ECONOMIC SURVEY

SUMMARY
2025 – 2026

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 INDEX
1. State of The Economy: Pushing the Growth Frontier .....1 – 8

2. Fiscal Developments: Anchoring Stability Through Credible Consolidation .....9 – 21

3. Monetary Management and Financial Intermediation: Refining The Regulatory Touch .....22 – 29

4. External Sector: Playing The Long Game .....30 – 33

5. Inflation: Tamed and Anchored .....34 – 39

6. Agriculture And Food Management: Raising Productivity, Securing Income and Ensuring .....40 – 43

7. Services: From Stability to New Frontiers .....44 – 48

8. Industry’s Next Leap: Structural Transformation and Global Integration .....49 – 65

9. Investment and Infrastructure: Strengthening Connectivity, Capacity and Competitiveness .....66 – 79

10. Environment and Climate Change: Building A Resilient, Competitive and Development-
Driven India .....80 – 91

11. Education and Health: What Works and What’s Next .....92 – 107

12. Employment and Skill Development: Getting Skilling Right .....108 – 119

13. Rural Development and Social Progress: From Participation to Partnership .....120 – 127

14. Evolution of The AI Ecosystem in India .....128 – 132

15. Urbanisation: Making India’s Cities Work For its Citizens .....133 – 138

16.1. From Import Substitution to Strategic Resilience and Strategic Indispensability ..... 139 – 151

16.2. Building Strategic Resilience and Strategic Indispensability: The Role of The State,
The Private Sector and The Citizens ..... 152 – 158
 ECONOMIC SURVEY 2025-26

CHAPTER
1 STATE OF THE ECONOMY: PUSHING
THE GROWTH FRONTIER

Chapter Overview
Against the geopolitical tensions, trade disruptions, and divergent growth and inflation outcomes across
major economies, the Indian economy has maintained strong growth momentum in FY26. The First
Advance Estimates place real GDP growth at 7.4 per cent, with growth largely driven by domestic demand.
Private consumption and capital formation continue to support expansion, while services remain the key
contributor on the supply side. Manufacturing activity has strengthened, and agriculture has provided
stability, despite its structural constraints. India’s medium-term growth potential has strengthened to 7
per cent, positioning the economy on a path of steady expansion amid global uncertainty.

Global Economic Growth- Fragile and Diverging

1. The global economy has been subjected to multiple upheavals. The most disruptive amongst these
disturbances was the imposition of tariffs by the USA on imports from its trade partners.
2. Globally, the shift from aggressive monetary policy tightening to a neutral or an accommodative stance
is still underway. There have been divergent trajectories of central bank policy rates across these
economies. This has implications for capital flows as fund houses trot the globe in search of higher
yields.

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3. Amidst ongoing weaknesses in growth and inflation, fiscal policies in major economies stay
expansionary. Long-term borrowing costs for the world’s biggest economies have stayed elevated as
investors question the ability of governments to cover massive budget deficits. These pressures are
showing in elevated bond yields across major AEs, particularly in the ultra-long tenure segment.

4. As per the United Nations Conference on Trade and Development’s (UNCTAD) World Investment
Report 2025, FDI flows in 2024, barring those in certain conduit economies, have declined by 11 per
cent YoY.

5. The global economy has entered a phase in which geopolitical considerations exert a much stronger
influence than they did in the 2010s. Rapidly evolving country alignments and supply chains, as well

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as technological developments, necessitate supplementing traditional economic assessments with a

geopolitical perspective. There has thus been a resurgence of economic statecraft.

Resurgence of Economic Statecraft

Economic Statecraft- It is broadly defined as the deliberate use of economic means to achieve strategic
ends. It goes beyond economic policy (which uses traditional instruments such as fiscal, monetary, and trade
tools, to achieve economic objectives such as reducing deficits, controlling inflation, and economic growth).
It employs economic tools to achieve foreign policy or national security objectives, such as compelling a
country to stop hostilities with a third party or to liberalise its markets.
Historical Examples of Economic Statecraft- Megarian Decree imposed by Athens in ancient Greece,
Roman Empire’s grain provisioning system, and Kautilya’s Arthashastra which recognised economic
statecraft.
Drivers behind the resurgence of Economic Statecraft-
1. Resurgence of ultra-nationalism
2. Increasing scepticism of free trade and multilateral institutions
3. Lack of updated global norms to govern competition, investment, and subsidies.
4. Intensification of geopolitical tensions (pacifist nations like Japan have upped their defence spending
to 2 per cent of their GDP)
5. New colonial scramble for access to critical minerals and technological resources.
6. Incentivising companies to develop local supply chains in strategic sectors and to adopt friend-
shoring and near-shoring.
7. Advancement of state support to bigger players in emerging strategic industries such as renewable
energy, electric vehicles, critical minerals, semiconductors, and AI.
Tools of Economic Statecraft
1. US’ export controls on critical technologies such as advanced semiconductors.
2. Dual-use and critical mineral export restrictions like China’s tightening of export licensing and
controls on key rare earth elements.
3. Sanctions and blacklists like Western nations sanctions against Russian entities to constrict war-
related supply chains..
4. Tariffs such as EU Carbon Border Adjustment Mechanism (CBAM) puts tariffs on imports like steel
and cement based on embedded emissions, targeting high-pollution exporters (e.g., China, India).
5. Fiscal policy such as China utilising its fiscal power to construct infrastructure in other countries
through its Belt and Road Initiative, aiming to enhance its trade and economic dominance.
India must focus on deliberately cultivating strategic indispensability. Strategic indispensability arises
when an economy offers goods, services, or roles that are sufficiently critical to global value chains that
partners cannot easily substitute, thereby reducing the effectiveness of coercive measures.

TRENDS IN THE DOMESTIC ECONOMY

Advance Estimates for FY26 reflect strong growth momentum

First Advance Estimates (FAE) for FY26 released by the Ministry of Statistics and Programme Implementation
(MoSPI), place the real GDP growth rate at 7.4 per cent and the GVA growth rate at 7.3 per cent. It has
reaffirmed India’s status as the fastest-growing major economy for the fourth consecutive year.

Demand Side- Domestic Drivers of Growth

1. Increase in PFCE- The share of final private consumption expenditure (PFCE) in GDP has increased to
61.5 per cent in FY26, the highest level since FY12.

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2. Steady GFCF- The share of Gross Fixed Capital Formation (GFCF) in GDP has remained steady at 30.5
per cent in H1 of FY26, well above the prepandemic average of 28.6 per cent.

Supply Side Growth- Industry and Services Led

1. From a supply-side perspective, growth in GVA during FY26 was led by the industry and services
sectors, supported by sustained capital expenditure, improved capacity utilisation, and steady demand
for services.
2. Agriculture has provided a stabilising force, with output supported by favourable monsoon conditions
and steady value addition from allied activities.

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3. Industrial growth remained broad-based, with most segments performing above their pre-pandemic
trends.

4. Services have grown by 9.1 per cent in FY26, up from 7.2 per cent in FY25, indicating a further
acceleration in services-led expansion.

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Strengthening India’s National Statistical System: From Data Generation to Data Readiness
Government has undertaken a comprehensive strengthening of the National Statistical System, spanning
new data generation, survey modernisation, macroeconomic rebasing, digital dissemination and data
harmonisation.
Expanding the data frontier through new surveys
1. Annual Survey of Incorporated Service Sector Enterprises (ASISSE)- It will for the first time
provide a systematic coverage of the incorporated services sector. It is expected to commence from
April 2026.
2. All India Debt and Investment Survey (AIDIS)- It will provide comprehensive information on
household asset ownership and indebtedness across rural and urban areas. It is scheduled to be
conducted from July 2026 to June 2027.
More Frequent and Granular Analysis
1. The Annual Survey of Unincorporated Sector Enterprises (ASUSE) is now released quarterly.
2. Sampling design of the Periodic Labour Force Survey (PLFS) has been revised to generate monthly
and quarterly estimates.
Modernising surveys and strengthening state statistical systems
Survey operations have been transformed through digitalisation. Computer-Assisted Personal
Interviewing (CAPI), integrated with the cloud-based eSIGMA platform, enables real-time validation,
monitoring, geotagging and faster data processing.
Rebasing macroeconomic indicators for a changing economy
1. The National accounts is being rebased to 2022-23.
2. Index of Industrial Production (IIP) is being rebased to 2022-23.
3. The Consumer Price Index (CPI) is being rebased to 2024, using the latest consumption patterns from
the Household Consumption Expenditure Survey (HCES) 2023-24.
Digital-first data dissemination
MoSPI has developed an integrated digital ecosystem- eSankhyiki Portal provides access to over 770
indicators, covering 18 statistical products and comprising approximately 136 million records.
Data harmonisation and AI readiness
The National Metadata Structure (NMDS 2.0) and the Statistical Quality Assessment Framework (SQAF),
aligned with UN standards, aim to improve data quality, transparency and interoperability.

Assessment of Domestic Macroeconomic Fundamentals

1. Inflation dynamics in the economy- Domestic inflation dynamics in FY26 (April-December) reflect a
broad-based easing in price pressures, led by a sharp disinflation in food prices.
2. Supportive fiscal policy strategy- The gross tax revenue collection has progressed resiliently during
the year, with direct tax collections reaching nearly 53 per cent of the budgeted annual target. Indirect
tax collections has also remained robust despite lower inflation and import volatility, with gross
GST collections in absolute terms recording multiple all-time highs during the year. There has been
restructuring of personal income tax and the rationalisation of the GST rate.
3. Monetary Transmission and the Changing Credit Mix- There was a cumulative reduction of 125
basis points in the policy repo rate since February 2025. There has been injection of durable liquidity
via cash reserve ratio cuts (₹ 2.5 lakh crore), open market operations (₹6.95 lakh crore) and forex swap
of around $25 billion.

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■ The weighted average lending rate (WALR) on fresh Rupee loans by scheduled commercial banks
declined by 59 basis points (bps), while the WALR on outstanding Rupee loans declined by 69 bps
between February and November 2025.
■ The gross non-performing asset (NPA) ratios have declined to multi-decade lows of 2.2 per cent.
4. Stable External Sector despite persistent headwinds- Against a backdrop of global trade
uncertainty, India’s total exports (merchandise and services) has reached a record USD 825.3 billion
in FY25, with continued momentum in FY26.
■ The rise in merchandise trade deficit has been counterbalanced by an increase in services trade
surplus, while the growth in remittances has bolstered this balance. Current account deficit remains
moderate at 0.8 per cent of GDP in H1 FY26.

 FPI flows this year have been tepid due to elevated uncertainty and increased interest in AI-related
financial investments in countries such as the US, Taiwan, and Korea. There was a balance of payments
(BOP) deficit of USD 6.4 billion in H1 FY26 compared to a surplus of USD 23.8 billion in H1 FY25, which
was funded by a decline in foreign exchange (forex) reserves.

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 This widened BOP deficit, coupled with market uncertainty over the outcome of a trade deal with the
US, has exerted pressure on the Indian Rupee, causing it to weaken. Between April 1 and January 22,
2026, the Indian rupee depreciated by approximately 6.5 per cent against the US dollar.
 Forex reserves cover over 11 months of imports as of 16 January 2026 and approximately 94.0 per
cent of the external debt outstanding as of the end of September 2025, offering a comfortable liquidity
cushion.
 India has negotiated trade agreements with the UK, Oman, and New Zealand and the EU.

Labour Market Developments

1. India has witnessed improvements
in the labour market. Recent labour
market indicators suggest improving
employment conditions supported by
ongoing structural reforms.
2. The consolidation of 29 central laws
into four Labour Codes aims to simplify
compliance, enhance labour market
flexibility, and extend security to a
broader section of the workforce, while
maintaining safeguards for wages,
occupational safety, and social security.
3. In June 2025, the World Bank revised the international poverty line from USD 2.15 to USD 3.00 per day
(PPP, 2021 prices). Based on the revised poverty line, India’s poverty rates in 2022-23 are estimated
at 5.3% per cent for extreme poverty and 23.9% per cent for lower-middle-income poverty.

Outlook and Way Forward

1. FY27 is expected to be a year of adjustment, as firms and households adapt to these changes, with
domestic demand and investment gaining strength.
2. If the AI boom fails to deliver the anticipated productivity gains, it could trigger a correction in overly
optimistic asset valuations. Protraction of trade conflicts would weigh on investment and further
weaken the global growth outlook.
3. Cumulative impact of policy reforms over recent years appears to have lifted the economy’s medium-
term growth potential closer to 7 per cent.
4. Economic Survey projects real GDP growth in FY27 in the range of 6.8 to 7.2 per cent.

Question For Practice

1. “The global economy is witnessing a resurgence of economic statecraft, where geopolitical
considerations increasingly shape trade, investment, and technology flows.” Explain the concept of
economic statecraft and the factors driving its resurgence in recent years.
2. Despite global economic headwinds, India has sustained strong growth momentum in FY26, driven
largely by domestic factors. Critically analyse the role of macroeconomic stability, structural reforms,
and data system modernisation in strengthening India’s growth fundamentals.

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FISCAL DEVELOPMENTS:
CHAPTER
2 ANCHORING STABILITY THROUGH
CREDIBLE CONSOLIDATION

Chapter Overview- India’s Central Government achieved fiscal consolidation while sustaining public
investment through credible deficit reduction and strategic spending reorientation. Revenue receipts
rose from 8.5% in the pre-pandemic period (FY 16- FY 20) to 9.1% of GDP post-pandemic years (FY 22-
FY 25), driven by buoyant direct taxes, reforms, and technology-enabled compliance. GST collections hit
record highs with growth aligned to nominal GDP.
Revenue expenditure fell from 13.6% to 10.9% of GDP (FY22-FY25), while capital expenditure increased
from 1.7% to 3% of GDP, reaching 4% effective capex through subsidy rationalization, DBT leakage
reduction, and Just-in-Time fund releases.
The Central Government, through its Special Assistance to States for Capital (SASCI) has incentivized
States to maintain 2.4% GDP capex. India reduced general government debt-to-GDP by 7.1 percentage
points since 2020 unlike its peers. It is targeting 50±1% by FY31. Reform suggestions include reducing
cross-subsidies, revising government company definitions for equity monetization, advancing e-way
billing nudges, and improving spending efficiency.

Introduction
1. India received three sovereign credit rating upgrades in 2025 (Morningstar DBRS, S&P Global Ratings,
R&I) due to prudent fiscal management, deficit reduction, improved revenue buoyancy, and shift toward
capital investment.
2. Fiscal resilience has been achieved through deliberate policy effort despite expenditure pressures and
revenue uncertainty.

Central Government Finances

Fiscal Policy as Key Anchor of macroeconomic stability and confidence

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1. The Union Budget for FY22 articulated a Medium-term glide path targeting fiscal deficit below 4.5% of
GDP by FY26, balancing growth with sustainability.
2. Fiscal deficit decline: 9.2% (FY21) → 4.8% (FY25 PA) → 4.4% (FY26 BE). Revenue deficit is at its lowest
since FY09. Primary deficit declined, indicating borrowings used for servicing past debt rather than
current spending.

Sustained Revenue Buoyancy supporting consolidation

1. In an environment of heightened global volatility, government revenues have strengthened fiscal
capacity, allowing expenditure needs to be met while following a consolidation path.
2. Revenue receipts have increased from 8.5% of GDP (FY16-FY20) to 9.1% (FY22-FY25 PA). It has been
driven primarily by the increase in Gross tax revenue, which has increased from 10.8% of the GDP to
11.5% of GDP during the same period.

Broadening of Direct Tax Base

1. Direct taxes share increase: 51.9% (pre-pandemic) → 55.5% (post-pandemic) → 58.8% (FY25 PA).
2. Non-corporate tax collections: 2.4% of GDP→ 3.3% of GDP (post-pandemic) → 3.7% (FY25 PA).
Average buoyancy of 1.8 (FY23-FY25 PA).
3. Income tax returns filed: 6.9 crore (FY22) → 9.2 crore (FY25). The increase has been driven primarily by
wider use of technology in tax administration, and a growing number of individuals entering the tax
net as their incomes rise. Nudge-based interventions have emerged as a powerful tool for improving
tax compliance.

Nudging Compliance: How Data-Driven Behavioural Interventions Transformed Tax Collection

Efficiency in India
It is anchored in behavioural economics,the NUDGE(Non-intrusive Usage of Data to Guide and Enable)
approach adopted by the Income Tax Department, focuses on influencing taxpayer behaviour through
timely information, gentle prompts, and data-driven insights rather than coercive enforcement.
Results due to NUDGE Compliance
1. Foreign Asset Campaign- 25,000 taxpayers revised returns, ₹29,000 crore foreign assets declared,
₹1,000 crore foreign income
2. Section 80GGC nudges- 91,000 updated returns, ₹2,050 crore reduction in excessive deductions,
₹680 crore additional tax

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3. HRA corrections- ₹119 crore additional tax

4. TDS revisions- 8,500 deductors, 1.08 crore deductees added, ₹4,825 crore additional TDS.
NUDGE initiative has improved tax collection efficiency by shifting the focus from post-facto enforcement
to preventive, technology-enabled compliance. It has reduced friction, litigation, and compliance costs for
both taxpayers and the administration, while increasing revenue through voluntary means.
4. Corporate tax collections buoyancy ~1 (FY23-FY25). Listed company profits have increased from ₹2.5
trillion (FY21) → ₹7.1 trillion (FY25) (RBI Data).
5. Major direct taxes at 53% of Budgeted Estimates (Nov 2025). Personal income tax has grown by
6.8% YoY. The Corporation tax has increased by 7.8% YoY. The Union Budget 2025-26 has ushered in
significant-income tax relief for the middle class with no tax on income up to ₹12 lakh (₹12.75 lakh for
salaried). New Income Tax Act 2025 from 2026-27.

Excise and Customs Duties: Supporting growth through rate rationalisation

1 Excise duty has decreased from: 1.7% of GDP (FY22) → 0.9% (FY25 PA) due to rate reductions on
petroleum products.
2. Customs duty buoyancy 0.4 (post-pandemic) due to rate reductions on raw materials.
GST : Revenue stability amid ongoing reform

1. Gross GST revenue (Apr-Dec 2025) has been ₹17.4 lakh crore. There has been an increase in 6.7%
YoY. The GST growth has aligned with nominal GDP. It has recorded multiple all-time highs in absolute
terms.

2. The registered taxpayers have increased from 60 lakh (2017) → 1.5 crore. E-way bills during Apr-Dec
2025 have increased by 21% YoY.

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3. Recent GST rate rationalisation expected to support demand through lower tax incidence and improved
competitiveness.

Expected channels of impact of GST 2.0 reforms

The 56th meeting of the GST Council has brought in a two-rate structure with a Standard Rate of 18 per
cent, a Merit Rate of 5 per cent and a special de-merit rate or sin-good rate of 40 per cent for a select few
goods and services.
Key Changes introduced in GST 2.0
 Agriculture: Tractors, machinery 12%→5%; Fertiliser inputs 18%→5%
 Auto: Small cars, motorcycles ≤350cc, buses, trucks 28%→18%; motorcycles >350cc, luxury
cars→40%
 Electronics: ACs, large TVs, dishwashers 28%→18%
 Textiles: Man-made fibres, yarn 18%/12%→5%
 Essentials: Hair oil, soaps, bicycles, kitchenware→5%; UHT milk, breads, paneer→0%
 Food items: Packaged namkeens, noodles, chocolates, coffee, meat, butter→5%
 Medicines: Select lifesaving drugs→0%; all other drugs 12%→5%
 Hotels: Accommodation ≤₹7,500/day 12%→5%
 Services: Salons, gyms 18%→5%
 Insurance: Life and health insurance→exempt
 Renewables: Solar, wind equipment 12%→5%
The reduction in the tax burden on essential goods, services, and emerging sectors is expected to lower the
cost of living, improve affordability, and stimulate household consumption demand. At the same time, the
move towards a simplified two-rate structure is expected to reduce transaction costs, ease compliance,
and encourage small businesses to enter the formal sector, thereby supporting greater formalisation and
widening of the tax base.
Aligned with the Viksit Bharat 2047 vision, GST 2.0 also strengthens India’s position as a global
manufacturing and investment destination.

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4. Next wave of GST reforms- Reimagine e-Way Bill system with “trusted dealer” framework, e-seals,
risk-based monitoring, reducing physical checks.

Non-Tax Revenues buoyed by rising dividends and profits

1. Non-tax revenues are stable at ~1.4% of GDP. Dividends and profits grew by more than 70%
annually (last 2 years). During FY26, RBI approved a surplus transfer of ₹2.68 lakh crore to the Central
Government for the accounting year FY25. Non-tax revenues at 88.6% of Budgeted Estimates (Apr-
Nov 2025), registering a 20.9% increase YoY.

2. Between FY20 and FY25, the gross turnover per CPSE increased by approximately 32 per cent, while
net profits and dividends per CPSE went up by 174 per cent and 69 per cent respectively.

Non-Debt Capital Receipts

1. During FY26 (up to 31 December 2025), the disinvestment activity remained focused on market-based
transactions aligned with valuation discipline and minimum public shareholding norms.
In FY26 (till Dec 31), OFS transactions (Mazagon Dock, Bank of Maharashtra, Indian Overseas Bank):
₹7,717 crore.
SUUTI (Specified Undertaking of Unit Trust of India): ₹1,051 crore.
InvIT based monetisation: ₹18,837 crore.
2. Strategic disinvestment- 36 CPSEs approved since 2016, 13 completed.
3. Reform suggestion for “equity monetisation”-
■ Amend “Government Company” definition under Companies Act to allow government ownership at
26% (instead of 51%) for listed entities while retaining special resolution rights.

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■ A portion of disinvestment receipts could also be earmarked for strategic investments in emerging
technology and innovation-driven companies through professionally managed platforms such as
the National Investment and Infrastructure Fund (NIIF).

Trends in Expenditure
Continued rationalisation in Revenue Expenditure
1. Revenue expenditure has decreased from: 13.6% of GDP (FY22) → 10.9% (FY25), below pre-pandemic
average of 11.1% of GDP. This has created space for more productive capital expenditure.
2. Major subsidies: 1.9% of GDP (FY22) → 1.2% (FY25) → 1.1% (FY26 BE). Free food grains: 78.9 crore
beneficiaries (Oct 2025).

3. DBT efficiency gains- ₹3.48 lakh crore leakages prevented over past decade. Beneficiary coverage- 11
crore → 176 crore. . The efficiency gains are evident across major schemes, including PDS, MGNREGA17,
PMKISAN and fertiliser subsidies. An issue that remains to be addressed is cross-subsidy in the railway
traffic and power sectors.
4. Interest payments: 3.1% of GDP (pre-pandemic) → 3.4% (post-pandemic). The increase in interest
payments reflect higher borrowing undertaken to support economic recovery during the pandemic.
Interest costs are expected to be contained through active debt management measures being
undertaken by the Government, such as switch and buyback operations, and calibrated issuance
across the yield curve.

Tech-driven solutions for improving efficiency in public expenditures

Just-in-Time (JIT) Fund Release Reforms- It aims to improve cash management, reduce idle balances,
enhance transparency, and strengthen expenditure efficiency. It replaces the earlier credit-push model
of bulk fund releases with a debit-pull model, under which funds are released only when expenditure is
incurred.
JIT has been implemented through two key initiatives:
SNA-SPARSH (Single Nodal Account-Samyochit Pranali Ekikrit Shighra Hastantaran) for Centrally
Sponsored Schemes (CSS)

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Treasury Single Account (TSA) and TSA Hybrid models for Central Sector (CS) schemes.
Tech-driven solutions in the Public Distribution System (PDS) supply chain
Route Optimisation in the Public Distribution System (RO-PDS) in India is a strategic initiative to
improve efficiency and reduce costs by using optimisation algorithms developed by IIT Delhi and the UN
World Food Programme. These algorithms define optimal warehouse-to- warehouse and warehouse-
to-Fair Price Shop (FPS) routes, lowering transportation costs, saving time, and ensuring timely delivery of
food grains through operations research.

Capital Expenditure
1. Capital expenditure increase: 1.7% of GDP (pre-pandemic) → 2.9% (post-pandemic). Effective capex
has increased from: 2.7% → 3.9% → 4% (FY25 PA).

2. Road transport and highways, along with railways, continued to account for over half of total
capital expenditure through FY25(PA). At the same time, allocations towards transfers to States,
telecommunications, and housing and urban affairs recorded robust double-digit growth, leading to a
higher share for these sectors in overall capex.

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State Government Finances

Centre-State Transfers through tax devolution and Finance Commission grants
1. Fiscal transfers from the Centre to the States constitute an important component of the overall fiscal
landscape. Total transfers from the centre to the states has increased from ₹11.5 lakh crore (5.7%
GDP, FY20) to ₹25.6 lakh crore (6.9% GDP, FY26 BE).

2. FY26 FC grants- ₹1,47,827 crore recommended. The utilisation of these grants and its implications on
the growth trajectory of the States are shown below:

Fiscal devolution and economic convergence across States

Fiscal devolution is a core feature of India’s intergovernmental fiscal architecture. Transfers from the Centre
expand the fiscal space available to States, but their contribution to growth depends on prevailing fiscal
conditions and the deployment of resources.
State-level analysis by the Maharashtra Institution for Transformation (MITRA) over 1980-81 to 2022-
23 indicates that higher transfers, by themselves, do not automatically generate faster growth in lower-
income States; the growth payoff is mediated by expenditure composition and fiscal discipline.
The focus must be on the protection of capital spending, strengthening investment execution capacity, and
aligning fiscal devolution with growth-enhancing public investment.

3. The XV-FC has recommended a net Borrowing Ceiling- 3% of GSDP in FY26. An additional 0.5% has
been recommended for power sector reforms. NPS-linked borrowing is ₹69,769 crore. This additional
borrowing is intended to address the divergence in pension accounting across States.

State Finances Performance

1. States’ fiscal deficit has increased from- ~2.8% GDP (post-pandemic avg) → 3.2% (recent). Excluding
SASCI- the Scheme for Special Assistance to States for Capital Investment, under which the Centre
provides 50-year interest-free loans to states exclusively for capital expenditure – the fiscal deficit is
back in the range of 2.8 per cent.

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2. 18 States’ revenue balances deteriorated between FY19→FY25 PA. 10 moved to deficit, 5 worsened, 3
stayed surplus but weakened. States in revenue surplus have decreased from- 19 (FY19) → 11 (FY25
PA).
3. States’ own tax revenue CAGR: 12.6% (post-pandemic). The state’s share of its own tax revenue has
increased from- 46% (FY22) → 50% (FY25 PA).
4. Total revenue receipts of states as a percentage of GDP has declined from 13.3% GDP (FY22) → 12.2%
(FY25 PA). Allocations under SASCI increased sharply from about ₹12,000 crore in FY21 to around
₹1.5 lakh crore in FY26. Capital expenditure of states as a share of GDP remains stable at around 2.4%
GDP.

