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Subject: Economics

  • DAC Grants AoN Worth ₹3.6 Lakh Crore for Rafale, P-8I and Major Defence Modernisation Push

    Why in the News?

    The Defence Acquisition Council chaired by Rajnath Singh has granted Acceptance of Necessity for defence procurement proposals worth about ₹3.6 lakh crore, including 114 Rafale fighter jets and six P-8I aircraft.

    About Defence Acquisition Council

    • Apex decision making body for capital procurement in the Ministry of Defence after the Kargil War of 1999.
    • Headed by the Defence Minister
    • Grants Acceptance of Necessity, which is the first formal step in defence procurement
    • Functions under the framework of the Defence Acquisition Procedure 2020

    Composition 

    • The council is chaired by the Defence Minister (Raksha Mantri). Key members include the Chief of Defence Staff, the three Service Chiefs (Army, Navy, Air Force), and the Defence Secretary, with the Deputy Chief of Defence Staff (Planning & Procurement) as Member Secretary.

    Key Points: Recent procurement proposals: 

    • Acceptance of Necessity (AoN): First stage of capital procurement approval under Defence Acquisition Procedure 2020.
    • Indian Air Force: 114 Rafale Multi Role Fighter Aircraft, combat missiles, and High Altitude Pseudo Satellite for ISR and ELINT roles.
    • Indian Navy: Six P-8I long range maritime reconnaissance aircraft for anti submarine warfare and maritime strike capability.
    • Indian Army: Procurement of Vibhav anti tank mines and overhaul of T-72, BMP II and armoured recovery vehicles.
    [2024] Consider the following aircraft: 1. Rafael 

    2. MiG-29 

    3. Tejas MK-1 

    How many of the above are considered fifth generation fighter aircraft? 

    (a) Only one (b) Only two (c) All three (d) None

  • New CPI Inflation Series (Base Year 2024): Food Weight Reduced to 37%

    Why in the news?

    India’s new Consumer Price Index (CPI) series with base year 2024 will reduce the weight of food and beverages from 45.86% to 36.75%, aligning the inflation basket with updated household consumption patterns from the 2023–24 Household Consumption Expenditure Survey (HCES).

    What is CPI?

    The Consumer Price Index (CPI) measures retail inflation by tracking changes in prices of goods and services consumed by households.

    It is:

    • The headline inflation measure in India
    • Used by the Reserve Bank of India for monetary policy
    • Based on periodic base year revision to reflect current consumption patterns

    Key Changes in the New CPI Series

    • Food Weight Reduced
      • From 45.86% → 36.75%
      • Reflects decline in food expenditure share
      • Based on Engel’s Law: As income rises, share of food expenditure falls
    • HCES Findings:
      • Rural food share: 52.9% (2011–12) → 47.04% (2023–24)
      • Urban food share: 42.62% → 39.68%
    • Housing Weight Increased
      • From 10.07% → 17.66%
      • Now includes: Water, Electricity, Gas and Other fuels
      • Methodological change: Employer provided accommodation excluded
      • This may exert upward pressure on inflation.
    • Basket Expansion
      • Items increased from 299 → 358
      • Reclassification of categories
      • Linking factor to be released for back series comparison

    Why Was High Food Weight a Concern?

    • Food inflation is often supply driven.
    • Monetary policy cannot control vegetable or cereal supply in short run.
    • High food weight caused:
      • Excess volatility in headline inflation
      • Constraints on repo rate decisions

    Example:

    • October 2025 CPI: 0.25%
    • Food inflation: (-)5.02%
    • Food price fall dragged headline inflation sharply lower

    Implications for RBI

    • The RBI follows Flexible Inflation Targeting (FIT):
      • Target: 4%
      • Tolerance band: 2–6%
      • Mandated under RBI Act amendment (2016)
    • Lower food weight may:
      • Reduce volatility
      • Give clearer signal of core inflation
      • Improve monetary policy transmission
      • However, higher housing weight may increase measured inflation.
    [2020] Consider the following statements: 1. The weightage of food in Consumer Price Index (CPI) is higher than that of Wholesale Price Index (WPI). 

    2. The WPI does not capture changes in the prices of services, which CPI does. 

    3. Reserve Bank of India has now adopted WPI as its key measure of inflation and to decide on changing the key policy rates. 

