Context: In keeping with the international standards, India’s economic growth story has long been measured through National level GDP Estimates. Yet the most critical unit of development- the district- remains an economic blind-spot.
Relevance of the Topic: Mains: District-level GDP Estimation- Issues, Need, Challenges, Way Forward
Limitations of the Current GDP Estimation Methodology
Top-down Approach:
Economic output is first estimated at the national level and then apportioned to States and districts.This method does not measure economic activity directly at the district level.
Relies on a top-down approach, using indicators like employment levels, wages, and infrastructure presence.
Fails to capture real-time economic activity or the sectoral contribution of districts.
Data Gaps and Inaccuracies:
The unorganised sector and informal economic activities are poorly captured.
Survey methodologies are inconsistent, leading to unreliable estimates.
Economic reality at the district level is often misrepresented.
Need for District Domestic Product (DDP) Estimation
Granular data for policymaking: Helps tailor policy interventions to address economic disparities at the district level.
Localised economic planning:
Identifies sector-specific growth opportunities for each district.
Enables targeted investments in agriculture, manufacturing, or services as needed.
Strengthening Fiscal federalism:
Empowers districts to develop independent economic strategies aligned with national and state goals.
Case Study: Uttar Pradesh (UP) & COVID-19:
During 2020-21, GDP data was distributed using the traditional method, which did not reflect UP’s economic reality.
UP’s agriculture sector contributed 25% of its Gross State Value Added (GSVA) and was less impacted than manufacturing.
The state advocated for a bottom-up approach to estimate GDP more accurately.
Challenges in Implementing district-level GDP estimation:
Financial and logistical investment: Requires substantial funding for data collection and statistical infrastructure.
Collaboration between Central & State agencies: Needs coordination between MoSPI and state statistical departments.
Capacity building: Training local officials to collect and analyze economic data.
Way Forward
Investment in data infrastructure: Every $1 invested in statistics leads to $32 in economic development.
Real-time economic monitoring: Use digital tools, AI, and big data analytics to track economic activities.
Incorporating DDP in Viksit Bharat 2047 vision: Empowering districts for equitable and inclusive growth.
A robust district-level economic measurement framework will ensure balanced growth, making India’s journey toward a $5 trillion economy more inclusive and sustainable.
Context: India’s labour market is witnessing a shift from jobless growth to rising employment across sectors. Various surveys highlight increasing job creation, especially in manufacturing, MSMEs, and rural non-farm employment.
Relevance of the Topic: Prelims: India’s labour market- Trends.
Survey findings on Employment Trends
MSME Udyam Portal: Jobs increased from 121 million (2023) to 201.9 million (2024).
Annual Survey of Industries (ASI) FY23:Manufacturing employment rose by 7.5% (from 17.2 million in FY21 to 18.4 million in FY23).
Periodic Labour Force Survey (PLFS): Manufacturing employment growth increased from 1.15% p.a. (2017/18-19/20) to 5.8% p.a. (2019/20-22/23).
RBI KLEMS Database: 46.7 million jobs were created in FY24, more than double the 19.1 million in FY23.
Women's Labour Force Participation Rate
Rural Job Diversification and Women's LFPR:
Increasing shift of males to rural non-farm employment (RNFE) has led to higher women’s labour force participation rate (LFPR).
PLFS 2023-24:
59.8% of rural workers are in agriculture, with the rest in RNFE.
The share of male workers in agriculture fell to 49.4% and that of females rose to 76.9%.
Study in Eastern UP (2006-2023):
Agricultural income growth: 0.1% p.a.
RNFE (including remittances) growth: 7.3% p.a.
Agriculture’s share in household income: fell from 22% to 8%.
Rural manufacturing employment grew at 4%, exceeding urban manufacturing growth of 3.8%.
Urban women’s LFPR is rising due to higher incomes, availability of household help, and reduced household constraints.
Wage growth and Income patterns
PLFS 2023-24:
The self-employed had the highest wage growth (9.6%).
Casual workers saw 7.4% growth, with a daily wage of ₹433.
Regular wage earners had a lower wage growth of 5.5% (₹21,103 monthly).
ICRIER Analysis of PLFS Data:
Since 2019, urban nominal wages grew at 6% p.a., while real wages rose by only 0.5% p.a.
Real wages remain largely constant due to labour absorption trends.
Higher real wage growth without productivity rise could lead to inflationary pressures.
Lessons from previous wage growth:
2010-2013: Real wage growth in rural areas peaked at 7% due to high post-GFC fiscal deficits and food inflation.
Post-2013: Real wages stabilized due to financial tightening and economic corrections.
Wage growth must align with productivity to remain sustainable.
Real Private Final Consumption Expenditure (PFCE):
Fell after the pandemic but recovered to 7% growth in FY25.
A slight dip to 6% in Q2 was cyclical and expected to reverse with financial easing.
Sustaining consumption requires continued income growth and employment generation.
Economic growth and Job creation:
Growth averaged 8.3% (2021-24), providing stability for job creation. Earlier periods of jobless growth were marked by economic volatility.
Labour Market Trends (FY25):
Q2 FY25 saw GDP growth dip to 5.4% and unemployment rise to 6.6%.
Q3 FY25: Government capital expenditure revival led to UR falling to 6.4%.
Youth Unemployment:
High youth unemployment often results from aspirational job-seeking. Above 35 years, unemployment declines as job-seekers settle for available opportunities.
