bill does not fall.
    5. What is saved: The country saves on offshore collateral, transaction costs and financial outflows.
    6. The precise gain: The result is a reduction in the volatility of India’s foreign exchange requirement, not a large reduction in total foreign exchange outflow.

    What multiplier effect do FPIs bring to the domestic market?

    1. The liquidity function: FPIs can create a multiplier effect by providing the liquidity that domestic hedgers need on the other side of their trades.
    2. The hedgers who benefit: Airlines, oil marketing companies (OMCs) and industrial users would be able to hedge efficiently on Indian exchanges.
    3. The scale even at low participation: Of the more than 11,000 registered FPIs, even a tenth participating on a conservative estimate would bring in considerable liquidity.
    4. Benchmark influence: By attracting global capital, Indian exchanges can gradually become more influential in regional price discovery.
    5. Reduced benchmark dependence: A deeper market also cuts India’s dependence on overseas benchmarks for the same commodities.

    What does the MCX data show about the market’s current depth?

    1. Combined turnover: MCX recorded a combined futures and options Average Daily Turnover of Rs 10.5 lakh crore as of the first quarter of FY27.
    2. Rate of growth: The combined futures and options ADT of MCX rose by 238 per cent in the first quarter of FY27.
    3. What the growth reflects: The rise reflects growing investor adoption of commodity derivatives for both hedging and trading.
    4. Client base: The active client base almost doubled year on year to 13.72 lakh in the review period.
    5. Registered foreign investors: More than 11,000 FPIs are already registered in India across asset classes.
    6. Composition advantage: MCX is dominated by commodities that are either imported or globally priced, which is why the proposal is expected to benefit it most.
    7. The positioning goal: The change is expected to expand MCX’s addressable market and strengthen its position as an Asian commodity trading hub.

    How did the present proposal evolve from earlier reform?

    1. The origin: The seeds of the present proposal were sown in 2015, at the time of the merger of the Forward Markets Commission with SEBI.
    2. The approach since: SEBI has taken measured steps in developing the commodity derivatives market in an orderly manner.
    3. The products introduced: SEBI introduced futures on commodity indices, options on commodity futures, and options in goods.
    4. The stated purpose of those products: To attract broad based participation, enhance liquidity, facilitate hedging and bring more depth to the commodity derivatives market.
    5. Who took them up: The products launched by the exchanges are witnessing substantial trading volumes, driven by mutual funds, alternate investment funds and portfolio management services.
    6. The earlier foreign access route: Eligible Foreign Entities (EFEs) were initially allowed to participate only for hedging, and only if they had direct exposure to Indian physical commodities.
    7. Why that route failed: The response of eligible foreign entities was woefully low, due to operational complexities in the eligibility and compliance design.

    What does the single international precedent cited actually establish?

    1. The one study relied upon: SEBI cites a study of China, which found a jump in volume and in the number of deals after internationalisation of its futures markets.
    2. The cost finding: That study also found trading cost was largely unaffected by the entry of foreign participants.
    3. The inference drawn: SEBI reasoned from this evidence for the entry of FPIs into Indian commodity derivatives.
    4. The limit of the evidence: A single country study of volume and cost does not establish that benchmark authority shifted, which is the outcome India is actually seeking.
    5. The offshore venues that matter: The benchmarks India competes against sit in London, New York, Chicago and Singapore, and none of those cases is examined in the proposal.

    Does deeper liquidity buy price setting power or imported volatility?

    1. The reform is significant: Widening access for FPIs into non farm commodity derivatives is a significant step towards market depth.
    2. The speculation risk: Speculation may amplify price movements in an already charged geopolitical environment, with currency fluctuations and supply disruptions.
    3. Position concentration: Large international commodity trading houses and hedge funds could accumulate significant positions and influence short term prices.
    4. The partial safeguard: SEBI has mandated such participants to square off positions before the delivery period, which limits delivery squeezes but not price influence during the contract’s life.
    5. Contagion channel: Indian commodity markets may sway to Federal Reserve policy and dollar movements once foreign capital is a large presence.
    6. Financialisation risk: Excessive financialisation of commodities may create a discord between futures prices and physical market realities.
    7. The central trade off: The same foreign capital that gives India benchmark weight also transmits foreign monetary policy into domestic commodity prices.