    Which of the statements given above is/are correct? 

    (a) 1 and 2 only (b) 2 only (c) 3 only (d) 1, 2 and 3

  • [12th Februrary 2026] The Hindu OpED: The CPI base revision exercise measures a slice of life

    PYQ Relevance[UPSC 2023] Most of the unemployment in India is structural in nature. Examine the methodology adopted to compute unemployment in the country and suggest improvements. Linkage: Unemployment and inflation are core GS-3 macro indicators influencing growth and monetary policy. Just as CPI base revision affects inflation measurement, unemployment estimates depend on survey methodology (PLFS), shaping policy credibility and reform design.

    Why in the News?

    The Ministry of Statistics and Programme Implementation (MoSPI) has decided a comprehensive exercise for revision of the base year of Gross Domestic Product (GDP), Index of Industrial Production (IIP) and Consumer Price Index (CPI) to enhance their relevance, accuracy and international comparability. The proposed new base year for the GDP and IIP is 2022-23, and for CPI the proposed base year is 2024. The revision of CPI will be done using findings from the latest Household Consumption Expenditure Survey (HCES). The revision recalibrates expenditure weights to reflect structural shifts in consumption patterns over the past decade. Since CPI is the anchor for inflation targeting and monetary policy, changes in its composition directly influence measured inflation and policy response. The exercise also gains significance after gaps in consumption data, making representativeness and credibility central concerns.

    What is CPI and Why is it Important?

    Consumer Price Index (CPI) measures the average change over time in the retail prices of a fixed basket of goods and services consumed by households. It reflects retail inflation and serves as the nominal anchor under India’s inflation targeting framework.

    1. Retail Inflation Measure: Tracks price changes at the consumer level across goods and services.
    2. Inflation Target Anchor: Forms the basis of RBI’s flexible inflation targeting framework.
    3. Cost-of-Living Indicator: Reflects purchasing power of households.
    4. Policy Benchmark: Guides interest rate decisions, wage revisions and welfare indexation.
    5. Macroeconomic Signal: Influences investor expectations and economic outlook.

    Why Was Base Year Revision Necessary?

    1. Outdated Consumption Weights: 2012 basket no longer reflects current spending behaviour.
    2. Structural Economic Shift: Expansion of services sector and urbanisation since 2012.
    3. Consumption Diversification: Rising share of telecom, transport and service expenditures.
    4. Reduced Food Share: Relative decline in food and clothing weight in total expenditure.
    5. Data Discontinuity Concern: Delay in updated consumption data affected representativeness.

    How Does the CPI Basket Reflect Structural Changes in Society?

    1. Shift from Goods to Services: Higher expenditure on communication, transport and service-based consumption.
    2. Urbanisation Impact: Changing food habits, mobility patterns and housing expenditure.
    3. Changing Aspirations: Rising discretionary spending relative to subsistence consumption.
    4. Technology Integration: Inclusion of modern consumption categories such as telecom services.
    5. Rural-Urban Convergence: Updated survey captures evolving rural consumption patterns.
    6. Declining Engel Ratio: Reduced proportional spending on food indicates income progression.

    What Are the Macroeconomic Implications of CPI Base Year Revision?

    1. Inflation Recalibration: Weight changes can alter headline and core inflation trends.
    2. Monetary Policy Adjustment: RBI policy stance depends on CPI trajectory.
    3. Real Interest Rate Impact: Changes in measured inflation affect real returns.
    4. Fiscal Planning Effect: Influences subsidy indexation and welfare transfers.
    5. Market Signalling: Alters inflation expectations in financial markets.
    6. Credibility Enhancement: Strengthens confidence in official inflation statistics.

    Conclusion

    CPI base revision updates inflation measurement to reflect contemporary consumption patterns. It strengthens accuracy, improves macroeconomic signalling and supports effective monetary policy.

  • Taxpayer base more than doubled in the last decade

    Why in the News?

    India’s direct tax system has recorded sustained expansion in both individual and non-individual taxpayers. India’s taxpayer base has more than doubled over the last decade, with individual taxpayers rising from 3.26 crore in AY2013-14 to nearly 7.26 crore in AY2024-25, while the total base expanded to about 4.8 crore. Simultaneously, the cost of collecting direct taxes declined to 0.41% in FY2024-25 (provisional), the lowest in available data.The increase reflects administrative reforms, digitalisation of filing systems, and structural strengthening of compliance mechanisms.