Special Assistance to States for Capital Expenditure/Investment (SASCI)

Launched in October 2020 in the wake of the pandemic, the scheme provides 50-year interest-free loans
to support State-level capital expenditure, recognising its high multiplier effects and role in crowding in
private investment.
Reflecting strong uptake and positive feedback from States, the scheme has been continued with
progressively higher allocations from FY22 to FY26, resulting in total uptake of ₹4,49,845 crore from FY21
to FY26 (till 04.01.2026).
SASCI strikes a balance between a flexible and a reform-oriented approach. In FY26, out of the allotted
₹150,000 crore, around ₹68,000 crore has been allocated as untied assistance, enabling States and UTs to
undertake priority capital projects of their choice, while ₹80,000 crore is earmarked for reform-linked and
sector-specific Investments.
States’ capex has increased from 2.17% GDP (FY22) to 2.37% (FY25 PA). Excluding SASCI, the capex has
decreased from: 2.11% → 1.92%. Lower income states rely more heavily on SASCI.
By sustaining investment and incentivising reforms, SASCI strengthens productive capacity, enhances
future revenue potential, and supports medium-term fiscal health.

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5. Total expenditure of the states has decreased from: 15.7% GDP (FY19) → 15.4% (FY24). Revenue
expenditure continues to account for the bulk of State spending, although its share declined modestly
from 86 per cent in FY19 to 84 per cent in FY24. Within revenue expenditure, however, the composition
has undergone a notable shift, with an increasing tilt towards unconditional cash transfers and other
committed Outlays.

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Unconditional Cash Transfers - Fiscal Trade-offs and Medium-term

Implications
Unconditional cash transfers (UCTs) have expanded rapidly across several States and now form a growing
share of State-level welfare spending.
Aggregate UCT spending: ~₹1.7 lakh crore (FY26)
States implementing UCTs: 5x increase (FY23→FY26).
UCT’s Share of female workers’ monthly income: 11-87%. It consists of ~40-50% of MPCE (Monthly Per
Capita Consumption Expenditure) for half rural population.
Concerns about fiscal prudence
Combined states’ fiscal deficit: 2.6% GDP (FY22) → 3.2% (FY25 PA). The Revenue deficit has increased
from 0.4% to 0.7%. The Outstanding liabilities is 28.1% GDP (FY25). Committed expenditures is around
62% of revenue receipts (FY24).
NBER analysis (115 studies, 72 programs, 34 countries)
UCTs improve consumption/food security but don’t consistently improve nutrition, education, or enable
poverty exits without complementary services. UCTs are not substitutes for investments in health,
education, nutrition, childcare, or growth-enhancing public expenditure.
International models:
 Mexico’s Progresa/Oportunidades, Brazil’s Bolsa Família - UCTs are conditional on school
attendance, health checks
 Philippines’ Pantawid- Benefits were time-limited and subject to regular reassessment, with
families expected to “graduate” once conditions improved.
 Opportunity NYC programme in the United States- It was explicitly designed as a time-bound
experiment, where families earned cash rewards for meeting education, health, and work-related
targets, and the programme ended after evaluation.

Debt Profile
Central Government Debt
1. The Central Government’s debt management strategy is anchored in three guiding Principles-
■ Maintaining a low and stable cost of borrowing
■ Mitigating risks associated with maturity (rollover risk)
■ Interest rates and currency exposure
■ Supporting the development of government securities markets
Medium-term goal- Debt-to-GDP ratio 50±1% by FY31.
Marketable securities: ~65% of liabilities.
’

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Fiscal policy framework for the Central Government

In the year of the pandemic, the fiscal deficit of the Central Government reached 9.2 per cent of GDP.
FY21 commitment- Reduce fiscal deficit by half in 5 years- achieved (9.2%→4.4%).
FY26 budget- New glide path targeting 50% debt-to-GDP by FY31. Since the FRBM Act was first enacted
in 2003, the 3 per cent target has been achieved only once. A new FRBM target may be considered at the
end of the Sixteenth Finance Commission period.

2. Weighted average maturity (WAM) of borrowings stood at about 19.14 years in FY26 so far, compared
with 20.66 years in FY25. The weighted average coupon (WAC) of fresh issuances during FY26 (as on
19 January 2026) has declined to 6.65 per cent as compared to 7.11 per cent in FY25.
3. Despite volatile global conditions, the weighted average yield on new government securities declined
from 7.14 per cent in Q1 FY25 to 6.48 per cent in Q1 FY26.

States’ Debt
1. The debt-GSDP ratio and the interest payments to revenue receipts (IP/RR) ratio are key variables
in assessing the fiscal health of States. Combined debt-GSDP- 28.1% (FY25 PA). Interest payments/
revenue receipts- 12.6%. There is wide variation across states.
2. SDL (State Development Loan) market lacks adequate risk-based price differentiation. XV-FC
emphasizes disclosure of states’ financial positions for better market pricing.

General Government Finances

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1. General government liabilities are consolidating post-pandemic, mirroring central government trends.
2. India reduced general government debt-to-GDP by ~7.1 percentage points since 2020 while sustaining
growth. Advanced Economies have higher debt burden, and limited unwinding. There is persistent
fiscal pressures in emerging market economies(EMEs).
3. Sustainable public debt enables productive investments that increase productivity and expand the
production frontier. According to Economic Survey 2020-21- High growth delivers favorable interest-
rate-growth differential, keeping debt-to-GDP stable.
4. The general government investment in FY 24 is 4% of GDP (~20% of total revenue). OECD countries
at similar income- 2-5% of GDP with revenue 20-28% of GDP. India’s higher ratio reflects growth-
enhancing focus.

Conclusion and Future Outlook

1. Fiscal performance balances growth and prudence through capital expenditure prioritization while
consolidating deficits and debt. Medium-term debt glide path enhances credibility.
2. States progressed on capex and revenue mobilization. However there are concerns of rising UCTs
creating expenditure rigidity and limiting fiscal flexibility. There is need for improved targeting, periodic
review, outcome-oriented design.

Question For Practice

1. “India’s recent fiscal consolidation has been achieved not through compression of growth-enhancing
expenditure but through a strategic reorientation of public finances.” In this context, critically examine
the key pillars of India’s fiscal consolidation strategy since the pandemic.
2. “Sustainable fiscal federalism requires not just higher transfers, but better quality of spending
and stronger fiscal discipline at the State level.” Discuss this statement in the context of the rise of
unconditional cash transfers and their implications for fiscal sustainability and growth.

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MONETARY MANAGEMENT AND

CHAPTER
3 FINANCIAL INTERMEDIATION:
REFINING THE REGULATORY
TOUCH

Chapter Overview- India’s financial sector performed strongly in FY26 (April-December 2025). The
Reserve Bank cut interest rates and increased money supply to support growth as inflation eased. This
helped lower bank lending rates. Banks became healthier with bad loans falling to record lows and
profits rising.
More Indians are investing in stocks and mutual funds instead of just keeping money in banks. Digital
payments, fintech, and government loan schemes have helped more people access financial services.
GIFT City is attracting global investment. Pension and insurance coverage has expanded.
However, financial regulations need updating, AI in finance must be managed carefully, and the system
must grow to serve India’s rising population while maintaining stability.

Global Financial Markets- Uncertainty and Other Emerging Risks

1. The year 2025 was marked by heightened uncertainty, which had a palpable impact on financial
markets. Global financial markets reacted to the tariff announcements by the US government. Global
policy uncertainty increased following the announcement, prompting investors to reduce their exposure
to the US Dollar (USD) and seek safe-haven assets, such as gold.

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2. Prolonged periods of uncertainty affect the financial sector through at least three key channels-
■ A rise in uncertainty will trigger a ‘wait-and-see’ sentiment, delaying investments and capital
formation.
■ Heightened uncertainty can raise the cost of finance through a rise in credit spreads and financial
intermediation costs.
■ Prolonged uncertainty can increase the possibility of sharper market corrections across asset
classes.
3. Global financial markets grapple with the impact introduced by new technologies such as artificial
intelligence (AI). The IMF’s Financial Stability Report (FSR) of October 2025 notes that there is a higher
likelihood of herding behaviour in financial markets, as global investors use similar AI models.
4. Technology stocks pose an emerging risk of inflated valuations, with AI-related stocks accounting for
75 per cent of S&P 500 returns, 80 per cent of earnings growth, and 90 per cent of capital spending
growth since ChatGPT launched in November 2022.
5. As of 31 December 2025, the total market capitalisation of stablecoins stands at USD 305.4 billion.
Stablecoins’ rising market capitalisation and increasing interconnections with the traditional financial
system have reached a stage where potential spillovers to that system can no longer be ruled out.

Monetary Developments
1. Monetary policy acts as a key enabler of sustainable development and economic prosperity in the
country, by maintaining price stability, supporting financial stability, and promoting inclusive growth.
2. RBI’s Monetary Policy Committee (MPC) cumulatively reduced the repo rate by 100 basis points during
its meetings from April to December 2025. As of December 2025, the repo rate stands at 5.25 per cent.
3. MPC’s stance was changed from accommodative to neutral in June 2025. This neutral stance has been
consistently maintained since then, allowing the MPC the flexibility to respond to economic conditions
as necessary.
4. The RBI also announced a 100-bps reduction in the cash reserve ratio (CRR) to 3.0 per cent of net
demand and time liabilities.
5. As of 31 December 2025, the money multiplier (MM), i.e., the ratio of M3 to M0, stood at 6.21 vis-à-vis
5.70 a year ago.

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Liquidity Conditions
1. Along with the 100-bps cut, the RBI also injected durable liquidity of ₹2.39 lakh crore through nine
Open Market Operations (OMO) purchases during April-May 2025.
2. Monetary policy transmission to lending and deposit rates of scheduled commercial banks (SCBs) has
been robust amid surplus liquidity conditions. In response to the 100-bps cumulative cut in the policy
repo rate, the weighted average lending rates (WALR) of the SCBs declined.

Financial Intermediation
The country’s financial intermediation landscape has undergone rapid digital transformation, with
innovations such as the Unified Payments Interface (UPI), Aadhaar-enabled services, and AI-driven credit
scoring expanding access to financial services, particularly in rural and underserved areas.

Performance of the Banking Sector

1. A significant improvement has been observed in the asset quality of SCBs, as evidenced by their gross
non-performing asset (GNPA) ratio and net NPA ratio, having reached a multi-decadal low level and
record low level, respectively.

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2. Between FY20 and FY25, there has been a notable increase in the overall flow of resources to the
commercial sector, demonstrating a compounded annual growth rate (CAGR) of 20.9 per cent.
Performance of regional rural banks
1. In recent years, the financial health of the RRBs has improved. During FY24, they achieved a record
consolidated net profit of ₹7.6 thousand crore, followed by a second-highest consolidated net profit of
₹6.8 thousand crore during FY25.
Factors driving strong performance of regional rural banks
1. Consolidation of RRBs on the principle of One-State-One-RRB that reduced their number from 196 to
28.
2. Integration of the Core Banking Solution and other IT systems of the amalgamated RRBs into unified
platforms.
3. Adoption of a common logo for all 28 RRBs for unified brand and national identity of RRBs.
Major policy actions in the banking sector
1. RBI’s policy statement on ‘Framework for Formulation of Regulations’ with an objective to standardise
the process of making regulations in a transparent and consultative manner.
2. Launch of the credit assessment model (CAM) by the public sector banks (PSBs) based on the digital
footprints of MSMEs in 2025. It will leverage digitally fetched and verifiable data to enable automated
loan appraisal for MSMEs.
3. Constitution of a regulatory review cell with a mandate to review every regulation in a comprehensive,
objective, and systematic manner, at least once every 5-7 years.

Artificial Intelligence in financial services: Global trends and India’s approach

The World Economic Forum’s white paper on AI in Financial Services projects that investments across
banking, insurance, capital markets and payments business will reach USD 97 billion by 2027, with AI
making substantial contributions to revenue growth in the forthcoming years through enhanced operational
efficiency, accuracy and a higher degree of personalisation at scale.
 The European Central Bank utilises AI to enhance statistics for monetary policy, supplement data
with sources such as text and images using large language models.
 The Bank of Canada has primarily adopted AI to forecast inflation, economic activity, and the demand
for banknotes.
 The Bank of England has forecasted service inflation using a machine learning model, as well as to
predict financial crises and bank distress.
India: RBI’s FREE-AI Framework for Responsible AI
The RBI’s FREE-AI is designed to foster innovation while ensuring robust risk management. It identifies
seven core guiding principles, referred to as
the ‘Seven Sutras’, to ensure effective AI development, deployment, and governance within the financial
sector. These are (i) Trust; (ii) People First; (iii) Innovation over restraint; (iv) Fairness and equity; (v)
Accountability; (vi) Understandable by design; (vii) Safety, resilience and sustainability.

Microfinance and financial inclusion

1. NBFC-MFIs held 39 per cent market share by loan outstanding, followed by banks (32 per cent), small
finance banks (16 per cent), NBFCs (12 per cent), and others (1 per cent). The microfinance sector
experienced a reversal in growth in FY25, with loan outstanding declining by 14 per cent on a YoY
basis.

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Microfinance, financialisation, and the need to re-centre household welfare in impact investing
Microfinance has been central to India’s financial inclusion, expanding access to credit for low-income,
rural, and women borrowers, aided by institutionalisation and PE/VC funding.
Commercial capital enabled scale, technology adoption, and formal credit integration, but also led to
cycles of over-lending, rising NPAs, and borrower stress. Growth-driven incentives and scale-based impact
metrics often prioritised outreach over household welfare, risking over-indebtedness.
The shift towards financialisation may dilute social objectives. Reorienting microfinance requires welfare-
linked, household-level impact indicators and aligning investor incentives with verified social outcomes to
ensure sustainable, resilient financial inclusion.
Financial inclusion – trends and structural drivers
1. The number of adults possessing a bank account doubled between CY 2011 (35 per cent) and CY 2021
(89 per cent). There has also been a sharp narrowing in the gaps in financial access (between rich and
poor, male and female) over the past decade.
2. The Pradhan Mantri Jan Dhan Yojana (PMJDY), launched in CY 2014, has opened 55.02 crore accounts
as of March 2025, with 36.63 crore in rural and semi-urban areas, establishing foundational savings
and transaction infrastructure for previously unbanked populations.
3. The PM Street Vendor’s Atmanirbhar Nidhi (PM SVANidhi) scheme, launched in CY 2020, provides
collateral-free working capital loans to street vendors. . The Pradhan Mantri Mudra Yojana (PMMY),
operational since April 2015, finances micro and small enterprises in manufacturing, trading, services,
and allied agricultural activities.

Performance of the Insolvency and Bankruptcy Code

1. Over nine years, IBC has contributed to improved credit discipline, a reduction in banking sector NPAs,
and greater predictability in insolvency outcomes.
2. Average recovery rates have improved from 15-20 per cent under the pre-IBC regime to approximately
30 per cent, while resolution timelines have reduced from 6-8 years to about 2 years. Secured creditors,
in particular, have experienced significantly higher recoveries.
3. In light of the extended insolvency timelines, the Pre-Packaged Insolvency Resolution Process (PPIRP)
was introduced in 2021 to provide a simpler, faster, and less costly resolution. However, PPRIP has seen
only 14 admissions in four years. The reasons behind the low take-up include procedural complexity
that is inappropriate for the target segment, a lack of awareness among MSME promoters and lenders,
trust deficits regarding debtor-led processes, and the inability of small enterprises to fund the process.

Development in the capital markets

1. Nifty 50 and BSE Sensex registered
gains of approximately 11.1 per cent
and 10.1 per cent, respectively, during
April-December 2025, marking a
period of correction and consolidation
following the robust rally observed in
the preceding fiscal year.
2. In comparative terms, India’s equity
market performance was subdued
relative to its global peers such
as South Korea (KOSPI), the US’s
NASDAQ, Japan’s Nikkei, China’s CSI
300 and Singapore’s STI.

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Broadening retail participation in capital markets

During FY26 (till December 2025), 235 lakh of demat accounts were added, pushing the total count
beyond 21.6 crore.

Evolving patterns of household financial savings in India

There has been a gradual but persistent movement towards market-linked instruments, particularly
equities. The share of individual investors increased from ~11 per cent in FY14 to 14.3 per cent in FY19,
and further to 18.8 per cent by September 2025. In absolute terms, individual equity holdings expanded to
around ₹84 lakh crore by September 2025, from just 8 lakh crore in FY14.

Debt market
1. India’s corporate bond market has demonstrated impressive growth, with outstanding issuances
increasing from ₹17.5 trillion in FY15 to ₹53.6 trillion in FY25, growing with an annual rate of
approximately 12 per cent.
2. Furthermore, India’s debt market is skewed towards highly rated borrowers (AAA or AA-rated), which
accounts for 85-90 per cent of bond issuances.

Foreign Portfolio Investment

1. India’s Foreign Portfolio Investment (FPI) trends in FY26 exhibit volatility. During Q1 FY26, FPIs were
net buyers of Indian equities and net sellers of debt instruments.

Domestic Institutional Investors: Counterbalancing FPIs

1. In the midst of volatile foreign capital flows, domestic institutional investors (DIIs), particularly mutual
funds and insurance companies, have counterbalanced the volatility of foreign investment outflows
and have provided much-needed support to the markets.

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2. The share of DIIs(by value of holdings) surpassed that of foreign institutional investors (FII) for the first
time in Q4 FY25 and has now reached an all-time high in Q2 FY26.
GIFT City

1. The International Financial Services Centres Authority (IFSCA), established in April 2020 under the
IFSCA Act 2019, serves as GIFT City’s unified regulator with a mandate to develop and regulate
financial products, services, and institutions within the IFSCs.
2. By consolidating regulatory powers previously dispersed across RBI, SEBI, Insurance Regulatory
Development Authority of India (IRDAI), and Pension Fund Regulatory and Development Authority
(PFRDA) for IFSC operations, IFSCA enables a cohesive regulatory approach aligned with international
standards.

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Conclusion
In a period of global uncertainty and rapid technological change, India’s financial regulators have
strengthened regulatory quality to support resilience and growth. The RBI’s 2025 regulatory framework
marks a shift towards transparent, consultative, and impact-driven governance, complemented by SEBI’s
focus on modernisation and investor protection.
IRDAI and PFRDA have advanced principle-based reforms to deepen inclusion and expand insurance
and pension coverage, especially for informal workers. International assessments by the IMF–World Bank
FSAP validate India’s resilient and well-capitalised financial system. Going forward, regulators must balance
growth with stability through proportionate, risk-sensitive supervision.

Question For Practice

1. Discuss the major developments in India’s banking and financial sector during FY26, highlighting the
role of monetary policy, digital finance, and regulatory reforms in strengthening financial stability.
2. Examine the progress made in financial inclusion, capital markets, and fintech in India. Also discuss the
emerging concerns related to microfinance, AI-driven finance, and market volatility.

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CHAPTER
4 EXTERNAL SECTOR: PLAYING
THE LONG GAME

Introduction
India’s external sector has demonstrated remarkable resilience amid a global environment characterized
by heightened trade policy uncertainty, geopolitical realignments, and a structural shift away from hyper-
globalization. The reconfiguration of global trade and investment flows, increasingly influenced by national
security considerations, technological sovereignty, and strategic autonomy, has created both constraints
and opportunities for emerging economies.
India’s total exports reached record levels of USD 825.3 billion in FY25 and USD 418.5 billion in H1 FY26,
driven by strong services exports and sustained momentum in non-petroleum, non-gems and jewellery
exports. The services trade surplus remains a key stabilizing factor, consistently offsetting a large portion
of the merchandise trade deficit. India’s current account remains stable, supported by robust inflows from
services exports and remittances, while foreign exchange reserves provide comfortable import cover and
protection against external liabilities.

GLOBAL TRADE DYNAMICS

1. The current global order faces three concurrent challenges: trade policy uncertainty driven by rising
protectionism and retaliatory tariffs, strategic decoupling amongst major economies, and the migration
of national security tools into trade policy.
2. The Trade Policy Uncertainty (TPU) Index and Global Economic Policy Uncertainty (GEPU) Index
peaked in April 2025, with the TPU Index registering a 1165.6% year-on-year increase and the GEPU
Index rising 228.2% - the highest levels since 1960 and 1997 respectively.
3. Geoeconomic factors now critically determine bilateral trade patterns. Friendshoring trends (trade
growth between politically close countries) remained above 2021 averages and resurged in 2025.
4. Trade concentration increased after declining in 2024, indicating accelerated trade growth among the
largest economies. The Global Trade Policy Activity Index rose significantly in 2025, driven more by
restrictive trade policies than facilitation measures.
5. The IMF projected global trade volume growth of 3.6% in 2025, decreasing to 2.3% in 2026 - markedly
lower than 3.5% in 2024. While emerging market and developing economies (EMDEs) are expected
to see higher trade volume growth than advanced economies (AEs), trade policy uncertainty will likely
impact EMDEs more severely.

TRENDS IN INDIA’S TRADE PERFORMANCE

Overall Trade Performance
1. India has significantly deepened its global market integration. Between 2005 and 2024, India’s share
of global merchandise exports nearly doubled from 1% to 1.8%, while its share in commercial services
exports more than doubled from 2% to 4.3%.

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2. India ranks third among Global South countries in trade partnership diversity and fourth in merchandise
trade diversity.
3. In FY25, total exports reached USD 825.3 billion (6.1% YoY growth), with services exports growing
13.6% to USD 387.5 billion. Total imports increased 7.4% to USD 919.9 billion, resulting in a trade deficit
of USD 94.7 billion. In April-December 2025, exports totaled USD 634.3 billion (4.3% YoY increase),
while imports grew 4.9% to USD 730.8 billion.
Merchandise Trade
1. FY25 merchandise exports totaled USD 437.7 billion, maintaining FY24 levels. However, non-petroleum,
non-gems and jewellery exports (78.7% of total) grew robustly at 7.5%, reaching a historic high of USD
374.3 billion.
2. Key export sectors included petroleum products, telecom instruments (51.2% growth), and drug
formulations and biologicals (11.2% growth).
3. Merchandise imports increased 6.3% to USD 721.2 billion in FY25, driven by higher demand for critical
intermediate inputs and capital goods. The merchandise trade deficit widened to USD 283.5 billion
(17.6% YoY increase).
4. In April-December 2025, merchandise exports grew 2.4%, with non-petroleum, non-gems and jewellery
exports up 6.0%, driven by electronics goods (35.1% growth).
Agricultural Exports
1. Agricultural exports increased from USD 34.5 billion in FY20 to USD 51.1 billion in FY25 (8.2% CAGR),
but have stagnated between FY23-FY25.
2. Despite being the world’s second-largest agricultural producer by value, India’s share in global
agricultural exports only increased from 1.1% in 2000 to 2.2% in 2024.
3. The government has set a target of USD 100 billion in combined exports of agriculture, marine products,
and food and beverages within four years.
Production-Linked Incentive (PLI) Scheme Performance
1. PLI sectors demonstrated strong trade performance during FY21-FY25, with exports growing at 10.6%
average annual growth rate (AAGR) and imports at 12.6% AAGR.
2. High-growth export sectors included IT hardware (77.2%), ACC batteries (45.0%), electronics (38.8%),
solar PV (23.9%), and specialty steel (22.5%).
3. The telecom sector achieved notable success with exports rising 1.5% while imports declined 18.5%,
indicating successful import substitution.
Export Diversification
1. India demonstrated remarkable resilience in diversifying export destinations amid US tariff pressures.
Despite a 44.3% decline in gems and jewellery exports to the US during April-November FY26, total
sector exports grew 0.6% through diversification to UAE (34.9% growth) and Hong Kong (23.4%).
Similar diversification patterns emerged across sectors including marine products, auto components,
textiles, pharmaceuticals, and leather products.
2. Crude oil import sources also diversified significantly, with increased imports from Libya, Egypt, Brazil,
the US, and Brunei, while imports from Russia, Saudi Arabia, Iraq, and Venezuela declined.
Services Trade
1. Services exports reached an all-time high of USD 387.5 billion in FY25 (13.6% YoY growth), while
imports grew 11.4% to USD 198.7 billion. The services trade surplus increased to USD 188.8 billion,
covering two-thirds of the merchandise trade deficit.
2. In April-December 2025, services exports increased 6.5% to USD 304.0 billion, with imports up 1.5%
to USD 152.2 billion.

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3. Software services exports grew 7.3% in FY25, with Global Capability Centres (GCCs) playing an
increasingly important role.
4. India ranks second globally in AI skill penetration with a score of 2.5, just behind the US at 2.6. The US
share in software exports declined from 54.1% to 52.9%, while Europe’s share increased from 30.8%
to 32.8% between FY24-FY25.

India’s Balance of Payments

Current Account
1. The current account deficit (CAD) moderated to USD 15 billion (0.8% of GDP) in H1 FY26 from USD
25.3 billion (1.3% of GDP) in H1 FY25. India’s modest deficit of 1.3% of GDP in Q2 FY26 positions it
better than high-deficit peers like New Zealand (-7.7%), Brazil (-3.8%), and Australia (-3.6%).
2. Remittances remained a key external-sector strength, increasing to USD 73 billion in H1 FY26 from
USD 64.7 billion previously. Remittance inflows grew from USD 55.6 billion in FY11 to USD 135.4 billion
in FY25 (3.5% of GDP), consistently exceeding gross FDI inflows. The US became the top remittance
contributor (27.7%), followed by UAE (19.2%), UK (10.8%), and Singapore (6.6%).

