Economy

All (4049)Current Affairs (4038)Mains Practice (126)Mains PYQs by Subjects (40)

Case for Direct Cash Transfers

Context: With state governments increasingly disbursing ‘freebies’, debates have emerged regarding their economic implications on fiscal discipline. While RBI has raised concerns on rising revenue expenditure, the role of government in redistribution of resources cannot be overlooked.

Relevance of the Topic: Mains: Direct Cash Transfers, Subsidies and Freebies- Impacts

Role of the State in Redistribution of Resources

  • As defined in public economics, the role of the state is to bring about effective redistribution of resources. 
  • The principles of taxation envisages a progressive tax structure where the more affluent pay higher taxes. 
  • The revenue earned is used in social welfare and in building social and economic infrastructure. 

Approaches of Redistribution of Resources: 

  • Social Infrastructure development:
    • One form of redistribution is by creating hospitals, schools, roads, irrigation facilities, etc. which benefits people. 
    • Normally, these facilities would not be used by people in the higher income groups, and hence there is matching of expenses with the beneficiaries.
  • Subsidies:
    • The other approach to redistribution is through the subsidy schemes. These include subsidies on food, fertilizer, housing loans, etc.
      • Loan waivers help farmers when crops fail. 
      • Subsidised meals in certain States benefit street vendors, drivers, etc. 
      • Freebies like cycles, laptops and sewing machines have been given to girls/women to empower them.
    • These forms of transfers have helped improve the living standards of people.
  • Cash Transfers:
    • The PM Kisan Samman Nidhi scheme gives ₹6,000 a year to every farmer. 
    • MGNREGA (Mahatma Gandhi National Rural Employment Guarantee Act, 2005) programme gives employment for 100 days at an average wage of around ₹250 a day. 
    • Free power and irrigation is given to farmers by State governments. 
    • Cash transfers to women are also done in some states. (E.g., Mukhyamantri Majhi Ladki Bahin Yojana, Maharashtra)
Case for Direct Cash Transfers

Arguments Supporting Cash Transfers:

  • Multiplier Effectson the Vulnerable Groups:
    • Consider the case of cash transfers to women or free travel facilities.
      • Socially, women have been empowered with such transfers and are able to lead a more dignified life. 
      • Free transport encourages women to take up jobs and girls to attend school. 
  • Increases Consumption Expenditure:
    • The free food scheme (PMGKAY) of the Central Government releases considerable resources of the poor population, which they can use for buying other goods. 
    • As per NSSO Household Consumption Survey, people were spending less on food and moved up the ladder. This was possible as basic food was provided by the government. 
    • Even in the case of the PM Kisan scheme, the cash given is used exclusively for consumption. 

Also Read: RBI asks States to sustain Fiscal Prudence 

Way Forward: Balancing Welfare and Fiscal Responsibility

  • Targeted allocation: To ensure benefits reach the most deserving segments.
  • Conditional cash transfers by linking handouts to social objectives, such as education and employment.
  • Fiscal Prudence: By monitoring expenditures to prevent unsustainable fiscal deficits.

Also Read: Do new schemes ahead of elections amount to ‘voter bribes’? 

Freebies, if well-targeted and fiscally sustainable, can serve as effective redistribution tools. Governments must balance welfare spending and capital investments to ensure inclusive and sustainable development. 

Rupee's Real Effective Exchange Rate soars High

Context: While the rupee is hitting fresh lows against the US dollar each day, its exchange rate has scaled an all-time-high in “real effective” terms. The real effective exchange rate (REER) index of the rupee touched a record 108.14 in November, strengthening by 4.5% during the calendar year 2024. 

Relevance of the Topic: Prelims: Real Effective Exchange Rate, Nominal Effective Exchange Rate

What is Real Effective Exchange Rate (REER)?

image 181
  • Real effective exchange rate (REER) is the weighted average of a country's currency in relation to an index or basket of other major currencies. The weights are determined by comparing the relative trade balance of a country's currency against that of each country in the index.
  • Function: REER is used to understand how well a currency is doing with respect to other currencies and also with respect to itself in the past. 
  • Interpretation: 
    • An increase in a nation's REER is an indication that its exports are becoming more expensive and its imports are becoming cheaper, reducing its trade competitiveness.
    • A decrease in REER denotes depreciation in rupee’s value, whereas an increase reflects appreciation.
  • REER above 100 denotes that the home currency is overvalued and more expensive compared to its competitors.

What Is the Nominal Effective Exchange Rate (NEER)?

