Context: The US President has recently proposed that the US will take over Gaza and develop it as the “Riviera of the Middle East”.
Relevance of the Topic:Prelims: Key locations in News.
Key points about the Gaza Strip:
Geographical Location:
It is a coastal enclave along the eastern Mediterranean Sea.
It borders Israel (north and east) and Egypt (southwest, at the Rafah crossing).
Does not share a border with Jordan.
Political Status:
One of the two Palestinian territories, the other being the West Bank.
Governed by Hamas since 2007 after a conflict with the Palestinian Authority.
Subject to an Israeli and Egyptian blockade since Hamas took control.
Historical Context:
It was under Egyptian control (1948-1967) after the Arab-Israeli War.
After the 1967 Six-Day War, it was captured by Israel.
Oslo Accords (1993-1995) gave partial control to the Palestinian Authority.
Israel withdrew settlements in 2005 but still controls airspace and maritime access.
Strategic Importance:
Highly populated and densely urbanized (~2 million people in ~365 sq. km).
A focal point of the Israeli-Palestinian conflict with frequent clashes.
Economic blockade of the strip affects trade, employment, and humanitarian conditions.
Concerns:
The proposal risks violating long-standing UNSC and UNGA resolutions supporting the Palestinian right of self-determination (which India has proactively backed at the United Nations).
There are concerns with respect to rehabilitation of the displaced population.
It also risks several peremptory norms of international law (jus cogens) including those that prohibit ethnic cleansing.
Context: RBI’s Monetary Policy Committee (MPC) is expected to cut the repo rate by 25 basis points (bps) in its upcoming meeting (February 2025), from 6.5 per cent to 6.25 per cent.
If implemented, this would be the first rate cut in nearly five years. This decision is influenced by easing inflation, government stimulus measures, and the need to boost economic growth.
Relevance of the Topic:Prelims: Repo Rate, External benchmark lending rate, Marginal cost of fund-based lending rate; RBI’s Inflation targeting framework
Repo Rate:
Repo rate is the interest rate at which the commercial banks borrow money from the Reserve Bank of India (RBI) during a short-term liquidity crunch.
Repo stands for ‘Repurchasing Option’ or ‘Repurchase Agreement’.
In the agreement, banks provide eligible securities such as Treasury Bills to the RBI, while availing overnight loans. They agree to repurchase securities at a predetermined price later from RBI.
Thus, the bank gets the cash and the central bank the security.
How does Repo Rate affect the Economy?
Rise in inflation:
During high levels of inflation, RBI increases the repo rate to bring down the flow of money in the economy.
This curbs excessive spending, makes borrowing costly for businesses and industries, slows down investment and money supply in the market, and eases inflation.
Increasing Liquidity in the Market:
When the RBI needs to pump funds into the economy, it lowers the repo rate. Consequently, businesses and industries find it cheaper to borrow money for different investment purposes.
It also increases the overall supply of money in the economy. This ultimately boosts the growth rate of the economy.
Related Monetary Policy Tools:
1. Reverse Repo Rate:
Reverse Repo Rate is when the RBI borrows money from banks when there is excess liquidity in the market.
The banks benefit out of it by receiving interest for their holdings with the central bank.
Reverse Repo Rate is a mechanism to absorb the liquidity in the market, thus restricting the borrowing power of investors.
During high levels of inflation in the economy, the RBI increases the reverse repo.
It encourages the banks to park more funds with RBI to earn higher returns on excess funds.
Banks are left with lesser funds to extend loans and borrowings to consumers.
2. Marginal Cost of Lending Rate (MCLR):
MCLR is the minimum interest rate at which commercial banks can lend.
This rate is based on four components:
Marginal cost of funds
Negative carry on account of cash reserve ratio
Operating costs
Tenor premium
MCLR is linked to the actual deposit rates. Hence, when deposit rates rise, it indicates the banks are likely to hike MCLR and lending rates are set to go up.