Capital Account
Foreign Direct Investment (FDI)
1. Despite a subdued global FDI environment (global FDI declined 11% in 2024), India attracted USD
81.0 billion in gross FDI inflows in FY25 (13% increase from FY24). In April-November 2025, gross FDI
inflows strengthened to USD 64.7 billion compared to USD 55.8 billion in the same period of FY24.
2. India ranked fourth globally in announced greenfield projects in 2024 with 1,080 projects and emerged
as the largest destination for greenfield digital investments between 2020-2024, attracting USD 114
billion. Net FDI increased nearly sevenfold to USD 5.6 billion during April-November 2025 from USD 0.8
billion in the same period of FY25.
3. India’s average return on inward FDI is approximately 7.3% for 2014-2023, higher than major
economies like Thailand (7%), Brazil (6.1%), Mexico (4.3%), France (3.6%), Germany (3.0%), US (2.9%),
and UK (2.2%).
Foreign Portfolio Investment (FPI)
1. FPI flows showed volatility in FY26, with six months of net outflows and three months of sizeable
net inflows, reflecting global financial conditions rather than domestic macroeconomic factors. Equity
flows dominated in positive periods, while debt flows remained sensitive to interest rates and global
risk.
Foreign Exchange Reserves
Foreign exchange reserves increased to USD 701.4 billion as of 16 January 2026 from USD 668.3 billion at
end-March 2025, sufficient to cover approximately 11 months of goods imports and about 94% of external
debt. Foreign Currency Assets softened to USD 560.5 billion, while gold holdings rose sharply to USD 117.5
billion, reflecting both valuation gains and diversification.
Exchange Rate
The Indian rupee depreciated approximately 5.4% against the US dollar between 1 April 2025 and
15 January 2026, making it one of the most depreciated currencies alongside the Japanese Yen (-5.5%).
Empirical analysis reveals a one percent appreciation of the Rupee results in net total trade declining by
1.26%, with merchandise trade highly responsive (elasticity of -1.45) and services trade relatively inelastic
(elasticity of -0.38).
International Investment Position
India’s Net International Investment Position (NIIP) improved, with net claims of non-residents declining by
USD 31.2 billion during FY25. India’s international financial assets-to-liabilities ratio improved from 74.1% in
March 2024 to 77.5% in March 2025, while net IIP as a ratio to GDP improved to -8.7% from -10.1% a year
ago.

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External Debt
India’s external debt stood at USD 746 billion at end-September 2025, up from USD 736.3 billion at
end-March 2025. At end-December 2024, India ranked 21st worldwide with USD 718.2 billion (10.7% YoY
increase), accounting for only 0.69% of global external debt. The external debt-to-GDP ratio remained stable
at around 20.2% over the last decade, with external debt constituting less than 5% of government of India’s
total debt.
Conclusion and Outlook
India’s external sector demonstrates resilience amid global fragmentation, supported by strengthened
buffers, diversified trade linkages, and improving resilience. The policy challenge lies in leveraging these
strengths to sustain external stability while supporting high-growth trajectory in an environment where
global integration is increasingly shaped by strategic rather than purely economic considerations.
Key priorities include: maintaining FDI inflows through improved investment climate and deeper GVC
integration; achieving strong export growth through reduced manufacturing costs, corrected inverted
duties, improved logistics, and selective import substitution based on productivity and competitiveness;
and supporting manufacturing competitiveness, innovation, productivity, and quality alongside efforts to
mobilize domestic savings.
The external sector’s medium to long-term strength will depend on the economy’s ability to generate
domestic savings, sustain external balance, attract stable FDI, and build export competitiveness rooted in
innovation, productivity, and quality.

Question For Practice

1. Discuss the factors that have supported India’s external sector stability in recent years, with special
reference to exports, current account balance, and foreign exchange reserves.
2. Examine the trends in India’s merchandise and services trade and analyse how export diversification
and capital inflows have strengthened India’s balance of payments.

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CHAPTER
5 INFLATION: TAMED
AND ANCHORED

This chapter provides a comprehensive analysis of inflation trends both globally and domestically in
India, focusing on the period up to December 2025. It examines the drivers of disinflation, sectoral
dynamics, regional patterns, and future outlook.

Global Inflation Landscape:

■ The world has witnessed a significant and broad-based moderation in inflation across advanced
and emerging economies during 2025.
■ Global headline inflation declined sharply from a peak of 8.7% in 2022 to 4.2% in 2025.
■ Advanced economies have seen inflation stabilize in the 2-3% range after reaching 7.3% post-
pandemic, while emerging market and developing economies experienced a substantial decrease
from 9.7% to 5.3%.
■ India notably recorded an inflation rate of just 2.8%, while China continued experiencing price
stagnation at 0%.

 Among major economies, the United States saw headline inflation moderate from 3.0% to 2.7%, driven
by declining core services inflation and negative commodity price movements.
 The Euro region’s inflation eased slightly from 2.3% to 2.1%, supported by lower energy and food
prices despite the ongoing Russia-Ukraine conflict.
 Conversely, the United Kingdom experienced rising inflation (2.5% to 3.4%) due to high service inflation
and policy rate cuts.

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 Central banks in advanced economies responded by reducing policy rates, with cumulative cuts of 75-
100 basis points in the UK, Euro Area, and United States.
 The Reserve Bank of India reduced rates by 125 basis points, while Japan’s central bank increased
rates by 50 basis points as an outlier response to rising inflation.
 The moderation in global inflation was facilitated by declining oil and food prices. Food prices remained
stable before turning negative by October 2025, with a year-end decline of 2.4%.
 Oil prices decreased by more than 20%, remaining in negative inflation territory throughout 2025,
ending the year down 23.9%.
 Key metals like aluminum and copper initially declined but recovered in the second half, with copper
surging due to data center/AI demands and tight supplies, showing 32% year-end inflation.

India’s Inflation Performance:

 India achieved one of the sharpest declines in headline inflation among major emerging economies—
approximately 1.8 percentage points—while simultaneously maintaining robust GDP growth of 8% in
the first half of FY26. This demonstrates strong macroeconomic fundamentals and effective inflation
management without economic overheating.
 Global rating agencies, including S&P, acknowledged India’s credible inflation targeting framework,
noting that inflationary expectations are better anchored than a decade ago.

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 Retail inflation (CPI) followed a clear downward trajectory, declining from 6.7% in FY 2022-23 to just
1.7% in FY 2025-26 (April-December). The current financial year marked the lowest average inflation
rate in the present CPI series.
 Wholesale Price Index (WPI) inflation remained consistently lower than CPI and mirrored the
disinflationary trend.
 The disinflation phase that began in October 2024 accelerated dramatically in FY 2025-26. Headline
inflation fell from 3.2% in April to a historic low of 0.3% in October 2025—the lowest reading in the
current CPI series—before settling at 1.3% in December.
 Food inflation was the primary driver, reflecting favorable weather conditions and strong agricultural
production. However, core inflation remained relatively stable, rising modestly from 3.8% in October
2024 to 4.62% in December 2025.

Understanding Core Inflation Dynamics:

 The apparent stickiness in core inflation is largely an artifact of surging precious metals prices—gold
and silver—which reached lifetime highs amid global uncertainty and safe-haven demand. When
precious metals are excluded from the core measure, underlying inflation shows a declining trajectory
that mirrors headline inflation moderation.
 The wedge between standard core inflation and adjusted measures amounts to approximately 235
basis points when excluding precious metals alone, and 226 basis points when also excluding petrol
and diesel effects.

 Between June and December 2025, core inflation excluding precious metals decelerated from 3.4% to
2.3%, even as the standard core measure remained elevated at 4.6%. This divergence indicates that
recent firmness in core inflation primarily reflects precious metals price pressures rather than broad-
based underlying inflationary momentum.
 Decomposition analysis reveals that the base effect played a dominant role in shaping the inflation
trajectory in FY26, with its downward influence outweighing the momentum effect in seven out of nine
months, creating significant disinflationary pressure. While some price pressures emerged during the
year, they were relatively contained and limited to specific periods.

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Food Inflation Drivers:

Food inflation experienced sustained decline throughout the year, entering deflationary territory from June
2025 onwards. October 2025 witnessed the largest monthly decline of -5.02% in the current CPI series. Key
contributors included:
 Vegetables: Prices remained deeply negative for much of the year, with dramatic declines in tomatoes,
onions, potatoes (TOP commodities), and garlic—ranging from 20-40%. The government actively
intervened through buffer stocking and market release operations, including scaled-up rail transport
for onion movement to ensure cost-effective market intervention.
 Pulses: After remaining elevated during 2023-2024 due to production shortfalls and low stocks,
pulses inflation declined continuously over nine months as domestic production recovered, supported
by stable imports and improved stock positions. The government imposed strategic import duties to
balance farmer interests with consumer prices. Price volatility in pulses has been significantly lower
during 2022-24 compared to 2015-17, despite similar production challenges, reflecting improved
policy interventions.
 Spices: Remained in deflation for an extended 18-month period, though the magnitude was relatively
modest.
 Cereals: Inflation declined steadily from 6.2% in January 2025 to -0.4% in December 2025.
 Edible oils: The government calibrated basic customs duty from 20% (imposed in September 2024) to
10% (reduced in June 2025) to manage prices effectively in this structurally import-dependent market
where over 50% of consumption is met through imports.
 Protein items: Eggs, meat, and fish prices declined temporarily but recovered, while milk products
remained stable at around 2.6%.

Agricultural Outlook:
 The agricultural outlook for FY26 has been broadly favorable for inflation outcomes. About 30 states/
UTs recorded normal or excess rainfall, supporting strong agricultural performance.
 Cereal production reached a record high of approximately 3,320 lakh tonnes in 2024-25, with strong
yields in rice, wheat, and coarse cereals.
 Pulses production reached about 257 lakh tonnes, while oilseeds registered sharp increases to around
430 lakh tonnes.
 Rabi sowing exceeded previous year levels with total cropped area expanding 3.3% year-on-year (as
of January 16, 2026), supported by improved reservoir storage and soil moisture.
 Pulses acreage increased 3.8%, oilseeds by 3.5%, and overall foodgrain area by 3.0%, indicating a
promising Rabi season.

Core Components Analysis:

 The four major components of core CPI—clothing and footwear, housing, health, and transport and
communication—account for nearly one-third of the CPI basket and over 60% of the core measure.
 Since Q2 of FY26, disinflationary trends appeared in components other than housing. Housing inflation,
which had declined through 2023 and early 2024, remained stable thereafter, reflecting the infrequent
nature of rental adjustments.
 Health inflation showed gradual easing with similar stability. Clothing and footwear inflation fell
sharply from elevated 2023 levels, reflecting easing input costs and competitive pressures. Transport
and communication exhibited episodic movements driven by specific sub-components but showed
disinflationary trends from June 2025.

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Manufacturing’s Terms of Trade:

 Analysis of GDP deflators reveals a significant long-term shift in relative prices.
 The agricultural GDP deflator grew faster than other sectors, reaching 2.17 by FY25 (relative to 2011-
12 base), while manufacturing rose more slowly to 1.41. Consequently, manufacturing’s terms of trade
with agriculture declined by 50%—from 1.29 in FY05 to 0.65 in FY25—while its ratio with services
declined 25% to 0.81.
 This declining terms of trade helps explain manufacturing’s reduced share in current price GVA (from
17-18% two decades ago to 14% in FY25), even as its share in constant price GVA and gross value of
output remained stable.
 Better terms of trade favoring agriculture may encourage resource shifts toward agriculture, while
declining relative prices for manufacturing could deter investment if prolonged, though corporate profit
margins have remained healthy, indicating successful cost-cutting innovations.

Regional and State-Level Dynamics

 Rural inflation remained above urban inflation through much of 2023 and 2024, reflecting the larger
food share in rural consumption baskets.
 As food inflation eased in 2025, rural inflation fell below urban levels. Rural areas exhibited greater
inflation volatility due to higher food weights.
 Core inflation in rural and urban areas followed similar, smoother adjustment paths with only modest
differentials.

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 At the state level, inflation in FY 2025-26 (April-December) followed national trends, with across-the-
board reductions except Kerala and Lakshadweep, which breached the 6% upper tolerance band. All
other states remained within the RBI’s 2-6% tolerance band, suggesting increasing synchronization of
inflation outcomes across states.
 States with average wage rates above the national level tended to experience relatively higher
inflation. Regression analysis demonstrated significant positive associations between state-level
inflation and wage rates, state GDP growth rates, and COVID impacts, while industrial output share
showed negative association, reflecting supply-side efficiencies in dampening prices.

Future Outlook:
 Both RBI and IMF project inflation to progressively increase in the upcoming fiscal year while remaining
within the 4% (±2%) target range. RBI revised its FY26 projection from 2.6% to 2.0% in December
2025, citing good kharif harvests and healthy rabi sowing. IMF projects 2.8% for FY26 and 4.0% for
FY27, with RBI forecasting 3.9% and 4.0% for Q1 and Q2 of FY27 respectively.
 Several factors support favorable outlook: below-normal temperatures and above-normal monsoon
in 2025 strengthened kharif harvests and rabi sowing momentum; improved foodgrain stock positions;
government efforts to increase fertilizer supply; continued GST rate rationalization pass-through; and
expected soft global commodity prices. The World Bank projects global commodity prices to decline
approximately 7% in FY27, primarily from subdued crude oil amid oversupply.
 However, risks persist: currency depreciation could enable imported inflation; base metals prices
(iron, copper, aluminum) may increase moderately, particularly copper due to green technology and
data center demands; precious metals may continue rising as safe-haven investments amid global
uncertainties.
Overall, India’s headline inflation and core inflation (excluding precious metals) will likely be higher in FY27
than FY26, but are expected to remain within manageable ranges and not pose significant concerns.

Question For Practice

1. What factors explain the apparent paradox of India achieving one of the sharpest declines in
headline inflation among major emerging economies while simultaneously maintaining robust
GDP growth of 8% in H1 FY26?

2. According to the Economic Survey, the core inflation excluding precious metals shows a declining
trajectory (from 3.4% to 2.3% between June-December 2025), while standard core inflation
remains elevated at 4.6%. How should policymakers interpret this divergence when formulating
monetary policy responses?

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AGRICULTURE AND FOOD

MANAGEMENT: RAISING
CHAPTER
6 PRODUCTIVITY, SECURING
INCOME AND ENSURING

This chapter examines India’s agricultural sector performance, productivity challenges, government
interventions, and food management systems, emphasizing the need to raise productivity, secure farmer
incomes, and ensure food security.

Sector Performance and Growth Dynamics:

 India’s agriculture and allied sectors contribute nearly one-fifth of national income but employ 46.1%
of the workforce, making agricultural performance central to inclusive growth.
 The sector has demonstrated resilience with an average annual growth rate of 4.4% over the last
five years, reaching 3.5% in Q2 of FY 2025-26. The decadal growth of 4.45% (FY16-FY25) represents
the highest compared to previous decades, driven primarily by robust performance in livestock (7.1%
growth) and fisheries/aquaculture (8.8% growth), with the crop sector growing at 3.5%.

 The livestock sector recorded particularly strong expansion, with GVA increasing nearly 195%
between FY15 and FY24, registering a compound annual growth rate of 12.77% at current prices.
Fish production increased by more than 140% (88.14 lakh tons) during 2014-2025 compared to the
previous decade. These allied sectors are increasingly emerging as important growth engines and key
contributors to farm income enhancement.

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 Foodgrain production reached an estimated 3,577.3 lakh metric tonnes in Agriculture Year 2024-25,
an increase of 254.3 LMT over the previous year, driven by higher output of rice, wheat, maize, and
coarse cereals.
 However, horticulture has emerged as a particularly bright spot, accounting for approximately 33%
of agricultural GVA. In 2024-25, horticulture production reached 362.08 MT, surpassing estimated
foodgrain production of 329.68 MT, underscoring gradual diversification toward high-value crops.
 India is the world’s largest producer of dry onions (25% of global output) and ranks second in vegetables,
fruits, and potatoes (12-13% of global output each).

Productivity Challenges and Regional Disparities

 While India’s agricultural growth rate exceeds the global average of 2.9%, substantial potential
remains to enhance productivity.
 Yields across several crops—including cereals, maize, soybeans, and pulses—continue to trail global
averages significantly.
 Groundnut is a notable exception, reflecting concentration in agro-climatically suitable regions and
sustained policy focus in states like Gujarat, Karnataka, and Tamil Nadu.
 Major rice-producing states including West Bengal, Uttar Pradesh, Telangana, Odisha, Andhra
Pradesh, and Tamil Nadu recorded yields below the national average, with major causes identified as
unseasonal rains, heat stress, and dry spells during critical crop stages.
 Pulse yields remain particularly low due to persistent technological, structural, and climatic constraints.
According to NITI Aayog, in 15 of 27 El Niño years (1951-2024), pulse acreage declined 2-9%,
production fell 6-30%, and yields dropped 5-25% year-on-year. Madhya Pradesh and Gujarat are
top pulse producers with higher yields, largely due to agro-climatic conditions well-suited to major
pulse crops, with Gujarat also having one of the highest Seed Replacement Rates supported by strong
cooperative and private seed ecosystems. This underscores the importance of using certified, high-
performance varieties, access to irrigation, aligning crops with natural resource endowments, and
deploying climate-resilient high-yielding variety seeds.

Government Interventions and Policy Measures:

The government has implemented comprehensive interventions across multiple dimensions:
 Mission-Mode Approaches:
■ The National Food Security and Nutrition Mission (NFSNM, renamed from NFSM in FY25) enhances
productivity in rice, wheat, pulses, coarse cereals, commercial crops, and nutri-cereals through area
expansion and productivity enhancement.
■ The National Mission on Edible Oils (NMEO-OS and NMEO-OP) aims for self-sufficiency in oilseed
production, targeting 70 million tonnes by 2030-31. Between 2014-15 and 2024-25, oilseed
area increased over 18%, production by 55%, and productivity by 31%, while domestic edible oil
availability rose from 86.30 lakh tonnes (2015-16) to 121.75 lakh tonnes (2023-24), reducing import
dependence from 63.2% to 56.25%.
 Quality Seeds: The Sub-Mission on Seeds and Planting Materials created 6.85 lakh Seed Villages,
produced 1649.26 lakh quintals of quality seeds, and benefited 2.85 crore farmers. A new National
Mission on High-Yielding Seeds announced in Budget 2025-26 targets development of climate-resilient
varieties and improved commercial availability of over 100 new seed varieties.
 Irrigation and Water Management: Under PMKSY and the Per Drop More Crop (PDMC) program,
gross irrigated area as share of gross cropped area increased from 41.7% (2001-02) to 55.8% (2022-
23). However, significant disparities persist, with irrigation coverage ranging from under 15% in millets
and 26% in pulses to 67% in rice.

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 Soil Health: Over 25.55 crore Soil Health Cards have been issued as of November 2025. The
National Soil Mapping Programme and National One Soil Unified Information System provide detailed
village-level soil resource inventories. However, fertilizer use remains inefficient, with the N:P:K ratio
deteriorating from 4:3.2:1 (2009-10) to 10.9:4.1:1 (2023-24), far from the recommended 4:2:1 ratio.
 Credit Access: Ground Level Credit disbursement reached ₹28.69 lakh crore in FY25, surpassing the
₹27.5 lakh crore target. The Kisan Credit Card scheme had 7.72 crore operative accounts with ₹10.20
lakh crore outstanding as of March 2025. The Kisan Rin Portal has flagged ₹1,080.88 crores in duplicate
claims, strengthening financial discipline. However, regional disparities persist—the Central region,
despite accounting for 30% of Gross Cropped Area and highest PM-KISAN beneficiaries, reflects only
14.7% of MISS benefits released.
 Mechanization: 25,689 Custom Hiring Centres have been established under SMAM between 2014-
15 and 2025-26, though fragmented landholdings and rising labor shortages continue hindering
adoption.

Emerging Concerns: Ethanol and Crop Diversification:

 Between FY22 and FY25, the administered price of maize-based ethanol increased at a CAGR of
11.7%, growing faster than rice or molasses-based ethanol.
 Maize production and area grew at CAGRs of 8.77% and 6.68% respectively during this period, while
pulses declined and oilseeds showed modest growth (1.7% CAGR). This creates tension between
energy security (Aatmanirbharta in energy) and food security (Aatmanirbharta in food), as maize
increasingly competes with pulses, oilseeds, and other nutritionally important crops for land and
resources.

Infrastructure, Marketing, and Allied Sectors:

 The Agriculture Infrastructure Fund mobilized ₹1,23,002 crore supporting over 39,000 custom hiring
centres, 25,000 processing units, and 17,000 warehouses among others. e-NAM registered 1.79 crore
farmers, 2.72 lakh traders, and 4,698 FPOs across 1,522 mandis. 10,000 FPOs were registered by
December 2025 under the 2020 scheme.
 The Digital Agriculture Mission approved in September 2024 envisions creating Digital Public
Infrastructure including AgriStack and Krishi Decision Support System.
 In livestock, the Artificial Insemination programme expanded from 76.23 million inseminations (2017-
18) to 88.32 million (2024-25), with AI coverage rising from 25% to 40%. However, feed and fodder
shortages remain critical, with ICAR-IGFRI estimates indicating demand-supply gaps of 11-32% in
green fodder, 23% in dry fodder, and 28-40% in concentrates.
 Fisheries sector initiatives under PM-MKSSY onboarded over 28 lakh stakeholders, formed 2,195
FFPOs, extended KCC to 4.39 lakh fishers, and launched the ISRO-enabled Vessel Communication
Support System covering 36,000+ fishing vessels.

Price Support, Income Security, and Insurance:

 MSP is announced for 22 mandated crops at 1.5 times the cost of production from 2018-19.
 Under PM-KISAN, over ₹4.09 lakh crore has been released to eligible farmers across 21 installments.
 The Pradhan Mantri Fasal Bima Yojana insured 4.19 crore farmers in 2024-25 (32% increase over
2022-23), covering 6.2 crore hectares, with ₹1.90 lakh crore in claims disbursed since inception.

Cooperatives and Sustainability:

 67,930 PACS are being computerized with ₹752.77 crore allocated, with 54,150 on ERP software and
43,658 live. 18,183 new multipurpose cooperative societies were registered by March 2025.

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 The National Mission on Natural Farming established 17,632 clusters covering 6.39 lakh hectares,
trained 32,224 Community Resource Persons, enrolled 15.79 lakh farmers, and created 3,500+ Bio-
Resource Centres.

Food Processing and Management:

 Agri-food exports totaled USD 49.43 billion in FY25 (11.2% of total exports), with processed food
share rising from 14.9% (FY18) to 20.4% (FY25).
 Under PMKSY, 1,185 projects were completed by November 2025.
 The PLISFPI scheme approved 169 applications with ₹9,207 crore investments and ₹2,162.55 crore
incentives disbursed.
 The PMFME scheme sanctioned 1,72,707 loans worth ₹14.19 thousand crore.
 The National Food Security Act covers 81.35 crore beneficiaries (67% of population). ONORC has
been rolled out across all 36 States/UTs covering 80 crore beneficiaries. 99.8% Aadhaar seeding of
ration cards and 99.6% of 5.43 lakh Fair Price Shops equipped with ePoS devices have significantly
reduced leakages. Inter-database integration flagged 8.51 crore records, leading to removal of 2.12
crore ineligible beneficiaries.

Conclusion and Way Forward:

 Key priorities in the agriculture sector should be: strengthening assured water supply through irrigation
systems, reviving water bodies, and promoting drip irrigation; enhancing agricultural R&D through
coordinated public-private efforts; reforming the fertilizer sector to promote sustainability and restore
soil carbon; and promoting crop diversification responsive to water availability.
 With sustained investment, innovation, private sector participation in food processing and cold chain
logistics, and expansion of high-growth sectors like horticulture, dairy, and fisheries, Indian agriculture
can achieve greater resilience, competitiveness, and income enhancement essential for Viksit Bharat.

Question For Practice

1. The chapter identifies an emerging tension between "Aatmanirbharta in energy" and "Aatmanirbharta
in food" due to ethanol pricing policies. What policy instruments could be deployed to encourage crop
diversification toward pulses and oilseeds without undermining the ethanol blending program?
2. The chapter highlights that India's N:P:K fertilizer ratio has deteriorated from 4:3.2:1 in 2009-10 to
10.9:4.1:1 in 2023-24, far from the recommended 4:2:1 ratio, primarily due to excessive nitrogen (urea)
application. Analyze the proposed reform of shifting from fertilizer input subsidies to acre-based direct
payments.

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CHAPTER
7 SERVICES: FROM STABILITY
TO NEW FRONTIERS

This chapter provides a comprehensive analysis of India’s services sector, which has emerged as the
principal engine of economic growth, resilience, and structural transformation. The sector now contributes
over half of India’s Gross Value Added and serves as a major driver of exports and employment.

Global Context and India’s Performance:

 Against a backdrop of global uncertainty and subdued industrial activity, the services sector has
emerged as a stabilizing force globally.
 While global goods trade has stagnated, services trade has continued expanding, reinforcing its role
as a critical buffer against external shocks.
 India has experienced service-led growth at a significantly lower level of per capita income compared
to the typical manufacturing-led growth paths followed by other countries at comparable development
stages.

 India is now the world’s seventh-largest exporter of services, with its share in global services trade
more than doubling from 2% in 2005 to 4.3% in 2024.
 The sector records average annual growth of 7-8% year after year with remarkably low volatility
(standard deviation of 1.22 compared to 4.20 for manufacturing), making it a high-growth, low-
volatility anchor for the economy.
 Services are the largest recipient of foreign direct investment inflows.

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 The COVID-19 pandemic reshaped the sector’s structure, severely disrupting contact-intensive
services while accelerating digitally delivered services.
 This compositional shift toward high-value services raised the services share in global GDP. India’s
services share in GDP rose about 1.5 percentage points above pre-pandemic average to reach 49.9%
in 2024, a larger increase than observed globally and across major advanced economies.
 Despite this rising share, services growth faced post-pandemic headwinds globally, but India remained
relatively resilient with services growth staying close to pre-pandemic levels.
 Global services FDI patterns show rising concentration, with services accounting for 53.5% of global
FDI during 2022-2024, up from 50.9% pre-pandemic.
 Flows have become skewed toward energy-centric and strategic sectors, with energy and gas supply,
information and communication, construction, and transportation absorbing over 88% of services FDI
post-pandemic compared to 75.5% before.

 India’s experience mirrors these trends, with services-sector FDI accounting for 80.2% of total FDI
during FY23-FY25, concentrated in information and communication services (25.8%), professional
services (23.8%), finance and insurance (14.2%), energy and gas (12.8%), and trading (12.2%).

Recent Performance Trends in India:

 The services sector gained momentum in H1 FY26 despite heightened global uncertainty, with its GDP
share rising to 53.6%, higher than H1 FY25 and the pre-pandemic period. Services GVA grew 9.3% in
H1 FY26, up from 7.0% in the corresponding period of FY25.
 Financial, real estate, and professional services remained the key driver, with both growth and GVA
share exceeding pre-pandemic levels. Public administration, defence and other services continued
expanding above pre-pandemic trends.
 Trade, hospitality, transport, communication and related services saw more gradual normalization,
with growth close to pre-pandemic averages but overall contribution yet to fully recover.
 According to NITI Aayog’s October 2025 study, services now account for around 30% of total
employment—substantially higher than manufacturing and construction (11-12% each)—employing
more people than industry as a whole. Over 2011-2024, employment elasticity in services stood at
0.43, rising to 0.63 post-COVID.

