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Subject: Economics

  • RBI faces liquidity deluge as surplus climbs to 4-yr high of Rs 10.3 lakh crore

    Why in the News

    Banking system liquidity has climbed to a four-year high of about Rs 10.3 lakh crore on 3 September, its highest level since May 2022. The surplus is the direct product of the Reserve Bank of India’s (RBI) special US dollar-rupee forex swap facility, which drew foreign exchange inflows of $136.377 billion through 31 August. The RBI has closed that window ahead of schedule, leaving the swap usable only until 11 September. The tension is that an instrument run to defend the currency has produced a rupee overhang large enough to push overnight rates down at a moment when the Monetary Policy Committee expects headline inflation to peak. The central bank must now drain the surplus without triggering a sharp rise in interest rates or unsettling the government securities market.

    How does the special dollar-rupee swap window work?

    1. The transaction: Banks sell dollars to the RBI against rupees today, with an agreed reverse leg at a fixed future date, so the RBI takes the foreign exchange and releases rupees into the system.
    2. Where the dollars came from: Banks raised them by mobilising Foreign Currency Non-Resident (Bank), or FCNR(B), deposits, which accounted for $127.226 billion of the total mobilisation.
    3. The concession that made it attractive: The deposits were exempted from the Cash Reserve Ratio (the share of deposits a bank must park with the RBI) and the Statutory Liquidity Ratio (the share it must hold in specified securities), so the rupees released landed unencumbered.
    4. The window’s closure: The deposit scheme ended on 31 August, and banks may use the dollar swap facility only until 11 September.

    How large is the surplus, and how fast did it build?

    1. The record: The liquidity surplus in the banking system hit a fresh record on 3 September, surpassing the previous high of Rs 9.7 lakh crore set a day earlier.
    2. The pace of the build-up: The daily average surplus stood at Rs 3.67 lakh crore in August, more than three times July’s Rs 1.07 lakh crore.
    3. The second source: Liquidity released through the RBI’s own foreign exchange operations added to the swap inflows, leaving a large pool of rupee funds chasing limited avenues for deployment.

    Who raised the money?

    1. Private banks took the largest share: Private sector lenders netted $61 billion, or 46.9 per cent of the $130 billion counted to 3 September.
    2. Public sector banks came second: State-owned lenders raised $37 billion, a 28.5 per cent share.
    3. Foreign banks took the remainder: Foreign lenders picked up $32 billion, or 24.6 per cent.
    4. The tally is provisional: The final figure is likely to run higher once the data is fully captured.

    Why is a surplus a problem for the central bank?

    1. It drags the operating rate down: A large surplus puts downward pressure on the overnight money-market rate, including the repo rate, unless the RBI actively absorbs it.
    2. It works against the inflation stance: Cheap overnight money can push inflation levels up, at a time when members of the Monetary Policy Committee have indicated that headline inflation is projected to peak as high as 5.9 per cent in Q3 2026-27 and that a case for a rate hike may emerge.
    3. It runs against the global direction: Global central banks are keeping rates high or tightening cautiously, because inflation from energy and geopolitical shocks remains above target even as growth weakens.
    4. The absorption itself carries risk: Draining the excess cannot be done in a way that triggers a sharp rise in interest rates or unsettles the government securities market.

    What is the RBI doing about it?

    1. It shut the window early: The swap scheme was stopped ahead of schedule. An official position two weeks earlier had stated there was no intention to do so.
    2. It is absorbing through auctions: A 30-day variable rate reverse repo of Rs 7 lakh crore was announced on 4 September, an auction in which the RBI borrows surplus funds from banks for a fixed term at a market-determined rate.
    3. A reserve requirement change is under discussion: Near-term options include a temporary Cash Reserve Ratio hike or the Incremental Cash Reserve Ratio first used in 2023.
    4. One tool may not suffice: The assessment on record is that mopping up the surplus is a challenge and that the RBI may have to employ a range of liquidity absorption tools rather than one.

    What could deepen or offset the surplus?

    1. The projected peak: CareEdge Ratings expects core liquidity to rise from Rs 8.1 lakh crore as of mid-August to closer to Rs 13-14 lakh crore by December-end in the absence of liquidity management operations.
    2. Festive currency demand pulls the other way: Currency in circulation could rise by around Rs 1.1 lakh crore from June levels by December during the festive season.
    3. The forward book drains more: Maturing RBI short positions in the forwards market create an additional drag of around Rs 3 lakh crore, against a short-forward book maturing of $22 billion in three months.
    4. Reserve accretion adds a smaller drain: Cash Reserve Ratio accretion on deposit growth should reduce core liquidity by a further Rs 70,000 crore.

    What does the surplus do to bank funding?

    1. Money market rates are already falling: Interest rates on certificates of deposit are declining as banks holding the new deposits stay away from bulk borrowings.
    2. Large banks have saved on funding: The bigger banks are estimated to have saved about 25 to 60 basis points in incremental cost of deposits in August as they shed bulk funds.
    3. The benefit spreads unevenly: Smaller banks and non-banking financial companies gain through cheaper money market funding, and the surplus itself is not evenly distributed among lenders.

    Challenges to the special swap window

    1. The inflow is debt and it matures: The deposits are repayable, so this year’s balance of payments gain converts into an outflow when they come due. Eg. Repayments begin in 2029, against a short forward book of $200 billion already lined up.
      The Fix: Build the repayment schedule into the reserve adequacy target and stagger maturities through a partial rollover window opened well before 2029.
    2. Reversing the reserve exemption carries a credibility cost: Imposing a cash reserve requirement on deposits raised on an explicit exemption unwinds the term on which banks accepted the scheme. Eg. A temporary or incremental reserve ratio hike is among the absorption tools under discussion.
      The Fix: Exhaust longer tenor auction absorption before touching the exemption, and announce any change with a fixed sunset date.
    3. The mobilisation is concentrated in a few balance sheets: Nearly half the money sits with private lenders, so both the funding advantage and the eventual repayment risk are clustered. Eg. Smaller lenders gain only indirectly, through cheaper money market rates.
      The Fix: Require bank-wise disclosure of the swap position and its maturity profile in the regulatory returns.
    4. The scheme substitutes for structural inflows: A one-off deposit window fills the external account in a year when nothing has changed to attract durable foreign investment. Eg. A flight to safety in global markets would leave India unable to raise incremental inflows at any price.
      The Fix: Keep a standing, smaller swap facility open through the cycle, so mobilisation is not bunched into a single crisis window.

    Conclusion

    The RBI has ended one problem by creating its mirror image, and the currency defence now sits on the wrong side of the inflation mandate. The immediate marker is the outcome of the term absorption auctions and whether the reserve ratio is touched before the festive season drains currency out of the system on its own. The larger question opens at the far end of the deposit tenor, when the money raised in this window has to be sent back out. Every absorption tool used until then buys time rather than closing the external gap the window was opened to cover.

    Back2Basics: Foreign Currency Non-Resident (Bank) deposit

    1. What it is: A term deposit held with an Indian bank by a non-resident Indian or a person of Indian origin, denominated in a permitted foreign currency rather than in rupees.
    2. Who carries the exchange risk: Principal and interest are repayable in the same foreign currency, so the depositor bears no rupee depreciation risk and the bank or the central bank carries it.
    3. Tenor: Deposits are accepted for terms of one year to five years.
    4. Regulation: The RBI sets ceilings on the interest rate banks may offer, fixed against a reference benchmark rate for the currency concerned.

    Matching Previous Year Question

    “[2010] When the Reserve Bank of India announces an increase of the Cash Reserve Ratio, what does it mean? (a) The commercial banks will have less money to lend (b) The Reserve Bank of India will have less money to lend (c) The Union government will have less money to lend (d) The commercial banks will have more money to lend (a)”

  • Does inflation targeting work in India?

    Why in the News

    India has completed a decade of inflation targeting as the formal policy framework of the Reserve Bank of India (RBI). An empirical evaluation of that decade finds India’s New Keynesian Phillips Curve effectively flat on data from April 2012 to March 2026, meaning output and inflation do not move together as the framework assumes. The same evaluation finds household inflation expectations running consistently above the RBI’s own projections, on average by four percentage points. Both findings attack the framework at the same place, since inflation targeting works through exactly these two channels. The consequence claimed is that rate action compresses output and employment without a commensurate reduction in inflation.

    How is inflation targeting supposed to work?

    1. The mandate: The RBI is required to contain inflation at 4 per cent within a band of plus or minus 2 percentage points.
    2. The demand channel: The RBI raises its policy rate of interest, the repo rate, when inflation rises. That pushes commercial banks’ lending rates up, households become wary of taking home and consumer loans, and businesses postpone building factories.
    3. The expectations channel: Expectations of higher inflation tomorrow raise inflation today, because firms build them into pricing decisions and workers into wage decisions. Anchoring expectations to the RBI’s projected path is meant to break that loop.
    4. The relationship both channels run through: The New Keynesian Phillips Curve links the level of output in an economy to inflation, and it is the mechanism through which either channel is supposed to deliver disinflation.

    What does the curve assume about wages?

