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Subject: Economics

  • Why has net FDI inflow plummeted?

    Why in the News?

    The RBI Bulletin (May 2025) reports that India received a record-breaking $81 billion in gross FDI inflows in FY 2024-25, but retained only $353 million in net FDI, revealing a dramatic divergence in the investment narrative.

    What do gross and net FDI trends indicate about India’s investment climate?

    • Gross FDI inflows are high: India received a record $81 billion in gross FDI in 2024-25, indicating strong headline interest from foreign investors. Eg: Media and government reported this as a sign of a robust investment climate.
    • Net FDI is drastically low: Net FDI dropped to only $353 million, showing that much of the incoming investment is offset by capital outflows, weakening the real impact on the economy. Eg: Rising outward FDI and disinvestment reduced net foreign capital retained in India.
    • Declining FDI-to-GDP ratio: The gross inflow-to-GDP ratio fell from 3.1% (2020-21) to 2.1% (2024-25), and net FDI-to-GDP fell from 1.6% to near zero, reflecting a slowing domestic investment environment despite high gross inflows. Eg: This signals tepid corporate investment and cautious investor sentiment in India.

    What is  Private Equity (PE) and Venture Capital (VC)?

    • Private Equity (PE) refers to investment funds that buy existing companies or large stakes in businesses, often to improve their performance and later sell them for profit. PE typically invests in more mature companies.
    • Venture Capital (VC) is a type of financing that supports early-stage startups and small businesses with high growth potential. VC investors take higher risks in exchange for potentially high returns.

    Why is the rise in Private Equity (PE)/Venture Capital (VC) driven FDI a concern for long-term investment?

    • PE/VC-driven FDI focuses on brownfield investments: These funds mainly acquire existing firms rather than creating new production capacity, limiting contributions to capital formation and technology acquisition. Eg: Investments by Blackstone in Care Hospitals and ChrysCapital in Lenskart.
    • Short investment horizon: PE/VC funds typically have a 3-5 year exit strategy, often selling holdings during stock market booms, which leads to disinvestment rather than sustained growth. Eg: The spike in disinvestment in FY25 was partly due to PE/VC funds liquidating their positions.
    • Limited impact on long-term industrial growth: Since these funds focus on services like fintech and retail rather than manufacturing or infrastructure, they contribute less to enhancing India’s productive capacity. Eg: The declining share of FDI in greenfield projects shows limited greenfield capital formation.

    How does outward FDI suggest India is used for tax arbitrage?

    • High correlation between inward and outward FDI: India shows a strong link between the money flowing in and out, suggesting that funds often enter and exit quickly rather than being invested long-term. Eg: Similar volumes of FDI both coming into and going out of India.
    • Use of tax havens as intermediaries: A significant portion of both inward and outward FDI involves countries like Singapore and Mauritius, known for tax concessions and treaty benefits. Eg: Many Indian companies route investments through these jurisdictions to reduce tax liabilities.
    • ‘Treaty shopping’ for tax benefits: Global investors move capital through India to exploit variations in tax laws, a practice called tax arbitrage, which may not contribute to domestic economic growth. Eg: Research shows India ranked 6th among emerging markets for such correlated FDI flows, indicating use as a conduit for tax optimization.

    What are the effects of declining FDI-to-GDP and GFCF ratios?

    • Reduced contribution to economic growth: Declining FDI-to-GDP and FDI-to-GFCF (Gross Fixed Capital Formation) ratios indicate that foreign investments are becoming a smaller part of India’s overall economy and capital investment, potentially slowing down industrial expansion and technology adoption. Eg: Gross FDI inflows peaked at 7.5% of GFCF in FY21 but have declined sharply since then.
    • Weakening investor confidence: The downward trend signals tepid domestic corporate investment and reduced foreign investor interest, which can affect job creation and long-term economic stability. Eg: Net FDI relative to GDP has declined from 1.6% in 2020-21 to nearly zero in 2024-25, showing declining investor enthusiasm.

    Why should India reform its foreign capital regulations?

    • To curb tax arbitrage and ‘hot money’ flows: Current regulations allow large volumes of inward and outward FDIthrough tax havens, enabling tax optimization rather than genuine investment, which undermines domestic economic goals. Eg: High FDI flows involving Singapore and Mauritius reflect such practices.
    • To promote long-term, productive investments: Reform is needed to encourage FDI that contributes to capital formation, technology acquisition, and industrial growth rather than short-term PE/VC-driven disinvestment. Eg: The rising share of alternative investment funds in FDI has led to increased disinvestment, affecting sustainable growth.

    Way forward: 

    • Strengthen Regulatory Frameworks: Implement stricter rules to curb tax arbitrage and limit quick inflows and outflows via tax havens, ensuring FDI supports genuine, long-term economic growth.
    • Promote Greenfield and Productive Investments: Encourage FDI in new capacity building, manufacturing, and technology sectors over short-term PE/VC deals to boost capital formation, industrial growth, and sustainable development.

