Economy

All (4050)Current Affairs (4038)Mains Practice (126)Mains PYQs by Subjects (40)

IT Sector in India

Context: India’s IT industry looks content being the world’s back office, while the real tech giants chase the future through world-class software products, AI breakthroughs, and deep-tech start-ups.

Relevance of the Topic: Mains: IT Sector in India- Issues, Way Forward

India’s Services Sector

  • India’s services sector has been a significant contributor to the Gross Value Added (GVA) in the economy.
    • Its contribution to the total GVA at current prices has increased from 50.6% in FY14 to about 55% in FY25. 
    • Growth in the service sector (measured by YoY change in real GVA by services) has been above 6% in each year in the last decade, except for FY21 (Covid-19 pandemic).
  • The Indian IT/ ITeS industry is a cornerstone of India’s services sector and a key contributor to the growth of exports. The industry has estimated revenues of $254 billion, marking a 3.8% YoY growth in FY24 (excluding e-commerce).
    • Tech exports reached nearly $200 billion reflecting a growth of 3.3%.
    • The domestic market is expected to expand by 5.9%, crossing $54 billion in FY24.
  • India’s Global Capability Centres (GCCs) are providing various support services, such as IT, finance, human resources, and analytics, to their parent organisations.
    • The number of GCCs in India has grown from approximately 1430 in FY19 to over 1700 in FY24. 
    • As of FY24, GCCs in India employ nearly 1.9 million professionals.

Constraints limiting India’s IT Sector

Despite its successes, the sector remains overly focused on outsourcing, missing opportunities in innovation, deep tech, and indigenous technology development.

  • Low on Innovation:
    • Predominant focus on outsourcing rather than creating intellectual property (IP).
    • Indian IT giants (TCS, Infosys, Wipro) prioritize human resource deployment over technological innovation.
    • Despite a 55% share in global outsourcing, India lacks global software products comparable to Google or OpenAI.
  • Absence of long-term technology vision:
    • Companies prioritise dividends over investing in long-term research and development (R&D).
    • Risk aversion leads to missed opportunities in emerging fields like AI, blockchain, and automation. 
    • In contrast, countries like China invest heavily in cutting-edge technologies.
  • AI blind spot:
    • Limited investment in AI, with industry leaders underestimating the feasibility of building cost-effective Large Language Models (LLMs).
      • DeepSeek’s success proves AI models can be developed for under $7 million.
    • Underrepresentation of Indian languages in AI datasets (only 3% of global web data), hindering AI models from effectively serving Indian users.
  • Overreliance on Global Capability Centres (GCCs):
    • GCCs, despite hiring Indian engineers, retain innovation and IP abroad.
    • These centres diminish revenues for Indian IT firms and may exploit tax loopholes through transfer pricing.
  • Dependence on American digital firms:
    • India failed to develop indigenous tech giants despite having early industry leaders.
    • Unlike China, which fostered domestic alternatives (Baidu, WeChat, Tencent), India’s market is dominated by foreign platforms.
    • Weak policy support for homegrown companies has exacerbated this reliance.
  • Low Data centre capacity:
    • India’s data centre capacity stands at 1GW, significantly lagging behind the US’s 20GW.
    • Reliance on foreign data hosting limits India’s sovereignty over data-driven innovations.
  • Weak Start-up culture:
    • Start-ups focus mainly on services (e.g., Zomato, Swiggy) rather than deep-tech solutions.
    • Investors prefer low-risk ventures, unlike in the US or China where venture capital supports high-risk, innovative technologies.
  • Role of Nasscom
    • Nasscom’s influence has faded; currently operating more as a lobbying entity than a driver of innovation.
    • Lacks up-to-date data and actionable strategies to promote technological advancement.

Way Forward

  • Fostering innovation and risk-taking:
    • Shift from a service-oriented model to product-based innovation.
    • Encourage companies to reinvest profits into R&D rather than distributing them solely as dividends.
  • Promoting indigenous AI and deep-tech development:
    • Develop AI models in Indian languages to cater to local users.
    • Invest in cost-effective solutions like open-source models (e.g., DeepSeek).
  • Building a robust Start-up ecosystem:
    • Government to incentivise deep-tech start-ups through funding and procurement policies.
    • Support for venture capital investment in high-risk, high-reward ventures.
  • Strengthening data sovereignty:
    • Expand India’s data centre capacity to reduce dependence on foreign infrastructure.
    • Implement policies to retain data within national borders for security and innovation benefits.
  • Revitalising Nasscom’s role:
    • Reorient Nasscom towards promoting deep-tech innovation and supporting start-ups.
    • Develop comprehensive data repositories and policy recommendations to guide industry growth.

True leadership in IT will only come when India embraces a culture of innovation, risk-taking, and long-term vision.  

NAKSHA Scheme

Context: Union Rural Development Minister launched the Central government’s new initiative- ‘NAtional geospatial Knowledge-based land Survey of urban HAbitations’ (NAKSHA).

Relevance of the Topic:Prelims: NAKSHA Scheme

About NAKSHA Scheme

  • NAKSHA (National Geospatial Knowledge-based Land Survey of Urban Habitations) is a geospatial technology-driven city survey initiative under the existing Digital India Land Records Modernisation Programme (DILRMP). 
  • Aim: To create and update land records in urban areas to ensure transparency, efficiency, and accuracy in property ownership documentation.
  • Nodal Ministry: Ministry of Rural Development.
  • Implemented by: Department of Land Resources, in collaboration with Survey of India, and National Informatics Centre Services Inc. (NICSI)

Objectives:

  • Modernise urban land records: Ensure accurate, updated, and digitalized land ownership records.
  • Enhance urban planning: Facilitate smart city development and infrastructure planning.
  • Reduce land disputes: Minimize property disputes through clear, verifiable records.
  • Foster transparency: Establish a Web-GIS-based IT system for land record management.
  • Support sustainable development: Improve urban governance and land resource management.