    1. Prices are a markup over costs: Where wages are the main cost, a rise in wages passes into prices directly.
    2. Output is assumed to strengthen workers: A rise in output and employment is assumed to let workers demand more in real terms for the same hours, so the wage demand curve slopes upward with output and the price curve follows it.
    3. Expectations set the curve’s position: A worker negotiating a money wage today for goods bought later must price in expected inflation, so a higher expected price level shifts the whole wage demand curve and the price curve upward.
    4. Bargaining power sets its slope: The position of the curve is determined by expectations and its slope by the bargaining power of workers and firms, so the framework’s two levers map onto those two properties.

    What do the data show?

    1. The test: Monthly data on industrial output, measured by the Index of Industrial Production (IIP), the volume index of factory, mining and electricity output, was plotted against CPI-C inflation, the combined rural and urban consumer price index on base 2012, for April 2012 to March 2026.
    2. The construction: The output gap is measured as de-seasonalised IIP minus trend IIP, and the inflation variable as the first difference of CPI-C inflation, so the common time trend that produces spurious correlations is removed before any relationship is read.
    3. The result: The best-fit trend line shows India’s curve is at best flat, meaning changes in the output gap are not associated with changes in inflation.
    4. The finding is not an artefact of one method: The underlying academic work published in the Economic and Political Weekly finds the curve flat under multiple configurations and methodologies.

    Why is India’s curve flat?

    1. Most workers do not set wages: Around 92 per cent of workers have no bargaining power and are simply price takers.
    2. The assumed link therefore breaks: Wages do not rise with output and employment, so the rising wage demand curve on which the whole relationship rests does not exist in this economy.
    3. The consequence for policy: Compressing demand slides the economy along a flat line, which costs output without buying disinflation.

    Do household expectations track the RBI’s projections?

    1. What is surveyed: The RBI asks households for their inflation expectations a quarter ahead and one year ahead through its Inflation Expectations Survey.
    2. The gap against projections: Household expectations run consistently higher than the RBI’s own projections, on average by a margin of four percentage points.
    3. The gap against outturns: The same gap holds when expectations are plotted against actual inflation rather than against projections, so it is not an artefact of projection error.

    What follows if both assumptions fail?

    1. Route one is closed: Sliding the economy down the curve delivers falling output with no matching fall in inflation, because the line is flat.
    2. Route two is closed: Shifting the curve downward requires household expectations to move with the central bank’s projections, and they do not.
    3. The combination that results: Output falls, inflation stays where it is, and the outcome resembles stagflation rather than disinflation.
    4. Who carries the cost: The burden of a demand compression that produces no disinflation falls on employment, in a workforce that has no wage bargaining power to recover it.

    Challenges to flexible inflation targeting in India

    1. The targeted index is driven by supplies the rate cannot reach: Food and fuel carry a heavy weight in the headline consumer price index, and a policy rate has no effect on a monsoon or a crude price. Eg. A rate increase cannot move vegetable prices during a supply shock.
      The Fix: Set the operational stance against a core measure and treat food spikes through buffer stock releases and import duty action.
    2. Transmission reaches only part of the credit market: A repo change passes quickly to loans linked to an external benchmark and slowly to deposit rates and older loans. Eg. External benchmark linking covers floating rate retail and small business loans, not the whole loan book.
      The Fix: Extend external benchmark linking further and publish transmission data by loan category with each policy review.
    3. The framework has no instrument for the employment cost: The statutory objective names price stability first and growth second, so a flat curve leaves the entire adjustment burden on output. Eg. A rate cycle records its inflation outturn but not the jobs foregone during it.
      The Fix: Publish an estimate of the output and employment cost alongside every rate decision, so the trade-off is on the record.
    4. Expectations are formed outside the central bank’s reach: Households form price expectations from grocery bills rather than from a policy statement, so communication does not anchor them. Eg. The survey’s respondents run persistently above the projected path.
      The Fix: Broaden the expectations survey to report by income group and publish the survey design, so the anchoring claim becomes testable.

    Conclusion

    The dispute is no longer about the level of the target but about whether the mechanism connecting the policy rate to prices exists in this economy. The unresolved tension is between a framework designed for a market where wages respond to output and a labour force where almost all workers are price takers. Ten years of data are now available to settle it, and the statutory review of the framework is where that evidence has to be confronted. Whether the central bank revises its model or continues to force-fit it is the thing to watch.

    Matching Previous Year Question

    “[2024, GS3, 10 marks] What are the causes of persistent high food inflation in India? Comment on the effectiveness of the monetary policy of the RBI to control this type of inflation.”

  • [7th September 2026] The Hindu OpED: India’s unemployment data dilemma

    [7th September 2026] The Hindu OpED: India’s unemployment data dilemma

    Question (2023, GS3): “Most of the unemployment in India is structural in nature. Examine the methodology adopted to compute unemployment in the country and suggest improvements.
    Linkage: This is the most direct match. The transition to high-frequency monthly indicators based on CWS directly challenges how India computes its unemployment. CWS captures employment status over a short seven-day reference period (which is why seasonal peaks like the kharif sowing season show a temporary drop to 5.1%), but it fails to address the underlying structural nature of informal underemployment.

    Mentor Comment

    India has converted its official unemployment estimate from a quarterly and yearly release into a monthly indicator, measured on the Current Weekly Status approach. The latest Periodic Labour Force Survey (PLFS) reports the unemployment rate for those aged 15 years and above at a four-month low of 5.1 per cent in July. The review period coincided with the peak of the kharif season, when demand for agricultural labour rises for land preparation and transplanting. The tension is that a higher frequency reading is being asked to measure a labour market where roughly 90 per cent of the workforce is informal and tens of millions of workers circulate seasonally. A rate can be published every month without becoming a measure of the quality of work behind it.

    What is the Periodic Labour Force Survey, and what changed?

    1. What it is: The Periodic Labour Force Survey is the household survey through which India produces its official employment and unemployment estimates.
    2. The reference period: Under the Current Weekly Status (CWS) approach, a person’s activity status is determined on the basis of the preceding seven days.
    3. What the change is: The survey has moved from quarterly and yearly unemployment data to a monthly indicator, raising the frequency of the headline rate without altering the sample’s household basis.

    What does the July reading actually show?

    1. The headline: The unemployment rate for those aged 15 and above marked a four-month low.
    2. The rural share of the move: The overall decline was owing to rural areas, where unemployment fell to 4.5 per cent from 5 per cent.
    3. A supply side signal: The month recorded an increase in the labour force participation rate, meaning a larger share of the working age population entered the labour market.

    Why is a seasonal reading not a structural improvement?

    1. The month is the agricultural peak: July hiring rises for land preparation, transplanting and allied activities, so the decline reflects the calendar rather than a turn in the market.
    2. The affected sectors are the seasonal ones: Construction, agriculture, small trade, logistics and local services all fluctuate seasonally, and the fall concentrates there rather than in formal sector jobs.
    3. A falling rate can mark distress: A decline in unemployment can indicate distress-driven entry into low-productivity jobs rather than genuine employment creation.
    4. The correct status of the number: A monthly unemployment figure functions at best as a leading indicator, not as a comprehensive measure of labour market health.

    Why does informality defeat a high-frequency headline rate?

    1. The scale of the informal market: Various reports place around 90 per cent of the population in informal work, where wage payments are negotiated informally rather than contracted.
    2. The workers the frame misses: Independent labour studies estimate 30 to 35 million seasonal labourers moving across India annually, forming the backbone of urban construction and infrastructure.
    3. Underemployment does not register: Disguised employment and underemployment are widespread, and neither shows up in a status that records whether a person worked.
    4. The granularity is missing: Data is sketchy on wage growth, hours worked, job quality, occupational shifts and sector-wise employment trends, so the rate carries no information about the nature of the job.

    What do mature labour markets do differently?

    1. The common benchmark: Most advanced nations count unemployment through a Labour Force Survey built on the definition of the International Labour Organization (ILO), which fixes what counts as employment, unemployment and labour force participation.
    2. The depth behind the number: The United States, Japan, the European Union and the United Kingdom hold decades of household survey data carrying full-time versus part-time status, hourly wages, job duration, labour mobility and unemployment spells.
    3. The administrative spine: Those markets run payroll surveys, unemployment insurance records, formal contracts and extensive administrative databases alongside the survey, so the headline rate is corroborated rather than standalone.

    Can administrative data close the gap?

    1. The sources already exist: Employees’ Provident Fund Organisation and Employees’ State Insurance Corporation payroll data, Goods and Services Tax based enterprise information, income tax records, corporate payroll data, gig economy employment data and rural wage indicators are all being built up.
    2. They do not yet speak to each other: These sources remain fragmented, so none can be used to cross-check the survey’s monthly movement.
    3. The gap they would close: A large informal employment market is difficult to track through a household survey alone, which is precisely the market these registers touch at the formal edge.

