Economy

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

What is the Balance of Payments (BOP)?

Context: India’s balance of payments (BoP) is in better shape now compared to previous years. This improvement is primarily due to the relatively low Current Account Deficit. While India’s forex reserves have declined slightly in the recent past, they still remain at a comfortable level. 

Relevance of the Topic: Prelims: Balance of payments;  Current Account Deficit; Forex Reserves. 

Balance of Payments:

The balance of payments (BoP) of a country is a systematic record of all economic transactions between the residents of the reporting country and residents of foreign countries during a given period of time.     

                                                          Balance of Payments
Current AccountCapital Account
- Exports/Imports
- Net factor Income from Abroad
-Remittances and other Transfers		- Foreign Investment (FPI/FDI)
- External Commercial Borrowings
- Non-Resident Bank Deposits
  • India typically experiences a Current Account Deficit (CAD), which is often balanced by a Capital Account Surplus. This means that when the capital account surplus exceeds the current account deficit, it results in an overall positive balance of payments, contributing to an increase in foreign exchange (forex) reserves.
  • Conversely, if the capital account surplus does not sufficiently cover the current account deficit, it can lead to a negative BoP, resulting in a depletion of forex reserves.
Balance of Payments key components

What are Forex Reserves? 

  • Foreign exchange reserves refers to the reserves of the RBI kept in the form of Foreign Currency Assets, Gold, SDR and Reserve Tranche Position with the International Monetary Fund (IMF).
    • Forex reserves are kept as a cushion against any potential balance of payment related crisis. 
    • In India, the Reserve Bank of India Act 1934 enables the RBI to act as the custodian of foreign reserves.
  • Forex reserves accrete when there is positive BoP, while negative BoP may deplete the forex reserves. 

Dynamics of Forex Reserves in India:

  •  In recent years, India has witnessed accretion of forex reserves in most of the years while depletions happened only in some, such as 2011-12, 2018-19 and 2022-23.
foreign exchange reserves

Also Read: Foreign Exchange Reserves

Capital Account Vulnerability:

  • India’s BoP problems today stem mainly from the capital account but not current account. CAD levels have been moderated over the period and they can be financed through capital flows. 
  • However, net foreign direct investment (FDI) flows into India dropped by around 62% to $10.58 billion in 2023-24 (FY24) — the lowest since 2007 — from $27.98 billion the previous year. This was mainly on account of higher repatriation of capital and Indian companies’ investments abroad. Net FPI flows, by contrast, hit a record $44.08 billion in 2023-24.

Fertilizer Subsidies: Mechanism and Challenges

Context: The 10th World Soil Day was recently celebrated on December 5, 2024. The theme ‘Caring for Soils – Measure, Monitor, and Manage’ was appropriate as our soils are becoming deficient in the essential nutrients needed for healthy soils. The role of the fertilizer industry is critical in ensuring that our soils are healthy and well-nourished.

Relevance of the topic:

Prelims: Subsidy Mechanism for Urea; Subsidy mechanism for Non-urea (P, K) Fertilizers.

Mains: Issues of Fertilizer Subsidies; Government Initiatives

State of Soil in India: 

  • Topsoil (up to two to three cm in depth), which takes 1,000 years to form, is a critical resource for Agriculture as almost 95% of food currently produced comes from it. 
  • The major essential nutrients in a productive soil include nitrogen (N), phosphate (P) and potash (K).
    • Less than 5% of Indian soils have high or sufficient nitrogen.
    • Only 40% have sufficient phosphate.
    • Only 32% have sufficient potash.
    • Only 20% are sufficient in organic carbon. 
  • Our soils suffer from a deficiency of micronutrients like sulphur, iron, zinc, boron, etc. 

How are fertilizers subsidised in India?

  • Fertilizers provide key nutrients (N, P and K) to the soil. Important fertilizers are- Urea (N based), DAP (P based) and MOP (K based). 
  • With the objective of enhanced agricultural growth, the Government of India has been providing subsidized fertilizers to the farmers since 1970's. Over the period the Government has devised separate mechanisms for Urea(N) Subsidy and Non urea (P, K) fertilizer subsidy.
  • The allocation for fertilizer subsidy for FY24 was budgeted at Rs 1.75 lakh crore in FY24.

Subsidy Mechanism for Urea:

  • Cost-Plus Method: Under this method, the MRP of Urea is statutorily fixed by the Government of India and the difference between MRP and Cost of production is provided to the manufacturing company as subsidy. Different amounts are given to different manufacturers based on their Cost of production.
    • As this method encourages the fertilizer companies to remain inefficient, New Urea Policy (2015) addressed this anomaly.
    • Under New Urea Policy (2015) all the gas-based urea manufacturing plants are divided into three groups and a specific energy norm is fixed for each group. Urea plants falling in the same group will be getting the same amount of subsidy irrespective of their actual cost of production (actual consumption of energy). This will force plants to become more energy efficient.

Subsidy-mechanism for Non-Urea (P, K) Fertilizers:

  • Nutrient-Based Subsidy (NBS): The market prices of these fertilizers are deregulated. Manufacturers are free to decide the market price at which they want to sell and they receive a fixed subsidy from the government based on the amount of nutrient (N, P & K) present in a given amount of fertilizer. 
  • NBS to be paid on each nutrient namely ‘N’, ‘P’, ‘K’ & ‘Sulphur’(S) would be decided (per kg) annually by the government. NBS, so decided, would be converted into a subsidy per tonne for each subsidized fertilizer.
  • Under NBS Policy, freight cost is also reimbursed to the fertilizer companies on account of movement of P&K fertilizers.