    Mains PYQ:

    [UPSC 2013] Though India allowed Foreign Direct Investment (FDI) in what is called multi-brand retail through the joint venture route in September 2012, the FDI, even after a year, has not picked up. Discuss the reasons.

    Linkage: The net FDI-to-GDP ratio has steadily fallen from 1.6% in 2020-21 to zero in 2024-25. This ongoing decline is worrying, even though policymakers continue to make optimistic claims.

  • Growing pains: On economic performance, Viksit Bharat

    Why in the News?

    India’s economic data for 2024–25 shows a mixed picture: the economy grew strongly by 7.4% in the last quarter, which was better than expected, but the overall yearly growth dropped to 6.5% — the lowest in four years since the pandemic.

    What led to the higher-than-expected GDP growth in Q4 2024-25?

    • Robust Growth in Construction and Agriculture Sectors: The construction sector returned to double-digit growth, and agriculture performed strongly, both of which are key employment generators. Eg: Infrastructure expansion and favourable harvests boosted rural incomes and demand.
    • Strong Performance of Services Sector: The services sector maintained steady and strong growth, contributing significantly to the GDP rise. Eg: IT, finance, and hospitality services saw sustained recovery post-pandemic.
    • Statistical Boost from Higher Net Taxes: A 12.7% increase in net tax collections inflated the GDP figure, even though underlying economic activity was slower. Eg: Higher indirect tax revenues during the quarter pushed headline growth from ~6.8% to 7.4%.

    Why is 6.5% annual GDP growth seen as inadequate despite being the highest globally?

    • Below the Required Rate for ‘Viksit Bharat 2047’ Vision: To achieve the developed nation goal by 2047, India needs sustained annual growth of around 8% or more. Eg: The Economic Survey states that consistent 8% growth is essential to meet infrastructure, employment, and welfare needs by 2047.
    • Mismatch with India’s Domestic Demands and Aspirations: India’s population growth and development needs demand faster economic expansion, regardless of how the rest of the world is performing. Eg: Even though India outpaces global peers, a 6.5% rate may not create enough jobs or uplift per capita incomes sufficiently.
    • Limited Acceleration Potential Under Stable Growth Phase: While 6.5% reflects stability, it also signals a plateau, with low inflation but no signs of rapid acceleration in the near future. Eg: Chief Economic Adviser V. Anantha Nageswaran indicated India may not see major growth spurts soon, making it harder to catch up with long-term development targets.

    How do net taxes affect the true picture of GDP growth?

    • Artificial Boost to Headline GDP: A significant rise in net taxes (taxes minus subsidies) can inflate GDP figures without a corresponding increase in real economic activity. Eg: In Q4 2024–25, GDP growth was 7.4%, but without the 12.7% surge in net taxes, real growth would have been around 6.8%.
    • Distorts Sector-Wise Contribution Assessment: High net tax contributions may overshadow sluggish performance in core sectors like manufacturing or consumption, giving a misleading impression of overall health. Eg: Despite weak private consumption, GDP looked robust due to the statistical impact of increased tax revenue.

    Is stable growth enough for India’s transition?

    • Stability Reduces Risk but Limits Acceleration: While stable growth ensures low inflation and reduced economic volatility, it may not generate the momentum needed to transform India into a developed economy. Eg: As per the Chief Economic Adviser, India has entered a phase of low inflation and stable growth, but such stability might cap faster economic acceleration.
    • Inadequate for Meeting Rising Aspirations: India’s growing population and developmental needs require higher employment, infrastructure, and productivity, which stable but slow growth may not adequately support. Eg: A 6.5% GDP growth may not create enough jobs or income levels to match the goals of schemes like ‘Viksit Bharat 2047’.
    • Missed Opportunity in a Global Slowdown: In a “growth-scarce” global environment, India has the chance to become a key economic engine. Relying on stable growth without pushing for higher gains may lead to missed strategic opportunities. Eg: Despite outperforming other major economies, India’s slow capital investment pace until late FY25 indicates underutilization of its potential.

    Way forward: 

    • Accelerate Structural Reforms and Investments: India must boost productivity by investing in infrastructure, manufacturing, skilling, and digitalisation, while simplifying regulations to attract both domestic and foreign investment. Eg: Fast-tracking initiatives like Gati Shakti and PLI schemes can unlock higher economic momentum.
    • Enhance Domestic Demand and Job Creation: Policies should focus on reviving rural consumption, supporting MSMEs, and expanding labour-intensive sectors to ensure inclusive growth. Eg: Increasing public expenditure on health, education, and affordable housing can stimulate demand and generate employment.

    Mains PYQ:

    [UPSC 2024] Examine the pattern and trend of public expenditure on social services in the post-reforms period in India. To what extent this has been in consonance with achieving the objective of inclusive growth?

