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Subject: Economics

  • ED Notice to Kerala CM: KIIFB Masala Bonds Case 

    Why in the news?

    The Enforcement Directorate’s (ED) notice to Kerala Chief Minister Pinarayi Vijayan and senior officials in the KIIFB masala bond case has revived debates on FEMA compliance, off-budget borrowings, and Centre–State fiscal relations. As local body polls approach, the issue has also acquired political significance.

    What is KIIFB?  

    Kerala Infrastructure Investment Fund Board (KIIFB)

    • Statutory body established under KIIF Act, 1999
    • Revived in 2016 as Kerala’s key infrastructure financing arm
    • Raises funds outside the State budget, mainly through long-term borrowing
    • Functions as an off-budget financing mechanism

    What is Off-Budget Borrowing?

    • Debt raised by state entities (SPVs, boards) instead of the government directly
    • Not reflected in the official fiscal deficit
    • CAG has criticised such borrowings for reducing transparency

    What Are Masala Bonds?  

    Masala Bonds =

    • Rupee-denominated bonds issued in overseas markets
    • Borrowing risk is borne by the investor, not the issuer
    • Governed by RBI’s External Commercial Borrowing (ECB) Framework

    KIIFB Masala Bond:

    • Issued in 2019 on the London Stock Exchange
    • Total amount: ₹2,150 crore
    • First sub-national entity in India to issue such a bond

    Why Did ED Issue Notices?

    ED’s probe relates to alleged violations under:FEMA, 1999 – Foreign Exchange Management Act

    ED claims: Part of the masala bond funds was used for land purchase. RBI prohibits land purchase using ECB/masala bond proceeds

    Kerala’s defence:

    • Land was acquired, not purchased
    • Public land acquisition does not violate FEMA or RBI norms

    Enforcement Directorate (ED)

    • Established under DOF Notification (1956)
    • Investigates:
      • PMLA, 2002
      • FEMA, 1999
      • Economic offences referred by other agencies
    • Works under Department of Revenue, Ministry of Finance

    CAG (Comptroller and Auditor General of India)

    • Constitutional body under Article 148
    • Criticised KIIFB borrowings as off-budget liabilities
    With reference to ‘IFC Masala Bonds’, sometimes seen in the news, which of the statements given below is/are correct? (2016)

    1. The International Finance Corporation, which offers these bonds, is an arm of the World Bank. 

    2. They are the rupee-denominated bonds and are a source of debt financing for the public and private sector. 

    Select the correct answer using the code given below. 

    (a) 1 only (b) 2 only (c) Both 1 and 2 (d) Neither 1 nor 2

  • In the era of AI and climate change, energy policy must navigate the trade-offs

    Introduction

    India’s energy policy historically prioritised universal access, affordability, and supply security, achieved through government-led institutions, public sector enterprises, and diversified import sources. However, climate change, AI-driven electricity demand, and the greening of global supply chains have disrupted this stable model. The new policy imperative is to navigate complex trade-offs between economic growth, technological innovation, environmental sustainability, and geopolitical risks.

    Why in the news?

    India’s energy policy is at a crossroads as AI adoption, climate imperatives, and rising electricity demand collide for the first time at such scale. The article highlights a major policy dilemma: India’s rapid infrastructural expansion and AI-linked power consumption (e.g., Amazon’s data centre requirement causing Maharashtra to extend a coal plant licence) is clashing with renewable targets. This marks a significant shift from earlier decades when India only chased universal access and affordability. Today, the challenge is more complex, balancing energy security, economic growth, technology competitiveness, and environmental degradation simultaneously. The piece reveals how institutional fragmentation, import dependence on lithium/solar components from China, and new energy demands from data centres are re-shaping India’s energy calculus.

    How has India’s energy approach evolved over time?

    1. Universal Access Achieved: India electrified all villages; 80% of the poor now receive subsidised fuel.
    2. Diversified Supply Sources: Imports now come from the US, Australia, Brazil, Indonesia, and soon Guyana, not just the Middle East.
    3. Governance Continuity: Post-Independence PSE structure ensured accountability; Nehru’s model remained dominant for decades.
    4. Shift to Private Actors: Reforms allowed private sector participation, reducing exclusive PSE control.
    5. Fragmented Institutional Structure: Multiple ministries and regulators divide responsibility, limiting coordinated energy transitions.

    Why are new trade-offs emerging in India’s energy landscape?

