February 1, 2025

Current Affairs

Key Takeaways from Economic Survey 2024-25

Context: The Economic Survey for 2024-25 was tabled by Finance Minister Nirmala Sitharaman in Parliament on 31 January 2025.

Relevance of the Topic:Prelims: Key takeaways from Economic Survey.

About Economic Survey

The Economic Survey is prepared by the Economic Division of the Department of Economic Affairs in the Ministry of Finance under the supervision of the Chief Economic Adviser.
The Survey is a report of the state of the Indian economy in the financial year that is coming to a close.
It serves as a crucial resource for policymakers, economists, and stakeholders, outlining the trends, challenges, and opportunities that shape the economic landscape.

State of Indian Economy:

The Economic Survey contends that the domestic economy remains steady amidst global uncertainties.

1. Real GDP

Real Gross Domestic Product maps economic activity from the demand side of the economy.
- In the current financial year (FY25) Real GDP is pegged at 6.4%.
- In the coming year (FY26), the Survey expects it to lie between 6.3% and 6.8%.
The share of private final consumption expenditure — the money Indians spend in their individual capacity (the consumer demand) — in India’s GDP (at current prices) is estimated to increase from 60.3% in FY24 to 61.8% in FY25. This share is the highest since FY03.

2. Gross Value Added

On the supply side, which is mapped by Gross Value Added (GVA), India’s growth remains close to the decadal average.
Aggregate GVA surpassed its pre-pandemic trend in the first quarter of FY25, and it presently is above the trend.

3. Inflation

Headline inflation is moderating because of moderating core inflation.
- Core inflation refers to inflation in goods and services except food and fuel.
However, food inflation increased from 7.5% in FY24 to 8.4% in the current financial year, driven by factors such as supply chain disruptions and vagaries in weather conditions.

4. Employment

India’s labour market growth in recent years has been supported by post-pandemic recovery and increased formalisation.
The 2023-24 annual Periodic Labour Force Survey (PLFS) report shows that all key employment related metrics, such as unemployment rate, labour force participation rate and the worker-to-population ratio (WPR), have improved.

5. FDI Inflow

FDI indicates the amount of money invested in Indian companies by foreign investors. These inflows also regulate balance of payments and the rupee’s strength.
Net FDI inflows have fallen during the first eight months of FY25 due to a rise in repatriation/disinvestment. For the overall financial year, FY24 saw a drop in FDI compared to previous years.

6. Foreign Exchange Reserves

The country’s foreign exchange reserves act as a means to service external debt and imports, maintain liquidity and play an important role in monetary policy.
As of December 2024, the reserve stood at 640.3 billion U.S. dollars. This amount will cover 90% of India’s external debt of 711.8 billion dollars as of September 2024.

7. Industrial sector

The industrial sector is estimated to grow by 6.2% in FY25.
Growth in the services sector is expected to remain robust at 7.2%, driven by healthy activity in financial, real estate, professional services, public administration, defence, and other services.
The manufacturing sector, while steadily recovering, remains slightly below its pre-pandemic trajectory as it recovers from slowing global demand and supply chain disruptions.

8. Trade

The value of exports and imports fell by 0.1% and 2.3% in FY24 when compared to FY23. But they have seen a rise in FY25 (April to December) by 6.6% and 3%.

9. UPI payments

UPI payments have seen an exponential growth since it was launched in FY 2016. The total value of UPI payments almost touched ₹2 lakh billion in FY24, and it has already surpassed ₹1.9 lakh billion from April to December in FY25.

Survey’s recommendations

The Union government and state governments should strive to boost employment, income generation, and therefore consumption.
Need to deregulate the economy to unleash economic growth. There is a positive correspondence between business reforms and level of industrial activity.
- Presently, India faces limitations in producing critical goods at the scale and quality required, to serve the infrastructure and investment needs of an aspiring economy.
- By simplifying regulations that affect businesses can lower the cost of doing business, boost employment, income growth and therefore higher consumption.
- E.g., Adoption of Business Reform Action Plan (BRAP) formulated by the Department for Promotion of Industry and Internal Trade (DPIIT).

Concerns

In the context of the global economy, the Survey has flagged two main concerns:

1. Unfavorable global economic environment

The broader global economic environment has become unfavourable and challenging, and global trade and investment have slowed down.
Global trade dynamics have changed significantly in recent years, shifting from globalisation to rising trade protectionism, accompanied by increased uncertainty.
The impact of this shift in global structural forces is reflected in global trade growth, and signs of stagnation in the global economy are beginning to emerge.