Key features

  • Launched as a pilot project in 152 Urban Local Bodies (ULBs): Across 26 States and 3 Union Territories (UTs).
    • Cities selected meet two criteria: area less than 35 sq km, and population less than 2 lakhs. The pilot project will be completed in a year.
    • As per the Census 2011, India has 7,933 towns covering 1.02 lakh square km of the total 32.87 lakh square km geographical area of the country. NAKSHA will cover 4,142.63 square km of area.
  • Estimated cost of pilot project: ₹194 crore (100% funded by Government of India).
  • Drone-based land survey: High-precision aerial surveys for accurate mapping.
  • Web-GIS platform: End-to-end IT-based land record management system.
  • Public accessibility: Citizens can access digital land records for ease of living.

How will the Survey be conducted?

  • Use of drone technology:
    • Aerial photography using two types of cameras: Simple cameras & Oblique angle cameras (5 cameras with LiDAR sensors).
    • Mounted on drones with 5 cm resolution, much sharper than satellite imagery.
  • Three-Stage survey process:
    • Drone Survey & Data Collection:
      • Select survey area and create a flight plan for drone survey.
      • Drones capture images, from which data is extracted.
    • Field Survey & Data Verification:
      • Ground verification of property tax, ownership, and registration records.
      • 2D/3D models are created, and draft land ownership details are published.
    • Public Review & Finalisation:
      • Claims and objections are reviewed.
      • Grievance redressal is conducted.
      • Final maps are published.

Potential benefits:

  • Will provide comprehensive digital urban land records.
  • Reduce land disputes and facilitate faster and efficient urban planning.
  • Improve property tax collection and simplify property transactions.
  • Enhances access to credit by streamlining ownership records.

Need for Urban Land Record Updation: 

  • While rural land records have improved due to efforts like Digital India Land Records Modernisation Programme (DILRMP), urban land records remain fragmented, outdated or incomplete in many Indian cities.
    • As of 2024, around 95% of rural land records have been computerised, covering over 6.26 lakh villages. 
  • Lack of cadastral map (detailed property maps within a specific area) in urban areas results in:
    • Difficulty in verification of land ownership
    • Disputes and delays in urban infrastructure projects
    • Inefficiencies in governance and loss of tax revenue for municipal bodies.  

RBI lowers risk weightage on Banks’ exposure to NBFCs

Context: The Reserve Bank of India (RBI) has announced a significant reduction in risk weights on bank loans to Non-Banking Financial Companies (NBFCs) by 25 percentage points. This move is aimed at improving credit flow and ensuring financial stability in the banking sector.

Relevance of the Topic: Prelims: Risk-weighted assets; Liquidity boost measures by RBI

Background

  • In November 2023, RBI increased risk weights on bank exposures to NBFCs by 25% to 125%, leading to tighter credit conditions and slowing down bank lending.
  • RBI has now reversed this decision after evaluating its impact on credit availability and liquidity.
  • Objective: To enhance credit flow to NBFCs, thereby, improving credit availability for retail borrowers and small businesses.
  • Impact on Microfinance loans: RBI has also reduced risk weights on microfinance loans under regulatory retail to 75% from 125%.

Reasons for Reduction

  • Sluggish bank credit to NBFCs: The previous increase in risk weights had constrained bank lending to NBFCs.
  • Liquidity tightening: Prevailing liquidity challenges required intervention to ease credit flow.
  • Economic stability: Ensuring a balanced credit supply is critical for financial and economic stability.

Implications of RBI’s Decision

  • Impact on Banks: 
    • Lower capital requirement: Reduced risk weights mean banks need to hold less capital against loans to NBFCs.
    • Enhanced credit growth: Encourages banks to lend more, boosting overall economic activity.
  • Impact on NBFCs: 
    • Easier access to bank credit: Lower risk weights increase banks’ willingness to extend loans.
    • Lower borrowing costs: Reduced capital requirements translate into lower interest rates for NBFCs.
    • Business expansion: Greater liquidity enables NBFCs to lend more to retail borrowers and underserved markets.
  • Impact on the Economy: 
    • Boost to retail credit: Increased NBFC lending supports consumer spending and small business growth.
    • Financial stability: A steady credit flow prevents liquidity crunches and economic slowdowns.

Challenges Ahead

  • Asset quality concerns: Recent issues in micro-loan segments may temper immediate growth.
  • Selective lending: Banks may prefer stronger NBFCs, limiting relief for weaker players.
  • Diversification needs: NBFCs continue to explore bond markets to reduce bank dependence.

Risk-Weighted Assets (RWAs)

  • Risk-Weighted Assets (RWAs) refer to a bank’s total assets, adjusted by a risk factor, to determine the capital required to mitigate potential losses.
  • How are RWAs calculated:
    • Each loan or asset is assigned a risk weight based on its risk level.
    • Higher-risk assets require banks to allocate more capital as a safeguard against potential defaults.
  • Regulatory requirement: Banks must maintain a Capital Adequacy Ratio (CAR) to ensure they have sufficient capital to absorb risks.

Farmers’ Producer Organisations (FPOs)

Context: Recently, the Prime Minister of India announced that the target of creating 10,000 farmer producer organisations (FPOs) has been achieved before the deadline, March 31, 2025. 

Relevance of the Topic: Mains: Farmers’ Producer Organisations: Significance and Challenges.

What is the Farmers Producer Organisation (FPO)?

  • A Producer Organisation (PO) is a legal entity formed by primary producers such as farmers, milk producers, fishermen, weavers, rural artisans, craftsmen etc. 
  • FPO is a type of PO where the members are farmers. The FPOs can be registered as Cooperatives (under Cooperative Societies Act of the respective State), Farmer Producer Company (Under Companies Act, 2013) or Societies (under Society Registration Act, 1860).

How FPOs Benefit Small and Marginal Farmers?

  • Facilitate land pooling and address problems associated with fragmented landholdings.
  • Reap economies of scale for buying inputs and selling the agricultural produce.
  • Enable sharing of services such as knowledge input, production supervision, storage, transportation, etc and hence reduce the transaction costs.
  • Create opportunities for farmers to get more involved in value addition activities such as input supply, credit, processing, marketing and distribution.
  • Provide interface between the farmer and global market enabling them to export  commodities.
  • Provide access to capital for farmers and manage risk for farmers through diversification.
  • Promote economic democracy at the grass root level.