    1. Economic Growth vs. Environmental Degradation: Rising demand from infrastructure, manufacturing, and consumers collides with pollution and ecological limits.
    2. Technological Innovation vs. Energy Mix: AI and green manufacturing require high reliability and large electricity reserves.
    3. Speed of Transition vs. Social Costs: Rapid shifts affect livelihoods of coal-linked communities.
    4. Domestic Needs vs. Global Climate Commitments: India must meet developmental aims while honouring decarbonisation pledges.
    5. Self-reliance vs. Global Dependence: Lithium, solar cells, and key minerals remain import-dependent, especially from China.

    How do data centres and AI intensify energy challenges?

    1. High Electricity Demand: AI training models and data centres require massive power inputs.
    2. Policy Example Highlighted: Maharashtra extended a thermal plant licence and delayed the shutdown of a 500 MW unit mainly to serve Amazon’s data centre load.
    3. Conflict with Renewables: Renewable supply intermittency makes it difficult to guarantee continuous uptime for AI workloads.
    4. Absence of Grid Upgradation: Without advanced transmission and storage infrastructure, clean energy cannot reliably support such heavy loads.
    5. Corporate Commitments: Most IT companies pledge renewable sourcing but depend on a grid unable to meet that demand consistently.

    How does China’s dominance in green-energy supply chains complicate decisions?

    1. Global Solar Dominance: China controls 80% of photovoltaic manufacturing.
    2. Lithium-ion Control: 80% of global lithium-ion processing is China-centric.
    3. Cheaper Supply, High Dependence: India relies heavily on China for panels, cells, and critical mineral processing.
    4. Strategic Risks: Over-dependence raises concerns about supply disruptions and competitiveness.
    5. Manufacturing Dilemma: India must choose between accelerating competitiveness through imports or slowing transition to build domestic capabilities.

    What institutional and policy shifts are required to navigate these trade-offs?

    1. Governance Reform Needed: India’s energy responsibilities scattered across multiple ministries require rationalisation.
    2. Integrated Resource Management: Indigenous fuels, renewables, and storage must be coordinated under a unified strategy.
    3. Balanced Administrative Processes: Policies must simultaneously account for environmental costs, economic needs, and grid stability.
    4. Dual-track Approach: Supporting clean energy while ensuring conventional capacity remains stable during transition.
    5. Holistic Decision-making: Manufacturing, infrastructure, climate targets, and technological competitiveness need collective planning rather than siloed decisions.

    Conclusion

    India’s energy policy is transitioning from a supply-security model to a complex balancing act involving climate goals, technological competition, environmental constraints, and geopolitical dependencies. The coming decade will require stronger governance, resilient domestic manufacturing, upgraded grid capacity, and a careful negotiation of new trade-offs amplified by AI and climate change.

    PYQ Relevance

    [UPSC 2018] Access to affordable, reliable, sustainable and modern energy is the sine qua non to achieve Sustainable Development Goals (SDGs). Comment on the progress made in India in this regard.

    Linkage: India’s challenge of meeting AI-driven energy demand while pursuing clean, modern and reliable power directly reflects SDG energy goals. The article’s concerns on grid gaps and import dependence highlight why this theme remains central to GS-3 energy policy.

  • How the rupee’s fall is ‘real’ this time

    Introduction

    The rupee’s depreciation in late 2024 and 2025 has raised concerns not merely because of its nominal slide but because the Real Effective Exchange Rate (REER) also shows a downward trend. Unlike previous years, when inflation differentials kept the rupee “overvalued,” the REER for 2024-25 has fallen below 100, indicating undervaluation and revealing deeper currency pressures.

    Why in the news

    The rupee breached the ₹89-per-dollar mark for the first time, closing at ₹89.46, marking a significant psychological barrier. More importantly, the rupee has weakened not only nominally but also in real effective terms, a sharper and broader fall than seen in recent years, including against the euro, pound, yen and yuan. This constitutes a shift from earlier patterns where inflation-adjusted metrics often showed the rupee as stable or overvalued. The current fall is “real,” signaling deeper macroeconomic pressures.

    How have the rupee’s effective exchange rates behaved recently?

    1. NEER trends: The Nominal Effective Exchange Rate (NEER) fell from a peak of 106.19 (2022) to 103.53 in October 2024, showing broad-based weakening.
    2. REER trends: The Real Effective Exchange Rate (REER) also declined from 109.86 (Nov 2024 high) to 97.05, pushing it below the 100-mark, indicating undervaluation.
    3. Shift from past pattern: For years, REER stayed above 100 due to India’s higher inflation, which normally made the rupee appear stronger, this trend has reversed.

