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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).

Criteria	Forex Buy/Sell Swap	Forex 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 Liquidity	Increases Rupee Liquidity	Decreases
Impact on Rate of Interest on Loans	Increase in Rupee Liquidity → Decrease in Rate of Interest on Loans	Decrease in Rupee Liquidity → Increase in Rate of Interest on Loans
Impact on Forex Reserves	RBI 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

Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE): Supports MSMEs by providing collateral-free loans. Revamped Credit Guarantee Scheme for Micro & Small Enterprises Scheme (CGTMSE Scheme)

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.
- MUDRA Loans hit All Time High
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.

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:

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)

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.

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.

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%.

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.

Government begins consultations on Airport Privatisation

Context: The Centre government has initiated the consultation process for leasing out (privatisation of) more than 10 airports under the public-private partnership (PPP) model.

Relevance of the Topic: Prelims: Key facts about National Monetisation Pipeline.

Airport Privatisation

The Cabinet will decide which airports will be leased out and if any new terms and conditions should be added in the concession agreement for the upcoming round.
The initiative falls under the National Monetisation Pipeline (NMP).
- Under the NMP, 25 airports belonging to the Airports Authority of India (AAI) were earmarked for leasing out between 2022 and 2025.
- These included airports in Bhubaneswar, Varanasi, Amritsar, Tiruchi, Indore, Raipur, Kozhikode, Coimbatore, Nagpur, Patna, Madurai, Surat, Ranchi, Jodhpur, Chennai, Vijayawada, Vadodara, Bhopal, Tirupati, Hubli, Imphal, Agartala, Udaipur, Dehradun and Rajahmundry.
The government is planning to lease out the airports to improve their management by utilising private sector efficiency and investment.
It is being planned to bundle profitable and non-profitable airports for the bidding process to attract a variety of bidders.

Note:

Since 2014, Airports Authority of India (AAI) has leased out six of its airports for better operations, management, and development under the PPP model.
These airports have been leased out for 50 years, with AAl remaining the owner of the airport land throughout the lease period. The land and other assets would revert to AAl on expiry of the lease period.

National Monetisation Pipeline (NMP)

Aim of NMP: Envisages an aggregate monetisation potential of Rs 6 lakh crore through the leasing of core assets of the Central government. NMP does not include monetisation of non-core assets (such as land, buildings etc).
Core Assets: Roads, railways, power, oil and gas pipelines, telecom, civil aviation, shipping ports and waterways, mining, warehouses, stadiums and sports complexes.
Sector accounting for highest share: Roads (27%), Railways (25%), Power, Oil & Gas Pipelines and Telecom. Roads and Railways together account for 52% of the share.
Duration: Four-year period (FY 2022 to FY 2025)

Imperatives for Core Asset Monetisation

Monetisation of 'Rights' not 'Ownership': Assets will be handed back to the government at the end of transaction life.
Selection of de-risked and brownfield assets with stable revenue streams.
Structured partnerships under defined contractual frameworks with strict key performance indicators (KPIs) & performance standards.

Reforms in Insurance Sector

Context: The Insurance Regulatory and Development Authority of India (IRDAI) has formed a 7-member committee to scrutinise Insurance Act 1938 and suggest amendments. Also, the Government of India is gearing up to introduce the Insurance Amendment Bill in Parliament.

Relevance of the Topic: Prelims: Insurance Sector- FDI limit, GST provisions.

The Insurance Act, 1938

Background: Originally passed in British India to regulate the insurance sector.
What does it include:
- Statutory framework: It provides the broad legal framework within which the insurance industry operates.
- Institutional framework: It also led to establishment of the regulatory authority, Insurance Regulatory and Development Authority of India (IRDAI), which oversees the implementation of the Act.
- Insurance Act, 1938 outlines the various types of insurance policies that can be offered in India, such as life insurance, general insurance and health insurance. It also allows insurers to appoint insurance agents for soliciting and procuring insurance business.

Proposed Reforms in Insurance Sector

100% FDI in Insurance:
- Budget 2025 proposed to raise the FDI limit in the Indian insurance sector from 74% to 100%.
- Previously the FDI cap had been raised from 26% to 49% in 2015, and from 49% to 74% in 2021.
- Benefits:
  - Fully open the insurance market to global investors and attract significant capital inflows.
  - Improve competition.
  - Increase insurance penetration.