Initiatives for the Promotion of FPOs

  • The SFAC is the nodal agency at the national level for the creation of FPOs. The SFAC operates a Credit Guarantee Fund to mitigate credit risks of financial institutions which lend to the FPCs without collateral. SFAC also provides matching equity grants up to Rs. 10 lakh to double the share capital of FPCs. 
  • NABARD also provides financial support to the FPOs through two dedicated funds - “Producers Organization Development Fund (PODF)” and PRODUCE Fund (Producers’ Organization Development and Upliftment Corpus) to promote new FPOs and support their initial financial requirements.

Challenges and Issues in Building Robust FPOs

In the last 8-10 years, 5000 FPOs have been formed through initiatives of SFAC (Nodal Agency), NABARD, Government etc. without much success. Hence, to ensure success of a new initiative, the Government needs to acknowledge present weaknesses, analyse their reasons and then take outcome-oriented actions.

  • Promote Collaborative Farming: The FPOs need to be formed on the basis of adjoining land holdings and common produce to ensure higher economies of scale and undertake value addition.
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  • Finances: The reluctance of Banks to give loans has to be countered through enhanced credit support from Government agencies. Further, Just like cooperatives, the FPOs also must be given income tax exemption.
  • Handholding: Need to provide regular training and business level handholding. 
  • Professional Management: It can be improved by enabling the Private sector to invest in FPOs. This will need amendment of Companies Act which currently allows only farmers to be producer members.
  • Market Linkages: Direct procurement by Government; freight subsidy to wholesale buyers; connecting FPOs to online platforms etc.
  • Village Producer Organisations (VPOs): The VPOs can be developed as a joint venture of FPOs such that an entire village region is developed for a predetermined set of agricultural produce with post-production activities. For example, a region having strength in producing fibre crops can be developed as a VPO to include small handloom weavers.

Suggestion for Improved Functioning of FPOs

  • Efficient Selection Mechanism: There is a need for a proper selection mechanism for the promoters/organisation as well as members based on merit to avoid subsidy gouging.
  • Optimal Size Determination: Enables easier monitoring and delivery of attributes like appropriate quality and food safety.
  • Skill and Product Differentiation: Optimal composition with participation of members having different skills is important to reap the gains based on comparative advantage. Further, FPOs can maximise prices for farmers if their products are differentiated.
  • Collaboration with NGOs is essential as they can play a crucial role in the development of FPOs as promoting institutions. Thus, more approaches of social enterprises should be infused to further develop these companies.

Way Forward

The promotion of FPCs should not be seen as a one-time exercise. Though there is sufficient focus on providing financial assistance to FPOs, there is limited hand-holding subsequent to their formation. In this regard, the Government must provide for sustained and continuous support until the time the FPCs become financially viable and independent.

Time use survey 2024: NSO

Context: Recently, the National Statistics Office (NSO) has released the findings of the Time Use Survey 2024, conducted during January – December 2024. 

Relevance of the topic:

Prelims: Key facts about Time Use Survey 2024.

Mains: Issues associated with Unpaid care work. 

Time Use Survey

  • Time Use Survey (TUS) measures time dispositions by the population on different activities. 
  • The primary objective of the Survey is to measure the participation of men and women in paid and unpaid activities.
  • Time Use Survey 2024 (January-December) covered over 4.5 lakh people belonging to 1.3 lakh households (both rural and urban). Information on time use was collected from each member of age 6 years and above of the selected households. 
  • Released by: Ministry of Statistics and Programme Implementation (MoSPI)
    • National Statistics Office, MoSPI conducted the first all-India Time Use Survey during January – December 2019. 
    • January – December 2024 is the second such All-India Survey.
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Major findings of the Time Use Survey 2024

  • The gap between the minutes spent by females than males in a day is the sharpest for unpaid domestic work, followed by unpaid caregiving services for household members.
    • Females spent 289 minutes in unpaid domestic services for household members than 88 minutes spent by males in 2024. 
    • Time spent by females in a day on unpaid domestic services for household members reduced by 10 minutes to 289 minutes in 2024, from 299 minutes in 2019. 
  • For unpaid caregiving services for household members, females spent 137 minutes a day, while males spent 75 minutes in 2024.
  • For employment and related activities, men spent 132 minutes more than females (341 minutes by females, 473 minutes by males).
    • During 2024, 75% of the males and 25% of the females in the age group 15-59 years, participated in employment and related activities during the reference period of 24 hours. 

What are Unpaid Activities?

  • Paid work includes self-employment for production of goods and services; regular wage or salary or casual labour for production of goods and services.
  • Unpaid activities include:
    • care for children, sick, elderly, differently-abled persons in own households;
    • production of other services for own consumption
    • production of goods for own consumption
    • voluntary work for production of goods & services in households and market/non-market units
    • unpaid trainee work and other unpaid work for production of goods and services.

Also Read: Empowering Women: Unpaid Care Work's Influence on Labor Force Engagement

AI in Agriculture

Context: Microsoft CEO Satya Nadella highlighted Project Farm Vibes in Baramati, Maharashtra, showcasing how AI-driven solutions improved crop yield by 40% and reduced fertilizer use by 25%.

Relevance of the topic:

Prelims: AI- Applications

Mains: AI in Agriculture

About Project Farm Vibes

About Project Farm Vibes
  • What is it?
    • A suite of AI-driven agricultural technologies developed by Microsoft Research to enhance farming efficiency, sustainability, and productivity.
    • Uses satellite data, IoT sensors, drones, and AI algorithms to generate actionable insights for farmers.
  • Organisations associated: Microsoft Research & Azure AI Team, Agricultural Development Trust, Baramati, Oxford University AI Researchers. 
  • How AI transformed agriculture in Baramati?
    • Sensor Fusion Technology: Integrated real-time data from drones, satellites, and soil sensors to optimise farm operations.
    • AI-Powered Insights: AI analysed soil moisture, temperature, pH levels, and humidity, offering data-driven recommendations.
    • Vernacular AI Assistance: Farmers accessed AI-generated advice in their local language, making technology more accessible and user-friendly.
    • Precision farming: Spot fertilisation techniques reduced chemical use by 25%, improving soil health and sustainability.
    • Climate-responsive farming: AI monitored weather patterns and field conditions, enabling better water management and crop scheduling.
  • Impact on Agriculture:
    • 40% increase in crop yield: AI-driven insights led to better farming practices and higher productivity.
    • 25% reduction in fertilizer costs: Precision farming minimized chemical overuse, improving cost-effectiveness.
    • 50% water conservation: AI-enhanced irrigation strategies optimized water usage, making farming more sustainable.
    • Shorter crop cycle: Sugarcane harvest time reduced from 18 to 12 months, increasing profitability for farmers.
    • 12% reduction in Post-harvest losses: AI applications streamlined logistics and storage, cutting wastage.

