Economy

All (4265)Current Affairs (4243)Mains Practice (77)Mains PYQs by Subjects (40)

K-Shaped Households' Balance Sheet Stress

Context: The Reserve Bank of India’s (RBI) latest Financial Stability Report signals a K-shaped growth of household debts in India. There is a rise in retail debt driven by consumption loans, while the asset-creating loans are shrinking.

Relevance of the Topic: Prelims: Household Debts- Trends

What are Household Debts?

Household debt is defined as all liabilities of households (including non-profit institutions serving households) that require payments of interest or principal by households to the creditors at a fixed date in the future.
Debt is calculated as the sum of the following liability categories:
- Loans
  - Mortgage loans
  - Consumer credit (personal loans, credit card debt)
- Other accounts payable (outstanding bills and dues).
Household debt is typically measured as a percentage of net household disposable income (NHDI).

Trends in Household Debts in India

Rising Household Balance Sheet Stress:
- Current household debt has increased significantly to about 43% of GDP from 35% of GDP in March 2020.

K-shaped Credit Market: Consumption loans vs. Asset creating loans
- Subprime borrowers (those with lower credit-worthiness) are primarily taking on consumption loans. (E.g., personal loans, credit card debt etc.)
- Wealthier households are taking on leverage to buy assets. (E.g., house)
- This suggests a K-shaped credit market.
  - The upper arm of K represents wealthier households benefiting from productive credit and asset creation.
  - The lower arm of K represents vulnerable households taking loans for consumption expenditure, which is unsustainable in future.

Credit History of Households:
- Approximately 60% of those taking on personal loans had more than three active loans.
- Retail Loan Stress:
  - Increased reliance on personal loans risks higher delinquency rates, particularly in unsecured credit and microfinance.
  - Banks and non-banking financial institutions (NBFCs) are reporting increased write-offs indicating financial distress among borrowers and poses challenges in credit recovery.

Purchasing Managers’ Index: Factory activity at 12-month Low

Context: The manufacturing sector in India showed signs of slowing down, with factory activity dropping to a 12-month low in December 2024. Various concerns like reduction in export orders, rise in input costs cast a shadow on future growth expectations.

Relevance of the topic:

Prelims: Key facts about the Purchasing Managers’ Index (PMI).

Mains: Manufacturing Sector: Trends, Challenges, Way Forward

Highlights of HSBC survey on India’s Manufacturing Purchasing Managers’ Index (PMI)

Slip in manufacturing activity expansion:
- Manufacturing activity expansion plummeted further as per HSBC India Manufacturing Purchasing Managers’ Index (PMI).
- It dropped from 56.5 in November 2024 to 56.4 in December 2024.
- A reading of over 50 indicates a rise in activity levels.
Reducing export orders: New export orders rose at a slower rate than total new business for surveyed factories.
Increasing input costs: Input costs continued to firm up, with firms reporting an uptick in container, material and labour costs in December,
Uptick in hiring:
- Manufacturing employment increase for the tenth month in a row during December
- The rate of job creation quickened to the fastest in four months.
- Around one-in-ten companies recruited extra staff, while fewer than 2% of firms shed jobs.

What is the Purchasing Managers Index?

PMI is a survey-based measure that asks the respondents about changes in their perception about key business variables as compared with the previous month.
PMI is compiled by IHS Markit for more than 40 economies worldwide.
- IHS Markit is a part of S&P Global.
Purpose: To provide information about current and future business conditions to company decision makers, analysts, and investors.
Calculation:
- It is calculated separately for the manufacturing and services sectors
- A composite index for both manufacturing and services is also created.
- The PMI is a number from 0 to 100.
Interpretation:
- A score above 50 means expansion, while a score below that denotes contraction.
- A reading at 50 indicates no change.
- If the PMI of the previous month is higher than the PMI of the current month, it represents that the economy is contracting.

Problems in India’s Manufacturing Sector

Stagnant growth: Share of manufacturing to India’s GDP has remained stagnant at around 17% since 1991 reforms.
Jobless growth: due to focus on Capital Intensive Manufacturing, instead of Labour intensive manufacturing.
Dwarf firms: MSMEs account for 45% of manufacturing output. However, the majority of MSMEs are dwarf firms which are more than 10 years old but continue to employ less than 100 people.
Shortage of skilled labour: Only 51.25% of the assessed youths found to be employable with the required skills as per India Skills Report 2024.
Import dependency: Over-reliance on imported raw materials and components, especially in electronics and automobiles, weakens resilience.

Way Forward

Strengthen implementation of schemes like Production Linked Incentive schemes, Make in India, etc.
Seamless integration with Global Value Chains.
Increased focus on Labour intensive industries.
Promote R&D by increasing funding for innovation and adopt Industry 4.0 technologies.

Urban Cooperative Banks need Prompt Action

Context: Urban Cooperative Banks (UCBs) in India face various operational challenges like frequent license revocations and other regulatory actions. To address this, the Reserve Bank of India is set to replace the Supervisory Action Framework with the Prompt Corrective Action (PCA) Framework in 2025.