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 Services added nearly 40 million jobs over six years, though a paradox exists: rapid GVA growth in high-
end services hasn’t translated proportionately into job creation due to skill intensity and automation.
Most new employment continues in low-value-added subsectors like trade, hospitality, transport and
personal services. However, 51.5% of service workers are in regular wage employment compared to
1% in agriculture and 25.5% in industry, indicating superior job quality.
 PLFS data for Q1-Q2 FY26 shows services’ share in urban employment rose to 61.9%, while EPFO
data for April-July FY26 indicates services accounted for 51.7% of net employment additions.
 High-frequency indicators signal continued strengthening in Q3 FY26, with PMI Services averaging
58.9, driven by robust domestic demand. Bank credit growth to services strengthened from 9.9%
(April-September 2025) to 12.4% (October-November 2025), driven by rebounding NBFC lending.

Services Exports as Economic Buffer:

 Services exports have become a central pillar of India’s external sector, with their GDP share averaging
9.7% during FY23-FY25, up from 7.4% pre-pandemic, rising further to 10.0% in H1 FY26.
 Average services export growth more than doubled from 7.6% pre-pandemic to 14.0% during FY23-
FY25, though moderating to 8.0% during FY26 (April-November) amid competitive conditions and
policy uncertainty, still above pre-pandemic levels.
 Software services, accounting for over 40% of total services exports, remain the primary driver,
expanding at 13.5% during FY23-FY25 compared to 4.7% pre-pandemic.
 Professional and management consulting services emerged as the second-largest contributor with
25.9% growth, increasing their share from 10.5% to 18.3%. Together these segments account for over
65% of services exports.
 A difference-in-difference analysis examining AI’s impact on services exports reveals that AI-intensive
services (software, business, and financial services) grew approximately 39.5% faster than less AI-
exposed services after the AI diffusion phase (Q2 FY23 onwards). Sub-category results show software
services increased ~44%, business services ~67%, while financial services showed positive but
statistically insignificant effects.
 India has increasingly leveraged trade agreements to enhance market access:
■ The India-UK CETA (concluded July 2025) grants comprehensive market access across 137 services
sub-sectors, includes MRAs in nursing, accountancy and architecture, a dedicated annual quota of
1,800 positions for chefs/yoga instructors/musicians, and eliminates dual social security payments
for assignments up to 36 months, benefiting over 75,000 professionals with annual savings
exceeding USD 500 million.
■ The India-Oman CEPA (December 2025) offers commitments in 127 services sub-sectors with
enhanced Mode 4 mobility provisions.
■ The India-EFTA TEPA (in force October 2025) provides opportunities across multiple delivery modes
with MRAs in professional services.

Sub-Sector Performance:
 Tourism:
■ Domestic tourism increased 17.5% in 2024 and 52.7% during January-September 2025 year-on-
year.
■ International Tourist Arrivals rose to 20.57 million (8.9% increase over 2023, 14.8% above 2019),
though foreign tourist arrivals remained below pre-pandemic levels, declining 11.8% during
January-October 2025.
■ In FY24, travel and tourism contributed 5.22% to GDP, supporting an estimated 8.46 crore jobs
(13.3% of total employment), with foreign exchange earnings reaching USD 35.0 billion.

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■ Medical tourism emerged as a high-value segment, with arrivals increasing from 1.12 lakh (2009)
to over 6 lakh (2022-2024), implying 12.4% CAGR, with market size estimated at USD 8.7 billion
(2025), projected to reach USD 16.2 billion by 2030.
 IT-ITeS:
■ Industry revenues reached USD 283 billion in FY25 (5.1% YoY growth vs 3.9% in FY24), with IT
services exports growing 3.7%.
■ India hosts 1,700+ Global Capability Centres employing over 19 lakh professionals—the largest
global hub. GCC revenues grew from USD 40.4 billion (FY19) to USD 64.6 billion (FY24E) at 9.8%
CAGR.
■ Data centre capacity is projected to reach 8 GW by 2030 from 1.4 GW (Q2 2025), though India
hosts only ~3% of global data centres despite generating 20% of world’s data.
■ The technology startup ecosystem comprises 32,000-35,000 startups with over 2,000 added in
CY25. GenAI startups rose from 240 (H1 CY2024) to 890 (H1 CY2025).
■ India’s cybersecurity market is estimated at USD 6.0 billion (2023), growing at 30%, with India
achieving Tier-1 ranking on ITU’s Global Cybersecurity Index with a score of 98.49.
 Transport:
■ Port cargo handled increased from 1052 million tonnes (FY15) to 1603 million tonnes (FY25), with
April-December FY26 recording 8.2% growth. Average turnaround time at major ports declined
from 43 hours (FY15) to 30 hours (FY25).
■ Cargo movement on national waterways increased from 18.1 million tonnes (FY14) to 145.5 million
tonnes (FY25).
■ Air passenger traffic reached 411.8 million in FY25 (9.4% growth), moderating to 3.5% during April-
November 2025. Railway freight loading exceeded 1.6 billion tonnes in FY25, growing 3.3% to
1,215 MT during April-December FY26.
 Telecommunications:
■ Total telephone connections rose from 933 million (2014) to over 1.2 billion (November 2025), with
tele-density increasing from 75% to 86.8%.
■ Internet subscriptions expanded from 25 crore to 101.8 crore (September 2025).
■ Average monthly data consumption increased from 62 MB (2014) to 25 GB (mid-2025), supported
by data price decline from ₹300 per GB (2014) to ₹8.3 per GB (2025).
 Real Estate:
■ The sector contributes about 7% to annual GVA, entering a sustained upcycle from September
2021 post-COVID.
■ Outstanding individual housing loans tripled from ₹10 lakh crore (March 2015) to over ₹37 lakh
crore (March 2025), raising housing loans from 8.0% to over 11% of GDP.
 Media & Entertainment:
■ The sector reached ₹2.5 trillion in 2024, with digital media contributing approximately one-third of
revenues. Video subscription revenues estimated at ₹9,200 crore.
■ Animation and VFX reached ₹103 billion, gaming ₹232 billion, and live entertainment crossed ₹100
billion in 2024.
 Space Services:
■ Valued at USD 8.4 billion (2% of global market), projected to reach USD 44 billion over the next
decade.
■ India launched 393 foreign satellites for 34 countries (2015-2024), earning USD 143 million and
EUR 272 million.

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■ NSIL revenues rose from ₹322 crore (FY20) to ₹2,940 crore (FY23), projected at ₹3,246.1 crore in
FY25.

Challenges and Way Forward:

 Technology is enhancing productivity but outpacing workforce adaptation, creating skills gaps
particularly in data analytics, cybersecurity, cloud computing, and AI.
 Tighter immigration regimes and intensifying global competition further complicate cross-border
service delivery.
 For the IT-ITeS sector, priorities include timely reskilling, wider technology diffusion, and supportive
innovation policies.
 Specific reforms needed: recognizing data centres as distinct category rather than “commercial
buildings”; releasing anonymized public data; facilitating skilled professional visas; providing tax
clarity; enabling renewable power access for data centres; and establishing centres of excellence for
research partnerships, drawing lessons from Singapore’s multi-year RIE framework.
 Tourism development requires strengthening state and local capacity, developing long-distance hiking
trails leveraging ecological diversity and cultural heritage, implementing a national marina development
policy to unlock blue economy potential, streamlining live event permissions, and facilitating foreign
artist participation.

Conclusion:
Sustaining India’s services sector competitiveness will depend on productivity gains, continued innovation,
skills aligned with emerging technologies, and regulatory simplification. How effectively the sector responds
to these factors will shape its contribution to India’s growth trajectory toward Viksit Bharat.

Question For Practice

1. What are the key vulnerabilities and structural constraints that could threaten India's competitive
positioning in global services trade?
2. What policy interventions could help bridge the gap between high-value output creation and quality
employment generation in the services sector? How can India ensure that services-led growth remains
employment-intensive while also moving up the value chain?

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INDUSTRY’S NEXT LEAP:

CHAPTER
8 STRUCTURAL TRANSFORMATION
AND GLOBAL INTEGRATION

The industrial sector in FY 2025-26 continues to display resilience and regain momentum, underpinned
by a shift towards high-technology manufacturing and strategic indispensability within Global Value Chains
(GVCs). This transformation is anchored by the Production Linked Incentive (PLI) scheme and the National
Manufacturing Mission, which aim to transition India from a technology adopter to a global innovator while
scaling up MSMEs. The innovation ecosystem is being strengthened through the establishment of the
Anusandhan National Research Foundation (ANRF) and the Research, Development & Innovation (RDI) Fund.
A strong thrust on infrastructure and logistics efficiency—through initiatives like PM GatiShakti and National
Industrial Corridor Development Programme—is contributing towards enhancing cost competitiveness The
path to Viksit Bharat @2047 requires sustained reforms across five pillars: Ease of Doing Business, R&D and
innovation, Skilling, Infrastructure & Logistics, and Scaling up of MSMEs to position industry as a key engine
of future growth.

GLOBAL MANUFACTURING: UNEVEN RECOVERY AND THE SHIFT TOWARDS HIGH-

TECH VALUE CHAINS
In 2025, the global industrial sector faced macroeconomic challenges from evolving geopolitics, inflationary
pressures, and supply chain realignments. While world manufacturing output expanded by 0.7 per cent in Q3
2025, performance was uneven; Africa, Asia, and Oceania led growth, while Europe experienced stagnation
and Latin America declined. Amidst this subdued global outlook with risks tilted to the downside, India
maintained strong industrial growth, placing it among the fastest growing industrial performers globally.

Global manufacturing is shifting towards higher-value, innovation-intensive Activities with Medium-

and high-technology industries expanded by 1.7 per cent and 1.4 per cent in Q2 and Q3 of 2025
respectively. The UNCTAD World Investment Report 20254 notes, ‘investment in the digital economy
and technology continues to act as a growth engine.’

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Countries are recalibrating their industrial strategies to reduce vulnerability to external disruption and
enhancing their leverage by securing reliable positions in the global value chain. The next phase of global
manufacturing will be shaped less by simple cost arbitrage and more by strategic indispensability. Future
success will depend on a country’s preparedness and capacity to embed itself into GVCs as a high-tech,
highly productive manufacturing hub supported by a stable policy environment.

DOMESTIC DEVELOPMENTS: RESILIENCE AND STRUCTURAL TRANSFORMATION

Against this backdrop, India’s industrial performance remains robust, with Industry Gross Value Added
(GVA) growing by 7.0 per cent year-on-year in the first half of FY2025-26. While manufacturing activity
softened across major economies through 2024 and early 2025, the easing in FY25 reflected a broader
cooling of global demand rather than a weakening of India’s underlying industrial capabilities. This is further
reinforced by the recovery in FY 2025-26, as Manufacturing GVA grew by 7.72 per cent and 9.13 per cent in
Q1 and Q2, respectively, driven by ongoing structural shifts toward higher-value manufacturing segments
and improved industrial infrastructure.

medium and high-technology activities now account for 46.3 per cent of total manufacturing value added,
positioning the country among middle-income industrialising economies moving towards sophisticated
production structures, driven by government initiatives like the Production Linked Incentive (PLI) schemes
and the India Semiconductor Mission, domestic capacity growth in electronics, pharmaceuticals, chemicals,
and transportation. Consequently, India’s global standing has strengthened, with its Competitive Industrial
Performance (CIP) ranking improving to 37th in 2023.
’

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Forward-looking indicators continue to signal optimism within India’s industrial sector. The Manufacturing
Purchasing Managers’ Index (PMI) has remained well above the expansion threshold of 50 between March
2023 and the present, while the RBI’s Business Expectations Index has consistently stayed above the
neutral benchmark of 100 through FY25 and into Q2 FY26. Together, these indicators reinforce the continued
resilience of industry sentiment and reflect confidence about demand and growth prospects.

Overall, India’s industrial sector continues to emerge as a key contributor of resilience and growth amidst
the challenging global industrial landscape. Given the sector’s strategic vitality, significant employment
potential, and deep economic linkages, a more concerted focus is required on five structural pillars of
competitiveness: strengthening the regulatory environment, boosting innovation and R&D, addressing skill
gaps, enhancing infrastructure and logistics, and scaling up the MSME sector.

Industrial credit
Though bank-based industrial credit growth from commercial banks moderated to 8.24 per cent in FY25
compared with 9.39 per cent in FY24, assessments indicate an ongoing diversification of funding sources
away from banks. The decrease in bank credit coincides with the increase in the overall flow of financial
resources to the commercial sector, with large corporations increasingly relying on market-based instruments
such as commercial paper and corporate bonds.

Financial flows from non-bank sources to the commercial sector recorded a CAGR of 17.32 per cent over
the period FY20 to FY25, while the total flow of financial resources from domestic sources has demonstrated
remarkable resilience, growing at a CAGR of 28.6 per cent since FY20.
The moderation in bank credit flow to industry, though still growing at a rate above 8 per cent in FY25,
should be seen as a sign of an ongoing structural adjustment. Diversification of finance sourcing by industries

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is expected to improve stability and reduce cyclical dependence on bank credit. The growing depth of the
corporate bond markets and non-bank financing channels is expected to create an industrial credit landscape
supportive of higher investment with lower systemic risk.

CORE INPUT INDUSTRIES:

Cement:
India is the second-largest cement producer in
the world after China, with an annual installed
capacity of about 690 million tonnes and cement
production of around 453 million tonnes in
FY25. About 85 per cent of the cement industry
is concentrated in states like MP, Rajasthan,
Andhra Pradesh etc with the adequate installed
capacity to meet domestic demand. Domestic
cement consumption in India is approximately
290 kg per capita, compared to a global average
of 540 kg per capita.
The cement industry is mainly driven by robust
infrastructure development and urbanisation, with the Government’s focus on infrastructure and industrial
growth expected to fuel cement demand significantly.

Steel
The steel sector serves as the backbone of industrialisation and infrastructure, securing India’s position
as the world’s second-largest crude steel producer. In April–October 2025-26, crude steel production grew

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by 11.7 per cent, finished steel production by 10.8 per cent, and consumption by 7.8 per cent. To foster self-
reliance, the Production-Linked Incentive (PLI) Scheme for Specialty Steel was launched in 2021 with an
outlay of ₹6,322 crore, with cumulative investment reaching ₹23,022 crore and production of 2.34 MT as of
October 2025.

However, the sector faces challenges related to international price disparity and raw material security.
India was a net importer of steel during FY26 (April–October), and while self-sufficient in iron ore, the industry
faces critical dependence on imported coking coal, prompting the launch of Mission Coking Coal in 2022 to
enhance domestic production.

Coal
With the fifth-largest coal reserves and as the second-largest consumer, Coal remains crucial, contributing
55 per cent to the national energy mix and fuelling over 74 per cent of total power generation. In FY25,
India’s coal industry produced 1,047.52 MT of coal, the highest ever, with total coal supply reaching 1,025.33
MT. Driven by strong domestic output, imports declined by 7.9 per cent in FY25, and the ratio of domestic
production to consumption has steadily improved over the past decade.

Chemicals & Petrochemicals

The Chemicals and Petrochemicals sector plays a significant role in industrial development, with strong
backward and forward linkages, contributing 8.1 per cent to the manufacturing sector’s GVA in FY24. The
production of major chemicals and petrochemicals has shown a consistent upward trend, reaching 58,617
thousand MT in FY25, registering a CAGR of 2.8 per cent during FY16 to FY25.

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PERFORMANCE OF CAPITAL GOODS AND CONSUMER GOODS INDUSTRIES

Capital Goods
The export performance of the Capital Goods sector since FY22 is aligned with the expansion in domestic
production capacity and domestic investment activity, while imports have grown, reflecting reliance on
technologically advanced imported machinery. These trends indicate strong domestic investment cycles and
the need to reduce dependence on imported high-tech capital goods.
The Government is enhancing competitiveness through Phase II of the Scheme on Enhancement of
Competitiveness in the Indian Capital Goods Sector, launched in 2022. Under Phase II, 29 projects with
a total cost of ₹891.37 crore and government contribution of ₹714.64 crore have been sanctioned, with
technologies capturing export markets in countries such as France, Belgium and Qatar.

Automobile
The automotive industry is a significant driver of economic growth, with India as the world’s largest
market for Two-Wheelers and Three-Wheelers and the third-largest market for Passenger Vehicles and
Commercial Vehicles, providing employment to over 30 million people and accounting for nearly 15 per cent
of GST collections. The industry has witnessed strong export growth, with more than 5.3 million vehicles
shipped in FY25 and double-digit growth in H1 2025-26, recording nearly 33 per cent growth in production
over the last decade.

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Box VIII.1: Strategic Policy Interventions for Electric Mobility:

1. PLI Scheme: Approved in September 2021 with ₹25,938 crore outlay, incentivises Advanced
Automotive Technology vehicles and has attracted cumulative investment of ₹35,657 crore.
2. PLI scheme for National Programme on Advanced Chemistry Cell (ACC) Battery Storage: with
₹18,100 crore outlay is localising ACC manufacturing, with 40 GWh capacity already awarded.
3. PM E-DRIVE Scheme: launched in September 2024 with an outlay of ₹10,900 crore provides demand
incentives for e-2W and e-3W, and support for charging infrastructure.
4. PM e-Bus Sewa–Payment Security Mechanism Scheme: notified in October 2024 with an outlay of
₹3,435.33 crore supports deployment of over 38,000 electric buses.
5. Scheme to Promote Manufacturing of Electric Passenger Cars in India (SMEC): aims to attract global
EV investments and promote India as a manufacturing hub for e-cars, offering reduced customs
duty on limited imports contingent upon a minimum ₹4,150 crore investment and mandatory phased
Domestic Value Addition targets.

Electronics:
India’s electronics sector has undergone a structural transformation, rising from the seventh-largest export
category in FY22 to the third-largest and fastest-growing in FY25, with exports reaching USD 22.2 billion
in H1 FY26. This growth is driven by a surge in domestic production and export volumes, led by the mobile
manufacturing segment, whose production value increased nearly 30-fold from ₹18,000 crore in FY15 to
₹5.45 lakh crore in FY25. India has transitioned from a net importer to the world’s second-largest mobile
phone manufacturer, hosting over 300 manufacturing units compared to just two units in 2014.

The government has recognised the challenges in building a competitive electronics manufacturing
ecosystem, including the need for large capital investment, economies of scale, long gestation periods,
access to cutting-edge technologies, and a highly skilled workforce. In response, strategic interventions have
been implemented to help domestic firms overcome these barriers and integrate more effectively into GVCs.

Box VIII.2: Key initiatives to strengthen electronics manufacturing

 PLI Scheme for Large Scale Electronics Manufacturing (April 2020): Generated cumulative
production of ₹9.34 lakh crore, exports of ₹5.12 lakh crore, and investment of ₹13,759 crore as
of September 2025.
 PLI Scheme 2.0 for IT Hardware (May 2023): Realised cumulative production of ₹14,462.7 crore
and investments of ₹892.47 crore as of September 2025.

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 Electronics Component Manufacturing Scheme (ECMS, April 2025): Budgetary outlay of

₹22,919 crore to develop a component manufacturing ecosystem; offers turnover-linked, capex,
and hybrid incentives on target segment products.
 Electronics Manufacturing Clusters (EMC and EMC 2.0) Scheme: Provides “plug-and-play”
infrastructure; EMC approved 19 Greenfield clusters and 3 CFCs, EMC 2.0 approved 11 clusters
and 2 CFCs as of September 2025.
 Scheme for Promotion of Manufacturing of Electronic Components and Semiconductors
(SPECS): Notified in April 2020 it Provides 25% financial incentive on capital expenditure for
downstream value chain; 58 applications approved with proposed investment of ₹22,081 crore
as of September 2025.
 Modified Programme for Development of Semiconductors and Display Manufacturing
Ecosystem): Under the ₹76,000 crore programme, India Semiconductor Mission approved
projects including Micron’s ATMP facility, Tata Electronics’ Semiconductor Fab, one compound
semiconductor fab, and various packaging facilities; 24 projects for financial support and 100
companies for chip design infrastructure for domestic start-ups/MSMEs approved.

Pharmaceuticals:
The Indian pharmaceutical industry is the world’s third-largest by volume, meeting about 20 per cent of
global generics demand and exporting to 191 countries in FY25, with over 50 per cent directed to highly
regulated markets such as the United States and Europe. India is also a global leader in low-cost vaccine
supply, providing the majority of DPT, BCG, and measles vaccines.
In FY25, the sector’s annual turnover reached ₹4.72 lakh crore, with exports growing at a CAGR of 7 per
cent over the last decade. The medical devices sector is rapidly becoming globally competitive, exporting to
187 countries and manufacturing high-end equipment such as MRI and CT scanners, linear accelerators,
cardiac stents, and ventilators. India ranks 11th globally in pharmaceutical exports by value, with a 3 per
cent share, while medical devices exports grew from USD 2.5 billion in FY21 to USD 4.1 billion in FY25.
To move up the value chain, the pharmaceutical industry is shifting from a volume-driven to a value-driven
approach, emphasizing complex generics, biosimilars, and innovation, while the medical devices sector
focuses on reducing import dependence through advanced manufacturing technologies and streamlining
global certification processes.

Box VIII.3: Key policy initiatives in the pharmaceutical sector:

 Supply Chain Resilience (PLI for Bulk Drugs): Mobilised investments of ₹4,763 crore as of
September 2025, creating manufacturing capacity of 55,000 MT per year for 26 critical products,
with a strategic focus on fermentation-based synthesis for KSMs like Penicillin G Potassium.
 Strengthening of Pharmaceutical Industry (SPI): Outlay of ₹500 crore to support MSMEs and
clusters; under RPTUAS, 255 applications approved to align units with global standards.
 Scheme for Promotion of Bulk Drug Parks: Three parks being developed in Gujarat, Himachal
Pradesh, and Andhra Pradesh with a total outlay of ₹3,000 crore.
 PLI for Medical Devices: Attracted ₹1,093.69 crore in investment as of September 2025;
manufacturing of 57 high-end medical devices has started.
 Scheme for Promotion of Medical Devices Parks: Financial assistance of ₹100 crore each approved
for Uttar Pradesh, Tamil Nadu, and Madhya Pradesh; land allotted to 184 manufacturers.
 Strengthening of Medical Device Industry (SMDI) Scheme: Launched in November 2024 with
₹500 crore outlay to reduce import dependence, build capacity, and support clinical studies.

Textiles:

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The Indian apparel and textile industry, valued at about USD 179 billion, contributes nearly 2 per cent of
GDP and about 11 per cent of manufacturing GVA. India is the world’s largest cultivator of cotton by acreage,
the largest producer of jute, and the second-largest producer of silk and cotton. In the man-made fibres
(MMF) segment, India ranks second globally, producing polyester and viscose fibres through technologically
advanced facilities.
India is the 6th largest global exporter of textiles and apparel, with exports rising to USD 37.75 billion in
FY25 from USD 35.87 billion in FY24. Despite its strengths, the sector faces challenges such as small-scale
and fragmented value chains, heavy reliance on cotton, limited FDI, and low technology adoption. To drive
structural transformation, the Government launched initiatives including the PM-Mega Integrated Textile
Region and Apparel Parks (PM-MITRA) Scheme, revisions to the PLI Scheme for MMF and Technical Textiles
to encourage fresh investment, reduction of minimum investment thresholds, and lowering incremental
turnover requirements.
Additionally, multiple Quality Control Orders (QCOs) were revoked by the government in the MMF and
viscose value chains in November 2025, and the National Technical Textile Mission (NTTM) with an outlay of
₹1,480 crore (2020-21 to 2025-26) supports R&D, market development, and skill development to position
India as a global leader in technical textiles.

India’s

KEY INITIATIVES TO PROMOTE MANUFACTURING

Performance Linked Incentive (PLI) scheme
The Production Linked Incentive (PLI) Scheme, launched in 2020 under Aatmanirbhar Bharat, spans 14
key sectors with an outlay of ₹1.97 lakh crore to attract investments, introduce cutting-edge technology, and
achieve economies of scale. Till September 2025, the scheme has realised over ₹2.0 lakh crore in investment,
generated incremental production/sales of over ₹18.70 lakh crore, created over 12.60 lakh jobs, and enabled
exports surpassing ₹8.20 lakh crore driven significantly by sectors like electronics, pharmaceuticals, and
telecom & networking products
Sectoral gains are tangible, with electronics emerging as a flagship success and India becoming a major
mobile phone manufacturing hub. Pharmaceutical sales under the PLI scheme crossed ₹2.63 lakh crore in the
first three years with domestic value addition of 83.74 per cent, while the automobile and auto-components
PLI scheme attracted ₹35,657 crore in investments and created 48,974 jobs.

National Manufacturing Mission

Complementing PLI, the National Manufacturing Mission (NMM) announced in Union Budget 2025–26
aims to boost innovation, raise competitiveness, and expand manufacturing capacity across priority

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sectors,complementing Make in India and the Atmanirbhar Bharat push, with emphasis on faster technology
adoption and deeper MSME integration into value chains.

Box VIII.4: National Mission on Manufacturing (NMM):

The National Mission on Manufacturing (NMM), announced in the Union Budget 2025–26, is the foundational
policy blueprint for accelerating India’s industrial growth and global competitiveness, with targets for 2035
to raise manufacturing’s GDP share to 25 per cent, generate 143 million jobs, and boost merchandise
exports to USD 1.2 trillion through deeper integration into GVCs. The Mission adopts a two-pronged
approach with sector-specific interventions across 20–30 prioritised industrial clusters, classifying sectors
into Scale, Fix and Transform, and Seed categories. It also addresses cross-cutting challenges such as
Ease of Doing Business, Plug & Play infrastructure, workforce skilling, MSME empowerment, technology
prioritisation, and industrial housing to enhance competitiveness.

Innovation and R&D: From Adopters to Innovators:

India’s research and innovation ecosystem has strengthened significantly, with its global ranking in scholarly
publications rising from 7th in 2010 to 3rd currently, reflecting expanded academic research capacity. The
quality of output has also improved, as the number of Indian universities in the QS World University Rankings
increased five-fold from 11 in 2015 to 54 in 2026. India’s Global Innovation Index ranking improved from
66th in 2019 to 38th in 2025, placing it first among lower-middle-income countries and in the Central and
Southern Asia region.