Government jobs remain highly sought after due to higher entry-level pay, job security, and lesser workload.
If government jobs shift to contract-based hiring, youth unemployment may decrease significantly.
Corporate Investment and Productivity:
The post-reform period saw rising labour productivity benefiting corporate margins more than wages.
Policy tools needed:
Incentives (Carrots): Encouraging investment and job creation.
Regulations (Sticks): Ensuring wage growth aligns with productivity.
External shocks create uncertainty, affecting business expansion.
India’s post-pandemic policies have helped sustain growth despite global volatility.
Policy recommendations for Job sustainability
Skilling and Training: Enhancing workforce capabilities for higher productivity.
Job-specific training: Ensuring alignment with industry demands.
Labour market flexibility: Balancing worker security with employer needs.
Macroeconomic stability: Maintaining steady growth to encourage hiring.
Continued policy support: Implementing countercyclical policies to absorb global shocks.
Context: Indian government has recently reimposed import duties on yellow peas after allowing duty-free imports for a limited period. The surge in pulse imports has impacted domestic prices, causing distress among Indian farmers.
Relevance of the topic:
Prelims: Pulses,Import of pulses- Trends
Mains: Pulses- Production, Imports, Challenges
Pulses
Temperature: Between 20-27°C
Rainfall: Around 25-60 cm.
Soil type: Sandy-loamy soil.
These are the major sources of protein in a vegetarian diet.
Being leguminous crops, all these crops (except arhar)help in restoring soil fertility by fixing nitrogen from the air. Therefore, these are mostly grown in rotation with other crops.
Pulses are grown throughout the agricultural year.
Kharif pulse crops require a warm climate throughout their life from sowing to harvesting.
Recent Government Policies on Pulse Imports
The government allowed duty-free imports of yellow peas from December 2023 to February 2025, but has now reimposed the duty.
The duty-free import period for pigeon peas (tur) has been extended until March 31, 2026.
A decision on chickpeas (chana) and black gram (urad) is awaited.
The Ministry of Food has recommended reimposing customs duty on lentils, but no notification has been issued yet.
Impact of Duty-free imports on domestic market
Increased imports: According to trade data, India is estimated to have imported 6.63 million tonnes of pulses in 2024, compared with 3.31 million tonnes in 2023.
Falling domestic prices:
Prices of pulses in India have fallen below the Minimum Support Price (MSP) due to increased imports.
Example:
Urad prices dropped by 25% from over ₹100/kg since June 2024.
Pigeon pea (tur) prices fell to $800/tonne from $1,400/tonne in mid-2024.
Yellow peas prices fell to $450/tonne from $700/tonne when duty-free imports were allowed.
Benefits to foreign farmers, while Indian farmers struggle:
Australian and Canadian farmers have benefited from exports, while Indian farmers struggle with lower prices.
Example: Australian farmers earn ₹160/kg for chickpeas, whereas Indian farmers earn ₹100/kg.
Impact on Domestic farmers:
Lower prices may discourage farmers from growing pulses, impacting India's self-sufficiency in food production.
Farmers may switch to other crops like maize, which is gaining demand due to ethanol production.
Reasons behind India’s dependence on Pulses Imports
According to trade data, India is estimated to have imported 6.63 million tonnes of pulses in 2024, compared with 3.31 million tonnes in 2023.
Shifting cropping patterns:
Traditionally, farmers in India practised crop rotation with pulses.
However, in recent decades, there has been a shift towards cultivating water-intensive cereals like rice and wheat due to the following reasons:
Rice and wheat are staples in most Indian diets, leading to a rise in consumption demands.
Government incentives like higher margins over the average cost of production in MSPs and assured procurement for these crops.
Availability of better irrigation facilities in some areas.
Lower profitability:
Pulses often offer lower returns per hectare compared to cereals. This discourages farmers from planting them, especially on fertile and irrigated land.
Climate challenges:
Erratic rainfall and droughts can negatively impact pulse production, which are generally rain-fed crops.
Limited technological advancements: Compared to cereals and cash crops, research and development in pulse is limited and higher susceptibility to diseases and pests persist.
India’s Initiatives to boost Pulses Production
1. National Food Security Mission (NFSM)-Pulses:
Led by Department of Agriculture & Farmers Welfare
It operates in 28 States and 2 Union Territories including Jammu & Kashmir and Ladakh.
Interventions under NFSM-Pulses:
Assistance to farmers through States/UTs for various interventions.
Cropping system demonstrations.
Seed production and distribution of HYVs/hybrids.
Additionally, the establishment of 150 Seed Hubs for Pulses has significantly contributed to increasing the availability of quality pulse seeds.
3. Mission for Aatmanirbharta (self-reliance) in Pulses:
In Budget 2025, the government announced plans to launch a 6-year mission with a special focus on Tur, Urad and Masoor.
The Mission will place emphasis on:
development and commercial availability of climate resilient seeds
enhancing protein content in pulses
increasing pulses productivity
improving post-harvest storage and management
assuring remunerative prices to the farmers.
Rs 1,000 crore have been allocated to provide Minimum Support Price (MSP) based procurement and post-harvest warehousing solutions for these 3 pulses.
Central Agencies (NAFED and NCCF) will procure these 3 pulses, as much as offered during the next 4 years from farmers who register with these agencies and enter into agreements.
