Inclusive Growth & Financial Inclusion

Human Development Report 2025

Context: India has ranked 130 out of 193 countries in the recently released Human Development Report 2025, ‘A Matter of Choice: People and Possibilities in the Age of AI’. India has improved its ranking from 2022, reflecting gradual improvements in key development indicators.

Relevance of the Topic : Prelims: Key facts related to Human Development Report 2025.

Human Development Report

  • Annual report published by: United Nations Development Programme (UNDP). 
  • The first HDR was launched in 1990 by the Pakistani economist Mahbub ul Haq and Indian Nobel laureate Amartya Sen.
  • The report provides Human Development Index (HDI) which measures a country's performance across three dimensions:
    • Health: Life expectancy at birth
    • Education: Mean & expected years of schooling
    • Standard of living: Gross National Income (GNI) per capita. 
  • HDI Score Range: 0 (lowest) to 1 (highest). 
image 19
  • Based on the scores, the countries are classified into: Very High Human Development, High Human Development, Medium Human Development, Low Human Development.
image 3

Key Highlights of Human Development Report 2025

  • Theme: A Matter of Choice: People and Possibilities in the Age of Artificial Intelligence.
  • The report highlights AI's potential to reignite human development, provided that policies are people-centered and focus on enhancing human capabilities.  
  • Ireland secured the first spot in the Index with a score of 0.972. 

India’s Performance:

  • India has ranked 130th out of 193 countries, moving up three places from 133 in 2022.
  • India’s HDI value has increased from 0.676 (2022) to 0.685, showing an improvement in areas like health, education, and income.
  • However, India still falls under the medium human development category (which includes countries with HDI values between 0.550 and 0.699). 
  • However, with a score of 0.685, India is now very close to entering the high human development category, which starts at 0.700.

India’s achievements over the years (as highlighted in the Report):

  • Gross National Income per capita has risen over four times to $9,046.76 in 2023 from $2,167.22 in 1990.
  • 135 million Indians have escaped multidimensional poverty between FY16 and FY21.
  • India’s life expectancy at 72 years in 2023, is the highest level it has reached since the inception of the index in 1990 (58.6 years). 
  • Children are expected to stay in school for 13 years on average, up from 8.2 years in 1990.

It is a result of programmes such as MGNREGA, the Right to Education Act, the National Rural Health Mission and other initiatives.

The report highlights deep-rooted inequalities in India:

  • Income and gender inequalities have pulled down India’s overall HDI by 30.7%, one of the highest losses in the region.
  • Women’s participation in the workforce and politics still remains low.
    • Economic Survey of 2024-25: Female labour participation rate has risen to 41.7% in 2023-24.
    • Recent measures like the constitutional amendment reserving one-third of legislative seats for women offer inclusive political participation.

The report highlights a global slowdown in human development, stating that the rate of progress is the slowest since 1990. India is also affected by this trend. 

MUDRA Loans hit All Time High

Context: Over 52 crore loans worth more than 32 lakh crore rupees have been sanctioned under Pradhan Mantri Mudra Yojana since the launch of the scheme in 2015. Half of the beneficiaries belong to SC, ST and OBC communities, and over 70% of them are women. 

Relevance of the topic:

Prelims: Pradhan Mantri Mudra Yojana (PMMY)

Mains: Benefits of MUDRA Loans

Pradhan Mantri MUDRA Yojana

  • Launch: April 8, 2015
  • Type: Central Sector Scheme
  • Objective: Providing loans up to Rs. 10 lakh to the non-corporate, non-farm small/micro enterprises. These loans are classified as MUDRA loans under PMMY. 
  • Eligible Member Lending Institutions (MLIs):
    • Public Sector Banks
    • Private Sector Banks
    • State operated cooperative banks
    • Rural banks from regional sector
    • Micro Finance Institution (MFI)
    • Non-Banking Finance Company (NBFC)
    • Small Finance Banks (SFBs) 
    • Other financial intermediary approved by Mudra Ltd. as member financial institutions
  • Eligible borrowers:
    • Individuals
    • Proprietary concern
    • Partnership Firm
    • Private Ltd. Company
    • Public Company
    • Any other legal forms
  • Application: The borrower can also apply online through portal www.udyamimitra.in
  • Interest rate: declared by Member Lending Institutions from time to time as per RBI guidelines based on which applicable interest rate is determined.

Components of MUDRA loans

  • The scheme has been classified as:
Components of MUDRA loans
  • Tarun Plus: From FY 2024-25, the upper cap on Tarun loans was increased to ₹20 lakh, for loanees with a good repayment history, which can be given on the discretion of the banks. This has been one of the drivers for higher quantum of loans.
  • Key facts- MUDRA:
    • MUDRA is a refinancing Institution. 
    • MUDRA does not lend directly to the micro entrepreneurs / individuals. 