3. External Benchmarks Lending Rate:
To ensure complete transparency and standardisation, RBI mandated the banks to adopt a uniform external benchmark within a loan category, effective from 1st October, 2019.
Unlike MCLR which was internal system for each bank, RBI has offered banks the options to choose from 4 external benchmarking mechanisms:
RBI repo rate
91-day T-bill yield
182-day T-bill yield
Any other benchmark developed by Financial Benchmarks India Pvt. Ltd.
Factors influencing Repo Rate Cut Decision:
Easing Inflation:
Retail inflation fell to 5.22% in December 2024, the lowest in four months. Lower inflation allows for monetary easing without major inflationary risks.
Union Budget 2025-26 stimulus:
Tax cuts and revised TDS limits aim to boost disposable income and consumption.
Increased consumer demand may require monetary support for sustained economic growth.
Liquidity Measures by RBI: Recent liquidity enhancement steps of RBI ensure banking system liquidity before a rate cut. RBI announced liquidity enhancement measures such as:
$5 billion forex swap.
₹60,000 crore open market operations.
₹50,000 crore variable repo rate operations.
Global Economic Uncertainty:
Trade tensions: US imposing tariffs on China, Canada, and Mexico, is creating instability in global trade.
Impact on currency markets, with rupee hitting an all-time low of ₹87.29 per USD.
The RBI must balance rupee stability and domestic liquidity management.
Impact of Repo Rate Cut on Economy
Reduce Borrowing costs:
Repo-linked lending rates (EBLR): A cut in repo rate will reduce borrowing costs, making home, vehicle, and business loans cheaper.
MCLR-linked loans: Banks may also reduce rates for loans linked to the marginal cost of funds-based lending rate (MCLR). This will lead to lower lending rates for borrowers.
The expected 25 bps rate cutwill lower EMIs for borrowers.
Boost Economic Growth: A rate cut could stimulate investment and consumption, boosting GDP.
The anticipated repo rate cut signals a pro-growth strategy while ensuring inflation remains in check.
Context: The Union Budget 2025-26 has set the fiscal deficit target for 2025-26 at 4.4%. This will enable the Reserve Bank of India (RBI) to consider reducing interest rates to stimulate economic growth.
Relevance of the Topic:Prelims: Monetary Policy Committee, Inflation targeting
Monetary Policy Committee (MPC)
The Monetary Policy Committee is a statutory body established under Reserve Bank of India Act, 1934 (as amended by the Finance Act, 2016).
MPC is responsible for setting benchmark policy rate (repo rate) required to contain inflation, within the specified target level.
Composition: The Central government is empowered to constitute a six-member MPC.
RBI Governor (ex officio chairperson)
Deputy Governor in charge of monetary policy
An RBI officer nominated by the Central Board
Three members to be appointed by the central government.
Decision-Making:
Quorum: At least four Members (at least one of whom shall be RBI Governor and, in his absence the Deputy Governor).
Decisions are based on a majority vote.
In case of a tie, the RBI governor has the casting vote.
MPC decisions are binding on the Bank.
What is Inflation Targeting?
It is a monetary policy framework where the Central Bank aims to maintain the rate of Inflation within a targeted (pre-defined) range.
India has adopted inflation targeting through the Monetary Policy Framework Agreement (MPFA) signed between the Government of India and the Reserve Bank of India in 2015.
India’s Inflation Targeting Framework:
India adopted Flexible Inflation Targeting (FIT) in 2016, with an inflation target of 4% (with a deviation of +/- 2%).
The Consumer Price Index (CPI) serves as the key indicator.
The inflation target is set by the government in consultation with RBI every five years, under the amended RBI Act, 1934.
Current Inflation Trends:
Retail inflation declined to 4.5%-4.7% in January 2025 (down from 5.2% in December 2024).
Essential commodities prices fell by 2.4% in January, indicating a cooling trend.