Relevance of the topic:

Prelims: Urban Cooperative Banks- Prelims-related facts

Mains: Challenges associated with UCBs, Way Forward

What are Cooperative Banks?

Cooperative Banks refer to financial institutions under the Banking System in India that operate on the principles of cooperation and mutual benefit for their members.
Their members are both the owners and customers of the bank.
They operate on the principle of “one person, one vote” in decision making and are managed on the basis of cooperation, self-help, and no profit no loss.
Along with lending, these banks also accept deposits.
They are incorporated and registered under the States’ Cooperative Societies Act passed by the concerned state.

What are Urban Cooperative Banks?

Urban Cooperative Banks (UCBs) are financial institutions that operate in urban and semi-urban areas in India.
They primarily serve the banking needs of small businesses, individuals, and communities in urban areas.
UCBs were brought under the purview of the Banking Regulation Act, 1949 through an amendment in 1966.
Until 1996, these banks were allowed to lend money only for non-agricultural purposes. This distinction does not hold today.

Regulation of Urban Cooperative Banks:

UCBs are registered as societies under the Co-operative Societies Acts of the respective State Governments.
UCBs that have a multi-State presence are registered under the Multi State Co-operative Societies Act administered by the Government of India.
Previously, the UCBs were under dual regulation by the state registrar of societies and the RBI.
- Registration, administration, amalgamation and liquidation of UCBs were governed by the provisions of the State Co-operative Societies Acts.
- Banking related functions were governed by the provisions of Banking Regulation Act, 1949 (AACS).
This dual regulation resulted in ambiguity and a lack of clarity, creating additional impediments to effective governance of UCBs.
In 2020, all UCBs and multi-state cooperatives were brought under the supervision of RBI for banking-related functions through the Banking Regulation (Amendment) Act, 2020.

Banking Regulation Amendment Act, 2020:

Applicability	- Applicable to Scheduled Cooperative banks which include Urban Cooperative Banks, District Cooperative Banks and State Cooperative Banks. - Not applicable to Non-Scheduled Cooperative Banks.
Enhanced Regulatory Powers of the RBI	- Empowers RBI to remove the chairperson of the Cooperative Banks. - Extends RBI’s power to supersede the Board of Directors of all the Scheduled Cooperative Banks. (Earlier, RBI was only empowered to supersede the Board of Directors of the Multi-State Cooperative Banks) - RBI can order a special audit of Cooperative Banks.
Issue of Shares	- Cooperative Banks are allowed to issue shares to members or persons residing within Banks’ area of operation.

Challenges Associated with Urban Cooperative Banks:

Board members as borrowers:
- Cooperative bank board members can borrow from the banks, unlike the commercial bank board members.
- The board members in several cases have misused their borrowing powers to siphon off large sums of money, resulting in major cooperative bank failures. E.g., PMC Bank Failure due to misuse of power by board.
Financial Challenges: Such as low capitalisation, high levels of Non Performing Assets (NPA), inadequate Capital Adequacy Ratio (CAR).
Technological Limitations: Many UCBs lag in adopting technologies like Core Banking Solutions (CBS).
Decline in number of UCBs: Due to various reasons like unsafe operations to the interests of depositors and the general public, insufficient capital, low earnings, etc.

RBI’s Prompt Corrective Action:

To strengthen UCBs in India, RBI will implement the Prompt Corrective Action (PCA) Framework for UCBs starting April 1, 2025. This will replace the current Supervisory Action Framework (SAF).
The PCA framework will be applied based on different tiers of UCBs.
- Tier 1 UCBs: deposits up to ₹100 crore
- Tier 2 UCBs: deposits b/w ₹100 crore - ₹1,000 crore
- Tier 3 UCBs: deposits b/w ₹1000 crore - ₹10,000 crore
- Tier 4 UCBs: deposits above ₹10,000 crore
Tier 1 UCBs are excluded from PCA Framework for now.
PCA framework applies to UCBs in Tier 2, Tier 3 and Tier 4.
- The framework establishes risk thresholds for capital adequacy, asset quality, and profitability.
- For capital adequacy, breaches are categorised based on the extent to which the levels fall below the regulatory minimum — by up to 250 basis points, 250-400 basis points, or exceeding 400 basis points.
- In terms of asset quality, thresholds are determined by the level of net non-performing assets (NNPAs), with categories set at 6-9 per cent, 9-12 per cent, and 12 per cent or higher.
A UCB may exit the PCA framework if it reports no breaches in risk parameters for four consecutive quarters.

Way Forward

Strict diligence practices through credit assessments, proper documentation, and compliance with legal and regulatory standards.
Regular compliance checks: A well-designed compliance programme with a dedicated Chief Compliance Officer (CCO) can help UCBs to adhere to regulatory complexities and maintain operational stability.
Enhance risk management through risk management committees to oversee activities related to credit and operational risks.
Upskilling staff: Regular staff training on compliance and risk management is essential for effective functioning of UCBs.
Strengthening Audit mechanisms to help meet regulatory standards and restore depositor confidence.

The PCA framework emphasises the need for UCBs to manage credit and concentration risks effectively. This involves diversifying loan portfolios, reducing exposure to risky sectors, and maintaining healthy asset quality.

