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Prime Minister Dhan-Dhaanya Krishi Yojana

Context: In the Union Budget 2025-26, the Finance Minister announced several new initiatives for the agriculture sector, including the Prime Minister Dhan-Dhaanya Krishi Yojana.

Relevance of the Topic: Prelims: Key facts about Prime Minister Dhan-Dhaanya Krishi Yojana.

About Prime Minister Dhan-Dhaanya Krishi Yojana

The scheme will be launched in partnership with states through the convergence of existing schemes and specialised measures.
No separate allocation has been made for the Prime Minister Dhan-Dhaanya Krishi Yojana, however, there are allocations for existing schemes which are to be converged:

Rs 1,000 crore has been allocated for the mission for pulses.
Rs 500 crore for the mission for vegetables and fruits.
Rs 100 crore support for the Makhana Board.
Rs 100 crore for the mission on hybrid seeds.
Rs 500 crore for the cotton technology mission.
In phase 1, It will be launched in 100 districts with low crop productivity, moderate crop intensity and below-average credit parameters.
- It is expected to benefit 1.7 crore farmers spread across the targeted districts.
- The scheme draws inspiration from the Aspirational Districts Program and would drive focused reforms to uplift farmers in underdeveloped agricultural regions.

Key focus of PM Dhan-Dhaanya Krishi Yojana

Enhance agricultural productivity
Adopt crop diversification and sustainable agriculture practices
Augment post-harvest storage at the panchayat and block level
Improve irrigation facilities
Facilitate availability of long-term and short-term credit.

Components:

Rural Prosperity and Resilience Program:

It aims at addressing under-employment in agriculture through skilling, investment, technology, and invigorating the rural economy.
The goal is to generate ample opportunities in rural areas so that migration is an option, but not a necessity.
The programme will focus on rural women, young farmers, rural youth, marginal and small farmers, and landless families.
Global and domestic best practices will be incorporated and appropriate technical and financial assistance will be sought from multilateral development banks.

Aatmanirbharta in Pulses:

The government will 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; increasing productivity; improving post-harvest storage and management and assuring remunerative prices to the farmers.
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.

Comprehensive Programme for Vegetables & Fruits:

A comprehensive programme to promote production, efficient supplies, processing, and remunerative prices for farmers will be launched in partnership with states.
Appropriate institutional mechanisms for implementation and participation of farmer producer organizations and cooperatives will be set up.

Grameen Credit Score: Public Sector Banks will develop the ‘Grameen Credit Score’ framework to serve the credit needs of SHG members and people in rural areas.

De-Regulation to boost Indian Economy: Economic Survey 2024-25

Context: Globally, there is a shift from an era of hyper-globalisation to increased protectionism and strategic competitiveness among countries. In this backdrop, the Economic Survey 2024-25 prescribed reforms through de-regulation and increasing private sector participation.

Relevance of the Topic: Prelims: Economic Survey- State of Economy, Measures to boost economy

Highlights of Economic Survey 2024-25

Growth Rate: The Survey predicted India’s economic growth to be between 6.3-6.8% in 2025-26.
- The forecast falls short of both the previous Economic Survey’s 6.5-7% projection and the RBI’s 6.6% estimate for 2024-25.
- Its growth projection for FY26 is lower than the ADB’s forecast of 7% but in line with the World Bank’s (6.7%), the IMF’s (6.5%) and Fitch Ratings (6.5%).
- The Statistics Ministry expects the economy to grow at 6.4% in 2024-25.

Viksit Bharat can only be achieved with 8% growth for at least a decade. The survey prescribes a 4 pillar strategy to achieve higher growth in the new playing field, marked by protectionism and strategic competitiveness among countries.