    What is the scale of expansion in the taxpayer base?

    1. Individual taxpayers: Increased from 3.26 crore (AY2013-14) to nearly 7.26 crore (AY2024-25), more than doubling in a decade.
    2. Total taxpayer base: Expanded from about 2.9 crore in AY2013-14 to nearly 4.8 crore in AY2024-25.
    3. Growth rate: Registered a CAGR of approximately 5% over the period.
    4. Peak annual growth: 7.89% CAGR observed during the period.
    5. Pandemic disruption: Growth slowed sharply in FY2020-21 due to COVID-19-related economic disruption.
    6. Recovery phase: Growth rebounded in subsequent years, indicating durability of expansion.

    How has the composition of taxpayers evolved?

    1. Dominance of individuals: Individual taxpayers continue to dominate the system.
    2. Non-individual taxpayers: Includes firms, companies, LLPs, Association of Persons (AOPs), Body of Individuals (BOIs), local authorities, and artificial juridical persons.
    3. Steady growth in non-individuals: Growth remained more stable compared to individuals, without major pandemic volatility.
    4. Broader base expansion: Evidence suggests increasing formalisation across business entities.

    What institutional changes supported this expansion?

    1. Digital filing systems: Increased reliance on online return filing.
    2. Pre-filled returns: Reduced compliance burden and errors.
    3. Expanded third-party reporting: Strengthened information matching.
    4. Reduced face-to-face interactions: Enhanced transparency and minimised discretion.
    5. Compliance friction reduction: Enabled smoother onboarding of taxpayers.
    6. Administrative strengthening: Indicated by consistent year-on-year improvements.

    What does the cost of collection indicate?

    1. Declining cost of collection: Reduced from 0.61% of gross direct tax collections (FY2000-01) to 0.41% (FY2024-25 provisional).
    2. Lowest in available data series: Reflects sustained administrative efficiency.
    3. Pandemic spike: Temporary rise in FY2020-21 due to disruptions.
    4. Post-pandemic correction: Returned to declining trajectory.
    5. Efficiency gain: Indicates improved revenue mobilisation per rupee spent.

    What does this imply for fiscal capacity and governance?

    1. Structural strengthening: Evidence suggests durable expansion, not a one-time compliance surge.
    2. Formalisation of economy: Broader cross-section of taxpayers entering formal net.
    3. Revenue resilience: Supports fiscal planning and long-term budgeting.
    4. Administrative modernisation: Reflects digital governance success.
    5. Compliance culture: Indicates deeper tax participation.

    Conclusion

    The sustained expansion of the taxpayer base alongside declining cost of collection signals structural strengthening of India’s direct tax system. The evidence suggests institutional reform, digitalisation, and broader formalisation have enhanced fiscal resilience and administrative efficiency.

    PYQ Relevance

    [UPSC 2019] Enumerate the indirect taxes which have been subsumed in the goods and services tax (GST) in India. Also, comment on the revenue implications of the GST introduced in India since July 2017.

    Linkage: This question tests understanding of how tax reforms expand the revenue base and strengthen fiscal capacity, a core GS3 theme. The article shows how widening the taxpayer base and improving compliance are part of the same structural shift that GST triggered in India’s tax ecosystem.

  • Carbon Capture to Drive India’s Green Steel Transition

    Why in the News

    The Prime Minister shared an article highlighting the role of Carbon Capture, Utilisation and Storage in decarbonising India’s steel sector, aligning with India’s Net Zero 2070 commitment.

    India’s Steel Sector at a Glance

    • India is the world’s second largest crude steel producer.
    • Production: Around 152 million tonnes in FY 2024-25.
    • Target under National Steel Policy 2017:
      • 300 million tonnes by 2030-31
      • 500 million tonnes by 2047

    Note: Steel production contributes nearly 10 to 12 percent of India’s total greenhouse gas emissions due to coal based blast furnace and direct reduced iron routes.

    What is CCUS

    Carbon Capture, Utilisation and Storage involves:

    • Capturing carbon dioxide from industrial processes
    • Utilising it for industrial applications or
    • Storing it underground to prevent atmospheric release

    It helps address process emissions that cannot be eliminated through energy efficiency or renewable power alone.