  • Nominal effective exchange rate (NEER) is an unadjusted weighted average rate at which one country's currency is exchanged for a basket of multiple foreign currencies. 
  • NEER is an economic indicator of a country's international competitiveness in terms of the foreign exchange (forex) market. 
  • The Reserve Bank of India has constructed NEER indices of the rupee against a basket of 6 and also of 40 currencies.
    • The former is a trade-weighted average rate at which the rupee is exchangeable with a basic currency basket, comprising the US dollar, the euro, the Chinese yuan, the British pound, the Japanese yen and the Hong Kong dollar. 
    • The latter index covers a bigger basket of 40 currencies of countries that account for about 88% of India’s annual trade flows.
  • A nation's nominal effective exchange rate (NEER), adjusted for inflation in the home country, equals its real effective exchange rate (REER).

What are the implications of soaring REER?

  • The real effective exchange rate (REER) index of the rupee touched a record 108.14 in November 2024. 
  • A rising REER indicates that India’s exports are becoming less competitive globally due to higher prices, while the imports are becoming cheaper. That translates into a loss of trade competitiveness and can potentially widen the trade deficit. 

Why are Green Deposits struggling?

Context: In April 2023, the Reserve Bank of India (RBI) had issued a comprehensive framework for lenders to accept green deposits. It was done with the intent to enable the lenders and customers to further the green cause. However, over 20 months since its introduction, banks still face hurdles in pricing and public engagement.

Relevance of the topic:

Prelims: Key features of Green Deposits.

Mains: Green Deposits- Bottlenecks, Way Forward

What are Green Deposits?

  • A green deposit is a fixed-term deposit for investors looking to invest their surplus cash reserves in environmentally friendly projects.
    • Lenders shall issue green deposits as cumulative/non-cumulative deposits. 
    • On maturity, the green deposits can be renewed or withdrawn at the option of the depositor.
    • According to RBI norms, these deposits shall be denominated in Indian Rupees only.
  • Who can offer green deposits? All scheduled commercial banks (excluding Regional Rural Banks, Local Area Banks, and payment banks) and all deposit-taking NBFCs registered with RBI, including Housing Finance Companies.
  • RBI’s Regulatory Framework for Green Deposits lays down clear allocation guidelines for sectors eligible to receive green deposits.
  • RBI also mandates an independent annual third party audit of allocation of funds raised through green deposits to ensure compliance to green objectives. 
image 179

Eligible sectors/projects to receive green deposits:

Excluded projects: Projects involving new or existing extraction, production and distribution of fossil fuels; Nuclear power generation; Direct waste incineration; Landfill projects; Hydropower plants larger than 25 MW, etc.

Note: Green deposits are different from green bonds. 

Challenges facing Green Deposits in India:

  • Lower interest rate: For instance, SBI offers a 7% interest rate for 2-3 year tenor retail domestic term deposit, whereas a green deposit with similar tenor has 6.65% rate of interest. Customers usually do not consider the nature of deposit as they seek higher returns.
  • Lack of alignment with green goals: Customers are neither aware of nor attracted by the philosophy behind or benefits of green deposits.
  • Poor adoption by private banks: While most public sector banks have started accepting green deposits, private banks have been slow adopters to market green deposits.
  • Absence of Indian green taxonomy: There is a lack of an established Indian green taxonomy in the green deposits framework . Establishing a green taxonomy is essential not only to define what constitutes “green” but also to enhance transparency, prevent greenwashing and effective deployment of green deposits.
    • E.g., the description of the renewable energy sector is mentioned as “incentivising adoption of renewable energy,” which is vague.
  • Weak regulatory enforcement: There are inconsistencies in operational practices across banks. E.g., one bank’s green deposit policy mentions opportunities for green investment in the highly polluting oil and gas sector, raising questions of legitimacy and greenwashing. 

RBI has not enforced any penalties for non-compliance or partial compliance with its related guidelines. 

Way Forward

  • Reduction in CRR: Lowering cash reserve ratio (CRR) requirement for green deposit can boost growth and will help garner more customers.
  • Increased customer awareness:  Customers must be informed that funds they park with banks as green deposits are used for financing renewable energy projects, projects that lower carbon emission, and enable clean transportation. This can boost volumes of green deposits.
  • Streamlining ESG funds: Placing ESG funds (environmental, social and governance) of large corporations in green deposits with banks, will further the green cause.
  • Develop an Indian Green Taxonomy: Clear definition of ‘green’ projects and activities with sector-specific measurable targets. 
  • Robust Regulatory Enforcement: Imposition of penalties for non-compliance or inadequate disclosures by banks. Technological mechanism to monitor the implementation of green deposits framework to prevent greenwashing. 

Ensuring authenticity and the impact of green projects requires robust monitoring and reporting mechanisms. Technology can play a pivotal role in overcoming these challenges. 

Indian Rupee vs Dollar: Currency Exchange Rate 

Context: The Indian Rupee has been weakening in value relative to the US Dollar, for a long time. INR’s exchange rate against USD breached the 85 mark last week, i.e., now $1 = Rs 85.

Relevance of the topic:

Prelims: Exchange rate- different contexts

Mains: Factors affecting exchange rate

What is the Exchange Rate?