    Challenges to the revamped Periodic Labour Force Survey

    1. A short reference period counts any work as employment: A person engaged for as little as an hour on a single day in the reference week is recorded as employed, so a full-time job and a day of casual work carry the same weight. Eg. Unpaid work in a family enterprise is counted as employment.
      The Fix: Publish hours worked and earnings distributions alongside the headline rate, so the composition of employment is visible.
    2. The household frame loses the circulating worker: A survey records a person at their usual residence, so a worker moving between a home district and a distant worksite can be missed at both ends. Eg. Urban construction runs on labour that its home district still records as resident.
      The Fix: Link the survey frame to social security registration numbers, so a worker traced at the destination is not lost at the origin.
    3. Unemployment is the wrong headline where there is no income support: Without unemployment insurance a worker cannot afford to remain unemployed, so joblessness appears as low-paid self-employment rather than in the rate. Eg. A person selling goods on the street with no earnings floor is counted as employed.
      The Fix: Publish an underemployment and working poverty series with each monthly release.
    4. Monthly sampling limits disaggregation: A monthly sample supports a national and rural-urban split, not a State, district or occupational reading. Eg. The release carries no monthly breakdown by sector or by occupational shift.
      The Fix: Pool three consecutive monthly rounds into a rolling State level estimate published alongside the headline.

    Conclusion

    A statistical system has been made faster without being made deeper, and the two are not substitutes. The unresolved question is whether the survey will be judged on how often it reports or on whether it captures the working lives of a largely informal workforce. Frequency answers a demand from markets and commentary; job quality answers the policy question of whether participation is converting into stable, higher-productivity work. Until the administrative registers are integrated into a single frame, the monthly rate will keep being read as a verdict it cannot deliver.

    Back2Basics: International Labour Organization

    1. Formation: Established in 1919 under the Treaty of Versailles, and it became the first specialised agency of the United Nations in 1946.
    2. Headquarters: Geneva, Switzerland.
    3. Structure: It is the only tripartite United Nations agency, bringing together governments, employers and workers of member States with equal standing in its decision making.
    4. Why it matters here: Its conferences of labour statisticians set the international statistical definitions of employment, unemployment and the labour force that national surveys are benchmarked against.
  • Lost and found: An ‘A’ for India’s long game

    Lost and found: An ‘A’ for India’s long game

    Why in the News

    The Japan Credit Rating Agency has upgraded India’s long-term sovereign rating from BBB+ to A-, and raised the country ceiling to A. The upgrade is unsolicited, meaning the agency issued it without India commissioning or negotiating it. India last held an A-grade in January 1988, when Moody’s assigned it an A2 rating. That grade was lost when the borrowing fuelled growth of the 1980s ended in the balance of payments crisis of 1991. The contested question is whether a single external verdict marks a structural shift, since three of the largest agencies still hold India below the A band.

    What is a sovereign credit rating?

    1. What it measures: A sovereign credit rating is an independent assessment of a country’s creditworthiness, expressed as a letter grade standing for a probability of default.
    2. The scale: Grades run from AAA down to junk, with BB+ and below classified as non-investment grade.
    3. What agencies assess: The inputs are institutional strength and governance, economic structure and growth, external accounts and reserve adequacy, the fiscal position and debt path, and monetary flexibility.
    4. Why it moves money: Ratings are embedded in bank capital rules under Basel III (the global bank capital standard), so an upgrade lowers the risk weight banks must carry against government debt. Lower risk weights raise demand for sovereign bonds and cheapen funding.

    How did India lose the A-grade, and why did the return take 36 years?

    1. The 1980s growth was borrowed: The central government’s fiscal deficit reached 9.1 per cent of GDP and the current account deficit rose to 3.1 per cent of GDP in FY 1989-90.
    2. Political churn delayed the correction: Three prime ministers in as many years pushed reform out of reach, and no prospect of fiscal rectitude was in sight.
    3. The external shock arrived on top: The First Gulf War and rising oil prices produced the balance of payments crisis.
    4. The downgrade came in two steps: India was cut to Baa1 by October 1990. By mid-1991 reserves barely covered a few weeks of imports and the rating fell to non-investment grade.
    5. Recovery did not restore the grade: Credible progress across successive governments followed, and thirty-six years passed before an A-grade was accepted again.

    What did the Japan Credit Rating Agency actually cite?

    1. Growth and its composition: The agency cited a high growth rate of around 7 per cent, supported by robust private consumption and public investment.
    2. Tax action as a support: It named personal income-tax cuts and reductions of Goods and Services Tax rates, with the economy growing 7.7 per cent in real GDP terms.
    3. Bank balance sheets: It cited the banking sector’s gross non-performing loan ratio declining to 1.8 per cent, supported by the Insolvency and Bankruptcy Code and capital injections by the government.
    4. The character of the list: Almost every item cited is structural rather than cyclical, which is what separates a rating upgrade from a reaction to a good quarter.

    Does the new GDP series survive scrutiny?

    1. The quarter behind the upgrade: First quarter estimates for 2026-27 recorded real GDP growth of 7.8 per cent, nominal growth of 10.3 per cent, real Gross Value Added growth of 8.2 per cent, and gross fixed capital formation growing 11.9 per cent.
    2. Revision is routine, not novel: India has revised its national accounts series in 1948-49, 1960-61, 1970-71, 1980-81, 1993-94, 1999-2000, 2004-05, 2011-12 and 2022-23.
    3. What the revision fixed: The old series carried an outdated base year and relied on wholesale rather than producer prices, both flagged in International Monetary Fund assessments. The new series introduces an Output Producer Price Index, adopts double deflation across sectors including manufacturing, and aligns India closer to the System of National Accounts (SNA) 2008 (the international standard for compiling national accounts).
    4. The official position on the charge of inflation: The Ministry of Statistics and Programme Implementation has stated that the revisions do not represent a downward revision made to make the current year’s growth appear higher, and that the improved implicit deflator now carries more than 300 individual price deflators.

    Why is the upgrade significant beyond the letter grade?

    1. It is an external verdict: An unsolicited upgrade is delivered rather than negotiated, so it cannot be presented as the product of official persuasion.
    2. It validates pooled sovereignty: The rating rests on institutions built through Centre-State consensus, the GST Council foremost among them, whose pooling of taxation powers has no true parallel elsewhere.
    3. It should reprice risk in boardrooms: A lower risk premium enters the calculations where foreign direct investment decisions are actually taken, which augurs well for inward capital flows.

    Where the rating methodology itself is contested

    1. The framework carries judgement, not only data: The assessment model is opaque at the point where committee judgement enters, and the resulting grade cannot be replicated from published inputs.
    2. Fast growing emerging markets are penalised: The predilections built into the process have downgraded economies carrying low external debt and sound macroeconomic frameworks.
    3. The divide runs along territorial lines: A duality of standards based on where economic activity is located separates advanced economies from the Global South in the outcomes.
    4. Even AAA borrowers organise around the grade: The World Bank and several sovereign governments manage their balance sheets around retaining a rating, which shows how much the letter governs behaviour.

    Where do the other agencies stand?

    1. Three still hold India below the A band: S&P Global rates India BBB, Moody’s Baa3 and Fitch BBB-.
    2. The upgrade works as pressure: Agencies are wary of being conspicuous outliers, so one move raises the cost of holding a divergent view.
    3. Six firms set the price of capital: S&P Global, Moody’s, Fitch, the Japan Credit Rating Agency, R&I of Japan and Morningstar DBRS dominate sovereign assessment, in an industry dating to 1909 when John Moody began grading American railroad bonds.

    Challenges to the A- upgrade

    1. A single agency’s move does not reset the cost of borrowing: Investor mandates and bank capital rules key off the larger agencies, so funding costs shift only when the others follow. Eg. Indian issuers still price external debt against grades set one to three notches lower.
      The Fix: Publish a point by point rebuttal of each agency’s stated assessment, so a divergent grade has to be defended on the record.
    2. External shocks sit outside the rating’s control: A grade earned on structural reform can be tested by a price the economy does not set. Eg. Tariff frictions, tensions in West Asia and elevated oil prices ran alongside this upgrade.
      The Fix: Hold the reserve buffer and the fiscal glide path independently of the rating cycle, so the grade is not defended by procyclical tightening.
    3. Capital follows enforcement rather than a letter grade: A lower risk premium converts into investment only where contract enforcement and clearances are predictable. Eg. The agency itself credited a statutory change, the Insolvency and Bankruptcy Code, for the cleaner bank balance sheets it cited.
      The Fix: Extend the same statutory approach to contract enforcement, with time bound disposal in commercial courts.
    4. Assessment is concentrated in a handful of committees: A small set of firms prices capital for the entire Global South, and their method is not open to challenge. Eg. Even a multilateral lender orders its balance sheet around retaining its own top grade.
      The Fix: Build a credible rating agency headquartered in the Global South with a published and replicable methodology.

    Conclusion

    India holds one A-grade rating and three grades below it, and the gap is now the operative fact rather than the upgrade. The next test is whether the other large agencies move, since a rating changes funding costs only when the market’s benchmark grades change with it. The second test is whether the lower risk weight shows up as cheaper borrowing for Indian issuers rather than as a headline. The deeper question the upgrade leaves untouched is who gets to set the method by which a fast growing economy is judged.

    Back2Basics: Insolvency and Bankruptcy Code, 2016

    1. What it is: A single consolidated law for the time bound resolution of insolvency for companies, partnerships and individuals, replacing a scattered set of earlier debt recovery laws.
    2. How the process runs: A committee of creditors takes charge of the defaulting company through a licensed resolution professional and votes on a resolution plan, with liquidation as the outcome where no plan is approved.
    3. The forum: The National Company Law Tribunal adjudicates corporate insolvency, and the Debt Recovery Tribunal handles individuals and partnership firms.
    4. The regulator: The Insolvency and Bankruptcy Board of India regulates insolvency professionals, agencies and information utilities under the Code.