DBT in Fertilizers:

  • The Direct Benefit Transfer (DBT) model in fertilizers is different from the conventional system of DBT being implemented in LPG.
  • Under this, farmers would continue to get fertilizer at subsidised price whereas the fertilizer companies receive subsidy, only after the fertilizers are sold to farmers by the retailers through Point of Sale (PoS) machines (linked to the Department of Fertilizers’ e-Urvarak DBT portal) through biometric authentication by Aadhar Card.

Issues of Fertilizer Subsidies:

  • Loss of Fertility: Since the price of Urea is still regulated, it failed to achieve balanced use of fertilizers and resulted in loss of fertility of soil and pollution of water bodies.
  • Diversion of subsidised fertilisers: Illegal diversion of Subsidised fertilizers for other Industrial uses like manufacturing of plywood, textile dyes etc.
  • Fertilizer subsidies are regressive: Since rich farmers use more fertilizers, they end up getting more subsidies than small and marginal farmers.
  • Increased subsidy burden on the government: Fertilizer subsidy is one of the important items of revenue expenditure. 
  • Breaches WTO AoA limit: Fertilizer subsidies are treated as Amber box subsidies and breach the WTO (Agreement on Agriculture) limit of 10%.
  • Inverted Duty Structure:  The Basic Custom Duty (BCD) and GST rates of finished fertilizers are more than the raw materials like Sulphuric Acid and Ammonia and Natural gas, a major input for fertilizers, remains outside GST.

What are the steps taken by the Government till now?

  • Reduced the size of the Urea bag from 50 kg to 45 kg to prevent indiscriminate use. 
  • Soil Health Card Scheme promoted balanced use of N, P and K fertilizers (ideal ratio is 4:2:1)
  • Neem-coated Urea not only prevented the illegal diversion of urea for Industrial use but also improved nitrogen-use efficiency by slowing the release of nitrogen and thereby reducing the consumption.
  • Introduction of Nano Urea:
    • Nano Urea contains nitrogen in the form of granules that are a hundred thousand times finer than a sheet of paper. At this ‘nano’ scale, which is about a billionth of a metre, materials behave differently than in the visible realm. 
    • Nano Urea when applied on to the leaves, stimulates a range of enzymes, like nitrase and nitrite reductase, which helps plants metabolise nitrogen.
  • New Urea Policy (2015):
    • Maximising indigenous urea production.
    • Promoting energy efficiency in urea production.
    • Rationalising subsidy burden on the government.
    • Encouraged Organic farming through “Paramparagat Krishi Vikas Yojana.”
  • One Nation One Fertilizer (ONOF): Under this scheme, all types of fertilizers, whether it is DAP, NPK or urea will be sold under the brand name of ‘Bharat’. This will standardise fertilizer brands across the nation irrespective of the company that manufactures it.
  • PM Program for restoration, awareness, nourishment & amelioration of mother earth (PM-PRANAM) is aimed at incentivising the states to promote balanced use of fertilizers by reducing chemical based fertilizers. 

Way Forward:

  • Deregulating the MRP of Urea and paying a fixed per-tonne subsidy linked to its nutrient content of 46% Nitrogen.
  • Introduce Direct cash transfer method of subsidy (on the lines of LPG subsidy) where farmers can purchase the fertilizers at the market price and the government would be transferring the cash amount in the farmers account. This will help in rationalising the subsidy burden on the government.
  • Triangulating data on fertiliser sales, soil health cards (SHC), PM-KISAN, land records, crops grown, bank accounts and mobile numbers of farmers should be undertaken for seamless implementation of DBT mechanism in fertiliser subsidy.
  • De-Canalization of Urea imports: At present Urea is imported only by government agencies. Allowing private agencies to import the urea will increase competition and reduce the price.
  • Encourage Bio fertilizers and Fertigation techniques to reduce chemical fertilizers consumption.
  • Reduce GST rate and customs duty for raw materials such as Sulphuric Acid and Ammonia for P&K fertilizers to at least 5%.           
  • Bringing Natural Gas under the ambit of GST.
  • Need to create separate tariff code for Urea being used for non-agricultural purposes.

One Nation One Fertilizer (ONOF) scheme:

  • Under this scheme, all types of fertilizers, whether it is DAP, NPK or urea will be sold under the brand name of ‘Bharat’. This will standardise fertilizer brands across the nation irrespective of the company that manufactures it.
  • Companies are allowed to display their name, brand, logo and other relevant product information only on one-third space of their bags. On the remaining two-thirds space, the “Bharat” brand and Pradhanmantri Bharatiya Jan Urvarak Pariyojana logo will have to be shown.

Benefits:

  • Reduces freight subsidy: Brand wise demand for fertilizers in the specific areas by the farmers results in their criss-cross movement. E.g., Indigenous Urea produced by IFFCO in UP moves to Rajasthan and whereas Urea produced by Chambal fertilizers located in Rajasthan moves to UP.
  • ONOF reduces the preference for various brands and hence reduces the freight subsidy burden. It will not only ensure the availability of fertilizers throughout the year but also help to stop the diversion of Urea for industrial purposes.