Present status of MUDRA Loans

  • All-time high disbursal: The disbursal of MUDRA Loans reached an all-time high at ₹3.39 lakh crore in the third quarter of FY 2024-25, that ended December 2024.
  • Largest share: SBI has the largest share in the distribution of PMMY loans.
  • Reduction in NPAs of PMMY: Aggregate NPAs of PMMY loans decreased to 3.4% in 2023-24 from 4.9% in 2019-20.
image 173

Benefits of MUDRA Loans

  • Financial Inclusion: Extending financial services to those who are traditionally underserved by the formal banking sector, including small entrepreneurs, micro-enterprises, and self-employed individuals. Funding support helps them start, expand, or modernise their operations. 
  • Economic Growth: Contribute to the overall economic growth of the country by boosting the productivity and profitability of micro and small enterprises.
  • Employment Generation: Facilitate creation of job opportunities and promote entrepreneurship, particularly in rural and semi-urban areas, by supporting small businesses and self-employment ventures.
  • Skill Development: Encourage skill development and capacity building among small entrepreneurs and individuals engaged in various trades and businesses.
  • Women Empowerment: Empower women entrepreneurs. Promote their participation in economic activities by offering financial assistance and support.

There are certain challenges such as over-indebtedness and the need for a more comprehensive support system. Addressing these challenges and expanding MUDRA's reach can further contribute to economic growth and inclusive development in India.

Is Income Inequality widening in India?

Context: A number of recent consumption and asset surveys are showing a fall in inequality in India. 

Relevance of the Topic: Mains: Debate surrounding income inequality in India.

Economic Growth of India

Post-Independence Economic Issues:

  • India inherited a poor economy in 1947 with excessive poverty levels. The first 50 years of independence saw poverty persist due to a lack of substantial economic growth, in spite of the socialist policies for income redistribution.
  • The economy witnessed slow growth, excessive taxation, and policies that focused on wealth redistribution by way of public sector dominance and centralised control. 

Liberalisation in the 1990s: 

  • In the early 1990s, India shifted toward economic liberalisation, opening up its markets, reducing trade barriers, and embracing foreign investments. These reforms led to an annual growth rate of ~6% (1990-2020), lifting 400 million people out of poverty. 
  • By 2021, Indian poverty had declined to 13% of the population, from 40% in 2000, according to the World Bank's $2.15/day poverty line (2017 PPP). This reflects upwards economic mobility.
  • Based on household consumption expenditure surveys (2022-23), urban poverty was at 10%, while rural poverty was at 5%.
  • There has been a significant decline in multidimensional poverty, extending to access to sanitation, electricity, education, and healthcare.

World Inequality Lab (WIL) Estimates: 

  • Inequality Trends in India: According to WIL, the top 1% of earners in India take home 21% of disposable income, while the bottom 50% earn only 13%.

Limitations of WIL Data :

  • WIL's findings are based on income tax data, which represents a small proportion of the population. Surveys conducted by PRICE and NCAER, including both formal and informal sectors, reveal a far more equal distribution of income, with the richest 1% getting 8.8%, and the poorest 50% getting 22.8%.
  • Dependence on income tax data is a major drawback, as India has a relatively low proportion of taxpayers. This skews actual distribution of income and wealth. Other studies, including academic and market surveys, disagree with WIL's report, suggesting the data may not be credible.

Trends suggesting fall of Inequality in India

A number of recent consumption and asset surveys are showing a fall in inequality in India. 

  • More than 450 million individuals have moved past the $2/day income line from 2000 to 2012, with great economic mobility.
  • The proportion of individuals with incomes ranging from ₹5 lakh to ₹31 lakh annually grew from 14% between 2005 and 2021 to 31%, evidencing a large-based increase in income.
  • The ratio of workers in the population went up from 34.7% in FY18 to 43.7% in FY24, indicating better employment participation.
  • Average per capita income touched ₹2 lakh in FY24, which indicates rising economic growth.
  • Small FMCG players reaching price-sensitive consumers grew significantly more than big business, falsifying the premise that inequality is on the increase due to unbalanced consumption behavior.
  • Multidimensional poverty declined with noteworthy improvements in the availability of basic facilities like electricity, sanitation, and healthcare.
  • India has seen massive entry into wealth creation, particularly in the form of start-ups and MSMEs (Micro, Small, and Medium Enterprises). Credit to MSMEs has increased very fast, encouraging the establishment of new enterprises and facilitating wealth distribution among a wider segment of society. 
  • The number of Indian dollar millionaires doubled from 2012 to 2022, though their absolute numbers are few compared to world averages. India's percentage of world millionaires is merely 1.4%, whereas its percentage in world population is 17.2%. This shows that wealth creation is at a nascent stage in India.