Reforms prescribed by Economic Survey 2024-25:

De-Regulation:
- The Survey strongly advocates for de-regulation, guided by a broad laissez faire approach of ‘getting out of the way’ principle.
  - It recommends the government to stop micromanaging economic activity and to embrace risk-based regulations.
  - Changing the operating principle of regulations from ‘guilty until proven innocent’ to ‘innocent until proven guilty’.
  - Simplifying regulations that affect businesses. E.g., Adoption of Business Reform Action Plan (BRAP) formulated by the Department for Promotion of Industry and Internal Trade (DPIIT).
- Focus on Ease of Doing Business 2.0, pushing on de-regulation as a pathway to employment generation. It recommends labour with a flexibility of working hours.
De-regulation by States: The Survey has called upon States to begin de-regulation exercise by:
- Identifying regulations that affect decision-making in enterprises
- Comparing their regulations on these issues with those in other States and countries
- Examining the economic impact of their current regulation on a single sample enterprise.
In Ease of Doing Business 2.0, States must work on:
- liberalising standards and controls
- setting legal safeguards for enforcement
- reducing tariffs and fees
- applying risk-based regulation

Private-sector participation in nation building:
- Bridge the Profit-Wage Gap:
  - The Survey suggested an equipartition of profits by the private sector to ensure better wages for workers.
  - Despite companies achieving a stable EBITDA margin of 22% over the last four years, wage growth has moderated.
  - Aligning profit growth with wage increases is essential for sustaining demand and supporting corporate revenue and profitability growth in the medium to long run.
- Creating Jobs: While corporate profits have climbed 22.3% in FY24, employment grew by a mere 1.5%.

Augmenting internal capacities: Enhancing economic freedom for individuals and small businesses to bolster India’s medium-term growth prospects.
Urgent Indigenisation for India’s EV sector:
- India will need to focus on indigenisation of raw material and technology.
- It highlights concerns over the need for imports to achieve transition to electric mobility, even as the global automobile industry looks to reduce its dependence on China.

Excessive Financialisation can hurt India's Economy

Context: Economic Survey 2024-25 highlights concerns about the rapid growth of financial markets in India, emphasising that excessive financialisation can harm the economy.

Relevance of the Topic: Prelims: Savings Trends in Indian Economy; Basic idea about Financialisation of Economy.

What is Financialisation?

Financialisation of Economy refers to the increasing dominance of financial markets, financial institutions, and financial motives in the overall economy.
- It means that economic growth and wealth generation rely more on financial activities (like stock markets, banking, and investment funds) rather than traditional sectors like manufacturing, agriculture, or services.
Financialisation of Savings refers to the shift of household or corporate savings from traditional, physical assets (like gold, real estate, or cash) to financial assets (like stocks, mutual funds, bonds, and insurance).

Aspects of Financialisation

Expansion of Financial Markets:
- Financial markets include the stock market, bond markets, derivatives, and foreign exchange markets.
- Financial assets and instruments are increasingly traded on a global scale, driving economic growth, but also introducing volatility.
Rise of Financial Institutions:
- Banks, investment firms, hedge funds, and insurance companies have grown in power and influence over other sectors, including manufacturing and service industries.
Shift in Corporate Focus: Companies increasingly rely on stock buybacks, dividends, and mergers and acquisitions to boost stock prices, rather than reinvesting profits into productive activities.
Households and Financialisation:
- Ordinary households have become more engaged in financial activities, from mortgage lending and credit card debt to retirement savings managed through pension funds and mutual funds.
- Financial markets directly influence household wealth and savings, making them vulnerable to market fluctuations.

Implications of Financialisation

Economic Inequality:
- Benefits of financialisation tend to be concentrated among the wealthy, particularly those with significant financial assets, leading to rising income and wealth inequality.
- Workers and middle-class households often do not benefit proportionately from financial growth.
Vulnerability to Financial Crises:
- Financialisation has made economies more vulnerable to financial shocks, such as the 2008 global financial crisis.
- The increasing complexity of financial instruments (E.g., derivatives, mortgage-backed securities) can lead to instability.
- The interconnectedness of global financial systems means that a crisis in one market or country can have ripple effects worldwide.
Short-Termism:
- Corporations and investors focus on short-term profits and immediate financial returns, often at the expense of long-term investment in innovation, infrastructure, and human capital. This short-termism undermines sustainable economic growth.
Debt-driven Growth:
- Financialisation often leads to a growing reliance on debt, both for governments and individuals.
- Consumer credit, corporate debt, and public debt have surged globally as access to credit has expanded.
- This debt-driven growth can lead to bubble in real estate and other asset markets, increasing the risk of financial crises.
Political Influence:
- Financial lobbyists often shape policy in ways that favour the financial sector, such as deregulation and tax incentives.