Drawbacks:

  • It will disincentivise fertilizer companies from undertaking marketing and brand promotion activities. They will now be reduced to contract manufacturers and importers for the government. Any company’s strength ultimately is its brands and farmer trust built over decades.
  • After the implementation of the scheme, it is being assumed that the market can suffer dilution of brand value as all bags will look the same and mainly under the brand name of Bharat and logo Pradhanmantri Bharatiya Jan Urvarak Pariyojana which will hamper brand loyalty.
  • This scheme will cause a great hurdle for manufacturers as there would be a significant reduction in their profit margins and they will have to incur huge expenditures in the form of marketing and promotional strategies to maintain a hold on their market share and growth.
  • Currently, in case of any bag or batch of fertilizers not meeting the required standards, the blame is put on the company. But now, that may be passed on fully to the government.

PM-PRANAM:

  • PM Program for restoration, awareness, nourishment & amelioration of mother earth (PM-PRANAM) is aimed at incentivising the states to promote balanced use of fertilizers by reducing chemical based fertilizers. 
  • Centre will financially incentivise states by paying them a grant of 50% of savings by reduction in consumption of chemical fertilisers (Urea, DAP, NPK, MOP). Thus, the scheme will be financed by the savings of existing fertilizer subsidies under schemes run by the Department of Fertilizers but not by levying any cess.
  • The states are required to use these grants to promote consumption of alternate fertilizers. Out of the grant, 70% can be used to create assets related to the technological adoption of alternative fertilizers and production units at various levels. The remaining 30% can be used to reward and encourage farmers, panchayats, and other stakeholders involved in fertilizer reduction and awareness generation.

RBI develops AI tool to detect Mule Accounts

Context: The Reserve Bank of India (RBI) has created an artificial intelligence (AI) powered model ‘MuleHunter.AI’ that could reduce digital fraud by helping banks deal with the increasing problem of “mule” bank accounts. 

Relevance of the Topic: Prelims- Mule Accounts; MuleHunter.A; RBI’s Initiatives. 

What are Mule Accounts?

  • A mule account refers to a bank account that is used by criminals to launder illicit funds. Such accounts are often set up by individuals who are either unknowingly recruited through promises of easy money or coerced into participating in illegal activities. 
  • While high valued transactions are routinely screened as per the Prevention of Money Laundering Act (PMLA), mule accounts are very difficult to track.
Mule Accounts

Who is the Money Mule?

  • Money Mule is a term used to describe innocent victims who are duped by fraudsters into laundering stolen/ illegal money via their bank account(s).
  • When such frauds are reported, the money mule becomes the target of police investigations because it is their accounts that are involved, while the actual criminals remain undetectable. 
Who is the Money Mule?

What is MuleHunter.AI?

  • MuleHunter.AI is an AI-model that enables detection of mule bank accounts being used for committing financial frauds. 
  • Developed by: Reserve Bank Innovation Hub (RBIH), Bengaluru (a subsidiary of the RBI). 
  • The tool has undergone successful pilot testing at two public sector banks that has yielded encouraging results. 
  • Benefits: As compared to conventional rule-based systems, advanced machine learning algorithms can anticipate mule accounts more quickly and accurately by analysing datasets pertaining to transactions and account details.

RBI's measures against Financial Frauds:

As reported by the National Crime Records Bureau (NCRB), online financial frauds make up 67.8% of cybercrime complaints, underscoring the urgent demand for AI-powered fraud prevention solutions. Mule bank accounts are seen as a key element in the majority of online financial frauds in India.

  • RBI has issued the Revised Master Directions on Fraud Risk Management (July 2024) in Commercial Banks (including Regional Rural Banks) and All India Financial Institutions (AIFIs).
    • Early detection of frauds through a robust framework for Early Warning Signals (EWS) and Red Flagging of Accounts (RFA). Integrate EWS with their Core Banking Solutions to monitor transactions effectively.
    • External and Internal Audit can be conducted on red-flag accounts.
    • Banks to report payment system related disputes, suspected or attempted fraudulent transactions to Central Payments Fraud Information Registry maintained by RBI.
      • The Central bank has fixed a threshold of Rs 1 crore above which banks have to report fraud incidents to state police. 
      • Private banks have to report frauds above Rs 1 crore to the Serious Fraud Investigation Office and the Ministry of Corporate Affairs.
      • Public sector banks have to report frauds over Rs 6 crore to the Central Bureau of Intelligence (CBI). 
    • Banks are required to constitute a ‘Special Committee of the Board for Monitoring and Follow-up of cases of Frauds’. It would comprise of minimum three members to monitor, review and propose risk management framework for reducing cases of fraud.
RBI fraud policy
  • RBI is running a hackathon on the theme “Zero Financial Frauds”, to encourage development of innovative solutions to tackle financial frauds, particularly mule accounts.

The RBI's measures aim to strengthen the banking system's resilience against financial fraud and ensure better protection for customers against the misuse of their accounts.

What is De-Dollarisation?

Context: Reserve Bank of India (RBI) Governor Shaktikanta Das has recently said that India has no immediate plans for de-dollarisation. These comments came in the backdrop of U.S. President-elect Donald Trump’s threat to impose a 100% tariff on BRICS nations planning to have a common currency to challenge the dominance of the U.S. dollar in global trade.

Relevance of the Topic: Prelims- De-Dollarisation; Why is De-Dollarisation gaining traction?

 What is De-Dollarisation?

  • De-dollarisation refers to the process by which the countries seek to reduce their reliance on the US dollar in International trade and finance.
    • The US dollar has long been the world's reserve currency, but its dominance is under threat. 
    • In recent years, there has been an accelerating trend towards de-dollarisation. 

Why is De-Dollarisation gaining traction?