2. Dominance of China

The dominance of China as the world’s manufacturing superpower is concerning for India.
- A third of all global production happens in China, and it alone manufactures more global output than the next 10 countries put together.
- However, post COVID-19 and due to global economic fragmentation, the world’s modus operandi of outsourcing manufacturing to China (pursued vigorously in the globalisation era) is coming to rest.

Targeted Approach for Leprosy Containment

Context: The Union Ministry of Health targets leprosy containment in India by introducing a new treatment regimen to achieve zero transmission by 2027.

Relevance of the Topic: Prelims: Key facts about Leprosy; Government Initiatives.

What is Leprosy?

Leprosy (aka Hansen’s disease) is a chronic infectious disease caused by a bacteria called Mycobacterium leprae.
Threats:
- It primarily affects the skin (causes severe, disfiguring skin sores) and peripheral nerves (damage in the arms, legs).
- Loss of sensation occurs on the affected area of skin with muscle weakness. Left untreated, it may cause progressive and permanent disabilities.
- The incubation period is 3 to 5 years / till 20 years. Children are more likely to get leprosy than adults.
- Leprosy can be contagious, if one comes into close and repeated contact with nose and mouth droplets from someone with untreated leprosy.
Treatment:
- Leprosy is curable with a multi-drug therapy (MDT), recommended by WHO. MDT is a combination of three drugs: dapsone, rifampicin, and clofazimine.
- The duration of treatment is six months for Paucibacillary (mild form of leprosy) and 12 months for Multibacillary (severe case of leprosy) cases. MDT kills the pathogen and cures the patient.
Leprosy is a neglected tropical disease (NTD) that still occurs in more than 120 countries, with around 200,000 new cases reported every year.

Government Initiatives

1. National Leprosy Eradication Programme (NLEP)

Centrally sponsored Scheme under National Health Mission, launched in 1983.
Target: Detect cases of leprosy at an early stage and provide complete treatment, free of cost to prevent occurrence of Grade II Disability (G2D) in affected persons.
Achievements:
- In 2005, India achieved the ‘elimination of leprosy as a public health problem’ as per the World Health Organisation’s (WHO) criteria of less than 1 case per 10,000 population at the national level. However, there are few districts within States where leprosy is still endemic.
- The number of new leprosy cases detected has come down to 75,394 in 2021-22 from 125,785 in 2014-15.
Targeted approach: The government is taking a targeted approach to tackle the disease in 5 states and 124 districts in India. The five states in India with the highest prevalence of leprosy include Bihar, Chhattisgarh, Jharkhand, Maharashtra, and Odisha.

2. National Strategic Plan (NSP) and Roadmap for Leprosy (2023-27)

The Ministry of Health has launched the National Strategic Plan and Roadmap for Leprosy (2023-27) in January 2023, under NLEP.
Aim: To achieve zero transmission of leprosy by 2027, i.e., three years ahead of the Sustainable Development Goal (SDG).
The strategy and roadmap focuses on:
- awareness for zero stigma and discrimination
- promotion of early case detection
- prevention of disease transmission by prophylaxis (leprosy post exposure prophylaxis)
- web-based information portal (Nikusth 2.0) for reporting leprosy cases, facilitating seamless data recording, analysis, and reporting of key indicators.

3. New treatment regimen for Leprosy

To contain leprosy and stop its transmission by 2027, the Central Government has approved a new treatment regimen for leprosy (i.e., introduction of MDT as recommended by WHO).
It introduced a three-drug regimen for Pauci-Bacillary cases (a mild, less severe form of leprosy) in place of a two-drug regimen for six months. WHO has agreed to supply the revised drug regimen from April 1, 2025.

Taxation in India

Context: The Economic Survey 2025 projects India’s FY 2025-26 GDP growth at 6.3-6.8%. For Viksit Bharat, India has to grow 8% for at least 10 years. As India's per capita income rises and its democratic processes deepen, an increase in tax collections is anticipated in the country.

Relevance of the Topic: Prelims: Key trends in Taxation in India

Why does Taxation become important in the present state of Indian Economy?

Inadequate consumption-led growth: Indian consumers are not spending enough on goods and services. This has led to weak demand in the economy.
Impact on Private investment: Dullness in demand has discouraged private firms from investing in creating new productive capacities.
Constraints in exports-led growth:
- With Trump as the US President, US’s threat to impose tariffs can possibly lead to a global trade and currency war.
- With rising protectionism, threat of tariffs and competitive devaluations of currency, India cannot solely rely on exports-led growth.
Necessity for government spending: With low private consumption expenditure and low private investment, the increase in government expenditure is the necessary condition for economic growth. But in order for the government to spend more, robust tax revenues are required.

