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Subject: Economics

  • Inflation falls but not unemployment

    Why in the News?

    Despite headlines celebrating India’s less than 3% inflation rate in May 2025, deeper economic indicators tell a more troubling story. The same month saw a rise in unemployment from 5.1% to 5.8%, and GDP growth has slowed sharply from 9.2% in 2023-24 to 6.5% in 2024-25.

    What caused the recent fall in inflation despite rising unemployment?

    • Faster Agricultural Growth Narrowed Supply-Demand Gap: In 2024-25, agriculture grew faster than non-agricultural sectors, leading to an increased supply of food items. E.g., higher food production reduced scarcity, stabilising prices and easing inflationary pressure.
    • Sharp Decline in Food Inflation: Food-price inflation fell from nearly 11% in October 2024 to less than 1% in May 2025. Eg: This drop significantly pulled down the overall Consumer Price Index (CPI).

    Why is the RBI’s inflation control strategy being questioned?

    • Mismatch Between Interest Rates and Inflation Trends: The RBI’s key tool—repo rate hikes—did not align with the sharp fall in inflation, especially food inflation. Eg: Despite no major repo rate hike since June 2022, inflation fell from ~11% in Oct 2024 to <1% in May 2025.
    • Inflation Expectations Remain Unchanged: Household inflation expectations remained high and stable, even as actual inflation dropped, undermining the theory that RBI can anchor inflation through expectations. Eg: RBI’s own surveys (Mar 2024–May 2025) show expectations stayed well above the 4% target.
    • Policy Reactivity, Not Proactivity: The RBI’s approach appears reactive, adjusting repo rates after inflation changes instead of steering inflation proactively. Eg: RBI Governor stated repo rates may be reduced if inflation continues to fall—indicating policy follows rather than leads inflation.

    How does sectoral growth affect inflation?

    • Balanced Sectoral Growth Reduces Supply-Demand Gaps: When agriculture and non-agriculture sectors grow at similar rates, it narrows the supply-demand gap, especially for essentials like food. Eg: In 2024–25, agriculture grew faster than non-agriculture, helping reduce food shortages and lowering food inflation.
    • Agricultural Growth Directly Lowers Consumer Prices: A rise in farm output increases food availability, leading to a direct fall in food prices, which are a major part of the Consumer Price Index (CPI). E.g., food inflation fell from nearly 11% in Oct 2024 to under 1% in May 2025 due to a strong agricultural season.
    • Wage Effects Spill into Non-Agricultural Prices: Lower food inflation slows down wage growth demands, especially for rural labour, which indirectly eases price pressures in services and manufacturing. Eg: Cheaper food reduces pressure on industrial wages, helping contain broader inflation in non-farm sectors.

    What does the data say about interest rates and managing inflation?

    • Weak Link Between Interest Rates and Inflation Control: Econometric studies show no conclusive evidence that interest rate hikes directly reduce inflation in India. Eg: Despite a repo rate increase of over 10% in June 2022, food inflation fell in 2025 largely due to improved agricultural supply, not rate changes.
    • Sectoral Growth Differences Matter More: Inflation responds more to the relative growth of agriculture and non-agriculture sectors than to interest rate tweaks. Eg: In 2024–25, faster agricultural growth narrowed the supply-demand gap, lowering inflation, independent of any monetary policy shift.
    • Inflation Expectations Remain High Despite Rate Hikes: Even with a tighter monetary policy, household inflation expectations remained above the 4% RBI target, questioning the effectiveness of interest rate-driven expectations control. E.g., from March 2024 to May 2025, inflation expectations stayed high despite stable repo rates.

    Why should inflation and unemployment be assessed together?

    • Inflation Control Alone Doesn’t Reflect Economic Well-being: Focusing only on low inflation can hide deeper problems like joblessness, which directly affects livelihoods. Eg: In May 2025, inflation dropped to 2.8%, but unemployment rose to 5.8%, showing a weak job market despite price stability.
    • Policy Trade-offs Require Balanced Assessment: Sometimes policies that lower inflation may slow economic growth and reduce employment opportunities. Eg: Growth fell from 9.2% in 2023–24 to 6.5% in 2024–25, aligning with rising unemployment—highlighting that price stability came at the cost of jobs.