    Linkage: Inclusive growth is a core objective for a “transitioning economy” like India aiming for goals such as ‘Viksit Bharat’, and challenges in achieving it represent “growing pains”.

  • Steep decline: On the Index of Industrial Production

    Why in the News?

    India’s industrial output grew by only 2.7% in April 2025, the slowest pace in 8 months, showing a clear slowdown at the start of the new financial year (FY26).

    What are the key reasons behind the slowdown in India’s factory output and IIP growth in April 2026?

    • Weak Performance of Core Sectors: The eight core industries, which have a 40% weight in the IIP, grew by just 0.5% in April 2026, the lowest in eight months. Eg: Refinery products, steel, and cement showed subdued output, dragging overall industrial growth.
    • Contraction in Mining Activity: Mining output shrank by 0.2%, marking its first contraction since August 2024, adversely affecting raw material availability for other industries. Eg: Reduced coal and mineral extraction hit electricity generation and steel production.
    • Slowdown in Manufacturing and Electricity Generation: Manufacturing grew only by 3.4% (down from 4.2%) and power generation by 1.1% (down from 10.2%). Eg: Weak electricity demand and reduced industrial usage reflected sluggish overall economic activity.
    • Trade and Tariff-Related Uncertainties: Global trade volatility, tariffs, and supply chain disruptions have reduced demand for export-oriented goods. Eg: Decline in orders from U.S. and EU markets affected electronics and textile manufacturing.
    • Persistently Low Rural Demand: Consumer non-durables contracted for the third consecutive month, indicating weak rural consumption despite low inflation. Eg: Low sales of food and hygiene products in rural markets signal demand compression in the FMCG sector.

    Why is the contraction in consumer non-durables output a concern for rural consumption trends?

    • Indicates Weak Rural Demand: Consumer non-durables, such as food and hygiene products, form a major part of rural consumption. A contraction suggests low purchasing power and reduced rural spending. Eg: Declining sales of items like cooking oil, soap, and packaged food in rural areas reflect demand stagnation.
    • Signals Broader Economic Distress in Agriculture-Dependent Households: Despite low inflation, rural incomes haven’t risen due to falling crop prices and below-MSP realizations. This affects demand for basic goods. Eg: Farmers selling wheat and pulses below MSP in mandis earn less, reducing their ability to buy essential goods.
    • Affects Industrial and FMCG Sector Recovery: Sustained low rural consumption weakens demand for consumer non-durables, impacting production and profits in the FMCG and small-scale industries. Eg: Companies like Hindustan Unilever or Dabur see lower rural sales, leading to reduced factory output and job cuts.

    How can implementing MSPs more systematically help boost rural incomes and demand?

    • Ensures Price Stability and Income Security for Farmers: A guaranteed MSP reduces the risk of distress sales and provides a stable income floor for farmers, encouraging spending. Eg: If paddy is procured at the MSP instead of below-market rates, farmers are assured of fair returns, enabling them to spend on consumption and inputs.
    • Enhances Rural Purchasing Power and Consumption Demand: Higher farm incomes lead to greater spending on goods and services, especially consumer non-durables, which form a bulk of rural consumption. Eg: A farmer earning better returns on wheat is more likely to purchase goods like clothing, packaged food, and household items.
    • Stimulates Local Economies and Industrial Output: With higher rural demand, local businesses and FMCG industries see increased sales, encouraging higher production and employment. Eg: Higher MSP-based procurement leads to better incomes in Punjab, increasing demand for tractors, fertilizers, and daily-use goods, boosting factory output.

    Who should drive capital expenditure to revive demand?

    • Private Sector as the Primary Driver: The private sector must lead CapEx to create productive assets, jobs, and income, especially in manufacturing and infrastructure. Eg: Large firms investing in semiconductor plants or logistics hubs generate employment and boost demand for allied sectors.
    • Government as a Catalyst through Public Investment: The government should maintain strong capital spending on infrastructure, rural development, and connectivity to crowd in private investment. Eg: Projects like Bharatmala or PM Gati Shakti improve transport networks, encouraging private factories and warehousing units to set up nearby.
    • Public-Private Partnerships (PPPs) to Leverage Resources and Efficiency: PPPs can combine government support with private expertise and funding, especially in sectors like renewable energy, urban transport, and health. Eg: Hybrid Annuity Model (HAM) in road construction allows private players to build highways with shared investment risk, boosting economic activity.

    Way forward: 

    • Boost Rural Demand through Targeted MSP Implementation and Welfare Schemes: Ensure systematic MSP procurement and expand rural employment and income support to revive consumption of consumer non-durables and support FMCG growth.
    • Accelerate CapEx through Private Investment and Strategic Public Spending: Encourage private sector-led capital expenditure in manufacturing and infrastructure, complemented by government investments in connectivity and logistics to stimulate industrial output and job creation.

    Mains PYQ:

    [UPSC 2016] The nature of economic growth in India in recent times is often described as a jobless growth. Do you agree with this view? Give arguments in favour of your answer.