Financialisation in India

Widening role of financial markets: In India, financialisation is evident in the increasing role of financial markets, particularly with the growth of stock markets, insurance, and the mutual funds industry.
Rise in Retail Investors:
- There has been a significant increase in individual investors participating in the stock market, both directly and through mutual funds.
- The number of demat accounts (necessary for trading stocks) grew from 114.5 million in FY23 to 151.4 million in FY24.

Potential Risks:

Risk of Overconfidence: Overconfidence might lead to speculative behavior, expecting higher returns that may not align with actual market conditions.
Engagement of youth: Many new investors are young and may have a higher risk appetite, leading them to engage in derivatives trading, which is often speculative.
Derivatives Trading Concerns:
- Derivatives are financial instruments used for hedging but are often used for speculation.
- Globally, most retail investors lose money in derivatives trading.
- A significant market downturn could result in substantial losses for these investors, potentially discouraging them from future participation.

Lessons from other Economies:

The Economic Survey warns that rapid financial market growth without corresponding economic growth has led to crises in both developed and developing countries.
The 2008 global financial crisis is cited as an example of the dangers of excessive financialisation.

Recommendations:

India should ensure a gradual and orderly development of its financial markets.
All stakeholders, including investors, regulators, and the government, should work together to ensure that capital markets effectively channel savings into productive investments.
Continuous financial education is essential to inform investors about the risks associated with speculative trading.

Underdeveloped Bond Market in India

Context: The Economic Survey 2024-25 highlighted that the Indian corporate bond market remained underdeveloped compared to global standards.

Relevance of the Topic: Mains: Detailed question on bond market of India; its implications and suggestive measures.

Major Highlights:

The Survey highlighted that in contrast to the equity market, the debt market in India remains undercapitalised.
Indian corporate bond market share is 18% of GDP, as compared to 80% in South Korea and 36% in China.
Corporate bond issuances stood at ₹7.3 lakh crore from April to December 2024, with an average monthly issuance of ₹80,000 crore, higher than average of ₹66,000 crore in the corresponding period previous year.
In FY24, the public placement of corporate bonds stood at Rs 19,000 crore against the private placement of around Rs 8,38,000 crore. The overwhelming majority of corporate bond issuance happens through private placement, which significantly limits participation of retail investors.

What are corporate bonds?

Corporate bonds are debt instruments issued by a corporation to raise capital from the public.
Corporations have a right to issue these bonds to fulfill their purpose, like debt refinancing, research development, etc.
The holder of corporate bonds receives interest from the corporation periodically, for a fixed period of time and gets back the principal, along with the interest due at the end of the maturity period.
It normally offers a higher rate of interest as compared to fixed deposits or postal savings or similar investments.
Regulated by: Securities and Exchange Board of India (SEBI).

Who can issue corporate bonds in India?

In India, both public and private companies can issue corporate bonds.
A company incorporated in India, but part of a multinational group, can also issue corporate bonds.
However, a company incorporated outside India cannot issue corporate bonds in India.
A statutory corporation like LIC (Life Insurance Cooperation) can also issue corporate bonds.