Way Forward

  • Focusing on Upward Mobility: Policy and research must aim at enhancing upward mobility in the income distribution, instead of monitoring poverty and inequality alone. Policy must encourage economic engagement and offer opportunities for individuals to climb the income ladder. 
  • Avoiding Excessive Taxation of Wealth Creators: Excessive taxation of wealth creators, as proposed by certain inequality research, may hurt India's growth prospects by discouraging entrepreneurship and innovation. The government must aim at creating conditions where prosperity and upward mobility across income levels are promoted to ensure long-term economic growth.
  • Improving Governance and Infrastructure: To ensure continued growth, India needs to give high priority to governance reforms, particularly in non-metro areas, so that economic benefits are spread widely. Improving infrastructure, decentralisation, and local public service delivery will be key to inclusive and sustainable growth.

Indian growth is primarily based on a broad-based increase in consumption and economic mobility, as opposed to a concentration of wealth at the top. Policies aimed at economic mobility, employment generation, and narrowing inter-regional imbalances will be crucial to continuing this growth trend.  

Cabinet approves ₹1,500 Crore UPI Incentive Scheme 

Context: The Union Cabinet has approved the ‘Incentive Scheme for promotion of low-value BHIM-UPI transactions Person to Merchant’ (payments of less than ₹2,000) for FY 2024-25, with an outlay of around ₹1,500 crore. 

Relevance of the Topic :Prelims : UPI Incentive Scheme.

Key Highlights of the UPI Incentive Scheme: 

  • Estimated expenditure of ₹1,500 crore during the financial year 2024-25. 
  • Incentive Structure:
    • Banks will get a 0.15% incentive on UPI transactions of less than ₹2,000.
    • 80% of the admitted claim amount will be paid to banks without any restriction every quarter.
    • The remaining 20% will depend on achieving certain performance metrics:
      • Technical decline rate should be below 0.75%.
      • System uptime should be more than 99.5%.
  • Target Group: specifically aimed at small traders, who can accept UPI payments at no additional charge. UPI transactions under the scheme remain free of cost for merchants. 
image 86

Objectives: 

  • Promotion of indigenous BHIM-UPI platform. Achieving total transaction value of ₹20,000 crore via UPI for FY 2024-25. 
  • Penetration of UPI in tier 3 to 6 cities, especially in rural & remote areas by promoting innovative products such as: UPI 123PAY & offline (UPI Lite/UPI LiteX) payment solutions.
  • Building a robust and secure digital payment infrastructure with minimal technical declines.

Benefits of the Scheme:

  • Common citizens will benefit from seamless payment facilities with no additional charges.
  • Enable small merchants to avail of UPI services at no additional cost. As small merchants are price-sensitive, incentives would encourage them to accept UPI payment.
  • Supports the government's vision of a less-cash economy through formalising and accounting the transaction in digital form.
  • Efficiency gain- 20% incentive is contingent upon banks maintaining high system uptime and low technical decline. This will ensure round-the-clock availability of payment services to citizens.

Hence, the scheme is a judicious balance of both the growth of UPI transactions and the minimum financial burden on the Government exchequer.

Implementation gaps in Pradhan Mantri Awas Yojana-Gramin 

Context: Parliamentary Standing Committee on Rural Development has accused the government of failing to identify “genuine beneficiaries” for its flagship rural housing scheme, Pradhan Mantri Awas Yojana-Gramin (PMAY-G).

Relevance of the Topic: Prelims: Key facts about Pradhan Mantri Awas Yojana-Gramin (PMAY-G). 

Pradhan Mantri Awas Yojana-Gramin (PMAY-G)

  • Launched on April 1, 2016, by restructuring the Indira Awaas Yojana (IAY).
  • Aim: Provide "Housing for All" in rural areas by March 2029.
  • Implemented by: Ministry of Rural Development
  • Financial assistance is provided for constructing pucca houses with basic amenities for the rural poor.
  • Key Objectives:
    • Provide permanent housing to eligible rural households.
    • Address housing deprivation identified through the Socio-Economic Caste Census (SECC) 2011.
    • Ensure basic facilities such as electricity, sanitation, and clean drinking water.
    • Promote women empowerment by mandating joint ownership in house allotment.
  • Funding:
    • 60:40 ratio between the Centre and States: for Plains. 
    • 90:10 ratio for Northeast, Himalayan States, Jammu & Kashmir, and Ladakh.   
    • 100% centrally funded for Union Territories.
  • Financial Assistance to Beneficiaries:
    • ₹1.2 lakh per unit in plains.
    • ₹1.3 lakh per unit in hilly and difficult areas.
  • Beneficiary selection based on SECC 2011 data, verified through Gram Sabha. It Includes:
    • SCs/STs and freed bonded labourers.
    • Non-SC/ST BPL families.
    • Widows and next-of-kin of defence personnel killed in action.
    • Ex-servicemen, paramilitary forces, disabled persons, and minorities.
  • Progress and Targets:
    • Target (2016-2029): 4.95 crore houses.
    • As of February 2, 2025:
      • Target allotted: 3.79 crore houses.
      • Houses sanctioned: 3.34 crore.
      • Houses completed: 2.69 crore.
    • Additional 2 crore houses approved for construction during 2024-29.