Roadmap for GST Relief:
- A roadmap for reducing the GST rates on term and health insurance premiums (currently taxed at 18%) is likely to be introduced.
- This move aims to reduce the financial burden on policyholders and make insurance more affordable across different income groups.

Composite Licenses:
- Composite licenses for Insurance companies to allow insurers to offer both life and non-life insurances (health, motor insurance etc.) under a single license.
  - Presently, as per the provisions of the Insurance Act, 1938, life insurance companies can only offer life insurance products, while general insurance companies can offer non-life insurance products, such as health, motor insurance etc.
- Benefits:
  - Enhance operational flexibility
  - Streamline regulatory processes
  - Foster innovation
  - Insurers will be better positioned to cater to diverse customer needs, improving their competitive edge in the market.

Capital Requirement:
- The 1938 Act provides capital requirements for different classes of insurance business.
- The amendment provides that IRDAI may specify the capital requirements for entities engaged in more than one class of insurance business. This should not be less than the sum of capital required for carrying out each class of business separately.
- In addition, IRDAI can also reduce the minimum capital required to up to Rs 50 crore. This can be done for insurers serving underserved or special segments prescribed through regulations.

Value-Added Services to make insurance more personalised.
- Examples:
  - Health-monitoring devices with health insurance policies.
  - Rewards programs for healthy behavior and timely premium payments.
- Purpose: This will align with global trends to attract new policyholders and improve customer retention.

Challenges & Concerns

Exclusion of proposal to sell Financial products:
- A proposal to allow insurance companies to sell other financial products (E.g., bank deposits and mutual funds) may not feature due to regulatory challenges and operational complexities.
Issue with composite license:
- To enable PSU insurers for availing composite licenses, the government needs to amend the two existing Acts- The Life Insurance Corporation Act of 1956 and the General Insurance Business (Nationalisation) Act, 1972 (GIBNA). However, in the list of proposed amendments no such provisions have been proposed.
- This implies that only the private sector companies can offer both Life Insurance and General Insurance. This would hinder public sector insurance companies from competing with the private sector Insurance companies.
Regulatory hurdles:
- Proposed changes, particularly in FDI limits and product diversification, may face regulatory challenges that could delay their implementation.
- Additionally, the GST reduction for insurance products might encounter political resistance due to the fiscal constraints and competing budget priorities.
Operational complexities:
- The introduction of composite licenses and changes in capital requirements may introduce operational complexities for existing insurers.

Also Read: Insurance Regulatory and Development Authority of India (IRDAI)

The Insurance Amendment Bill is expected to introduce transformative reforms in India’s insurance sector. This aligns with the “Insurance for All by 2047” vision, which seeks to enhance financial inclusion and provide wider insurance coverage to citizens.

Urban Unemployment Rate at 6.4% in Q3 FY25: MoSPI

Context: As per the latest Periodic Labour Force Survey (PLFS) report released by the Ministry of Statistics and Programme Implementation (MoSPI), the urban unemployment rate stood at 6.4% in Q3 FY25.

Relevance of the Topic: Prelims: Key Idea about trends in Unemployment.

Key Findings of the Report

Overall Unemployment Rate (for individuals aged 15 and above) declined to 6.4% in the third quarter (Oct-Dec 2024) of the current financial year (FY25).
- Compared to 6.5% during the same period in 2023.
- Unchanged from 6.4% in July-Sept 2024 quarter of FY25.

Labour Force Participation Rate (LFPR):
- Overall LFPR: 39.6% (up from 39.2% in Oct-Dec 2023)
- Women’s LFPR: Increased marginally to 20% from 19.9% in 2023, but down from 20.3% in the previous quarter.
- Lowest LFPR: Bihar
Gender-wise Unemployment Rate:
- Men: 5.8%
- Women: 8.1% (down from 8.6% in Oct-Dec 2023)
State-wise Unemployment:
- Highest: Himachal Pradesh - 10.4%
- Lowest: Gujarat - 3%
State-wise Female Unemployment:
- Highest- Himachal Pradesh: 24%
- Lowest- Delhi: 1.3%
Worker Population Ratio (WPR):
- Overall WPR (15+ years): 47.2% (up from 46.6% in Oct-Dec 2023)
- Male WPR: 70.9% (from 69.8% in the previous year)
Employment Composition- by Employment type:
- Self-employed: 39.9%
- Regular wage/salaried employees: 49.4%
- Casual labourers: 10.7%
Employment Composition- by Sector:
- Agriculture: 5.5%
- Secondary sector (including mining): 31.8%
- Tertiary sector (includes services sector): 62.7%