Challenges in corporate bond development in India:

Limited investor base: Indian investor base is shrinking due to decline in individuals and households savings. Eg; Indian savings reduced from 35% in 2011-12 to 30% in 2022-23.
High taxation and inflation burden: India is facing a dual issue of high taxation combined with high inflation rate, especially food inflation, leading to low investments.
Long-term capital gains tax: Investors are refraining from the bond market due to re-introduction of the long term capital gains tax.
Regulatory constraints: Stringent regulations limit investors (like insurance companies) to invest in high-rated bonds. Eg; IRDAI mandates insurance companies to invest in at least AAA rating bonds. This effectively crowds out small players in the corporate bond market.
Skewed bond distribution: Over 97% corporate bonds in India belong to AAA, AA+ and AA, making it difficult for lower-rated firms to issue bonds in the market.

Implications on Indian Economy:

Overdependence on banking finance: Companies, due to low corporate bonds, depend on banks for finances. This leads to crowding out effects for the retail borrowers and MSMEs. Eg; In 2023, bank credit grew by 15.4%, while corporate bond issuances lagged at ₹7.5 lakh crore.
Limited access for lower-rated companies: The nascent state of the corporate bond market restricts access to capital for lower-rated or first-time issuers. Investors often prefer bonds from top-rated companies, leaving others with limited financing options.
Economic slowdown: A shallow corporate bond market impedes efficient capital allocation, slowing down economic development and infrastructure projects.
Hampers innovation: The shortage of funding may lead to the reduction in innovation by new corporations and startups.

Suggestive measures to boost Corporate bonds:

Diversification of investor base: Encouraging participation in retail investors, pension funds and foreign investors can enhance market depth and liquidity. Eg; Providing tax incentives and simplification of process in the corporate bonds.
Relaxing regulations: Streamlining regulations to reduce compliance burdens, while maintaining market integrity. Eg; Allowing insurance companies to invest in bonds below AAA rating.
Developing risk management tools: Developing and promoting instruments like credit default swaps (CDS) and Interest Rate Futures to mitigate investment risks. Eg; India can implement similar tools like US Credit Default Swaps.
Diversification of bond: Encourage diversified bonds like Green Bonds, social bonds and Municipal Bonds to encourage the habit of investments in bonds. Eg; India issued $10 billion in green bonds in 2023, but needs further regulatory support.

The Indian corporate bond market can become liquid if problems such as entry costs, information asymmetry, and the absence of a secondary market are addressed.

Key Takeaways from Economic Survey 2024-25

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

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

About Economic Survey

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

State of Indian Economy:

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

1. Real GDP

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

2. Gross Value Added

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

3. Inflation

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

4. Employment

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

5. FDI Inflow

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

6. Foreign Exchange Reserves

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

7. Industrial sector

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

8. Trade

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

9. UPI payments

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

Survey’s recommendations

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

Concerns

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

1. Unfavorable global economic environment

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

2. Dominance of China

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

Taxation in India

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

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

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

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

Role of Taxation

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

Scope of Taxation in India

1. Critical importance of tax revenues for Indian government:

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

2. Tax revenues as share of GDP:

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

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

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

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

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

5. Taxation in Electoral Democracies:

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

Conclusion

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

Re-evaluating FRBM Act 2003

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

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

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

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

Salient Features of Fiscal Responsibility and Budget Management Act, 2003

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

FRBM Review Committee headed by NK Singh

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

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

FRBM Act – Escape Clause

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

Documents Mandated by FRBM Act

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

2024-25: Budget Estimates vs. Revised Estimates

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

Way Forward

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

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

Capital Expenditure allocation decreased in Budget 2025

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

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

What is Capital Expenditure?

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

Importance of Capital Expenditure:

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

Current State of India’s Capex:

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

Challenges:

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

Government’s Push:

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

Mutual Credit Guarantee Scheme for MSMEs

Context: Government of India has introduced the Mutual Credit Guarantee Scheme for MSMEs (MCGS- MSME) to enhance credit access for the Micro, Small and Medium Enterprises (MSMEs) and bolster the growth of the manufacturing sector.

Relevance of the Topic: Prelims: Key facts about Mutual Credit Guarantee Scheme for MSMEs.