Monitoring and Transparency Measures: 

  • AwaasSoft platform: Tracks progress through geo-tagged, time-stamped photographs.
  • Regular inspections: Conducted at block, district, and national levels.
  • Social audits: Annual audits at Gram Panchayat level.
  • Direct Benefit Transfer (DBT): Ensures funds go directly to beneficiary bank accounts.
  • Performance Index Dashboard: Monitors implementation and progress.
  • Grievance redressal mechanisms: Complaints can be lodged via CPGRAMS, IGRS, and CM helplines.

Challenges highlighted by Standing Committee on Rural Development: 

  • Outdated beneficiary data: PMAY-G still relies on SECC 2011, leading to exclusion of genuine beneficiaries and inclusion of ineligible categories.
  • Financial assistance has not increased despite rising construction costs.
  • Issue of backlogs: Scheme extension mainly covers previous backlog rather than new allocations.

Way Forward

Recommendations by Standing Committee on Rural Development

  • Update beneficiary data: Conduct a comprehensive review to include newly emerging needy households.
  • Expand eligibility: Include semi-permanent structure owners.
  • Increase per-unit assistance to ₹4 lakh, considering rising construction costs and inflation.
  • Addressing backlog and fresh allocations: Increase total houses planned under extended PMAY-G to 3.46 crore (1.46 crore backlog + 2 crore fresh allocations).

Household Debt and Consumption Loans in India

Context: The Financial Stability Report (FSR) 2024 by the RBI highlights the rise in household debt and its implications on financial stability and economic growth. 

Relevance of the topic:

Prelims: Questions on economic indicators like GDP, inflation, household debt, and financial stability.

Mains: Impact of debt on economic growth, financial inclusion, and inequality. 

Major Highlights: 

image 7

1. Rising Household Debt:  

  • Household debt-to-GDP ratio increased from 36.6% (June 2021) to 42.9% (June 2024), while household assets declined.
  • Debt growth driven by increase in number of borrowers, not rising indebtedness per borrower
  • Sub-prime borrowers are decreasing; two-thirds of debt now belongs to prime and super-prime borrowers

2. Shift in Borrowing Purpose: 

  • Shift in borrowing patterns—greater unsecured loans for consumption (than asset creation), particularly among low-income groups.
    • Super-prime borrowers: 64% of loans used for asset creation.
    • Sub-prime borrowers: Nearly 50% of loans used for consumption.
  • Lower-income groups rely more on unsecured credit (credit cards, personal loans).

3. Increasing Financial Stress for Lower-Income Households:  

  • Higher delinquencies in credit card and personal loans since September 2023.
  • Unsecured debt defaults can impact secured loans (housing, vehicle loans).
  • Financial stress among low-income groups can weaken economic stability.

Challenges: 

  • Macroeconomic Weakness: High household debt can lower economic growth.
  • Financial Marginalisation: Low-income households are burdened with debt, reducing their ability to spend.
  • Credit Risks: Increase in non-performing assets (NPAs) due to defaults in unsecured loans.
  • Decline in Income Multiplier Effect  Poor households spend more of their income, but debt servicing reduces consumption, impacting economic growth.
  • Role of Financial Innovations: Growth in unsecured loans raises concerns over financial stability.

Benefits: 

  • Increase in Credit Access: More individuals now have access to credit.
  • Better Borrower Profiles: More lending to prime and super-prime borrowers.
  • Control Measures by RBI: Recent steps have slowed credit growth, reducing risks.

The policy will have to remain awake to the possible sources of fragility engendered by the increase in consumption loans and the proliferation of unsecured forms of consumer credit. 

District-level GDP Estimation

Context: In keeping with the international standards, India’s economic growth story has long been measured through National level GDP Estimates. Yet the most critical unit of development- the district- remains an economic blind-spot. 

Relevance of the Topic: Mains: District-level GDP Estimation- Issues, Need, Challenges, Way Forward

Limitations of the Current GDP Estimation Methodology

  • Top-down Approach:
    • Economic output is first estimated at the national level and then apportioned to States and districts. This method does not measure economic activity directly at the district level.
  • Sectoral Challenges:
    • Primary Sector (Agriculture, Forestry, Fishing, Mining):
      • Uses a bottom-up approach, aggregating data from districts to the national level.
      • However, data collection methods are often outdated and inconsistent.
    • Secondary & Tertiary sectors (Manufacturing, Construction, Services, etc.):
      • Relies on a top-down approach, using indicators like employment levels, wages, and infrastructure presence.
      • Fails to capture real-time economic activity or the sectoral contribution of districts.
  • Data Gaps and Inaccuracies:
    • The unorganised sector and informal economic activities are poorly captured.
    • Survey methodologies are inconsistent, leading to unreliable estimates.
    • Economic reality at the district level is often misrepresented.