India’s

Bengaluru, Delhi and Mumbai are among the top 50 most innovation-intensive clusters globally, and India
ranks 4th in trademarks, 6th in patents, and 7th in industrial designs in global filings. Between FY20 and
FY25, patent applications nearly doubled, trademark registrations rose 1.5 times, and design registrations
increased 2.5 times, indicating a shift towards higher value-added innovation.
Innovation is increasingly driven by a vibrant start-up ecosystem, with India ranked 12th globally by
WIPO for entrepreneurship culture. Since Startup India in 2016, DPIIT-recognised startups have grown from
about 500 to over 2 lakh by 2025, with innovation activity expanding across biotech, AI, digital services, and
sustainability-oriented solutions.

Box VIII.5: CSIR Progress in Applied Innovation:

Between FY25 and H1 FY26, CSIR has made tangible progress in advancing applied, impact-oriented
research and translating it into deployable solutions across strategic sectors, supporting Aatmanirbharta
and technology-led growth. Indigenous infrastructure technologies such as REJUPAVE, ECOFIX, bio-
bitumen highways, and steel-slag roads reflect a shift towards circular economy-aligned innovation. CSIR’s
portfolio now includes commercially licensed industrial processes, defence and chemical technologies,
health and biotechnology innovations, and frontier capabilities such as HAPS, UAV systems, and indigenous
aircraft manufacturing, demonstrating a clear transition from laboratory research to deployment, industrial
adoption, and commercial transfer.

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India ranks among the top five countries in 45 of 64 critical technologies, up from just 4 during 2003–07,
reflecting expanding strategic capabilities across defence, space, AI, quantum computing, and advanced
materials.

India’s

India’s Gross Expenditure on R&D remains modest at 0.64 per cent of GDP, well below global leaders, with
business sector contribution at only 41 per cent, highlighting the need to foster greater private investment
in R&D.
To address these challenges, the Anusandhan National Research Foundation (ANRF) was established
under the ANRF Act, 2023 to provide strategic direction, competitive funding, and collaboration across
industry, academia, and government, complemented by national missions in quantum, AI, semiconductors,
cyber-physical systems, and green hydrogen.
Further, the Government announced a Research, Development and Innovation (RDI) Fund with an outlay
of ₹1 lakh crore over six years, including ₹20,000 crore for FY26, to catalyse private investment, support
advanced R&D, and accelerate India’s transition towards technological leadership.

Box VIII.7: Why the India Semiconductor Mission Matters

Microprocessors are essential to modern economies, powering sectors from energy and finance to
healthcare and space. COVID-19 exposed global semiconductor supply chain fragilities, with shortages
affecting over 169 industries. Heavy reliance on a few supplier countries poses economic and strategic
risks, prompting India to launch the India Semiconductor Mission (2021) to build domestic capability and
technological sovereignty.
Design
Chip design defines architecture, cost, power efficiency, and performance and is the most R&D-intensive
stage of semiconductor production. High capital needs, long R&D cycles, and skilled manpower have
concentrated advanced design capabilities in the US, South Korea, Taiwan, and Japan, which together
dominate global IC design revenue.

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Manufacturing of Semiconductors
Semiconductor manufacturing requires ultra-precise, capital-intensive facilities, with a single fab costing
around USD 10 billion. Equipment supply and fabrication ecosystems are highly concentrated in a few
countries, making access to chips critical for competitiveness, economic resilience, and national security.
The India Semiconductor Mission for a Resilient India
India’s Semiconductor Mission and Semicon India Programme, backed by ₹76,000 crore in incentives,
aim to build an end-to-end domestic semiconductor ecosystem. With fiscal support for fabs, OSAT units,
compound semiconductors, and chip design, ten projects worth about ₹1.60 lakh crore across six states
have been approved, positioning India as an emerging player in global semiconductors

Quality control: Enhancing global competitiveness:

With the National Manufacturing Mission aiming to integrate India deeply into global value chains, quality
is as vital as cost competitiveness. To this end, the Government has expanded Quality Control Orders (QCOs),
which mandate compliance with prescribed standards. As of 31 December 2025, 143 QCOs covering 723
products have been notified—over three times the 214 products covered in 2019—ensuring product quality,
consumer protection, and reduced market distortions.

Box VIII.8: Quality Control-Towards Pragmatism

QCOs help manage reputational risks, curb substandard imports, and reward firms investing in
quality, improving standards across sectors like toys, cement, footwear, and transformers. Toy QCOs
plus higher import duties led to a 52% fall in imports and a 239% rise in exports (FY15–FY23), turning
India into a net toy exporter from FY21.
Beyond quality, QCOs enhance consumer and workplace safety in products like electrical appliances
and helmets, supported by better surveillance and testing systems.
Poorly designed QCOs can burden MSMEs due to certification costs, short transition periods, and
limited testing capacity. QCOs on raw materials and intermediates can disrupt global value chains,
causing delays and cost escalation where domestic substitutes are unavailable.
QCOs must be applied with value-chain awareness, as rigid rules can raise costs and weaken
competitiveness in interconnected production systems. A balanced QCO framework needs prior
assessment, phased implementation, MSME support, adequate testing capacity, and flexibility for
critical inputs and R&D.

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Infrastructure and Logistics: Improving Competitiveness

A competitive manufacturing ecosystem depends on efficient, connected, and predictable infrastructure.
India has shifted from project-based execution to systems-level planning via PM GatiShakti, a unified
geospatial platform. As of November 2025, 57 Ministries and 1,700 data layers are integrated, allowing
planners to optimize routes and avoid duplicate expenditure. The platform now provides private users access
to 230 datasets, transitioning toward shared national infrastructure intelligence.
States and districts are adopting this framework rapidly; 27 States have notified Logistics Policies, and
the GatiShakti District Master Plan is being rolled out across Aspirational Districts. This is complemented by
the National Logistics Policy (NLP) and the Unified Logistics Interface Platform (ULIP). ULIP now connects 44
systems across 11 ministries, with over 1,700 companies registered and 200 crore API transactions executed,
significantly improving operational predictability for industry.
Infrastructure execution is further accelerated by the National Industrial Corridor Development Programme.
Phase-I cities like Dholera and Greater Noida are operational, attracting ₹2.02 lakh crore in investment
across sectors like electronics and EVs. These efforts, alongside sector-specific logistics plans (e.g., for the
cement industry), focus on providing “plug-and-play” facilities and multimodal connectivity to reduce costs
and digitalize transparency.
India’s strategy has evolved into an integrated ecosystem approach—combining physical assets, digital
platforms (ULIP), and corridor-based industrialization. This shift is yielding results: a DPIIT-NCAER study
estimates logistics costs fell to 7.97% of GDP in FY24, down from 8.84% in FY23. Initiatives like Dedicated
Freight Corridors, Bharatmala, and Sagarmala are driving this optimization, building a cost-competitive
environment that facilitates India’s integration into Global Value Chains (GVCs).

Box VIII.9: Why India must strengthen its industrial cluster strategy to compete globally:
India’s global industrial competitiveness will depend heavily on the strength and scale of its industrial
clusters. Evidence from countries like China, Vietnam, and South Korea shows that high-performing,
globally connected clusters drive exports, attract investment, foster innovation, and boost productivity.
Clusters benefit from co-location of firms, suppliers, workers, and logistics, enhancing efficiency through
shared infrastructure, knowledge spillovers, and stable labour pools—illustrated by Nashik’s luggage
ecosystem, now the world’s largest by volume.
While India has several domestic clusters and schemes such as SEZs and the National Industrial Corridor
Programme, many remain small and constrained by regulatory inflexibility, limiting global competitiveness.
A strategic upgrade involves three pillars: prioritising scale and connectivity through well-located brownfield
sites, empowering institutional mechanisms for regulatory flexibility, and leveraging private developers for
infrastructure planning and operation. Reimagined clusters under this framework could become India’s
primary engines of growth, accelerating integration into global value chains and supporting economic
resilience.
Manufacturing in India is increasingly expanding to Tier-2 and Tier-3 cities, which offer affordable land,
lower real estate and wage costs, and proximity to raw materials. These cities have the potential to generate
jobs, sustain economic growth, improve livelihoods, and decongest large metros. Continued investments in
connectivity, industrial infrastructure, skilling, and supportive policies can help many Tier-2 and Tier-3 cities
become competitive manufacturing hubs both domestically and globally.
Case studies highlight this potential: Hubballi-Dharwad-Belagavi is emerging as an advanced
manufacturing cluster. In Belagavi (Karnataka), foundry and precision-engineering capabilities have evolved
into an aerospace-focused cluster supplying components to domestic and global manufacturers, supported
by local skills and cluster-based development. Similarly, Hubballi–Dharwad has developed a diversified
manufacturing base in steel processing, metal fabrication, and consumer durables, benefiting from lower
operating costs and improved connectivity. India’s industrial future is thus likely to be driven significantly by
its smaller cities.

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SCALING UP MSMEs: DEEPENING COMPETITIVENESS,EXPANDING MARKET ACCESS,

AND BRIDGING THE CREDIT GAP:
Micro, Small, and Medium Enterprises (MSMEs) form the backbone of India’s industrial economy,
accounting for approximately 35.4 per cent of manufacturing, around 48.58 per cent of exports, and 31.1
per cent of GDP in the country. With over 7.47 crore enterprises employing over 32.82 crore persons, the
sector holds its position as the second-largest employer after agriculture. Globally, MSMEs make up about 90
per cent of businesses and are responsible for over 50 per cent of the total global employment. With India’s
manufacturing sector positioned for greater global integration, the MSME sector’s role is critical in enabling
effective supply-chain participation, fostering local value addition, and supporting inclusive regional growth.
Despite expanding credit footprints and rising digital integration, access to formal credit remains a binding
constraint for many micro-enterprises due to limited collateral and documentation readiness. The World
Bank’s Financial Sector Assessment Report for India (2025) noted that 27 per cent of MSMEs identify finance
as their biggest obstacle. Furthermore, MSME credit has maintained a positive trajectory in recent times,
bolstered by several government interventions.
MSME credit remained the primary driver of industrial credit growth during H1FY26, with year-on-year
growth significantly outpacing large industry credit. This acceleration can partly be attributed to policy
measures, including the revised MSME classification thresholds implemented in April 2025, expanded
eligibility for priority sector lending, and targeted Budget schemes, while NBFCs continued to play a critical
role as last-mile credit providers.

The SME public markets have witnessed a dramatic expansion over the past two years, driven by buoyant
market conditions and digital retail participation. Between 2022–23 and 2024–25, SME IPO listings surged
by 87.2 per cent, with the total issue amount growing by 52.7 per cent, supported by rising retail investor
participation through the UPI-based ASBA system. While capital-intensive manufacturing dominated issue
sizes, the services sector also saw a rise in listings, indicating the SME segment’s enhanced role in mobilising
capital for growth.

Box VIII.10: Maharashtra’s Pioneering Defence & Aerospace Venture Fund— A State-Led Innovation
Finance Model:
Maharashtra launched the Defence & Aerospace Venture Fund (MDAVF), a ₹330 crore Category II AIF in
2018, to support MSMEs in precision engineering, aerospace components, UAV systems, and defence sub-
systems. Managed by IDBI Capital, the Fund blends State capital with professional fund management to
provide early- and growth-stage support and attract private investment. It supports defence certifications,
vendor development, export readiness, and investments across missile systems, aerospace technologies,
naval platforms, and electronic warfare.
To strengthen credit linkages, the Credit Guarantee Scheme (CGS) for Micro and Small Enterprises was

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revamped from 01 April 2023 with a ₹9,000 crore corpus infusion, enhancing the guarantee ceiling from
₹2 crore to ₹5 crore, reducing annual guarantee fees, and increasing coverage for women-owned MSEs to
90 per cent. Further, from 01 April 2025, the government doubled the guarantee ceiling to ₹10 crore and
rationalised the annual guarantee fee.
The Self-Reliant India (SRI) Fund has supported MSMEs through equity investments, while the Prime
Minister’s Employment Generation Programme provides margin money subsidies and expanded project scope.
Competitiveness and innovation are promoted through the MSME Champions Scheme, ZED Certification,
Lean initiatives, and the MSME-Innovative component.
To address liquidity issues from delayed payments, government interventions include expanding the
TReDS ecosystem with a lower onboarding threshold, along with ONDC and the TEAM Initiative, enabling
MSMEs to integrate into formal e-commerce and supply chains at lower transaction costs.

Box VIII.11: Online Dispute Resolution (ODR) for MSMEs: Securing Working Capital
Delayed payments lock up approximately ₹8.1 lakh crore in the MSME sector, stifling growth. MSMEs
often hesitate to pursue legal options for fear of damaging buyer relationships.
The MSE Online Dispute Resolution (ODR) portal solves this by providing a digital, amicable
settlement process before formal adjudication. This low-cost, 24/7 platform uses negotiation and
conciliation to recover dues without ruining commercial ties, directly easing cash-flow stress and
improving MSME resilience.
Overall, the MSME sector is well-positioned to harness the current momentum in the manufacturing sector.
To sustain this momentum, innovative measures, including cash-flow–based lending, should be expanded
to encourage formal credit access, especially for micro and first-time borrowers. Further, accelerating digital
lending partnerships can help channel timely and affordable finance to a wider base of enterprises.

Box VIII.12: Strengthening Access to Small-Value Credit– Financing Opportunities for Unincorporated
Manufacturing Enterprises:
Access to credit for India’s unincorporated sector is improving, with the average loan per
establishment rising 7.12% to ₹53,710 in 2023–24. Crucially, there is a visible shift toward formal
financing; manufacturing establishments using formal credit rose to 51%, while reliance on informal
lenders dropped as commercial bank borrowing increased.
This transition is driven by government initiatives like MUDRA Yojana, PM Jan Dhan Yojana, and
various credit guarantee schemes, which have successfully expanded banking outreach and
strengthened the MSME ecosystem.

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INTEGRATING WITH GLOBAL VALUE CHAINS:

In 2024, India held 2.9% of global manufacturing GVA and 1.8% of merchandise exports, limited
largely by low participation in Global Value Chains (GVCs)—specifically in backward integration
(importing components for export assembly).
Research supports that for a labor-rich economy, prioritizing GVC integration over domestic sourcing
is more effective. While importing intermediates initially raises foreign value-added, it drives higher
absolute domestic value-added and mass employment in the medium term through increased scale.
To capitalize on global supply-chain shifts, India must address inverted duty structures where tariffs
on inputs exceed those on final products. Recent budgetary corrections to lower tariffs on intermediates
and capital goods are essential to enhancing cost-competitiveness and positioning India as a preferred
global assembly hub.

Backward GVC participation and Domestic Value Addition:Evidence from India and Vietnam
GVC integration operates through two channels: backward linkages (importing intermediates to
export final goods) and forward linkages (exporting domestic inputs for processing abroad). For
industrializing economies, backward participation is crucial as it facilitates entry into labor-intensive
assembly and enables rapid scale expansion.
Post-1990s, India’s BVAX ratio (foreign value added in gross exports) rose from 10.7% in 1995 to a
peak of 25.5% in 2012, before moderating to 17.2% in 2020. In contrast, Vietnam’s ratio surged to
nearly 48%, driven by aggressive tariff liberalization and an export-oriented policy that deepened its
role in global production networks.
Higher backward participation in Global Value Chains (GVCs) is a proven driver of increased Total Domestic
Value Added (DVA). Even if the domestic share per unit of export is initially low, the scale effects of global
production significantly amplify the absolute value generated within the country.

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Box VIII.14: Why Advanced Manufacturing Matters for India:

An advanced manufacturing strategy based on R&D and innovative technology drives growth while
enforcing systemic discipline at scale in India. Exposure to global competition and strict quality standards
compels firms to maintain productivity, reliability, and efficiency, distinguishing it from other growth
pathways. Integration with logistics, power, ports, standards, and skills ensures weaknesses translate into
economic costs, incentivising capacity building. International experience shows sustained engagement
supports firm upgradation and state capacity, making advanced manufacturing central to India’s strategic,
mission-driven manufacturing policy.

CONCLUSION: A ROADMAP FOR THE NEXT LEAP:

India’s industrial sector shows strong momentum, supported by reforms, PLI schemes, and growing MSME
integration into formal and digital supply chains. Amid global supply-chain shifts, the next phase requires
moving from import substitution to scale, competitiveness, innovation, and deeper GVC integration. Strategic
resilience, private investment in R&D, technology, skills, and quality systems will be key, with MSMEs playing
a central role in export-linked supply chains.

Box VIII.15: Innovation for Strategic Resilience and Indispensability

In a landscape where innovation defines national security, India’s R&D expenditure remains at
~0.64% of GDP, trailing global leaders. While the nation excels in early-stage research (TRL 1-3), it
faces a “stagnation” at the prototyping and commercialization stages (TRL 4-9). To bridge this, the
government launched the ₹1 lakh crore RDI Scheme in November 2025 to provide long-term, low-
interest capital for private-sector innovation. This is complemented by the Anusandhan National
Research Foundation (ANRF) and proposed Translational Research Centres (TRCs)—shared assets
for piloting technologies. These reforms aim to move India from a “service provider” to a state of
defensive sovereignty (shielding from supply shocks) and offensive leverage (becoming indispensable
in critical domains like semiconductors).
India’s manufacturing is a strategic national asset vital for employment, productivity, exports, and
strategic resilience, requiring a mission-oriented, cluster-based approach. Sequenced capability building—
from assembly to IP-intensive activities—and export-oriented milestones can strengthen competitiveness,
with the State acting as strategist, coordinator, and risk absorber. Strengthening the ecosystem through
tariff rationalisation, PM GatiShakti, industrial clusters, innovation funds, and a future-ready workforce will
support advanced manufacturing, boost productivity and exports, and build a robust industrial sector central
to Viksit Bharat@2047.

Question For Practice

1. “India’s industrial strategy is undergoing a structural shift from cost-based manufacturing to
innovation-led, globally integrated production.” In this context, examine the changing nature of global
manufacturing and the emergence of strategic indispensability in Global Value Chains (GVCs).
2. Examinee role of MSMEs in employment generation, exports, and industrial deepening, along with the
challenges they face in credit access, scale, and technology adoption.

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INVESTMENT AND
INFRASTRUCTURE:
CHAPTER
9 STRENGTHENING CONNECTIVITY,
CAPACITY AND COMPETITIVENESS

Chapter Overview
This chapter highlights India’s strategic shift towards integrated, high-quality infrastructure development
as a key driver of growth and competitiveness. It covers advances in transport, energy, digital, water,
tourism and space infrastructure, emphasising multimodal connectivity, clean energy transition and
digital public infrastructure. Sustained public capital expenditure, PM GatiShakti, and PPP-led reforms
have improved logistics efficiency and service delivery. Overall, infrastructure is positioned as a central
pillar for achieving Viksit Bharat @2047.

Infrastructure As The Engine Of Growth

1. Infrastructure investment has emerged as a central pillar of India’s growth strategy. Since FY20, Union
Budgets have prioritised large-scale public capital expenditure, supported by integrated planning and
modernisation of logistics and connectivity.
2. Alongside highways, railways, ports and energy, India has expanded into digital public infrastructure
(DPI), renewable energy and data systems—shifting the focus from capacity creation to efficiency,
competitiveness and network integration.
3. Government of India capital expenditure rose by 92% between FY19 and FY22, from ₹3.07 lakh crore
to ₹5.92 lakh crore, and has remained on an upward trajectory.
4. Capital outlay increased further to a budgeted ₹11.21 lakh crore in FY26, nearly 89% higher than FY22,
reflecting infrastructure’s high multiplier effect of 2.5–3.5 times GDP over the medium term.
5. Institutional reforms such as PM GatiShakti National Master Plan and PM GatiShakti Public have
strengthened multimodal, GIS-based planning and reduced execution risks, while enabling private
participation through regulated access to geospatial data.
6. The National Logistics Policy (NLP), supported by ULIP and LEADS, has improved logistics efficiency
and manufacturing competitiveness.
7. DPI—including BharatNet, 5G, UPI, Aadhaar, FASTag, DigiYatra and ULIP—acts as a force multiplier,
enabling smart, inclusive and scalable infrastructure services.
8. Infrastructure-led growth is supported by:
(i) sustained public capex and improved execution,
(ii) crowding-in of private investment through PPPs, and
(iii) diversified long-term financing via capital markets and banks/NBFCs.
9. Effectiveness of infrastructure spending depends on project quality. Time and cost overruns stem from
weak project preparation, rigid procurement and delayed dispute resolution. Strengthening lifecycle
planning, standardised contracts, technology adoption and institutional capacity is critical.
10. The chapter examines infrastructure financing reforms and progress across physical, energy, digital,
rural and emerging sectors. Urban and social infrastructure are covered separately.

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Enhancing Infrastructure Financing and Private Participation

1. Infrastructure financing is shifting from bank-dominated credit to diversified capital market and non-
bank channels. Bank credit to infrastructure grew 4.6% YoY in October 2025.
2. NBFC credit to the commercial sector grew at a CAGR of 43.3% (FY20–FY25), outpacing bank
credit. InvITs and REITs are enabling long-term institutional participation and reducing asset–liability
mismatches. From April–November 2025, ₹13,893 crore was raised through REITs and InvITs.

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3. The RBI (Project Finance) Directions, 2025 (effective 1 October 2025) mark a major reform in
infrastructure credit by introducing a uniform project lending framework across financial institutions. The
revised DCCO norms allow realistic handling of project delays, enabling better stress recognition and
preventing loan evergreening. Alignment of the infrastructure sector definition with the government’s
Harmonised Master List (HML) ensures regulatory clarity and policy coordination.
4. Capital Market Reforms: SEBI strengthened long-term funding and asset recycling through the
SM REIT framework, reducing the minimum asset size from ₹500 crore to ₹50 crore and introducing
a scheme-based structure. This expands monetisation of smaller, stabilised real estate assets and
supports urban regeneration and commercial infrastructure.
5. REITs and InvITs: From 1 January 2026, investments by Mutual Funds and SIFs in REITs will be treated
as equity instruments, easing participation and improving liquidity. Between April–November 2025,
₹13,893 crore was raised through listed REITs and InvITs.

Public-Private Partnerships
1. PPPs leverage private expertise and resources to bridge infrastructure gaps. Their success depends on
strong institutions, financial support and standardised documents such as Model RfQ, RfP and MCAs.
2. India follows multiple PPP models including BOT, DBFOT, HAM and TOT, with BOT (Toll) and BOT
(Annuity) differing in traffic risk allocation.
3. As per the World Bank PPI Report 2024, India ranks among the top five globally and accounts for over
90% of South Asia’s private infrastructure investment. PPPAC approvals have increased significantly.
4. Public investment alone cannot meet India’s infrastructure needs. A multi-pronged approach—
combining public capex, private participation, diversified PPP models, viable user charges, municipal
bonds and strong dispute resolution mechanisms—is essential to sustain infrastructure-led growth
and achieve Viksit Bharat @2047.

Key Institutional Mechanisms to support PPPs in India

 Public Private Partnership Appraisal Committee (PPPAC): Apex body for appraisal of Central
Sector PPP projects, chaired by Secretary, DEA with inter-ministerial representation including
NITI Aayog.
■ 129 projects recommended with TPC ₹5.61 lakh crore (2014-15 to 4 Dec 2025).

 Viability Gap Funding (VGF) Scheme: Supports economically viable but commercially unviable
projects.
■ Up to 40% Capex for economic sector projects; up to 80% Capex + 50% Opex (5 years) for
social sector.
■ 72 projects approved; ₹7,941.84 crore sanctioned, ₹6,314.86 crore disbursed (up to 4 Dec
2025).
 India Infrastructure Project Development Fund (IIPDF): Funds transaction advisers to build a
bankable PPP project pipeline.
■ Notified Nov 2022; ₹150 crore outlay for FY23–FY25.

 Three-Year PPP Project Pipeline (Budget 2025-26)

■ 852 projects across Centre and States/UTs with TPC over ₹17 lakh crore.

 Standardisation & Capacity Building

■ Reference guides on risk allocation, PPP appraisal, and Waterfall Framework developed.

■ Sector-specific PPP toolkits (Roads, Ports, SWM, Water & Sanitation).

■ Ongoing capacity-building for States/UTs.

■ National Infrastructure Enablement Index (NIEI) to assess institutional readiness.

■ Model RfP (single-stage PPP) introduced to ensure consistency, best practices, and
flexibility.

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Public–Private Partnerships (PPP) – Strengthening the Partnership Paradigm

 India’s PPP framework has evolved from early experimentation to mature, standardised models
through continuous learning and reform. Core sectors such as roads, ports, power and renewables
now attract sustained private investment due to stable policies and clearer regulation.
 The next phase requires extending PPPs to social and emerging sectors where co-design, shared
risks and outcome-based models are essential. The focus must shift from transaction-led contracts
to system-level market building, with better project preparation and early risk resolution by the
public sector.
 Challenges persist at the sub-national level due to capacity gaps, trust deficits and misconceptions
about PPPs. Strengthening PPP cells, adopting programmatic approaches, improving transparency
and deepening financial instruments such as guarantees, take-out financing and refinancing
frameworks are critical.

Core Physical Infrastructure

Roadways & Highways
The roads and highways sector remains a key infrastructure driver, shifting from rapid network expansion
to logistics efficiency and technology integration. Over the past decade, sustained investment and reforms
have expanded the National Highway (NH) network and accelerated construction. For FY26, a target of
10,000 km has been set, with 4,938 km completed as of 31 December 2025.

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Key Initiatives and Reforms in the Roadways & Highways Sector

 High-Speed Connectivity and Urban Integration
■ High-Speed Corridors (HSC): Expanded from 550 km (2014) to 5,364 km (Dec 2025); target
of ~26,000 km by FY33, with 9,366 km under implementation.
■ Economic Node Connectivity: Priority to highways linking ports, IWT terminals and industrial
corridors to reduce logistics costs.
■ Urban Decongestion: Policy for access-controlled ring roads and bypasses for cities with
population >1 lakh, using land pooling and value capture models.
 Privatisation and Asset Monetisation
■ Public InvIT: First Public InvIT planned in 2026, following monetisation of ₹1.52 lakh crore
via ToT and private InvITs.
■ PPP Pipeline: 13,400 km identified for development over three years, with an estimated cost
of ₹8.3 lakh crore.
 Project Quality Reforms
■ Project Preparation: Fixed-cost bidding and performance-based bid evaluation.
■ Construction: Stricter eligibility norms, additional performance security for low bids, and
contractor performance ratings.
■ Technology Adoption: Mandatory drone surveys, AIMC deployment, pre-cast components
for projects above ₹300 crore, drone-based encroachment monitoring, and AI-enabled
pothole and crack detection.
 Rural roads have significantly improved last-mile connectivity. Under PMGSY, 99.7% of eligible
habitations have been connected as of 31 December 2025. Under PM-JANMAN, 2,495 roads (7,323.96
km) and 163 bridges have been sanctioned, with 248 roads (1,242.41 km) completed.
 PMGSY-IV, launched in September 2024, aims to connect 25,000 habitations by constructing/
upgrading 62,500 km of roads and bridges at a cost of ₹70,125 crore (FY25–FY29). The programme
uses GIS-based planning, PM GatiShakti integration and convergence with DA-JGUA. So far, 2,490
roads (8,655.38 km) and 1 bridge have been sanctioned, covering 2,734 habitations.
 Outlook: The sector is transitioning towards efficiency and quality, supported by sustained capex,
high-speed corridors, multimodal integration and project delivery reforms—key to reducing
logistics costs and congestion.