    [2019, GS3, 10 marks] Do you agree with the view that steady GDP growth and low inflation have left the Indian economy in good shape? Give reasons in support of your arguments.

  • Why is BRICS exploring cross-border payments?

    Why in the News

    The 18th BRICS summit in New Delhi, with India as Chair, is expected to push for mechanisms to settle payments between members, including links between national digital payment systems and central bank digital currencies (CBDCs), which are digital versions of a national currency issued by its central bank. Finance ministry and central bank representatives from member countries met at Jaipur on August 12-13 to discuss financial cooperation, payments and the wider use of national currencies in settling trade between members. The push follows a 2024 BRICS report under Russia’s chairmanship, which argued that this part of the financial system is monopolised by a single institution and that the monopoly raises transaction costs. India has framed its own proposal as a way of cutting costs and speeding settlement rather than as a move away from the dollar. The tension is that every workable alternative needs a critical mass of banks and regulators to join before it saves anyone money, and the members most eager to build one are the members others are most wary of joining.

    How does a cross-border payment move today?

    1. The chain of correspondents: Money does not travel directly between the buyer’s bank and the seller’s bank. It moves through a series of correspondent banks that hold accounts with each other. Eg. An importer in Cape Town paying an exporter in Chennai is routed through a larger international bank typically headquartered in London or New York.
    2. The dollar as a vehicle: Very few banks hold both rupees and rand, so the payment is converted from rand to dollars and then from dollars to rupees, with no American party to the trade.
    3. Messaging is separate from settlement: The instructions travel over SWIFT, the Society for Worldwide Interbank Financial Telecommunication, a Belgium-based cooperative overseen by the National Bank of Belgium along with the G-10 central banks including the U.S. Federal Reserve. It carries payment instructions; the money is settled separately.
    4. Why the network is hard to displace: SWIFT is used directly by more than 11,000 institutions in over 200 countries, and smaller banks reach it indirectly through larger member banks.

    What does the chain cost?

    1. Foreign exchange margins are paid twice: Every intermediary charges a fee, and the two currency conversions mean the exchange margin is taken on both legs.
    2. The measured margins: A 2019 BRICS survey of cross-border payment systems conducted by Brazil found Brazilian respondents reporting foreign exchange margins of 2.5 per cent, rising to 8.5 per cent for payments into Africa and in some cases as high as 20 per cent.
    3. The network has thinned: The Bank for International Settlements (BIS) found active correspondent banking relationships fell by 20 per cent between 2011 and 2018, with regional declines ranging from 12 per cent to 30 per cent and Latin America worst affected. The reasons were largely commercial, since payment volumes kept growing through the same period.
    4. Speed is no longer the binding problem: SWIFT states that its Global Payments Innovation service has cut transaction times substantially, and the remaining delays are structural rather than a function of chain length.

    Why does BRICS want to change this system?

    1. Exposure to other countries’ monetary policy: Settling in a handful of dominant currencies, the U.S. dollar, the euro and the Japanese yen, exposes developing economies to policy decisions taken by the issuing countries.
    2. The stated cost argument: The 2024 BRICS report held that concentration of the messaging layer in one institution raises what every participant pays to transact.
    3. Sanctions are the sharpest driver and the sharpest deterrent: Several Russian banks were cut off from SWIFT in 2022 following Russia’s invasion of Ukraine. Sanctions-hit Russia has pushed hardest for an alternative, and that is also the reason other members are wary of joining one.
    4. The adoption problem: An alternative rail is useful only once a large number of banks and regulators have joined it, and a bank that uses one to deal with sanctioned entities risks sanctions itself.

    What alternatives are on the table?

    1. Bilateral linkage of national systems: Two countries can connect their domestic payment systems directly, avoiding correspondent banks and dollar conversion. Eg. India and Singapore have linked the Unified Payments Interface with PayNow for remittances. Building such links pair by pair does not scale.
    2. A shared hub: Project Nexus, designed by the BIS and handed to a company set up by six central banks including the Reserve Bank of India, lets each country join one connection rather than many. It goes live only in 2027 and is not a BRICS initiative.
    3. CBDC settlement on a common platform: Central banks issue digital versions of their currencies for use between banks, a settlement asset distinct from the retail digital rupee held by individuals, and exchange them on one platform. Both legs of a currency swap occur at the same instant or not at all, which removes the risk of paying out before the other side pays and cuts the capital banks must set aside.
    4. The one platform running today: mBridge, built by the BIS with the central banks of China, Thailand, Hong Kong and the UAE, was handed to its participants when the BIS left in October 2024. Over 95 per cent of its settlement volume is in China’s digital yuan, according to People’s Bank of China figures.
    5. The BRICS-specific proposal: The Kazan declaration of 2024 agreed to discuss and study the feasibility of an independent settlement system called BRICS Clear. The Rio declaration the following year did not mention it.

    What is India’s position?

    1. The proposal: India has proposed that members link their CBDCs for trade and tourism payments, extending the linkage idea from retail systems to central bank money.
    2. The framing is deliberate: Indian officials have consistently presented the payment systems as a means of cutting transaction costs and speeding settlement, not as an initiative to displace the dollar.
    3. Other members have gone further: Russian proposals, and those of some Brazilian economists, have moved towards alternative financial systems explicitly aimed at reducing dependence on the dollar.
    4. The reason for the caution: In November 2024 the U.S. President threatened 100 per cent tariffs on BRICS countries that moved away from the dollar, and a further 10 per cent on countries aligning with vaguely defined anti-American BRICS policies. The threats were not carried out.

    Challenges to a linked BRICS payment system

    1. Domestic rails are not built alike: Member systems differ in message formats, operating hours and rules on when a payment becomes final, so linking them forces each participant to change domestic infrastructure. Eg. The Unified Payments Interface settles instantly and around the clock. Several member country systems settle in batches on business days only.
      The Fix: Require every participant to migrate to the ISO 20022 messaging standard and extend operating windows so linked systems overlap for a common settlement period.
    2. Most member currency pairs have no liquid market: Settling directly in national currencies needs someone willing to hold and convert the receiving currency, which does not exist for most BRICS pairs. Eg. Indian exporters accumulated rupee balances in special vostro accounts under the rupee trade settlement mechanism that counterparties could not readily deploy.
      The Fix: Establish central bank swap lines and designated market makers for the main pairs, so balances can be converted rather than parked.
    3. One platform needs one rulebook: Customer verification, anti money laundering standards and dispute resolution differ across members, and a shared platform cannot function on several standards at once. Eg. Financial Action Task Force grey listing constrains banks anywhere from dealing with counterparties in a flagged jurisdiction.
      The Fix: Agree a common rulebook and a named dispute resolution seat before the platform carries live value rather than after.
    4. CBDC readiness is uneven across members: A linkage of central bank digital currencies cannot include a member whose currency has not reached production. Eg. India’s wholesale and retail digital rupee pilots began in 2022 and remain pilots.
      The Fix: Sequence the linkage in waves, beginning with members whose wholesale CBDC is already in live operation.

    Conclusion

    The grouping has no shortage of proposals and a shortage of commitment. Every model on the table asks members to surrender something domestically, either control over settlement or their own infrastructure standards, before any of them saves a rupee. The declarations so far have moved in the opposite direction, agreeing to study a settlement system in one year and passing over it the next. The New Delhi summit is where the members either name one model and a date for it or repeat the study language a third time.

    Back2Basics: Bank for International Settlements

    1. Established in 1930 and headquartered at Basel, Switzerland, it is the oldest international financial institution.
    2. It is owned by 63 member central banks, including the Reserve Bank of India, and functions as a bank for central banks rather than for governments or individuals.
    3. It hosts the committees that set global financial standards, including the Basel Committee on Banking Supervision.
    4. Its Innovation Hub builds payment and settlement prototypes and hands them over to participating central banks, which is how both mBridge and Project Nexus were created.

    Matching Previous Year Question

    “With reference to the Central Bank digital currencies, consider the following statements: 1. It is possible to make payments in a digital currency without using US dollar or SWIFT system. 2. A digital currency can be distributed with a condition programmed into it such as time-frame for spending it. Which of the statements given above is/are correct? (a) 1 only (b) 2 only (c) Both 1 and 2 (d) Neither 1 nor 2”

  • The economy, its math and politics

    Why in the News

    A former Economic Affairs Secretary in the Ministry of Finance has claimed that nominal Gross Domestic Product (GDP) growth in the first quarter of 2026-27 was 2.6 per cent, against the 10.3 per cent estimated by the Ministry of Statistics and Programme Implementation (MoSPI). Adjusted for inflation of 2 to 2.5 per cent, that arithmetic puts real growth at zero rather than at the official 7.8 per cent. The claim was built by comparing the April-June 2025 GDP level computed on the old 2011-12 base year with the April-June 2026 level computed on the 2022-23 base year that MoSPI adopted in February 2026. Splicing two series produces a growth rate that measures neither of them. The contest is between an official estimate the government spent a week publicly defending and a public mood in which a very low growth number was readily believed.