Mutual Credit Guarantee Scheme for MSMEs

MCGS- MSME scheme will provide 60% guarantee coverage by National Credit Guarantee Trustee Company Limited (NCGTC) to Member Lending Institutions for credit facility up to Rs.100 crore.
These loans are sanctioned to eligible MSMEs for purchase of equipment / machinery.

Key Features

Eligibility: Borrower should be an MSME with a valid Udyam Registration Number.
Loan details: Collateral-free loans up to Rs. 100 Crore.
- For loans up to Rs. 50 crore, the repayment period is up to 8 years, with a 2-year moratorium on principal installments.
- For loans above Rs. 50 crore, higher repayment schedule and moratorium period may be considered.
Equipment condition: At least 75% of the project cost must be allocated for the purchase of equipment or machinery.
Upfront contribution: MSMEs will make an initial contribution of 5% of loan amount at the time of applying for the guarantee cover.
Annual guarantee fees: No fees during the sanction year; 1.5% per annum of loan outstanding for next three years and 1% per annum thereafter.
Duration: Applicable to all loans for 4 years from the date of issue of operational guidelines, or until a cumulative guarantee of Rs. 7 lakh crore is issued, whichever is earlier.

Impact of the scheme on MSMEs

Easier access to credit: Facilitate collateral free loans by banks and financial institutions to MSMEs who are in need of debt capital for their expansion and growth.
Capital investment: Requirement to invest 75% of the loan to machinery and equipment will promote capital investment.
Enhancing registration: The scheme requires mandatory registration with UDHYAM, this will motivate MSMEs to get registered. This will formalise operations of MSMEs and enable them access to government support and benefits.
Reduce collateral burden: 60% guarantee by NCGTC reduces the risk for Money lending institutions and thus will encourage them to extend loans to MSMEs.

Significance of MSME in Indian Economy (As per Ministry of MSME)

MSMEs contribute to around 30% of India’s GDP.
MSMEs are the second largest employment provider after agriculture, providing employment to over 110 million people.
MSMEs contribute about 45% to India’s total industrial output.
MSMEs contribute 48% to India’s total exports.

CRED’s beta version of e-rupee (e₹) wallet

Context: Fintech major CRED has launched a beta version of its e-rupee (e₹) wallet, becoming the first fintech to integrate RBI’s central bank digital currency.

Relevance of the Topic: Prelims: Central Bank Digital Currency

Central Bank Digital Currency (CBDC)

CBDC is a form of digital currency issued by a country's central bank.
It is similar to cryptocurrencies, except that its value is fixed by the centralbank and is equivalent to the country's fiat currency.
- Fiat money is a government-issued currency that has no physical commodity like gold or silver backing it up.
- It is considered a form of legal tender that can be exchanged for goods and services.

Types of CBDCs:

There are two types of CBDCs: wholesale and retail.

Wholesale CBDCs:
- Financial institutions are the primary users of wholesale CBDCs.
- Wholesale CBDCs function similarly to holding reserves in a central bank.
- The central bank grants an institution an account in which to deposit funds or to use to settle interbank transfers.
- Central banks can then use monetary policy tools, such as reserve requirements or interest on reserve balances, to set interest rates and influence lending.
Retail CBDCs:
- Retail CBDCs are government-backed digital currencies used by consumers and businesses.
- Retail CBDCs eliminate intermediary risk—the risk that private digital currency issuers might become bankrupt and lose customers' assets.
- Two types of retail CBDCs: They differ in how individual users access and use their currency:
  - Token-based retail CBDCs are accessible with private keys, public keys, or both. This method of validation allows users to execute transactions anonymously.
  - Account-based retail CBDCs require digital identification to access an account.

e-Rupee in India:

India has introduced the e-Rupee, a form of digital currency, through the Reserve Bank of India (RBI).
Aims:
- modernise the financial infrastructure
- ensure financial inclusion
- reduce transaction costs.
The digital currency was initially rolled out in phases, with pilot projects for wholesale and retail use in 2022 and 2023.
The e-Rupee seeks to integrate with India’s existing digital payment systems, providing a reliable, government-backed alternative to cash for everyday transactions.