Railways
 Indian Railways continues to expand capacity and modernise assets. As of March 2025, the network
stood at 69,439 Rkm, with 3,500 km targeted for addition in FY26. Electrification has reached 99.1%
by October 2025. Post-2014, commissioning rates have more than doubled.
 Record capital expenditure continues in FY26, focusing on new lines, doubling, multi-tracking, rolling
stock, signalling and safety to accelerate capacity creation.
 Railways are central to freight and energy logistics through DFCs, modern terminals and first-mile
connectivity. Investments in stations, signalling and digital systems are improving safety, reliability and
user experience.

Key Infrastructure Initiatives in the Railways Sector

 Economic Railway Corridors (PM GatiShakti):
■ 434 projects identified with an outlay of ₹11.17 lakh crore.
■ 122 projects (12,150 km) sanctioned; 198 projects (19,779 km) under appraisal.

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 Major Projects:
■ Mumbai–Ahmedabad High-Speed Rail: Over 55% physical progress achieved by October 2025.
■ Dedicated Freight Corridors: 96.4% of the 2,843 km network commissioned; Eastern DFC fully
completed.
 Station Redevelopment:
■ 1,337 stations identified under Amrit Bharat Station Scheme; 15 stations under PPP mode.
 Safety & Technology:
■ Deployment of Kavach (ATP), electronic interlocking, automatic block signalling and track renewal.
■ 78% of tracks upgraded for speeds of 110 kmph and above.
 PPPs:
■ 18 projects (₹16,636 crore) completed; 7 projects (₹16,334 crore) under implementation.
 Outlook: Railways is undergoing structural transformation through high investment, corridor-
based planning and near-universal electrification, improving freight efficiency and multimodal
connectivity.

Civil Aviation
India is the world’s third-largest domestic aviation market. Airports increased from 74 (2014) to 164
(2025). Passenger traffic stood at 412 million in FY25, projected to reach 665 million by FY31. Air cargo rose
from 2.53 MMT (FY15) to 3.72 MMT (FY25).

Key Policy Initiatives Driving Civil Aviation Growth

 RCS–UDAN:
■ 657 routes operational across 93 airports.
■ Modified UDAN to connect 120 new destinations and serve 4 crore passengers over 10 years.
 Greenfield Airports Policy:
■ 24 airports approved; 13 operational, including Navi Mumbai.
 Airport Modernisation:
■ Passenger handling capacity raised to ~575 million per annum since FY20.
 Digital & Technology Initiatives:
■ Digi Yatra expansion, liberalised drone rules, PLI for drones, and focus on Advanced Air Mobility.
 Legislative Reforms:
■ Bharatiya Vayuyan Vidheyak, 2024
■ Protection of Interests in Aircraft Objects Act, 2025
 Outlook: Civil aviation shows strong growth potential with rising demand and supportive policies.
Low airport density (0.11 per million people) indicates significant headroom. Expansion of airport
infrastructure, MRO and leasing ecosystems strengthens sector resilience.

Ports and Shipping

1. India’s maritime sector has modernised rapidly under Maritime India Vision 2030 and Maritime Amrit
Kaal Vision 2047, enhancing port capacity, regulation, efficiency and private participation.
2. Cargo throughput and capacity have increased significantly. Mechanisation, smart ports and digital
trade facilitation have reduced turnaround times to near-global benchmarks. India’s competitiveness
is reflected in 2 ports in the global top 30 and 7 in the top 100 of the World Bank’s CPPI 2024.
3. India has strengthened the landlord port model to catalyse private investment in port development
and operations. PPP projects awarded increased from 37 (FY15) to 87 (FY25), while project value rose

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from ₹16,180 crore to ₹61,029 crore (377% growth). At present, 57 operational PPP projects worth
₹42,235 crore have added ~660 MTPA of port capacity.
4. By 2030, PPP and captive operators are expected to handle 80% of cargo at major ports. A pipeline of
48 PPP projects worth ~₹23,000 crore has been identified for FY26–FY31, excluding the Vadhvan Port
Project (₹76,220 crore), further strengthening port capacity and efficiency.

Recent Legislative Reforms in Ports and Shipping Sector

 Merchant Shipping Act, 2025: Aligns Indian maritime law with IMO conventions, improves
ease of doing business, enhances seafarer welfare, safety, environmental protection and
emergency preparedness.
 Coastal Shipping Act, 2025: Promotes coastal shipping as a cost-effective, eco-friendly mode;
removes licensing for Indian vessels in coasting trade; enables integrated planning with inland
waterways and introduces a National Coastal Shipping Database.
 Indian Ports Act, 2025: Provides a framework for integrated port development; mandates
Centre–State coordination, data sharing, compliance with international safety and pollution
norms, and introduces a Maritime Single Window System.
 Bills of Lading Act, 2025: Simplifies legal provisions on bills of lading, clarifying transfer of
rights and liabilities to reduce disputes.
 Carriage of Goods by Sea Act, 2025: Aligns sea trade laws with Hague–Visby Rules, clarifies
carrier–shipper responsibilities and strengthens global trade competitiveness.

Inland Water Transport

1. As of November 2025, 32 National Waterways (5,155 km) are operational. Cargo services operate on
29 NWs, passenger services on 23, and cruise services on 15, with 11 NWs supporting all three modes.
Cargo movement increased from 18 MMT (2013–14) to 146 MMT (2024–25), while passenger traffic
rose to 7.6 crore in 2024–25.
2. India targets raising IWT modal share from 2% to 5%, with cargo traffic exceeding 200 MMT by 2030
and 500 MMT by 2047 under Maritime Amrit Kaal Vision.

Inland waterways transformation: Achievements, Key Projects and Initiatives

Jal Marg Vikas Project (NW-1):
 ₹4,600 crore project covering 1,390 km (Varanasi–Haldia); completion by 30 June 2026.
 Cargo increased 220%, from 5.05 MMT (2014–15) to 16.38 MMT (2024–25).
 MMTs at Varanasi, Sahibganj, Haldia and Inter-Modal Terminal at Kalughat operational.
 QPOM enables vessel passage in 5 minutes.
 Arth Ganga: 53 of 86 community jetties operational, serving ~1.22 lakh daily users.
River Cruise Tourism:
 Cruise vessels increased from 3 (2013–14) to 25 (2024–25) across 15 circuits on 13 NWs.
 4,000 km Varanasi–Dibrugarh corridor with 129 terminals; four new terminals planned by 2027.
Cargo Promotion: Jalvahak Scheme (2024) incentivises scheduled cargo services on NW-1, NW-2
and NW-16.
Digital Initiatives:
 Jal Samriddhi Portal (2025): Streamlines NoCs for private jetties/terminals.
 Jalyan & Navic: Unified vessel and crew registry—One Nation, One Registration.
 Naudarshika: Real-time navigation support with Least Available Depth (LAD) data.
North-East Region: Projects underway on NW-2 and NW-16; DPRs for Nagaland and Mizoram under
finalisation; Tripura implementing ₹24.53 crore connectivity project.

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Urban Water Transport: Kochi Water Metro as a Scalable Model

 Operational since 2023, Kochi Water Metro (KWM) is India’s first large-scale urban water transit
system. Implemented via an SPV (Govt. of Kerala 74%, KMRL 26%), the project envisages 15 routes
(78 km), 38 terminals, and a total cost of ₹819 crore, supported by a €85 million KfW loan.
 Electric-hybrid ferries built by Cochin Shipyard Ltd., universal-access terminals and full integration
with Kochi Metro enable seamless multimodal travel. Ridership has crossed 5 million by 2025. With
costs estimated at ~one-tenth of elevated metro systems, KWM offers a scalable, green mobility
model, now being explored in 21 cities including Varanasi, Patna, Prayagraj, Kolkata, Mumbai and
Ayodhya.

Shipbuilding
In September 2025, the Government approved a ₹69,725 crore package to revitalise shipbuilding, adopting
a four-pillar strategy to build a globally competitive, technologically advanced and sustainable maritime
ecosystem.

Shipbuilding: Reforms, Achievements, Key Projects and Initiatives

 Shipbuilding Financial Assistance Scheme (SBFAS): Corpus ₹24,736 crore (valid till 2036);
includes ₹4,001 crore ship-breaking credit for green recycling.
 Maritime Development Fund (MDF): ₹25,000 crore, including ₹20,000 crore Maritime Investment
Fund (49% GoI) and ₹5,000 crore Interest Incentivisation Fund.
 Shipbuilding Development Scheme (SbDS): Outlay ₹19,989 crore to raise capacity to 4.5 million
GT/year, support mega shipbuilding clusters, yard modernisation, risk insurance and an India
Ship Technology Centre.
 Infrastructure Status: Large ships included in Infrastructure Harmonised Master List (Sept
2025).

Energy Sector
Power

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1. Installed power capacity increased 11.6% YoY to 509.74 GW as of November 2025.

2. Around ₹1.85 lakh crore invested under DDUGJY, IPDS and SAUBHAGYA, electrifying 18,374 villages
and providing electricity access to 2.86 crore households. RDSS (2021) with an outlay of ₹3.03 lakh
crore has approved projects worth ₹2.8 lakh crore for infrastructure upgradation and smart metering
3. Power availability has improved substantially, with the energy demand–supply gap reduced to zero by
November 2025. DISCOM reforms have strengthened operational and financial performance.
4. The proposed Electricity (Amendment) Bill, 2026 aims to enhance efficiency, competition and financial
discipline by enabling regulated competition in distribution, cost-reflective tariffs, payment security for
generators and stronger regulatory accountability, while protecting vulnerable consumers.

Reforming the Last Mile – Strengthening DISCOM Finances

 Sector Stress: DISCOMs remain the weakest link in the power value chain due to non–cost-
reflective tariffs, delayed subsidies, and high AT&C losses.
■ Accumulated losses rose from ₹5.5 lakh crore (FY21) to ₹6.47 lakh crore (FY25); debt at
₹7.26 lakh crore.
 Late Payment Surcharge (LPS) Rules: Enforced payment discipline; dues reduced from ₹1.4
lakh crore (June 2022) to ₹4,927 crore (Jan 2026).
 Automatic Monthly Cost Adjustment: Formula-based monthly tariff revisions for fuel and
power purchase costs to prevent cash-flow mismatches.
 Recognition of Prudent Costs: Pass-through of justified power procurement and network costs,
subject to regulatory approval.
 Change-in-Law Cost Recovery: Automatic tariff adjustment to restore utilities/generators to
original economic position.
 Subsidy Accounting Reforms: SOPs for timely release of state subsidies and improved financial
transparency.
 AT&C Loss Reduction Mandate: State-specific loss reduction trajectories aligned with national
scheme targets.
 Return on Equity (RoE) Alignment: State regulators to allow reasonable RoE in line with CERC
norms, boosting investor confidence.
 Cost-Reflective Tariffs: Tariffs to match ARR, revenue gap capped at 3%;
■ New gaps cleared in 3 years; legacy gaps (as of Jan 2024) in 7 instalments.
 Revamped Distribution Sector Scheme (RDSS): Performance-linked funding to improve
operational efficiency and service quality.
 Additional Prudential Norms: Lending to state power utilities linked to DISCOM operational
performance.
 Outcomes:
■ Positive PAT ₹2,701 crore in FY25 (vs loss ₹67,962 crore in FY14).
■ AT&C losses reduced from 22.62% (FY14) to 15.04% (FY25).
■ ACS–ARR gap narrowed from ₹0.78/kWh to ₹0.06/kWh (FY25).

Enabling Consumer Agency, Open Innovation, and System Efficiency through India Energy Stack
(IES)
India Energy Stack (IES): Key Highlights
 Problem Statement: India’s power sector is fragmented, with data silos, costly bespoke
integrations, limited scalability, weak consumer choice, and poor monetisation of distributed
energy assets.

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 India Energy Stack (IES): A Digital Public Infrastructure (DPI) for the power sector providing
open, interoperable digital rails for trusted interactions across stakeholders.
■ Led by Ministry of Power; REC Ltd. as nodal agency.
■ Not a centralised database; data sharing is consent-based.
 Core Design Elements: Standardisation of identity, data exchange, measurement, and
settlement to enable an interoperable, competitive, and consumer-centric power ecosystem.

1. Consumer-Centric Energy Agency

 Once-only onboarding with portable credentials across utilities and service providers.
 Consent-based data sharing enabling competition in energy services (billing, EV charging,
demand response).
 Monetisation of distributed assets (rooftop solar, batteries, EVs, flexible loads).
 Shift from passive consumers to active market participants (prosumers).
2. Open Innovation & Scalable Markets
 Enables P2P electricity trading, flexibility markets, aggregators, EV charging operators, and
optimisation services.
 Lowers entry barriers through open standards and national scalability.
 Supports AI-driven analytics and automated trading, deepening participation.
3. Benefits for DISCOMs & Regulators
 Improves grid coordination, settlement efficiency, demand forecasting, and dispute reduction.
 DISCOMs evolve from intermediaries to system orchestrators.
 Regulators gain transparency via “policy as code” (embedded compliance and settlement
rules).

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4. Livelihoods & Inclusion

 Enables households, MSMEs, and farmers to earn from flexibility (off-peak charging, load
curtailment).
 Creates energy micro-entrepreneurs.
 Strong alignment with DAY–NRLM (Jeevika) and women-led SHGs through community solar
and local enterprises.
5. Openness with Safeguards
 Strong privacy, cybersecurity, grid security, verified identities, audit trails, and consent
mechanisms.
 Big Picture: IES marks a shift from “energy access” to “energy agency”, enabling consumers
to choose, participate, and earn from India’s energy transition at scale.

Renewable energy
1. Renewable energy constitutes 49.83% of India’s installed power capacity as of 30 November 2025.
Total RE capacity increased from 76.38 GW (2014) to 253.96 GW (2025). India ranks 3rd globally in
overall RE and solar capacity, and 4th in wind capacity, reflecting strong policy support and private
participation.

2. During the first eight months of FY26 (up to November 2025), India added a record 34.56 GW of non-
fossil capacity—the highest ever annual increase. This was driven by solar (27.20 GW), followed by
wind (3.95 GW), hydro (2.68 GW), bio-power (0.03 GW) and nuclear (0.70 GW).
3. Sustaining renewable momentum requires addressing high capital costs, land acquisition delays and
grid constraints through innovative financing and improved execution. Large-scale deployment of
Battery Energy Storage Systems (BESS) and Pumped Storage Projects (PSP) is critical for managing
intermittency, ensuring grid stability, meeting peak demand and enabling reliable, large-scale
renewable integration.

Future-Ready Digital Infrastructure

Telecommunications
1. India’s telecom sector has undergone a structural transformation driven by 5G rollout, 6G research,
BharatNet and Digital Bharat Nidhi, aligned with the vision of a digitally empowered nation. Indigenous

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4G by BSNL, 100 5G Labs, and citizen-centric platforms are advancing self-reliance, security and
global leadership, guided by the principles of Samaveshit, Viksit, Tvarit and Surakshit.
2. Tele-density improved from 75.23% to 86.76% over the last decade, with rural growth outpacing
urban, narrowing the digital divide. Internet and broadband subscriptions recorded multi-fold growth,
reflecting a shift toward data-intensive digital usage.
3. Declining data tariffs led to a sharp rise in per capita data consumption. Network infrastructure
expanded to 31.87 lakh BTS and 8.48 lakh mobile towers as of December 2025.

Key Developments in India’s Telecom Sector

 Nationwide 5G Rollout: 5G available in 99.9% districts, supported by 5.18 lakh BTS, enabled by
spectrum reforms, AGR rationalisation, RoW simplification, SACFA reforms and the GatiShakti
Sanchar portal.
 5G/6G Innovation: 100 5G Use Case Labs, 5G Innovation Hackathon 2025, Bharat 6G Vision
(2023) and Bharat 6G Alliance guiding R&D and standardisation.
 Rural Connectivity: 13,415 towers operational under 4G saturation project, covering 19,901
villages; BharatNet connected 2.14 lakh Gram Panchayats via fibre and satellite.
 Domestic Manufacturing: PLI Scheme (₹12,195 crore) attracted ₹4,700+ crore investment,
generated ₹1 lakh crore sales, ₹21,000 crore exports and ~30,000 jobs.
 R&D Support: TTDF approved 136 projects with ₹542.23 crore funding across 6G, SatCom, Open
RAN, AI and security.
 Cybersecurity & Citizen Protection: Platforms like Sanchar Saathi, ASTR, FRI, ICDR disconnected
3.3 crore fraudulent connections, prevented losses of ~₹660 crore.
 Infrastructure & Spectrum Management: RoW approvals time reduced from 451 days (2019) to
40 days (2025); NFAP-2025 and 6G Spectrum Roadmap (2025) ensure future-ready spectrum
planning.

Information Technology
1. India’s IT infrastructure is anchored by data centres supporting e-governance, finance and enterprise
services. As of June 2025, installed capacity stood at ~1,280 MW, with 130 private and 49 government
data centres. Capacity is projected to reach ~4 GW by 2030, driven by cloud, AI, IoT and 5G adoption.
2. The GI Cloud (MeghRaj) initiative provides secure, scalable cloud services for government applications.
As of December 2025, 26 Cloud Service Providers are empanelled, strengthening India’s digital
infrastructure backbone.

Social And Emerging Sector Infrastructure

Infrastructure development has increasingly focused on service delivery, inclusion and strategic capacity,
covering drinking water, water resource management, tourism and space infrastructure.

Rural Drinking Water and Sanitation

1. Under Jal Jeevan Mission (Har Ghar Jal), over 81% of rural households have tap water access. As
of December 2025, 15.76 crore rural homes are covered. Launched in 2019 with a central outlay of
₹2.08 lakh crore, the Mission has been extended till 2028 with an additional ₹67,000 crore to achieve
universal coverage.
2. Innovations include HAM-PPP for STPs, One City One Operator model, vertical STPs, and green
STPs using solar and biogas. Afforestation over 33,024 hectares along the Ganga has strengthened
riverbank stability and climate resilience.

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3. Ecological recovery is reflected in the Gangetic Dolphin population increase from ~3,500 (2015) to
6,327 (2021–23). Reintroduction of Red Crowned Roofed Turtles (2025) marks progress in biodiversity
restoration.

Key Achievements and Initiatives in Water Resource Management

 M-CADWM (PMKSY): Pilot in FY26 using SCADA and IoT for efficient irrigation and participatory
governance.
 C-Flood Platform: Two-day advance village-level flood forecasts for major river basins.
 National Register of Specified Dams 2025: Covers 6,628 dams.
 River Cities Alliance: Expanded to 145 cities; 60 Urban River Management Plans prioritised.
 National Water Censuses: Four ongoing surveys for evidence-based water planning.

Tourism
1. Swadesh Darshan 2.0 sanctioned 53 projects (₹2,208.87 crore), while CBDD approved 38 projects
(₹697.68 crore) to develop sustainable tourism destinations.
2. PRASHAD Scheme supports integrated pilgrimage and heritage infrastructure. Since 2015, 54 projects
worth ₹1,726.74 crore have been sanctioned across 28 States/UTs.

Space Sector
1. India operates 56 active space assets, including communication, navigation, earth observation,
scientific and technology demonstration satellites.
2. In 2025, India achieved autonomous satellite docking (SpaDeX), launched NVS-02, completed
100th launch from Sriharikota, participated in Axiom-04 ISS mission, launched NISAR, and
placed the heaviest LEO payload via LVM3-M6.

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3. ISRO’s platforms—Bhuvan, Yuktdhara, UWIS and ROCERS—support infrastructure monitoring,

urban planning, groundwater management and industrial safety using geospatial technologies.
4. Outlook: Aligned with Space Vision 2047, India targets a Bharatiya Antariksh Station by 2035
and a manned lunar mission by 2040, supported by missions including Gaganyaan follow-on,
Chandrayaan-4 & 5, Venus Orbiter and Next Generation Launch Vehicle.

Enhancing Private Participation in the Space Sector

 300+ space start-ups active.
 IN-SPACe as single-window regulator.
 Liberalised FDI policy (up to 100% in non-sensitive areas).
 ₹1,000 crore VC fund and ₹500 crore Technology Adoption Fund.
 Successful private launches and satellite deployments.
 70+ technology transfers from ISRO.
 New launch infrastructure at Kulasekarapattinam.

Conclusion
1. India’s infrastructure strategy reflects a shift toward scale, integration and quality, driven by sustained
public capital expenditure and integrated planning under PM GatiShakti.
2. Improved connectivity is reducing travel time, logistics costs and enhancing market access, strengthening
India’s participation in domestic and global value chains.
3. Infrastructure now extends beyond physical assets to digital public infrastructure, clean energy, water
security and future technologies. Sustaining investment, deepening private participation and aligning
with decarbonisation, digitalisation and resilience will anchor infrastructure as a key pillar of Viksit
Bharat @2047.

Question For Practice

1. “Robust infrastructure and investment are essential for enhancing India’s competitiveness and
sustaining economic growth.” Analyse the role of connectivity and capacity-building initiatives in
strengthening India’s economic competitiveness.
2. Evaluate how investment strategies in physical infrastructure and financial instruments have helped
bridge regional disparities and mobilise private capital for infrastructure projects.

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ENVIRONMENT AND CLIMATE

CHANGE: BUILDING A RESILIENT,
CHAPTER
10 COMPETITIVE AND DEVELOPMENT-
DRIVEN INDIA

Chapter Overview
India’s vision of becoming a developed nation by 2047 rests on achieving high, inclusive, and
environmentally sustainable growth. This requires transforming consumption and production patterns
through policy, technology, and behavioural change, with Mission LiFE placing citizens at the centre
of climate action. Despite low per capita emissions, climate change poses serious risks to livelihoods,
infrastructure, and economic stability, making adaptation a key priority. India is also advancing a
balanced mitigation pathway by scaling renewables, energy storage, and nuclear power to ensure
energy security and competitiveness, while highlighting the need for stronger domestic finance and
reforms in global climate finance.

Introduction
 Climate transitions must balance decarbonisation with growth, energy security, and system resilience.
 Global experience shows that renewable expansion without grid readiness and storage creates
reliability risks.
 Durable transitions require sequencing, buffers, and institutional capacity, not capacity additions alone.
 For India, adaptation is central, with development itself acting as a key form of climate resilience.
 Mitigation follows a balanced pathway, combining renewables with storage, hydro, and nuclear power.
 Strengthening domestic finance and reforming global climate finance are critical to sustaining the
transition.

Adaptation: Strengthening Climate Resilience

 India’s high climate vulnerability necessitates adaptation to protect livelihoods, infrastructure, and
economic stability.
 Integrating climate resilience into development planning is essential for sustaining growth.
 Unlike mitigation, adaptation delivers immediate gains by reducing losses, stabilising incomes, and
safeguarding investments.

Financing Gap in Climate Adaptation

 Despite rising adaptation needs, global and private finance remains skewed towards mitigation.
 Developing countries require USD 310–365 billion annually by 2035, against current flows of only USD
26 billion.
 India therefore emphasises sub-national, context-specific adaptation embedded in policy design.

Public Investment–Led Climate Adaptation in India

 India follows a development-led adaptation strategy anchored in domestic public investment.

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 Adaptation-related spending increased from 3.7% of GDP in FY16 to 5.6% in FY22.

 The National Action Plan on Climate Change (NAPCC) drives adaptation through nine missions, many
with a resilience focus.

Sectoral Missions for Climate Resilience

 The National Mission on Sustainable Agriculture promotes climate-resilient farming, water efficiency,
and soil health.
 The National Water Mission focuses on conservation, equitable access, and state-specific water
planning.
 Health and urban resilience are addressed through missions on climate-linked health risks and
sustainable habitats.

Coastal, Marine, and Ecosystem-Based Adaptation

 The National Coastal Mission strengthens climate-resilient coastal infrastructure and livelihoods.
 MISHTI promotes large-scale mangrove restoration, employment generation, carbon sequestration,
and eco-tourism.
 Wetland conservation and Mission LiFE reinforce ecosystem-led, behaviour-driven resilience.

Federal and Localised Climate Action

 Climate adaptation is implemented through coordinated national, state, and local action.
 States tailor national frameworks to local needs through sectoral policies and institutions.
 Employment- and livelihood-linked missions further strengthen climate-resilient development
outcomes.
 States play a pivotal role in planning and implementing climate adaptation strategies. State Action
Plans on Climate Change (SAPCCs) translate the National Action Plan on Climate Change into region-
specific action, reflecting diverse vulnerabilities such as coastal exposure and Himalayan fragility.
While early SAPCCs emphasised mitigation, recent revisions mark a shift towards adaptation-led
development. They increasingly focus on local risk profiles, sectoral vulnerabilities, and alignment with
district-level development priorities, making climate responses more contextual, robust, and effective.

Kerala Climate-Resilient Agri-Value Chain Modernisation Project (KERA)

 The Government of Kerala, with World Bank support, is implementing the KERA Project to build
a climate-resilient, competitive, and market-oriented agricultural sector. With an outlay of USD
285 million (₹2,365 crore), the project aims to enhance resilience, raise productivity, promote value
addition, and strengthen market linkages, directly benefiting over 4 lakh farmers across the State.
 KERA has three core components: promotion of climate-resilient and low-carbon cultivation
practices; support to smallholder commercialisation through up to 150 Productive Alliances between
Farmer-Producer Companies and agribusinesses, along with replantation of climate-resilient crop
varieties; and strengthening of agri-food MSMEs and agri-tech start-ups through targeted grants
and development of agri-parks and food parks.
 Implemented across all 14 districts, KERA focuses on measurable outcomes such as higher farm
incomes, enterprise growth, job creation, and improved resilience to climate shocks, with special
emphasis on small and marginal farmers, women-led enterprises, FPCs, and rural entrepreneurs.