    Way forward: 

    • Adopt a Dual-Mandate Approach: Policymakers, especially the RBI, should consider both inflation and unemployment while framing monetary policy—moving beyond inflation targeting alone.
    • Promote Inclusive Growth through Sectoral Investment: Encourage job creation by investing in labour-intensive sectors like manufacturing, MSMEs, and services, while ensuring agricultural support to maintain price stability.

    Mains PYQ:

    [UPSC 2022] Besides the welfare schemes, India needs deft management of inflation and unemployment to serve the poor and the underprivileged sections of the society. Discuss.

    Linkage: This question is highly relevant because it explicitly mentions both “inflation and unemployment” together and the need for their effective management. This article talks about the inflation has fallen, unemployment has risen, and it criticizes the focus on inflation while neglecting unemployment.

  • [23rd June 2025] The Hindu Op-ed: Steering the Indian economy amidst global troubles 

    PYQ Relevance:

    [UPSC 2019] The economy is in a state of crisis due to global inflation. Critically examine whether this crisis and high inflation have left the Indian economy in good shape? Give reasons in support of your arguments.

    Linkage: This PYQ directly mentions a specific global economic “trouble” – global inflation – and asks about its impact on the Indian economy. This article talks about the “monetary policy should continue to remain accommodative” and that “inflation currently under control and projected to be lower” can help “propel growth,” indicating that managing inflation is a key part of steering the economy amidst global challenges.

     

    Mentor’s Comment:  The global trade order is witnessing a seismic shift amid renewed trade wars, evolving tariff regimes, and accelerating bilateral negotiations. In this flux, India’s exports of nearly one-fifth of its merchandise to the U.S., finds itself vulnerable, especially in sectors dominated by MSMEs like apparel, gems, and electronics. The uncertainty surrounding U.S. reciprocal tariffs, potential dumping threats, and the instability in trade negotiations pose a structural challenge. However, India also faces a rare geopolitical opportunity—to integrate into the reconfigured global supply chains, reduce dependency on traditional partners, and assert itself as a global manufacturing and export hub.

    Today’s editorial analyses the impact of new trade rules and ongoing political tensions between countries. This content would help in GS Paper II (International Relations) and GS Paper III (Indian Economy) in the mains Paper.

    _

    Let’s learn!

    Why in the News?

    The global economy is changing in a big way, mainly due to new trade rules and ongoing political tensions between countries.

    Why are current global trade dynamics creating uncertainty for Indian exporters?

    • Rise in protectionism and trade wars: Many countries are reviewing tariffs and adopting protectionist measures. This creates unpredictability in global trade flows, making it harder for Indian exporters to plan pricing and market strategies. Eg: The U.S. imposing or revising tariffs on Indian goods affects sectors like garments and pharmaceuticals.
    • Geopolitical tensions: Conflicts like the U.S.-China trade war or the Russia-Ukraine war are disrupting supply chains and altering trade alliances, impacting Indian exporters’ access to global markets and increasing costs. Eg: Indian exporters face delays or higher freight costs due to changes in trade routes.
    • Uncertain tariff regimes: Indian exporters face difficulty in decision-making due to fluctuating U.S. trade policies and lack of clarity on future duty structures, impacting pricing and margins. Eg: Sectors such as auto components and gems & jewellery, heavily reliant on the U.S., face profitability issues.
    • Losing competitive advantage: Competing countries like Bangladesh and Vietnam may benefit from early trade deals with the U.S., while India’s relative tariff advantage remains unclear. Eg: Indian textile exports could become costlier compared to Bangladesh’s duty-free access.
    • Planning uncertainty: Exporters hesitate to invest or plan for the long term in the absence of stable trade rules and policies. This impacts capacity expansion and export contracts, particularly for MSMEs. Eg: Indian MSMEs may cancel new orders or delay shipments due to lack of tariff clarity.

    What challenges do Indian MSMEs face due to potential U.S. tariff changes?

    • Profit Margin Erosion: Increased U.S. tariffs make Indian goods costlier, reducing profit margins for MSMEs and making their exports uncompetitive. Eg: A carpet-exporting MSME in Uttar Pradesh may struggle to maintain orders if buyers shift to cheaper alternatives from Bangladesh.
    • Order Uncertainty and Planning Delays: Fluctuating tariff policies create hesitation among U.S. buyers, affecting long-term contracts and production planning for small businesses. Eg: An MSME manufacturing leather goods may face cancelled or delayed orders due to uncertainty over final landed prices.
    • Limited Ability to Absorb Costs: Unlike large firms, MSMEs lack the financial cushion to absorb increased costs from tariffs, logistics, or compliance. Eg: A small pharmaceutical exporter may not afford sudden freight hikes or additional duties, making exports unviable.