    Linkage: The concept of “jobless growth” is highly relevant in a scenario where economic expansion, or lack thereof, is debated in relation to employment generation. A slowdown in industrial output could exacerbate concerns about job creation.

  • Quality Council of India (QCI)

    Why in the News?

    The Minister of State for Commerce and Industry inaugurated the new unified headquarters of the Quality Council of India (QCI) at the World Trade Centre in New Delhi.

    About Quality Council of India (QCI):

    • Establishment: QCI was set up in 1997 as an autonomous, non-profit body through a public-private partnership between the GoI and industry associations ASSOCHAM, CII, and FICCI.
    • Legal Status: It is registered under the Societies Registration Act, 1860.
    • Leadership: Ratan Tata was QCI’s first Chairman; the current chairman is appointed by Prime Minister.
    • Parent Department: QCI works under the Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce and Industry.
    • Role: Acts as India’s national accreditation body, offering independent assessments of products, services, and processes.
    • Mission: To improve quality standards in key areas like education, healthcare, environment, governance, and infrastructure.
    • Financial Model: It is a self-sustaining organisation, generating its own revenue without regular government funding.

    Structure, Divisions, and Key Functions:

    • Governing Council: A 38-member council with equal representation from government, industry, and stakeholders oversees QCI.
    • Key Divisions: QCI operates through 5 major boards, each focusing on a different sector:
      1. National Accreditation Board for Testing and Calibration Laboratories
      2. National Accreditation Board for Hospitals and Healthcare Providers
      3. National Accreditation Board for Education and Training
      4. National Accreditation Board for Certification Bodies
      5. National Board for Quality Promotion
    • Core Activities:
      • Develops accreditation systems and quality frameworks.
      • Conducts third-party audits for schemes like Swachh Bharat Abhiyan and Pradhan Mantri Kaushal Vikas Yojana.
      • Runs the National Quality Campaign to build a culture of quality across sectors.
      • Helps boost India’s global competitiveness through quality certification and awareness initiatives.
    [UPSC 2017] With reference to Quality Council of India (QCI), consider the following statements:

    1. QCI was set up jointly by the Government of India and the Indian Industry.

    2. Chairman of QCI is appointed by the Prime Minister on the recommendations of the industry to the Government.

    Which of the above statements is/are correct?

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

     

  • Govt. releases Provisional GDP Estimates

    Why in the News?

    The Ministry of Statistics and Programme Implementation (MoSPI) released two important data sets on May 30, 2025 — one for India’s GDP growth in Q4 (January–March) FY25, and another for the provisional estimates for the entire FY25 (2024–25).

    How is Economic Growth measured?

    • Gross Domestic Product (GDP) measures economic growth by adding all expenditures in the economy — including private, government, and business spending. It shows demand-side performance.
    • Gross Value Added (GVA) measures the supply-side. It calculates how much value is added by each sector of the economy.
    • GDP and GVA are related:
      GDP = GVA + (Taxes) – (Subsidies)
    • MoSPI reports both in:
      • Nominal terms: Includes current prices.
      • Real terms: Adjusted for inflation to reflect true growth.

    Why are these Estimates called “Provisional”?

    • GDP estimates are revised in stages:
      • January: First Advance Estimates (FAE)
      • February: Second Advance Estimates (SAE)
      • May: Provisional Estimates (PE)
    • Final figures come later:
      • First Revised Estimate: After 1 year
      • Final Estimate: After 2 years
    • FY25’s final numbers will come in 2026 and 2027.

    Key Takeaways from FY25 Data

    • India’s Economy Size:
      • India’s economy is now worth ₹330.7 lakh crore or $3.87 trillion.
      • GDP grew by 9.8%, which is slower than in previous years.
    • Real GDP Growth:
      • After removing inflation, real GDP grew by 6.5%.
      • This is slower than the 9.2% growth seen last year (as mentioned in the Provisional Estimates). (Disputed: India’s real GDP growth rate was 8.2% in FY 2023-24 as per Economic Survey.)
    • Sector Performance:
      • Agriculture grew well at 4.6%.
      • Manufacturing grew only 4.5%, which is a concern.
      • Construction was strong with 9.4% growth.
      • Services grew by 7.2%.
    • Manufacturing Worry:
      • Manufacturing is growing slower than agriculture.
      • This is affecting urban jobs, especially for youth.
    • Best Growth in Jan–Mar 2025 (Q4):
      • GDP growth was 7.4% in Q4 — the highest for the year.
      • Construction grew fastest at 10.8%.
      • Agriculture and Services also did well.
    • Spending Trends:
      • People spent more — household spending rose 7.2%.
      • Investment in assets grew 7.1%, slower than last year.

     

    [UPSC 2015] With reference to Indian economy, consider the following statements:

    (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?

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

     

  • Initial Public Offering (IPO)

    Why in the News?

    OpenAI has announced its readiness for a future Initial Public Offering (IPO).