4. ICAR's role in research and variety development: ICAR focuses on:
Basic and strategic research on pulses.
Collaborative applied research with State Agricultural Universities.
Development of location-specific high-yielding varieties and production packages.
During the period from 2014 to 2023, an impressive 343 high-yielding varieties and hybrids of pulses have been officially recognised for commercial cultivation across the country.
Way Forward: Balanced Approach
Imposing customs duties on pulses:
Urgent need to curb imports of chickpeas and lentils to protect domestic farmers.
A moderate duty on pulses can stabilize prices while preventing excessive dependence on imports.
Import quotas for future stability: Instead of a blanket duty-free policy, the government should set an import quota and adjust duties based on production estimates.
Stakeholder consultation for a long-term policy: Engaging farmers, traders, and policymakers to create a stable pulse import policy.
Supporting farmers with MSP and procurement:
Strengthening procurement mechanisms to ensure farmers get prices above MSP.
Promoting pulse cultivation with incentives and better storage facilities.
Context: Income Tax Bill 2025 was introduced in Parliament to replace the Income Tax Act, 1961. However, analysis reveals that the bill primarily introducesstructural and textual changes rather than substantive reforms.
Relevance of the Topic:Prelims: Income Tax Bill 2025 - Provisions
Objectives of Income Tax Bill 2025
Simplification of tax laws by removing redundancies.
Fiscal laws inherently require clarity for common taxpayers, but the bill does not substantially change taxation principles.
It continues to use complicated legal text. For instance, minor terminological changes, such as replacing "notwithstanding anything contained to the contrary" with "irrespective of anything to the contrary," do not effectively simplify legal language.
Superficial structural changes:
Cross-references to the old Income-Tax Act, 1961 undermine the claim of a fresh legislation.
The bill primarily reorganises timelines and compliance requirements into tables and schedules.
It does not fundamentally alter the structure of tax assessments or compliance mechanisms.
Potential for increased litigation:
Courts have rigorously interpreted provisions of the 1961 Act over decades.
Redrafting certain provisions may lead to re-litigation of settled issues.
Uncertainty in interpretation could lead to more disputes rather than reducing them.
Expanded powers for tax authorities:
The bill retains and extends search and seizure powers. Officials can now access "electronic media or computer systems," including emails and social media accounts.
Raises concerns over privacy, especially post-K.S. Puttaswamy judgment (2017), which upheld the right to privacy.
Lack of judicial oversight over these enhanced powers increases risks of misuse.
Changes and their Implications
Removal of Inter-corporate dividend deductions:
Billremoves deduction for inter-corporate dividends for companies under the 22% tax regime.
Retains benefits for companies under the 15% regime. This discrepancy could impact tax efficiency of holding company structures.
Expansion of Associated Enterprises (AE) definition:
Section 92A of ITA defines AEs under transfer pricing rules.
The bill broadens AE definition by treating "management, control, or capital participation" as sufficient criteria.
This change increases transfer pricing disputes and may lead to excessive litigation.
Interpretation of Tax Treaties:
The bill allows the government to define undefined treaty terms via notification.
This contradicts the Vienna Convention and may create conflicts with judicial interpretations.
Raises concerns over unilateral government amendments to tax treaty interpretations.
Timely filing for Refunds:
Requires taxpayers to file returns on time to claim refunds.
Departs from the current provision, which allows refunds even with belated returns.
Could negatively impact taxpayers who miss deadlines due to genuine reasons.
Indemnity for Tax Deduction at Source (TDS):
Introduces an indemnity clause for tax withholders.
Raises questions about the scope of indemnity (e.g., penalties, interest, etc.).
Unclear whether parties can contractually waive indemnity obligations.
Overlap between Old and New law:
The bill repeals the 1961 Act but retains certain provisions.
For example, the definition of "income" includes references to the old law.
This overlap may create confusion rather than simplifying compliance.
Way Forward
Ensure genuine simplification by adopting plain legal languagewithout losing precision.
Introduce safeguards against excessive government authority in tax searches and seizures.
Reduce overlap between old and new laws to avoid confusion.
Address inconsistencies in corporate tax provisions to maintain fairness.
Align tax treaty interpretations with international standards to avoid disputes.
Context: A recent report by the International Monetary Fund (IMF) titled “India Financial System Stability Assessment” highlighted that stress in the Non-Banking Finance Companies (NBFCs) may pose risk in the financial system due to their overexposure to the power and infrastructure sector.
Relevance of the Topic: Prelims: NBFCs Mains: NBFCs- Risks and Way forward
Findings of the IMF Report
NBFCs Over-Exposure:
NBFCs (particularly infrastructure financing companies) have an excessive concentration of loans in the power sector, which has been historically plagued by structural inefficiencies.
In FY24, 63% of power sector loans were from the three largest Infrastructure Financing Companies. This increased from 55% in 2019-20.
Dependence on Market Instruments and Bank Borrowings:
In Q2 FY24, 56% of power sectors’ lending wasfinanced by market instruments and only the rest by bank borrowings.
Since FY19,the dependence on bank borrowings for financing their lending has increased, raising systemic risk.
State-owned NBFCs like IREDA are at a higher risk.
Limited Regulatory Support compared to Banks:
Unlike banks, NBFCs cannot accept demand deposits and their funds are not insured.