Role of Artificial Intelligence in Agriculture

  • Precision Agriculture (Enhancing productivity and efficiency): 
    • AI technologies, such as machine learning, drone applications, and remote sensing, are revolutionising farming practices.
    • These innovations enable precise monitoring of crop health, soil conditions, and weather patterns, allowing farmers to make informed decisions.
    • These allow for targeted interventions, such as precise application of water and fertilizers.
  • Data-driven innovations: 
    • By analysing vast amounts of data, AI systems can recommend optimal planting times, crop rotations, and irrigation schedules. It helps in conserving water, reducing chemical usage, and maintaining soil health. 
    • For example, drones equipped with hyperspectral imaging can detect nutrient deficiencies and pest infestations early.
    • The concept of Hybrid Agricultural Intelligence (HAI), which combines farmers’ indigenous knowledge with AI, is particularly promising for smallholder farmers in India.
  • Climate-Smart Agriculture: 
    • AI can predict weather patterns and provide early warnings for extreme weather events, enabling farmers to take preventive measures.
    • AI-based systems can optimise resource use, such as water and fertilizers, to adapt to changing climatic conditions.

AI-Powered Solutions in Agriculture

  • Kisan e-Mitra Chatbot: 
    • An AI-powered tool designed to assist farmers with queries related to the PM Kisan Samman Nidhi scheme.
    • It supports multiple languages and is evolving to provide information on other government programs.
  • National Pest Surveillance System: 
    • AI and Machine Learning (ML) are utilized in the National Pest Surveillance System to detect crop issues early.
    • It helps in timely interventions, reducing crop losses due to pests and diseases.
  • IoT-based Irrigation systems: 
    • Indian Council of Agricultural Research (ICAR) has developed IoT-based irrigation systems tested in the field for selected crops.
    • These systems optimize water usage, ensuring efficient irrigation.
  • Crop health monitoring: 
    • AI-based analytics, using field photographs and satellite data, assess crop health.
    • It monitors weather and soil moisture conditions, particularly for rice and wheat, enabling farmers to make informed decisions.

Concerns in integration of AI into Agriculture

  • Challenges for smallholders: Small landholdings in India pose a challenge for the adoption of AI technologies, which are often designed for larger farms.
  • Ensuring affordable and accessible AI tools for smallholder farmers is crucial.
  • Technological infrastructure and costs: The high costs of AI technologies and the need for robust technological infrastructure are significant barriers.
  • Skill deficiency: There is a need for specialized skills to operate and maintain these technologies. 

Tariff reduction on Agricultural Products in India-US Trade Negotiations

Context: Agricultural goods receive high protection in India and have largely remained outside trade agreements. India is considering a range of items for tariff reductions on US products, however, the United States is particularly interested in reduction of tariffs in the agricultural sector to export more agricultural goods to India.

Relevance of the Topic: Prelims: Key trends in the US-India Trade relations. 

India-US trade in Agricultural products

  • High protection in India:
    • India has traditionally maintained high tariffs on agricultural imports to protect its domestic farming sector, which is highly sensitive and politically significant.
    • Despite tariff reductions on select products in recent Union Budgets, agriculture remains a protected sector.
  • US Agricultural export interests:
    • The American agricultural sector (especially in the Midwest) forms a key voter base for former President Donald Trump, influencing US trade policies.
    • Increasing agricultural exports is an offensive interest for the US, aiming to support domestic farmers and strengthen economic ties.
  • Tariff rates comparison:
    • India’s average applied Most Favoured Nation (MFN) tariff on agricultural goods: 39%
    • The US average applied MFN tariff on agricultural goods: 5%
  • Implications:
    • High Indian tariffs on agricultural products lead to trade imbalances and hinder the growth of US exports to India.
    • The disparity prompts US demands for reciprocal tariff reductions, which could potentially benefit both sides through enhanced trade volumes.
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India’s agricultural exports to the US

  • Key export items: Basmati rice, spices, cereals, dairy, and poultry products.
  • Export value: Approximately $4 million annually.
  • Potential gains from tariff reductions:
    • Lowering tariffs could improve the market access for Indian agricultural goods in the US.
    • Enhanced access could particularly benefit sectors like basmati rice, processed foods, and spices.

Sectoral vulnerabilities in Indian agriculture from US Reciprocal Tariffs (As per GTRI Report): 

  • Seafood (Fish, Meat, Processed Seafood): 
    • Exports worth $2.58 billion face a 27.83% tariff differential.
    • Shrimp, a key export item, is likely to lose competitiveness in the US market.
  • Processed Foods, Sugar, and Cocoa:
    • Exports worth $1.03 billion affected by a 24.99% tariff increase.
    • Indian snacks and confectionery products will become costlier and less attractive to US consumers.
  • Edible Oils: Coconut and mustard oil exports valued at $199.75 million face a 10.67% tariff increase.
  • Alcohol, Wines, and Spirits: Exports of $19.20 million affected by a steep 122.10% tariff hike.
  • Live Animals and Animal products: $10.31 million in exports face a 27.75% tariff differential.
  • Tobacco and Cigarettes: Despite a high US tariff of 201.15%, Indian exports worth $94.62 million remain largely unaffected due to an already negative tariff differential (-168.15%).

Also Read: Reciprocal Tariffs by the U.S. 

Comparison in Global Context

  • United States - Mexico - Canada Agreement (USMCA):
    • Signed during Trump’s tenure to replace North American Free Trade Agreement (NAFTA) and expand the US agricultural market access.
    • Key Provisions:
      • Removal of Canadian Class 6 and 7 milk pricing programs to prevent undercutting of US dairy prices.
      • Reforms in Canada’s wheat grading system to ensure fair competition for US wheat growers.
    • Impact: Significant increase in the US dairy and wheat exports to Canada.
  • US-China Trade Deal (2020-2021):
    • Focused on boosting US agricultural exports amid the trade war.
    • Key Provisions:
      • China agreed to purchase US agricultural products worth $12.5 billion above the 2017 baseline in 2020 and $19.5 billion above the same baseline in 2021.
      • Removal of non-tariff barriers, such as lifting age restrictions on US beef imports.
    • Outcome: Enhanced market access and increased agricultural trade between the two economies.