CRED’s e-Rupee wallet

The fintech company CRED launched a beta version of its e-rupee (e₹) wallet.
- This makes CRED the 1st fintech to integrate RBI’s CBDC.
- This development is part of a broader initiative by the RBI to enhance access to CBDC-Retail and expand user choices.
Details of CRED’s e-Rupee Wallet:
- It allows users to transact up to ₹10,000 per transfer.
- Daily transaction limit of ₹50,000.
- Users can store up to ₹1 lakh in their wallets.
- It supports zero-cost merchant transactions, making it appealing for both consumers and merchants.
- Sponsor Bank: Yes Bank serves as the first sponsor bank for the e-rupee wallet. It facilitates the issuance of CBDC tokens from the RBI to CRED.
Future Enhancements:
- Future updates for the e-rupee wallet are expected to introduce programmable merchant payments.
- This includes integration with CRED Pay and PIN-less transactions for amounts below ₹500.

Significance of CBDCs

Security: CBDCs offer greater security compared to physical currency, as they are resistant to counterfeiting and fraud, with transactions being traceable.
Eliminating Third-Party Risk: CBDCs can reduce risks associated with events like bank failures or bank runs.
Enhanced Monetary Policy: With direct control over the digital currency, central banks can more effectively implement monetary policy, such as controlling inflation and managing interest rates.
Financial Inclusion: By providing access to digital money, CBDCs can bring unbanked populations into the formal financial system.
Reduced Transaction Costs: CBDCs can lower the costs of transactions by eliminating intermediaries, thus making payments more efficient and affordable.
Direct Consumer-Central Bank Connection: CBDCs can establish a direct connection between consumers and central banks, eliminating the need for costly intermediary infrastructure and improving the efficiency of payment systems.
Lower Cross-Border Transaction Costs: By simplifying the distribution systems and fostering greater cooperation between jurisdictions, CBDCs can lower the high costs of cross-border transactions.

Challenges with CBDCs

Impact on Banking System: Widespread adoption of CBDCs could disrupt traditional banking models, potentially reducing the role of commercial banks in credit distribution.
Privacy Concerns: Digital nature of CBDCs makes it easier for governments to track and monitor transactions, raising concerns about user privacy and surveillance.
Cyber Security: With increased reliance on digital systems, CBDCs are susceptible to cyber-attacks.
Infrastructure and Accessibility: Implementing a CBDC system requires significant digital technological infrastructure, which could be a challenge for developing nations with limited digital infrastructure.

National Critical Mineral Mission

Context: The Union Cabinet has approved setting up of National Critical Minerals Mission (NCMM) with a budgetary outlay of Rs 16,300 crore over seven years.

Relevance of the topic:

Prelims: Critical Minerals, National Critical Minerals Mission, International Collaborations for Critical Minerals

Mains: Critical Minerals- Govt. Initiatives

About National Critical Minerals Mission (NCCM)

The National Critical Mineral Mission will be implemented under the Ministry of Mines for a period from FY 2024-25 to 2030-31.
The mission will have a financial outlay of ₹16,300 crore and an additional funding support of ₹18,000 crore will be raised from different PSUs.
Nodal Ministry: Ministry of Mines
Objectives of NCCM:
- To secure India’s critical mineral supply chain.
- To ensure mineral availability from domestic and foreign sources.
- To strengthen the value chains by enhancing technological, regulatory, and financial ecosystems.
- To foster innovation, skill development, and global competitiveness in mineral exploration, mining, beneficiation, processing, and recycling.
Critical Minerals:
- Apart from lithium, there are 23 other critical and strategically important minerals that have been identified.
- These include vanadium, tungsten, molybdenum, platinum group of elements, rare earth elements and potash etc.
Governance Framework:
- Mission Secretariat to be led by the Joint Secretary. The mission will also have a director, geologists, mineral economists and professionals from the mining industry, mineral processing industry and finance.
- Empowered Committee on Critical Minerals to coordinate activities.
  - Chaired by: Cabinet Secretary
  - Members from relevant stakeholder ministries.
Present status:
- India is a net importer of most critical minerals on account of their nil or limited reserve/production in the country.
- The net import bill for critical minerals (excluding lithium) for FY24, was approximately ₹30,000 crore, with net phosphorous imports being the highest at ₹12,648 crore.
- Rare earth elements were the only segment in which India was a net exporter.