Related Key terms:

Labour Force Participation Rate (LFPR): It represents the percentage of the population aged 15 and above that is either employed or actively seeking employment.
Worker Population Ratio (WPR): WPR measures the percentage of employed individuals within the total population aged 15 years and above.
Unemployment Rate (UR): It indicates the percentage of unemployed persons among those in the labour force.
Regarding Activity Status:
- Principal Activity Status (PS): The primary activity in which a person is engaged in for a substantial period (during 365 days preceding the survey).
- Subsidiary Economic Activity Status (SS): Additional economic activities performed, apart from the usual primary activity, for at least 30 days in the 365-day period before the survey.
- Current Weekly Status (CWS): This status reflects a person's activities during the immediate past 7 days before the survey date.

Agricultural Protectionism and Higher Import Tariffs in India

Context: India’s approach to import tariffs, especially in the agricultural sector, is characterised by a significant protectionist stance aimed at safeguarding its domestic producers.

Relevance of the Topic: Mains: Key trends related to Agricultural protectionism and Import Tariffs.

Overview of India’s Import Tariffs:

1. India’s Average Tariff (2023):

Average import tariff levied by India stood at 17% in 2023, which is five times higher compared to the U.S., where the average tariff is just 3.3%.
Despite the difference in the average tariffs levied by India and the U.S., the number of products subject to tariffs remains comparable in both countries.

2. Comparison with other Economies:

Other BRICS nations (Brazil, South Africa, China, and Russia) have relatively lower tariffs than India.
- India: 17%
- Brazil: 11%
- South Africa & China: 7%+
- Russia: 6.6%
- European Union: 5%

3. Agricultural vs. Non-Agricultural tariffs:

India’s higher tariff rate is largely attributed to the protection of its agricultural sector.
Non-agricultural tariffs tend to remain under 15%.
This disparity reflects the government's focus on shielding domestic farmers from international competition.

Agricultural Protectionism:

India levies significantly higher tariffs on agricultural goods, which have consistently been more than twice the tariffs on non-agricultural products. The tariff on agricultural goods has always exceeded 38%, with some exceptions like in 2020.
Key products with high tariffs: Agricultural and dairy products, beverages, and tobacco items attract duties higher than 30%.
Rationale:
- High agricultural tariffs are to protect India’s domestic agricultural sector, which faces inefficiencies due to low investment (6% of total national investment).
- These tariffs serve as a buffer against subsidised agricultural products from countries like the U.S., where government subsidies make foreign agricultural products more competitive.
- High agricultural tariffs reflect the Indian government’s preference for protecting food security and rural livelihoods.

Challenges in Reducing Tariffs

Global competition and subsidies:
- A significant challenge in reducing agricultural tariffs lies in the heavy subsidies provided by countries like the U.S.
- These subsidies make it difficult for Indian producers to compete with foreign agricultural products.
Inefficiencies in Indian Agriculture:
- The agricultural sector remains inefficient by global standards, and without substantial investment, it would struggle to compete internationally.
- The government is thus cautious about reducing tariffs, which could expose local farmers to global competition and harm livelihoods.

Impact on India-U.S. Trade Relations:

U.S. trade deficit with India:
- As India continues to increase its exports to the U.S., it has caused concern within the U.S. over trade imbalances.
- Goods exported from India to the U.S. surpassed $53 billion in FY25 (April-November).

Reciprocal Tariffs:
- U.S. President Donald Trump proposed the imposition of “reciprocal tariffs” on countries that have “unfair” trade practices, which could include pressure on India to reduce its agricultural tariffs.
India-U.S. bilateral negotiations:
- India has been adamant about excluding agricultural products, such as cereals, from tariff negotiations in Free Trade Agreements (FTAs).
- However, with increasing pressure from the U.S. for reciprocal tariffs, there is growing concern that agricultural tariffs may be revisited as part of a broader trade agreement.

Future of Agricultural Tariffs in India

Policy Flexibility:
- The Indian government is likely to continue its protectionist stance on agricultural tariffs to ensure food security and protect farmers.
- However, international trade agreements and pressure from countries like the U.S. may compel India to make some compromises.
Long-Term Sustainability:
- While tariffs provide short-term protection, they may not be sustainable in the long run.
- India will need to balance agricultural protectionism with the need for agricultural reforms and investment to enhance the sector’s competitiveness.