  • Exchange rate is the value of one currency relative to another currency.
    • It is the rate at which one can swap currencies of different countries. For instance, how many rupees would buy you a dollar or a euro. 
    • Presently, one would have to pay Rs 85 to buy $1.

What decides the Exchange Rate?

  • Demand for a particular currency decides its value relative to other currencies in the currency market.
  • If Indians demand more US dollars than Americans demand Indian Rupee, the exchange rate will tilt in favour of the US dollar.

Factors deciding demand for Rupee vis-à-vis Dollar:

  • Trade of Goods and Services: For sake of simplification, consider the case of only 2 countries- India and the US. 
  • Investments:
image 178

Factors deciding direction of Trade and Investments:

  • Foreign trade policy:
  • Suppose the US decides to cut imports from India, demand for Indian rupees will fall. This will cause rupee depreciation.
  • High rate of inflation:
    • In the scenario where India is having an inflation rate of 6%, an American investing in India with the expectation of 10% returns annually, will ultimately get only 4% returns. 
    • Comparatively, US markets would be more rewarding, because of less rate of inflation there.
    • This will cause pull out of investments from India, and fall of demand for rupees. 

Tough Roads to Viksit Bharat by 2047

Context: Ex governor of Reserve Bank of India has raised concerns about the achievement of targets of 'Viksit Bharat’ by 2047 with the present pace of economic prospects. 

Relevance of the Topic: Mains: Analytical questions on 'Viksit Bharat by 2047’, inflation and Growth prospect in nation. 

About 'Viksit Bharat 2047’

  • Viksit Bharat 2047 is a vision introduced by the Government of India aiming to transform the country into a developed and self- reliant nation by the year 2047, marking the centenary of India's  Independence. 
  • There are various objectives of the Viksit Bharat target;
    • Economic growth and self-reliance by pushing 'Make in India’ and Atma Nirbhar Bharat scheme. 
    • Human resource development by implementing National Education Policy 2020 with efficiency and promoting skill training with PM Kaushal Vikas Yojana. 
    • Infrastructure development by fostering the growth of physical, social and digital infrastructure under Smart City initiative. 
    • Sustainable growth by reducing carbon emission by adopting alternative energy sources to achieve carbon neutrality by 2070. 
    • Promoting good governance with administrative reforms using Mission Karmyogi and e-governance. 
    • Fostering inclusive growth by raising women participation in the economy and ensuring equitable growth across the regions in the nation. 
    • Robust global leadership by strengthening the position of India in organisations like the UN, G20 and BRICS. 
'Viksit Bharat 2047’

Constraints in achieving Viksit Bharat by 2047

Various constraints in achieving the targets of Viksit Bharat exist, these are;

  • High rate of inflation: India is facing a high headline inflation, especially due to food and fuel inflation. This reduces the savings of people reducing the prospects for an investment led growth by channelising the savings. 
  • Low growth rate: India is facing a low growth rate of  about 6%, due to the underutilised potential of demographic potential in India. 
  • Populist policies: The state governments are more inclined towards the ‘freebies politics’ leaving less scope for the capital investment to foster the growth of India. 
  • Low tax to GDP ratio: India has a low tax to GDP ratio i.e., of 11.7% as compared to 40% in OECD nations impacting the revenue of the government. 
  • Substandard labour: India has only 5% of formal skilled labour as compared to 95% in South Korea, hampering the growth. 
  • Pre-mature deindustrialisation: India is facing a premature deindustrialisation, where the service sector has taken over the economy without complete actualisation of the manufacturing sector's potential. 
  • Skewed sectoral growth: A non-uniform sectoral growth leaves certain sectors like agriculture vulnerable. This restrains the growth rate of the nation. 

Way Forward to achieve Viksit Bharat by 2047

  • Rationalisation of targets: India should rationalise the targets making them more practical to achieve by tracing the growth in a phased manner. 
  • Focusing job creation: To materialise the demographic potential of India jobs need to be created by promoting labour intensive industries like textile. 
  • Promoting capital expenditure: To achieve the desired infrastructural growth India needs to focus more on the capital expenditure. 
  • Human resource development: India should focus on promoting skills and education, especially higher education in STEM (Science and technology; Engineering and Mathematics). 
  • Rationalisation of schemes: The government should rationalise the 'freebies schemes’ to focus more on developmental aspects. 
  • Deep sectoral reforms: India should implement deep sectoral reforms in the agriculture, mining and manufacturing sectors by fostering private partnership to make them a growth engine of the economy. 

Conclusion: India's target to become a developed nation by the year 2047, though there are certain challenges like high inflation, low growth, and poor human capital prospects. But, to achieve the target a holistic approach driven by the reforms need to be implemented. A phased, consultative and inclusive strategy will help India to become a 'Viksit Desh’ by 2047 in a sustainable manner. 