Rationalising Food Subsidy: Providing Direct Benefit Transfer

Context: Ahead of Budget 2025-26, the Confederation of Indian Industry (CII) has recommended rationalisation of food subsidies urging the government to adopt direct benefit transfer (DBT) model to provide direct income support to beneficiaries of the Public Distribution System (PDS).

Relevance of the topic:

Prelims: National Food Security Act, 2013- Features

Mains: PDS- Problems, DBT for PDS.

National Food Security Act, 2013

National Food Security Act, 2013 provides food and nutritional security by ensuring access to adequate quantities of quality food at affordable prices to households.
Coverage: Up to 75% of rural population and 50% of urban population (encompassing 67% of total population of India).
Entitlement:
- Priority households: 5 kg/person/month
- Antyodaya households: 35 kg/household/month
- Subsidised prices of Rs. 3/2/1 per kg for rice, wheat and coarse grains.
Nutritional Support: Meals for Pregnant women and lactating mothers and children (6 months- 14 years)
Maternity benefit: Rs 6000 for pregnant women and lactating mothers.
Women empowerment: Eldest woman (18 years and above) considered as head of household for issuing ration cards.
Grievance redressal: At district and state levels.
Accountability through social audits and Vigilance committees.
Food Security Allowance: Provided in case of non-supply of food.

Need for Rationalisation of Food Subsidies

Higher Subsidy Burden: Food subsidy burden has increased to more than Rs. 2 lakh crores on an annual basis. This indicates the unsustainability of food subsidies.
Leakage in PDS system: Recent ICRIER study highlights 28% leakage in the PDS system. Inefficiencies and corruption lead to diversion of food grains.
Rise in fiscal deficit: High subsidy bills strain the fiscal deficit, diverting funds from other critical areas like education, health, infrastructure, etc.

Benefits of Direct Benefit Transfer for PDS Beneficiaries

Empowerment of beneficiaries: Direct income support would empower beneficiaries to purchase food items of their choice, based on individual needs.
Better targeting: DBT can precisely reach the intended beneficiaries with the help of digitisation as the system is linked to Aadhar.
Eliminate middlemen: Cash transfers directly to the beneficiaries remove intermediaries, reducing chances for diversion, corruption and leakages.
Administrative Efficiency: DBT would reduce the logistical burden of transporting and distributing food grains under the PDS system.

Bottlenecks for DBT in PDS

Existing legal provision: There exists an optional provision under the National Food Security Act, 2013, (NFSA) for the states to transfer the subsidy directly to the beneficiary’s bank account. However, no State had requested for DBT since NFSA was rolled out in 2013.
Linkage with MSP procurement: The issue of DBT is linked with the Minimum Support Price procurement as PDS is one of the outlets where the government disposes of the grains purchased from farmers.
Poor Banking infrastructure and Digital Divide: Limited access to digital resources and inadequate banking infrastructure would hinder DBT implementation.

Rationalisation of Food Subsidies should be considered by the government, considering the unsustainable subsidy bill and rising cases of leakages reported in the PDS system. An overhaul of the system along the lines of Direct Benefit Transfer, end-to-end computerisation of PDS, seeding of Aadhar with Ration Card, etc. is the need of the hour.

Cabinet extends PM FASAL till 2025-26

Context: The Union Cabinet has announced the continuation of the Pradhan Mantri Fasal Bima Yojana and Restructured Weather Based Crop Insurance Scheme till 2025-26.

Relevance of the topic:

Prelims: Scheme based questions.

Mains: Impacts; reforms and potential of schemes in the agriculture sector.

Major Highlights:

The Union Cabinet has-

Approved the continuation of Pradhan Mantri Fasal Bima Yojana and Restructured Weather Based Crop Insurance Scheme till 2025-26 with a total budget of ₹69,515.71 crore.
- The aim is to provide risk coverage to farmers against natural calamities.
Approved setting up of Fund for Innovation and Technology (FIAT) for upgradation in farm technology by revitalising research and development, with an allocation of ₹824.77 crore. Key initiatives include:
- Yield Estimation System using Technology (YES-TECH) which uses remote sensing for crop yield estimates.
- Weather Information and Network Data System (WINDS) for augmenting weather data through automatic weather stations. Implementation of WINDS to assist state governments will begin in 2024-25.
Approved the extension of the subsidies on DAP. DAP is Diammonium Phosphate, a fertiliser that contains a mix of nitrogen and phosphate.

Yield Estimation System using Technology (YES-TECH)

Yield Estimation System using Technology (YES-TECH) uses Remote Sensing Technology for yield estimation with minimum 30% weightage to technology-based yield estimates.
Under YES-TECH Claim calculation and settlement has been done for 2023-24. Madhya Pradesh has adopted 100% technology based yield estimation.
9 Major States are currently implementing (namely AP, Assam, Haryana, Uttar Pradesh, MP, Maharashtra, Odisha, Tamil Nadu & Karnataka). Other States are also being on-boarded expeditiously.