The Budget 2025 has maintained a fiscal deficit target at 4.4% of GDP to avoid excessive borrowing. Non-inflationary budget to ensure long-term economic stability.
Rationale:
Excessive spending can lead to high inflation and economic instability.
Fiscal policy (government spending & taxation) and Monetary policy (RBI’s control over interest rates and money supply) need to work together to maintain economic stability.
The government’s disciplined spending approach allows the RBI to lower interest rates, when inflation is under control. Lower interest rates can boost borrowing, investment, and economic growth.
Government’s subtle Message to the RBI:
The government is signaling RBI that since inflation is under control, it may be a good time to start cutting interest rates.
RBI’s Monetary Policy Committee (MPC) will decide whether to cut repo rates in its upcoming meeting.
Lower interest rates make loans cheaper, helping businesses and individuals invest more.
A well coordinated approach between Fiscal and Monetary Policy is crucial for achieving economic growth and long-term economic stability.
Context: Recently, the Supreme Court has ordered the Assam Government to deport the foreigners lodged in detention centres. Some of them have been in detention for 10 years after being declared as foreigners by the Foreigners Tribunal.
Relevance of the Topic:Prelims: Key facts about Foreigners Tribunals in Assam.
About Foreigners Tribunals in Assam
Foreigners Tribunals (FTs) are quasi-judicial bodies established in Assam to adjudicate cases concerning individuals suspected of being illegal immigrants.
They were created under the Foreigners (Tribunals) Order, 1964, which derives its authority from the Foreigners Act of 1946.
The tribunals primarily handle cases related to individuals left out of the National Register of Citizens (NRC), with a significant number of cases involving approximately 19.06 lakh people.
Structure of Foreigners Tribunals
Number of Tribunals: Currently, there are around 100 Foreigners Tribunals operating in Assam.
Composition: Each tribunal is headed by a member with legal or judicial experience, including judges and advocates. The members are appointed under the guidelines provided by the government.
Referral Process: Cases can be referred to FTs by District Magistrates or through notices served to individuals marked as "doubtful voters" on electoral rolls. The tribunals also handle references made by border police regarding suspected illegal immigrants.
Functioning of Foreigners Tribunals
According to the 1964 order, an FT has the powers of a Civil Court in matters such as summoning and enforcing the attendance and examining on oath and requiring the production of any document.
A tribunal is required to serve a notice in English or the official language of the State to a person alleged to be a foreigner within 10 days of receiving the reference from the authority concerned.
Such a person has 10 days to reply to the notice and another 10 days to produce evidence in support of his or her case. An FT has to dispose of a case within 60 days of reference.
If the person fails to provide any proof of citizenship, the FT can send him or her to a detention centre (now called transit camp) for deportation later.
The burden of proof under the Foreigners Act is on the person accused as a foreigner.
Failure on his part to appear before the Tribunal, will result in him being declared a foreigner without the state having to prove its case.
Appeal against the order of a FT
Individuals declared as foreigners by the FT can challenge the decision of the tribunal by filing a writ petition in the High Court of Assam, under Article 226 of Indian Constitution.
If unsatisfied by the decision of the High Court, they can appeal to the Supreme Court of India under Article 136 (Special Leave Petition).
Background: The legal foundation for the FTs was laid down in 1964, but significant amendments have been made in 2019, which refined the procedures for handling appeals related to NRC claims and objections. Notably, this amendment allows individuals to approach the tribunals directly, shifting some responsibility from state authorities to the tribunals themselves.
Context: The Government in the Union Budget 2025-26 has announced no personal income tax on income up to 12 lakhs per annum. Apart from it several other key tax reforms are announced expected to have a big impact on individuals across all income categories.
Relevance of the Topic: Prelims: Basic idea ofNew Tax Regime; tax dynamics of India.
Major Highlights:
1. Basic Exemption Limit Raised to Rs 4 Lakh:
The government has proposed increasing the basic exemption limit under the new tax regime from Rs 3 lakh to Rs 4 lakh.