Need for District Domestic Product (DDP) Estimation

  • Granular data for policymaking: Helps tailor policy interventions to address economic disparities at the district level.
  • Localised economic planning:
    • Identifies sector-specific growth opportunities for each district.
    • Enables targeted investments in agriculture, manufacturing, or services as needed.
  • Strengthening Fiscal federalism:
    • Empowers districts to develop independent economic strategies aligned with national and state goals.
  • Case Study: Uttar Pradesh (UP) & COVID-19: 
    • During 2020-21, GDP data was distributed using the traditional method, which did not reflect UP’s economic reality.
    • UP’s agriculture sector contributed 25% of its Gross State Value Added (GSVA) and was less impacted than manufacturing.
    • The state advocated for a bottom-up approach to estimate GDP more accurately.
image 32

Challenges in Implementing district-level GDP estimation:

  • Financial and logistical investment: Requires substantial funding for data collection and statistical infrastructure.
  • Collaboration between Central & State agencies: Needs coordination between MoSPI and state statistical departments.
  • Capacity building: Training local officials to collect and analyze economic data.

Way Forward

  • Investment in data infrastructure: Every $1 invested in statistics leads to $32 in economic development.
  • Real-time economic monitoring: Use digital tools, AI, and big data analytics to track economic activities.
  • Incorporating DDP in Viksit Bharat 2047 vision: Empowering districts for equitable and inclusive growth.

A robust district-level economic measurement framework will ensure balanced growth, making India’s journey toward a $5 trillion economy more inclusive and sustainable.

Making sense of India's GDP Data

Context: The Indian government recently released the latest estimates of the country’s economic growth.

Relevance of the Topic: Prelims: GDP- Definition, Real vs Nominal GDP, GDP estimates. 

Understanding Gross Domestic Product (GDP)

  • Definition: GDP is the total market value of all goods and services produced within India's geographical boundaries in a specified period.
  • Real vs. Nominal GDP: 
    • Nominal GDP: value of all the final goods and services at current market prices, without adjusting for inflation.  
    • Real GDP: adjusts nominal GDP for inflation. It reflects the economy’s true growth by accounting for changes in price levels.

India's GDP Growth trends

  • Second quarter GDP decline (Q2 FY25): India's GDP growth rate in the second quarter (July-September) slumped to 5.4%, indicating a potential slowdown.
  • Revised Q2 growth: Ministry of Statistics and Programme Implementation (MoSPI) later revised the Q2 GDP growth rate to 5.6%, reflecting a minor upward correction.
  • Third quarter GDP (Q3 FY25): GDP growth for October-December was 6.2%, signaling a recovery from the previous slump.
  • Second advance estimates (SAE) for FY25: Real GDP growth of 6.5% for FY 2024-25. 
image 12

Revision of GDP Estimates

GDP figures undergo multiple revisions as more accurate data becomes available. Revisions reflect a more precise picture of economic performance.

  • Stages of GDP revisions:
    • First Advance Estimates (FAE): Released in January of the financial year.
    • Second Advance Estimates (SAE): Released in February.
    • Provisional Estimates (PE): Released in May, incorporating Q4 data.
    • First Revised Estimates (FRE): Released the following February with better data.
    • Final Estimates: Released two years later as the most accurate GDP assessment.
  • Key GDP revisions and their implications:
    • Upward GDP revision for FY24: GDP growth rate was revised sharply from 8.2% to 9.2%, a significant 1 percentage point increase.

Significance of sharp GDP Revisions

  • Economic planning: GDP data influences government policy decisions on fiscal measures, investments, and subsidies. 
  • Tax revenues and corporate performance: Weaker GDP growth implies lower tax revenues for the government and weaker corporate earnings, affecting investor sentiment.
  • Foreign investment and Stock market trends: Revisions in GDP growth impact foreign investor confidence and the valuation of Indian stocks.

Reliable GDP data is needed to formulate effective fiscal and monetary policies, and uphold investor confidence (both domestic and foreign). 

Private consumption as a key growth driver

  • Revised private consumption estimates: Initially pegged at 4% growth for FY24, private consumption was later revised to 5.6%.
  • Importance of private consumption: It is the largest contributor to GDP, driving demand for goods and services, impacting production, employment, and economic stability.
  • Comparison with other growth engines: Unlike government spending and private sector investments, private consumption currently plays a more significant role in driving GDP growth.