  • Containing Risk Exposure: The over-dependence on a single currency exposes the nation to risks associated with:
    • fluctuations in the value of the dollar.
    • changes in US monetary policy.
    • potential sanctions or restrictions imposed by the US.
  • Rise of Cryptocurrencies: Cryptocurrencies, such as Bitcoin, are a new form of digital currency that is not subject to government control. This has made them an attractive alternative to the US dollar.
  • Bilateral Trade Agreements: Increasingly, countries are entering into bilateral agreements to conduct trade in local currencies rather than using the dollar. This shift aims to enhance economic sovereignty and reduce transaction costs associated with currency conversion.
De-Dollarisation

Global examples of De-dollarisation efforts:

  • China: China is actively promoting Yuan through its Belt and Road Initiative & Yuan-based trade agreements. 
  • Russia: India and Russia are exploring a dynamic rupee-rouble rate to overcome dollar trade barriers in the wake of US sanctions on Russia. 
  • Proposed BRICS Currency: The BRICS countries are discussing the possibility of a common BRICS currency to reduce their reliance on the dollar. 

The global movement toward de-dollarisation is a complex, gradual process driven by geopolitical and economic realities. The challenges include the inertia against transition to alternative currencies, huge investment to build robust-systems for non-dollar transactions. 

Also Read: Trump threatens tariffs if BRICS adopt Common Currency 

RBI’s Rate Dilemma

Context:  India’s retail inflation has eased to around 5% in November from October’s 14-month high of 6.2%. This assumes significance ahead of the Reserve Bank of India’s (RBI’s) Monetary Policy Committee (MPC) meeting in the backdrop of a spike in October’s inflation and a sharp slump in economic growth with GDP rising just 5.4% in the July-September quarter. 

Relevance of the Topic: Prelims: Monetary Policy and its Components. 

What is Monetary Policy?

  • Monetary policy refers to a policy of the Central Bank (Reserve Bank of India) to regulate money supply in the economy.
  • It is aimed to achieve certain objectives like Price stability, accelerating economic growth or exchange rate stabilization. 
  • RBI uses various tools to achieve these objectives. One such tool is Liquid Adjustment Facility (LAF).

Liquid Adjustment Facility (LAF): 

  • LAF is a facility provided by RBI to scheduled commercial banks to avail of liquidity in case of need or to park excess funds with RBI on an overnight basis against the collateral of government securities. The components of LAF are:
    • Repo rate is the interest rate charged by the RBI on overnight loans given to the commercial banks under the Liquidity Adjustment Facility.
    • Reverse repo rate is an interest rate given by the RBI to commercial banks when the latter parks one-day deposits with the RBI.

These rates are referred to as key policy rates.

 Expansionary Monetary PolicyContractionary Monetary Policy
ActionTo infuse liquid into the marketTo absorb liquid from the market
ToolReduce policy ratesIncrease policy rates
GoalAccelerate economic growthInflation control

Resolving Base Year Conundrum in National Accounting 

Context: With India's GDP increasing from ₹98 lakh crore in FY14 to ₹173.8 lakh crore in FY24, the recovery from the COVID-19 pandemic has been uneven, and comparisons across different periods may be misleading due to significant base effects. In this context, the choice of a base year for measuring economic variables becomes extremely important, as it can introduce biases that distort growth assessments. 

Relevance of the Topic: Prelims- Concept of the base year is vital to understand national accounting, indices like GDP, CPI, WPI, and IIP.

Base Year:

  • A base year is a reference year used to measure important economic indicators like:
    • Gross Domestic Product (GDP)
    • Consumer Price Index (CPI) 
    • Wholesale Price Index (WPI) 
    • Index of Industrial Production (IIP)

Purpose of Base year:

  • Providing a reference point: The base year serves as a fixed reference point to measure changes in economic variables like GDP, IIP or CPI over time. It allows for meaningful comparisons of these indicators across different time periods.
  • To differentiate quantity from value: A reference year is necessary to arrive at the right measure of production activities in the economy like GDP by removing the impact of inflation.
  • Composition of Indices: Ensures composition of indices like CPI/WPI reflect contemporary consumption patterns.
  • Fixing Weightage: The base year is used to fix the relative weights of different goods and services in the calculation of various economic indicators.
  • Facilitating International Comparisons: When countries use a common base year, it enables better comparison of economic indicators like GDP and inflation across different economies.

Revision of Base Year:

  • The base year is typically updated periodically (E.g., every 5-10 years) to ensure the economic indicators remain representative of the current economic structure and consumption patterns.
  • In India, the practice was to revise the base every 5 years, so as to coincide with quinquennial rounds of the NSSO. However, since 2004-05, base year revision has been staggered due to several reasons. 
  • Post the financial crisis of 2009-10, 2011-12 was chosen as the base year and the updated series was released only in 2015.

Need for Revision of Base Year in India:

  • Old basket of Goods: We continue to monitor a basket of goods that includes torches, radios, tape recorders, CDs, DVDs, audio/video cassettes, and trunks, among some 300 other items which no longer reflect the consumption patterns of the public.
  • Disproportionate Weights:
    • The weightage of food in the CPI basket has decreased from 60.9% (in 1960) to 57.0% (in 1982) and to around 45% (present), consistent with Engel’s Law. This gradual decline indicates that as the economy grows, the proportion of income spent on food decreases. (Engel’s Law suggests that as income rises, the proportion of income spent on food falls, even if the absolute expenditure on food rises.).
    • Additionally, inflation data under-represents services in the consumption basket. In production, services are about 55% of the GDP but have no representation in WPI and about 24% in CPI. 