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Subnational Initiatives on Adaptation: Ecosystem-Based and Institutional

Innovations
Adaptation in India is shifting from isolated projects to integrated, growth-supporting resilience strategies.
Ecosystem-based approaches and institutional innovations are central to subnational climate action.
 Meghalaya: Ecosystem-Based Water Security and Climate Adaptation
■ Nearly half of Meghalaya’s springs have dried up or show reduced discharge, posing serious water
security risks.
■ The state has adopted community-led adaptation through MegARISE, spring mapping, and climate-
adaptive water harvesting.
■ Over 55,000 springs have been mapped using GIS, enabling targeted interventions.
■ Catchment protection, forest restoration, and watershed treatment cover over 8,430 hectares.
■ More than 500 community water-harvesting projects enhance climate-resilient water access and
local resilience.
 Odisha: Institutionalised Climate Adaptation through Water Governance
■ Over 39,000 Pani Panchayats empower communities, ensuring inclusive water governance.
■ Climate-resilient irrigation upgrades across 15 districts benefited 1.25 lakh households.
■ Outcomes include a 28.8% rise in water productivity, 67.8% increase in agricultural output, and
27% income growth.
■ Integration of irrigation, agriculture, and aquaculture strengthens livelihood resilience.
 Tamil Nadu: Coastal Restoration Mission
■ Tamil Nadu’s 1,069 km coastline and 14 coastal districts face erosion, storm surges, and sea-level
rise.
■ The Blue Economy Project adopts a multi-sector approach covering biodiversity, livelihoods,
pollution control, and coastal protection.
■ Focus is on ecosystem restoration alongside economic resilience of coastal communities.
 Ahmedabad: Heat Insurance for Informal Workers
■ Ahmedabad pioneered South Asia’s first Heat Action Plan in 2013.

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■ Parametric heat insurance compensates informal women workers for wage losses during extreme
heat.
■ Automatic payouts are triggered by temperature thresholds, with premiums of ₹354 and payouts
up to ₹1,250.
■ Recognises heat stress as an economic shock, not just a health risk.
 Uttarakhand: Community Radio for Disaster Preparedness
■ Mandakini ki Aawaz, a community radio station, enhances disaster preparedness in Rudraprayag.
■ It disseminates early warnings and advisories in coordination with IMD and State Disaster
Management Authority.
■ Strengthens preparedness, response coordination, and recovery at the grassroots level.
 Jodhpur: Community Cooling Stations
■ Net-zero cooling stations support outdoor workers in heat-vulnerable areas.
■ Combine passive cooling, solar power, reflective roofing, drinking water, and first aid.
■ Interior temperatures recorded up to 8°C cooler during peak heat hours.
■ Offers a scalable model for urban heat resilience.

Mainstreaming Climate Resilience into Development

 Climate adaptation now extends beyond forests and water bodies into urban services and economic
systems.
 Decentralised energy, solid waste management, and drinking water are emerging as resilience assets.
 Climate Resilient Village models institutionalise resilience as a governance function.
 Urban planning must internalise climate risks to sustain growth and livability.

Mitigation: Transition to a Low-Carbon Economy

 India’s mitigation strategy balances emissions reduction with energy security and affordability.
 Policies target higher non-fossil fuel share, energy efficiency, and system stability.
 Lessons from Europe highlight risks of rapid renewable expansion without baseload and grid
reinforcement.

Energy Transformation at Scale: India’s Renewable Imperative

 India is advancing renewables alongside nuclear, green hydrogen, battery storage, and critical minerals.
 This integrated approach addresses both climate goals and energy security.

Progress on Non-Fossil Fuel Energy

 India crossed 50% non-fossil fuel installed capacity (51.93% by Dec 2025).
 Installed 38.61 GW of renewable capacity during FY 2025–26 (till Dec 2025).
 India ranks 4th globally in installed renewable energy capacity.
India’s

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India’s

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SHANTI Act, 2025 – Nuclear Energy for India’s Energy Transition

 Nuclear energy offers clean, reliable, and dispatchable power, addressing intermittency and energy
security challenges associated with solar and wind, while supporting heavy industry and green
hydrogen production. In the Union Budget 2025–26, the Government launched the Nuclear Energy
Mission with an allocation of ₹20,000 crore to develop at least five indigenously designed Small
Modular Reactors (SMRs) by 2033.
 India’s current nuclear capacity stands at 8.78 GW, with projections of 100 GW by 2047. To enable
this scale-up, India enacted the Sustainable Harnessing and Advancement of Nuclear Energy for
Transforming India (SHANTI) Act, 2025. The Act consolidates and amends the Atomic Energy
Act, 1962 and the Civil Liability for Nuclear Damage Act, 2010, allowing private sector and state
participation for the first time.
 The SHANTI Act introduces a graded liability framework without diluting victim compensation
and enables private participation in nuclear plant operations, power generation, equipment
manufacturing, and R&D, marking a structural reform to accelerate India’s low-carbon, secure
energy transition.

Key Challenges Ahead

 Solar and wind are material- and capital-intensive and require large-scale storage.
 Storage costs and access to critical minerals are major constraints.
 The viability of storage depends on utilisation rates and long-term investment planning.
India’s climate strategy is increasingly pragmatic—anchoring adaptation in development, sequencing
mitigation carefully, and prioritising resilience, affordability, and institutional capacity.

The Case for Battery Storage

 India will require 336 GWh of energy storage by 2029–30 and 411 GWh by 2031–32 to reliably
integrate renewable energy (CEA).
 Energy storage is formally recognised as core power infrastructure, enabling access to long-tenure,
low-cost finance and inclusion in resource adequacy planning.
 Regulatory and market reforms expand revenue streams for storage, including transmission charge
waivers (till June 2028), eligibility for ancillary services, participation in high-price day-ahead
markets, and competitive bidding guidelines for BESS.
 The Government has launched two VGF schemes supporting ~43 GWh of BESS, alongside a
₹18,100 crore PLI for 50 GWh of advanced battery manufacturing, including 10 GWh for grid-
scale storage.
 Pumped storage projects receive grant support, faster clearances for closed-loop systems, and
liberalised ownership, including by consumers; advisory norms encourage co-location of storage
(≥10%) with solar capacity.
 In FY26, IFC committed USD 51.4 million to India’s largest standalone BESS (180 MW / 360 MWh)
in Gujarat, supported by concessional finance from the Clean Technology Fund, setting a benchmark
for future projects.
 Kerala mandates battery storage for new rooftop and large solar installations (10–20% depending
on system size), with higher tariffs under gross metering to incentivise adoption and address solar
intermittency.

Critical Minerals & the Political Economy of Energy Transition

 The global energy transition is increasingly shaped by control over critical minerals such as lithium,
cobalt, nickel, copper, and rare earths, which now act as strategic chokepoints affecting energy
security, industrial competitiveness, and geopolitics.

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 Copper has emerged as a highly price-volatile mineral due to mine outages in major producers (Chile,
Congo, Indonesia), rising long-term demand from power and data centres, and trade protectionism.
 Advanced economies are promoting standards-based critical mineral markets (e.g., G7 roadmap),
emphasising sustainability, traceability, and ESG compliance. While necessary, these standards
function as instruments of market power, shaping entry, value capture, and cost distribution across
supply chains.

Challenges for Developing Countries

 Standards as barriers: High costs of digital traceability, certification, and ESG compliance may deter
investment and slow mineral supply expansion in resource-rich developing nations.
 Value-chain lock-in: Narrow or asymmetric standards risk confining developing countries to low-
value raw material exports, while processing and manufacturing remain concentrated in advanced
economies.
 Affordability concerns: Sustainability premiums can raise mineral prices without commensurate
finance, technology transfer, or capacity building—making the transition clean but unaffordable and
hence unjust.
 A durable global framework must therefore be inclusive, capacity-sensitive, and development-
oriented, treating resource-rich regions as co-producers of value, with cooperation in technology,
skills, institutions, processing, and recycling.

India’s Strategy
 India balances strategic autonomy with global integration through the National Critical Mineral
Mission (NCMM) and partnerships such as the Minerals Security Partnership and Indo-Pacific
Economic Framework.
 MMDR Act amendments (2023 & 2025) empower the Centre to auction 24 of 30 critical minerals,
open six previously restricted minerals to private participation, and allow inclusion of new minerals in
mining leases.
 The Geological Survey of India completed 195 exploration projects (FY25) and initiated 230
projects (FY26); KABIL has secured lithium assets in Argentina and partnerships in Australia and
Chile.
 The NCMM, approved in January 2025, has an outlay of ₹16,300 crore with ₹18,000 crore expected
investment, covering the entire value chain—from exploration to recycling.
 A ₹1,500 crore recycling incentive scheme under NCMM aims to develop domestic capacity for
recovering critical minerals from secondary sources, enhancing long-term supply resilience.

Carbon Credit Trading Scheme (CCTS)

 India operationalised the Carbon Credit Trading Scheme (CCTS) in June 2023 as a core mitigation
instrument, built on a dual structure comprising a mandatory compliance mechanism and a
voluntary offset mechanism.
 The compliance mechanism applies to energy-intensive industries through an emission-
intensity based baseline-and-credit system, initially covering sectors such as cement and iron
& steel.
 Entities outperforming assigned targets earn Carbon Credit Certificates (CCCs), denominated
in tCO₂e, which are tradable on power exchanges; underperforming entities must purchase and
surrender equivalent credits.
 The framework leverages the existing Perform, Achieve and Trade (PAT) architecture, enabling
a phased transition from energy efficiency trading to a full-fledged compliance carbon market.
In 2025, the government notified pro-rata Greenhouse Gas Emission Intensity (GEI) targets for
four sectors: Aluminium, Cement, Chlor-Alkali, and Pulp & Paper.

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Offset Mechanism
 The voluntary offset mechanism allows non-obligated entities to register emission reduction,
removal, or avoidance projects and earn CCCs, broadening mitigation beyond regulated sectors.
 Ten sectors have been approved for offsets, including energy, industry, agriculture, waste
management, forestry, transport, construction, solvent use, fugitive emissions, and CCUS,
incentivising economy-wide climate action.

Developments in International Carbon Markets: Key Takeaways

 Major economies have operationalised Emissions Trading Systems (ETS) as market-based mitigation
tools, notably the EU ETS, Korea ETS, and China National ETS, each reflecting different design
choices and maturity levels.
 EU ETS (2005) is an absolute cap-and-trade system with a progressively tightening cap; now in
Phase IV, it covers power, industry, aviation, and maritime sectors, with ~57% allowances auctioned
and the rest freely allocated to prevent carbon leakage.
 To address leakage, the EU is introducing the Carbon Border Adjustment Mechanism (CBAM) from
2026, gradually replacing free allocation; offset use has been discontinued in Phase IV, and ETS2
will extend coverage to buildings and road transport by 2027.
 Korea ETS (2015) follows a cap-and-trade model with benchmark-based free allocation, covers
industry, power, transport, buildings, waste, maritime and aviation, and allows offset use up to 5%
of verified emissions.
 China’s National ETS (2017) is an intensity-based system covering power, steel, cement, and
aluminium, with 100% free, output-based allocation and offset use capped at 5%.
 Key lessons: adopt a phased sectoral rollout, avoid excessive free allocations or over-reliance on
offsets, and align market design with national circumstances.

Mission LiFE (Lifestyle for Environment)

 Mission LiFE, launched by India at COP26 (2021), integrates behavioural change at the individual and
community level into India’s climate action strategy and forms a core component of its NDC.
 The Mission focuses on shifting consumption and production patterns towards sustainability by

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promoting resource efficiency, circularity, and climate adaptation, highlighting the cumulative
impact of small collective actions.
 Most of India’s climate-oriented schemes align with LiFE’s ethos by combining government interventions
with lifestyle and behavioural shifts at household, community, and enterprise levels.
 Initiatives such as Standards & Labelling, UJALA (LED adoption), and PAT embed mindful energy
consumption, complementing supply-side emission controls.
 The NAPCC reinforces Mission LiFE through its missions on energy efficiency, sustainable habitats,
water, and agriculture, emphasising conservation and community participation.

Climate Finance: Global Gaps and India’s Response

Global Climate Finance Landscape
 Global financial assets reached USD 147 trillion (2025), but climate finance remains skewed.
 Of USD 1.9 trillion climate finance (2023), over 50% flowed to advanced economies, ~30% to
China, and only 15% to other developing countries.
 Nearly 80% of climate finance is domestically sourced, reflecting structural bias in global finance
towards low-risk, developed markets.
 High borrowing costs, currency volatility, and shallow financial markets deter climate investments in
vulnerable developing countries.

India’s Climate Finance Challenge

 India reduced emissions intensity by 36% since 2005 and achieved 50% non-fossil power capacity
ahead of schedule, yet finance remains concentrated in solar, wind, and energy efficiency.
 Adaptation, MSMEs, urban infrastructure, and hard-to-abate sectors remain underfunded.
 83% of mitigation finance and 98% of adaptation finance comes from domestic sources, making
external finance critical.

Bridging the Finance Gap: Key Initiatives

 Issuance of Sovereign Green Bonds to fund low-carbon public infrastructure.
 100% FDI permitted under automatic route for renewable energy projects.
 Strengthened role of DFIs such as IREDA, NABARD, SIDBI, PFC, and REC.
 Regulatory reforms include SEBI’s BRSR & BRSR Core, green bond guidelines, IFSCA’s
sustainability-linked lending norms, and RBI’s green deposit framework to improve transparency
and prevent greenwashing.

Disaster Risk Financing

 Shift from relief-based financing to risk mitigation and prevention via SDMF and NDMF under the
Disaster Management Act, 2005.
 Glacial Lake Outburst Flood Mitigation Programme approved under NDMF for Himalayan regions.

Persisting Gaps
 High cost of capital, complex access to multilateral finance, limited long-term institutional capital, and
weak risk-sharing mechanisms—especially for adaptation and emerging technologies.

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India’s

Scaling Climate Finance: Municipal, National and Global Dimensions

Municipal & Sovereign Green Finance
 Urban Local Bodies (ULBs) are financing climate-aligned functions such as water supply, waste
management, and green energy through municipal green bonds.
 Cities including Indore, Ghaziabad, Ahmedabad, and Vadodara have issued green bonds under SEBI
norms, with potential to mobilise USD 2.5–6.9 billion over the next 5–10 years.
 The Government of India issued ₹15,000 crore of sovereign green bonds in FY26, taking cumulative
issuance to ₹72,697 crore since FY23.

Role of Development Finance Institutions (DFIs)

 Institutions such as IREDA, NABARD, SIDBI, PFC, and REC play a catalytic role by supporting project
preparation, improving bankability, and aligning climate finance with development priorities.
 Scaling blended finance, project de-risking, and capacity-building is critical to mobilise larger climate
investments.

Insurance and Climate Risk Management

 Expanding insurance coverage against climate risks improves household protection and enhances
creditworthiness of climate-exposed borrowers, especially farmers and MSMEs.
 Insurance is particularly vital for agriculture, given increasing climate volatility.

International Climate Finance & MDBs

 The Paris Agreement mandates developed countries to provide climate finance to developing nations.
 While developed countries reported USD 115.9 billion in 2022, independent estimates place actual
climate finance at only USD 28–35 billion, highlighting transparency concerns.
 COP30 (Belem, 2025) established a two-year work programme under Article 9.1, refocusing attention
on developed countries’ obligations rather than private flows.

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Structural Constraints in Global Finance

 Developing countries face high capital costs, shaped by credit ratings, risk perceptions, and global
financial architecture.
 Climate investments are often financed through short-term, high-cost borrowing, limiting scale and
effectiveness.

Need for Systemic Reforms

 Scaling climate action requires coordinated reforms across MDB mandates, global regulations, blended
finance tools, and domestic financial systems, while safeguarding other development priorities.
 Blended finance must be used judiciously, as excessive de-risking can strain public finances and
increase contingent liabilities.
 Over-reliance on foreign currency borrowing raises exchange rate risks and financing costs,
underscoring the need for strong governance and macroeconomic prudence.

Greenium
 The yield advantage of green bonds over conventional bonds—has been observed across sovereign
issuers, but its size and durability vary widely across markets. International experience shows that
greenium is not automatic; it depends on issuance at benchmark scale, strong secondary-market
liquidity, clear comparability with conventional bonds, credible allocation and impact reporting, and
integration within a stable sovereign debt programme.
 In India, the modest and intermittent greenium seen so far reflects market structure rather than weak
investor demand. Enhancing liquidity, consolidating issuances, and strengthening post-issuance
reporting can help generate a sustained cost-of-capital advantage over time.

Regulation: Streamlining Environmental Governance for Growth

 Environmental regulation addresses pollution as a market failure while enabling sustainable growth.
 Shift from rigid command-and-control norms to market-based, risk- and outcome-based regulation.
 Well-designed regulations reduce compliance burden, promote innovation, and improve ease of doing
business.

Evolution of Environmental Regulation in India

 Post-1972 Stockholm Declaration led to Water Act (1974) and SPCBs.
 Bhopal Gas Tragedy (1984) resulted in the Environment (Protection) Act, 1986 as umbrella law.
 EIA Notifications (1994, 2006) institutionalised prior environmental clearances.
 NGT (2010) strengthened enforcement but increased litigation risk.

Shift towards Market-Based and Flexible Instruments

 PAT Scheme (2012) introduced tradable energy efficiency certificates.
 Indian Carbon Market framework and Surat PM-ETS signal innovation in emissions control.
 Incentive-based mechanisms complement traditional regulation.

Recent Reforms in Environmental Clearance and Governance

 Gradual move to risk-based, outcome-oriented, and predictable regulation.
 Key challenges remain: multiple clearances, weak monitoring, SPCB capacity gaps, litigation
uncertainty.

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Digitalisation and Trust-Based Regulation

 PARIVESH 3.0 enables single-window digital clearances and compliance monitoring.
 Environment Audit Rules, 2025 introduced third-party auditors.
 Uniform consent guidelines issued across SPCBs.

Rationalisation Based on Pollution Potential

 Industry categorisation into Red, Orange, Green, Blue, White.
 Simplified norms for CBG plants and critical/strategic mineral mining projects.

Circular Economy, Waste and Plastic Management

 Green Credit Programme and Circular Economy Action Plans across 10 waste streams.
 Expanded EPR framework supported by digital portals.
 Ban on 12 single-use plastic items; stronger monitoring systems introduced.

Legal and Institutional Reforms

 Contaminated Sites Rules, 2025 and Biodiversity Regulations, 2025 notified.
 Jan Vishwas Act decriminalised minor environmental offences.
 Enhanced compensation and use of Environmental Relief Fund.

Conclusion:
Towards a Green, Resilient and Competitive India
India’s climate action is firmly grounded in development realism, balancing sustainability goals
with economic growth imperatives. The approach prioritises adaptation, strengthening domestic
institutional and technological capacity, and seeking predictable and adequate global climate
finance to support an orderly transition. Environmental regulation in this framework is no longer a
constraint but an enabler, increasingly functioning as a facilitator of sustainable growth, resilience,
and long-term competitiveness.

Question For Practice

1. “Green finance and sustainable environmental governance are essential for achieving India’s climate
and development goals.” Analyse the significance of finance-related instruments such as sovereign
green bonds, domestic climate finance frameworks, and carbon markets in supporting India’s transition
to a low-carbon and resilient economy.
2. Assess the challenges and opportunities in mobilising climate finance for adaptation and mitigation
priorities.

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CHAPTER
11 EDUCATION AND HEALTH: WHAT
WORKS AND WHAT’S NEXT

Chapter Overview
India’s path to Viksit Bharat is anchored in inclusive growth and human capital development. Education
reforms have improved access, quality, and skill alignment, while health outcomes have strengthened
through infrastructure expansion and targeted policies. Addressing emerging challenges in health
and skills through preventive, adaptive, and accountable frameworks is key to building a future-ready
workforce.

Introduction
Public health and education are core pillars of India’s human capital and economic growth. India has
improved access to healthcare through public investment, reducing infant and maternal mortality, expanding
immunisation, and strengthening primary care, supported by initiatives such as the National Health Mission
and Ayushman Bharat. Education achievements include higher literacy, school and higher education
enrolment, and vocational education opportunities. The Right to Education Act (2009) and National Education
Policy (NEP) 2020 have promoted access, equity, and innovation. However, regional disparities, quality
variations, digital divides, and infrastructure gaps remain key challenges. This chapter presents progress,
challenges, and future pathways in education and health.

Education: Enhancing Quality And Access

Progress in School Education
School education forms the foundation of human capital for Viksit Bharat @2047. India’s demographic
advantage includes 27% of the population aged 3–18 in 2024. Despite this, the Education Index and expected
years of schooling (EYS) lag global peers. NEP 2020 aims to raise EYS to 15 years through a lifecycle approach
covering early childhood education, foundational literacy and numeracy, universal secondary schooling, and
integration of vocational and digital skills.
School Infrastructure
 India has one of the world’s largest school systems: 24.69 crore students across 14.71 lakh schools
with over 1.01 crore teachers. Government schools constitute 69% of all schools, enrolling nearly
half of all students. Gross enrolment ratios (GER) show steady progress: foundational stage 41.4%,
preparatory 95.4%, middle 90.3%, and secondary 68.5%. Digital tracking through APAAR IDs enables
monitoring of enrolment and progression.
 Improvements in sanitation and ICT facilities, along with increased participation in learning activities
(89.3% of children aged 6–14 in 2024), highlight positive developments in school infrastructure. Female
participation and engagement in sports/exercise are also rising, with rural children spending more time
on physical activities than urban peers.
Achievement of school education programmes

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Scheme/Initiative Objective/Target Key Features/Progress

PM-JANMAN (Pradhan Mantri Uplift 75 Particularly Vulnerable 500 hostels approved (₹1,255.24
Janjati Adivasi Nyaya Maha Tribal Groups (PVTGs) across 18 crore); Multilingual learning tools:
Abhiyan) states + Andaman & Nicobar Jaadui Pitara (53 materials, ages
3–8), e-Jaadui Pitara (3,000+
interactive digital content with
AI bots); Kitab Ek Padhe Anek
(Grades I & II)
Bharitya Bhasha Pustak Promote education in regional Textbooks and study materials
Scheme languages in 22 Indian languages (digital
format)
Kasturba Gandhi Balika Residential schools for girls from 2,682 KGBVs upgraded by March
Vidyalayas (KGBVs) disadvantaged groups 2025 (317 up to Grade X, 2,365 up
to Grade XII)
Dharti Aaba Janjatiya Gram Improve educational access for 692 residential hostels sanctioned
Utkarsh Abhiyan tribal students across 23 states/UTs
ULLAS (Adult Education Scheme) Promote adult literacy 3.1 crore learners, 47 lakh
volunteer teachers, 1.7 crore neo-
literates registered; full literacy
achieved in Ladakh, Mizoram,
Goa, Tripura, Himachal Pradesh

Innovative Pedagogy and Community Participation

 Secondary net enrolment (NER) is low at 52.2%, with rural-urban disparities: 54% of rural schools
offer only foundational-preparatory education, while only 17.1% offer secondary education.

 Dropouts increase due to long travel, transition losses, and limited secondary access in rural areas.

 Key initiatives: Poshan Shakti Nirman, Samagra Shiksha Abhiyan, upgrading schools to Class XII,
open schooling, DIETs & SCERTs teacher training, and PM e-Vidya digital platforms.

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Empowering change in Indian education through community participation

Community participation improves accountability, enrolment, and foundational literacy and
numeracy (FLN). Examples include:
 Chaduvula Panduga (Andhra Pradesh), Alokar Jatra (Assam), Aao School Chalein (Haryana) –
enhancing enrolment and local monitoring.
 Zilla Parishad School Jalindarnagar, Maharashtra – peer-learning “Subject Friend” model,
student-led advanced learning (coding, robotics), enrolment rose to 120; globally recognized in 2025.
 Teacher communities and parental engagement enhance motivation, policy implementation, and
inclusive learning.

Improvement in Learning Outcomes

 Learning assessments are key to identify gaps and improve outcomes.
 PARAKH Rashtriya Sarvekshan 2024: Competency-based assessment for Grades 3, 6, 9; over 21.15
lakh students assessed.
■ Grade III: Girls outperform boys in Language (65% vs 63%), rural students outperform urban, state
schools show strong foundational outcomes.
■ Math proficiency: 65% (up from 42% in 2021); Language: 57% (up from 39%).
 Vidya Samiksha Kendras will enable real-time, data-driven monitoring for timely interventions.

Institutionalised Systemic Assessments

 Current internal/board exams mainly assess recall, not diagnostic learning gaps.
 International examples (US NAEP, Australia NAP) show assessments should guide teaching
improvements.
 India could implement PISA-like assessments at Grade X for benchmarking across states, schools,
and socio-economic cohorts.
Independent Evaluation and System-wide Benchmarking
 Effective accountability requires independent oversight and benchmarking.
 Example: Dubai – third-party school inspections improve governance, pedagogy, and inclusion.
 NIRF for higher education fosters competition; similar school-level benchmarking recommended.
 Independent agencies could assess schools 2–3 years for continuity and longitudinal tracking.
Key Findings from PARAKH & Learning Insights
 Only 35% of schools accommodate children with special needs (CWSN); 38% have trained teachers.
 Emotional well-being is low: 55% motivated to attend school, <50% feel emotionally safe.
 Urgent need for Social-Emotional Learning (SEL), peer support, and child protection policies.
 Learning outcomes influenced by school entry age, remediation, digital access, and parental
education.

From Books to Report Cards: Evidence from Learning Surveys

 Foundational Literacy & Numeracy (FLN): NEP aims for all students to achieve FLN by the end of
Grade III.
 Learning Gains: PARAKH 2024 and ASER 2024 show improvements in reading and arithmetic
post-pandemic.
■ % of Grade III children performing at Grade II level increased steadily from 2014–2024 (reading:
23.6% → 28.1%; subtraction: 20.5% → 33.7%).

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Key Drivers of Learning Outcomes

1. Parental Education:
■ Maternal education strongly impacts children’s performance.
■ % of mothers with no schooling decreased from 43% (2014) → 24% (2024).
■ Increased maternal education drives enrolment and demand for better facilities (e.g., Anganwadi
enrolment).
■ Policy focus: adult literacy, skill-building, women’s employment, girls’ education, and home-
learning activities.
2. Age of School Entry:
■ Children 8+ in Grade II perform better than younger peers.
■ Underage Grade I students decreased from 25.6% (2018) → 16.7% (2024), reflecting improved
alignment with policy norms.
Teaching at the Right Level (TaRL)
 Groups children by learning levels rather than grades.
 Uses simple, engaging daily activities with time-bound assessments.
 Children are re-grouped as they progress, ensuring targeted support and improved outcomes.
Digital Learning and Technology Integration
 Digital access in rural youth (14–16 years): 89.1% have smartphones; ~50% use them for education,
~75% for social media.
 Opportunity to enhance learning through digital tools.
 NEP vision: integrate digital technologies, expand affordable infrastructure, bridge digital divide, and
support teachers using AI and technology.
 Focus: align education with labour market needs and create seamless education-to-employment
pathways.
School-to-Skill Pathways
 The education system is crucial for preparing youth for life beyond school.
 Skill-based education is essential for out-of-school children and those at risk of dropping out, helping
them gain practical skills and improve job prospects.
 Out-of-school adolescents (14–18 years): Nearly 2 crore (PLFS 2023–24).
■ Main reasons for drop-out:
■ Boys: 67.3% leave school to supplement household income (44% overall).
■ Girls: 55% leave due to domestic and care responsibilities.