Critical takeaways from the GDP revisions

  • Stronger economic performance: In FY24, India’s economic performance was stronger than initially assumed. The sharp upward revision indicates robust underlying economic activity.
  • Pronounced growth slowdown: The growth slowdown in FY25 is more pronounced than expected. With growth falling from 9.2% to 6.5%, the economic momentum has weakened significantly.
  • Credibility of GDP estimates needs strengthening: Large-scale revisions create uncertainties in economic assessments and policymaking, necessitating more reliable initial estimates.

India needs Accelerated Reforms to reach High Income Status by 2047: World Bank

Context: Recently, the World Bank has released a report titled ‘India Country Economic Memorandum’ which has called for accelerated reforms to help India achieve high income status by 2047. 

India will need to grow by 7.8% on average over the next 22 years to achieve the country’s aspirations of reaching high-income status by 2047.

Relevance of the Topic:Mains: Viksit Bharat- Recommendations

Major Highlights of the Report

  • Global Experience in Economic Transition: 
    • Only a few countries, such as Chile, Romania, Poland, Czech Republic, and Slovakia, have transitioned from middle to high-income status within two decades.
    • Many others, including Brazil, Mexico, and Turkey, have remained in the upper-middle-income trap.
    • India needs ambitious reforms and effective implementation to avoid stagnation.
  • India’s Growth and Investment Projections: 
    • India’s Gross National Income (GNI) per capita must increase nearly eight times from $2,540 (2023) to exceed the $14,005 high-income threshold.
    • Under a moderate reform scenario in India:
      • Investment is projected to peak at 37% of GDP by 2035.
      • Economic growth is expected to average 6.6% annually.
      • Total factor productivity (TFP) growth would peak at 2.5%.
      • Female labor force participation (FLFPR) is expected to increase to 45% by 2045. 
    • India needs ‘accelerated reforms’, with which:
      • Investment share in GDP could reach 40% by 2035.
      • Growth could reach 7.8% annually, enabling high-income transition.
      • Total factor productivity (TFP) growth would peak at 2.7%.
      • FLFPR is expected to increase to 55% by 2050. 
image 8

Key Reform Areas

  • Financial-Sector Reforms:
    • Ensure efficient credit allocation and risk minimisation.
    • Deepening corporate bond markets.
    • Facilitating further credit access for Micro, Small, and Medium Enterprises (MSMEs).
  • Boosting private and public investments: Increasing public investment in sectors that crowd-in private investment, such as:
    • Agriculture and allied industries
    • Urban development
    • Transport infrastructure
  • Trade and FDI liberalisation:
    • Reducing tariffs and trade barriers.
    • Encouraging participation in Global Value Chains (GVCs) to enhance productivity and exports.
    • Addressing market concentration and large state presence in key sectors like petroleum, IT equipment, and cement.
  • Creating Quality Jobs:
    • Targeting stronger growth in labor-intensive sectors 
    • Expanding MSMEs to increase employment opportunities.
    • Supporting traditional market services (hospitality, trade, and communications) through better infrastructure and reduced entry barriers.
    • Enhancing intermediate manufacturing by reforming labor regulations, improving land availability, and upgrading logistics infrastructure.
  • State-specific growth strategies:
    • Addressing inter-state income disparities for inclusive growth.
    • Encouraging policies for large-scale inter-state migration.
    • Implementing differentiated policy approaches, rather than a ‘one size fits all’ approach:
      • Less-developed states: Strengthening growth fundamentals.
      • Developed states: Focusing on next-generation reforms.

By implementing these reforms, India can sustain high growth, create employment opportunities, and improve the standard of living for its citizens.

EPFO retains 8.25% Interest Rate on Employees' PF Deposits

Context: Employees’ Provident Fund Organisation (EPFO) retained an interest rate of 8.25% on employees' provident fund (EPF) deposits for 2024-25, in the recent meeting by the Central Board of Trustees. 

Relevance of the Topic:Prelims: Employees’ Provident Fund Organisation, Central Board of Trustees.

About Employees’ Provident Fund Organisation (EPFO)

  • EPFO is a statutory body set up under the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952.
  • The Act and Schemes framed are administered by a tri-partite Board known as the Central Board of Trustees, Employees' Provident Fund.
    • It consists of representatives of Government (Both Central and State), Employers, and Employees.
    • The Board administers a contributory provident fund, a pension scheme and an insurance scheme for the workforce engaged in the organised sector in India.
      • Provident fund: Financial scheme that aims to provide retirement benefits to employees.
      • It is a savings scheme established by employers and/or employees to accumulate a fund over a period of time, which can be withdrawn by the employee upon retirement or under certain specified conditions.
  •  EPFO is under the administrative control of the Ministry of Labour and Employment.