Centre might raise the Deposit Insurance Limit

Context: The government is considering increasing the insurance cover limit on bank deposits from the current Rs. 5 lakh per depositor.

Relevance of the Topic: Prelims: Deposit Insurance, DICGC

What is Deposit Insurance?

Deposit insurance is a financial safety net that protects depositors from bank failures by guaranteeing a certain amount of their money.
In India, deposit insurance is managed by the Deposit Insurance and Credit Guarantee Corporation (DICGC), a wholly owned subsidiary of the Reserve Bank of India (RBI). This system helps maintain trust in the banking sector, prevent bank runs, and promote financial stability.

What is Credit Guarantee?

It is the guarantee that often provides for a specific remedy to the creditor if his debtor does not return his debt.

Deposit Insurance and Credit Guarantee Corporation (DICGC)

All deposits and interest income are insured by Deposit Insurance and Credit Guarantee Corporation (DICGC). It is the second oldest insurer in the world.
It is a statutory body created by the Deposit Insurance and Credit Guarantee Corporation Act, 1961.
It is a wholly owned subsidiary of RBI.
Insured banks by DICGC:
- All Scheduled Commercial Banks
- Foreign Banks
- Small Finance Banks
- Payment Banks
- Regional Rural Banks
- Local Area Banks
- State Co-operative Banks
- District Central Co-operative Banks
- Urban Co-operative Banks.
Note: Primary Cooperative Societies are not covered by DICGC.

Deposit Insurance in India:

Evolution:
- 1993: The deposit insurance limit was fixed at ₹1 lakh.
- 2020: The government raised it to ₹5 lakh, following the Punjab and Maharashtra Cooperative Bank (PMC Bank) crisis.
- 2024: RBI’s Deputy Governor proposed a periodic increase in deposit insurance based on factors such as inflation, deposit growth, and rising income levels.
- 2025: Finance Ministry is actively considering increasing the deposit insurance limit further, following the New India Cooperative Bank crisis.

Insurance Cover amount:
- Currently, the DICGC has set the insurance cover limit to 5 lakhs. This covers all the money (Principal + Interest) with the bank e.g., savings, term deposit, recurring deposits etc.
- Deposits kept in different branches of a bank are aggregated for the purpose of insurance cover and maximum amount of up to rupees 5 lakhs is paid.
- If funds are in different types of ownership or are deposited into separate banks they would then be separately insured.
Insurance Premium is provided by banks. This amount stands at Rs 12 paisa per Rs 100.
When is DICGC liable to pay: If a bank goes into liquidation, DICGC is liable to pay to the liquidator the claim amount of each depositor up to Rs. 5 lakhs within two months from the date of receipt of the claim list from the liquidator.

Importance of Deposit Insurance:

Ensures Financial Stability:
- Prevents bank runs (mass withdrawal of deposits during financial crises).
- Strengthens confidence in the banking system, especially for small depositors.
Protects Small Depositors:
- A large percentage of depositors (97.8%) are fully covered, ensuring their money remains safe.
Encourages Savings and Banking Growth:
- With insured deposits, people are more likely to trust banks and deposit their money, promoting financial inclusion.

Challenges in Deposit Insurance

Inadequate Coverage Limit: The current ₹5 lakh insurance cap may not be sufficient in the face of rising inflation and increasing deposits.
Delays in Payouts: When a bank collapses, depositors often face delays in receiving insured amounts.
Moral hazard: Since deposits are insured, banks might take excessive risks, knowing that the government will protect depositors.
Limited coverage of high-value deposits: While 97.8% of accounts are insured, only 43.1% of total deposit value is covered, leaving large depositors exposed.

Way Forward

Increase the Deposit Insurance limit periodically: The insurance cap should be linked to inflation and economic growth, ensuring depositors receive adequate protection.
Strengthen regulation of Cooperative banks: RBI must closely monitor urban cooperative banks and take pre-emptive action to prevent failures.
Faster claim settlement mechanism: DICGC must speed up payout processing to ensure depositors do not suffer delays.
Enhance public awareness: Many depositors are unaware of deposit insurance coverage, necessitating awareness campaigns.

Horticulture Sector in India

Context: India’s horticulture sector including fruits and vegetables can try replicating the Amul model for harnessing the potential of farmer producer organisations.