    What is a base year in GDP computation?

    1. The purpose: A base year fixes the set of prices at which output in every later year is valued, so a change in the measured total reflects a change in volume and not a change in prices.
    2. Nominal against real: Nominal GDP values output at the prices ruling in the year it was produced. Real GDP values that same output at base year prices, which is what makes growth comparable across years.
    3. The worked illustration: A country producing only crude oil sells 10 million barrels at $10 in year 1, giving a GDP of $100 million, then 5 million barrels at $30 in year 2, giving $150 million. Measured at year 1 prices, year 2 output is $50 million, so the economy has contracted by half even though its nominal GDP rose 50 per cent.
    4. What the base year carries: It fixes the relative prices and the weights of the period chosen, and those weights then run through every year of the series.

    Why is the base year revised every five to six years?

    1. Consumption patterns move: What households spend on shifts substantially over a decade, so an old price structure misvalues what the economy now produces. Eg. Telecom tariffs collapsed after 2016 and digital services barely existed as a separate category in 2011-12.
    2. Measurement itself improves: Technology and method allow faster and more precise capture of output and prices than were available when the previous base was set.
    3. Administrative data replaces proxies: The 2022-23 series draws on Goods and Services Tax returns, the Public Financial Management System for central government accounts, e-Vahan for transport spending, and the Annual Survey of Unincorporated Sector Enterprises and the Periodic Labour Force Survey for the informal economy.
    4. Every earlier year is restated: When the base moved from 2011-12 to 2022-23, the GDP values changed for all years from 2011-12 onwards, so growth must be computed between two comparable periods within the new series.

    Where did the disputed calculation go wrong?

    1. The splice: The claim took the April-June 2025 level from the 2011-12 series and the April-June 2026 level from the 2022-23 series, then divided one by the other.
    2. What that number actually measures: A ratio across two series captures the gap between two different valuations of the economy, not the change in output between two quarters.
    3. The office lent the claim weight: The claimant had headed the Department of Economic Affairs and was designated Finance Secretary, which is why the government machinery responded for most of a week rather than ignoring the claim.
    4. The rebuttal crossed party lines: A Congress Rajya Sabha member who is himself critical of the government’s economic management wrote publicly that the arithmetic behind the real growth estimate was not among the things wrong with India’s economy.

    Why did a wrong number travel so far?

    1. Perception ran ahead of the arithmetic: A low growth number was plausible to a section of readers before any of them checked how it was derived.
    2. The protest backdrop: The claim landed during the Jantar Mantar protests, which had already made the government’s economic record a live public argument.
    3. The employability gap: An education system that does not leave its graduates job ready weakens the link between a headline growth number and what people observe.
    4. The demographic pressure: More than a crore young people enter the job market every year, so growth is judged against absorption rather than against output.
    5. Political amplification and its limit: The Congress and several of its leaders amplified the claim. The Leader of the Opposition in the Lok Sabha, a standing critic of the government’s economic policy, did not comment on it.

    Challenges to the 2022-23 GDP series

    1. The deflator is built for goods: Converting nominal output into real output leans heavily on the Wholesale Price Index, which carries no services component at all. Eg. Services are close to 55 per cent of gross value added and are deflated using price indices constructed for wholesale goods transactions.
      The Fix: Complete the Wholesale Price Index base revision and introduce a Producer Price Index, which is the standard deflator in most large economies.
    2. The corporate database carries inactive firms: Private corporate value added is estimated from company filings, which can include shell and dormant entities. Eg. A National Sample Survey Office technical report on the corporate affairs database found a large share of sampled companies untraceable or wrongly classified.
      The Fix: Publish an annual reconciliation of the active company frame against Goods and Services Tax filings before the frame is used for estimation.
    3. Independent verification lags the release: The detailed sources and methods document that lets researchers reproduce the estimates is published well after the series itself. Eg. After the 2011-12 revision, the back series for years before that base remained contested for years, with a committee estimate and the official estimate disagreeing about growth in the 2000s.
      The Fix: Release the sources and methods volume on the same day as the new series rather than as a follow-up publication.
    4. Growth is not tracked by tax collections: High measured nominal growth that is not matched by proportionate corporate tax receipts leaves the estimate open to challenge. Eg. Direct tax buoyancy has repeatedly diverged from nominal GDP growth in years of strong headline expansion.
      The Fix: Publish the nominal GDP to tax base reconciliation alongside quarterly estimates, so the divergence is explained rather than argued over.

    Conclusion

    The arithmetic is settled and the credibility question is not. Two incompatible growth claims about the same quarter circulated side by side because most readers have no way to adjudicate between them. A statistical office that must be publicly defended each time a headline number is disputed is carrying a trust problem that no revision of the base year resolves. The transition to the 2025 System of National Accounts, due by 2029-30, is the next occasion on which that gap is either closed or carried forward.

    What is National Income Accounting?

    1. About: National income accounting is the set of methods used to measure economic activity across a national economy as a whole, producing indicators such as GDP, Gross National Product and Net National Income.
    2. Rationale: National accounts give fiscal policy, monetary policy, welfare targeting and cross-country comparison a single common measurement base.
    3. Named typology, the three methods: The production method sums value added at each stage across agriculture, industry and services. The income method sums rent, wages, interest, profit, mixed income and net income from abroad. The expenditure method totals consumption, investment, government spending and net exports.
    4. Who compiles it in India: The National Statistical Office under MoSPI prepares the estimates using the benchmark indicator method.

    Laws and Rules Governing National Income Accounting

    1. Collection of Statistics Act, 2008: Empowers the Centre, State governments and local bodies to collect statistics on economic, demographic, social, scientific and environmental matters, and makes furnishing the information a legal obligation.
    2. Collection of Statistics Rules, 2011: Prescribe how a statistical collection is notified and how statistics officers are appointed and their powers exercised.
    3. Collection of Statistics (Amendment) Act, 2017: Extended the parent Act to Jammu and Kashmir, closing a jurisdictional gap in national statistical collection.

    Key Facts about National Income Accounting

    1. National Statistics Day is observed on 29 June, the birth anniversary of P.C. Mahalanobis.
    2. MoSPI was created in 1999 by merging the Department of Statistics with the Department of Programme Implementation.
    3. The National Statistical Commission was set up in 2005 on the recommendation of the Rangarajan Commission and remains a non-statutory advisory body.
    4. The first estimate of India’s national income was made by Dadabhai Naoroji in 1868, and the first official post-Independence estimates came from the National Income Committee of 1949.

    Challenges in National Income Accounting

    1. The unorganised economy resists direct measurement: A large share of output comes from unregistered enterprises that file no accounts, so their contribution is surveyed and then projected forward. Eg. The informal sector contributed roughly 45 per cent of gross value added in 2022-23.
      The Fix: Shorten the interval between unincorporated enterprise surveys so projection periods are measured in months rather than years.
    2. Final and intermediate goods are hard to separate: Counting the same output twice inflates the total, and the distinction depends on who buys the good rather than on the good itself. Eg. Flour bought by a bakery is an intermediate input, and the identical flour bought by a household is final consumption.
      The Fix: Extend the Supply and Use Tables framework, which balances production against consumption and forces the discrepancy to surface.
    3. Non-market work is excluded by construction: Subsistence farming, barter and unpaid care work produce real output that no price attaches to, so they never enter the total. Eg. Time use survey data shows women performing several hours of unpaid domestic and care work daily, none of which is counted.
      The Fix: Publish satellite accounts for household and care production alongside the main accounts, as several statistical systems already do.
    4. Natural capital depletion is treated as income: Resource extraction adds to measured output and the loss of the resource is not netted out anywhere. Eg. Groundwater drawn beyond recharge in Punjab and Haryana raises agricultural value added. The stock that produced it shrinks, and nothing in the accounts records the loss.
      The Fix: Build a Green GDP series that deducts resource depletion and pollution costs, reported as a companion to the headline estimate.

    Matching Previous Year Question

    “Explain the difference between computing methodology of India’s Gross Domestic Product(GDP) before the year 2015 and after the year 2015.”

  • A BIT of a reset, with a wider debate

    Why in the News

    India is revising its model bilateral investment treaty (BIT), and the revised text will soon be placed before the Union Cabinet. The Finance Minister signalled the intention to revamp the 2015 Model BIT in the Union Budget speech of 2025. The 2015 model was itself the product of an appraisal launched after several foreign investors sued India for treaty breaches. That appraisal produced two outcomes: unilateral termination of existing treaties, and a new model text as the basis for fresh negotiations. Debate on the current revision has concentrated almost entirely on what the treaty should say. The process by which the text is written has attracted almost no attention, and that is where the democratic deficit sits.

    What is the 2015 Model Bilateral Investment Treaty?

    1. What a model treaty is: A model bilateral investment treaty is the template text a country negotiates from when it concludes investment protection agreements with other countries.
    2. What such a treaty does: It grants legal protections to investors of one country investing in the other. It also gives those investors a route to bring a claim directly against the host state before an international arbitral tribunal.
    3. The two objectives it must balance: Investment treaties sit between investment protection at one end of the spectrum and the state’s right to regulate at the other.
    4. When India adopted it: India circulated a draft in 2015 and adopted the revised version in December 2015.