Role of Taxation

Reducing direct taxes like Income tax can increase disposable income for the tax payers and ensure household consumption expenditure.
Rationalising indirect taxes, like rationalising Goods and Services tax (GST) will make goods and services more affordable and thus, boost consumption expenditure.
Tax-incentives and favourable policies for export-oriented sectors and firms can enhance their global competitiveness, invest in innovation and expand their operations.
Efficient tax collection and broadening the tax-base can provide the government with sufficient tax revenue to increase expenditure.

Scope of Taxation in India

1. Critical importance of tax revenues for Indian government:

The Indian government has a very high dependence on tax revenues -close to 80%. Comparable economies such as Brazil, Mexico and China are much less dependent on tax revenues.
Cutting tax rates or collecting less taxes will force the Indian government to borrow more money from the market, thus competing with private firms for investible funds. This will drive up interest rates for everyone in the economy.

2. Tax revenues as share of GDP:

India ranks fairly low when total tax revenues as a share of total national GDP is concerned- well below 20%.
Most developed countries in Europe manage to raise much higher levels of revenues as a proportion of GDP. This suggests that those countries are more efficient at raising revenues.
India’s government, despite being desperately dependent on taxation for their expenditure, is not able to target as wide a tax base.

3. Tax revenues as a share of GDP versus GDP per capita:

India fits into a broad pattern where the richer a country, the more capable its government is in raising taxes as a percentage of the overall GDP. So, India is behind China, which, in turn, is behind the US.
Older, more established economies are more efficient in raising revenues.

4. Income Tax vs. Taxes on Goods & Services:

Direct taxes such as personal incomes taxes are more progressive and just — i.e., the rich can be made to pay a higher rate of tax as against the poor.
Indirect taxes such as the GST are regressive, since a poor person also pays at the same rate at which the rich pays.
In India, both direct and indirect taxes roughly amount to around 7% (of the GDP) each.
Richer developed countries use direct taxes more to raise much higher levels of taxation as against emerging economies such as China or Vietnam or India.
Indian taxpayers should expect higher tax collections, especially from direct taxes such as personal income taxes, as India becomes richer and the Indian government becomes more efficient in collecting taxes.

5. Taxation in Electoral Democracies:

The higher a rank for a country in electoral democracy, the more tax revenues its government is able to raise.
So, India does better than Bangladesh while it is behind Brazil, the US and Germany on both electoral democracy index as well as tax revenue collection (as a % of GDP).
As India improves its electoral democracy ranking, we can expect higher tax collection.

Conclusion

While it is true that, due to repeated economic shocks as well as the government’s inability to successfully kick-start a virtuous cycle of economic growth in the country, there are concerns that the Indian government is overtaxing citizens.
But, India’s tax revenues (as a percentage of GDP) is not as high as many of the developed countries, even though it funds a remarkably high proportion of central government’s spending. Moreover, as India becomes richer (in per capita income terms), and its democracy deepens, tax collection can be expected to go higher.

Life's Basic Building Blocks found in Asteroid Bennu

Context: As per a recent study, the samples of the asteroid Bennu transported to Earth contain the basic building blocks for life and the salty remains of an ancient water world.

Relevance of the Topic: Prelims: Key facts about Asteroid Bennu; NASA's OSIRIS-REx spacecraft.

Major Highlights:

Scientists studied the material collected from asteroid Bennu by NASA's OSIRIS-REx spacecraft in 2020.
Initial analysis of the sample had already revealed evidence of high-carbon content and water.
The latest research has found that evaporated water on Bennu's parent asteroid left behind a "briny broth" of salts and minerals. This indicates that Bennu's parent asteroid once had pockets of liquid water.
The samples contain sodium-rich minerals and confirm the presence of amino acids, nitrogen in the form of ammonia and traces of real extraterrestrial organic material formed in space (and not a result of contamination from Earth).
More testing is needed to better understand the Bennu samples, as well as more asteroid and comet sample returns.
Significance: The analysis of the sample suggests a non-terrestrial origin and provides the strongest evidence yet that asteroids may have planted the seeds of life on Earth.

About Asteroid Bennu

Bennu is a carbon-rich near-Earth small asteroid. It is just little less than 500 metres in depth.
It is expected to have formed around 65 million years ago, from the debris of a parent asteroid dating back some 4.5 billion years.
It is classified as a near-Earth object because it passes relatively close to planet Earth, every six years.
- The closest asteroids which travel within 1.3 AU (Astronomical Unit) of the sun are called near-Earth objects.
- 1 AU is approximately equal to 93 million miles - the distance between the Sun and the Earth.
The samples from Bennu (around 122 grams of dust and pebbles) were brought to Earth in a capsule by the OSIRIS-REx mission in 2023.