Relevance of the topic:

Prelims: Government Schemes

Mains: Horticulture Sector

About Horticulture Sector:

It is a vast and diverse field that encompasses the cultivation, production, processing, and marketing of fruits, vegetables, flowers, and ornamental plants.
Major types of horticulture:
- Pomology: Fruit cultivation and includes Viticulture (grape cultivation)
- Olericulture: cultivation of vegetables
- Floriculture: cultivation of flowers and ornamental plant
- Arboriculture: cultivation of trees and shrubs

Status of India's Horticulture Sector

India is the second-largest producer of fruits and vegetables globally, after China.
Contribution to Agriculture Gross Value Added (GVA): 33%
In 2023-24, horticulture production was estimated at 355 million tonnes, surpassing food grain production.
Horticulture sector growth rate: Around 4-5% annually, higher than cereals.
Exports: India is ranked 14th in vegetables and 23rd in fruits.
Post-harvest losses: About 8.1% for fruits and 7.3% for vegetables, accounting for 37% of the total post-harvest losses, valued at Rs 1.53 trillion annually (NABCONS, 2022).
Farmers' income: Farmers typically receive only 30% of the final consumer price due to unorganised value chains.

Significance of Horticulture Sector for India

Sunrise sector: Horticulture has the potential to:
- Double farmers income
- Generate employment
- Enhance foreign currency earnings
- Enable rural development
Food & Nutritional security:
- Fruits & vegetables form major sources of vitamins/minerals in Indian diet
Potential in India:
- Favourable agro-climatic conditions
- Abundant labour force
- Relatively low production costs
- High productivity, compared to cereals

Challenges in India’s Horticulture Sector

Infrastructure Deficit:
- Poor logistics and lack of equitable cold storage and warehousing facilities contribute to delays and wastages as Horticulture crops are highly perishable.
- Cold storage distribution among the states is inequitable, with around 59% of the storage capacity present in 4 states- Uttar Pradesh, West Bengal, Gujarat, and Punjab.
Post-harvest losses:
- Lack of cold storage, grading, and processing infrastructure leads to significant wastage.
- Seasonal gluts result in price crashes, affecting farmers' incomes.
Small operational landholdings:
- They limit the amount of land available for cultivation, for crop rotation and sustainable soil management resulting in reduced yields and decreased soil fertility.
Fragmented value chains:
- Unlike the dairy sector, where cooperatives like AMUL ensure stable pricing, horticulture lacks a structured aggregation and distribution system.
- Middlemen dominate the market, reducing farmers’ bargaining power.
Limited processing and value addition:
- Only 10% of India’s fruits and vegetables are processed, compared to 60-70% in developed countries.
- The absence of strong food processing industries leads to distress sales and lower farmer earnings.
Market linkages and Export challenges:
- Limited direct market access for farmers results in price volatility.
- Quality and traceability issues restrict India’s potential in global Fruits & Vegetables exports.
- India’s export share in horticulture remains low, despite being a top producer. (mere 1%.)
  - Indian exports face food safety and standards related issues due to non-tariff trade barriers like Sanitary and phytosanitary measures.
  - E.g.: pesticide residue has led to rejection of exports in key markets like the EU.

Initiatives taken

Mission for Integrated Development of Horticulture (2014): Centrally Sponsored Scheme, for the holistic growth of the horticulture sector with 2 sub-schemes:
- National Horticulture Mission: aims at holistic development of the horticulture sector by ensuring forward & backward linkage through a cluster approach under Horticulture Cluster Development Programme.
- Horticulture Mission for North East and Himalayan States.
Operation Greens:
- Launched during Budget 2018-19 to address price fluctuations in tomato, onion, and potato (TOP) and for the benefit of farmers and consumers.
- It was later extended to all crops (from TOP to TOTAL).
Clean Plant Programme:
- CPP aims to enhance the quality of fruit crops across the nation by providing disease free high-quality planting material to farmers regardless of their landholding size.
Formation of Farmer Producer Organisations (FPOs):
- The government aims to establish 10,000 FPOs by 2027, with 8,875 already registered (as of August 2024).
- FPOs help in collective bargaining, better price realization, and reducing dependency on middlemen.
Agriculture Infrastructure Fund (AIF):
- Provides financial support for cold chains, warehouses, and processing units.
- Aims to reduce post-harvest losses and improve price realization for farmers.
Coordinated programme on Horticulture Assessment and Management using geoinformatics (CHAMAN):
- To develop and firm up scientific methodology for estimation of area and production under horticulture crops.
Capital Investment Subsidy Scheme:
- for construction/ expansion/ modernization of Cold Storages/Storages of Horticulture Products.
Mega Food Parks:
- Establishment of agriculture export zones and Mega food parks to increase processing facilities for horticulture crops.
HORTINET App:
- Launched by APEDA (Agriculture and Processed Food Export Development Authority).
- Provide online services such as farm registration, testing and certification, real time details of farmers, farm location, etc.