Quality of Government Expenditure Index: RBI

Context: Recently, the Reserve Bank of India (RBI) has released the ‘Quality of Public Expenditure’ Index to assess how well the government is spending public money. The latest report makes for a positive picture.

Relevance of the Topic: Prelims: Quality of Public Expenditure Index; Public Expenditure- Trends & Analysis. 

Quality of Public Expenditure (QPE) Index

  • Developed by the RBI to assess how well the government is spending public money. 

The Index uses five variables to assess quality of spending:

  1. Capital outlay to GDP ratio
  2. Capital outlay to GDP ratio
  3. Development expenditure to GDP ratio
  4. Development expenditure measured as a percentage of a government’s total expenditure
  5. Interest payments to total government expenditure ratio

Variables of Quality of Public Expenditure (QPE) Index

  •  Capital outlay to GDP ratio:
    • Money set aside by the government towards building physical infrastructure expressed as a percentage of Gross Domestic Product (GDP).
    • The higher the ratio, the better is the quality of public expenditure (stronger commitment to enhance a nation's productive capacity).
  • Revenue expenditure to Capital outlay ratio:
    • Relative weight of the revenue & capital expenditures. Compares day-to-day operational expenses of the government (like salaries, subsidies, pensions) to the long-term capital investment. 
    • The lower the value of this ratio, the better is the quality of public expenditure.
  • Development expenditure to GDP ratio:
    • Development expenditure refers to all public expenditure to enhance production factors (labour and capital) or by improving their productivity, in order to stimulate economic growth. 
    • It includes expenditure on:
      • Education and training
      • Public infrastructure investments
      • R&D (which drives technological advancement and innovation)
      • Healthcare (which boosts both the size and productivity of the labour force by extending the span of healthy life). 
      • Subsidies (particularly those aimed at improving nutrition, such as food subsidies) to bring long-term welfare gains.
  • Development expenditure as a percentage of a government’s total expenditure: The higher the value of this ratio, the better is the quality of public expenditure.  
  • Interest payments to total government expenditure ratio:
    • Proportion of government spending on servicing debt. 
    • A lower value of this ratio shows better quality of public spending.

Quality of India’s Public Expenditure: Analysis by RBI

  • The RBI has broken the whole period  (from 1991 to now)  in six phases to illustrate how structural forces have shaped the quality of public expenditure at both levels of government (Centre & states). 
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  • Phase 1: Early Post-Liberalisation Reforms & Fiscal Realignments (1991-95):
    • Centre’s index (Chart 1) showed a slight improvement in quality of public expenditure (QPE), while the States’ index (Chart 2) declined modestly. These movements were driven by the fiscal pressures faced by both levels of government. 
    • Public investment fell as fiscal consolidation took precedence.
  • Phase 2: Pre- FRBM Consolidation (1996-2003):
    • Both indices experienced a sharp decline reflecting the combined impact of the Fifth Pay Commission implementation, rising interest payments, and the persistent dominance of revenue expenditure over capital outlay.
  • Phase 3: FRBM Implementation & Growth Upswing (2003-2008):
    • Reflects positive effects of both fiscal discipline (as FRBM Act started guiding government borrowing) and fast economic growth making more money available for spending. 
    • States also benefited from higher fiscal devolution.
    • The index rebounded sharply until the world was hit by the Global Financial Crisis (GFC) of 2008.
  • Phase 4: Global Financial Crisis & Countercyclical Adjustments (2008-13):
    • GFC prompted the Centre to adopt countercyclical fiscal measures, including stimulus packages. 
    • Governments, especially the Centre had to spend more in order to counter the slowdown and hurt caused by the GFC. 
    • While this continued to push up the index during this phase, higher spending levels resulted in higher deficits, and it eventually started eroding the quality of public expenditure.
  • Phase 5: Structural Reforms & GST Rollout (2013-20):
    • The trajectory of the index goes in opposite directions for the Centre and the states. 
    • The QPE saw an improvement in states with improvements in development spending, as well as more money being available to them, thanks to the recommendations of the 14th Finance Commission. 
    • The Centre further faced challenges with GST revenue sharing initially favouring the states.
  • Phase 6: Pandemic shock & Infrastructure-focused recovery (2020-Present):
    • Economic recovery especially driven by the heightened focus on capital expenditure helped push up the quality of public expenditure.

Thus, according to RBI’s index, the quality of public expenditure in India (both at Centre and state levels) is close to the highest point it has ever been since the start of economic liberalisation in 1991.

Recent Trend shifts in India’s Public Expenditure

  • Push for Fiscal Discipline:
    • To limit the tendency in government to overspend, India instituted the Fiscal Responsibility and Budget Management (FRBM) Act, 2003. 
    • FRBM limit on Fiscal & Revenue Deficit:
      • As per FRBM Act, the fiscal deficit should ideally not exceed 3% of GDP.  
      • The revenue deficit should be zero.
      • Purpose: Government should only borrow for capital expenditure (and not for paying higher salaries and other similar everyday spending).
    • Targeting overall debt: India has now shifted to targeting overall debt as a percentage of GDP, instead of an individual year’s fiscal deficit, as a way to maintain fiscal discipline.
  • Push for higher capital expenditure: Capex boosts productive capacity of the economy. 

Also Read: Re-evaluating FRBM Act 2003 

India needs to enhance the Quality of Public Expenditure by continued investment in infrastructure, renewable energy, and digital transformation, keeping borrowing under control, strengthening Centre-state financial coordination and using data-driven governance models to track expenditure efficiency.

RBI to conduct $10 Billion USD-INR Swap Auction

Context: The Reserve Bank of India (RBI) has announced a $10 billion USD-INR Buy/Sell swap auction with a tenure of three years, scheduled for February 28, 2025. This move is aimed to inject liquidity into the banking system and stabilise Indian currency.