Schemes by EPFO

The Board operates three schemes, namely: 

  • Employees' Provident Funds Scheme 1952 (EPF):
    • Accumulation plus interest upon retirement and death.
    • Partial withdrawals allowed for education, marriage, illness and house construction.
    • Housing scheme for EPFO members to achieve the Prime Minister’s vision of Housing for all by 2022.
  • Employees' Pension Scheme 1995 (EPS):
    • Monthly benefit for superannuation/benefit, disability, survivor, widow(er) and children.
    • Minimum pension of disablement.
    • Past service benefit to participants of the erstwhile Family Pension Scheme, 1971.
  • Employees' Deposit Linked Insurance Scheme 1976 (EDLI):
    • The benefit is provided in case of the death of an employee who was a member of the scheme at the time of death.
    • The benefit amount is 20 times the wages, a maximum benefit of 6 Lakh.

Key Agendas of CBT Meeting

  • Supreme Court order on Higher PF Pension:
    • Background: Supreme Court’s November 2022 ruling allowed employees to opt for a higher pension based on actual wages instead of the capped wage.
    • Pro-Rata based calculation: EPFO argues that pro-rata pension calculation ensures equity between wage-ceiling pensioners and higher-wage pensioners.
    • Concerns raised by workers’ representatives: Oppose pro-rata pension computation, stating it violates the Supreme Court order.
    • Demand stricter directions for exempted establishments (private PF trusts) to comply.
    • Current status: 70% of higher pension applications processed.
  • Proposed changes to Employees’ Deposit Linked Insurance Scheme (EDLI):
    • Current issue: No benefits if a worker dies within one month of joining the scheme.
    • Proposed reforms: 
      • Minimum compensation of ₹50,000 for the family if the worker dies within a month.
      • Increased compensation for deaths within six months.
      • Relaxation of the one-year threshold for eligibility.

Maternity Benefits in India

Context: Despite legal provisions under the National Food Security Act (NFSA) 2013, implementation of maternity benefits has been inadequate. PM Matru Vandana Yojana (PMMVY), also has been restrictive and ineffective.

Relevance of the Topic: Mains: Maternity Benefit initiatives-Issues, Way forward

Maternity Benefit Initiatives in India

  • National Food Security Act (NFSA) 2013: Entitles all pregnant women (except those in the formal sector) to ₹6,000 per child.
  • PM Matru Vandana Yojana (PMMVY): Initially introduced in 2017, restricts benefits to one child per family, later extended to a second child (if a girl).
  • Maternity Benefits Act 1961 (amended 2017): Provides 26 weeks of paid maternity leave in the formal sector, compared to only ₹5,000 in the informal sector under PMMVY.

Issues with PMMVY Implementation

  • Violation of NFSA provisions: 
    • PMMVY provides only ₹5,000 instead of ₹6,000.
    • Limiting benefits to one child (or two in case of a girl) contradicts NFSA's universal entitlement.
  • Shrinking Coverage:
    • Effective coverage peaked at 36% in 2019-20 and crashed to 9% in 2023-24.
    • Budgetary allocation for PMMVY fell to ₹870 crore in 2023-24, about one-third of the allocation five years ago.
    • Required budget to cover 90% of births at ₹6,000 per child: ₹12,000 crore.
  • Lack of Transparency:
    • The Ministry of Women and Child Development does not proactively disclose PMMVY data.
    • Basic statistics on beneficiaries and disbursement rates are absent from public records.
  • Administrative and Technical challenges:
    • Frequent software issues disrupted disbursements in 2023-24.
    • Aadhar-linked payments and digital application processes create exclusionary barriers.
  • Comparison with State Schemes:
    • Tamil Nadu: Offers ₹18,000 per child, with 84% coverage in 2023-24.
    • Odisha: Provides ₹10,000 per child, covering 64% of births in 2021-22.
    • PMMVY (all-India): Coverage fell below 10% in 2023-24.

Way Forward

  • Universal Coverage: Restore NFSA-mandated ₹6,000 benefit for every pregnancy.
  • Increase budget allocation: Align PMMVY spending with estimated needs.
  • Transparent implementation: Publish real-time data on applications, approvals, and disbursements.
  • Simplified disbursement process: Reduce bureaucratic and technological hurdles.
  • Indexation to inflation: Adjust maternity benefits in line with rising living costs.

Revamped scheme aligned with NFSA provisions is essential to ensure better maternal and child health outcomes. Strengthening maternity benefits is a social investment that benefits not just women, but the entire society.

Credit Guarantees in India: Trends and Concerns

Context: The Union government has launched various Credit Guarantees schemes to strengthen the credit delivery system and facilitate the flow of credit to bolster economic activity. However, the sustainability and long-term implications of government-backed guarantees need careful evaluation. 