Weather Information and Network Data System (WINDS):

Weather Information and Network Data Systems (WINDS) envisages setting up Automatic Weather Stations (AWS) at block level and Automatic Rain Gauges (ARGs) at panchayat level.
Under WINDS, 5 times increase in current network density is envisaged to develop hyper local weather data. Under the initiative, only data rental costs are payable by Central and State Governments.

About PM FASAL Bima Yojana

Pradhan Mantri Fasal Bima Yojana is a flagship crop insurance scheme launched in 2016 to promote crop insurance penetration among the farmers.
Objectives: Providing financial support to farmers in case of unforeseen circumstances; stabilising farmers income; encouraging farmers to adopt modern technology; and ensuring flow of credit to the agriculture sector.
Coverage of the scheme:
- Food crops (Cereals, Millets and Pulses)
- Oilseeds
- Annual Commercial/Annual Horticultural crops
The scheme also covers the post-harvest losses due to rainfall, hail storm or any such negative externality within 14 days of harvesting.
Farmers pay a nominal premium:
- 2% for Kharif crops.
- 1.5% for Rabi crops.
- 5% for commercial and horticultural crops.
- The remaining premium is shared between the central and state governments. In the ratio of 50:50 in normal states and 90:10 in the case of north-eastern.
Use of Remote Sensing Technology, Smartphones & Drones for quick estimation of crop losses to ensure early settlement of claims.

Benefits of the decision to Extend Schemes:

Protecting from vulnerability: Indian farmers are prone to vulnerabilities like monsoon dependency and pest attack along with the risks of seed productivity. Extension of scheme will reduce such vulnerabilities by insuring farmers against risks.
Reducing input cost: Extending the subsidies for DAP fertiliser will reduce the input cost of the farmers reducing expenditure burden.
Boost to North-East: Special treatment in insurance premium to north-eastern states will reduce the regional disparities.
Promoting R&D: Institutionalisation and fund allocation to FIAT will revitalise the research and development in the farm sector in India making it more productive and gender neutral in nature.

Conclusion: PM FASAL and fertiliser subsidies are key for boosting the farmer’s income in India. But more funds need to be allocated in the research and development to enhance the overall productivity and optimum utilisation of the resources. India should take a slight turn from subsidies based support to innovation and capital generation based support to make agriculture sustainable.

UPI: Duopoly & Market Vulnerabilities

Context: The meteoric rise of Unified Payments Interface (UPI) since its launch eight years ago, is no small feat for a country like India. As UPI enters its next phase of growth in both reach and innovation, there remain certain challenges to be addressed.

Relevance of the Topic: Mains: UPI- Scope, Risks, Way forward

Present Scenario of UPI in India

Unified Payments Interface (UPI) ecosystem accounts for nearly 80% of digital transactions in India.
UPI transaction value exceeded Rs. 20.60 lakh crore in August 2024 alone.
UPI penetration is at 30% of the population. With India’s low digital literacy and a historic reliance on cash, this is a big achievement.
UPI has played a key role in fostering public trust in digital payments.

Scope for further growth of UPI

Enhancing public trust:
- UPI’s continued success will heavily depend on whether its ecosystem can maintain and build upon such public trust.
- This, in turn, will depend on UPI’s performance on resilience, reliability, and openness to innovation.
Wider reach:
- 70% of the population remains to be brought into the digital payments fold.
Potential for Innovations:
- Expanding reach of UPI will require substantially new innovations ranging from service offerings to app design and the overall product base of the UPI ecosystem.
Scope for new entrants:
- A major hindrance for UPI’s growth is the extreme market concentration of two Third Party App Providers (TPAPs) in the UPI network — Phone Pe and Google Pay.
- Together, they control over 85% of the total market share.
- The next biggest player, Paytm, controls merely 7.2%.

What are the risks posed by Duopoly in the UPI ecosystem?

Increased systemic vulnerability:
- High market concentration of payments systems in PhonePe and GooglePay can lead to single points of failure, where any sudden break in services can have ripple effects across the entire financial structure.
Risk of decreased competition and innovation:
- Disproportionately large share of the market and user base creates high entry barriers for smaller and newer market participants.
- Lack of competition also discourages investment in new innovations.
Risk of foreign dominance:
- Both PhonePe and GPay are foreign-owned (by Walmart and by Google respectively).
- Foreign ownership creates multiple potentially new lines of failure, including data protection and backdoor access to sensitive information of Indian citizens, etc.

Regulative Measures and Recent Developments:

Initial proposal: In November 2020, National Payments Corporation of India (NPCI) proposed that the digital payment firms would not be allowed to hold more than 30% share of the volume of transactions processed via India's popular unified payments interface (UPI). The mandate was to take effect from the end of 2024.
Extension of Deadline: In December 2024, NPCI extended the deadline for compliance by two years to the end of December 2026.
- Recent reports suggest that the NPCI may potentially increase the market share cap from 30% to 40%.
- Presently, Phone Pe accounts for 48.36% and Google Pay for 37.3% of market share in volume, as of August 2024.
Every subsequent extension to the deadline given by the NPCI, with any potential increase in the market share cap, will only allow the dominant TPAPs to consolidate their hold.