They lack direct access to RBI’s liquidity facilities, making them more vulnerable to financial shocks.
Cascading Effect:
NBFC distress could have cascading effects across the financial system due to their deep inter-linkages with banks, mutual funds, and corporate bond markets.
Spillover Effect on Banks and Financial Markets:
Any financial distress in NBFCs could amplify stress across the banking system, leading to liquidity crises in mutual funds and bond markets.
Past crises, such as IL&FS and DHFL collapses, demonstrated how NBFC failures impact the broader economy.
Regulatory gaps for State-owned NBFCs:
State-owned NBFCs dominate the sector, with three government-backed Infrastructure Financing Companies (IFCs) holding one-third of total NBFC assets.
Unlike private NBFCs, state-owned entities are not subjected to large exposure limits, raising regulatory concerns.
Regarding status of Public Sector Banks:
In the event of a stagflation, public sector banks (PSBs) may have difficulties maintaining a capital adequacy ratio (CAR) of 9%.
CAR is the ratio ofcapital to risk-weighted assets, used to measure the bank’s ability to absorb losses.
RBI mandates a 12% CAR for PSBs and 9% CAR for Scheduled commercial banks.
Though the likelihood of stagflation had receded in 2024, geopolitical risks and monetary policy miscalibration of major central banks could result in an increase in interest rates, which could slow economic growth.
PSBs are relatively more vulnerable because they have lower initial CARs and are more sensitive to credit risk.
PSBs should strengthen their capital base, including by retaining their earnings instead of paying dividends to the government. This can ensure they support economic recovery in a potential future downturn.
Regulatory parity: State-owned NBFCs should have the same regulatory burden as private sector NBFCs to create a level playing field.
Reducing over-reliance on Market instruments: NBFCs shoulddiversify funding sources to reduce dependence on market instruments and bank borrowings.
Strengthening liquidity regulations: NBFCs, particularly those with significant infrastructure exposure, should comply with stricter liquidity norms to avoid asset-liability mismatches.
Enhanced Data sharing and Risk monitoring: Regular monitoring of NBFCs’ lending patterns and improved risk management frameworks are needed to prevent financial disruptions.
Prioritising financial stability over developmental motives: The government should balance financial stability with the developmental role of banks and NBFCs.
Context: India’s agricultural trade surplus has reduced from $10.6 billion in April-December 2023-24 to $8.2 billion for the corresponding nine months of the current fiscal year 2024-25.
Relevance of the Topic: Prelims: Agriculture exports- trends.
Agriculture Trade: Trends
Agriculture Exports:
India's agricultural exports increased by 6.5%, rising from $35.2 billion (April-December 2023) to $37.5 billion (April-December 2024).
This growth surpassed the 1.9% increase in total merchandise exports.
Agriculture Imports:
Grew at a higher rate of 18.7%, rising from $24.6 billion (April-December 2023) to $29.3 billion (April-December 2024).
Narrowing Agricultural Trade Surplus:
The surplus fell from $10.6 billion (April-December 2023-24) to $8.2 billion(April-December 2024-25).
Historically, India's agricultural trade surplus peaked at $27.7 billion in 2013-14 but declined to $8.1 billion by 2016-17.
It increased again to $20.2 billion in 2020-21, but has since been declining.
Impact of Global Commodity Prices on Indian Exports
The FAO food price indexfell between 2013-14 (119.1) and 2019-20 (96.4), reducing India's agricultural export competitiveness.
Post-COVID-19 and the Russia-Ukraine war, global food prices surged, leading to higher Indian exports.
The index peaked at 140.6 in 2022-23, boosting exports to $53.2 billion, but has since fallen, affecting exports.
Key Agricultural Export Commodities
Marine products:
No. 1 export commodity in India’s agri-exports.
Exports fell from $8.1 billion (2022-23) to $7.4 billion (2023-24).
Sugar: Dropped from $5.8 billion (2022-23) to $2.8 billion (2023-24) due to government restrictions.
Wheat: Exports reduced significantly due to domestic supply concerns.
Rice: Despite export restrictions, non-basmati rice exports remain high, while basmati rice exports are expected to reach record levels.
Spices, Coffee, and Tobacco: Crop failures in other countries (Brazil, Vietnam, Zimbabwe) have boosted India’s exports.
Key Agricultural Import Commodities
India’s agricultural imports are dominated by two commodities: Edible oils and pulses.
Edible oils: Imports surged due to high global prices post-Ukraine war.
Pulses: Poor domestic production led to an increase in imports, expected to cross $5 billion for the first time.
Spices: India has become a net importer of pepper and cardamom, despite leading in other spices.
Cotton: Once a major exporter, India is now a net importer, with imports increasing by 84.2% in 2024.
While India remains a strong player in agricultural exports, increasing imports and global market uncertainties pose challenges. A balanced trade policy, along with investments in domestic agricultural productivity, will be crucial in maintaining a healthy agricultural trade surplus.
Context: India’s Income Tax Bill, 2025 introduces a comprehensive legal framework for Virtual Digital Assets (VDAs) defined in Section 2(111), aligning the country’s tax structure with global precedents. Meanwhile, the US President Donald Trump has announced five virtual coins to be included in the American reserve stockpile.