As a result, individuals with an annual taxable income of up to Rs 4 lakh will have zero tax liability.
Taxpayers opting for the new tax regime will not be required to file an income tax return, if they do not meet other mandatory filing criteria.
2. Full Tax Rebate for Income up to Rs 12 Lakh:
The income threshold for availing a full tax rebate has been raised from Rs 7 lakh to Rs 12 lakh under the new tax regime.
This means that taxpayers earning up to Rs 12 lakh annually will pay no income tax.
A standard deduction of 75000 rupees for salaried employees is announced, making a cumulative tax benefit of 12.75 lakh rupees.
However, incomes subject to special tax rates, such as capital gains, are excluded from this rebate calculation.
3. Revised Income Tax Slabs:
The new tax regime will feature an additional 25% tax bracket, expanding the total number of slabs to seven. The updated structure is as follows:
4. Updated Return Filing Window Extended:
Taxpayers will now have five years, instead of the current three, to file updated tax returns.
However, additional tax penalties will apply—60% for returns filed in the fourth year and 70% in the fifth year.
5. Higher Limit for Foreign Remittance under LRS:
The threshold for a 20% Tax Collected at Source (TCS) on foreign remittances under the Liberalised Remittance Scheme (LRS) has been raised from Rs 7 lakh to Rs 10 lakh per annum.
Additionally, TCS will no longer be levied on remittances for educational purposes funded through loans from specified institutions.
Rationale behind Tax Benefits
Slumping demand: There has been a slump in demand for goods in the market, especially the automobile and real estate sector, due to low disposable income with the salaried employees.
Stagnant salaries: Economic Survey 2024-25 has observed that the employees in the companies are working on low salaries, leading to net reduction in the salaries (i.e., inflation rate is more than the salary increment).
Inflation: The tax burden combined with rising inflation and stagnant salaries leaves less scope for the individual to participate in the economic growth of the nation.
Potential Impact of Benefits
The slabs and rates have been changed to benefit all taxpayers to reduce the tax burden of the middle class and leave more money in their hands, boosting household consumption, savings, and investment.
Reducing triple burden: It will help in reducing the triple burden of tax-inflation and low salaries on the middle class.
Rise in Demand: The tax benefits will increase the disposable income and will increase consumption expenditure. This, in turn, will fuel the sluggish GDP growth rate.
Increase in the savings: Indian savings has reduced in the past 10 years by 5%, reduction in the tax will help the middle class to invest the money in the saving instruments.
Major Constraints in Indian Direct Tax
Narrow tax-base: India have a low tax base where only 2% people pay income tax due to;
Large number of deductions in the income tax.
Vast presence of informal labour force lead to reduction in tax paying citizens
Exemption on agricultural income leads to tax evasion.
High Litigation and Dispute Resolution Issues: A large number of tax cases are pending in courts, leading to delays and inefficiencies in tax collection.
Lack of Awareness and Compliance: Many individuals and businesses lack knowledge of tax laws, leading to unintentional non-compliance.
Political and Social Factors: Pressure from interest groups, political interference, and populist measures such as tax exemptions reduce overall tax collection.
Black Money and Corruption: The presence of black money in the economy and corruption within tax administration weaken efforts to collect direct taxes effectively.
Low Penalties and Weak Enforcement: Weak enforcement mechanisms and relatively low penalties for tax evasion do not act as strong deterrents.
However, in recent times the net direct tax collection has increased. E.g., Net direct tax collections in India from April 1, 2024, to January 12, 2025, reached Rs 16.90 lakh crore, reflecting a 16% growth year-on-year.
Probable reasons for rise in Net Direct Tax Collections:
Integration of PAN with Aadhar has streamlined the verification process.
Use ofTechnology:
Digital payment systems to file tax with simplified transactions.
e-verification and e-assesment processes.