    Laws Governing IPOs in India:

    • SEBI Act, 1992: Empowers SEBI to regulate capital markets and IPO processes.
    • Companies Act, 2013: Governs company formation, prospectus rules, and disclosure norms.
    • SEBI (ICDR) Regulations, 2018: Specifies detailed rules on IPO eligibility, pricing, disclosure, and allotment.
    • Securities Contracts (Regulation) Act, 1956:  Regulates the listing and trading of securities on stock exchanges.
    • SEBI (LODR) Regulations, 2015: Mandates continuous disclosure requirements and corporate governance standards for listed companies.

    What is an IPO?

    • Definition: An IPO is when a private company offers its shares to the public for the first time.
    • Objective: It marks the company’s move to become a publicly listed company on a stock exchange.
    • End Goal: Through an IPO, companies raise money from investors, and the public gets a chance to become shareholders.

    How is an IPO Listed in India?

    • Regulatory Filing: A company must file an offer document with SEBI (Securities and Exchange Board of India).
    • Offer Document Includes:
      • Details of the company and promoters.
      • Financial history and business goals.
      • The reason for raising capital and IPO structure.
    • SEBI Approval: After review, SEBI gives permission for the listing process to begin.

    IPO Eligibility & Pricing:

    • Eligibility Criteria (SEBI Rules):
      • Minimum Rs 3 crore in tangible assets in the last 3 years.
      • Minimum Rs 1 crore in net worth each year for 3 years.
      • Rs 15 crore average pre-tax profit in at least 3 out of the last 5 years.
    • Who sets the Price:
      • The company and its merchant banker decide the price based on valuation.
      • Factors include assets, profits, and future growth.
      • SEBI does NOT fix IPO prices.

    Who can invest in an IPO?

    • Eligibility: Anyone 18 years or older with a brokerage account can apply.
    • Investor Categories:
      1. Qualified Institutional Buyers (QIBs): Mutual funds, banks, insurance firms, FPIs, etc.
      2. Retail Investors: Individuals investing up to Rs 2 lakh.
      3. High Net Worth Individuals (HNIs): Investing more than Rs 2 lakh.
    [UPSC 2025] Consider the following statements:

    I. India accounts for a very large portion of all equity option contracts traded globally, thus exhibiting a great boom.

    II. India’s stock market has grown rapidly in the recent past, even overtaking Hong Kong’s at some point in time.

    III. There is no regulatory body either to warn small investors about the risks of options trading or to act on unregistered financial advisors in this regard.

    Which of the statements given above are correct?

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

     

  • Continuation of Modified Interest Subvention Scheme (MISS) 

    Why in the News?

    The Union Cabinet has approved the continuation of the Interest Subvention (IS) component under the Modified Interest Subvention Scheme (MISS) for the financial year 2025–26.

    About Modified Interest Subvention Scheme (MISS):

    • Central Sector Scheme: It helps farmers get low-interest short-term loans through the Kisan Credit Card (KCC).
    • Nodal Agencies: The scheme is monitored by RBI and NABARD and implemented through Public Sector Banks, RRBs, Cooperative Banks, and Private Banks.
    • Loan Details:
      • Borrowing Limit: Farmers can borrow up to ₹3 lakh at 7% interest.
      • Interest Support: Banks get 1.5% interest support from the government, helping them offer cheaper loans.
      • Extra Discount: Farmers who repay on time get a 3% Prompt Repayment Incentive, reducing their effective interest rate to 4%.
      • For Livestock & Fisheries: Loans up to ₹2 lakh also qualify for this benefit.
    • Digital Support: The Kisan Rin Portal (KRP), launched in August 2023, improves transparency and tracking of loan disbursal.

    Back2Basics: Kisan Credit Card (KCC) Scheme

    • Launch: Started in 1998 based on the R.V. Gupta Committee’s recommendation.
    • Who implements it: Managed by Commercial Banks, RRBs, Cooperative Banks, and Small Finance Banks.
    • Purpose and Uses:
      • Gives quick and easy loans for crop expenses, post-harvest needs, and household costs.
      • Supports dairy, poultry, fisheries, and other allied activities.
      • Offers credit for farming-related business investments.
    • Key Features:
      • Collateral-free loans up to ₹2 lakh.
      • Interest rates as low as 4% with timely repayment (under MISS).
      • Loan limit raised to ₹5 lakh in Budget 2025–26.
      • Uses a revolving credit system — farmers can borrow and repay as needed.
      • Flexible repayment is aligned with crop cycles to reduce stress.
    • Additional Benefits:
      • Includes crop insurance under PM Fasal Bima Yojana (PMFBY).
      • Since 2018–19, also covers farmers in animal husbandry and fisheries.
      • Helps farmers avoid moneylenders, promoting financial inclusion.

     

    [UPSC 2020] Under the Kisan Credit Card scheme, short-term credit support is given to farmers for which of the following purposes?