Case Study: Sahyadri Farmer Producer Company Ltd (SFPCL)

Located in Nashik, Maharashtra, Sahyadri FPO started in 2004 with 10 farmers and has expanded to 26,500 farmers across 252 villages and 31,000 acres.
Annual turnover: Grew from Rs 13 crore (2011-12) to Rs 1,549 crore (2023-24).
Processing & Export:
- Largest grape exporter (90% exported to EU and UAE).
- Strong processing infrastructure, turning tomatoes into ketchup, puree, and sauces.
- Employs over 6,000 people, with 32% being women.
Impact: Farmers receive 55% of the final export price, compared to the usual 30% in traditional markets.

Way Forward

Strengthening Farmer Producer Organizations (FPOs):
- Provide institutional support for working capital, infrastructure, and digital integration.
- Leverage platforms like Open Network for Digital Commerce (ONDC) to enhance market access.
Reviving and expanding Operation Greens:
- Increase financial allocation to improve processing, storage, and logistics.
Commodity-specific value chain development:
- Develop dedicated infrastructure for key horticultural crops, ensuring at least 10-20% of production is processed.
Promote PPPs:
- Encourage public-private partnerships (PPP) in food processing industries.
- Promote partnerships with retail chains like SAFAL to improve farm-to-market efficiency.
National Fruit and Vegetable Board:
- Establish a board similar to National Dairy Development Board (NDDB) to streamline policies, market linkages, and farmer support.
Leveraging technology for Market transparency:
- Implement blockchain for traceability and AI-driven price prediction models to prevent distress sales.
- Expand e-NAM coverage for horticultural produce.

The horticulture sector has immense potential to boost farmer incomes, enhance food security, and strengthen India’s agri-export base. Scaling up successful models like Sahyadri FPO across India can replicate the AMUL success story in fruits and vegetables.

No Consent needed to Collect Banking Data: RBI defends CICs

Context: Responding to a petition filed in the Supreme Court, the Reserve Bank of India (RBI) has defended the collection of financial data of banking users by credit rating companies to prepare credit scores.

It added that this was precisely the purpose behind Parliament enacting the Credit Information Companies (Regulation) Act, 2005 and companies do not need consent from the borrowers for this.

Relevance of the Topic: Prelims: Key facts about Credit Information Companies.

Supreme Court Case Overview

A Bengaluru-based entrepreneur and educational trainer, filed a plea questioning the legality of Credit Information Companies (CICs) operations.
Key Allegations:
- CICs collect financial data without obtaining explicit borrower consent leading to privacy violation.
- Mechanism of "forced consent" coerces users into allowing their financial data to be shared without an option to opt out.
- CICs allegedly profit by selling credit data to banks and financial institutions without user permission.
- CICs retain data beyond the seven-year limit established by the CIC Act.
The Supreme Court has appointed a Senior Advocate as amicus curiae to assist in the matter.
RBI’s Defence in Supreme Court:
- RBI argues that the collection of financial data by CICs is legal under the CICR Act, 2005, and that obtaining individual consent is unnecessary for credit assessment.
- RBI clarified that while seven years is the minimum retention period, there is no upper limit for data storage.
- CICs serve a vital role in risk mitigation, helping lenders assess a borrower's ability to repay loans and reducing Non-Performing Assets (NPAs).
- RBI assures that CICs follow strict security safeguards to prevent unauthorised data access or misuse, with penalties up to Rs. 1 crore for violations.
Legal and Ethical Implications:
- The case raises questions about the intersection of data privacy and financial regulation.
- It challenges the ethical implications of data collection practices by financial institutions.
- The outcome could set precedents for how personal financial data is handled in India.