Relevance of the Topic: Prelims: Virtual Digital Assets; Non-Fungible Tokens; VDA Taxation
About Virtual Digital Assets (VDA)
Definition of Virtual Digital Asset (VDA): Any information, code, number, or token generated by way of cryptographic or other means and (a) has inherent value or (b) Act as Unit of account or (c) Act as store of value.
It can be transferred, stored, or traded electronically.
It includes all the crypto assets, stable coins, Non-Fungible Token (NFT) etc.
Exclusion: VDAs will exclude:
Giftcard or vouchers, being a record that may be used to obtain goods or services or discount on goods or services.
Reward points or loyalty cards used or redeemed only to obtain goods or services or a discount on goods or services.
Subscription to websites or platforms or applications.
Framework for Virtual Digital Assets (VDAs) in Income Tax Bill, 2025
1. VDAs as Property and Capital Assets:
For the first time in India, the Income Tax Bill, 2025explicitly treats VDAs as property and capital assets.
VDAs (which include crypto assets, Non-Fungible Tokens (NFTs), and similar digital assets) should be considered property under Section 92 (5)(f)).
VDAs are classified as capital assets under Section 76(1). This means that any gains arising from their sale, transfer, or exchangewill be taxed under capital gains provisions, similar to real estate, stocks, and bonds.
2. Taxes on VDAs:
Capital Gains Tax: The bill imposes a 30% tax on income from VDA transfers.
Unlike traditional capital assets, no deductions (other than the cost of acquisition) are allowed.
Expenses related to mining, transaction fees, platform commissions, and gas fees cannot be deducted when calculating taxable income.
E.g., if an investor buys Ethereum for ₹5 lakh and sells it for ₹7 lakh, the ₹2 lakh profit is taxed at a flat 30% — with no relief for transaction costs.
TDS on VDA transfers:
There will be 1% TDS (Tax Deducted at Source) on transfers of VDAs. This applies even in peer-to-peer (P2P) transactions and ensures that the government tracks large crypto transactions.
The threshold for TDS exemption is ₹50,000 for small traders and ₹10,000 for others.
3.Inclusion of VDAs in Undisclosed Income Taxation:
If an individual fails to report VDA holdings in their tax filings, they can be classified as undisclosed income and taxed accordingly.
Tax authorities can seize VDAs during investigations or tax raids, similar to how cash, gold, or real estate is confiscated in cases of tax evasion. This aligns with global enforcement trends.
4. Compliance from Cryptotrading Platforms:
Any entity dealing in crypto assets — including exchanges, wallet providers, and even individual traders — is required to report transactions in a prescribed format.
VDAs ought to be included in Annual Information Statements (AIS), ensuring that all crypto transactions are automatically recorded in taxpayers’ financial profiles.
Significance:
This move aligns India with global practices, where digital assets are either classified as securities (like in the U.S.) or property (like in the U.K., Australia, and New Zealand), and thus bringing them under financial market regulations.
By treating VDAs as capital assets, the government ensures that transactions are subject to standard asset taxation principles, preventing their misuse as unregulated financial instruments.
By treating VDAs as property for seizure purposes, India ensures that crypto-assets do not remain a shadow asset class, immune from regulatory oversight.
Mandating compliance from cryptotrading platforms makes it harder to launder money through digital assets.
What are Non-Fungible Tokens (NFTs)?
NFTs are assets that have been tokenised via a blockchain.
They are assigned unique identification codes and metadata that distinguish them from other tokens.
NFTs can be tradedand exchanged for money, cryptocurrencies, or other NFTs.
NFTs can represent digital or real-world items like artwork and real estate. They can also represent individuals' identities, property rights, and more.
Global precedents in VDA Classification and Taxation
U.K.: The tax authority (HMRC) treats crypto assets as property, subject to Capital Gains Tax.
New Zealand: Inland Revenue Department similarly classifies crypto assets as property, subject to income tax on trades.
U.S.: Securities and Exchange Commission (SEC) classifies some crypto assets as securities, regulating them under financial market regulations.
UAE: Virtual Assets Regulatory Authority (VARA) allows 0% personal income tax on VDA gains under regulated conditions.
US moves for Crypto Reserves
The U.S. President has announced the creation of a U.S. Crypto Reserve. The announcement includes five major cryptocurrencies: Bitcoin (BTC), Ethereum (ETH), Ripple (XRP), Solana (SOL), and Cardano (ADA).
Trump's Crypto Summit and his alliance with Elon Musk could signal more crypto-friendly policies in the U.S., further bolstering the industry.
Market reactions:
Trump's announcements led to a surge in crypto prices, including Bitcoin and Ethereum.
However, concerns over volatility and fraud remain, as seen with Argentina's crypto meme coin fiasco.
While India has made strides in taxation and classification of VDAs, there is a need for a more holistic regulatory framework that includesInvestor protection, upheld consumer rights, and strict enforcement mechanisms to ensure a balanced and secure digital asset ecosystem.
Context: The Indian government recentlyreleased the latest estimates of the country’s economic growth.
Relevance of the Topic: Prelims: GDP- Definition, Real vs Nominal GDP, GDP estimates.
Understanding Gross Domestic Product (GDP)
Definition: GDP is the total market value of all goods and services produced within India's geographicalboundaries in a specified period.
Real vs. Nominal GDP:
Nominal GDP: value of all the final goods and services at current market prices, without adjusting for inflation.
Real GDP: adjusts nominal GDP for inflation. It reflects the economy’s true growth by accounting for changes in price levels.