Components of NCCM

Increasing Domestic Critical Minerals Production:
- Expanding exploration and mining activities
- Mining in offshore areas
- Fast-track regulatory approval process for domestic critical minerals exploration and mining projects
- Exploration Licences (EL) for encouraging private participation in exploration activities.
- Formation of Critical Mineral Processing Parks.
Acquisition of Critical Mineral Assets abroad:
- Government will earmark funds to support Critical Minerals Exploration Activities outside India.
- Motivate Central PSUs and encourage private sector companies to allocate funds for the acquisition of critical mineral assets overseas.
- The Empowered Committee will give broad directions and inter-ministerial support to PSUs and stakeholders to acquire critical mineral assets abroad.
- Ministry of Mines to work closely with the Ministry of External Affairs (MEA) to engage with the regulators from the resource country to support the development of mineral evacuation infrastructure.
Recycling of Critical Minerals:
- Incentive scheme for setting up minerals recycling
- Formation of Recycling Advisory Group on Critical Minerals
Trade and Markets:
- Enhance Trade with Resource-Endowed Countries
- Eliminate Import Duty on Critical Minerals
- Develop National Critical Mineral Stockpile/Reserves
Scientific Research & Technological Advancement:
- Promoting Research and Innovation in Critical Minerals
- Establishing a Center of Excellence (COE) on Critical Minerals
- Global Collaboration on R&D
Human Resource Development:
- Promoting Expertise and Skilled Workforce in Critical Minerals
- Develop Targeted Degree Programs, Scholarships, and Internships
- Capacity Building Programs for Resource-Endowed Countries

Rationale behind NCCM

Importance of Critical Minerals:
- Critical minerals are those minerals essential for economic development and national security.
- Lack of availability of these minerals or even concentration of their existence, extraction or processing in few geographical locations may lead to supply chain vulnerability and disruption.
Global Context:
- China’s restrictions on certain critical minerals, Russia-Ukraine War, and other issues highlight the fragility of critical mineral supply and the need for diversifying sources.
Meeting India’s climate commitments:
- Reducing emissions intensity of GDP by 45% by 2030, compared to 2005 levels.
- Achieving 50% cumulative electric power installed capacity from non-fossil fuel-based energy resources by 2030.
- Achieving the target of net zero emissions by 2070.

International Collaborations for Critical Minerals

Mineral Security Partnership (MSP):
- Collaboration of 14 countries (including India) and EU to catalyse public and private investment in critical mineral supply-chains globally.
Initiative on Critical and Emerging Technology (iCET):
- Announced in May 2022.
- 12 Projects prepared for taking up under iCET by involving GSI, IBM and IREL along with concerned institutes/ organisations in the USA.
Indo-Pacific Economic Framework (IPEF):
- US led initiative bringing together 14 partner countries, launched in May 2022.
- 2024 Dialogue highlighted India’s initiatives to develop the critical mineral value chain and auctioning of critical and strategic mineral blocks in India.
Quadrilateral Security Dialogue (QUAD):
- Strategic security forum involves- India, USA, Australia and Japan.
- At the 2023 leaders’ summit, partners announced a Quad statement of “Principles on Clean Energy Supply Chains in the Indo-Pacific.
- Quad partners have set up the Quad Investors Network (QIN), with a working group focusing on clean energy and critical minerals.
India-UK Technology and Security Initiative (TSI):
- Launched in July 2024.
- The Ministry of Mines is taking up research projects related to Critical Minerals.
Bilateral MoUs:
- The Ministry of Mines entered into MoUs with Governments of various countries such as Australia, Argentina, Chile etc.