Way Forward

Strict implementation of market cap at previously determined 30% to prevent monopolistic tendencies and encourage competition.
Create a level-playing field for Indian entrants to the UPI ecosystem, thus balancing foreign dominance and addressing data sovereignty concerns.
Encourage participation of small and new payment systems.
Ensure data protection, especially financial data handled by foreign-owned companies.
Encourage innovation through increased competition, user-friendly apps and customised user reach.

The UPI ecosystem has every potential to offer smaller market participants a level playing field to compete and innovate with large established players. Providing the right conditions and right incentives is the key, so as to ensure the next phase of growth in both reach and innovation.

India’s Financial System showing Stability & Resilience: RBI

Context: The RBI’s Financial Stability Report released in December 2024, highlights significant improvements in the asset quality of Scheduled Commercial Banks (SCB), with Gross NPA ratios at a 12-year low.

It shows the resilience of India’s financial system, supported by strong capital buffers, improved provisioning and healthy domestic financial fundamentals amidst global uncertainties.

Relevance of the Topic: Prelims: Important Banking-related terms.

RBI’s Financial Stability Report

Published bi-annually by the Reserve Bank of India.
It reflects the collective assessment of the Sub-Committee of Financial Stability and Development Council (FSDC), which is headed by the RBI Governor.
The report evaluates the resilience of the Indian financial system and identifies risks to financial stability.

Important Banking-related Terms

1. Asset Quality Ratio:

Asset quality ratio (AQR) is a key indicator that measures the proportion of non-performing assets (NPAs) to total assets in a bank.
A high AQR indicates that a bank has a large amount of bad assets that are dragging down its performance and posing a risk to its solvency.
A low AQR indicates that a bank has a healthy portfolio of assets that are generating income and interest for the bank, enhancing its profitability and stability.

2. Provisioning Coverage Ratio (PCR):

PCR provides insights into the adequacy of provisions made by banks to cover potential losses on their loan portfolios.
It is calculated by dividing the total provisions held by a bank by its total non-performing loans (NPLs).
It represents the percentage of NPLs that are covered by provisions.
A higher ratio indicates a stronger ability to absorb potential losses.

3. Capital Adequacy Ratio (CAR):

CAR is the ratio of a bank’s capital in relation to its risk weighted assets and current liabilities. This is a measure of a bank’s ability to meet its obligations.
A high CAR means the bank can absorb losses without diluting capital.

4. CASA Ratio (Current Account Savings Account ratio):

CASA is the proportion of current account and savings account deposits in the total deposits of the bank.
A low CASA ratio means the bank relies heavily on costlier wholesale funding, which can hurt its margins.

5. Net Interest Margin (NIM):

This is the difference between interest earned by a bank on loans and the interest it pays on deposits.
NIM will be high for banks with higher low-cost deposits or high lending rates.
Low NIM and high NPA is a bad combination.

6. Return on Assets (RoA):

It shows how profitable a bank’s assets are in generating revenue.
A lower RoA means that the bank is not able to utilise assets efficiently.
Negative RoA implies the bank’s assets are yielding negative returns.

7. Capital Conservation Buffer (CCB):

CCB is a concept introduced under the international Basel III norms.
According to Basel III norms, during good times, banks must build up a capital buffer that can be drawn from, when there is stress.
In India, to adhere to Basel norms, RBI wants all the commercial banks to achieve a minimum total capital of 9 per cent and a capital conservation buffer of 2.5 per cent, with the minimum total capital and CCB adding up to 11.5 per cent.

Major Highlights of RBI’s Financial Stability Report

Gross NPA ratio has declined to a 12-year low of 2.6% in September 2024.
Scheduled Commercial Bank’s Net NPA ratio stayed at 0.6%.
Provisioning Coverage Ratio improved to 77% in September, mainly due to proactive provisioning by Public Sector Banks.
Improvement in Return on Assets and earnings before provisions and taxes.
Sequential decline in the net interest margin abetted by shift of deposits to higher interest rate buckets.
Decline in share of low-cost Current Account Savings Account (CASA) deposits.
Increase in share of term deposits, especially for higher interest-rate buckets.

What is the H-1B Visa?

Context: The US President elect Donald Trump’s supporters are locked in a public row about skilled immigration and H-1B visa.

Relevance of the Topic: Prelims: Key facts about H-1B Visa.

What is the H-1B Visa?

The H-1B is a Visa in the United States that allows the US employers to employ high skilled foreign workers in specialised occupations. The programme was started in 1990.
Criterion: Specialty Occupation refers to a job that requires a specific set of specialised skills and educational qualifications.
- Educational Requirement: At least a Bachelor's degree or higher in a specific field of study.
- Specialised Knowledge: Expertise in a particular field like- IT specialists, engineers, scientists, healthcare professionals etc.
- Complex and specialised duties associated with the position.