India's GDP Growth trends
Second quarter GDP decline (Q2 FY25): India's GDP growth rate in the second quarter (July-September) slumped to 5.4%, indicating a potential slowdown.
Revised Q2 growth: Ministry of Statistics and Programme Implementation (MoSPI) later revised the Q2 GDP growth rate to 5.6%, reflecting a minor upward correction.
Third quarter GDP (Q3 FY25): GDP growth for October-December was 6.2%, signaling a recovery from the previous slump.
Second advance estimates (SAE) for FY25: RealGDP growth of 6.5% for FY 2024-25.
Revision of GDP Estimates
GDP figures undergo multiple revisions as more accurate data becomes available. Revisions reflect a more precise picture of economic performance.
Stages of GDP revisions:
First Advance Estimates (FAE): Released in January of the financial year.
Second Advance Estimates (SAE): Released in February.
Provisional Estimates (PE): Released in May, incorporating Q4 data.
First Revised Estimates (FRE): Released the following February with better data.
Final Estimates: Released two years later as the most accurate GDP assessment.
Key GDP revisions and their implications:
Upward GDP revision for FY24: GDP growth rate was revised sharply from 8.2% to 9.2%, a significant 1 percentage point increase.
Significance of sharp GDP Revisions
Economic planning: GDP data influences government policy decisions on fiscal measures, investments, and subsidies.
Tax revenues and corporate performance: Weaker GDP growth implies lower tax revenues for the government and weaker corporate earnings, affecting investor sentiment.
Foreign investment and Stock market trends: Revisions in GDP growth impact foreign investor confidence and the valuation of Indian stocks.
Reliable GDP data is needed to formulate effective fiscal and monetary policies, and uphold investor confidence (both domestic and foreign).
Private consumption as a key growth driver
Revised private consumption estimates: Initially pegged at 4% growth for FY24, private consumption was later revised to 5.6%.
Importance of private consumption: It is the largest contributor to GDP, driving demand for goods and services, impacting production, employment, and economic stability.
Comparison with other growth engines: Unlike government spending and private sector investments, private consumption currently plays a more significant role in driving GDP growth.
Critical takeaways from the GDP revisions
Stronger economic performance: In FY24, India’s economic performance was stronger than initially assumed. The sharp upward revision indicates robust underlying economic activity.
Pronounced growth slowdown: The growth slowdown in FY25 is more pronounced than expected. With growth falling from 9.2% to 6.5%, the economic momentum has weakened significantly.
Credibility of GDP estimates needs strengthening: Large-scale revisions create uncertainties in economic assessments and policymaking, necessitating more reliable initial estimates.
Context: With the Production-Linked Incentive (PLI) scheme gaining traction in its first phase, the government is considering the PLI 2.0 scheme. The PLI 2.0 scheme is exploring if incentives should be linked to metrics beyond incremental sales such as domestic value addition and incremental exports.
Relevance of the topic:
Prelims: Production Linked Incentive Scheme
Mains: PLI- Issues, Way Forward
About PLI Scheme
The PLI scheme was conceived to scale up domestic manufacturing capability, accompanied by higher import substitution and employment generation.
Launched in March 2020, the scheme initially targeted three industries:
Mobile and allied Component Manufacturing
Electrical Component Manufacturing and
Medical Devices.
Later, it was extended to 14 sectors:
Mobile Manufacturing and Specified Electronic Components
Critical Key Starting Materials/Drug Intermediaries & Active Pharmaceutical Ingredients
Manufacturing of Medical Devices
Automobiles and Auto Components
Pharmaceuticals Drugs
Specialty Steel
Telecom & Networking Products
Electronic/Technology Products
White Goods (ACs and LEDs)
Food Products
Textile Products: MMF segment and technical textiles
High efficiency solar PV modules
Advanced Chemistry Cell (ACC) Battery
Drones and Drone Components.
Key Features of the PLI Scheme
Outcome-based Incentives: Incentives will be disbursed only after the production has taken place.
Incremental Production Focus:
The calculation of incentives is based on incremental production at a high rate of growth.
In some sectors such as advanced chemistry cell batteries, textile products and the drone industry, the incentive will be calculated on the basis of sales, performance and local value addition done over the period of five years.
Emphasis on Scale: The scheme focuses on size and scale by selecting producers who can deliver high volumes.
Strategic Sectors: Sectors chosen include, those with:
Cutting-edge technology
Potential for integration with global value chains
High job-creation capacity
Sectors closely linked to the rural economy.
WTO Compliance: The scheme is designed to align with World Trade Organisation (WTO) commitments, as the quantum of support is not directly linked to exports or value-addition.
Sector-wise performance in job creation
High performance: Mobile phones, food processing, and pharmaceuticals.
Moderate Performance: Auto, IT hardware, and specialty steel.
Below Target: Textiles and advanced chemical cells.
Challenges with the current PLI framework
Low value addition:
Value addition in key sectors remains in single digits, even in relatively successful sectors.
Need for deeper integration of domestic supply chains.
Dependence on global supply chains:
India's small market size in telecom and electronics limits incentives for supply chain relocation.
Economies of scale are necessary to negotiate better rates for semiconductor chips and technology licensing.
Lack of economies of scale:
Indian firms are generally smaller and less competitive compared to Chinese and Vietnamese firms.