Faceless Assessment Scheme for greater transparency and efficiency in income tax assessments.
Rise in Incomes has also facilitated higher tax payments by individuals.
Simplification of Tax Rules:
Rationalisation of tax slabs, incentives for filing returns have led to voluntary compliance. E.g. ‘Honoring the Honest’ campaign.
Decrease in cost of collection is attributed to:
Adoption of centralised processing centres (E.g., CPC Bengaluru)
Automation of processes like return filing, scrutiny and refund issuance.
Increase in the efficiency of tax administration.
Formalisation of the economy.
To improve direct tax collection in India further, reforms should focus on simplifying tax laws, expanding tax base, enhancing digital compliance, strengthening enforcement, and curbing tax evasion.
Context: Delhi has witnessed a remarkable increase in the gender budget from ₹10 billion in 2011-12 to ₹71 billion in 2024-25. While providing financial assistance to women and child development is essential to reduce the gender gap, it is equally important to invest in other components like education and health.
Relevance of the Topic:Mains: Gender Budgeting: Concept & significance.
What is Gender Budgeting?
Gender Budgeting or Gender Responsive Budgeting, is an approach that uses fiscal policy to promote gender equality by assessing the impact of government budgets on gender equity.
In 2005-06, India introduced a gender budget. The Government of India publishes a Gender Budget Statement (GBS) annually along with the Union Budget.
The Union Ministry of Women and Child Development leads the implementation of gender budgeting at the national level.
The Departments of Women and Child Development, Social Welfare, and Finance act as nodal agencies in the States and Union Territories.
Rationale behind Gender Budgeting:
The needs and requirements of genders differ. Gender-neutral budgets ignore the gender-specific impacts of Budgets.
Thus, gender budgeting aims to:
Promote Gender Equality through positive discrimination in favour of women.
Promote higher efficiency through adequate provisions for women.
Significance:
It ensures public financial resources are allocated to address disparities between genders across various sectors.
Gender budgeting does not entail creating a separate budget for men and women; rather, it integrates gender considerations into the existing budget framework.
It dissects budgets to identify gender-differential impacts and translates gender commitments into actionable fiscal policies.
It addresses gender concerns within general schemes and programs, ensuring that even gender-neutral policies benefit women.
Examples of Gender Budgeting in Action
MGNREGA:
Mandates at least one-third participation of women.
Introduces gender-sensitive provisions like safe drinking water, first aid, and childcare facilities at worksites.
Establishment of Bharatiya Mahila Bank to enhance women's financial participation.
Rural Development: Prioritizes safe drinking water, reducing time poverty for women and enabling greater economic participation.
Housing (PMAY-U): Allocates housing under Pradhan Mantri Awas Yojana (Urban) to female household members, increasing women's asset ownership.
Energy Sector: Promotes clean cooking fuel initiatives, recognising their impact on women's health and labor.
Engendering Gender-Neutral Ministries: Ministries like Urban Development, Power, and Corporate Affairs incorporate gender concerns into their schemes for better planning and resource prioritization.
The Ministry of Women and Child Development have facilitated the gender neutral Ministries like the Ministry of Urban Development, Ministry of Information Technology, Ministry of Power, Ministry of Corporate Affairs, Ministry of Statistics and Programme Implementation for engendering their schemes and programmes for better planning and resource prioritisation.
Delhi’s Case:
In the last few years, Delhi has witnessed a significant drop in the share of education in the Gender Budget.
In 2017-18, education accounted for 54% of the gender budget, but this share has dropped to 27% in 2024-25.
Way Forward: Prioritise Education over Freebies
Targeted Investment in Education:
While cash transfers provide temporary relief, long-term empowerment requires targeted investment in women’s education and technical training.
Education and technical training are major pillars for sustainable long-term growth.
Increasing budget allocation to Education:
Increasing the education budget would lead to a more skilled female workforce, reduced gender gaps in employment, and better representation in high-paying jobs.