    1. Working capital for maintenance of farm assets

    2. Purchase of combine harvesters, tractors and mini truck

    3. Consumption requirements of farm households

    4. Post-harvest expenses

    5. Construction of family house and setting up of village cold storage facility

    Select the correct answer using the code given below:

    Options: (a) 1, 2 and 5 only (b) 1, 3 and 4 only* (c) 2, 3, 4 and 5 only (d) 1, 2, 3, 4 and 5

     

  • [29th May 2025] The Hindu Op-ed: India’s financial sector reforms need a shake-up

    PYQ Relevance:

    [UPSC 2013] The product diversification of financial institutions and insurance companies, resulting in overlapping of products and services strengthens the case for the merger of the two regulatory agencies, namely SEBI and IRDA. Justify.

    Linkage: The structure and efficiency of financial sector regulation by discussing the potential merger of two key regulatory bodies (SEBI for capital markets and IRDA for insurance). In this article, talks about the reforming India’s Financial Sector” calls for a “coherent, forward-looking strategy that harmonises rules across verticals” and mentions the need for regulatory scrutiny and transparency.

     

    Mentor’s Comment:  India’s financial sector is at a critical turning point. Even after years of policy changes, major problems remain — especially in areas like corporate bond markets, retirement savings, nomination rules across banks and financial services, and the growing risks from unregulated shadow banking. These aren’t just small technical issues; they are deep flaws that hurt investor confidence, customer safety, and the country’s economic strength.

    Today’s editorial will talk about the issues related to the Financial sector in India. This content would help in GS Paper III ( Indian Economy).

    _

    Let’s learn!

    Why in the News?

    There must be consistent rules across all financial sectors, support for a strong corporate bond market, active development of retirement savings options, and better regulation to control shadow banking.

    What are the major structural issues plaguing India’s financial sector?

    • Fragmented Nomination Rules Across BFSI Sectors: Inconsistent nomination rules in banks, mutual funds, and insurance create confusion and legal disputes. Eg: A person can nominate multiple people for a mutual fund but only one for a bank account, with different legal interpretations of nominee rights—leading to litigation among family members.
    • Underdeveloped Corporate Bond Market: The bond market remains shallow, illiquid, and lacks transparency, increasing the cost of capital for businesses. Eg: The RBI once directed the NSE to build a secondary bond market, but the exchange prioritized more profitable equity trading instead.
    • Opaque Capital Flows and Weak UBO Disclosures: Lack of transparency in identifying Ultimate Beneficial Owners (UBOs) hinders regulatory oversight. Eg: SEBI struggled to get ownership details from Mauritius-based Elara and Vespera Funds, delaying investigations into their Indian stock market investments.
    • Unregulated Shadow Banking Activities: NBFCs and brokers offer bank-like services without full regulatory supervision, exposing the system to financial risks. Eg: Brokers provide margin funding to retail investors at interest rates over 20%, without clear disclosure—mirroring unregulated lending seen before the 2008 global financial crisis.

    Why is a harmonised nomination framework across BFSI (Banking, Financial Services, and Insurance) verticals necessary?

    • Reduces Legal Ambiguity: Different sectors (banks, mutual funds, insurance) treat nominees differently—causing confusion between nominee rights and legal heirs’ claims. Eg: A nominee in a mutual fund may only act as a trustee, while in a life insurance policy, the nominee may receive full benefits—leading to conflicting court battles.
    • Prevents Exploitation of Loopholes: Inconsistent rules create loopholes that can be exploited by unscrupulous actors to divert funds or delay inheritance. Eg: A person can deliberately name different nominees across instruments to cause confusion or suppress rightful heir claims.
    • Simplifies Compliance for Citizens: A uniform nomination system makes it easier for ordinary people to understand, update, and track their financial nominations. Eg: A senior citizen managing multiple accounts would benefit from a single, standard process rather than navigating different forms and rules for each institution.
    • Reduces Litigation and Administrative Burden: Courts and financial institutions face prolonged legal disputes due to conflicting nominee laws, which could be avoided with uniformity. Eg: Banks and mutual funds spend years contesting claims when legal heirs and nominees disagree—slowing down asset transfer.
    • Increases Trust and Transparency: Harmonisation builds trust in the financial system by making processes predictable and fair, thus encouraging formal savings. Eg: When savers know that nomination rules are clear and uniformly applied, they are more likely to invest in insurance or mutual funds without hesitation.

    How can a well-developed corporate bond market benefit India’s economy?