Context: Recently, the World Bank has released a report titled ‘India Country Economic Memorandum’ which has called for accelerated reforms to help India achieve high income status by 2047.
India will need to grow by 7.8% on average over the next 22 years to achieve the country’s aspirations of reaching high-income status by 2047.
Relevance of the Topic:Mains: Viksit Bharat- Recommendations
Major Highlights of the Report
Global Experience in Economic Transition:
Only a few countries, such as Chile, Romania, Poland, Czech Republic, and Slovakia, have transitioned from middle to high-income status within two decades.
Many others, including Brazil, Mexico, and Turkey, have remained in the upper-middle-income trap.
India needs ambitious reforms and effective implementation to avoid stagnation.
India’s Growth and Investment Projections:
India’s Gross National Income (GNI) per capita must increase nearly eight times from $2,540 (2023) to exceed the $14,005 high-income threshold.
Under a moderate reform scenario in India:
Investment is projected to peak at 37% of GDP by 2035.
Economic growth is expected to average 6.6% annually.
Total factor productivity (TFP) growth would peak at 2.5%.
Female labor force participation (FLFPR) is expected to increase to 45% by 2045.
India needs ‘accelerated reforms’, with which:
Investment share in GDPcould reach 40% by 2035.
Growth could reach 7.8% annually, enabling high-income transition.
Total factor productivity (TFP) growth would peak at 2.7%.
FLFPR is expected to increase to 55% by 2050.
Key Reform Areas
Financial-Sector Reforms:
Ensure efficient credit allocation and risk minimisation.
Deepening corporate bond markets.
Facilitating further credit access for Micro, Small, and Medium Enterprises (MSMEs).
Boosting private and public investments: Increasing public investment in sectors that crowd-in private investment, such as:
Agriculture and allied industries
Urban development
Transport infrastructure
Trade and FDI liberalisation:
Reducing tariffs and trade barriers.
Encouraging participation in Global Value Chains (GVCs) to enhance productivity and exports.
Addressing market concentration and large state presence in key sectors like petroleum, IT equipment, and cement.
Creating Quality Jobs:
Targeting stronger growth in labor-intensive sectors
Expanding MSMEs to increase employment opportunities.
Supporting traditional market services (hospitality, trade, and communications) through better infrastructure and reduced entry barriers.
Enhancing intermediate manufacturing by reforming labor regulations, improving land availability, and upgrading logistics infrastructure.
State-specific growth strategies:
Addressing inter-state income disparities for inclusive growth.
Encouraging policies for large-scale inter-state migration.
Implementing differentiated policy approaches, rather than a ‘one size fits all’ approach:
Context: Employees’ Provident Fund Organisation (EPFO) retained an interest rate of 8.25% on employees' provident fund (EPF) deposits for 2024-25, in the recent meeting by the Central Board of Trustees.
Relevance of the Topic:Prelims: Employees’ Provident Fund Organisation, Central Board of Trustees.
About Employees’ Provident Fund Organisation (EPFO)
EPFO is a statutory body set up under the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952.
The Act and Schemes framed are administered by a tri-partite Board known as the Central Board of Trustees, Employees' Provident Fund.
It consists of representatives of Government (Both Central and State), Employers, and Employees.
The Board administers a contributory provident fund, a pension scheme and an insurance scheme for the workforce engaged in the organised sector in India.
Provident fund: Financial scheme that aims to provide retirement benefits to employees.
It is a savings scheme established by employers and/or employees to accumulate a fund over a period of time, which can be withdrawn by the employee upon retirement or under certain specified conditions.
EPFO is under the administrative control of the Ministry of Labour and Employment.
Schemes by EPFO
The Board operates three schemes, namely:
Employees' Provident Funds Scheme 1952 (EPF):
Accumulation plus interest upon retirement and death.
Partial withdrawals allowed for education, marriage, illness and house construction.
Housing scheme for EPFO members to achieve the Prime Minister’s vision of Housing for all by 2022.
Employees' Pension Scheme 1995 (EPS):
Monthly benefit for superannuation/benefit, disability, survivor, widow(er) and children.
Minimum pension of disablement.
Past service benefit to participants of the erstwhile Family Pension Scheme, 1971.
Context: India’s current liquidity deficit is due to variousdomestic and global factors,affectingdeposit growth, credit expansion, exchange rates, and central bank policies.
Relevance of the Topic: Prelims: Key terms related to Liquidity management by RBI.
Liquidity Management in India
Liquidity management is a key function of the Reserve Bank of India (RBI) that ensures effective monetary policy transmission and smooth financial system operations.
It involves the central bank's procedures to align short-term interest rates with the policy rate.
RBI's liquidity management framework involves three key aspects: operating framework, liquidity drivers, and liquidity control mechanisms.
Since 2011, the fixed overnight repo (repurchase) rate under the Liquidity Adjustment Facility (LAF) has been formally announced as the single monetary policy rate, with the Weighted Average Call Money Rate (WACR) as the operating target of monetary policy.
Importance of Liquidity Management
Supporting economic growth: By maintaining optimal liquidity, banks can continue lending to businesses and consumers, supporting economic activity and growth.
Facilitating monetary policy transmission: Effective liquidity management by the RBI helps in the smooth transmission of monetary policy.
Ensuring financial stability: It helps Indian banks and financial institutions maintain adequate cash reserves and liquid assets to meet short-term obligations and withstand economic shocks.