Challenges:

  • Selecting the Right Reference Year:
    • The reference year must be a normal year with no significant volatility in GDP or Inflation and also be devoid of any structural reforms made in the economy like GST etc.
    • Keeping a year with too high growth or too low growth may as base year will eventually result in “high base effect” in the following years.
  • Lack of relevant Consumer Data: A new nationwide consumer expenditure survey is long overdue. The last two such nationwide sample surveys were carried out in 2011-12 and 2017-18. Unfortunately, the results of the 2017-18 survey were not released on grounds of unexplained “data quality issues”. 

Banking Laws (Amendment) Bill 2024

Context: The Lok Sabha passed the Banking Laws (Amendment) Bill, 2024 to streamline the banking process and governance in India.

Relevance of the Topic: Prelims- Key provisions of Banking Laws (Amendment) Bill, 2024.  

Aim: The bill aims to improve the governance and operational efficiency of India’s banking sector.

Banking Laws (Amendment) Bill 2024

Key provisions of the Bill and their benefits:

  • The proposed amendment allows bank account holders to designate up to four nominees for their accounts.
    • The depositors have been given the option of successive or simultaneous nomination facility. 
    • Additionally, locker holders will have only successive nominations.

Benefit: It benefits the depositors by offering more options for ensuring smooth process and the management of their accounts.

  • It increases the limit for ‘substantial limit’ in a bank’s directorship from Rs. 5 lakh to Rs. 2 crore. The current limit was fixed almost six decades ago. 

Benefit: It will strengthen governance in the banking sector.

  • It extends the tenure of directors (except the chairperson and whole-time director) in co-operative banks from 8 to 10 years, in line with the 97th Constitutional Amendment Act, 2011.

Benefit: It will enhance the continuity of leadership and strengthen governance within the cooperative banks.

  • Allows a director of the Central Cooperative Bank to also serve on the board of State Cooperative Bank.

Benefit: It enables greater cross-collaboration between different levels of cooperative banks, thereby strengthening their overall functioning and improving coordination within the sector.

  • It seeks to grant the banks greater freedom in deciding the remuneration of statutory auditors.

Benefit: It will enhance the autonomy of banks in managing their internal operations and budgeting, allowing for more flexibility and efficiency in financial decision-making.

  • It changes the reporting dates for banks regarding the regulatory compliance from second and fourth Fridays to the 15th and last day of every month.

Benefit: Streamlines the compliance process, providing greater clarity and consistency in meeting regulatory requirements.

Criticism of the bill:

  • The opposition has raised concern that the bill is a “step towards privatisation.”
  • The opposition also stressed the need for better cybersecurity and fraud detection, criticising frequent KYC updates as burdensome.

Conclusion: These amendments are designed to strengthen the governance in the banking sector and improve customer convenience by making India’s banking system safer, more stable and healthier, pointing to the positive outcomes achieved over the past decade.

Oilfields (Regulation and Development) Amendment Bill 2024

Context: Rajya Sabha has passed the Oilfields (Regulation and Development) Amendment Bill, 2024. The Bill amends the Oilfields (Regulation and Development) Act, of 1948.

Relevance of the Topic: Prelims- Oil fields (Regulation and Development) [Once it becomes an Act]

About Oilfields (Regulation and Development) Amendment Bill, 2024: 

  • Aim: To ensure policy stability for oil and gas producers and allow international arbitration.
Oilfields

Key Highlights of the Bill:

1. Definition of Mineral Oils expanded:

  • The Oilfields (Regulation and Development) Act, 1948, defined only two mineral oils -  petroleum and natural gas. 
  • The Bill expands the definition to include:
    1. any naturally occurring hydrocarbon
    2. coal bed methane
    3. shale gas/ shale oil and gas hydrates.  
  • It clarifies that mineral oils will not include coal, lignite or helium. 

2. Introduction of petroleum lease: 

  • The Bill alters the previously used mining lease to introduce a ‘petroleum lease’ which allows companies to explore, prospect (assessment of potential petroleum accumulations across large areas), produce, make merchantable, and dispose of mineral oils. Existing mining leases granted under the Act will continue to be valid.
  • The Bill urges oil companies to use oilfields for other purposes like hydrogen production, carbon capture utilisation and storage or coal gasification. 

3. Expands regulatory powers of Central Government:  

  • Under the Act, the Centre is empowered to regulate the grant, terms and conditions, and time period of leases, production, storage and conservation of mineral oils and collecting royalties, fees and taxes for mineral oils. 
  • This Bill expands the Centre’s powers to include framing rules for lessees to reduce emissions, sharing of oil production and processing units, merger of leases and resolving disputes on leases. 

4. Decriminalisation of offences:

  • The Bill decriminalises offences related to the petroleum activities (such as invalid leases and non-payment of royalties etc.); however, it increases the monetary fine for violation of Rules from Rs. 1000 to Rs 25 lakhs. 
  • Adjudication of penalties:
    • The central government will appoint an officer of the rank of Joint Secretary or above for adjudication of penalties.
    • Appeals against the decisions of the Adjudicating Authority will lie before the Appellate Tribunal specified in the Petroleum and Natural Gas Board Regulatory Board Act, 2006. 

5. Opening up no-go areas to oil exploration:

  • The Centre has allowed oil exploration within previously defined no-go areas, such as those near missile testing sites. 