    Why is the current fall described as “real” rather than just nominal?

    1. Inflation-adjusted depreciation: The rupee has weakened even after adjusting for inflation differentials with 40 trading partners, capturing “true” competitiveness loss.
    2. CPI-driven REER insight: Higher CPI inflation in India (5.2% Oct 2024) versus trading partners like the US (3%), Japan (3%), and Euro Area (2%) historically kept REER high, but the nominal fall is now so steep that REER has slid below 100.
    3. Undervaluation signal: A REER below 100 means the rupee is undervalued relative to its long-term average, a reversal from the usual overvaluation.

    What explains the rupee’s weakening across multiple currencies?

    1. Broad-based decline: Rupee weakened against the dollar, euro, pound, yen, and yuan, not just one currency.
    2. Comparative movements: Between Nov 1-28, rupee depreciated:
      1. Against EUR: ₹90.18 to ₹93.36
      2. Against GBP: ₹103.32 to ₹106.37
      3. Against JPY (100 units): ₹54.62 to ₹57.18
      4. Against yuan: ₹11.82 to ₹12.49
    3. Higher import costs: Rising global inflation and domestic CPI have jointly exerted pressure.

    How does the RBI’s shift to a ‘stabilised arrangement’ matter?

    1. IMF reclassification (Nov 2024): India moved from “floating” to “stabilised arrangement”, meaning RBI intervenes more actively to limit volatility.
    2. Operational effect: RBI’s increased forex operations indicate greater management of rupee movements.
    3. Significance: Signals persistent depreciation pressure requiring defensive central bank actions.

    What macroeconomic factors are pushing REER below 100?

    1. Persistent CPI inflation: Even modest inflation differentials now fail to offset nominal weakness.
    2. Import-price pass-through: Costlier imports make domestic inflation elevated, weakening competitiveness.
    3. Global monetary tightening: Stronger dollar and higher yields globally reduce EM currency strength.

    Conclusion

    The current weakness of the rupee is not merely a nominal slide but a deeper, inflation-adjusted depreciation. With both NEER and REER falling sharply, and REER moving below 100 for the first time in years, the pressure is structural. Combined with higher domestic inflation and global monetary tightening, the rupee’s fall now reflects broader competitiveness concerns rather than short-term volatility.

    PYQ Relevance

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

    Linkage: Protectionism and currency manipulation directly affect exchange rate stability and India’s external sector, a core GS-III theme. They link to rupee depreciation, import costs, inflation, and RBI’s intervention needs.

  • India’s Q2 FY26 GDP Growth  

    Why in the News?

    India’s GDP grew 8.2% in Q2 of FY 2025-26 (July–September), marking a six-quarter high, supported mainly by manufacturing and services.
     However, economists flagged concerns over low nominal GDP growth (8.7%), which signals subdued economic activity and potential stress on fiscal targets.

    Key Data

    • Real GDP growth (Q2 FY26): 8.2%
    • Real GDP growth (Q1 FY26): 7.8%
    • Growth in H1 FY26: 8%
    • Nominal GDP growth: 8.7% (vs Budget assumption of 10.1%)
    • Last higher GDP growth: Q4 FY24
    • Government revised full-year growth forecast: “7% or higher”

    Why High Real but Low Nominal Growth?

    • Nominal GDP = Real GDP + Inflation (GDP deflator)
    • A very low deflator (~0.5%) boosted real growth artificially
    • Indicates inflation in tradable/manufactured goods is low, not necessarily high economic momentum
    • Low nominal growth → Lower tax revenues, harder to meet fiscal deficit target of 4.4%

    Sector-wise Performance

    1. Manufacturing

    • Growth: 9.1% (six-quarter high)
    • Reasons:
      • Corporate earnings showed strong growth
      • Low base effect (growth was only 2.1% last year)

    2. Services

    • Growth: 9.2%
    • Within services:
      • Financial, real estate, professional services: 10.2% (nine-quarter high)
      • Public admin, defence & other services: 9.7%

    3. Agriculture

    • 3.5% (lower than 4.1% last year)
    • Slight moderation due to uneven monsoon patterns

    Fiscal Concerns

    • Nominal GDP shortfall may:
      • Reduce tax buoyancy
      • Pressure fiscal deficit (target: 4.4%)
      • Lower denominator for deficit calculation
    • Lower capital expenditure visible (“no upswing in GFCF”)

    Opposition Criticism

    • IMF recently rated India’s national accounts ‘C’, the second-lowest grade
      • Claims real GDP inflated using unrealistically low deflator
      • Points to weak private investment and thin capital formation

    With reference to Indian economy, consider the following statements : (2015)

    (1) The rate of growth of Real Gross Domestic product has steadily increased in the last decade. 