    • Lowers Cost of Capital for Businesses: A deep bond market enables companies to raise funds at competitive interest rates, reducing their dependence on bank loans. Eg: An efficient bond market could lower borrowing costs by 2–3%, improving viability for sectors like infrastructure and manufacturing.
    • Diversifies Sources of Funding: It provides an alternative to bank financing, thereby reducing systemic risks and enhancing financial stability. Eg: Large firms like NTPC or Reliance can raise capital directly from investors through bonds, easing pressure on public sector banks.
    • Encourages Long-Term Investment: Corporate bonds are ideal for funding long-gestation projects like highways, power plants, and green energy, attracting pension funds and insurance firms. Eg: The National Investment and Infrastructure Fund (NIIF) can tap bond markets to finance long-term infrastructure.
    • Boosts Financial Market Development: A vibrant bond market leads to greater depth, liquidity, and transparency in the financial system. Eg: Countries like South Korea and Malaysia have developed strong bond markets that support efficient capital allocation.
    • Enhances Retail Participation and Savings Mobilization: If made accessible and credible, bond markets can attract retail investors, expanding financial inclusion and mobilizing household savings. Eg: Government-backed platforms could offer secure corporate bonds to middle-class savers as an alternative to fixed deposits.

    Who is responsible for regulating and curbing the risks of shadow banking in India?

    • Reserve Bank of India (RBI): RBI regulates Non-Banking Financial Companies (NBFCs), ensuring they comply with capital adequacy, liquidity norms, and risk management frameworks. Eg: After the IL&FS crisis, RBI tightened norms on NBFCs’ asset-liability management and enhanced their supervision.
    • Securities and Exchange Board of India (SEBI): SEBI oversees brokers, margin lenders, and mutual funds that may engage in shadow banking-like activities, ensuring transparency in trading and lending practices. Eg: SEBI took steps to curb margin funding risks offered by brokers to retail investors under complex lending structures. 
    • Ministry of Finance: The Ministry designs regulatory frameworks and inter-agency coordination, enabling RBI and SEBI to monitor and respond to emerging risks in shadow banking. Eg: The government supported RBI’s proposal to bring large NBFCs under bank-like regulations and backed a risk-based supervision model.

    Way forward: 

    • Unified and Risk-Based Regulatory Framework: Adopt a harmonised, activity-based regulation where entities performing similar financial functions are subjected to similar oversight, regardless of their institutional form. Eg: Apply the same capital, disclosure, and consumer protection standards to both NBFCs and banks offering credit, ensuring no regulatory arbitrage.
    • Enhanced Supervisory Capacity and Real-Time Monitoring: Strengthen inter-agency coordination (RBI, SEBI, Ministry of Finance) and invest in AI-powered data analyticsto track complex transactions and hidden risks. Eg: Use advanced analytics to monitor NBFC balance sheets and digital lending platforms in real time, enabling early warning systems and prompt corrective action.

  • Why India is the 3rd-largest Economy, NOT 4th or 5th?

    Why in the News?

    Recently, the CEO of NITI Aayog announced that India has moved ahead of Japan to become the world’s fourth-largest economy.

    What is the key difference between nominal GDP and PPP-based GDP?

    • Nominal GDP: Measured using current market exchange rates in US dollars. Eg: If India’s GDP is ₹270 lakh crore and $1 = ₹75, then nominal GDP = ₹270 lakh crore ÷ 75 = $3.6 trillion.
    • PPP-Based GDP: Adjusted for differences in the cost of living and price levels between countries. Eg: If goods and services are cheaper in India, PPP adjusts the GDP upward to reflect greater actual consumption — India’s GDP could be $12 trillion in PPP terms, even though nominal GDP is lower.

    When did India become the third-largest economy by PPP estimates?

    In 2009, India overtook Japan in PPP-based GDP. This milestone occurred during the tenure of the Manmohan Singh-led UPA government. India has retained the 3rd position ever since, behind only China and the United States. The PPP-based ranking reflects India’s large population and lower cost of living, which boosts its effective domestic consumption.

    How do exchange rates affect nominal GDP rankings?

    • Conversion Dependency: Nominal GDP is calculated in US dollars, so a country’s GDP in local currency must be converted using the exchange rate. Eg: If India’s GDP is ₹300 lakh crore and $1 = ₹75, its dollar GDP would be $4 trillion; but if $1 = ₹85, the same GDP becomes $3.5 trillion.
    • Exchange Rate Fluctuations Can Distort Rankings: A country’s global GDP rank can change without any real economic growth or decline, simply due to currency appreciation or depreciation. Eg: If the Japanese yen strengthens against the dollar, Japan’s nominal GDP in dollars rises—even if its actual output hasn’t changed.
    • Unfair Comparison Across Countries: Countries with volatile or weakening currencies may appear smaller in nominal terms than they are in real domestic terms. Eg: India’s GDP may seem lower than the UK’s in nominal terms due to a weaker rupee, even if India produces more goods and services overall.

    Why is per capita GDP more reflective of individual prosperity?