    How can bilateral and free trade agreements help India navigate global trade disruptions?

    • Ensure Preferential Market Access: FTAs allow Indian exporters to access foreign markets with lower or zero tariffs, making their goods more competitiveeven amid global disruptions. Eg: An FTA with the UK can benefit Indian apparel exporters by reducing tariff barriers, boosting exports.
    • Diversify Export Destinations: Bilateral trade deals reduce dependency on a single market like the U.S., helping India shift exports to Europe, Australia, or ASEAN during crises. Eg: The India-EU FTA under negotiation could open up multiple markets for Indian electronics and auto components.
    • Address Non-Tariff Barriers (NTBs): FTAs help resolve issues like customs delays, quality standards, or licensing hurdles, ensuring smooth trade flowduring uncertain times. Eg: A mutual recognition agreement (MRA) under a BTA with the U.S. could simplify pharmaceutical exports by accepting Indian drug certifications.

    What policies can boost India’s economic resilience?

    • Strengthening Public Capital Expenditure: Increased government spending on infrastructure boosts domestic demand, generates employment, and crowds in private investment during global slowdowns. Eg: The PM Gati Shakti scheme accelerates infrastructure development, improving logistics and economic stability.
    • Expanding Production-Linked Incentive (PLI) Schemes: Enhancing PLI coverage to include more sectors like IoT devices or battery raw materials promotes domestic manufacturing, attracts FDI, and reduces import dependency. Eg: PLI in electronics has boosted mobile phone exports and created supply chain resilience.
    • Maintaining Accommodative Monetary Policy: Ensuring low interest rates and easy liquidity through monetary support helps businesses manage costs and stimulate investment during global headwinds. Eg: RBI’s repo rate cuts post-COVID helped MSMEs access cheaper credit, aiding recovery.

    Why should India focus on foreign investment and PLI expansion?

    • Diversify Global Supply Chains: Global companies are looking to reduce dependency on China and Southeast Asia. India can attract them by offering stable policies and incentives. Eg: Apple has shifted part of its iPhone manufacturing to India due to the PLI scheme and policy support.
    • Boost Manufacturing and Employment: Expanding PLI coverage to sectors like wearables, batteries, and semiconductors can enhance local production, reduce imports, and generate jobs. Eg: The PLI for electronics has helped create thousands of direct jobs and increased exports.
    • Strengthen Export Competitiveness: Foreign investments bring technology transfer, better quality standards, and improved productivity, which are crucial for export growth. Eg: Investments in the automobile and pharma sectors under PLI have enhanced India’s global competitiveness.

    Way forward:

    • Accelerate FTA Negotiations and Ensure Tariff Stability: India should fast-track bilateral and multilateral trade agreements (e.g., with the EU, Australia) to ensure stable market access and reduce uncertainty for exporters.
    • Expand and Streamline PLI Schemes: Broaden the Production-Linked Incentive (PLI) schemes to include high-potential sectors (e.g., semiconductors, IoT), and simplify procedures to attract more foreign investment and boost domestic manufacturing.

  • PM Gram Sadak Yojana

    Why in the News?

    The Ministry of Rural Development (MoRD) asked states to add QR codes to Prime Minister Gram Sadak Yojana (PMGSY) rural road boards to boost public monitoring and streamline upkeep via the eMARG platform.

    About PM Gram Sadak Yojana (PMGSY):

    • Launch: It was launched on December 25, 2000, by then PM Atal Bihari Vajpayee as a Central Sector Scheme to provide all-weather road connectivity to unconnected rural habitations.
    • Objective: The scheme helps bridge the rural-urban divide and improves access to markets, healthcare, education, and public services.
    • Implementation: It is now a centrally sponsored scheme led by the Ministry of Rural Development (MoRD) and supported by state governments.
    • Monitoring: Progress is tracked using e-MARG, a digital platform for monitoring road construction and maintenance.
    • Implementation Phases:
      1. Phase I (2000): Focus on connecting unconnected habitations.
      2. Phase II (2013): Upgrading roads built in Phase I to enhance rural infrastructure.
      3. Phase III (2019–2025): Consolidation of 1.25 lakh km of rural roads connecting habitations to Gramin Agricultural Markets, Higher Secondary Schools, and Hospitals. Cost: ₹80,250 crore (2019-2025). Funding: 60:40 (Centre), 90:10 for North-East and Himalayan States.
      4. Phase IV (2024–2029): Aims at constructing 62,500 km of all-weather roads to provide connectivity to 25,000 unconnected habitations with a focus on Left-Wing Extremism (LWE) areas, tribal areas, and remote regions.