    (2) The Gross Domestic product at market prices (in rupees) has steadily increased in the last decade. 

    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 

  • Tex-RAMPS Scheme

    Why in the News?

    The Government of India approved a new scheme called Tex-RAMPS to strengthen research, data systems, innovation, and competitiveness in India’s textiles sector.
     The scheme aligns with India’s push to make its textiles ecosystem future-ready, technologically advanced, and globally competitive.

    What is Tex-RAMPS?

    Tex-RAMPS = Textiles Focused Research, Assessment, Monitoring, Planning and Start-up Scheme. It is a Central Sector Scheme, fully funded by the Ministry of Textiles.

    Outlay & Duration

    • Total Outlay: ₹305 crore
    • Period: FY 2025-26 to FY 2030-31
    • Co-terminus with the upcoming Finance Commission cycle

    Objectives

    To future-proof India’s textiles & apparel (T&A) ecosystem by:

    • Strengthening research and innovation
    • Building robust data systems
    • Enhancing global competitiveness
    • Supporting start-ups
    • Improving capacity development across the sector
    Atal Innovation Mission is set up under the (2019)

    (a) Department of Science and Technology 

    (b) Ministry of Employment 

    (c) NITI Aayog 

    (d) Ministry of Skill Development and Entrepreneurship

  • [28th November 2025] Hindu OpED Are the labour codes labour friendly

    PYQ Relevance

    [UPSC 2024] Discuss the merits and demerits of the four ‘Labour Codes’ in the context of labour market reforms in India. What has been the progress so far in this regard?

    Linkage: The article’s debate on worker protection vs. industry flexibility directly reflects the merits and demerits raised in this PYQ. It also covers the slow implementation and stakeholder resistance, matching the question’s focus on progress.

    Mentor’s Comment

    The introduction of India’s four consolidated labour codes has triggered a high-stakes national debate on whether they truly modernise labour regulation or dilute long-standing protections. This article dissects the core arguments expanding them into a UPSC-focused analytical framework. The aim is to help aspirants understand the political economy of labour reforms, their implications for workers and industry, and their place in India’s growth policy discourse.

    WHY IN THE NEWS?

    India’s four consolidated labour codes, wage, social security, industrial relations, and occupational safety, have reignited debate as trade unions accuse the government of diluting protections while industries argue they streamline a fragmented regulatory environment. The issue is significant because India has not attempted such a comprehensive codification since Independence, and the codes come at a time when informal workers form 93% of the workforce but only 7% receive social security. The codes also affect hiring, firing, job security, and collective bargaining, core issues shaping labour productivity and industrial peace.

    INTRODUCTION

    India’s labour market operates at the intersection of rapid economic modernization and persistent structural informality. The four new labour codes aim to consolidate 29 existing laws, reduce compliance rigidity, support ease of doing business, and expand social security. However, the reforms have triggered disagreements between trade unions, who fear erosion of worker rights, and industries, who seek flexibility to improve competitiveness. This article examines the institutional debates and policy implications emerging from the new codes.

    The Historical Context of Labour Law Reform

    1. Fragmented Legislation: Consolidated 29 separate laws, many framed in the 1940s-50s, marked by overlapping definitions, multiple inspections, and differing interpretations across states.
    2. Changing Labour Landscape: Witnessed rapid industrial growth, gig work, platforms, logistics, contract labour, and digital-era employment, demanding updated regulatory structures.
    3. Productivity Imperatives: Industries argue workers must be protected and empowered but rigidities must reduce to strengthen India’s global competitiveness.

    What Necessitated the Labour Codes?

    1. Regulatory Overlap: Multiple laws with inconsistent provisions complicated compliance and enforcement.
    2. Economic Modernisation Need: Traditional industry structure gave way to gig work, platform work, logistics, e-commerce and new forms of employment, requiring modern regulation.
    3. Social Protection Gap: Only 7% of workers covered by social security; informal economy workers remain largely unprotected.
    4. Investment Climate Concerns: Procedural delays in hiring/firing, disputes, and closures deterred global investment.