    • Accounts for Population Size: Per capita GDP divides total GDP by the population, showing the average income per person, unlike aggregate GDP which may hide disparities. Eg: India’s GDP is higher than the UK’s in total, but because India has over 20 times the population, its per capita GDP is much lower.
    • Better Indicator of Living Standards: It reflects the average economic well-being and purchasing power of citizens, making it more relevant for assessing prosperity. Eg: A country with $50,000 per capita GDP (like the UK) offers far better public services, infrastructure, and living conditions than one with $2,800 (like India), even if total GDPs are comparable.
    • Highlights Income Distribution and Development Needs: Low per capita GDP suggests widespread poverty or unequal wealth distribution, even if overall GDP is growing. Eg: Despite being the world’s 5th largest economy, India’s low per capita GDP shows most individuals have limited incomes and access to economic benefits.

    What does India’s per capita GDP reveal compared to the UK’s?

    Aspect India UK Example 
    Per Capita GDP (2025) 10,020 PPP dollars 58,140 PPP dollars UK’s per capita income is ~6 times higher than India’s.
    Living Standards & Services Lower access to quality services Higher standard of living, social welfare Indians have limited access to healthcare, education, and housing
    Economic Inequality & Prosperity Aggregate GDP is growing, but benefits are not evenly distributed Prosperity is more widely shared Despite India’s growth, individual prosperity remains low on average.

    Way forward: 

    • Invest in Human Capital and Social Infrastructure: India must enhance spending on education, healthcare, and skill development to improve productivity and raise per capita incomes. Improved human capital directly boosts innovation, employability, and long-term economic growth.
    • Focus on Inclusive and Equitable Growth: Policies should ensure that economic gains are widely distributed, especially through rural development, MSME support, and targeted welfare schemes. This will reduce income disparities and lift more people into the formal, productive economy, improving per capita prosperity.

    Mains PYQ:

    [UPSC 2022]  Is inclusive growth possible under market economy? State the significance of financial inclusion in achieving economic growth in India.

    Linkage: India’s high aggregate economic rank alongside low per capita income, raises questions about how India’s economic growth model is translating into shared prosperity, a central theme of inclusive growth. This question explicitly asks about the possibility and mechanisms (like financial inclusion) of achieving “inclusive growth” within a market economy.

  • Cabinet approves hike in MSP for Kharif Crops

    Why in the News?

    The Cabinet Committee on Economic Affairs chaired by Prime Minister has approved the increase in the Minimum Support Price (MSP) for 14 kharif crops for 2025-26.

    What is the Minimum Support Price (MSP)?

    • MSP in India originated in response to food shortages in the 1960s, notably during the Bihar famine of 1966–1967.
    • Agricultural Price Commission (APC) was established in 1965 to implement price policies like procurement at pre-decided prices and MSP.
    • Over time, the APC evolved into the Commission for Agricultural Costs and Prices (CACP) in 1985, with broader terms of reference.
    • Announcement: The government bases its announcement on the recommendations given by the Commission for Agricultural Costs & Prices (CACP).

    Steps involved in Fixing MSPs:

    • CACP sends its recommendations to the Government of India.
    • The reports are shared with state governments and concerned central ministries for comments.
    • After reviewing all inputs, the Cabinet Committee on Economic Affairs (CCEA) takes the final decision on MSPs.
    • Once approved, CACP publishes all its reports online, ensuring transparency and explaining the rationale behind its recommendations.

    How is MSP fixed?

    • Formulae for Calculation:
      • A2: Costs incurred by the farmer in production of a particular crop. It includes several inputs such as expenditure on seeds, fertilisers, pesticides, leased-in land, hired labour, machinery and fuel
      • A2+FL: Costs incurred by the farmer and the value of family labour
      • C2: A comprehensive cost, which is A2+FL cost plus imputed rental value of owned land plus interest on fixed capital, rent paid for leased-in land
    • National Commission of Farmers also known as the Swaminathan Commission (2004) recommended that the MSP should at least be 50 per cent more than the weighted average Cost of Production (CoP), which it refers to as the C2 cost.
    • The government maintains that the MSP was fixed at a level of at least 1.5 times of the all-India weighted average CoP, but it calculates this cost as 1.5 times of A2+FL.
    • Crops covered are: CACP currently recommends MSPs for 23 key crops:
      • 7 Cereals: Paddy, Wheat, Maize, Sorghum (Jowar), Pearl Millet (Bajra), Barley, and Ragi
      • 5 Pulses: Gram (Chana), Tur (Arhar), Moong, Urad, and Lentil (Masur)
      • 7 Oilseeds: Groundnut, Rapeseed-Mustard, Soybean, Sesame, Sunflower, Safflower, and Nigerseed
      • 4 Commercial Crops: Copra, Cotton, Raw Jute and Sugarcane (Fair and Remunerative Price (FRP) is announced by CACP.)
    [UPSC 2020] Consider the following statements:

    1. In the case of all cereals, pulses and oil-seeds, the procurement at Minimum Support Price (MSP) is unlimited in any State/UT of India.

    2. In the case of cereals and pulses, the MSP is fixed in any State/UT at a level to which the market price will never rise.

    Which of the statements given above is/are correct?

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