How does the nature of Fiscal Expenditure impact Growth?

Context: The provisional estimates of Gross Domestic Product (GDP) highlights that the Indian economy is going through a rough patch. The underlying growth rate is lower than what was expected and estimated by the government.

This slowdown is despite the rising capital expenditure in various budgets. An increase in revenue expenditure, particularly in the social sector, can help reverse the current growth decline happening in India.

Relevance of the Topic: Mains: Analysis of fiscal expenditure.

How does the nature of Fiscal Expenditure impact Growth?

1. Impact of Revenue Expenditure:

Those at the lower end of the income spectrum have a higher propensity to consume as compared to the richest.
If state spending tilts in favour of the working class, the income and employment multiplier effects of such spending would be much larger.
For example, consider the government is spending ₹100 as NREGA wages or pension to the elderly.
- The entire ₹100 can be used to increase workers’ consumption demand.
- This increase in demand, say on food and clothes, generates income for those employed in producing these commodities. This creates a multiplier effect in the economy.
- Also, the import component is negligible. The whole amount will be used up domestically.

2. Impact of Capital Expenditure:

For example, consider the government is spending ₹100 in commissioning a large scale dam/nuclear project.
- Here, only a part of ₹100 can be spent as wages. This reduces the rate of increase in consumption demand from workers’ class, thus reducing the multiplier effect.
- Also, there is a likelihood of a greater leakage of demand to the rest of the world in the form of higher imports (like heavy machinery required for a dam or a nuclear reactor).
- So, the domestic component of this multiplier might be even lower.

3. Income Transfers:

Direct income transfers (whether in cash or kind) to the workers at the lower income group, stimulate demand for mass consumption of goods.
A mere change in the composition of government expenditure in favour of such transfers, creates extra demand.

4. Welfare-based legislations:

During 2004-2011, the government introduced a major welfare scheme- NREGA and fixed its wages higher than the prevailing market wages.
This generated additional jobs as well as set a floor for rural wages. This rise in rural wages pushed up wages for casual unskilled workers.

5. Social services & Development expenditures:

There was a sharp rise in the share of social services expenditure as well as development expenditures out of the total expenditure of the Union government during 2004-2011.
- Developmental expenditure: expenditure on economic as well as social services. Includes the spending on agriculture and rural development.
- Social sector expenditure: only includes the direct social sector spending such as education, health and welfare programmes.
This change in the nature of fiscal spending had a significant impact on consumption, across different categories of commodities, for the bottom 80% of the population.

Reasons for the Present decline in growth:

Exclusive focus on Capital expenditure: While the government has acknowledged the slowdown and the lack of private investment, its response has been to focus on capital expenditure. This was done even as the share of fiscal expenditure (as a % of GDP) was falling.

Unmet expectations in private investment: The exclusive focus on capex was done with the expectation that this would crowd-in private investment. But, the corporate sector has not responded either to this or to the tax cuts from 30% to 22% in 2019.
Stagnant Private Consumption: Under conditions of slowdown or lack of demand, investment responds more to the level of activity than to cost considerations. If the existing factories are not running to capacity, the firms would not invest more even if they are flush with funds (in the form of post-tax profits) or have access to cheap credit.

Way Forward

Rise in the share of revenue expenditure:
- An increase in revenue expenditure, particularly in the social sector, would result in a virtuous cycle of higher income for the workers.
- This will further lead to higher income and employment multipliers, which may kick-start private investment as well.
Shift in the nature of capital expenditure: Capital expenditure must be focused on labour intensive projects that have a higher multiplier. E.g., Affordable housing projects, rural infrastructure projects.
Implementation of direct income transfer schemes for low income groups would reduce income inequality and boost consumption expenditure.