    Government Measures

    • Green Steel Taxonomy:Defines emission intensity benchmark: Less than 2.2 tonnes of CO2 equivalent per tonne of finished steel
      • Introduces star rating framework
    • National Green Hydrogen Mission: ₹455 crore allocated for pilot projects in steel sector
    • Union Budget Allocation: ₹20,000 crore for piloting CCUS across five sectors including steel

    Significance

    • Helps decarbonise existing steel plants without immediate asset replacement
    • Enhances global competitiveness amid carbon border measures
    • Supports Net Zero 2070 target
    • Encourages industrial ecosystems around carbon transport and storage
    [2023] Consider the following heavy industries: 1. Fertilizer plants 

    2. Oil refineries 

    3. Steel plants 

    Green hydrogen is expected to play a significant role in decarbonizing how many of the above industries? 

    (a) Only one (b) Only two (c) All three (d) None

  • A reckoning for India’s aviation sector

    Why in the News?

    India’s aviation sector is under scrutiny following operational failures, rising safety incidents, and declining passenger confidence. This sector is the world’s third-largest domestic aviation market carrying over 350 million passengers annually. The December crisis marked the first large-scale disruption for IndiGo, exposing systemic stress in the country’s largest airline, which controls nearly 60% of the domestic market. Simultaneously, pilot shortages, FDVT violations, high ATF volatility, and congestion at 85+ airports operating beyond capacity have intensified vulnerabilities. The sector faces a structural reckoning as new regional carriers enter an already overstretched ecosystem.

    What is the growth and economic significance of India’s Aviation Sector?

    1. Market Size Expansion: India is the world’s third-largest domestic aviation market, with airports increasing from 74 (2014) to 163 (2025).
    2. Economic Multiplier Effect: Aviation generates over three times economic activity for every rupee invested and supports more than six times employment in allied sectors.
    3. Employment Contribution: The sector supports over 7.7 million jobs, including 369,000 direct jobs.
    4. Traffic Growth: Domestic passenger traffic has grown at an annual rate of 10-12% over the past decade.
    5. Global Integration: India has over 116 bilateral Air Service Agreements, strengthening international connectivity.
    6. Industrial Linkages: Aviation drives FDI inflows, technology transfer, and growth in aircraft manufacturing, MRO, and ground handling services under Make in India.

    Why is India’s aviation sector facing operational stress?

    1. Scale without proportional capacity: Carries 350+ million passengers annually with over 840 aircraft, but expansion has outpaced structural preparedness.
    2. December disruption as stress test: First large-scale disruption affecting IndiGo exposed systemic fragility.
    3. Airport congestion: 85 airports operating beyond capacity; 102 new routes planned under UDAN 2025-26.
    4. Network dependency risk: High route concentration increases vulnerability to cascading delays and cancellations.

    What explains the pilot shortage and regulatory strain?

    1. Pilot-to-aircraft imbalance: India’s ratio remains below global benchmark of 18-20 pilots per aircraft; IndiGo at 14, Air India at 36 (group level including subsidiaries), Air India Express at 15.
    2. FDVT violations: DGCA issued 19 safety violation notices in 2025 citing breaches of flight duty time limitations, lapses in quality assurance, and expired emergency equipment use.
    3. Training pipeline constraints: CPL issuance inconsistent with estimated annual requirement of 7,000 pilots; issuance around 5,700 between 2020-24.
    4. Operational fatigue risks: Regulatory exemptions for scheduling rather than structural hiring reforms.

    How does market concentration amplify systemic risk?

    1. Duopoly structure: IndiGo (63-65%) and Air India group (27%+) together control nearly 90% of the domestic market.
    2. Route concentration: IndiGo dominant on 600 monopoly routes and 200 duopoly routes.
    3. Financial vulnerability: Past airline failures-Jet Airways (2019), Kingfisher Airlines (2012), Air Deccan collapse, Go First (2023-24), demonstrate systemic contagion risk.
    4. Passenger dependency: 60.4% of domestic capacity concentrated under a single carrier.

    How do infrastructure and fuel volatility impact viability?

    1. ATF volatility: Aviation Turbine Fuel priced in U.S. dollars; exposes airlines to exchange rate fluctuations.
    2. High cost structure: ATF remains one of the largest operational expenditures.
    3. Infrastructure bottlenecks: Congested metro airports; Tier-2 and Tier-3 airports underdeveloped despite UDAN push.
    4. Limited hedging mechanisms: Absence of systematic fuel hedging increases cost unpredictability.