    Why has the 2015 model produced so few treaties?

    1. The record: India has concluded only a handful of treaties on the basis of the 2015 model in the last decade or so.
    2. The imbalance in the text: The model tilts heavily towards the state’s right to regulate and away from the protection of the investment.
    3. What capital exporting countries read into it: Countries that export capital to India doubt the legal protection available to their investments under such a text.
    4. What compounds the doubt: High regulatory risk, governance models that are not well developed, and a slow judicial system add to that concern.

    What legal changes are being proposed, and what is being left out?

    1. Easier access to arbitration: Experts have argued for making it easier for a foreign investor to take a treaty claim to international arbitration.
    2. Stronger substantive protections: The protections given to foreign investment in the text would be enhanced.
    3. Investment facilitation: The revised model would carry more measures aimed at facilitating investment rather than only protecting it.
    4. The half of the review that is missing: A treaty review has two components, the substantive and procedural changes to the law, and the process followed to make the outcome robust. Only the first has been deliberated.

    What is the democratic deficit in treaty making?

    1. The all-affected principle: International economic treaties have a conspicuous impact on citizens, which raises the question whether those affected should have a right to participate in the decision.
    2. What the term means: Democratic deficit refers to insufficient oversight of the technocrats, bureaucracies and political executive who negotiate treaty frameworks behind closed doors.
    3. Where it originated: The term originated in European debates on the accountability of decision making removed from elected legislatures.
    4. The first form the gap takes: Parliamentary supervision of the treaty making process is absent or inadequate.
    5. The second form: There is no external consultative process with other stakeholders, including subject matter experts and civil society organisations.

    What do other countries do before adopting an investment treaty text?

    1. United Kingdom and Australia: Both mandatorily place the text of a negotiated treaty on the floor of Parliament before ratification, so the legislature can express its views on it.
    2. Norway: Two rounds of public consultation were held on an updated draft model BIT, in 2008 and in 2015.
    3. Colombia: The country released its model BIT for public consultation.
    4. What the set demonstrates collectively: Consultation is applied to the model text itself and not only to a concluded treaty, which means the template a country negotiates from is treated as a public policy document rather than an internal instruction.

    What did India’s own 2015 consultation produce?

    1. The public comment stage: India circulated its draft 2015 model BIT for public comment in March 2015.
    2. The expert study it enabled: That opening allowed the Law Commission of India to assemble a team of experts to study the draft text.
    3. The report: The Law Commission’s 260th report made recommendations on how to improve the draft model treaty.
    4. What was carried through: Not all of the recommended changes were reflected in the version India finally adopted.

    What consultative process is proposed for the revision?

    1. What has presumably already happened: Intra-governmental deliberation on the model text has been undertaken inside government.
    2. A core team of external experts: Form a team outside government of international lawyers and economists drawn from universities, research institutions and think tanks, to act as a sounding board.
    3. Wider stakeholder engagement: Invite industry bodies, arbitrators, law firms and other civil society organisations to offer their views on the model text.
    4. A public draft: Prepare a draft and place it in the public domain, inviting comments from the public at large.
    5. Parliamentary scrutiny: Place the draft model treaty on the floor of Parliament for discussion, and rope in the relevant department related parliamentary committees.
    6. The standard the exercise must meet: The process must engage with dissenting views rather than run as a box ticking formality.

    Challenges to revising the Model Bilateral Investment Treaty

    1. A model text does not bind the counterparty: A model is a negotiating template, so a partner with stronger bargaining power will press its own text and the model’s provisions will be traded away one by one. Eg. Investment provisions have been among the unresolved items in India’s long running negotiations with the European Union.
      The Fix: Publish the provisions treated as non-negotiable separately from those open to trade-off, so a concluded treaty can be judged against a stated position rather than against the template.
    2. The local remedies requirement is long relative to the delay it addresses: The 2015 model requires an investor to pursue domestic remedies for five years before starting international arbitration, in a system whose delay is itself the investor’s complaint. Eg. White Industries Australia v Republic of India (2011), the first adverse award against India, arose from delay in Indian courts enforcing a commercial arbitration award.
      The Fix: Tie the domestic remedies condition to a defined procedural stage being reached rather than to a fixed number of years.
    3. Termination does not end exposure: A terminated treaty carries a survival clause that keeps protections alive for investments made before termination, so liability continues for years after the instrument goes. Eg. The 2020 Vodafone award was rendered under the India-Netherlands treaty after India had begun issuing termination notices in 2016.
      The Fix: Negotiate replacement treaties with express provisions displacing the survival clauses of the instruments they replace.
    4. Taxation is carved out of the model’s scope: The 2015 model excludes taxation measures from treaty protection, which removes the very category of dispute that produced India’s largest awards. Eg. The 2020 Cairn Energy award, made under the India-United Kingdom treaty, concerned a retrospective tax demand.
      The Fix: Bring expropriatory tax measures within the treaty’s scope while keeping bona fide tax policy outside it.
    5. Consultation without a legal basis is discretionary: No Indian law requires the executive to lay a treaty text before Parliament, so every consultation depends on the willingness of the government of the day. Eg. Treaties are concluded under executive power and reach Parliament only where implementing them requires a change in domestic law.
      The Fix: Enact a treaty scrutiny statute setting out which categories of treaty must be laid before Parliament and for how long before ratification.

    Conclusion

    The revision is being handled as a drafting exercise. The gap it does not close is that India has no settled procedure for producing a treaty text at all, so the quality of the next model rests on the discretion of whoever drafts it. A text written without external scrutiny will attract the same legitimacy objection whichever direction it moves the balance in. What to watch is whether the draft reaches the public domain and the floor of Parliament before the Union Cabinet clears it, or only after.

    Bilateral Investment Treaties in India

    1. What they are: A bilateral investment treaty is an agreement between two countries setting the terms on which each protects investors from the other in its own territory.
    2. How disputes under them are settled: Most such treaties allow an investor to bring a claim directly against the host state before an international arbitral tribunal, without routing it through its own government.
    3. India’s treaty stock: India signed its first such treaty with the United Kingdom in 1994 and went on to sign more than 80. From 2016 it began terminating them and moved to renegotiate on the 2015 model.
    4. What has been concluded since: Treaties concluded on the newer template include those signed with the United Arab Emirates and with Uzbekistan in 2024.

    Constitutional Framework Governing Treaty Making

    1. Article 246 with Entry 14 of the Union List: Places entering into treaties and agreements with foreign countries, and implementing them, within Parliament’s exclusive legislative field.
    2. Entry 13 of the Union List: Covers participation in international conferences and associations, and the implementing of decisions taken at them.
    3. Article 253: Empowers Parliament to make law for the whole or any part of India to implement any treaty, agreement or convention with another country.
    4. Article 73: Extends the Union executive’s power to every matter on which Parliament may legislate, which is the basis on which the executive concludes a treaty without prior legislative approval.

    Back2Basics: Law Commission of India

    1. What it is: A non-statutory executive body constituted by the Government of India to advise on law reform.
    2. How it is constituted: It is set up for a fixed term by an order of the Ministry of Law and Justice, and is chaired by a retired judge.
    3. What it does: It examines existing laws and specific references made by the government, and submits reports carrying recommendations.
    4. The weight its reports carry: Its recommendations are not binding, and a change in law follows only where the government accepts them.

    [2010] A great deal of Foreign Direct Investment (FDI) to India comes from Mauritius than from many major and mature economies like UK and France. Why?

    (a) India has preference, for certain countries as regards receiving FDI

    (b) India has double taxation avoidance agreement with Mauritius

    (c) Most citizens of Mauritius have ethnic identity with India and so they feel secure to invest in India

    (d) Impending dangers of global climate change prompt Mauritius to make huge investments in India

  • Taking heart from the GDP story, behind the headline number

    Why in the News

    The Chairman of the Economic Advisory Council to the Prime Minister and the Secretary, Ministry of Statistics and Programme Implementation have defended the 7.8 per cent real Gross Domestic Product (GDP) growth estimate for the first quarter of 2026-27. They argue that the estimate is corroborated by high frequency indicators across investment, consumption, credit and goods movement. The defence answers academic scepticism about the reliability of India’s national accounts methodology, raised after the first quarter release. The specific charge concerns the GDP deflator, the price index used to convert output measured at current prices into output measured at constant prices. Manufacturing recorded a negative implicit deflator for Gross Value Added (GVA), meaning the accounts imply falling prices in a sector at a time when consumer prices are rising. The dispute is therefore not about the growth rate. It is about whether the price correction behind that rate can be read at all.

    How does double deflation work?

    1. Single deflation, the discontinued method: Nominal Gross Value Added was divided by a single output price index to arrive at real Gross Value Added.
    2. Double deflation, the current method: Output and intermediate consumption are deflated separately, each by its own price index.
    3. The residual: Real Gross Value Added is then taken as the difference between real output and real intermediate consumption.
    4. Why it is the accepted practice: Input prices and output prices move differently, so deflating each by its own prices is the global standard in national accounting.

    What do the high frequency indicators show about the first quarter expansion?