Rise in Net Direct Tax Collection

Context: The latest data released by the Income Tax (IT) department shows that India’s net direct tax collections grew 16.45% to Rs 15.82 trillion between April 1 and December 17 of FY-2025. The growth is largely driven by a rise in non-corporate tax receipts. 

Relevance of the Topic: Prelims: Tax Receipts- Trends, Composition, etc.

What is Direct Tax?

  • A Direct tax is imposed directly on the taxpayer and paid directly to the government by the persons (juristic or natural) on whom it is imposed. A direct tax is one that cannot be shifted by the taxpayer to someone else.
  • Central Board of Direct Taxes (CBDT) governs and administers the Direct tax.
image 170

Direct Tax Components and Latest Trends

The some important direct taxes imposed in India are as under:

  • Corporate Tax:
    • The companies and business organisations in India are taxed on the income from their worldwide transactions under the provision of Income Tax Act, 1961.
    • Current Growth (FY 25): Grew at a slower pace of 8.6%.
  • Non-Corporate Taxes:
    • Income Tax: Income Tax Act, 1961 imposes tax on the income of the individuals or Hindu undivided families or firms or co-operative societies (other than companies) and trusts (identified as bodies of individuals associations of persons) and artificial judicial persons.
      • All residents are taxable for all their income, including income outside India.
      • Non residents are taxable only for the income received in India or Income accrued in India. 
    • Current Growth (FY 25): 22.5%.
  • Securities Transaction Tax (STT):
    • STT is levied on selling or purchasing securities on listed stock exchanges.
    • Growth: 85.5%
  • Other Taxes:
    • Include: Equalisation Levy, Gift tax etc. 
    • Growth: 5.9%.
image 171

Significance for India’s Economy

  • Broadened Tax Base: The increasing share of non-corporate taxes indicates better tax coverage and improved tax compliance among individuals and small entities.
  • Balanced growth: Tax collection is better in both corporate and non-corporate, reflecting a balanced growth.
  • Policy Reforms Impact: Tax simplification measures and digital tax filing platforms may have contributed to higher collections by reducing procedural hurdles. 
  • Stock Market Dynamics: Higher STT tax revenue reflects robust trading activity and increased participation of retail and institutional investors in the Indian equity market.
  • Boost to Fiscal Space: Enhanced direct tax collection enhances government’s fiscal flexibility, enabling robust funding for developmental and welfare programs.

Challenges in Direct Tax Collection

  • Over-reliance on Non-Corporate Taxes: A slower rise in corporate tax revenues may reflect challenges in the corporate sector (including profitability in key industries).
  • Inequality Concerns: Higher taxes on individuals and small entities may reflect rising tax inequity, and needs to be balanced to ensure equity in taxation.
  • Refund Delays: Despite growth in refunds, delays in processing refunds remain, which impacts the liquidity of the taxpayers (particularly the small businessmen). 

Way Forward

  • Strengthen the Corporate Tax Base: Simplify corporate tax structure, encourage investment and ease of doing business to boost corporate tax revenues.
  • Encourage Compliance: Incentivise digital filing of taxes and conduct programs for awareness and financial literacy for non-corporate taxpayers.
  • Improve Refund Mechanisms: Deploy technology for quicker refund processing and reduce procedural delays.
  • Enhance Stock Market Regulation: Ensure sustainable trading volumes to maintain STT growth.

GATTi-fication of WTO

Context: The World Trade Organisation's appellate body is not fully functional from 2019, as the US is blocking appointments in the WTO's highest adjudicatory body.

Relevance of the topic:

Prelims: About GATTs and WTO

Mains: Role of WTO and concerns related to it. 

Major Highlights:

  • The appointment process to the WTO’s Appellate Body members operates by consensus, thus a member can block an appointment by formal objection.
  • In 2016, the United States blocked one proposed reappointment to the Appellate Body and since then has continued its refusal to entertain measures to fill the vacancies, citing the lack of progress toward reforms of the Appellate Body.
  • The US has accused WTO’s Appellate Body of procedural inefficiency (dissatisfaction in handling of issues like subsidies, tariffs, IPR disputes), judicial activism, and being lenient towards China.
    • As per the US, China is misusing the WTO principles to gain undue advantage in trade with the US. 
  • The step came as a response to the WTO’s decision against the US regarding protectionist trade policies to control trade from China, especially in the patent régime. 