About OSIRIS-REx Mission

Origins, Spectral Interpretation, Resources Identification and Security-Regolith Explorer (OSIRIS REx) is an asteroid study and sample return mission by NASA.
The spacecraft set out in 2016 to study asteroid Bennu, and returned to Earth with a sample for detailed analysis in 2023.
OSIRIS-APophis EXplorer (OSIRIS-APEX): After successfully completing its mission to gather a sample of asteroid Bennu in September 2023, OSIRIS-REx was renamed OSIRIS-APEX. NASA has redirected OSIRIS-REx to track asteroid Apophis.

Re-evaluating FRBM Act 2003

Context: The Fiscal Responsibility and Budget Management (FRBM) Act, 2003 was enacted to ensure macro-economic stability and inter-generational equity. The Act's rigid framework has been increasingly criticised for its limitations, especially during the times of economic crises.

Relevance of the Topic: Prelims: Key features of FRBM Act, 2003. Mains: FRBM Act- Limitations, Reforms.

Fiscal Responsibility and Budget Management (FRBM) Act, 2003:

The Act aims to ensure a balance between government revenue and government expenditure. It set deficit targets for the Union and States to control their deficits.
Objectives:
- Ensuring fiscal discipline.
- Efficient management of expenditure, revenue and debt.
- Promoting macroeconomic stability.
- Better coordination between fiscal and monetary policy.
- Increasing transparency in the fiscal operation of the Government.

Salient Features of Fiscal Responsibility and Budget Management Act, 2003

Section 4(1) of the FRBM Act provides that the Central Government shall:
- Take measures to limit the fiscal deficit up to 3% of GDP.
- Ensure that by the end of Financial Year 2024-25:
  - General Government debt does not exceed 60% of GDP.
  - Central Government debt does not exceed 40% of GDP.
- Not give additional guarantees with respect to any loan on security of the Consolidated Fund of India in excess of one-half per cent of GDP, in any Financial Year.
- Ensure that the fiscal targets are not exceeded after stipulated target dates.
Under Section 5 of the Act, except for certain circumstances, the Act does not allow the Central Government to borrow from the Reserve Bank of India (RBI).

FRBM Review Committee headed by NK Singh

The government believed the targets set by the FRBM Act were too rigid. In 2016, the government set up a committee under NK Singh to review the FRBM Act. Targets set by NK Singh Committee:

Debt to GDP ratio:
- The Committee suggested using debt as the primary target for fiscal policy.
- It advocated for a Debt to GDP ratio of 60% with a 40% limit for the centre and a 20% limit for the states.
Revenue Deficit Target:
- It should be reduced to 0.8% of GDP by March 31, 2023. The minimum annual reduction target was 0.5% of GDP.
Fiscal Deficit Target:
- The government should target a fiscal deficit of 3 percent of the GDP in the years up to March 31, 2020, cut it to 2.8 per cent in 2020-21.
- It should be reduced to 2.5% of GDP by March 31, 2023. The minimum annual reduction target was 0.3% of GDP.

FRBM Act – Escape Clause

The FRBM Act was amended in 2018, adding specific details that were given in Section 4(2).
If the escape clause is triggered, RBI is then allowed to participate directly in the primary auction of government bonds, thus formalising deficit financing.
- Deficit financing refers to the method of financing the budget deficits — such as issuing bonds or printing more money.
FRBM Act Section 4(2), provides for a trigger mechanism to escape deficit control–related clauses in the act and the Government can over cross the targets in the following situations:
- National Security / Act of War
- National Calamity
- If agriculture output and farm incomes collapse
- Fall in real output/GDP growth rate beyond x%
- Structural reforms in the economy with unanticipated fiscal implications.
During the above trigger conditions:
- The government may over cross/deviate from the fiscal deficit target by up to 0.5% of GDP, as recommended by NK Singh’s FRBM Review Committee.
- Individual State Governments may also do similar (E.g., overcross by 0.5% of GSDP), after amending the state FRBM Act accordingly.
The Finance Minister cited structural reform to escape the FRBM targets for 2019-20 and 2020-21.
In Budget-2021, FRBM was amended to provide a fiscal deficit target of 4.5% by 2025-26, as recommended by the 15th FC.

Documents Mandated by FRBM Act

Macroeconomic Framework Statement: This statement provides an overview of the economy, including GDP growth, inflation, receipts and expenditure.
Medium-Term Fiscal Policy Statement: This statement sets out the government’s fiscal policy goals for the medium term.
Fiscal Policy Strategy Statement: This statement explains how the government plans for fiscal policy goals.
Medium-Term Expenditure Framework: This framework sets out the government’s spending plans for the medium term.