    What role do new regional entrants play?

    1. New NOCs (December 2025): Shankh Air, Al Hind Air, and Fly91 approved.
    2. Regional connectivity expansion: Planned routes include Noida International Airport linkages and underserved regions such as Kochi and Shankh Air’s Uttar Pradesh focus.
    3. Deconcentration potential: Entry could reduce excessive dependence on major carriers.
    4. Structural risk persists: New entrants operate in an already capacity-stressed environment.

    Conclusion

    India’s aviation sector has evolved into a strategic growth engine, combining infrastructure expansion, employment generation, and global integration. Sustained capacity augmentation, regulatory strengthening, and balanced regional connectivity will determine whether the sector can translate its rapid growth into long-term economic resilience and inclusive development.

    PYQ Relevance

    [UPSC 2024] What is the need for expanding the regional air connectivity in India? In this context, discuss the government’s UDAN Scheme and its achievements.

    Linkage: It falls under GS Paper III-Infrastructure (Airports), Regional Connectivity, Inclusive Growth and Balanced Regional Development. Airport congestion and traffic concentration make regional connectivity expansion essential for decongestion and balanced growth.

  • Why Manufacturing Growth Has Not Led to Broad Employment

    Why in the News?

    Union Budget 2026 reinforces the existing manufacturing strategy, especially through Production Linked Incentive schemes and customs duty rationalisation. However, analysts note that manufacturing growth has not translated into large scale job creation.

    Core Issue: Growth Without Jobs

    1. Stagnant Share in GDP

    • Manufacturing share remains 14 to 17 percent for decades.
    • Successful industrialisers in East Asia reached 25 to 30 percent before stabilising.
    • Indicates incomplete structural transformation.

    2. Jobs Growth Disconnect

    • Organised manufacturing employs about 1.96 crore workers.
    • Only about 57 lakh jobs added in the last decade.
    • Total manufacturing employment around 5.44 crore, with two thirds in informal units.

    Note: Organised factories are productive but create few jobs. Unorganised units absorb labour but remain low productivity and low wage.

    3. Capital Intensive Expansion

    • Firms rely on automation and capital deepening.
    • Output rises faster than employment.
    • Job elasticity of growth remains low.

    4. Skills Mismatch

    • Firms struggle to find job ready workers.
    • Weak firm level training and apprenticeship ecosystem.
    • Skill programmes poorly linked to industry demand.

    5. MSME Constraints

    • MSMEs contribute 35 percent of manufacturing output and about half of exports.
    • Credit expansion improves liquidity but not productivity.
    • Weak technology adoption, poor supply chain integration, limited scaling.
    [2020] With reference to the Indian economy after the 1991 economic liberalization, consider the following statements: 

    1. Worker productivity (Rupee per worker at 2004-05 prices) increased in urban areas while it decreased in rural areas. 

    2. The percentage share of rural areas in the workforce steadily increased. 

    3. In rural areas, the growth in non-farm economy increased. 

    4. The growth rate in rural employment decreased. 

    Which of the statements given above is/are correct? 

    (a) 1 and 2 only (b) 3 and 4 only (c) 3 only (d) 1, 2 and 4 only

  • SC tells RBI to bring in stricter checks to stop online frauds

    Why in the News? 

    A Bench led by the Chief Justice of India directed the Reserve Bank of India (RBI) and the Union Government to strengthen safeguards against online financial frauds. The Supreme Court has flagged the siphoning of over ₹52,000 crore between April 2021 and November 2025 through online frauds such as “digital arrests,” calling it nothing short of “absolute robbery or dacoity.” In a sharp judicial intervention, the Court questioned why no alarm is triggered when unusually large sums like ₹50 lakh are withdrawn from a retiree’s account. It has directed the RBI and the Home Ministry to tighten suspicious transaction norms and formally implement Standard Operating Procedures for cyber fraud coordination. The scale of fraud and the Court’s direct push for systemic banking reforms make this a significant moment in India’s cyber-financial governance framework.

    What Triggered the Supreme Court’s Concern?