    1. Freight and business demand: Commercial vehicle sales grew 18.3 per cent, as firms expanded fleets in anticipation of higher demand.
    2. The investment cycle: Capital goods production grew 15.2 per cent. Machinery and equipment imports grew 51.5 per cent.
    3. Construction inputs: Cement production, finished steel consumption and infrastructure and construction goods all expanded strongly in the quarter.
    4. Goods movement and tax collection: Electronic way bill generation stayed in double digit growth. Gross Goods and Services Tax collections rose 8.4 per cent despite substantial rate rationalisation.
    5. Consumption: Household vehicle registrations and three wheeler registrations point to firming discretionary demand.
    6. Credit: Non-food bank credit grew 18.3 per cent year on year at end June, up from 15.9 per cent in March, with growth across agriculture, industry and services.

    Why did the GDP deflator become hard to read?

    1. The price database changed: The revised National Accounts moved from the Wholesale Price Index (WPI) to the new Output Producer Price Index (PPI), which measures prices received by producers at the factory gate rather than prices struck in wholesale markets.
    2. The deflation method changed: The February 2026 revision discontinued single deflation. It adopted double deflation wherever feasible and volume based extrapolation otherwise.
    3. The two changes landed together: Simultaneous change in method and in price database made recent movements in the deflator less readily interpretable.
    4. The index switch itself was minor: Revisions arising from the move from WPI to PPI were relatively small, which supports the position that WPI had introduced no material anomaly. The two indices are conceptually close.
    5. The deflator is not a single index: Constant price GVA is built using over 300 producer prices and price indices across a disaggregated set of inputs and outputs, not from a headline price index.

    Why can a negative implicit manufacturing GVA deflator be statistically sound?

    1. The arithmetic: Nominal GVA growth falls below real GVA growth when input prices rise faster than output prices. The implicit deflator then turns negative even though input and output prices are both rising.
    2. What happened in the quarter: Higher raw material inflation relative to output inflation lowered the GVA deflator. Weak price growth in some services widened the gap from headline consumer and wholesale inflation.
    3. The leverage inside manufacturing: Intermediate consumption is roughly 81 per cent of manufacturing output, leaving 19 per cent as GVA. A small divergence between input and output prices therefore produces a disproportionate movement in real GVA.
    4. The domestic precedent: 2024-25 recorded the same outcome, with input price inflation exceeding output price inflation.
    5. Not unique to India: Advanced economies using double deflation have encountered similar outcomes.

    What is the appropriate comparison for manufacturing activity?

    1. The mismatch in the criticism: Commentaries have set manufacturing Index of Industrial Production (IIP) growth, a volume index of factory output, against real manufacturing GVA growth.
    2. The correct counterpart: A volume index should be compared with manufacturing Gross Value of Output at constant prices, which is also a measure of output rather than of value added.
    3. What the correct comparison shows: Real Gross Value of Output averaged 6.7 per cent growth over 2023-24 and 2024-25, against 6.6 per cent for IIP.
    4. When the loose comparison still holds: Comparing manufacturing IIP with manufacturing GVA yields defensible short term results only where input and output prices move together.
    5. A separate reading of the same ratio: The ratio of intermediate consumption to Gross Value of Output at constant prices has been declining gradually, which indicates improving efficiency in the use of inputs.

    What is contested about the synthetic comparison country study?

    1. The method: A recent study builds a comparison country by combining economies whose performance moved closely with India’s before 2014. It uses that historical co-movement to estimate how India’s per capita GDP might have evolved after 2014.
    2. The objection: The study treats its estimated performance gap as a lower bound on the assumption that Indian growth is overstated, without demonstrating the methodological flaw it assumes.
    3. The stated position on scrutiny: Specific, focused and actionable scrutiny of the GDP methodology is welcomed. Inferences drawn by quoting aggregate and disparate numbers together are rejected.

    Challenges to the revised GDP deflation framework

    1. The deflators cannot be independently reproduced: The disaggregated producer price series that enter the constant price estimates are not published for outside users, so an external researcher cannot rebuild the sectoral deflators. Eg. Delays in the national accounts Sources and Methods publication have repeatedly held up independent verification of official estimates.
      The Fix: Release the sectoral deflators used, along with the underlying producer price series, alongside each quarterly estimate.
    2. Services deflation remains the weakest link: India has no producer price index covering the range of services, so services output is deflated using consumer price components and dedicated indices. Eg. Financial, real estate and professional services drove roughly 45 per cent of services value added growth in 2024-25, and their prices are proxied rather than directly observed.
      The Fix: Extend the producer price framework to services, starting with the sub-sectors that contribute most to value added.
    3. The unincorporated sector is estimated rather than observed within the quarter: Quarterly manufacturing estimates for small unregistered enterprises rest on survey benchmarks carried forward by indicators. Eg. The Annual Survey of Unincorporated Sector Enterprises replaced proxy indicators for this segment only with the 2022-23 base year series.
      The Fix: Publish the unincorporated enterprises survey on a fixed calendar and use it to benchmark each year’s quarterly manufacturing estimates.
    4. A base revision breaks comparability across the join: The series was rebased from 2011-12 to 2022-23, so growth rates on either side of the break are not directly comparable. Eg. Construction of a back series after the previous rebasing became a prolonged dispute over pre-2011 growth rates.
      The Fix: Publish a fully reconciled back series at the same sectoral detail as the new series with every base revision.
    5. Confidence rests on the standing of the producing body: A statistical estimate is accepted on the credibility of the institution that releases it, and that credibility has been contested. Eg. Two members resigned from the National Statistical Commission in 2019 over the withholding of survey results.
      The Fix: Give the National Statistical Commission a statutory basis, as an independent statistical commission was recommended in 2001.

    Conclusion

    The argument between the statistical system and its critics is not about whether the economy grew. It is about whether an outside user can see inside the price correction that turns nominal output into real output. A revision that changed the price database and the deflation method in the same round has raised the burden of explanation on the agency, not lowered it. The marker to watch is whether the producer price series used inside the estimates are released as a public series, and whether the methodology volume for the revised base year appears alongside the next annual release rather than after it.

    What is national income accounting?

    1. About: National income accounting is the set of methods used to measure economic activity for an economy as a whole, yielding aggregates such as GDP, Gross National Product and National Income.
    2. Rationale: It supplies the aggregates that fiscal and monetary policy design, welfare planning, sectoral resource allocation and cross country comparison all rest on.
    3. The three methods it rests on:
    4. Income method: sums factor incomes, meaning rent, wages, interest, profit, mixed income and net income from abroad.
    5. Expenditure method: totals final spending on consumption, investment, government spending and net exports.
    6. Production method: sums value added at each stage across agriculture, industry and services.
    7. Why the production method matters here: India’s quarterly estimates are built up as sectoral value added, so every sector needs a price deflator of its own.

    Key Concerns Regarding National Income Accounting

    1. Separating final from intermediate goods: Value added can be double counted where the same good is both an input and a final product. Eg. Flour bought by a bakery is an input, while flour bought by a household is a final good.
    2. Undisclosed income: Parallel transactions kept off records are not captured, which understates measured output.
    3. Environmental blind spot: Resource extraction is counted as income while the depletion of natural capital is not deducted.
    4. Non-monetised and non-market activity: Subsistence farming, barter, volunteer work and the care economy go uncounted, understating true output.

    Key Facts about National Income Accounting

    1. New base year: The GDP base was revised from 2011-12 to 2022-23, with the new series released on 27 February 2026.
    2. Companion rebasing: The Consumer Price Index base was updated to 2024 and the Index of Industrial Production base to 2022-23 alongside the GDP revision.
    3. New data sources: Goods and Services Tax returns, the Public Financial Management System, e-Vahan vehicle registration data and the unincorporated enterprise and labour force surveys replaced earlier proxy indicators.
    4. International alignment: The series follows the System of National Accounts 2008, with transition to the 2025 standard planned by 2029-30.

    [2019, GS3, 10 marks] Do you agree with the view that steady GDP growth and low inflation have left the Indian economy in good shape? Give reasons in support of your arguments.

  • Beyond GDP, brace for turbulence ahead

    Why in the News

    Long term government bond yields in the advanced economies have risen sharply, raising the risk free return foreign capital can earn without entering India. Official growth estimates for April to June, together with car, two wheeler and tractor sales and Goods and Services Tax (GST) collections, show the economy absorbing the energy supply shock caused by the West Asia war. Strong output data does not settle the financing question, since capital compares India’s expected return against an assured dollar return. The dollars India did attract came through Foreign Currency Non-Resident (Bank), or FCNR(B), deposits, priced at rates Indian banks could offer only because the Reserve Bank of India (RBI) carried the hedging cost.

    How does the FCNR(B) deposit and swap arrangement work?

    1. The deposit: An FCNR(B) deposit is a term deposit placed with an Indian bank by a non-resident Indian, held and repayable in foreign currency.
    2. The bank’s exposure: The bank owes repayment in that foreign currency, so a fall in the rupee raises what the deposit costs it in rupee terms.
    3. The swap facility: The RBI bore the hedging cost against currency fluctuation through a special dollar rupee swap facility.
    4. Where the risk now sits: The banks transferred the risk of rupee depreciation to the central bank, which is what allowed them to pay a high rate in foreign currency.

    What do bond yields in Japan, the United States and the United Kingdom demonstrate about the cost of capital?