Need for the Amendment: 

  • India needs to increase its domestic production and reduce its import dependence to meet the country’s rapidly growing energy demand.
  • Imports have largely remained unchanged in spite of policy measures aimed at boosting domestic production— such as the Hydrocarbon Exploration and Licensing Policy (HELP), the Discovered Small Fields (DSF) policy, gas pricing reforms, and reduced royalty rates for deepwater, ultra-deepwater, and high-pressure/ high-temperature areas.
  • India is believed to hold yet-to-find potential of 13 billion tons of oil equivalent. Currently, the petroleum industry is burdened by delays in obtaining environmental and forest clearances, complexities in land acquisition, absence of comprehensive standards, procedures, and guidelines for operational and safety compliance.

Significance of Amendment: 

  • The broader definition (of mineral oils) enables the efficient exploration, development, and production of both conventional and unconventional hydrocarbon resources without any policy confusion.
  • The regulatory changes (such as separation of leases) seek to simplify and streamline the regulatory environment, for the petroleum and energy sectors in India, by eliminating redundant or irrelevant approvals.
  • By shifting from criminal penalties to administrative fines for minor infractions, companies can focus on compliance and operational improvements without the fear of severe legal consequences. This will foster a more predictable environment, encourage innovation, and streamline the regulatory process.
  • The ‘zero interference’ promise by the government to the private sector would enhance India’s domestic output and cut down its reliance on oil imports. 

These reforms are designed to enhance exploration and production. Achieving a meaningful reduction in import dependency will require a sustained and significant growth in domestic production, particularly in oil, natural gas, and deployment of renewable energy. 

Production Linked Incentive

Context: The Government’s flagship Production Linked Incentive (PLI) scheme has been a mixed bag so far in terms of job creation.

Relevance of the topic:

Prelims: Key features of the PLI scheme

Mains: Significance of PLI Scheme; Challenges associated with PLI Scheme. 

About the PLI Scheme: 

  • The Production Linked Incentive (PLI) scheme refers to a rebate given to producers. This rebate is calculated as a certain percentage of sales of the producer (sales referred to in it can be total sales or incremental sales). 
  • The incentive percentages vary across sectors calculated on the basis of incremental sales, ranging from as low as 1% for the electronics and technology products to as high as 20% for the manufacturing of critical key starting drugs and certain drug intermediaries.

Key Features of the PLI Scheme:

  • Outcome-based Incentives: Incentives will be disbursed only after the production has taken place. 
  • Incremental Production Focus:
    • The calculation of incentives is based on incremental production at a high rate of growth. 
    • In some sectors such as advanced chemistry cell batteries, textile products and the drone industry, the incentive will be calculated on the basis of sales, performance and local value addition done over the period of five years.
  • Emphasis on Scale: The scheme focuses on size and scale by selecting producers who can deliver high volumes.
  • Strategic Sectors: Sectors chosen include, those with:
    • Cutting-edge technology
    • Potential for integration with global value chains
    • High job-creation capacity
    • Sectors closely linked to the rural economy. 
  • WTO Compliance: The scheme is designed to align with World Trade Organisation (WTO) commitments, as the quantum of support is not directly linked to exports or value-addition.

Coverage of the Scheme:

The PLI scheme has been rolled out for manufacturing in 14 sectors. 

  1. Key Starting Materials (KSMs)/Drug Intermediates (DIs) and Active Pharmaceutical Ingredients (APIs): Department of Pharmaceuticals
  2. Manufacturing of Medical Devices: Department of Pharmaceuticals
  3. Pharmaceuticals drugs: Department of Pharmaceuticals
  4. Large Scale Electronics Manufacturing: Ministry of Electronics and Information Technology
  5. Electronic/Technology Products: Ministry of Electronics and Information Technology
  6. Telecom & Networking Products: Department of Telecommunications
  7. Food Products: Ministry of Food Processing Industries
  8. White Goods (ACs & LED): Department for Promotion of Industry and Internal Trade
  9. High-Efficiency Solar PV Modules: Ministry of New and Renewable Energy
  10. Automobiles & Auto Components: Department of Heavy Industry
  11. Advance Chemistry Cell (ACC) Battery: Department of Heavy Industry
  12. Textile Products: MMF segment and technical textiles: Ministry of Textiles
  13. Specialty Steel: Ministry of Steel
  14. Drones and Drone Components: Ministry of Civil Aviation

Significance of PLI Scheme:

  • Utilising the comparative advantage: In some sectors the domestic industry has comparative advantage over other countries, focusing on these sectors could generate higher returns. For instance The Indian pharmaceutical industry is the third largest in the world by volume and 14th largest in terms of value. It contributes 3.5% of the total drugs and medicines exported globally.
  • Increased ability to tap the high global and domestic demand: This will help satisfy the growing domestic demand in the respective sectors and also give a fillip to exports.
  • Developing the nascent but high-potential sectors: These sectors may not be significant but in the present socio-economic context, present high potential. The growth of the processed food industry leads to better prices for farmers and reduces high levels of wastage.
  • Attract Global Manufacturers: The renewed scheme could attract big global IT hardware manufacturers to shift their production base to India and give a boost to local production of laptops, servers and personal computers among others.
  • Generate Employment: The expected incremental production value could touch Rs 3.35 lakh crore, and the scheme could generate 75,000 direct jobs – in total, the employment figure could touch 2 lakh when accounted for indirect jobs.
  • Increase Exports: The IT hardware industry is targeted to reach a production of $24 billion by 2025-26, with exports anticipated to be in the range of $12-17 billion during the same period. This revised PLI is expected to serve as a major catalyst for both global and domestic companies aiming to establish or expand their IT hardware manufacturing operations in India,