    Challenges to opening commodity derivatives to foreign portfolio investors

    1. Volatility transmission to consumer prices: Commodity futures prices feed into fuel and metal costs that households and industry pay. e.g. a spike in crude futures during the Strait of Hormuz disruption of 2026 pushed the Indian crude basket towards $90 a barrel.
    2. Warehousing and delivery infrastructure: Physical settlement needs accredited warehouses, assaying and quality certification at scale. e.g. the National Spot Exchange Limited payment crisis of 2013 arose from unverified underlying stocks in warehouses.
    3. Regulatory arbitrage with offshore venues: Participants can shift between Indian and foreign contracts to exploit margin and tax differences. e.g. Indian single stock and index derivative volumes migrated to Singapore before the exchanges restructured their offshore licensing.
    4. Currency convertibility limits: The rupee is not fully convertible on the capital account, which constrains how freely foreign hedgers can move funds. e.g. offshore participants continue to use non deliverable forward markets for rupee exposure.
    5. Concentration and manipulation risk: A few large global houses dominate physical trade in several of these commodities. e.g. global metal trading is concentrated among a small number of houses whose positions can move benchmark prices.
    6. Retail exposure to a wholesale market: Indian commodity exchanges have unusually high retail participation for a risk transfer market. e.g. the active client base at MCX almost doubled to 13.72 lakh in a single year.
    7. Agricultural spillover through sentiment: Even with farm contracts excluded, financialisation shapes expectations across commodity classes. e.g. futures trading in seven agricultural commodities was suspended in 2021 over inflation concerns and the suspension was extended repeatedly.

    Conclusion

    India buys crude oil, gold and base metals in global volume and still accepts a price discovered on exchanges abroad, and the proposal to admit FPIs is an attempt to relocate that price discovery onshore. The measurable gain is narrower than the framing suggests, since it lowers the volatility of India’s foreign exchange requirement and retains margin, brokerage and collateral, without reducing the dollar bill for demand inelastic imports. What remains unresolved is whether the same foreign capital that supplies depth also imports Federal Reserve policy and dollar movements into Indian commodity prices. The proposal is at the public consultation stage, and the design question SEBI must answer is how to ensure greater liquidity does not become greater volatility.

    Commodity Derivatives Market in India

    1. About: A commodity derivatives market allows producers, importers and consumers to lock in a future price for a commodity, transferring price risk to participants willing to bear it.
    2. The two functions: The market performs price discovery, by aggregating expectations into a single quoted price, and risk management, by allowing hedging against adverse price movement.
    3. Regulatory history: Commodity derivatives were regulated by the Forward Markets Commission under the Forward Contracts (Regulation) Act, 1952 until the Commission merged with SEBI in 2015.
    4. The exchanges: MCX dominates non agricultural commodities, while the National Commodity and Derivatives Exchange (NCDEX) is the principal agricultural commodity exchange.
    5. India’s scale: India is the world’s largest consumer of gold after China, the third largest consumer and importer of crude oil, and a leading consumer of silver and base metals.
    6. The structural weakness: Institutional and foreign participation is thin, so Indian contracts track international benchmarks rather than generating them.
    7. The newer venue: The India International Bullion Exchange at GIFT City was created to route bullion imports through an organised exchange platform.

    Statutory Framework Governing Commodity Derivatives

    1. Entry 48 of the Union List: Places stock exchanges and futures markets exclusively within Parliament’s legislative competence.
    2. Securities Contracts (Regulation) Act, 1956, Section 2(bc): Defines a commodity derivative, brought in by the Finance Act, 2015.
    3. SEBI Act, 1992, Section 11: Sets out SEBI’s duty to protect investors and to regulate the securities market, extended to commodity derivatives after the merger.
    4. Finance Act, 2015: Repealed the Forward Contracts (Regulation) Act, 1952 and transferred regulation of commodity derivatives to SEBI.
    5. Foreign Exchange Management Act, 1999, Section 6: Governs capital account transactions, the route through which foreign participation and collateral flows are controlled.
    6. Essential Commodities Act, 1955: Empowers the Union to regulate production, supply and trade in notified essential commodities, including suspension of futures trading.

    Laws and Rules Governing Commodity Market Participation

    1. Securities Contracts (Regulation) Act, 1956: Governs recognition of stock exchanges and the legality of contracts in securities and commodity derivatives.
    2. Section 2(bc): Introduced the statutory definition of a commodity derivative in 2015.
    3. SEBI Act, 1992: Establishes SEBI with powers of investigation, adjudication and penalty across securities and commodity derivative markets.
    4. SEBI (Foreign Portfolio Investors) Regulations, 2019: Set out registration categories, eligibility and investment conditions for foreign portfolio investors.
    5. Foreign Exchange Management Act, 1999: Governs the cross border movement of funds, margins and collateral by foreign participants.
    6. Foreign Exchange Management (Debt Instruments) Regulations, 2019: Regulate FPI access to Indian debt, the parallel route to their equity access.
    7. Warehousing (Development and Regulation) Act, 2007: Establishes the Warehousing Development and Regulatory Authority and the negotiable warehouse receipt system that underpins physical settlement.
    8. Essential Commodities Act, 1955: Provides the power under which futures trading in specific commodities has been suspended.
    9. Prevention of Money Laundering Act, 2002: Applies know your customer and reporting obligations to intermediaries handling foreign participant funds.