    Key Features of PMGSY:

    • Rural Connectivity Focus: Targets habitations based on population thresholds (e.g., 500+ in plains, 250+ in hill/NE areas).
    • Funding Pattern: Initially 100% central funding; since 2015–16, it follows a 60:40 split (90:10 for NE and Himalayan states).
    • Maintenance Period: Contractors are responsible for road upkeep for 5 years post-construction.
    • Quality Assurance: Involves routine inspections and geo-tagged photographs to evaluate maintenance performance.
    • Economic Impact: Improves rural livelihoods, reduces migration, and enhances access to markets and services.
    [UPSC 2001] Consider the following schemes launched by the Union Government: I. Antyodaya Anna II. Gram Sadak Yojana III. Sarvapriya IV. Jawahar Gram Samriddhi Yojana. Which of these were announced in the year 2000?

    Options: (a) I and II* (b) II and IV (c) III and IV (d) I, II and III

     

  • FASTag Annual Pass Scheme

    Why in the News?

    Union Transport Minister announced a new FASTag-based Annual Pass system for private non-commercial vehicles (cars, jeeps, vans) to ensure smoother travel across National Highways.

    What are FASTags?

    • FASTag is a contactless toll payment system that uses Radio Frequency Identification (RFID) technology to enable automatic toll collection at National Highway toll plazas.
    • Managed by the National Highways Authority of India (NHAI) and National Payments Corporation of India (NPCI), it was launched in 2014 and became mandatory in 2021 for all four-wheeled vehicles.
    • It is a sticker affixed on a vehicle’s windshield, linked to a prepaid wallet or savings account. Toll charges are automatically deducted when the vehicle passes through an electronic toll gate.
    • It enhances convenience, reduces traffic congestion, and promotes digital payments across India’s highway network.
    • As per the Motor Vehicles Rules, FASTags are mandatory for all new four-wheelers and necessary for renewal of fitness certificates and national permits.

    About the FASTag Annual Pass Scheme:

    • Overview: It is a new initiative announced by the Ministry of Road Transport and Highways to provide cost-effective and hassle-free travel for private non-commercial vehicles.
    • Implementation: The pass will be effective from August 15, 2025, and is optional, intended for cars, jeeps, and vans (not for commercial vehicles).
    • Objectives: The scheme is designed to reduce per-trip costs (as low as ₹15/toll) and provide savings of up to ₹7,000 annually for frequent travelers.
    • Benefits: It allows unlimited passage at National Highway (NH) and National Expressway (NE) toll plazas for either:
      • One year, or
      • 200 toll crossings, whichever is earlier.

    Key Features:

    • Eligibility: Applicable only for non-commercial private vehicles with a valid, active FASTag linked to a registered vehicle number.
    • Activation: Can be activated via the Rajmargyatra mobile app or NHAI website with a one-time payment of ₹3,000 for FY 2025–26.
    • Validity: Covers 200 trips or one year and then reverts to regular FASTag mode unless renewed.
    • Trip Count:
      • Point-based plazas: Each pass counts as one trip per crossing.
      • Closed toll systems: Entry and exit combined count as one trip.
    • Transfer Restrictions: The pass is non-transferable and valid only for the vehicle on which the FASTag is registered.
    • Coverage: Valid only at NH and NE toll plazas managed by the Centre. It does not apply to state highway or local toll plazas.
    • Fee Revision: The base fee may be revised annually starting April 1 every year.
    • Existing Users: No need for a new FASTag if one is already affixed and active. The pass can be added on top of the existing tag after eligibility verification.
    [UPSC 2023] With reference to India’s projects on connectivity, consider the following statements:

    1. East-West Corridor under Golden Quadrilateral Project connects Dibrugarh and Surat.

    2. Trilateral Highway connects Moreh in Manipur and Chiang Mai in Thailand via Myanmar.

    3. Bangladesh-China -India -Myanmar Economic Corridor connects Varanasi in Uttar Pradesh with Kunming in China. How many of the above statements are correct? Options: (a) Only one (b) Only two (c) All three (d) None*

     

  • What is Reverse-Flipping?