Relevance of the topic:

Prelims: Credit guarantee schemes

Mains: Credit Guarantee- Trends, Issues, Way Forward 

Loan Guarantee schemes in India

  • Emergency Credit Line Guarantee Scheme (ECLGS):
    • Introduced in 2020 to provide additional working capital support to businesses (focus on MSMEs, hospitality, tourism, healthcare) affected by the COVID-19 pandemic. 
    • It provides Member Lending Institutions (MLIs), 100% guarantee against any losses suffered by them due to non-repayment of the ECLGS funding by borrowers.
  • Mutual Credit Guarantee Scheme for MSMEs (2025): 
    • In pursuance of the Union Budget 2024-25 announcement, the Mutual Credit Guarantee Scheme for MSMEs (MCGS - MSME) has been launched recently. 
    • MCGS- MSME scheme will provide 60% guarantee coverage by National Credit Guarantee Trustee Company Limited (NCGTC) for facilitating loans up to Rs. 100 crore to MSMEs for purchase of machinery or equipment without collateral.
    • Mutual Credit Guarantee Scheme for MSMEs 
  • Enhanced Credit Availability in Union Budget 2025-26: 
    • Credit guarantee cover for micro and small enterprises (MSEs) is increased from ₹5 crore to ₹10 crore.
    • Credit guarantee cover of startups will double from ₹10 crore to ₹20 crore, with a reduced fee of 1% for loans in 27 priority sectors.
    • Exporter MSMEs will benefit from term loans up to ₹20 crore with enhanced guarantee cover. 
  • Stand-Up India Scheme:
    • It facilitates bank loans between Rs 10 lakh and Rs 1 Crore to at least one Scheduled Caste (SC) or Scheduled Tribe (ST) borrower and at least one woman borrower per bank branch for setting up a greenfield enterprise. This enterprise may be in manufacturing, services or the trading sector. 
  • Startup India Seed Fund Scheme (SISFS): Launched in 2021 to offer financial support to innovative startups.
  • Pradhan Mantri Mudra Yojana (PMMY): Facilitates micro-financing by offering loans to small businesses.
  • Atmanirbhar Bharat Abhiyan Credit Guarantee Scheme (2020): Aimed at revitalising MSMEs and facilitating the recovery of the economy post-pandemic. 
  • Kisan Credit Card (KCC): Provides timely credit support to farmers to support their cultivation needs. As of March 2024, India has 7.75 crore operational KCC accounts with a loan outstanding of ₹9.81 lakh crore. 

Positive impacts of government loan guarantees

  • Enhance liquidity and solvency:
    • Government guarantees have improved the liquidity of MSMEs, enabling them to sustain operations during periods of economic strain. 
    • E.g., Emergency Credit Line Guarantee Scheme (ECLGS) provided working capital support to businesses and prevented bankruptcies during COVID-19 pandemic.
  • Reduction in Non-Performing Assets (NPAs):
    • Government-backed guarantees (assurance of guarantees) encouraged banks to offer credit more freely. It has contributed increased formal credit and reduction in NPAs in public sector banks, showcasing an improved repayment rate from businesses benefiting from these schemes. 
    • E.g., The gross NPAs in MSME loans by Scheduled Commercial Banks had declined by over 18% to Rs 1.25 lakh crore in FY24 from Rs 1.54 lakh crore in FY22. 
image 171

Concerns associated with loan guarantees

  • Over-reliance on government guarantees:
    • Small borrowers often back comprehensive financial records, which makes risk assessment for the lenders complicated. 
    • Perpetual dependence on government-backed guarantees may discourage banks to conduct thorough credit appraisals, which could lead to potential moral hazard. 
    • This could lead to financial instability, if these guarantees are misused or extended too freely.
  • Increased defaults and fiscal burden:
    • If the borrowers (especially MSMEs and startups) default on their loans, the government will bear the liability, which could strain public finances and lead to higher fiscal deficits.
  • Impact on fiscal deficit and debt:
    • The Fiscal Responsibility and Budget Management Act has restricted the Central Government to extend guarantees up to 0.5% of GDP in any financial year, there is no concise definition around the informal form of implicit support by the government. 
    • The government has used loan guarantees as a substitute for direct public investment, especially in infrastructure, to curtail fiscal deficit. However, this approach could increase the fiscal deficit if large-scale defaults occur. 
    • Moreover, guarantees are often difficult to account for in the national budget due to their contingent nature, leading to challenges in financial reporting.

Way Forward for Loan Guarantees

  • Transparency in financial reporting: 
    • The shift towards better accounting standards for MSMEs and startups is crucial to improving transparency and reducing risks associated with loan defaults. 
    • This includes disclosing the range of expected outcomes and their probabilities to help policymakers assess whether the risks associated with the guarantees are manageable.
  • Merit-based support for startups:
    • Government guarantees should be directed towards startups based on merit-based assessments rather than blanket support. 
    • Factors such as corporate ethics, governance capacity, and leadership style should be considered before granting guarantees. 
    • This can ensure that these firms can sustain themselves without long-term dependence on government support.