Relevance of the Topic: Prelims: Forex Buy/Sell Swap, AD Category-1 Banks; Measures used by RBI to inject liquidity. 

About Forex Swap Auction

  • Forex Swap Auction is a financial instrument used by the Reserve Bank of India (RBI) to manage liquidity in the financial system. 
  • In the Buy/Sell swap mechanism, RBI buys U.S. Dollars from banks in exchange for Rupees (first leg) and agrees to sell them back at a pre-determined future date along with a premium (reverse leg). 
CriteriaForex Buy/Sell SwapForex Sell/Buy Swap
What does the RBI do?RBI buys dollars with an agreement to sell the dollars at a future date and at a fixed exchange rate.RBI sells dollars with an agreement to buy back the same amount of dollars at a future date and at a fixed exchange rate.
When is it adopted?Surplus of dollars → Rupee Appreciation pressureHence, RBI buys dollars and injects Rupee to control Rupee Appreciation.Shortage of dollars → Rupee DepreciationHence, RBI sells dollars and sucks out Rupee to control Rupee Depreciation.
What does it lead to?Potential Rupee Devaluation: Decrease in value of Rupee due to RBI’s Intervention Rupee Revaluation: Increase in value of Rupee due to RBI’s Intervention
Impact on Rupee LiquidityIncreases Rupee LiquidityDecreases
Impact on Rate of Interest on LoansIncrease in Rupee Liquidity → Decrease in Rate of Interest on LoansDecrease in Rupee Liquidity →  Increase in Rate of Interest on Loans
Impact on Forex ReservesRBI Purchases dollars →  Increase in Forex Reserves (temporarily) RBI sells dollars → Decline in Forex Reserves (temporarily) 

Significance of Swap Auctions

  • Liquidity management: Helps inject or absorb Rupee liquidity in the banking system.
  • Exchange rate stability: Reduces volatility in the USD/INR exchange rate by providing liquidity buffers.
  • Foreign exchange reserves management: Enhances the efficient utilization of forex reserves.
  • Inflation & Interest rate control: Manages liquidity, indirectly influencing inflation and interest rates.

RBI’s proposal for USD-INR Buy/Sell Swap Auction

  • Details of the auction:
    • Swap amount: $10 billion
    • Tenure: 3 years
  • Key features: 
    • Participants must place their bids in terms of the premium they are willing to pay to RBI for the tenure of the swap. Expressed in paisa terms up to two decimal places. 
    • The auction would be a multiple-price based auction, i.e., successful bids will get accepted at their respective quoted premium.
  • Authorised Dealers (ADs): Category-1 banks will be the eligible entities to participate in the auction.
  • Under the swap auction, minimum bid size would be USD 10 million and in multiples of USD 1 million thereafter. The eligible participants are allowed to submit multiple bids.
  • RBI reserves the right to:
    • Decide on the quantum of US Dollar amount to be accepted in the swap auction.
    • Accept offers for less than the aggregate notified US Dollar amount.
    • Accept marginally higher than the notified US Dollar amount due to rounding-off effects.
    • Accept or reject any or all the offers either wholly or partially without assigning any reason. 

Authorised Dealers (ADs) – Category-1 Banks

  • RBI gives an AD Category-1 Bank permission to deal in foreign exchange transactions. 
    • AD stands for Authorised Dealer.
    • Category-1 is the highest authorised dealer category in India's foreign exchange transactions.
  • These banks are allowed to carry out a wide range of activities related to foreign exchange, including:
    • Buying and selling foreign currency
    • Outward remittance of funds abroad
    • Issuance of letters of credit and bank guarantees.
  • They act as intermediaries between the buyers and sellers of foreign currencies and help to provide liquidity in the foreign exchange market.

Recent Liquidity Issues in the Indian Banking System: 

  • The Indian banking system encountered its worst liquidity crunch in more than a decade in January 2025. The liquidity deficit peaked at Rs 3.15 lakh crore on January 23, its lowest level in nearly 15 years. 
  • The deficit led to increased dependence by banks on market borrowing, thereby keeping interbank call money rates (rate at which banks lend to each other) consistently above the policy repo rate of 6.50%.
  • The RBI has been selling dollars to stabilise the rupee, thereby sucking out an equivalent amount in rupee from the system. RBI’s outstanding net forward sales of the dollar surged to $67.93 billion as of December 31, 2024, as the central bank intensified its efforts to stabilize the rupee.  

RBI’s measures to ensure liquidity

  • The RBI had infused over Rs 3.6 lakh crore of durable liquidity into the banking system in Jan-Feb 2025 through:
    • Debt purchases
    • Forex swaps (exchanging foreign currency with banks)  
    • Longer-duration repos. 
  • Other measures included:
    • Several variable rate repo (VRR) auctions 
    • $5 billion dollar-rupee swap
    • Rs 60,000 crore Open market operations (OMO) purchase auctions of government securities.  

Credit Guarantees in India: Trends and Concerns

Context: The Union government has launched various Credit Guarantees schemes to strengthen the credit delivery system and facilitate the flow of credit to bolster economic activity. However, the sustainability and long-term implications of government-backed guarantees need careful evaluation. 

Relevance of the topic:

Prelims: Credit guarantee schemes

Mains: Credit Guarantee- Trends, Issues, Way Forward 

Loan Guarantee schemes in India

  • Emergency Credit Line Guarantee Scheme (ECLGS):
    • Introduced in 2020 to provide additional working capital support to businesses (focus on MSMEs, hospitality, tourism, healthcare) affected by the COVID-19 pandemic. 
    • It provides Member Lending Institutions (MLIs), 100% guarantee against any losses suffered by them due to non-repayment of the ECLGS funding by borrowers.
  • Mutual Credit Guarantee Scheme for MSMEs (2025): 
    • In pursuance of the Union Budget 2024-25 announcement, the Mutual Credit Guarantee Scheme for MSMEs (MCGS - MSME) has been launched recently. 
    • MCGS- MSME scheme will provide 60% guarantee coverage by National Credit Guarantee Trustee Company Limited (NCGTC) for facilitating loans up to Rs. 100 crore to MSMEs for purchase of machinery or equipment without collateral.
    • Mutual Credit Guarantee Scheme for MSMEs 
  • Enhanced Credit Availability in Union Budget 2025-26: 
    • Credit guarantee cover for micro and small enterprises (MSEs) is increased from ₹5 crore to ₹10 crore.
    • Credit guarantee cover of startups will double from ₹10 crore to ₹20 crore, with a reduced fee of 1% for loans in 27 priority sectors.
    • Exporter MSMEs will benefit from term loans up to ₹20 crore with enhanced guarantee cover. 
  • Stand-Up India Scheme:
    • It facilitates bank loans between Rs 10 lakh and Rs 1 Crore to at least one Scheduled Caste (SC) or Scheduled Tribe (ST) borrower and at least one woman borrower per bank branch for setting up a greenfield enterprise. This enterprise may be in manufacturing, services or the trading sector. 
  • Startup India Seed Fund Scheme (SISFS): Launched in 2021 to offer financial support to innovative startups.
  • Pradhan Mantri Mudra Yojana (PMMY): Facilitates micro-financing by offering loans to small businesses.
  • Atmanirbhar Bharat Abhiyan Credit Guarantee Scheme (2020): Aimed at revitalising MSMEs and facilitating the recovery of the economy post-pandemic. 
  • Kisan Credit Card (KCC): Provides timely credit support to farmers to support their cultivation needs. As of March 2024, India has 7.75 crore operational KCC accounts with a loan outstanding of ₹9.81 lakh crore. 

Positive impacts of government loan guarantees

  • Enhance liquidity and solvency:
    • Government guarantees have improved the liquidity of MSMEs, enabling them to sustain operations during periods of economic strain. 
    • E.g., Emergency Credit Line Guarantee Scheme (ECLGS) provided working capital support to businesses and prevented bankruptcies during COVID-19 pandemic.
  • Reduction in Non-Performing Assets (NPAs):
    • Government-backed guarantees (assurance of guarantees) encouraged banks to offer credit more freely. It has contributed increased formal credit and reduction in NPAs in public sector banks, showcasing an improved repayment rate from businesses benefiting from these schemes. 
    • E.g., The gross NPAs in MSME loans by Scheduled Commercial Banks had declined by over 18% to Rs 1.25 lakh crore in FY24 from Rs 1.54 lakh crore in FY22. 
image 171

Concerns associated with loan guarantees

  • Over-reliance on government guarantees:
    • Small borrowers often back comprehensive financial records, which makes risk assessment for the lenders complicated. 
    • Perpetual dependence on government-backed guarantees may discourage banks to conduct thorough credit appraisals, which could lead to potential moral hazard. 
    • This could lead to financial instability, if these guarantees are misused or extended too freely.
  • Increased defaults and fiscal burden:
    • If the borrowers (especially MSMEs and startups) default on their loans, the government will bear the liability, which could strain public finances and lead to higher fiscal deficits.
  • Impact on fiscal deficit and debt:
    • The Fiscal Responsibility and Budget Management Act has restricted the Central Government to extend guarantees up to 0.5% of GDP in any financial year, there is no concise definition around the informal form of implicit support by the government. 
    • The government has used loan guarantees as a substitute for direct public investment, especially in infrastructure, to curtail fiscal deficit. However, this approach could increase the fiscal deficit if large-scale defaults occur. 
    • Moreover, guarantees are often difficult to account for in the national budget due to their contingent nature, leading to challenges in financial reporting.

Way Forward for Loan Guarantees

  • Transparency in financial reporting: 
    • The shift towards better accounting standards for MSMEs and startups is crucial to improving transparency and reducing risks associated with loan defaults. 
    • This includes disclosing the range of expected outcomes and their probabilities to help policymakers assess whether the risks associated with the guarantees are manageable.
  • Merit-based support for startups:
    • Government guarantees should be directed towards startups based on merit-based assessments rather than blanket support. 
    • Factors such as corporate ethics, governance capacity, and leadership style should be considered before granting guarantees. 
    • This can ensure that these firms can sustain themselves without long-term dependence on government support. 

REITs/InVITs: SEBI proposes fast track follow-on offers

Context: Securities and Exchange Board of India (SEBI) has proposed a framework for undertaking fast-track follow-on offers by real estate investment trusts (REITs) and infrastructure investment trusts (InVITs) to make fundraising more efficient.

Relevance of the Topic: Prelims: REITs, InVITs, Related key terms 

REITs & InvITs: 

image 169
  • REITs: A real estate investment trust (REIT) is a company that owns, operates, or finances income-generating real estate (E.g., offices, malls, hotels) and sells shares to raise capital to do so. Allow investors to earn returns without owning physical property.
  • InvITs: Infrastructure Investment Trusts (‘InvITs’) are pooled investment vehicles similar to mutual funds. InvITs enable private and retail investors for long-term investment in infrastructure projects such as roads, gas pipelines, transmission lines, renewable assets, etc. They are regulated by SEBI. 

Read: InvITs (Infrastructure Investment Trust)

image 170
image 3

SEBI Proposal: Key Features

  • Lock-In provisions for sponsors:
    • 15% of units allotted to sponsors & sponsor group: Locked in for 3 years from trading approval date.
    • Remaining units: Locked in for 1 year from trading approval date.
  • Follow-On Public Offer (FPO) requirements:
    • Application: To be made to all stock exchanges where units are listed.
    • Designated Stock Exchange: One exchange must be chosen for coordination.
    • Minimum public unit-holding: At least 25% of total outstanding units post-issue.
  • Issuance restrictions:
    • No further issuance of units (public issue, rights issue, preferential issue, etc.) between the draft filing and final listing, except through employee benefit schemes.
  • Documentation & Approvals:
    • Draft Follow-On offer document: Submitted via merchant banker to SEBI for observations.
    • Final document: Filed after incorporating SEBI’s comments.
  • Merchant Banker duties: Submit due diligence certificate along with draft document.

Significance of the Proposal

  • Enhanced fundraising efficiency: Fast-track FPO mechanism reduces fundraising delays.
  • Increased market confidence: Clear lock-in norms and compliance improve investor protection.
  • Transparency: Improved financial disclosure aligns with public issue norms.
  • Boost to Infrastructure & Real estate sectors: Facilitates smoother capital inflow into key sectors.