    Why in the News?

    SEBI has introduced key regulatory relaxations to ease IPO norms and incentivize startups to shift their legal base back to India through reverse-flipping.

    About Reverse-Flipping:

    • Reverse-flipping refers to the process by which Indian startups that were earlier incorporated abroad shift their domicile back to India, making India their legal and operational headquarters.
    • It allows Indian companies to access domestic capital markets, reduce compliance complexity, and align with the evolving global tax and regulatory environment.
    • This shift helps startups tap Indian stock exchanges, reduce reliance on foreign jurisdictions, and benefit from a favorable Indian regulatory ecosystem.

    Types of Reverse-Flipping

    1. Share Swap Arrangement:
      • In this structure, shareholders of the foreign parent company exchange their shares for shares in the Indian subsidiary.
      • This process may trigger capital gains tax under the Income Tax Act, 1961, especially for Indian shareholders.
    1. Inbound Merger (Cross-Border Merger):
      • The foreign parent company merges with its Indian subsidiary, with the Indian entity becoming the surviving legal structure.
      • If all conditions under the Foreign Exchange Management Act (FEMA), the Companies Act, 2013, and National Company Law Tribunal (NCLT) are met, this merger route can be tax-neutral.

    Key Features:

    • Domestic Listing Access: Startups gain access to Indian IPO markets and valuations.
    • Simplified Compliance: Reduced legal and regulatory complications from operating across jurisdictions.
    • Investor Incentives: SEBI now allows foreign venture funds and AIFs to be counted towards minimum promoter contribution in public issues.
    • ESOP Relaxation: SEBI has allowed promoters/founders to retain Employee Stock Option Plans (ESOPs) granted one year prior to the filing of the Draft Red Herring Prospectus (DRHP).
    • Capital Market Boost: The move supports India’s goal to become a global startup and financial hub by encouraging reverse-flipping.
    • Tax & Legal Alignment: Shifting domicile can help startups comply better with Indian tax and business laws.

    Note:

    Employee Stock Option Plans (ESOPs) are structured benefit schemes that grant employees the right to purchase shares of their company at a predetermined price—known as the exercise price—after completing a specific period.

     

    [UPSC 2025] Consider the following statements:

    Statement I: As regards returns from an investment in a company, generally, bondholders are considered to be relatively at lower risk than stockholders.

    Statement II: Bondholders are lenders to a company whereas stockholders are its owners.

    Statement III: For repayment purpose, bondholders are prioritized over stockholders by a company.

    Which one of the following is correct in respect of the above statements?

    (a) Both Statement II and Statement III are correct and both of them explain Statement I *

    (b) Both Statement I and Statement II are correct and Statement I explains Statement II

    (c) Only one of the Statements II and III is correct and that explains Statement I

    (d) Neither Statement II nor Statement III is correct

     

  • PM-WANI Scheme

    Why in the News?

    The TRAI ordered that public Wi-Fi hotspot operators under PM-WANI programme should not be charged more than twice what a residential broadband user paid for setting up a hotspot.

    What is the PM WANI Scheme?

    • Overview: PM Modi launched the Prime Minister Wi-Fi Access Network Interface (PM WANI) in December 2020.
    • Nodal agency: It is an initiative under the Department of Telecommunications (DoT).
    • Objective: To democratize internet access, particularly in remote and underserved areas.
    • Goals: It takes forward the goal of the National Digital Communications Policy, 2018 (NDCP) of creating a robust digital communications infrastructure.
    • Implementation: Leverages Public Data Offices (PDOs) established in public spaces like railway stations, banks, post offices, and more. Users can access the internet via Wi-Fi at these locations without requiring a SIM card.
    • PM-WANI ecosystem consists of four parts: 
      1. Public Data Office (PDO): It establishes the Wi-Fi Hotspots and provides internet access to users
      2. Public Data Office Aggregator (PDOA):  It provides authorisation and accounting services to PDOs.
      3. App Provider: It displays the available hotspots in the phone’s proximity.
      4. Central Registry: This overseen by the Centre for Development of Telematics maintains details of App Providers, PDOs, and PDOAs.
    • How to Utilize PM WANI?
      • To access PM WANI services, users must install the Data PM WANI app on their smartphones.
      • Through the app, users can connect to nearby public Wi-Fi PDOs.
      • This application facilitates seamless connectivity to PM-WANI-compliant Wi-Fi hotspots, empowering users to access broadband services conveniently.