Potential Issues with the Scheme: 

  • Absence of Common Parameters: DPIIT has raised concerns there were no common set of parameters to understand the value addition by companies that have received or are likely to receive incentives under the PLI scheme. At present, different ministries monitor the value addition of their respective PLI schemes. There is no way to compare two different schemes.
  • Multiple Deliverables: Also, there are various deliverables such as the number of jobs created, the rise in exports and quality improvement. There is no centralised database to gauge all these.
  • Steep Targets: Departments and ministries which interact with companies operating in their sector also face certain specific issues. For instance, at times, the target for companies to qualify for incentives are too steep. As for the Information Technology hardware sector, until last fiscal, only 3-4 companies managed to achieve the incremental sales targets to qualify for the PLI scheme out of the 14 companies that had been approved.
  • Designing sector specific incentives: The implementation of PLI scheme in the Electronics sector and Pharmaceutical sector has highlighted that every sector has to have different eligibility thresholds. Given the large range of activities covered in the 10 sectors, effectively determining the thresholds for each could become a difficult task.
  • Interfering with natural economic processes: In the long run, an economy can become competitive only when sectors can die and be born. Resources get reallocated to sectors that see higher productivity growth. External interference may hinder optimised allocation of resources.
  • Relative disadvantage for sectors with no incentives: The limited resources of the economy in the form of Capital and human resources will be nudged towards incentivized sectors thus indirectly disincentivizing other sectors.

What can be done to further Improve the Scheme?

  • Pre-defined Sunset clause on scheme: It will not only be beneficial for the sector in the long-term, it will also encourage the individual players to see it as a one-time opportunity for capacity building.
  • Improve technological competence: The breathing room created by these incentives could be used by the industry players to increase their technological competence and transition towards becoming globally competitive.
  • Improve business environment: It can be done by improving transparency and predictability in the policy framework. For example, simplification of the taxation regime or easing the land acquisition process etc. This becomes even more important for industries which are outside the purview PLI Scheme.
  • Managing the real exchange rate better to strengthen the export regime: The real exchange rate (adjusted for inflation) in India has appreciated 19% in the last decade on account of both Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI). This appreciation negatively affects the overall exports.
  • Augment industrial infrastructure and connectivity by increasing expenditure on infra creation for improved competitiveness.
  • Regular scheme review to keep track of progress and address concerns over raw materials, funds, skilled workforce, payments etc
  • Increased investments in innovation, research and skill development is necessary to build talent for PLI success. 

Conclusion:

  • The scheme and its associated ecosystem have ensured that India is well-positioned to develop resilient GVCs, which will continue to provide national security in the evolving global scenario.
  • However, the incentives should be well-crafted and temporary so that the industries receiving support can mature and become economically viable without protection. Keeping them in place for too long may slow down, rather than accelerate growth in these sectors.

Time to Review Inflation Targeting

Context: Despite extensive research and econometric studies, there is no conclusive evidence that inflation targeting is the most effective monetary policy framework. 

What is Inflation Targeting?

  • Inflation Targeting is a monetary policy framework where the Central Bank of a country aims to maintain the rate of Inflation within a targeted (pre-defined) range. 
  • India adopted inflation targeting through the Monetary Policy Framework Agreement in 2015, signed between the Reserve Bank of India (RBI) and the Central Government. 
  • Objective: RBI's primary objective would be to maintain price stability while keeping in mind the objective of growth. 
  • Target: The RBI is required to maintain inflation of 4% (with a deviation of +/- 2%), i.e., between 2% to 6%.

Why the Need to Review Inflation Targeting?

1. Inflation-Growth Dichotomy:

  • Inflation targeting relies on contractionary monetary policy (higher interest rates) to control inflation. However, such a policy would lead to an increase in rate of interest on loans, will raise borrowing costs, reduce private investment and consumption expenditure, thereby causing a decline in GDP growth rates. 

2. Persisting Inflation:

  • In Inflation targeting, controlling the money supply only alters demand-side inflation but does not address the inflation caused by supply-side constraints. 

E.g., Rise in prices of vegetables, pulses highlight supply side constraints, which are out of the purview of the RBI and hence they continue to erode household savings.

3. Inefficient Monetary Policy Transmission: 

  • Despite a cumulative hike in repo rate of 250 bps (during May 2022 to October 2023), banks revised their marginal cost of funds-based lending rate (MCLR) only by 152 bps. Hence, the cost of credit still remains high for prospective borrowers, thereby discouraging capital investment. 

Way Forward:

  • Shift to flexible inflation targeting: Post-Global Financial crisis, the dominant view around the world is that flexible inflation targeting (FIT), rather than pure inflation targeting, is more efficient for monetary policy formulation. By FIT, during times of extraordinary shocks (pandemics or financial crises), Central banks could temporarily adjust their inflation target to allow for more economic flexibility.
  • Address supply-chain constraints: Strengthening policy coordination with the government and undertaking structural reforms in the agriculture and developing efficient logistics and transport networks to address inflationary pressure due to supply-side shocks.

House Price Index (HPI)

Context: The All-India House Price Index (HPI) of the Reserve Bank of India rose by 4.34% as of September 2024. The rising HPI shows that the house prices are on the rise in India, despite high interest rates in the banking system and inflation. 

Relevance of the Topic: Prelims- House Price Index 

What is the House Price Index?