    Do the Labour Codes Promote or Restrict Worker Rights?

    1. Trade Union Concern-Reduced Security: Fears that fixed-term contracts, easier retrenchment thresholds, and union restrictions weaken bargaining power.
    2. Collective Bargaining Apprehension: Codes allow only a single negotiating union, potentially marginalising smaller unions.
    3. Industry Perspective-Greater Formalisation: Codification ensures predictable rules, reduces litigation, and encourages job creation.
    4. Worker Protection Measures: Codes extend minimum wage applicability, mandate formalised contracts, introduce new safety norms, and expand the definition of employees.

    How Will the Codes Impact Social Security and Gig Workers?

    1. Social Security Expansion: Gig and platform workers added under social security, but benefits remain contingent upon schemes and government implementation.
    2. Funding Challenges: Industry argues government and employees must co-contribute; trade unions insist government should shoulder primary responsibility.
    3. Small Share of Gig Workers: Currently form a small slice of the informal sector but rapidly growing; require future-ready welfare structures.

    Do the Codes Improve Industrial Relations and Productivity?

    1. Industry View: Ensures Stability
      • Predictability and ease of compliance strengthen investment climate and reduce industrial disputes.
    2. Trade Union View: Risk of Industrial Unrest
      • Dissatisfaction due to inadequate representation and perceived dilution of rights may trigger strikes.
    3. Flexibility vs. Protection Debate: Government seeks a balance between global competitiveness and worker protection.

    Will the Codes Expand Organised Employment?

    1. Industry Assertion: Broader wage definitions, coverage of establishments, and social security norms bring more workers under formal sector protections.
    2. Union Counterpoint: Without job stability, contract labour proliferation may worsen precarity.

    CONCLUSION

    India’s labour codes represent an ambitious attempt to modernise outdated labour laws, enhance productivity, and integrate India into global manufacturing networks. However, the success of these reforms will depend on transparent implementation, a balanced approach to worker protection, and sustained dialogue with trade unions. A labour ecosystem that provides both flexibility and security is essential for equitable and sustainable growth.

  • [27th November 2025] Hindu OpED Limited room: On the Indian rupee

    PYQ Relevance

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

    Linkage: Protectionism and currency pressures weaken the rupee, widen the CAD, and raise imported inflation. This directly affects India’s macroeconomic stability, as seen in the article’s emphasis on dollar strength and RBI’s limited room.

    Mentor’s Comment

    India’s recent 7% rupee depreciation has revived an uncomfortable truth, monetary tools alone cannot stabilise the currency when structural vulnerabilities remain unaddressed. The article examined today highlights India’s long-standing dependence on oil imports, the RBI’s limited manoeuvring room, and why external pressures have outweighed domestic macro stability. For UPSC aspirants, this topic offers rich intersections across macroeconomics, external sector management, energy security, inflation dynamics, trade policy, and structural reforms.

    Introduction

    India’s rupee has depreciated about 7% between late November 2024 and now, sliding from ₹83.4/$ to nearly ₹89.2/$. Despite large-scale RBI intervention, including selling nearly $50 billion in forex, the currency continues to weaken amid external pressures. The episode mirrors the 2018 phase of global dollar strength and U.S. interest rate hikes, exposing India’s long-standing vulnerability: heavy dependence on expensive crude oil imports. With crude forming more than one-fifth of total imports, and India transitioning away from Russian supplies, monetary stabilisation alone is insufficient.

    Why in the News 

    The rupee has dropped nearly 7% to ₹89.2 per dollar, even after the RBI sold $50 billion to stabilise it. This mirrors the 2018 downturn when global dollar strength and U.S. rate hikes triggered similar pressure. What makes this episode striking is the contradiction: inflation is low (0.25% in Oct 2025), forex reserves remain comfortable at $693 billion, yet the rupee continues to slide. The rapid fall highlights India’s structural weakness, oil import dependence, which raises the current-account deficit and inflation risks despite favourable domestic conditions.

    What Explains the Recent Rupee Depreciation?

    1. Global Dollar Strength: Mirrors 2018 trends where strong U.S. interest rates and trade tensions pressured emerging market currencies.
    2. Widening Current Account Deficit: Rising bullion imports as a hedge in uncertain times widened the CAD.
    3. Exporter Competitiveness Issues: Exporters struggled to maintain margins due to high U.S. tariffs, increasing pressure on the INR.

    Why Are RBI Tools Proving Insufficient?