    Role of Public Data Offices (PDOs):

    • The PM-WANI scheme includes a provision for establishing Public Data Offices (PDOs) by rural entrepreneurs in remote regions.
    • These PDOs procure internet bandwidth from telecom service providers or ISPs to offer Wi-Fi services at minimal charges.
    • This model enables individuals to access the internet even in areas with limited or no data connectivity.
    [2018] Which of the following is/are the aim/aims of “Digital India” Plan of the Government of India?

    1. Formation of India’s own Internet companies like China did.
    2. Establish a policy framework to encourage overseas multinational corporations that collect Big Data to build their large data centres within our national geographical boundaries.
    3. Connect many of our villages to the Internet and bring Wi-Fi to many of our school, public places and major tourists.

    Select the correct answer using the codes given below:

    (a) 1 and 2 only

    (b) 3 only

    (c) 2 and 3 only

    (d) 1, 2 and 3

     

  • PRASHAD Scheme

    Why in the News?

    The long-awaited Chamundi Hills development project in Karnataka is finally gaining momentum under the Pilgrimage Rejuvenation and Spiritual Heritage Augmentation Drive (PRASHAD) scheme.

    About the PRASHAD Scheme:

    • Launch: It was launched in 2014–15 by the Ministry of Tourism.
    • Core Objective: It aims to revitalize pilgrimage sites and develop spiritual tourism infrastructure across India.
    • Scope and Mission: In 2017, PRASHAD was upgraded to a National Mission, integrating features of the HRIDAY scheme to create a unified heritage and spiritual site development model.
    • Cultural Focus: The scheme emphasises cultural preservation, community involvement, and promoting both domestic and international spiritual tourism.
    • Implementation:
      • Executing Agencies: Projects are executed by state-level agencies appointed by the respective state or union territory governments.
      • Funding Model: The scheme offers 100% central financial assistance for eligible infrastructure and development components.
      • Public-Private Support: It encourages Corporate Social Responsibility (CSR) contributions and Public-Private Partnerships (PPP) to expand sustainability and local ownership.
      • Centre-State Collaboration: Implementation is designed to ensure close cooperation between central and state governments while respecting local cultural and religious traditions.

    Key Features:

    • Infrastructure Development: Roads, drinking water, sanitation, solid waste management, lighting, and public conveniences at pilgrimage sites.
    • Connectivity Enhancement: Improved rail, road, and air links to facilitate easier access for pilgrims.
    • Pilgrim Facilities: Creation of accommodation, food courts, wayfinding systems, and security measures for safe and hygienic pilgrimages.
    • Cultural Conservation: Restoration of temples, monuments, ghats, and sacred lakes; integration of cultural traditions in tourism.
    • Community Empowerment: Skill training for locals, development of tourism-linked jobs, and stakeholder participation in project design and operation.
    • Sustainability Focus: Use of eco-friendly technologies, green energy, and promotion of responsible tourism to reduce environmental impact.
    [UPSC 2022] The Prime Minister recently inaugurated the new Circuit House near Somnath Temple at Veraval. Which of the following statements are correct regarding Somnath Temple?

    1. Somnath Temple is one of the Jyotirlinga shrines.

    2. A description of Somnath Temple was given by Al-Biruni.

    3. Pran Pratishtha of Somnath Temple (installation of the present day temple) was done by President S. Radhakrishnan.

    Select the correct answer using the code given below:

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

     

  • What are Passively Managed Funds?

    Why in the News?

    Passively Managed Funds—those that track a market index without active stock selection—have become increasingly popular among investors seeking low-cost, predictable returns.

    About Passively Managed Funds:

    • Passively managed funds, commonly known as passive funds, are investment vehicles designed to replicate the performance of a specific market index, such as the Nifty Fifty or the Sensex.
    • Unlike actively managed funds, the fund manager in a passive fund does not select stocks or make frequent buy-and-sell decisions.
    • Instead, the fund holds the same stocks in the same proportion as the underlying index.
    • How Passive Funds Work?
      • These funds track a benchmark index by investing in all or a representative sample of the securities in that index.
      • The objective is to mirror the index’s returns, not to outperform it.
      • As a result, they incur lower management costs and have minimal portfolio turnover.