About Credit Information Companies (CICs)

What do they do?
- CICs collect public data, credit transactions and payment histories of individuals and companies regarding loans and credit cards, among others.
- Their primary function is to gather data from various sources, such as banks, financial institutions, lenders, and other credit-granting entities, and then compile this data into credit reports.
- Banks, non-banking financial institutions refer to the CIC's report and score to decide borrowers' creditworthiness before granting a loan or issuing a credit card.
Regulation:
- CICs in India are licensed by the RBI and governed by Credit Information Companies Regulation Act, 2005 (CICRA) and various other rules and regulations issued by the RBI.
- As per Section 15 of CICRA, every Credit Institution (like banks) should be a member of at least one CIC.
- CICRA also stipulates that a CIC may seek and obtain information from its members only. Thus, if a bank seeks information from a CIC, it will get the information given by other institutions (to CIC) only.
At present, four credit information companies are given certificates of registration by the RBI. These companies are:
- TransUnion Credit Information Bureau (India) Limited (CIBIL)
- Equifax Credit Information Services Private Limited
- Experian Credit Information Company of India Private Limited
- CRIF High Mark Credit Information Services Private Limited.
CICs are responsible for safeguarding this sensitive information, ensuring data privacy and protection.

Importance of CICs

For Lending Institutions:

Credit Risk Assessment: CICs offer detailed insights into a borrower’s credit history, enabling lending institutions to evaluate potential risks accurately.
Streamlined Lending Decisions: By using credit scores and reports from CICs, lending institutions can make quicker and more reliable lending decisions.
Portfolio Diversification: CIC data allows lending institutions to identify creditworthy customers and explore new lending opportunities, leading to portfolio diversification.

For Borrowers:

Higher Loan Approvals: Good credit score increases the chances of loan approvals.
Lower Interest Rates: Lenders offer lower interest rates to borrowers with high credit scores, reducing the cost of borrowing.
Better Negotiation Power: Borrowers with positive credit reports are in a stronger position to negotiate the terms and conditions of loans.

CICs must employ robust encryption, firewalls, and other security measures to safeguard data against unauthorised access to databases and breaches. Also, CICs must comply with regulations like Information Technology Act, 2000, ensuring responsible data collection, storage, and usage.

India-US to negotiate Bilateral Trade Agreement

Context: India and the US have agreed to negotiate the first tranche of a Bilateral Trade Agreement (BTA) in 2025 to reduce tariff and non-tariff barriers. However, the US policy on reciprocal tariffs, as proposed by President Donald Trump, could impact negotiations significantly.

Relevance of the Topic:Prelims: Key aspects of the US-India Relations- Bilateral Trade Agreement

India-US Trade Relations: Current Scenario:

US was India’s second-largest trading partner during April-November 2024-25, with bilateral trade reaching $82.52 billion.
India’s goods trade surplus with the US doubled from $17.30 billion in 2019-20 to $35.33 billion in 2023-24.
India enjoys a merchandise trade surplus of $35 billion with the US.

Major Indian imports from the US: Mineral fuels, precious stones, nuclear reactors, electrical machinery, and aircraft parts.
Major Indian exports to the US: Engineering goods, electronic goods, gems and jewellery, pharmaceuticals, and petroleum products.
Both Nations aim to double their bilateral trade to $500 billion by 2030.

Reciprocal Tariffs: Implications for India:

Trump’s reciprocal tariff plan aims to match higher tariffs imposed by trade partners on US goods.
US claims India imposes high tariffs, particularly on agricultural goods (39%) and motorcycles (100%), compared to US tariffs of 5% and 2.4%, respectively.
The policy could push India to reduce its tariffs rather than the US offering reciprocal concessions.
The US withdrawal of India’s Generalised System of Preferences (GSP) status in 2019 has already affected India’s duty-free exports worth over $5 billion.

Bilateral Trade Agreement (BTA):

What is it: An integrated approach to strengthen and deepen bilateral trade across the goods and services sector.
Objectives:
- Increasing market access
- Reducing tariff and non-tariff barriers
- Deepening supply chain integration.

Concerns in Bilateral Trade Agreement (BTA) Negotiations

Narrow scope: BTA is narrower in scope than a Free Trade Agreement (FTA), focusing only on specific sectors rather than overall trade liberalisation.
US demands: US may demand stricter standards and non-tariff measures to gain further concessions from India.
Potentially benefit US more: BTA likely means lower Indian tariffs on American goods, since average US tariffs are already among the lowest in the world.
Less favourable stand: India’s higher average tariff rates compared to competing nations reduce its ability to negotiate favorable trade terms.

Past experiences: Indo-Pacific Economic Framework for Prosperity (IPEF), which India is a part of, did not conclude its ‘trade pillar’ due to the lack of US tariff concessions.