About World Trade Organisation

  • WTO is an international organisation that regulates global trade. Established in 1995, replacing the General Agreement on Tariffs and Trade (GATT).
    • GATT was established in 1948, was a multilateral treaty aimed at promoting international trade by reducing tariffs and trade barriers. 
  • Key Principles of the WTO:
    • Non discrimination in trade i.e., no nation should be treated as less favourable. 
    • Market access by reducing tariffs and quotas. 
    • Predictability of market and trade policies. 
    • Fair competition by reducing unfair trade practices like subsidies and dumping. 
    • Development and inclusivity in the trade related growth. 
  • How does WTO differ from GATT?
    • Legal mechanism- GATT was a provisional agreement and lacked the legal status as WTO
    • Dispute resolution- GATT's decree was not legally binding unlike the WTO, where decisions are legally binding in nature. 
    • Institutional structure- GATT lacked the concrete institutional structure unlike WTO, where there is a well defined structure like Ministerial conference and General Council. 
    • Membership- GATT had contracting parties, but WTO has full time member nations. 
    • Scope- GATT was limited to goods trade. Whereas, WTO rules regulate different aspects of international trade: goods, services, and intellectual property.

GATT-fication of WTO: The term means that the WTO is losing its value as a structured dispute resolution agency and becoming a mere agreement. 

World Trade Organisation

Challenges faced by WTO include

  • Stalemate in Negotiations: Doha Development Round (2001) remains unresolved due to disagreements between developed and developing nations on issues like agricultural subsidies, industrial tariffs, and services.
  • Consensus Mechanism: In the WTO, the principle of decision making by consensus has resulted in the slowdown of multilateral agreements, as it requires 100% of the members to go forward.
  • Dysfunctional dispute settlement system: The decree of WTO council lacks implementation due to the continuous stalemate at the appellate agency.
    • The WTO appellate body has been redundant since 2019, because of US obstruction to new appointments in the body. As a result many trade disputes are pending at WTO.
  • Protectionist Polices: WTO has been ineffective in controlling protectionist policies pursued by the member countries. E.g., the US misused the ‘National security clause’ to increase import duties on steel and aluminium products from China. 
  • Misuse of developing country status: Developed economies like Singapore and China have taken unfair advantage of “developing country” status to seek temporary exemptions from commitments under various multilateral trade agreements. 
  • Inequality in Global Trade: Developing countries often criticise the WTO for favouring developed nations due to imbalances in negotiation power.

Way Forward

  • Appointment of officials: Democratisation of the process of appointment of appellate body members to ensure smooth functioning of WTO. 
  • Democratisation of power: Reforms to provide developing countries more power in WTO to ensure balance in power dynamics, presently tilted in the favour of developed nations. The reforms are needed to reduce the misuse of power. 

Conclusion: WTO is an important agency to ensure free and fair trade. But politicisation of agency and geo-political tassels are pushing back the agency into the era of GATT. In the wake of rising protectionism, proliferation of exclusionary trade blocks and rising bilateral free trade agreements, it is imperative to reform the WTO system to ensure rule-based multilateral trade across the countries.

India’s Economic Growth: Positives and Concerns

Context: The Reserve Bank of India has downgraded India’s GDP growth forecast for FY2024-25 from 7.2% to 6.6%. While the government maintains that the slowing of Q2 growth is a “temporary blip”, it raises some concerns about India’s economic growth trajectory. 

Relevance of the Topic: Mains: Key trends in India’s Economic Growth- Slowdown, Positives, Challenges, Investment-led growth, etc.

Present Situation in India’s Economic Growth

  • India’s GDP growth slowed significantly in 2024 dropping to 5.4% in Q2 of FY24-25.
    • There was a dip in economic output in the first three quarters of 2024.
  • RBI downgraded FY 2024-25 GDP growth forecast from 7.2% to 6.6%.
  • India’s long-term growth rate is projected at 6.5% over the next half decade. 
  • Comparison with Asian economies: China, Japan, and South Korea grew at 8%-plus on a sustained basis during their rapid-growth phases. 
image 165

Positives Aspects of Economic Outlook

  • Increased Fiscal spending: Post-election season, the government spending is witnessing a rise.
  • Decrease in CRR requirement: Recent cut in cash reserve ratio (CRR) has freed up money kept by banks with the RBI.
  • Boosting Capital formation: The capex cycle has restarted in some sectors, and this indicates return to investment-led growth.
  • Growth in services: India’s services exports to developed markets hit a new high in October 2024.
    • Supporting factors: Disaggregation of global services value-chains, rapid increase in global cross-border telecom bandwidth, surge in remote-working, etc.
  • Potential MSME recovery: An MSME rebound could narrow the two branches of the K-shaped recovery.
    • Consumption recovery in rural areas and an improvement in salaried employment reported in the Periodic Labour Force Survey reflect increasing non-casual jobs with MSMEs. 
  • Increase in female labour force participation particularly in rural areas.
    • Around 39.6% of women with higher educational level (post-graduate and above) were reported as working in FY24, compared to 34.5% in FY18. 
    • For women with higher secondary education level, these numbers were 23.9% and 11.4%.
image 166