  • Released by: Reserve Bank of India 
  • Frequency: Published quarterly.
  • Base year: 2010-11
  • Coverage: The Index tracks the price movements of residential property in ten major cities in India. (Ahmedabad, Bengaluru, Chennai, Delhi, Jaipur, Kanpur, Kochi, Kolkata, Lucknow, and Mumbai)
  • Data Source: Official data of property price transactions collected from registration authorities of respective state governments. 
  • Based on these city indices, an average house price index representing all-India house price movement is also compiled. 

Utility of House Price Index:

  • Functions as an analytical tool for estimating:
    • Changes in the rates of Real estate and mortgage defaults
    • Housing affordability  
  • Used by policymakers and banks to assess the impact of monetary policy on the housing sector and assists in framing housing and urban development schemes. 

Riyadh Design Law Treaty 

Context: India has signed the Riyadh Design Law Treaty to foster inclusive growth and strengthen India’s intellectual property (IP) ecosystem. 

Relevance of the Topic: Prelims: Riyadh Design Law Treaty, World Intellectual Property Organisation

About Riyadh Design Law Treaty:

  • The Riyadh Design Law Treaty (DLT) was adopted under the World Intellectual Property Organisation (WIPO). 
  • Aim: To harmonise procedures and simplify registration processes of industrial designs in different countries.
  • Key Features: 
    • The DLT introduces a standardised framework for design registration, reducing complexity and administrative burdens for applicants. 
    • Applicants can file multiple designs in a single application, saving time and costs.
    • It provides a mechanism to restore rights in case of lapses, ensuring that applicants can recover lost opportunities. Provisions have been added to make it easier to correct or add priority claims.
    • It encourages countries to adopt electronic systems for design registration and facilitate the digital exchange of priority documents, reducing cost and time for startups.
Riyadh Design Law Treaty 

About World Intellectual Property Organisation: 

  • The World Intellectual Property Organisation (WIPO) is the United Nations Agency.
  • WIPO was created to:
    • develop an international intellectual property (IP) system that encourages innovation and creativity.
    • promote and protect intellectual property (IP) across the world by cooperating with countries as well as international organisations and resolve disputes. 
  • Established in 1967.
  • Membership: 193 member states. 
  • Headquarters: Geneva, Switzerland.

What are Intellectual Property Rights?

  • Intellectual property rights (IPRs) are the rights given to persons over the creations of their minds. They usually give the creator an exclusive right over the use of his/her creation for a certain period of time. 
  • There are various types of IPRs, for E.g., Patent, Trademark, Copyright, Industrial design etc. 
What are Intellectual Property Rights?
  • India is a signatory to Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), which sets global standards for intellectual property protection. 
  • India has formulated the National IPR Policy 2016 to strengthen the Indian IPR ecosystem including- speeding up registration proceedings and reinforcing enforcement mechanisms and processes for all IP rights. 

Indian Designs Act, 2000: 

  • Industrial design is a specific IPR which protects the aesthetic or outward appearance of a product such as its unique shape, pattern and colour combinations. Some examples of industrial design include:
    • Unique shape of an iPhone
    • Shape of a Coca-Cola bottle
    • Outward appearance of a Volkswagen Beetle. 
  • India provides legal protection for industrial designs under the Designs Act, 2000 and the associated Designs Rules, 2001.
    • The registered design is protected for the period of 10 years from the date of registration of the design, which can be further renewed to 5 more years. 

What can India gain from Riyadh DLT?

  • Streamlined procedures: 
    • Simplified applications procedures for filings licenses and recording changes in design licences.
    • Single application and submitting a limited number of documents as per international best practices to the IPR office.

This will make it easier, faster, and more affordable for designers to protect their work internationally.

  • Flexibility in Compliance: The DLT allows applicants to request a deferment of the publication of their designs by the IP Office and provides a grace period that enables applicants to seek design protection even after their designs have been publicly disclosed.
    • Deferment allows the designers to delay the public disclosure of their design for a specific period (keep the design confidential until they are ready to launch the product in the market). 
    • The Indian Design treaty presently does not offer a deferment of publication, and the grace period available under our law is also limited in scope. 

Linking India’s existing Intellectual property rights (IPR) initiatives with the Design Law Treaty will amplify India’s IP capacity and boost its competitiveness. 

Recommendations of EAC-PM Working Paper:

India should sign- 

  • Geneva Act of the Hague Agreement on Industrial Designs 1999:
    • The Hague Agreement allows for a single international application for design protection in multiple countries. 
    • In absence of this agreement, Indian designers have to file separate applications in each country, which is time-consuming and costly. 
  • Strasbourg Agreement Concerning the International Patent Classification 1971
  • Geneva Act of the Lisbon Agreement on Geographical Indications 2015. 

Conclusion: An industrial design framework at par with global standards is a prerequisite for India which seeks to become a manufacturing hub for the world. Signing the DLT and the other major IPR treaties to align with the international best practices will send the right signals to domestic and foreign entrepreneurs about India’s commitment as a protector of IPR and showcasing itself as an IPR-savvy destination.

About World Intellectual Property Organisation: 

  • The World Intellectual Property Organisation (WIPO) is the United Nations Agency.
  • WIPO was created to:
    • develop an international intellectual property (IP) system that encourages innovation and creativity.
    • promote and protect intellectual property (IP) across the world by cooperating with countries as well as international organisations and resolve disputes. 
  • Established in 1967.
  • Membership: 193 member states. 
  • Headquarters: Geneva, Switzerland