Eligibility Criteria- Visa Requirements for Employees:

Education: A person should possess a Bachelor’s degree or higher (or its equivalent) in a specific field directly related to the offered position.
Job Offer: A person must have a legitimate job offer from a U.S. employer for a specialty occupation.
Work Experience: Depending on the specific occupation and degree, one may be required to demonstrate relevant work experience in the field.
Licensing: If the occupation requires a license to practice in the state of intended employment, the employee must generally possess that license before the H-1B petition can be approved.

Duration and Cap

Duration:

H-1B status is initially granted for three years but can be extended to another three years (maximum of 6 years).
After 6 years the visa holder has to either leave the US for a period of at least 12 months before returning or apply for and receive permanent residence that is a green card.
There is no capping on the number of H1-B Visas that an individual can have in his/her lifetime.

Cap:

Currently, the annual numerical limit is 85,000 for H-1B visas (65,000 new status visas and extra 20,000 visas available to those with a Master’s degree or higher from the US universities.)
Some H-1B petitions are exempt from the annual cap. (E.g., those for employees of institutions of higher education, non-profit research organisations, or governmental research organisations)

Debate over H-1B Visas

H-1B Visa has been the highly desired pathway for jobseekers including Indians to migrate to the US.
People born in India are the largest beneficiaries of the H-1B programme.
Data from the US government show that Indians account for more than 70% of all H-1B petitions approved each year since 2015.

Immigration is one of the most polarising political issues in the US. Much of the election time anti-immigration rhetoric focused on low skilled labour migration.
- Critics of the H-1B program claim that this program has been misused by tech corporations to staff their low to mid-level workforce for much less pay than what Americans would demand.
- They are of the view that such immigration depresses wages and takes away jobs that would have otherwise gone to the American working class.
- President elect Mr. Trump has encashed on such sentiments and has promised improved conditions for working American Middle Class by curbing immigration.
Proponents of H-1B visa argue that this programme is essential for bridging the skill gaps in the USA and wages are market driven. Since, China and India boast the highest number of STEM graduates (more than 6 million combined) in the World. When compared to the number of STEM graduates in the US (nearly 8 lakh), they become critical and vital for the economy.

Interest rate cuts likely in Small Savings Scheme

Context: The government is likely to cut interest rates on small savings schemes from April 2025, after a significant time period of steady rates since October 2022. The decision is likely influenced by falling G-Sec yields and monetary policy dynamics.

Relevance of the topic:

Prelims: Small Savings Scheme- Prelims-related facts.

Mains: Small Savings Scheme- Benefits, Limitations.

What are Small Savings Schemes?

Small Savings Schemes are a group of government-backed financial instruments intended to encourage people to save regularly at any age.
The depositors get an assured interest on their money. They are the major source of household savings in India.
They are popular as they provide returns higher than bank fixed deposits, sovereign guarantee and tax benefits.

About Small Savings Schemes in India

Small savings instruments can be classified under three heads:
- Postal deposits comprise savings accounts, recurring deposits, time deposits of varying maturities, and monthly income scheme.
- Savings certificates: National Savings Certificates (NSC); Kisan Vikas Patra (KVP)
- Social security schemes: Sukanya Samriddhi Yojana; Public Provident Fund (PPF); Senior Citizens Saving Scheme (SCSS); Mahila Samman Savings Certificate (MSSC).
All collections under the small savings are credited to the National Small Savings Fund (NSSF) in the Public Account of India.
The interest rates are revised every quarter based on the G-Sec yields of the previous three months.
A certain amount of NSSF is invested in the Central and State Government securities.
The fund is administered by the Department of Economic Affairs under the Ministry of Finance.

Kisan Vikas Patra:

KVP was initially launched as a small saving scheme certificate to encourage farmers to save for the long term. However, the scheme is now open to all Indian citizens over 18.

National Savings Certificates:

NSCs can be purchased from any Post Office in India. These are issued for five year maturity and can be pledged to banks as collateral for availing loans. The holder gets the tax benefit under Section 80C of Income Tax Act, 1961.

Sukanya Samriddhi Yojana:

It aims to secure the financial future of girl children under the age of 10. It matures 21 years after opening or at the time of marriage (whichever is earlier). Allows 50% withdrawal of the amount after the girl child turns 18.

Benefits of the Small Savings Schemes

Regular income: The schemes like SCSS provide regular income to vulnerable groups like senior citizens.
Encourages saving habit: Low entry values for savings investment enables even small investors to practice saving.
Financial Inclusion: Postal deposits schemes and Kisan Vikas Patras encourage savings in rural and other un-banked areas.
Tax benefits: Investments in Small Savings schemes are eligible for tax deductions under the Section 80C of the Income Tax Act.
Women Empowerment: Specialised schemes like Sukanya Samriddhi Yojana and Mahila Samman Savings Certificate empower women and girls financially.
Safety and Security: Having sovereign guarantee, small savings schemes are a secure investment option with minimal risk.

Limitations of the Small Savings Schemes

Inflation-related risk: Returns, at times, might not be in line with the prevailing inflation rate, thus reducing the real value of savings.
Taxable returns: Interests earned on certain schemes are taxable.
Lack of flexibility: Most schemes require fixed contributions, hence, there is little flexibility in investment amounts.
Comparatively Lower Returns: Returns are fixed and can be lower than high-yield investments like mutual funds or equities.
Low liquidity: Schemes, like PPF and Sukanya Samriddhi Yojana, have long lock-in periods, restricting premature withdrawals.