Concerns Remaining

  • Issue of Jobless growth: Adequacy of 6%-plus growth to generate 8 million jobs annually until 2030 is unclear.
  • Slowing down of Corporate growth: partly due to sliding consumption growth.
  • Sluggish Investments: due to softening urban demands and high food inflation.
  • Inequality in growth: Current growth trends reflect expanding wealth disparities and little scope for generational mobility.
  • Challenge in Service sector growth: India’s IT exports appear vulnerable to new technologies such as AI. 
  • Sliding credit growth: Growth in credit has been falling — for both households, as well as industry.
  • Rising NPAs:
    • There is a significant rise in NPAs in the personal loan and credit card segments. 
    • Both these types of credit are unsecured and carry high interest rates.
  • Savings-Investment Gap:
    • RBI’s latest Financial Stability Report shows Net financial savings of households fell to 5.3% of GDP in FY23 from 7.3% in FY22. 
    • Rising household debt, especially in loans, poses risks to future savings and economic stability.
  • Complex Tax laws: India’s tax laws and its administration is the single biggest hurdle in fostering a conducive investment environment.
  • Lack of reforms: The appetite for implementing even pending Labour reforms appears diminished.
  • State-level Fiscal Challenges:
    • Increased fiscal spending by states, especially in subsidies and welfare schemes, raises fiscal discipline concerns.
    • Programs like farm loan waivers and cash transfers, while beneficial, contribute to rising food inflation. 

India’s economic future remains promising despite challenges. The need of the hour is to address structural weaknesses in the economy, boost private investment, and improve fiscal discipline to ensure continued economic growth.

Tax on Popcorn: India’s GST formula sparks Outrage

Context: The Goods and Services Tax (GST) Council’s move to tax popcorn differently based on its sugar or spice content has drawn criticism from the opposition and sparked social media outrage, with two former government economic advisers questioning the tax system introduced in 2017.

Relevance of the topic:

Prelims: Key aspects of GST.

Mains: GST- Benefits & Challenges.

Tax on Popcorn

GST on Popcorn

  • The GST Council announced different tax rates for popcorn based on its sugar or spice content.
  • Following are the new differential rates, which come into effect immediately:
    • Non-branded popcorn mixed with salt and spices - 5% GST
    • Pre-packaged and branded popcorn- 12% GST
    • Caramel popcorn- 18% GST
  • Until now, popcorn was taxed differently across States.
  • Rationale behind 18% tax on caramel popcorn: Popcorn with added sugar (caramel) is categorised as a sugar confectionery, thus attracting a higher tax rate under GST.

Criticism: The GST system has run into similar controversies in the past, like taxing chapatis differently from layered flatbreads, different rates for curd and yogurt, and cream bun versus bun and cream served separately. 

  • Complexity of GST: Differential tax rates for similar products questions the rationale behind introducing GST to simplify indirect tax regime.  
  • Inconvenience to citizens: Calculating differential taxes can become very difficult for common people.
  • Difficulty in enforcement: Already existing loopholes in GST implementation can be widened with differential taxation rates. 

Taxes consumed under GST:

Central TaxesState Taxes
Central Excise DutySales Tax/VAT
Additional Excise DutyCentral Sales Tax
Excise Duty under Toilet and Medicinal PreparationOctroi Duty
Additional Customs dutyPurchase Tax
Service TaxTax on Advertisements
Krishi Kalyan CessTax on Lotteries & Gambling
Swachh Bharat CessEntertainment Tax

Benefits of GST:

  • For Taxation System:
    • Simple, Efficient, Transparent: GST has streamlined indirect tax structure by subsuming multiple taxes (subsumed 17 taxes and 13 cesses) into a single tax. 
    • With uniform tax on supplies of goods and services, India turned into one market.
    • Record GST collections & doubling of tax base: from 60 lakh to 1.2 crores (in 2022).
    • Parity on imported & local goods.
  • For Industries:
    • Reduced compliance burden.
    • Boost MSME sector through GST Compensation Scheme.
    • Greater formalisation of the economy.
  • For Consumers:
    • Average tax rates have reduced.
    • More than 50% of Goods and Services in CPI comes under the exempted category.
  • For Logistics sector:

Challenges with GST: 

  • Multiplicity of tax rates adds to complexity. 
  • Controversy over GST Compensation mechanism.
  • Delays in GST Refunds.
  • Implementation challenges due to loopholes, exemptions and differential tax rates for similar products. 

Also Read: Challenges in GST Implementation 

CII suggests changes in Priority sector lending norms

Context: The Confederation of Indian Industry (CII) has proposed reforms in the Priority-sector lending (PSL) framework suggesting inclusion of emerging sectors and high-impact sectors like digital infrastructure, green initiatives, healthcare and innovative manufacturing into the PSL framework.

Relevance of the topic:

Prelims: Questions based on Priority sector lending.

Mains: Analytical question on needs to expand PSL criteria. 