    1. ₹52,969 crore siphoned (April 2021-November 2025): The Court noted large-scale cyber-enabled frauds, including “digital arrests.”
    2. Characterisation as ‘absolute robbery or dacoity’: The Bench emphasized the severity and scale of financial losses.
    3. Pattern of large withdrawals: The Court questioned why no alert is triggered when ₹50 lakh is withdrawn from a retiree’s account, especially when monthly withdrawals are typically ₹10,000.
    4. Judicial scrutiny of RBI: The Court stated it was time for the central banker to ensure stronger protective mechanisms for depositors.

    Why Did the Court Question Suspicious Transaction Monitoring?

    1. Definition expansion required: The Court stated that the definition of “suspicious transaction” must be broadened.
    2. Banking business model shift: Justice Bagchi noted banks are largely in “business mode,” facilitating swift and seamless transfers.
    3. Digital efficiency aiding crime: Faster transactions enable quick movement of stolen money.
    4. Accountability query: The Bench sought explanation on misappropriation based on official reporting.

    What Directions Were Issued to the Government?

    1. Formal SOP implementation: Directed the Home Ministry to adopt and implement nationwide the SOP issued on January 2.
    2. Inter-agency coordination: Ensures structured coordination in cyber-enabled fraud cases.
    3. Victim identification mechanism: Mandates identification of defrauded parties.
    4. Notification of implementation rules: Ordered formal notification of required regulatory framework.

    What Institutional Mechanisms Are Being Strengthened?

    1. Memorandum of Understanding (MoU): Government finalising MoU for suspect registry sharing.
    2. Data sharing architecture: Facilitates exchange of suspect registry data.
    3. Mule account detection tools: Strengthens identification of accounts used for fraudulent transfers.
    4. Preventive and responsive tools: Supports blocking of fraudulent transactions.

    How Big is the Problem?

    1. Scale of fraud: ₹52,969 crore misappropriated in less than five years.
    2. Targeted vulnerability: Retirees and ordinary account holders vulnerable.
    3. Systemic gaps: Absence of automatic red-flag triggers for abnormal withdrawals.
    4. Judicial intervention: Indicates inadequacy of existing regulatory safeguards.

    Conclusion

    The Supreme Court’s intervention underscores the systemic risks posed by cyber-enabled financial frauds in an increasingly digital banking ecosystem. The scale of misappropriation and the absence of robust red-flag mechanisms reveal gaps in regulatory vigilance and inter-agency coordination. Strengthening suspicious transaction definitions, enhancing data-sharing frameworks, and ensuring proactive oversight by the RBI and enforcement agencies are essential to safeguard depositor trust and preserve financial stability.

    Value Addition

    What is a digital arrest?

    • It is a sophisticated cyber scam where fraudsters impersonate law enforcement (police, CBI, etc.) or government officials to instill fear and extort money or data from victims.
    • It makes the victims believe they are under arrest for serious crimes like money laundering or drug trafficking, often using fake documents, video calls with fake police station backgrounds, and high-pressure tactics to force compliance. 
    • It’s a form of online fraud, not a real legal process, designed to manipulate victims into paying fines or revealing personal information to avoid (fake) arrest, leading to financial loss or identity theft.

    PYQ Relevance

    [UPSC 2020] Discuss different types of cyber crimes and measures required to be taken to fight the menace.

    Linkage: The question addresses the rising threat of cyber crimes in India and the need for institutional, regulatory, and technological measures to combat them under GS-3 (Internal Security and Cyber Security).

  • Gross NPAs of SCBs at Historic Low

    Why in the News

    The Finance Ministry informed that the gross non performing assets ratio of Scheduled Commercial Banks has declined to a historic low of 2.15 percent as of September 30, 2025, the lowest level seen in more than a decade.

    Key Facts 

    • Gross NPA ratio of SCBs: 2.15 percent
    • Trend: Continuous decline for the last eight financial years
    • Comparison: Lower than the level seen in 2010-11

    Bank wise Gross NPA Ratio as on Sept 30, 2025

    • Public Sector Banks: 2.50 percent
    • Private Sector Banks: 1.73 percent
    • Foreign Banks: 0.80 percent

    Reasons for Decline in NPAs

    • Asset Quality Review initiated by Reserve Bank of India in 2015
    • Government’s 4R strategy
      • Recognition of NPAs
      • Resolution and recovery
      • Recapitalisation of PSBs
      • Reforms in banking and financial ecosystem
    • Improved underwriting standards
    • Stronger balance sheets and sustained profitability of banks
    [2019] What was the purpose of the Inter-Creditor Agreement signed by Indian banks and financial institutions recently? (a) To lessen the Government of India’s perennial burden of fiscal deficit and current account deficit 

    (b) To support the infrastructure projects of Central and State Governments 

    (c) To act as independent regulator in case of applications for loans of Rs. 50 crore or more 

    (d) To aim at faster resolution of stressed assets of Rs. 50 crore or more which are under consortium lending

  • Why borrowings have now begun biting govts

    Why in the News?