    Types of Passive Funds:

    1. Index Funds:
      • These are mutual funds that can be purchased or redeemed directly from the fund house.
      • Transactions are processed only once a day, based on the day’s closing Net Asset Value.
      • They offer ease of use and are suitable for systematic investment plans and long-term investors.
    1. Exchange Traded Funds:
      • These are funds listed on stock exchanges, like the National Stock Exchange or the Bombay Stock Exchange.
      • Investors buy or sell units during trading hours through brokers, just like stocks.
      • They require a dematerialised account and are suitable for investors seeking intraday trading flexibility.

    Advantages of Passive Funds:

    • Low Expense Ratios: Because no active research or trading is involved.
    • Transparency: Holdings closely follow a well-known index.
    • Diversification: Spreads investment risk across multiple securities.
    • No Human Bias: Avoids mistakes due to the fund manager’s poor decisions.

    Limitations:

    • No Outperformance: Returns will always be close to the index and cannot exceed it.
    • Tracking Error: Slight variation between the fund’s performance and the index due to operational reasons.
    • Limited Flexibility: Cannot adapt to sudden market downturns.
    [UPSC 2025] Consider the following statements:

    Statement I: As regards returns from an investment in a company, generally, bondholders are considered to be relatively at lower risk than stockholders.

    Statement II: Bondholders are lenders to a company, whereas stockholders are its owners.

    Statement III: For repayment purposes, bondholders are prioritised over stockholders by a company.

    Which one of the following is correct in respect of the above statements?

    (a) Both Statement II and Statement III are correct, and both of them explain Statement I *

    (b) Both Statement I and Statement II are correct, and Statement I explains Statement II

    (c) Only one of the Statements II and III is correct and that explains Statement I

    (d) Neither Statement II nor Statement III is correct

     

  • Brewing crisis: How climate change is unravelling India’s tea heartland

    Why in the News?

    North Bengal’s tea gardens are in crisis, especially for women workers, due to climate change, pests, low wages, and reduced production, causing economic struggles and increased gender-based hardships.

    What challenges do women tea workers face due to climate change and poor labour conditions?

    • Extreme Heat Exposure: Women work under open skies with no shade, facing soaring temperatures due to climate change. Eg: Workers suffer from headaches, vomiting, and exhaustion while plucking leaves during peak summer months like April and May.
    • Lack of Basic Facilities: Absence of crèches, sanitation, and rest shelters forces women to manage both labour and childcare in unsafe conditions. Eg: Children are hung in cloth cradles tied to trees as mothers continue work in the gardens.
    • Human-Wildlife Conflict: Encroachment of wildlife into tea estates due to changing weather patterns increases risk of attacks. Eg: Leopard attacks have injured several women, despite efforts like using whistles to drive them away.

    Why is tea yield and quality declining in North Bengal?

    • Erratic Rainfall Patterns: The monsoon is no longer evenly spread, with rainfall occurring in short, intense bursts, affecting soil moisture and crop cycle. Eg: Dry spells during critical growth months like February and March reduce yields and degrade leaf quality.
    • Rising Temperatures: Increasing heat reduces the ideal climatic conditions necessary for tea cultivation, impacting both quantity and flavour. Eg: Temperatures crossing 30°C for extended periods lead to loss of the tea’s aroma and taste.
    • Increased Pest and Disease Attacks: Climate change weakens tea bushes, making them more vulnerable to pests and diseases. Eg: Frequent pest attacks force farmers to use chemical sprays, which also degrade leaf quality.

    How do low wages impact the lives of tea plantation workers?

    • Economic Hardship: Low daily earnings make it difficult for workers to meet basic needs such as food, healthcare, and education. Eg: A worker earning only Rs 250 per day struggles to support their family after losing a spouse.
    • Lack of Childcare Support: Insufficient income prevents access to proper childcare facilities, forcing unsafe alternatives at the workplace. Eg: In some cases, children are kept in cloth cradles tied to trees due to the absence of crèche facilities.
    • No Scope for Upward Mobility: With stagnant wages and no savings, workers remain stuck in poverty with no chance to improve living standards. Eg: Despite long-standing demands to increase wages to Rs 600 per day, many still earn significantly less, affecting their long-term well-being.

    What climate-resilient practices are tea estates adopting?