What is Priority sector lending?

  • Priority sector lending is a practice of lending a certain portion of a bank’s funds to specific sectors of the economy identified as priority sectors by regulatory authorities.
  • The policy tool is aimed at ensuring that key sectors crucial to the nation’s development receive adequate financial support or credit.
  • These sectors include- Agriculture and allied sectors, MSME, Export credit, Education, Housing, Social Infrastructure, Renewable Energy etc. 
image 154

Also Read: Priority Sector Lending 

Needs to reform PSL framework:

  • Change in sectoral dynamics: The sector dynamics like contribution in GDP has changed with time. For instance, Traditional sectors like agriculture have seen a reduction in their GDP contribution to 14% now, while PSL allocations to the sector remain at 18 percent. So, a recalibration in the PSL framework is needed to reflect current economic reality. 
  • Requirements of sunrise sectors: Sectors like green energy, and digital infrastructure lack funding opportunities, therefore they require inclusion in the PSL for credit flow. 
  • Learnings from globe: Nations like Brazil and Indonesia provide cheap and priority loans to emerging sectors like green initiatives. 
  • Fostering promising growth: Providing PSL to sectors like digital infrastructure can ensure sustainable returns to the banks due to their profitable nature. 

Issues in PSL reforms:

  • Vulnerable sectors: Various sectors like agriculture and small industries sectors are already less attractive for banks. Changes in the PSL norms will negatively impact funding in these sectors. 
  • Exploring alternatives: Sectors like digital infrastructure are attractive for private investors and venture capitalists due to their scope and productivity. So, alternate funding mechanisms can be explored for them, without tapping into PSL. 
  • Possible public resistance: The change in norms may be perceived as an anti-welfarist approach leading to opposition and backlash. 
  • Uncertain potential: Emerging sectors like green initiatives lack proper research and their economic potential might be overestimated. This may lead to the issues in recovery of loans. 

Way Forward

  • Reducing stagnant sector share: Stagnant and reducing sectors like agriculture need to be rationalised, while alternate mechanisms like private financing can be explored for these sectors. 
  • Phased implementation: PSL norms need to be transformed in a phased manner by analysing the long-term and short-term impacts on the various stakeholders. 
  • Pushing for holistic reforms: A holistic approach needs to be devised to enhance funding in emerging sectors. Liberalising the bond market and promoting private financing can be explored in this regard. 

Way Forward: Priority sector norms are crucial to give a boost to the unserved and underserved sectors of the economy. But, reforms in PSL are crucial to keep the pace with economic dynamics, emerging opportunities and transforming social setup. Though these reforms need to be in a phased manner and should be extensively consulted with stakeholders.

Expanding funding base of NBFC

Context: National lending ecosystem requires the growth of Non-Banking Financial Company (NBFC) to promote inclusive and sustainable growth. However, NBFCs are burdened due to limited funding sources which hinder their ability to scale. 

Relevance of the Topic: Prelims: Basics of NBFC institutions. Mains: Funding prospects, issues and suggestions for NBFCs. 

About Non-Banking Financial Company: 

  • NBFCs are the Non-banking financial institutions, registered under the Companies Act, 1956, that provide diverse financial facilities like lending, pension and insurance. 
  • They do not have a full banking license and cannot accept deposits from the public.
  • NBFCs have played a pivotal role in making formal credit accessible to MSMEs, retail sectors and underserved populations.
    • The sector contributes 12.5% to the country's GDP. 
    • The sector's credit share has grown from 15% in 2014 to 22.5% of total Scheduled Commercial Bank credit in 2024. 
    • The growth of NBFCs has been supported by diverse funding streams like bank loans, commercial papers and other debt instruments- where term loans and debentures consist of 75% of borrowings. 
NBFC

Role of NBFCs in Economy:

  • Credit access to the underserved sectors like small businesses, rural areas, and the informal sector. 
  • Promoting financial inclusion by institutionalisation of the lending market in India, eliminating the unregulated lenders. 
  • Driving infrastructural growth by funding the long-term and risky infrastructure projects, as banks lack the capacity to fund large projects due to their asset-liability mismatch. 
  • Strengthening the financial market through the activities like leasing, hire-purchase and securitisation, improving the overall efficiency of the financial system. 
  • Contributing capital formation as the NBFCs mobilises the resources, savings and investments to foster economic growth.

Constraints in NBFC funding:

  • Over-regulated bond market: As pension and insurance companies have a mandate to invest 75% on pools in AAA rating bonds only pose funding constraints for NBFC. 
  • Liquidity challenge: NBFC often face liquidity challenges as they borrow short-term funds but lend long-term loans in the real estate and infrastructure sector.
    • Example- IL&FS crisis of liquidity. 
  • Limited Foreign funding: High regulatory restrictions and limited allowance of FDI in the financial sector like NBFC pose a challenge to funding. 
  • High cost of borrowing: NBFCs, as compared to banks, get high interest market loans influenced by their credit rating to sustain their operations. 
  • Limited access to public deposits: Only a few NBFCs are allowed to accept public deposits limiting their sources for sustainable funding. 