    1. Japan: The ten year government bond yield crossed 3 per cent for the first time since 1996, and the thirty year yield stands at 4.1 per cent.
    2. The United States: The ten year Treasury yield is at 4.8 per cent and the thirty year at 5.3 per cent.
    3. The United Kingdom: The ten year yield is at 5.2 per cent and the thirty year at 5.9 per cent.
    4. Why these set the benchmark: These instruments are virtually risk free, issued by governments that have never defaulted on their debts, so an assured 4.8 per cent dollar return is the floor any Indian asset has to beat.

    What did India have to pay to bring in dollars?

    1. The deposit rate: Indian banks offered 6 to 6.5 per cent interest on FCNR(B) deposits.
    2. The volume raised: The window mobilised $127.2 billion.
    3. The direction of travel: Foreign money no longer comes cheap, and the path of global bond yields points to it turning more expensive.

    Why does a strong growth number not settle the external financing question?

    1. The two measures test different things: Output and consumption data measure domestic demand. The financing question is whether a foreign investor’s expected return here beats a risk free alternative abroad.
    2. Equity returns are the transmission channel: Long term foreign capital enters on growth prospects that translate into equity market returns, and those prospects must be compelling against elevated yields.
    3. A window is not a policy: A special forex swap window is a one time reprieve for the external sector and cannot substitute for durable intervention.

    What would durable resilience require?

    1. Fiscal consolidation: In a rising interest rate environment a government cannot run high fiscal deficits, which crowd out private sector and other productive borrowing.
    2. Keeping the external account financeable: Those deficits must not spill into current account deficits, which are difficult to finance when global capital flows turn volatile.
    3. Export promotion: Exports are to be raised through increased access to global markets.
    4. Cheaper inputs for exporters: Duties on imported raw materials and components are to be eliminated.
    5. Predictability: Policy stability for foreign investors is the fourth durable intervention, alongside consolidation, exports and input duty removal.

    Challenges to relying on the FCNR(B) swap route

    1. The liability matures: A term deposit has to be repaid or rolled over on a fixed date, so an inflow raised in months becomes an outflow risk on a known one. Eg. The 2013 FCNR(B) swap window raised about $26 billion, and its redemption was concentrated in late 2016.
      The Fix: Stagger maturities across the deposit book and pre-announce the redemption profile, so repayment does not bunch into a single quarter.
    2. The central bank absorbs the currency loss: A hedging cost carried by the RBI becomes a loss on its own books if the rupee falls further than the swap rate assumed. Eg. The rupee’s record low against the dollar has been reset repeatedly since 2022.
      The Fix: Disclose the swap facility’s cost to the central bank’s balance sheet, so the public subsidy inside the scheme is visible.
    3. Debt creating inflows substitute for equity: A deposit is a repayable liability while direct investment is not, so the same headline inflow leaves a different obligation behind. Eg. Non-resident Indian deposits are counted within India’s external debt, and foreign direct investment is not.
      The Fix: Cap the share of external financing met through deposit schemes, so a reserve build is not increasingly borrowed.
    4. The inflow is rate sensitive and reversible: Money that arrives for an interest differential leaves when that differential narrows. Eg. Foreign investors withdrew from Indian debt in 2013 once United States yields rose after the taper announcement.
      The Fix: Build the buffer through current account improvement and equity inflows, so the stock of reserves does not depend on a rate spread.
    5. A headline reserves figure hides its composition: Reserves assembled through a swap window signal less resilience than the same figure built from a trade surplus. Eg. India’s reserves crossed $700 billion while the current account remained in deficit.
      The Fix: Report the hedged and unhedged components of reserves separately in the weekly statistical supplement.

    Conclusion

    India’s external position looks strongest at the moment it is most borrowed. A large stock of foreign currency has been assembled by paying for it, and part of that bill sits on the central bank’s own books rather than on the banking system’s. The tension left unresolved is one of timing: the measures that would make foreign capital cheap again work over years, and the rate environment that made it expensive changed in months. What to watch is whether a second window is opened when the first one matures.

    “[2013] Which one of the following groups of items is included in India’s foreign-exchange reserves?

    (a) Foreign-currency assets, Special Drawing Rights (SDRs) and loans from foreign countries

    (b) Foreign-currency assets, gold holdings of the RBI and SDRs

    (c) Foreign-currency assets, loans from the World Bank and SDRs

    (d) Foreign-currency assets, gold holdings of the RBI and loans from the World Bank

  • Norms allowing e-comm cos to keep inventory notified by govt

    Why in the News

    The Department of Economic Affairs, in the Ministry of Finance, has amended the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 to let e-commerce entities hold inventory. The permission is confined to goods meant for export. Those goods must be manufactured or produced in India. Foreign Direct Investment (FDI) in inventory based e-commerce retailing remains barred, so a foreign funded platform still cannot own the stock it sells to Indian consumers. The change separates a platform’s right to own goods from its right to sell them in India.

    What is inventory based e-commerce, and how does it differ from the marketplace model?

    1. Inventory based model: The platform owns the goods it lists and sells them directly to the buyer.
    2. Marketplace model: The platform runs a digital facility connecting independent sellers to buyers. It does not own the stock it displays.
    3. The investment line between them: Foreign investment up to 100 percent under the automatic route is permitted in the marketplace model. Foreign investment in the inventory based model is not permitted.

    What has the amendment changed?

    1. A permission tied to export: An e-commerce entity may now maintain inventory where the goods are meant for export.
    2. A domestic origin condition: The goods so held must be manufactured or produced in India.
    3. The retail bar is untouched: Foreign investment in inventory based e-commerce retailing has not been permitted.
    4. The route taken: The Department of Economic Affairs inserted the provision into the Foreign Exchange Management (Non-debt Instruments) Rules, 2019, which is the instrument that carries India’s foreign investment conditions in law.

    Why does an export only carve out change what a foreign funded platform can do?

    1. Ownership of stock becomes lawful for one purpose: A foreign funded platform may buy, own and warehouse Indian made goods, provided the buyer sits outside India.
    2. The domestic retail rationale survives: The bar exists to stop a platform holding foreign capital from selling its own stock to Indian consumers at prices small retailers cannot match. An export sale does not enter that market.
    3. Exports gain an aggregator: A small manufacturer without overseas logistics can sell to a platform that takes title to the consignment and ships it out.
    4. The test shifts from ownership to destination: Compliance now turns on where a consignment ends up, which is a harder thing to observe than who owns it.

    Challenges to the export only inventory permission

    1. Diversion into the domestic market: Stock held under the export permission can be sold at home unless each consignment is matched to a foreign buyer. Eg. Duty free inputs meant for export production have repeatedly been the subject of Directorate of Revenue Intelligence cases over domestic diversion.
      The Fix: Require the platform to reconcile inventory held under this permission against shipping bills filed with Customs, and treat an unreconciled balance as a contravention.
    2. No stated threshold for what counts as made in India: The condition turns on goods manufactured or produced in India, and a low value assembly operation meets that description. Eg. Domestic value addition has been a running dispute under the Production Linked Incentive scheme for electronics, where imported kits are assembled locally.
      The Fix: Attach a stated domestic value addition threshold to the permission, as the Production Linked Incentive schemes already do.
    3. Enforcement acts long after the sale: Contraventions under the Foreign Exchange Management Act, 1999 are penalised or compounded after the fact, so a breach is corrected once the goods have already moved. Eg. Proceedings against large foreign funded e-commerce platforms over foreign investment conditions have run for years without a settled outcome.
      The Fix: Require an annual statutory auditor’s certificate on compliance with the export condition, filed with the Reserve Bank of India.
    4. The marketplace disputes are left where they were: The standing complaints of small retailers concern preferential seller arrangements inside the marketplace model, which this permission does not touch. Eg. The Competition Commission of India’s investigation into preferred sellers and deep discounting on major platforms began in 2020.
      The Fix: Conclude the pending competition proceedings on preferential seller arrangements, so the marketplace conditions are enforced on their own terms.

    Conclusion

    India’s foreign investment rules now treat ownership of goods and sale of goods as two separate permissions. The carve out is drawn narrowly, so its practical worth depends entirely on how the export destination is verified rather than on the width of the wording. The marker to watch is whether operating conditions specifying that verification follow, and whether foreign funded platforms build export volumes large enough to make the permission material.

    Back2Basics: Foreign Exchange Management (Non-debt Instruments) Rules, 2019

    1. What they are: Rules made under the Foreign Exchange Management Act, 1999 governing investment by a person resident outside India in equity and other non-debt instruments.
    2. Who issues them: The Department of Economic Affairs in the Ministry of Finance notifies them.
    3. What they carry: Sectoral caps, entry routes and the specific conditions attached to foreign investment in each sector.
    4. Why they matter: A change announced as foreign investment policy takes legal effect only when these Rules are amended.

    Matching Previous Year Question

    “[2020] With reference to Foreign Direct Investment in India, which one of the following is considered its major characteristic? (a) It is the investment through capital instruments essentially in a listed company. (b) It is a largely non-debt creating capital flow. (c) It is the investment which involves debt-servicing. (d) It is the investment made by foreign institutional investors in the Government securities. ANSWER: (b)”