Logistics Sector in India

Context: Presently, the logistics sector in India is valued at $250 billion and contributes to 14% to India’s GDP. Given its crucial role in supply chains, experts remain bullish on the future growth prospects of the sector.

Relevance of the Topic: Mains: Logistics Sector- Present scenario, Initiatives, Way Forward

Present Scenario of Logistics Sector in India

Higher logistics cost in India (12-14% of GDP), compared to 8-10% global benchmark.
Logistics cost slid 0.8-0.9 percentage points of GDP between FY14-22.
India is elevated to the 38^th rank (among 139 nations) in the World Bank's Logistics Performance Index Report, 2023.
The logistics sector demonstrated resilience as it accelerated transition from unorganised to a structured industry.

Initiatives to boost the Logistics Sector in India

National Logistics Policy, 2022:
- Aim: achieve ‘quick last-mile delivery', end transport-related challenges.
- Logistics costs to be cut by half to be near global benchmarks by 2030.
- India aims to be among the top 10 in the Logistics Performance Index by 2030.
PM Gati Shakti National Master Plan:
- Essentially, a digital platform that brings 16 ministries together for integrated planning and coordinated implementation of infrastructure connectivity projects.
Unified Logistics Interface Platform (ULIP):
- Aim: to collapse all logistics and transport sector digital services into a single portal.
- ULIP platform enables the industry players to get secure access to information related to logistics and resources available with various Ministries.
Logistics Data Bank:
- It serves as a single-window container logistics visualization system, providing comprehensive tracking using container numbers.
- This system tracks containers between ports and their hinterlands, including Inland Container Depots (ICDs), Container Freight Stations (CFSs), port-associated parking plazas, toll plazas, railway stations, industrial corridors, SEZs, and empty yards, etc. during EXIM and domestic journeys.
National Logistics Portal- Marine (NLP-Marine):
- NLP Marine is a one-stop platform aimed at connecting all the stakeholders of the logistics community using IT.
- The activities of NLP Marine are categorized into four distinct verticals:
  - Carrier
  - Cargo
  - Banking and Finance
  - Regulatory Bodies and Participating Government Agencies (PGAs).

Role of GST in Logistics Sector

GST has played a crucial role in reducing logistics cost.
‘One Nation One Tax’ regime has cut waiting time of trucks at inter-state borders, significantly reducing travel time by 30%.
This has reduced the logistics cost and increased the average distance covered by trucks.

Further Scope for Logistics Development in India

Deeper digital adoption and intensified focus on risk management has resulted in transformative changes in the Indian logistics sector in 2024.
“China-plus-one-strategy” adopted by various multinational companies further reaffirms India’s critical position in global supply chains.
Supporting policies like giving Infrastructure status to ‘Warehousing’ and expanded FDIs accelerate the development of multi-client warehousing facilities.
The 11.1% rise in capital expenditure for infrastructure signals significant growth opportunities in the sector.

Way Forward

Need for skilling
- To fully unlock the potential of the sector, enhancing workforce skills is crucial.
Capitalise on global trade opportunities
- Policies strengthening the growth of e-Commerce, demand for faster delivery, export expansion driven by PLI schemes can accelerate goods movement.
Streamlining Government initiatives
- Initiatives like UDAN (promoting regional air connectivity) and NLP, will cut logistics cost by 4-5%, enhancing competition in global markets.
Multi-modal connectivity
- Strengthen Maritime connectivity projects to hasten transformation from land-based to coastal transportation.
- Implement India Ports Bill for the development of the ports sector and increasing its share in logistics.

Logistics has a crucial role in supply chains — whether road, rail, air, waterways or warehouses. India’s ambition of becoming a $5 trillion economy by 2027, strongly depends on the development of the logistics sector. Government interventions like cutting costs and focusing on reskilling and upskilling can be a game-changer.

India-Australia Trade Agreement

Context: The Ministry of Commerce has released data on Indo-Australian Trade relations, as nations visited the 2 year milestone of Indo-Australian Economic Cooperation and Trade Agreement (ETCA) trade deal.

Relevance of the topic:

Prelims: Basics of FTA, CEPA and ETCA.

Mains: Dynamics related to Indo-Australian trade relations; Issues related to CEPA.

Major Highlights:

Export utilisation of Indo-Australian Economic Cooperation and Trade Agreement (ETCA) has reached 79%. While the import utilisation has reached 84%.
- Trade Utilisation of a free trade agreement (FTA) indicates the extent to which the trade benefits from the agreement.
- It provides insights into whether businesses are effectively leveraging the FTA or finding its concession procedures burdensome.
Data also reveals that the trade between India and Australia has declined.
- As compared to $4.89 Billion during six months from April to September 2023, exports to Australia have declined to $3.99 Billion in the same period during 2024, marking a 18% decline.
- Imports also witnessed an 18% decline during the same period.