    1. Floating-but-Managed Regime: RBI can only “smoothen volatility”, not fix the rate.
    2. Forex Market Intervention: RBI sold nearly $50 billion, yet depreciation continued, signalling strong external headwinds.
    3. Liquidity Supports via Swaps:
      1. 2018: First longer-term currency swap as a systemic liquidity check.
      2. 2019: Completed a $5 billion three-year swap.
      3. Feb 2025: Conducted a $10 billion buy-sell auction to infuse long-term rupee liquidity.

    Why Is This Rupee Slide Concerning Despite Low Inflation?

    1. Exceptionally Low CPI Inflation: Headline CPI at 0.25% (Oct 2025), well below RBI’s 2-6% band, should normally support the rupee.
    2. Transition-Induced Cost Pressures: Shift from cheaper Russian crude toward costlier U.S. imports exerts upward pressure.
    3. Risk of Imported Inflation: Higher oil prices raise logistics, manufacturing, and CPI components.

    Why Must India Reduce Dependence on Oil Imports?

    1. Over One-Fifth of FY25 Imports Are Crude: A single commodity dominates the import basket, creating vulnerability.
    2. Rupee-Oil Linkage: Any crude price rise automatically weakens the rupee by widening CAD.
    3. Limited Monetary Space: Rupee stabilisation cannot rely solely on forex intervention or interest rate changes.

    What Structural Reforms Are Needed?

    1. Faster Transport Electrification: Must be treated as a strategic imperative, not a long-term aspiration.
    2. Holistic Trade Policy: India’s bilateral deals (Japan, UAE, ASEAN) have tilted the trade balance against it, offering limited diversification of energy trade routes.
    3. Reduced Oil Intensity in GDP: Accelerating renewable capacity, green hydrogen, and domestic energy alternatives.

    Conclusion

    The current rupee slide highlights a deeper structural flaw: India’s dependence on oil imports exposes it to global price volatility and external shocks. With RBI intervention offering only temporary relief, sustainable currency stability requires reducing crude dependence, reforming trade strategy, and accelerating energy transition. Unless structural measures address the root vulnerability, India cannot insulate the rupee from future external pressures.

  • Rupee is Asia’s worst performing currency

    Introduction

    The Indian Rupee has depreciated 4.3% against the US Dollar in 2025, making it Asia’s worst-performing currency. Analysts warn that the INR may slide to ₹90 per USD if the India-US trade deal does not materialise soon. The rupee’s movement is now driven more by global dollar strength than by domestic fundamentals. Persistent capital outflows, a rising trade deficit, U.S. tariffs, and a surge in gold imports have intensified pressure on the domestic currency.

    Why This Matters: Rupee Hits Asia’s Lowest Position

    The rupee’s sharp 4.3% calendar-year depreciation marks one of the steepest declines among Asian currencies. This contrasts sharply with the appreciation seen in much of the Asian currency complex, led by the Chinese Yuan through strong intervention by China’s central bank. The situation is aggravated by India’s record $41.7 billion trade deficit, U.S. tariff shocks, and a gold price spike that spurred a 200% rise in ETF investments. The worsening outlook raises concerns of the rupee breaching ₹90 per USD, a level not previously approached in recent years.

    Drivers Behind the Rupee’s Depreciation

    1. Global Dollar Strength: Dollar appreciation of 3.6% over two months increased pressure on most Asian currencies, including the INR.
    2. External Shocks:
      1. U.S. tariffs on Indian goods directly added stress.
      2. High precious metal prices increased import bills.
    3. Capital Outflows: The current account remains “benign”, but the depreciation is driven by capital flight, not trade fundamentals.
    4. Comparative Weakness: INR weakened more than IDR (2.9%) and PHP (1.3%), marking a distinct underperformance.

    Rupee’s Position Relative to Asian Peers

    1. Underperformance vs. China and Indonesia: Specialists note that while Indonesian Rupiah and Chinese Yuan have depreciated, INR weakened further.
    2. Better Than Structurally Weak Majors: INR still fares better than the Japanese Yen and Korean Won, which face domestic policy constraints.
    3. Asian Currency Complex Trend: Most Asian currencies appreciated, driven by Chinese intervention through PBOC/SAFE signalling.

    Market Movements and Recent Lows

    1. New Lows Recorded: Rupee touched 88.8 per USD on 21 November 2025, breaking earlier RBI-supported levels.
    2. Intraday Weakness: Fell further to 89.66, signalling intense currency-market stress.
    3. Partial Recovery: Rupee recovered to 89.22 by Tuesday, though still significantly weaker on a monthly basis.