Meeting regulatory requirements: RBI has implemented stringent liquidity requirements such as the Liquidity Coverage Ratio (LCR) for banks. Liquidity management is essential for banks to comply with these regulatory norms.
Managing volatility: Sound liquidity management helps banks and the RBI handle suddeninflows or outflows of foreign capital.
Building investor and depositor confidence: Strong liquidity positions enhance the credibility of banks among investors and depositors, crucial for maintaining stability.
Managing currency fluctuations: Liquidity management helps banks handle exchange rate volatility, which is important given India's increasing global financial integration.
Key drivers of Liquidity in the Banking System
Government cash balances with RBI: The government's higher cash holdings at the RBI reduce system liquidity and lower balances increase it.
Changes in currency in circulation: An increase in currency in circulation reduces liquidity in the banking system, while a decrease increases liquidity.
RBI's forex operations: When the RBI buys foreign currency, it injects rupee liquidity into the system, and when it sells foreign currency, it absorbs rupee liquidity.
RBI's market operations: Through its liquidity tools such as Open Market Operations (OMOs), the RBI can inject liquidity by purchasing government securities or absorb liquidity by selling them.
Changes in CRR, SLR: An increase in Cash Reserve Ratio (CRR) or Statutory Liquidity Ratio (SLR) requirements reduces liquidity in the banking system, while a decrease increases liquidity.
Factors contributing to current Liquidity Deficit in India
Mismatch between deposits and credit growth:
Faster credit expansion compared to deposit growth has created liquidity pressure in the banking system.
Many investors shifted funds from bank deposits to capital markets, driven by high stock market returns and mutual fund attractiveness.
Banks were unable to increase deposit interest rates significantly due to the high repo rate (6.5%), which affected their profit margins.
Impact of government spending:
Government spending was lower than usual due to the election code of conduct, leading to high cash balances with the RBI instead of commercial banks.
Payments made to the government reduced bank deposit growth, further tightening liquidity.
Impact of US economic policies: US government's policies (higher tariffs, tax cuts, and strict immigration rules) have strengthened the US dollar, leading to:
Depreciation of the Indian rupee and other currencies.
Increased volatility in Foreign Portfolio Investments (FPIs), as investors factored in currency risks.
Stock market fluctuations due to adjustments for currency depreciation and inflation.
RBI's role in managing forex reserves:
RBI’s forex reserves peaked at $705 billion (Sept 2024) but have now declined to $630–640 billion due to forex interventions.
RBI’s sale of dollars to stabilize the rupee led to a further liquidity crunch, reducing the money supply in the banking system.
Liquidity Management by RBI
Changes in RBI's Liquidity framework:
The 2020 liquidity framework focused on:
Variable Repo Rate (VRR) and Variable Reverse Repo Rate (VRRR) to manage liquidity.
Discontinuation of daily overnight repo operations.
Due to the liquidity crunch, RBI resumed daily overnight repo operations to fine-tune liquidity.
This was done, while ensuring that the weighted average call rate (WACR) remains stable at around 6.30% (above repo rate of 6.25%).
Anomalies in the banking system:
RBI is simultaneously injecting liquidity (~₹2 lakh crore through VRR) while banks are parking surplus funds in the Standing Deposit Facility (SDF) at 6% interest.
Banks prefer SDF deposits over lending in the unsecured call money market, even though the call rate is slightly higher (~6.30%).
Borrowers are shifting to the tri-party repo market, where borrowing is cheaper against securities like Treasury Bills.
Impact of a volatile Rupee on liquidity
FPI withdrawals have increased rupee volatility, leading to stock market fluctuations.
The US dollar index movements significantly affect the rupee’s value, even when US policies do not directly target India.
RBI's intervention to stabilize the rupee (selling dollars) has further tightened domesticliquidity, requiring more central bank action.
Way Forward
Domestic policies:
Banks need to offer higher deposit rates or introduce new savings schemes to boost deposits.
RBI could diversify its liquidity management tools beyond repo operations.
Maintaining forex stability is crucial to prevent excessive rupee depreciation.
Global context:
India’s trade negotiations with the US (on hold until March 2025) will be crucial in determining future liquidity trends.
The US-imposed tariff hike could trigger a trade war, affecting Indian exports and overall liquidity.
Central banks worldwide, including the RBI, need to remain vigilant in FY26 as global trade dynamics evolve.
Key Terms
Call money rate: rate at which short term funds are borrowed and lent in the money market.
The duration of the call money loan is 1 day.
Banks resort to these types of loans to fill the asset liability mismatch, comply with the statutory CRR and SLR requirements and to meet the sudden demand of funds.
RBI, banks, primary dealers, etc. are the participants of the call money market.
Demand and supply of liquidity affect the call money rate.
Tight liquidity conditions lead to a rise in call money rate and vice versa.
Weighted Average Call Rate (WACR): WACR represents the unsecured segment of the overnight money market and is best reflective of systemic liquidity mismatches at the margin.
It is explicitly chosen as the operating target of monetary policy in India.
The operating procedure of monetary policy is guided by the objective of aligning the operating target of monetary policy – the WACR (weighted average call rate) – to the repo rate through active liquidity management, consistent with the stance of monetary policy.
Once the policy repo rate is announced, liquidity operations are conducted to keep the WACR closely aligned to the repo rate.