Steps taken to address issues: 

  • Extending liquidity support to the banks by measures like Targeted Long-Term Repo Operations by RBI. 
  • Promoting co-lending models to reduce the burden of funding on the NBFC.
    • Co-lending is a mechanism in which NBFCs partner with banks to co-lend to reduce asset-liability burden. 
  • SEBI’s recent Liquidity Window Facility (LWF): It aims to improve the liquidity of corporate bonds (by significantly expanding retail participation in the corporate bond market). LWF can bridge the gap between public deposits and bond investments by providing investors with an exit option on predetermined dates.

What more can be done? There is a need to liberalise the bond market for the NBFC. The mandate to invest a major chunk in high-rated bonds needs to be relaxed to some extent, so that NBFCs can receive long-term and sustainable funding contributing to the economic growth of the nation. 

Opinion Trading and the Need for its Regulation

Context: The government is having a strict eye on the Opinion trading platforms, questioning their validity on parameters of 'game of skill’ and 'game of chance’. 

Relevance of the Topic:Mains: GS and Ethics paper; scope of impacts,provisions and opinion on legality. 

Opinion Trading

  • Opinion trading platforms are the applications that seek the opinion of people on diverse fields in 'Yes’ or 'No’. 
  • Allows betting: These apps allow the user to bet some amount and win on the basis of their answer. 
  • Rise in domain: Various applications like Probo and MPL opinion trading are growing by receiving funding or more than 35,000 crores. Also, there is an expansion of the user base, for instance Probo has a user base of more than 5 crore. 

Game of Chance versus Game of Skill

1. Definition:

  • Games of chance are the games whose outcomes are based on luck or random factors, with the minimum influence of players' decision making.
    • Examples: Casino games and Dice games 
    • Legal status in India: These games are considered as gambling and addressed by the State laws. Further, they are heavily taxed and regulated. 
  • Games of skill are the games based on the decision-making, expertise and strategy along with the players knowledge.
    • Examples: Esports and Video games 
    • Legal status: Considered as competitive in nature and are not regulated under gambling regulations. 

Note:

  • India is the fastest growing mobile gaming market and the annual revenue of the overall Indian gaming industry is expected to almost double to $6 billion by 2028 from $3.1 billion in 2023. 
  • Under the 7th Schedule of the Indian Constitution, the States have the authority to regulate the realms of "betting and gambling." Different states of India have enacted their own legislation on betting and gambling.

Debate over Opinion Trading: 

  • Opinion trading as Game of Skill:  
    • Dedicated skill committee: Platforms argue that they have constituted the dedicated skill board to look into the skill required to answer the questions. 
    • International precedences: Countries like the US have a separate regulator for the opinion trading platforms like Kalshi, an opinion trading platform of the US. 
    • Choice of fields: Platforms argue that their questions are majorly based on the politics, sports and major global events that require long-term analysis and experience to answer. 
  • Opinion trading as Game of Chance:
    • Random events: The questions are based on the random events that have no role of skill and decision-making.
      • Example: ‘Will Australia be able to take three wickets in the last over?’ Such questions are random in nature. 
    • Using legal loopholes: The platforms are using legal voids to avoid the regulations.
      • Example: Platforms lack questions based on Stock market to avoid SEBI regulations. 
    • Uncontrollable circumstances: The results of the events asked are beyond a person's ability to predict and influence, making it a chance based domain.   

Legal status on Opinion Trading in India: 

  • There is no dedicated regulatory body to regulate opinion trading. Though certain aspects of applications fall under the purview of the IT Ministry. 

Way Forward

  • Dedicated regulator: A dedicated regulator can help in reducing the arbitrariness in the domain of Opinion Trading. 
  • Learning from international experiences: India can learn from the nations like the US to regulate the Opinion trading by defining the do's and don'ts. 
  • Public guidelines: The IT Ministry and the Finance Ministry can issue guidelines for the public to make them aware about the risks associated with such platforms.

Conclusion: Regulating opinion trading in India is crucial to ensure transparency and safety of public money. Clear guidelines, stringent monitoring and robust penalties can curb the manipulations and misinformation. A balanced approach fostering market innovation, ease of doing business and prompt regulation by the government can ensure a fair market for consumers and investors of such applications. 

Trending now

State of India’s Environment 2026: Rising Climate Risks and the Need for Resilience
Karnataka Announces Ban on Social Media for Children Under-16
India–France “Special Global Strategic Partnership”: A New Indo-Pacific Anchor
Front-of-Package Labelling: A Preventive Strategy to Address India’s Rising Lifestyle Diseases