    Trade Deficit and Macro Pressures Intensifying Rupee Weakness

    1. Record Trade Deficit: October witnessed a $41.7 billion merchandise trade deficit triggered by tariff hikes.
    2. Gold Import Surge:
      1. Gold imports spiked to $14.72 billion in October.
      2. Gold ETF demand rose by 200% due to soaring global prices.
    3. Twin External Shocks: Tariffs + gold price rise combine with geopolitical uncertainty to pressure the currency.

    Impact of the U.S. Tariffs and Policy Changes

    1. 50% Tariff Imposed by U.S.: Direct impact on India’s export competitiveness, worsening the trade deficit.
    2. Cumulative Effect on Rupee: Tariffs + gold imports + dollar strength + capital outflows create a compounding depreciation effect.
    3. Forward Outlook: Without a trade deal with the U.S., the rupee may breach ₹90 per USD.

    Conclusion

    The rupee’s position as Asia’s worst-performing currency signals deeper stresses in India’s external sector. The depreciation stems from global dollar dominance, tariff shocks, capital outflows, and rising import bills. While partial recoveries occur, the broader trajectory depends heavily on the India-US trade negotiations and management of external vulnerabilities. Ensuring macroeconomic stability will require coordinated steps in trade policy, forex management, and domestic economic resilience.

    PYQ Relevance

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

    Linkage: It is directly linked to GS-3: External Sector, as it examines how tariffs and currency moves affect India’s macroeconomic stability. It is relevant for understanding exchange-rate volatility, CAD pressures, and global protectionist trends.

  • Capital Gains Accounts (Second Amendment) Scheme, 2025

    Why in the news? 

    The Ministry of Finance has notified the Capital Gains Accounts (Second Amendment) Scheme, 2025, introducing major changes to the existing Capital Gains Account Scheme (CGAS), 1988. The amendments aim to modernise processes, expand banking access, and increase clarity for taxpayers seeking capital gains exemptions.

    About Capital Gains Account Scheme (CGAS), 1988

    • Launched by the Central Government in 1988.
    • Objective: To help taxpayers claim exemptions on long-term capital gains when reinvestment cannot be completed before the ITR filing due date.
    • Linked mainly to Section 54, 54F, and related provisions of the Income Tax Act.

    Why CGAS is Needed?

    • Exemption requires reinvestment of capital gains within:
      • 2 years (purchase of property)
      • 3 years (construction of property)
    • If this period extends beyond the ITR filing deadline, the taxpayer can temporarily deposit unutilised gains in CGAS to keep the exemption claim valid.

    Important Conditions

    • Deposit must be made before filing Income Tax Return.
    • Money deposited is treated as reinvested for exemption.
    • If the amount is not utilised within the stipulated period, it becomes taxable long-term capital gains in that year.
    • Only long-term capital gains qualify — short-term gains are NOT eligible.

    Who Can Deposit in CGAS?

    • Any person with long-term capital gains, including: Individuals, HUFs, Companies, Firms, Trusts, and Any eligible taxpayer seeking exemption
    • Mainly used by property sellers who need more time to reinvest.

    Capital Gains Accounts (Second Amendment) Scheme, 2025 — Key Changes

    • Expansion of Authorized Banks: Previously limited mostly to Public Sector Banks + IDBI Bank.
      • Now extended to 19 private and small finance banks at all non-rural branches.
    • Non-rural branch condition: Branch must be located in an area with population ≥ 10,000 (2011 Census).
      • Rural branches cannot open CGAS accounts.
    • Wider Definition of Electronic Payments: Electronic deposits can now be made through: Credit cards, Debit cards, Net banking, IMPS, UPI, RTGS, NEFT and BHIM Aadhaar Pay.This modernises the earlier narrow definition of “electronic mode”.
    • Online Closure of CGAS Accounts (From April 1, 2027): Closure requests can be submitted electronically using:
      • Digital Signature (DSC)
      • Electronic Verification Code (EVC)
      • Earlier: Closure only through physical branches.
    • Clarification on Effective Date of Deposit: For cheque/DD/electronic transfers, the date of receipt of the payment instrument along with account application at the Deposit Office is treated as the effective date.Removes ambiguity around last-day deposits for tax exemption.
    • Electronic Statements Permitted: Banks can now issue electronic statements instead of physical passbooks.
      • Aligns CGAS with general digital banking norms.
    •  Extension of CGAS to Section 54GA: CGAS can now be used for exemptions under Section 54GA:

      • Relates to capital gains arising from shifting an industrial undertaking from an urban area to a Special Economic Zone (SEZ).
      • Broadens applicability beyond property-related reinvestments.
    Consider the following statements: (2025)

    I. Capital receipts create a liability or cause a reduction in the assets of the Government. 

    II. Borrowings and disinvestment are capital receipts. 

    III. Interest received on loans creates a liability of the Government. 

    Which of the statements given above are correct? 