About Economic Cooperation and Trade Agreement (ECTA)

Economic Cooperation and Trade Agreement is a bilateral trade agreement aimed at enhancing the economic ties between India and Australia.
It was signed on April 2, 2022 and came into force in December 2022
Key aspects of ETCA:
- Tariff Reduction: Australia eliminated 96% tariffs on Indian goods. While India offered concessions in coal, wine and agricultural produce to Australia.
- Market access: Both nations provided market access to sectors like pharmaceuticals, education, healthcare and information technology.
- Enhanced professional mobility: Indian IT and healthcare professionals gain improved access to the Australian market.
- Rule of origin: Agreement includes rules of origin clause to avoid benefits to any third party.
ETCA can be considered as the foundational stone for the upcoming Comprehensive Economic Cooperation Agreement (CECA).

About Comprehensive Economic Cooperation Agreement (CECA)

The Comprehensive Economic Cooperation Agreement is an extension of the ETCA, for which negotiations are undergoing between India and Australia.
It aims at broadening the scope of the agreement including areas like investment protection, intellectual property rights (IPR), digital trade, government procurement and regulatory framework.
Key Goals of CECA:
- Comprehensive access to goods-services across various sectors involving finance, education, medical etc,.
- Enhanced mobility for skilled professionals, students and workers between the two nations.
- Digital trade collaboration to boost e-commerce
- Innovation collaboration in sustainable means like clean energy.
Concerns regarding CECA
- Agriculture and dairy sector farmers in India are apprehensive about increased Australian agriculture products reading their income due to competition.
- Labour mobility issue: India wants IT professionals, paramedic staff, students and workers to have free mobility. But Australia opposes these conceptions due to concerns of locals.
- IPR: Australia wants a strict IPR regime, while India on the other hand is concerned about these stricter norms as it can impact the generic drug market of India.
Current status: Negotiations for the CECA began following the success of the ETCA. Both countries have expressed strong political will to finalise the agreement, though there are certain sensitive issues like agriculture, intellectual property rights and labour mobility that require comprehensive discussion and consensus.

Conclusion: Both ETCA and CECA are crucial for boosting the trade between India and Australia. But concerns of farmers, labourers and professionals need to be taken under consideration with a detailed discussion. A well discussed development of CECA will open a new route for the Indo-Pacific Economic Framework (IPEF).

PDS posing challenges in CPI calculation

Context: The Ministry of Statistics and Programme Implementation (MoSPI) has floated a discussion paper in a process to revise the base of Consumer Price Index (CPI).

Relevance of the Topic: Prelims: Key aspects about the Consumer Price Index (CPI).

Major Highlights of the discussion paper:

Objective: To revise the base year of CPI by updating weights and basket of CPI by introducing possible improvements in methodology of CPI compilation.
Contention on PDS and free social transfers in context of CPI: The Ministry highlighted two major challenges in free distribution of PDS (Public Distribution System) items in context of CPI compilations:
1. Mid Series Adjustments: How to address the reduction in the price of PDS items from positive value to zero or increase in price of PDS items from zero to some positive amount during an ongoing series?
2. Inclusion in CPI basket at start of series: Should the free PDS items (which involve no out of pocket expenditure) be included in CPI basket or not remains a challenge.

Challenges of including Free items in CPI

Various states and UT distribute various items like Kerosene in PDS for free of cost, which poses a challenge in calculation of such items as the out of pocket expenditure is zero for such items.
- Existing norm- Such goods are assigned with the value of zero. Therefore, these items are effectively excluded from the CPI basket.
- IMF recommendation- International Monetary Fund suggests excluding such items from the index as the index should be restricted to monetary transactions only. Further, such transactions should be ignored as they do not generate any demand for money.
Thus, including free items in CPI could underestimate inflation, while their exclusion might fail to reflect actual consumption patterns of households.

Suggestions given in the discussion paper:

The discussion paper suggests three methods to deal with free PDS items:

Zero value allocation- This method suggests that zero price to be allocated to items and adjusting the weight during the next update. (Method is proposed for next series of CPI)
Redistribution of weight- Method suggests that the weight of items of such items in PDS to be redistributed as other items within the class or section. (Method is used in existing series)
Redistribution across basket- Third method suggests redistribution of weight broadly over all items of basket.

About Retail Inflation Index in India

Consumer Price Index or CPI is the market basket index used to calculate the retail inflation in the country.
RBI uses CPI (Combined) with base year 2012 to calculate the inflation. CPI (Combined) takes into account price changes in both urban and rural areas.
- Base year is a reference year to calculate the value of goods.

About Public Distribution System

PDS is a government led initiative designed to distribute food grains and essential commodities to economically weaker sections.
Key objectives: Ensuring food security, stabilising food prices and reducing poverty.
Notable schemes:
- Antodaya Anna Yojana for the poorest of the poor households with heavily subsidised food grains.
- National Food Security Act 2013 covers 65% of the population of the nation, ensuring their Right to Food.

Conclusion: CPI calculation is a barometer for the inflation in the nation, helping India to calculate its real growth prospects. To address the challenges in the calculation, the suggestions of the experts and agencies like the International Monetary Fund need to be incorporated.