2024-25: Budget Estimates vs. Revised Estimates

Revenue Receipts: There is a decline in revenue receipts, which could increase the revenue deficit by 0.8% of GDP. This would mean the government is saving less, which negatively impacts economic growth.
Capital Expenditure: Capital expenditure is also expected to decline by 1.1% of GDP. This will slow down economic growth further.
Impact on Growth: The combined effect of the decline in revenue receipts, non-debt capital receipts, and capital expenditure has already contributed to a decrease in real economic growth from 8.2% in 2023-24 to 6.4% in 2024-25.
Fiscal Deficit: The decline in revenue receipts and capital expenditure, along with a drop in non-debt capital receipts, is expected to slightly increase the fiscal deficit-to-GDP ratio.

Way Forward

2025-26 Budget should aim to amend the FRBM targets by:

Eliminating the revenue deficit:
- The government should aim to eliminate the revenue deficit by 2027-28. This will help increase savings and support economic growth.
Reducing the fiscal deficit to 3% of GDP:
- The fiscal deficit should be reduced to 3% of GDP within the next three years.
Reducing the debt-to-GDP ratio to 50% over the next three years.
- The current rule of a 40% debt-to-GDP ratio is strict.
- The government should consider reducing it to 50% from the current 56.8% (estimated for 2024-25) over the next three years.
Introducing a rule to ensure that capital expenditure stays at 3% of GDP.
- The government often plans high capital expenditure in the budget but later reduces it, which distorts fiscal management. To fix this, the government should set a clear target for capital expenditure at 3% of GDP.

Capital Expenditure allocation decreased in Budget 2025

Context: The Union Budget 2025 has allocated ₹10.18 lakh crore towards capital expenditure (capex) to promote infrastructure-driven growth. This marks an 8.4% decrease from last year's allocation of ₹11.1 lakh crore.

Relevance of the Topic: Prelims & Mains: Budget- State of Capital Expenditure

What is Capital Expenditure?

The Union Budget defines capital expenditure (capex) as the funds allocated and utilised by the government to create assets or reduce liabilities that contribute to a country's economic growth.
This includes long-term investments in infrastructure, machinery, healthcare, education, and other essential sectors.
It covers expenses to acquire fixed assets, upgrade or repair existing assets, repaying loans, and other government investments that yield future profits or dividends.
Repayment of loans is also treated as capital payment since it reduces financial liabilities.

Importance of Capital Expenditure:

Determinant of Growth: Capital expenditure leads to the creation of long-term assets that generate revenue for many years, increases labour participation and boosts operational efficiency.
Multiplier Effect: Government’s focus on productive capex has a higher multiplier effect on growth, especially when consumer spending shows weakness.
Stimulate Consumption Demand: The present Indian economy goes through stagnant consumer spending and focused capital expenditure can help battle it.

Current State of India’s Capex:

Government spending on Capex:
- The Centre's budget allocations for capex have more than doubled, from 1.6% of GDP in FY19 to a projected 3.4% in FY25.
- State capex is also expected to grow modestly to 2.6% of GDP in FY25, exceeding pre-pandemic levels.
Increase in gross fixed capital formation (GFCF):
- Increased to 30.8% of GDP during FY24, surpassing the pre-pandemic average of 28.9%, observed during 2015-2019.
State of FDIs and FPIs:
- Gross FDI inflows stand at $48.6 billion during April-October 2024, higher than $42.1 billion of last year. However, higher repatriation of profit has resulted in muted FDI inflows on a net basis.
- Recent outflow of FPIs has increased depreciation pressure on the rupee.

Challenges:

Cautious spending amid economic challenges:
- Major central public sector enterprises reported a 10.8% decline in capital expenditure during H1FY25, reaching only 43.6% of their annual target.
- Under-utilisation by States: In the previous fiscal year, states used only Rs 1.1 trillion of the budgeted Rs 1.3 trillion.
Underperforming private capex: The overall private sector capex has yet to witness a strong pickup, due to:
- global policy uncertainties
- geopolitical risks
- oversupply from China
- increased borrowing costs
- muted domestic demand.

Government’s Push:

To bolster capex by states, the Centre has raised the allocation for the 50-year interest-free loans in the Union Budget for FY25 to Rs 1.5 trillion. Of this, Rs 550 billion is an unconditional loan, while the rest is tied to conditions such as industrial growth, land reforms, and state capex growth.