    • Organic Farming: Switching to organic methods reduces chemical use and improves soil health for long-term sustainability. Eg: Some estates have gone fully organic, avoiding chemical fertilisers and promoting natural soil enrichment.
    • Soil Conservation Techniques: Practices like mulching and intercropping help retain moisture, reduce erosion, and maintain fertility during erratic rainfall. Eg: Estates use mulching and intercropping with legumes to prevent soil erosion and conserve moisture during dry spells.
    • Water Management Strategies: Creation of water bodies and rainwater harvesting enhances water availability during prolonged dry periods. Eg: Gardens are building water bodies to improve microclimates and ensure irrigation in the absence of seasonal showers.

    Why is the tea sector overlooked in policy and climate action?

    • Lack of Market Visibility: Despite being globally consumed, tea lacks strong marketing and policy attention compared to other cash crops. Eg: Unlike coffee, tea receives little brand promotion, limiting public and policymaker focus.
    • Neglect of Women Labour Force: Tea is the largest employer of women labourers, yet there is inadequate investment in their welfare or working conditions. Eg: No crèche facilities exist in many gardens, forcing women to hang children from trees during work.
    • Insufficient Climate Funding: Small growers lack access to funds and technical guidance to adopt climate-resilient practices. Eg: High cost of herbal pesticides prevents adoption, while most farmers rely on peer advice instead of expert support.

    Way forward: 

    • Improve Working Conditions and Wages: Ensure minimum wage revision, provide shade, drinking water, crèche facilities, and medical support for women tea workers to enhance their safety and well-being.
    • Promote Climate-Resilient Practices with Institutional Support: Encourage organic farming, soil conservation, and afforestation, backed by government funding and policies tailored to protect both workers and the environment.

    Mains PYQ:

    [UPSC 2024] What are the major challenges faced by Indian irrigation system in recent times? State the measures taken by the government for efficient irrigation management.

    Linkage: The tea gardens are experiencing “prolonged dry spells” and a drop in the “groundwater table”, highlighting a critical challenge for irrigation and water management in the tea heartland.

  • What is Merchant Discount Rate (MDR)?

    Why in the News?

    The Finance Ministry has firmly denied recent online rumours suggesting that the government is planning to impose Merchant Discount Rate (MDR) charges on UPI transactions.

    About Merchant Discount Rate (MDR):

    • Overview: MDR refers to the fee charged to merchants by banks or payment service providers for processing digital payments made via credit cards, debit cards or other digital modes.
    • Purpose: It serves to compensate multiple stakeholders involved in a digital transaction, including the issuing bank, acquiring bank, payment gateway, and network operator.
    • Fee Structure: MDR is typically calculated as a percentage of the total transaction amount, usually ranging from 1% to 3%, depending on the transaction and merchant type.
    • RBI Regulation: The Reserve Bank of India (RBI) regulates MDR, and merchants are NOT permitted to pass this fee onto customers.
    • Discontinuation: To promote cashless payments, the government waived MDR on UPI and RuPay card transactions in 2020, benefiting small merchants and consumers.

    How does it work?

    • Transaction Flow: When a customer pays digitally, the payment amount is credited to the merchant’s account after deducting the MDR fee.
    • Example: If a customer pays ₹1,000 and the MDR is 2%, the merchant receives ₹980, while the remaining ₹20 is distributed among the banks and service providers.
    • Automatic Deduction: The MDR amount is automatically deducted by the settlement system at the time of transaction processing.
    • Variable Rates: The MDR rate may vary depending on factors such as the type of card used, nature of business, monthly transaction volume, and average transaction value.
    • Merchant Agreements: Merchants are required to sign MDR agreements with their payment service providers before they begin accepting digital payments.
    • Operational Cost: MDR is treated as a part of the merchant’s operational costs when offering customers the convenience of digital payment options.
    [UPSC 2017] Which one of the following best describes the term “Merchant Discount Rate” sometimes seen in news?

    Options: (a) The incentive given by a bank to a merchant for accepting payments through debit cards pertaining to that bank.

    (b) The amount paid back by banks to their customers when they use debit cards for financial transactions for purchasing goods or services.

    (c) The charge to a merchant by a bank for accepting payments from his customers through the bank’s debit cards. *

    (d) The incentive given by the Government to merchants for promoting digital payments by their customers through Point of Sale (PoS) machines and debit cards.