    Government borrowing costs are rising even after successive repo rate cuts by the Reserve Bank of India (RBI). Since February 2025, the RBI has reduced the repo rate by 100 basis points from 6.5% to 5.5%. However, yields on 10-year government securities have increased from 6.66% to 6.73% during the same period.

    This divergence is significant because bond yields typically soften after rate cuts. Instead, governments are now paying 0.4-0.5 percentage points more to borrow compared to 10-15 years ago. The issue affects both the Centre and States, which together budgeted gross market borrowings exceeding ₹40 lakh crore in 2025-26. Rising yields increase interest burdens and crowd out developmental expenditure.

    Why Are Borrowing Costs Rising Despite Repo Rate Cuts?

    1. Limited Monetary Transmission: Repo rate reduced from 6.5% to 5.5% since February 2025. 10-year G-sec yields increased from 6.66% to 6.73% during the same period.
    2. Higher Risk Premium: Markets demand higher yields due to elevated debt levels and fiscal pressures.
    3. Liquidity Tightening: RBI reduced bond purchases and ended aggressive liquidity injections.
    4. Foreign Outflows: Net FPI outflows of $12.5 billion during April-September 2025 reduced bond demand.

    How Large Is the Government Borrowing Programme?

    1. Gross Borrowing (Centre): ₹14.90 lakh crore budgeted for 2025-26.
    2. Gross Borrowing (States): ₹18.14 lakh crore budgeted.
    3. Combined Gross Borrowing: Exceeds ₹40 lakh crore.
    4. Net Borrowing (Centre): ₹11.73 lakh crore in 2025-26.
    5. Net Borrowing (States): ₹10.75 lakh crore in 2024-25.

    What Is the Status of Outstanding Liabilities?

    1. Centre’s Liabilities: Increased from 48.1% of GDP (2015-16) to above 55% in 2025-26.
    2. States’ Liabilities: Increased from 22.3% (2015-16) to 29.2% in 2025-26.
    3. Combined Liabilities: Exceed 80% of GDP.
    4. Interest Burden: Governments now pay 0.4-0.5 percentage points more compared to 10-15 years ago.

    What Role Has Liquidity Played?

    1. Pandemic Liquidity Surge: RBI expanded liquidity during 2020-22 to manage economic slowdown.
    2. Subsequent Tightening: RBI reversed bond purchases and injected limited liquidity.
    3. Foreign Exchange Dynamics: RBI sold dollars to stabilize the rupee, reducing domestic liquidity.
    4. Capital Inflows: Net foreign capital inflows modest at $18 billion during April-September 2025.

    How Does This Affect Fiscal Management?

    1. Higher Interest Payments: Expands revenue expenditure commitments.
    2. Reduced Fiscal Space: Limits developmental and capital spending.
    3. Crowding-Out Effect: High government borrowing absorbs financial resources.
    4. State-Level Stress: States face similar yield pressures amid large borrowing programmes.

    Conclusion

    Rising borrowing costs despite repo rate cuts indicate structural stress in India’s fiscal and financial architecture. Elevated debt levels, reduced liquidity support, and weak monetary transmission have increased the interest burden on both the Centre and States.

    Sustained high yields risk expanding revenue expenditure, compressing capital spending, and constraining developmental priorities. The situation underscores the need for calibrated fiscal consolidation, improved debt management, and better coordination between monetary and fiscal policy to ensure macroeconomic stability without compromising growth.

    PYQ Relevance

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

    Linkage: The question examines fiscal discipline, debt sustainability, and expenditure prioritisation under the post-liberalisation framework. The article highlights rising borrowing costs and elevated liabilities, which intensify interest burdens and constrain public expenditure management, making budget balancing more complex.