Related key terms

  • Lock-In period: refers to that period for which investments cannot be sold or redeemed.
  • Initial Public Offering (IPO): 
    • Refers to the process where private companies sell their shares to the public to raise equity capital from the public investors.
    • It is the first time a company goes public.
  • Follow-on public offer (FPO):
    • FPO is a follow up to the IPO as the name suggests. 
    • A follow-on public offer is the issuance of shares after the company is listed on a stock exchange.
  • Rights issue: When shares are issued to existing shareholders.
  • Private Placement & Preferential issue: When shares are issued to a select group of Persons including members or employees.

Economic Growth: Investment-driven vs Consumption-led

Context: Amidst the Budget 2025 emphasis on consumption-led growth in India, concerns arise over whether consumption-led growth can compete with investment-driven growth over its multiplier effects in the economy. 

Relevance of the topic:

Prelims: Sources of Aggregate demand

Mains: Investment-driven growth vs. Consumption-led growth

Understanding Economic Growth

  • A balanced economic growth ensures that Supply (Production) and Demand (Expenditure) must move in harmony.
  • GDP (Gross Domestic Product) measures the total monetary value of all goods and services produced within a country during a specific period. It reflects the economy's production capacity.
  • If Supply < Demand:
    • Consumers chase limited goods which cause inflation.
  • If Demand < Supply:
    • Companies face unsold inventories, leading to reduced production, job cuts, and decreased incomes, which triggers a negative demand-production cycle.

Sources of Aggregate Demand

  • Aggregate demand is the total expenditure on an economy’s output. It comprises four key components: Private Consumption, Private Investment, Government Expenditure and Net Exports.
  • Private Consumption:
    • Largest contributor to aggregate demand in India. E.g., In 2023, consumption was 60.3% of India's GDP, compared to 39.1% in China.
    • Involves household spending on everyday goods (e.g., food, clothing, electronics) and services (e.g., education, healthcare).
    • Driven by disposable income, consumer confidence, and credit availability.
  • Private Investment:
    • Expenditure by businesses on capital goods (machines, tools) and by households on real estate.
    • High private investment improves productivity, creates jobs, and drives innovation.
    • Highly sensitive to interest rates, political stability, and future demand expectations.
  • Government Expenditure:
    • Includes spending on infrastructure, defence, healthcare, and education.
    • Consumption Expenditure: Salaries for public sector employees and daily operational costs.
    • Investment Expenditure: Building roads, schools, and hospitals, enhancing long-term productive capacity.
  • Net Exports (Exports - Imports):
    • Positive net exports (trade surplus): Increases demand, boosts production. 
    • Negative net exports (trade deficit): Reduce demand, impacts currency value. 

Investment and its Multiplier effect

  • Investment is the gross fixed capital formation by the private sector and the government combined. It plays a pivotal role in driving economic growth due to the multiplier effects.
  • Example for Multiplier effect: A ₹100 public investment in highway construction can increase overall GDP by ₹125 (if multiplier = 1.25) through:
    • Direct incomes to construction workers and firms.
    • Indirect growth of roadside businesses (restaurants, fuel stations).
    • Induced demand from increased incomes and improved connectivity.

Consumption vs. Investment multipliers

  • Investment-driven growth has a higher multiplier effect than consumption-led growth. It stimulates long-term growth and capacity expansion.
  • Consumption-led growth: Lower multiplier. It supports immediate demand, it does not significantly enhance production capacity.

Consumption-driven Growth in India

  • Consumption share in 2023: India - 60.3% of GDP (whereas in China - 39.1%.)
  • High reliance on consumption reflects:
    • Weaknesses in investment and government expenditure.
    • Persistent trade deficit (imports > exports), draining domestic demand.
  • Concerns:
    • Consumption-led growth is slower and less sustainable.
    • Rising inequality: Benefits of growth accrue mainly to middle and upper classes.
    • Employment and income stagnation hinder inclusive growth.

India vs. China: Divergent Growth Trajectories

  • Economic conditions in the early 1990s:
    • Per capita incomes of India and China were almost the same. Both countries were equally poor, with the average income of an Indian or Chinese resident being approximately 1.5% of the average income of an American.
image 166
  • Divergence by 2023:
    • China’s per capita income became 5 times that of India (2.4 times under purchasing power parity - PPP).
    • Investment as the key driver: China’s growth has been heavily investment-led, focusing on manufacturing, infrastructure, and technology.
    • India has leaned more on domestic consumption, limiting its capacity for sustained long-term growth.
image 167
  • Investment rates over time:
    • 1992: China - 39.1% of GDP; India - 27.4%.
    • 2007 (Pre-Global Financial Crisis): India’s investment rate rose to 35.8%, reducing the gap with China.
    • Post-2008 Financial Crisis:
      • China: Used aggressive state-led investments, particularly through state-owned enterprises, to maintain growth momentum.
      • India: Witnessed declining investment rates; private sector hesitancy persisted.
    • 2023: China- 41.3%; India - 30.8%. 
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Investment Challenges in India

  • Private sector hesitation: 
    • Declining corporate investments due to policy uncertainties, infrastructure bottlenecks and credit constraints.
    • Business confidence (Animal spirits) remain subdued.
  • Household investment trends:
    • Growth in residential housing investments during the early 2010s.
    • Recent stagnation raises concerns about future demand and growth.

Government’s Role

  • Need for Proactive public investment:
    • Public investment can crowd in private sector spending, reviving growth momentum.
  • Priority areas:
    • Infrastructure (transport, energy, logistics)
    • Healthcare and education
    • Technology and renewable energy sectors
  • Recent Budget trends: Despite growth needs, the latest Union Budget shows:
    • Reluctance to increase capital expenditure significantly.
    • Preference for tax cuts over direct investments.
    • Focus on middle and upper-class consumption rather than inclusive development.

Way Forward

  • Government taking the lead: Enhance public investments to rebuild private sector confidence.
  • Develop policies that:
    • Promote employment generation.
    • Expand export competitiveness.
    • Address income inequality.
  • Encourage state-owned enterprises to invest in emerging sectors (E.g., AI, green technologies).

For India to achieve sustainable, inclusive, and high-growth trajectories, balancing consumption with investments is vital. Public investment, particularly in infrastructure and human capital, can act as a catalyst to revive private sector confidence, create jobs, and ensure long-term economic prosperity.

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