    (a) I and II only 

    (b) II and III only 

    (c) I and III only 

    (d) I, II and III

  • Labour codes: what changes for workers and employers

    Introduction

    The four labour codes, Code on Wages, Code on Social Security, Industrial Relations Code, and Occupational Safety, Health and Working Conditions Code, aim to simplify compliance for industries, expand social security to workers, and improve ease of doing business. However, labour being a concurrent subject, implementation depends on states, and concerns have emerged about job security, worker rights, and the impact on collective bargaining.

    Why in the News

    The government has notified the implementation of four labour codes after over five years of deliberation and the consolidation of 29 central labour laws. This marks the first time India will operate under a uniform nationwide wage system and a consolidated social security architecture. While the reforms promise simplified compliance and a push for manufacturing efficiency, trade unions warn of reduced strike power, easier employee termination, and increased precarity for informal workers, making it one of the most debated labour reforms in recent times.

    Labour Codes and the Changing Labour Landscape

    1. Consolidation of 29 laws into four codes to create uniformity and remove overlapping provisions.
    2. Target shift from penal to compliance-based enforcement, especially for small firms and first-time offences.
    3. Push for economies of scale in manufacturing, signalling alignment with global production norms.

    Code on Wages: What changes for employees and employers?

    1. Uniform definition of wages: It ensures consistency in minimum wage calculation across states and sectors.
    2. Mandated national floor wage: It enables states to set minimum wages only above the national baseline.
    3. Time-bound wage payment: within 2 days of resignation/termination and 7 days of completion of the wage period.
    4. Broader coverage for all employees irrespective of industry or wage threshold.
    5. Overtime provisions strengthened: capped at 48 hours weekly, 12 hours daily shift duration permitted with breaks.

    Code on Social Security: Is the social net expanding?

    1. Unified ecosystem of social security: It covers unorganised, informal, gig, and platform workers for the first time.
    2. National Social Security Board: For recommendations, registration, schemes, and funding decisions.
    3. Corporate Co-contribution: Corporates may co-contribute to gig/platform worker benefits but funding split still unclear.
    4. ESIC expansion: Applies to sectors previously exempt; plantation workers included voluntarily.
    5. Formalisation incentive through maternity benefits, gratuity reforms, and inclusion of fixed-term employees.

    Industrial Relations Code: Does it limit collective bargaining?

    1. Stricter strike rules: 60-day notice before strike and prohibition of strike in the next 14 days of conciliation.
    2. Increase in threshold: Threshold for prior permission for layoffs raised from 100 to 300 workers, enabling easier hiring-firing.
    3. Negotiating Union provision: Only unions with 51% membership can negotiate; multi-union negotiation councils for fragmented memberships.
    4. Push for stable industrial climate: It is criticised for shrinking bargaining space for workers.

    OSH Code: Will workplace safety improve?

    1. Standardised norms: Across industries norms for working hours, workplace safety, and facility obligations.
    2. Mandatory free annual health check-ups: For workers in notified industries.
    3. Women allowed in all sectors and night shifts: subject to safety conditions.
    4. Increased accountability for establishments: In case of handling hazardous activities and migrant labour.

    Conclusion

    The labour codes aim to simplify compliance and strengthen India’s labour market to support manufacturing-led growth. However, concerns persist regarding job security, collective bargaining, and implementation across states. Successful outcomes depend on balancing economic flexibility with worker protection and ensuring that reforms lead to formalisation without vulnerability.

    PYQ Relevance

    [UPSC 2024] Discuss the merits and demerits of the four ‘Labour Codes’ in the context of labour market reforms in India. What has been the progress so far in this regard?

    Linkage: Growth driven mainly by labour productivity has led to GDP rising without proportional job creation. This links to the four Labour Codes, which seek higher productivity and flexibility, but face concerns on whether they will create jobs while protecting workers.