    Back2Basics: Multi Commodity Exchange of India (MCX)

    1. What it is: MCX is India’s largest commodity derivatives exchange, dealing mainly in bullion, energy and base metals.
    2. Regulator: Regulated by SEBI under the Securities Contracts (Regulation) Act, 1956 since the 2015 transfer of commodity market regulation.
    3. Year of operations: Began operations in 2003 and became India’s first listed commodity exchange.
    4. Product range: Offers futures and options in gold, silver, crude oil, natural gas, aluminium, copper, lead, nickel, zinc, cotton and other commodities.
    5. Index products: Operates commodity indices such as iCOMDEX, on which index futures are traded.
    6. Settlement types: Runs both cash settled and physically settled contracts, with delivery through accredited warehouses and vaults.
    7. Current scale: Combined futures and options average daily turnover reached Rs 10.5 lakh crore in the first quarter of FY27, with an active client base of 13.72 lakh.

    Government Initiatives Related to Commodity Markets

    1. Merger of the Forward Markets Commission with SEBI: Unified regulation of securities and commodity derivatives under a single regulator from 2015.
    2. India International Bullion Exchange at GIFT City: Created to channel bullion imports through a regulated exchange and build a domestic gold price benchmark.
    3. Gold Monetisation Scheme: Mobilises idle household and institutional gold into the banking system to reduce fresh import demand.
    4. Sovereign Gold Bonds: Offer a paper alternative to physical gold holding, reducing import linked demand.
    5. Electronic Negotiable Warehouse Receipts: Issued under the Warehousing Development and Regulatory Authority framework to make stored commodities financeable and deliverable.
    6. Electronic National Agriculture Market (eNAM): Creates a unified electronic spot market for agricultural produce across regulated mandis.
    7. International Financial Services Centres Authority: Regulates the unified financial services centre at GIFT City, including commodity and bullion derivatives available to non residents.

    Key Facts about India’s Commodity Market

    1. Regulator: SEBI, since the Forward Markets Commission merged into it on 28 September 2015.
    2. Repealed statute: The Forward Contracts (Regulation) Act, 1952 was repealed through the Finance Act, 2015.
    3. Principal exchanges: MCX for non agricultural commodities and NCDEX for agricultural commodities.
    4. Gold consumption: India is among the two largest gold consuming countries in the world, with imports a major component of its current account deficit.
    5. Crude dependence: India imports well over 85 per cent of its crude oil requirement, which is why energy contracts dominate hedging demand.
    6. Institutional access built in stages: Mutual funds, alternate investment funds and portfolio management services were allowed into commodity derivatives before foreign portfolio investors.
    7. Physical settlement mandate: SEBI moved several non agricultural contracts to compulsory delivery based settlement to align futures prices with physical markets.

    Challenges in India’s Commodity Derivatives Market

    1. Shallow institutional participation: Banks, insurers and pension funds are largely absent from commodity hedging. e.g. Indian banks are not permitted to take proprietary positions in commodity derivatives the way global banks do.
    2. Fragmented physical markets: Spot markets remain dispersed and unstandardised, weakening the link between futures and delivery. e.g. agricultural produce market committee mandis quote different grades and prices for the same crop within one State.
    3. Policy reversals: Sudden suspension of contracts undermines confidence in the market as a hedging venue. e.g. futures trading in seven agricultural commodities including wheat, mustard and chana was suspended in December 2021.
    4. Tax and transaction cost: Commodity transaction tax and stamp duty raise the cost of trading relative to offshore venues. e.g. Indian participants have historically routed positions through Dubai and Singapore for cost reasons.
    5. Quality assaying and standardisation: Delivery requires reliable and uniform quality certification. e.g. bullion delivery requires refiners accredited to internationally recognised good delivery standards, which few Indian refiners hold.
    6. Investor protection in a leveraged market: Retail participants trade leveraged contracts they may not fully understand. e.g. the negative settlement of crude oil futures in April 2020 imposed large losses on Indian retail participants holding long positions.
    7. Weak farmer linkage: The agricultural segment does not reach the producers it is meant to protect. e.g. participation by farmer producer organisations in agricultural futures remains a very small share of turnover.

    Way Forward

    1. Phase the entry with position limits: Admit foreign portfolio investors in stages with commodity wise position limits, so liquidity builds without allowing concentrated control of a contract.
    2. Strengthen surveillance: Build cross market surveillance linking futures positions with warehouse stocks and physical trade data to detect manipulation early.
    3. Deepen delivery infrastructure: Expand accredited warehouses, vaults and assaying laboratories so physical settlement scales with volume.
    4. Allow domestic institutional hedgers: Permit banks, insurers and pension funds calibrated access, so foreign capital is not the only source of institutional depth.
    5. Stabilise policy: Commit to a rule based framework for suspending a contract, so intervention is predictable rather than discretionary.
    6. Rationalise transaction cost: Review the commodity transaction tax and stamp duty structure to remove the incentive to hedge offshore.
    7. Extend hedging to the producer: Support aggregation through farmer producer organisations and small industry associations so hedging reaches beyond large firms.

    Matching Previous Year Question

    “[2021] Consider the following:
    1.Foreign currency convertible bonds
    2.Foreign institutional investment with certain conditions
    3.Global depository receipts
    4.Non-resident external deposits
    Which of the above can be included in Foreign Direct Investments?
    (a) 1, 2 and 3
    (b) 3 only
    (c) 2 and 4
    (d) 1 and 4
    Answer: (a)”