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Strengthening School Education for Human Capital and Productivity Growth

 Continued schooling up to higher secondary is essential to meet evolving skill needs in manufacturing,
services, and the digital economy.
 Skill exposure among adolescents (PLFS data):
■ 91.94% have no skilling exposure.
■ 7.09% trained informally, without certification.
■ Among formally trained, 52.9% are in IT/ITeS; limited access exists for other sectors like electrical,
artisan trades, healthcare, and life sciences.
 Key interventions for workforce readiness:
■ Establish composite schools for smooth pre-primary to higher secondary transition.
■ Integrate vocational education (Grades VI–XII) with practical exposure and industry visits.
■ Expand partnerships with industry, MSMEs, and Sector Skill Councils for apprenticeships.
■ Strengthen linkages between schooling, digital skills, and future-ready competencies to enhance
productivity.

Progress in Higher Education

 Growth of Institutions & Access:
■ HEIs increased from 51,534 (2014-15) to 70,018 (June 2025).
■ Premier HEIs: 23 IITs, 21 IIMs, 20 AIIMS; 2 international IIT campuses (Zanzibar, Abu Dhabi).
■ Student enrolment rose from 4.33 crore (2021-22) to 4.46 crore (2022-23); GER: 29.5% in 2022-23.

 NEP Reforms & Frameworks:

■ National Credit Framework (170 universities), Academic Bank of Credit (2,660 HEIs, 4.6 crore
APAAR IDs).
■ Flexible entry-exit pathways, biannual admissions (153 universities).
■ MERITE scheme for 275 technical institutions to improve quality of technical education.
■ Viksit Bharat Shiksha Adhishthan Bill 2025: unified regulatory framework with three councils
(Regulatory, Accreditation, Standards), enhancing autonomy, transparency, and global
competitiveness.

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Developing state capacity to strengthen higher education

 495 State Public Universities (SPUs) account for ~81% of HEI enrolment (~3.24 crore students).
 Karnataka leads with 43 SPUs; Gender Parity Index (GPI) at SPUs: 0.93 nationally; improvements over
the decade (+31%).
 State initiatives: Gujarat Public Universities Act 2023, Maharashtra Faculty Development Academy,
Odisha’s Mo College and Higher Education Programme for Excellence and Equity.

Industry-Academia Integration (STEM & Employability)

 Industry collaborations expanded to teaching, curriculum co-development, labs, and project-based
learning.
 75% of HEIs lack industry readiness; placements low (16.7% achieve 76-100% placements).
 ‘Professor of Practice’ (PoP) scheme: 18,000 experts in 536 institutes; AICTE-Industry Fellowship:
350 faculty trained (2025-26).
 I-STEM portal connects 53,408 researchers and 30,144 instruments, fostering R&D and technology
collaboration.
 NIRF & Benchmarking:
■ Rankings influence funding, institutional support, and autonomy; South India and Delhi dominate
top 100; northern and central states lag.
■ Encourages accountability, competition, and learner-centric approaches.

Internationalisation of Higher Education

 NEP & UGC regulations promote twinning, joint, dual degrees; 100% FDI allowed; 15 foreign HEIs
expected to set up campuses in India.
 India remains largest source of international students; inbound students <0.1% of total enrolment.
 Policy measures: ‘Study in India’ initiative, global ranking-based branding, programme diversification
(summer schools, heritage, yoga, innovation labs).
 Opportunity to reduce outbound migration: 28 Indian students study abroad per 1 inbound student;
annual outward remittance USD 3.4 billion (FY24).
 Emphasis on improving campus experience, easing regulations, leveraging alumni and start-up
ecosystems, and building regional STEAM networks.

Promoting International Student Mobility

 Global Context:
■ Internationally mobile students rose from 22 lakh (2001) to 69 lakh (2022).
■ Major host countries: USA, Canada, UK, Australia, France, Germany.
■ Within BRICS, Russia and China dominate inbound mobility; India’s share remains in single digits.

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 India’s Outbound & Inbound Trends:

■ India is the largest source of international students: 6.85 lakh (2016) → 18 lakh (2025).
■ Outbound: 28 Indian students go abroad per 1 inbound student; FY24 outward remittance USD
3.4 billion.
■ Inbound students in India: 7,000 (2000-01) → 49,000 (2020), only 0.1% of HE enrolment.
■ Key states hosting inbound students: Punjab, Uttar Pradesh, Gujarat, Andhra Pradesh; Karnataka
and Tamil Nadu declining.
■ Top programmes attracting >1,000 foreign students: [Link], BBA, [Link].
■ India leads South Asia, attracting 80%+ of sub-regional inbound students, mainly from Nepal,
Afghanistan, Bangladesh, Bhutan.
 Challenges:
■ Limited international visibility of HEIs.
■ Regulatory frictions hinder India’s pull despite cost and scale advantages.
■ Regional competition rising; South Asian share declining since 2011.
Policy Levers & Education Tourism
 Enabling Ecosystem
■ NEP, updated UGC guidelines, academic collaboration rules, foreign branch campuses (e.g., GIFT
City).
■ ‘Study in India’ initiative leverages NAAC, NIRF, IoE, NBA, and global rankings.
■ Focus on India’s strengths: philosophy, Ayurveda, classical arts, affordability, English proficiency,
innovation ecosystem.
 Strategic Interventions
■ Programme diversification: summer schools, semester-abroad modules, heritage/philosophy
tracks, yoga/Ayurveda certificates, innovation/rural-immersion labs.
■ Promote reciprocal student mobility via bilateral agreements, joint/dual/twinning degrees.
■ Institutional reforms: improve campus experience (housing, health, counselling, visas).
■ Regulatory simplification: faster visas, post-study internships, recognition of prior learning, flexible
credits.
■ Leverage alumni/start-up networks, regional STEAM3 networks (STEM + Arts, Management,
Medicine).
 Opportunity
■ Increasing visa/enrolment restrictions abroad create a timely chance for India to brand itself as an
education hub.
■ Indian Technical & Economic Cooperation Programme trained 2+ lakh people from 160+ countries,
enhancing cultural diplomacy and goodwill.
 Caution:
■ Markt forces may increase costs or exclude marginalized groups.
■ Overreliance on foreign knowledge systems may undermine indigenous traditions.
■ Regulatory gaps may complicate governance.
 Way Forward
■ Focused internationalisation can improve student mobility to India.
■ Strengthening quality, accessibility, and global alignment positions India as a global education
and research hub.

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Health Outcomes: Maternal, Infant and Child Mortality

 Since 1990, India has achieved exceptional reductions in mortality indicators:
■ MMR reduced by 86% (global average: 48%).
■ Under-five mortality rate (U5MR) declined by 78% (global: 61%).
■ Neonatal mortality rate (NMR) fell by 70% (global: 54%).
 These gains reflect sustained public investment, improved maternal care, and targeted health policies.

Infant Mortality Rate (IMR): State-wise Progress

 IMR declined by over 37% in a decade: from 40 (2013) to 25 (2023).
 States like Karnataka and Himachal Pradesh have halved IMR.
 Kerala, Manipur, Sikkim, and Goa report single-digit IMRs, comparable to developed countries.
 Improvements indicate stronger neonatal care, maternal health services, and socioeconomic conditions.

Key Drivers of Improvement

 Expansion of neonatal intensive care units (NICUs) in government hospitals.
 Strengthened neonatal care protocols and universal immunisation coverage.
 Focus on the first month of life, when most infant deaths occur.
 Future policy must address region-specific disparities to sustain IMR reduction.

Digital Health and Health System Reforms

 India has leveraged ICT and digital platforms to enhance transparency and access in healthcare.
 Under PM Jan Arogya Yojana, ICT interventions have supported universal health reforms.
 Key initiatives include:
■ Ayushman Bharat Digital Mission (ABDM)
■ Hospital Management Information System (HMIS)
■ e-Sanjeevani telemedicine platform
 These initiatives improve service delivery, data-driven policymaking, and hospital efficiency.

AI and Technology-driven Healthcare Innovations

 AI Centres of Excellence established at AIIMS Delhi, PGIMER Chandigarh, and AIIMS Rishikesh.
 Deployment of:
■ AI-based Clinical Decision Support Systems
■ Digital disease surveillance tools
■ AI screening for diabetic retinopathy
 TB-focused innovations include AI cough-based screening, drug-resistant TB detection, and
vulnerability mapping, enhancing early diagnosis and surveillance.

Progress in health sector schemes

Scheme / Programme Objective Key Progress & Achievements

Ayushman Bharat Continuum of care across  Ayushman Arogya Mandirs (AAMs):

prevention, promotion, 1,82,944 operational
primary to tertiary  Expanded services AAMs: 1,51,116
healthcare
 Total footfall: 506.50 crore
 Teleconsultations: 42.66 crore
 Wellness & Yoga sessions: 6.72 crore

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Human Resources for Strengthen health  Total HR deployed: ~3.78 lakh

Health workforce capacity  GDMOs: 18,922; Specialists: 4,964
 Nurses: 77,874; ANMs: 96,720
 Paramedics: 93,034
 AYUSH doctors & staff: ~29,957

Ayushman Bharat– Financial protection for  AB cards generated: 42.78 crore

PM Jan Arogya secondary & tertiary care  Hospital admissions: 10.98 crore
Yojana (AB PM-JAY)
 Female beneficiaries: 49%
 Senior citizens covered: 6 crore

National Programme Early detection and  Hypertension screening: 40.13 crore

for Prevention & management of NCDs  Diabetes screening: 39.86 crore
Control of NCDs (NP-
 Oral cancer screening: 33.83 crore
NCD)
 Breast cancer screening: 15.86 crore

Ayushman Bharat Strengthen health  SC-HWCs (building-less): 9,519

Health Infrastructure infrastructure at all levels  Urban AAMs: 5,456
Mission
 Block Public Health Units: 2,151
 Integrated Public Health Labs: 744
 Critical Care Blocks: 621

National Tuberculosis Reduce TB incidence,  TB incidence reduced by 21% (2015–2024)

Elimination mortality & improve  TB mortality reduced by 25%
Programme treatment coverage
 Treatment coverage increased to 92%
(global avg: 78%)

Universal Digital immunisation  Registered beneficiaries: 14.32 crore

Immunisation tracking & universal  Deliveries recorded: 1.62 crore
Programme (U-WIN coverage
 Vaccine doses recorded: 60.98 crore
Portal)

Pradhan Mantri Financial protection &  OOP expenditure avoided: ₹9,741.25 crore
National Dialysis access to dialysis services  Patients covered:
Programme

India’s Epidemiological Transition

 India is undergoing a complex, overlapping epidemiological transition, rather than a linear shift
from communicable to non-communicable diseases. Mortality from infectious diseases has declined,
and life expectancy increased from 49.7 years (1973) to 70.3 years (2023). However, the country
faces a double burden: persistent communicable diseases such as tuberculosis and vector-borne
infections coexist with rapidly rising non-communicable diseases (NCDs), which now account for
over 57% of total deaths.

 This transition is marked by regional and socioeconomic disparities. States like Kerala exhibit
profiles similar to developed countries, dominated by degenerative diseases, while others continue to
struggle with malnutrition and infectious disease outbreaks.

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 Cardiovascular diseases (CVDs) remain the leading cause of death for both men and women, with
higher mortality among males. While men show higher all-cause and CVD mortality, women often
experience poorer outcomes after acute cardiovascular events, partly due to delayed diagnosis
and under-treatment. The presence of a higher share of ill-defined causes of death among women
indicates gaps in diagnostic accuracy and healthcare access.

 Going forward, India must consolidate gains in maternal and child health while scaling up elderly
and chronic disease care. The growing dominance of CVDs and the rapid rise in obesity—driven by
sedentary lifestyles, unhealthy diets, and increased consumption of ultra-processed foods—underscore
the need for targeted prevention, gender-responsive healthcare, and lifestyle-focused public
health strategies.

Tackling the obesity challenge

India has witnessed a simultaneous rise in obesity prevalence and ultra-processed food (UPF)
consumption between 2005 and 2019. Overweight and obesity increased significantly among both

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men and women, while the value of UPF consumption rose sharply, indicating a strong association
between dietary transition and rising NCD risks.

Health and Economic Impact of Ultra-Processed Foods (UPFs)

UPFs are increasingly displacing traditional diets, lowering overall diet quality and raising the risk
of obesity, cardiovascular diseases, diabetes, respiratory disorders, and mental health conditions.
Evidence consolidated under the Lancet Series on UPFs and Human Health establishes a strong link
between high UPF intake and adverse health outcomes. Rising UPF consumption also imposes economic
costs through higher healthcare expenditure, productivity losses, and long-term fiscal pressure.

Addressing the Challenge of Ultra-Processed Foods

Policy Imperative
UPFs contribute to chronic diseases and widen health inequalities, requiring immediate public health
action, even as further research continues. Reliance solely on consumer behaviour change is inadequate;
coordinated food-system regulation is essential.
The Marketing Challenge
UPF marketing aggressively promotes overconsumption using emotional appeals, celebrity
endorsements, price incentives, and misleading health claims, disproportionately influencing children
and adolescents. Global and Indian studies, including UNICEF reviews, show strong evidence linking food
marketing exposure to unhealthy dietary preferences.
India’s Policy Response
 National Multi-sectoral Action Plan (2017): Targets unhealthy diets and HFSS foods through
coordinated action across 39 departments, including FOP labelling and advertising restrictions.
 ICMR–NIN Dietary Guidelines (2024): Explicitly caution against UPFs.
 CCPA Guidelines (2022) and Food Safety and Standards Act, 2006: Prohibit misleading food
advertisements.
However, weak enforcement and lack of nutrient-based thresholds allow vague health claims,
exposing a critical regulatory gap.
Strengthening Regulatory Tools
 Marketing restrictions on UPFs, especially during peak child-viewing hours, including digital media,
may be considered (international examples: Chile, UK, Norway).

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 Front-of-Pack Labelling (FOPL): Strong evidence favours warning labels over rating systems like
Health Star Ratings for discouraging UPF consumption.
 Ban on health and nutrient claims on UPFs to prevent “health halo” effects.
 Nutrient-based taxation on UPFs exceeding sugar, salt, or fat thresholds, with revenues earmarked
for public health programmes.
Multi-Pronged Approach
A comprehensive strategy is required, including:
 Clear legal definition and regulation of UPFs (e.g., NOVA classification),
 Stricter labelling and monitoring of branded products,
 Awareness campaigns, especially in schools and colleges,
 Integration of UPF regulation alongside existing HFSS frameworks.
Government Initiatives to Address Obesity
Recognising obesity as a major public health challenge, India has launched multi-ministerial initiatives
integrating nutrition, physical activity, and lifestyle changes, including:
 POSHAN Abhiyaan & Poshan 2.0
 Fit India Movement, Khelo India
 Eat Right India & ‘Aaj Se Thoda Kam’ campaign
 School Health Programme, Yoga promotion, and AAMs
Under NP-NCD, over 31.5 crore adults have been screened, with 8.47 crore identified as overweight
or obese. MoHFW has directed states to target a 10% reduction in oil consumption, while FSSAI’s
“Stop Obesity” campaign promotes behavioural change through multilingual and accessible outreach.

Nutritional Intake Trends

India’s nutrition landscape remains complex, marked by child malnutrition, micronutrient deficiencies
among adolescent girls, pregnant and lactating mothers, and vulnerable groups. These deficiencies aggravate
lifestyle diseases, cancers, antibiotic resistance, and declining immunity, underscoring nutrition as a
central public health determinant.

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Nutrition Trends and SDG-2 (Zero Hunger)

Between 2009–10 and 2023–24, per capita calorie and protein intake increased in both rural and
urban areas. Calorie intake levels are now broadly similar across income groups, indicating a narrowing
rural–urban nutritional gap. Higher consumption expenditure is positively correlated with calorie intake.

Food Security to Nutrition Security

The National Food Security Act, 2013 ensures food access at scale, while programmes such as
Saksham Anganwadi, POSHAN 2.0, PMMVY, and Poshan Shakti Nirman target nutrition outcomes for
adolescent girls, mothers, and children. Despite progress, challenges persist due to diet quality, food
diversity, socio-cultural habits, and limited nutrition awareness.

Dietary Patterns and Diversity

Indian diets remain cereal-heavy, with under-consumption of legumes, milk, fruits, vegetables, and
nuts. Only 8.7% (rural) and 14.3% (urban) populations consume milk as recommended. Regional disparities
exist: high fat intake in urban North India, high calorie intake in the Northeast, and higher animal protein
consumption in southern states. Encouragingly, dietary diversity has improved across all consumption
classes, with the largest gains among the bottom 20% households, aided by better infrastructure and
food access.

Strengthening Nutrition Interventions

Policy focus must shift from mere access to food quality, bioavailability, and outcome tracking, using
region-specific evidence. Incorporating protein-rich and fortified foods in PDS, mid-day meals, and
promoting millets and traditional pulses can widen dietary diversity and reduce cereal dependence.

ICMR–NIN Dietary Guidelines 2024

The guidelines address the dual burden of undernutrition and obesity, emphasising diet diversity,
higher intake of vegetables and legumes, reduced salt, fat and sugar, and regular physical activity.
They serve as a key reference for preventing diet-related NCDs and promoting sustainable food choices.

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Schools as Nutrition Anchors

Schools are critical for instilling healthy habits. Evidence shows teacher-led, health-professional-
supported interventions are effective. Measures include free fruits, safe drinking water, healthy
cafeterias, physical activity integration, and school wellness councils. A School Well-Being Score
could incentivise holistic student development.

Nutraceuticals and Consumer Awareness

The growing market for health supplements and nutraceuticals poses risks due to unregulated use
and quasi-medical claims. Clear labelling, consumer education, and awareness that such products are not
substitutes for medical treatment are essential.

Role of States and SBCC

State-level innovation and Social & Behaviour Change Communication (SBCC) are crucial for effective
nutrition outcomes. SBCC has proven effective in health and welfare programmes by improving demand,
adoption, and sustained behaviour change.

Rajasthan Cash Plus Model

Rajasthan’s Cash Plus Model integrated DBT with targeted SBCC to address maternal and child
undernutrition in tribal districts. By engaging families, frontline workers, and communities through
customised counselling, multimedia campaigns, and digital outreach, the model improved nutrition
spending, dietary diversity, maternal weight gain, and reduced myths and taboos—demonstrating the
power of behaviour-informed welfare design.

Digital Addiction: Cognitive and Psychological Impacts

India’s rapidly expanding digital ecosystem has enabled growth and inclusion, but excessive digital
use among youth is emerging as a major behavioural risk. Digital addiction is linked to poor academic
performance, mental health disorders, sleep disruption, reduced productivity, financial stress, and
weakened social capital.

Nature and Risks of Digital Addiction

Digital addiction includes social media, gaming, online gambling, and streaming compulsion. Evidence
links these behaviours to anxiety, depression, low self-esteem, cyberbullying stress, aggression, and
social withdrawal, especially among adolescents and young adults.

Social Connectedness and Mental Well-Being

 Strong face-to-face social connections are associated with better mental health and lower
suicide rates. Analysis using the Facebook Social Connectedness Index (SCI) shows an inverse
relationship between within-district social connectedness and suicide death rates. States
with stronger local social bonds (e.g., Bihar, UP) exhibit lower suicide rates than states with more
geographically dispersed digital networks (e.g., Kerala, Tamil Nadu).
 India’s human capital outcomes hinge on nutrition quality, behavioural change, and digital well-
being, requiring whole-of-life, multi-sectoral, and behaviour-informed policies to secure long-
term health and productivity.

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Global and national responses to digital addiction

 Digital addiction among youth has emerged as a global public health concern, prompting regulatory,
educational, and therapeutic responses. The WHO classified Gaming Disorder in ICD-11, recognising
impaired control, prioritisation of gaming, and continuation despite harm.
 Countries have adopted diverse approaches: Australia banned social media access for children under
16; China imposed strict gaming-hour limits using real-name verification; South Korea experimented
with time-based gaming bans and later shifted to parental controls; Singapore promotes cyber
wellness through media literacy; and the UK integrates digital resilience into education and technology
design. Many countries now restrict smartphone use in schools to protect student well-being.

India’s Response to Digital Addiction

 India has adopted a multi-pronged institutional approach. CBSE and NCPCR have issued screen-time
and online safety guidelines, while the Pragyata Framework integrates responsible digital use into
education planning.

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 Tele-MANAS, launched in 2022, provides a 24/7 free mental health helpline, receiving over 32 lakh
calls, supported by a dedicated app (2024). The SHUT Clinic at NIMHANS offers specialised care for
technology addiction. The Online Gaming (Regulation) Act, 2025 bans real-money wagering games,
restricts advertising, and introduces licensing for permissible games to curb addiction and financial
harm.

Way Forward
A key gap remains the absence of comprehensive national data on digital addiction. The upcoming Second
National Mental Health Survey (NMHS) is expected to provide actionable evidence. Monitoring frameworks
should track screen-time patterns, mental health outcomes, academic/work performance, and cyber risks.
Adult-focused interventions such as digital diets, technology-free zones, workplace awareness programmes,
and community-based detox centres (e.g., Karnataka’s Beyond Screens) are essential.

Role of Schools, Families, and Communities

Schools should anchor a Digital Wellness Curriculum, covering cyber safety, mental health awareness,
screen-time literacy, and physical activity. Measures like peer mentoring, device restrictions, and reduced
dependence on online teaching tools can strengthen resilience. Families must promote device-free hours,
shared offline activities, and effective parental controls. Platforms should enforce age verification, safe
defaults, and limits on autoplay and targeted advertising. Simpler devices and ISP-level safeguards can
further reduce exposure to harmful content.

Expanding Tele-MANAS
Expanding Tele-MANAS to explicitly address digital addiction, integrating it with schools and colleges,
and training specialised counsellors can enable early detection, destigmatisation, and wider access to care.

Outlook
India’s demographic dividend faces risks from digital addiction, mental health challenges, poor nutrition,
obesity, and the double burden of communicable and non-communicable diseases. Open public dialogue,
normalising mental health discussions, and lifestyle awareness are critical. Leveraging technology-driven
surveys, AI tools, public-private partnerships, frontline worker-led digital platforms, and nationwide
awareness campaigns can identify health hotspots and drive targeted interventions. A holistic focus on
education, health, digital wellness, and nutrition is essential to build a resilient, productive, and thriving India.

Question For Practice

1. “Skilling the workforce is crucial for India’s demographic dividend and future economic growth.” Critically
examine the key challenges in India’s existing skill development ecosystem.
2. What institutional reforms are required to make skill development more inclusive, scalable, and
responsive to future skill needs?

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CHAPTER
12 EMPLOYMENT AND SKILL
DEVELOPMENT: GETTING
SKILLING RIGHT

Chapter Overview
India’s 56+ crore workforce is a major growth asset, supported by rising labour force participation,
falling unemployment, and strong job creation across organised and unorganised sectors. Realising
the demographic dividend requires a shift toward quality jobs and sustainable livelihoods. Government
efforts include structural reforms and targeted interventions, notably the Labour Codes, which balance
flexibility with workers’ rights and welfare. Measures to boost female labour participation (safe
housing, flexible/hybrid work) and expand social security for gig and platform workers are underway.
Strengthening vocational education and skills at all levels is crucial to improving workforce quality and
achieving the Viksit Bharat vision.

Introduction
 India’s labour market is undergoing structural transformation driven by digitalisation, green
transition, gig and platform work. Post-pandemic focus has shifted from job quantity to job
quality, aligned with inclusive and sustainable growth. Government initiatives emphasise labour-
intensive sectors and skill development to strengthen human capital.
 India’s working-age population (15–59 years) is expected to exceed 98 crore in the next decade,
with the demographic dividend peaking around 2030, when nearly 65% of the population will be
in this age group. Simultaneously, declining fertility and rising life expectancy indicate a gradual
shift towards an ageing population.
 This dual trend presents both opportunities and challenges. While workforce expansion can boost
growth, ageing pressures demand stronger social security and healthcare systems. The concept
of a longevity dividend highlights the need to extend healthy working lives through preventive
healthcare, NCD management, lifelong learning, and age-friendly work arrangements,
especially for informal workers.
 The Economic Survey underscores the need for labour market deregulation and skill mismatch
correction to improve employability and social mobility. Skilling acts as a catalyst for productivity,
decent work, and inclusive growth, supported by complementary investments in education,
healthcare, and infrastructure.
 This chapter focuses on supply-side policy levers for inclusive employment. It analyses employment
patterns, gender dimensions, Labour Codes, the gig workforce, vocational education reforms, and
concludes with an outlook on employment and skilling.

Employment Overview
 Employment outcomes reflect India’s resilient economic growth, supported by tax reforms and
deregulation. Data from PLFS, ASI, and QBUSE indicate rising labour force participation, falling
unemployment, and strong job creation across organised and unorganised sectors.

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 PLFS data for H1 FY26 show a declining unemployment rate, stable LFPR, and robust employment
levels. In Q2 FY26, total employment reached 56.2 crore, with 8.7 lakh net jobs added over the
previous quarter.
 India’s employment structure shows clear rural–urban differences. Rural areas are dominated by
agriculture (57.7%) and self-employment (62.8%), while urban employment is concentrated in
services (62%) with a higher share of regular wage jobs (49.8%). At the aggregate level, agriculture
(42.4%) and self-employment (55.8%) remain dominant.
 Despite gradual diversification, agriculture continues to absorb a large rural workforce, driven
by seasonal cycles, highlighting the need for decent work policies in agriculture and smoother
transitions between farm and non-farm employment.

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Gender Dimensions of Employment

 Women’s employment is marked by high self-employment and household enterprise participation,
especially in rural areas. In Q2 FY26, only 10.8% of rural women were in regular wage employment,
while a majority worked as own-account workers/employers (37.5%) or helpers in household
enterprises (34.2%).
 These patterns reflect women’s preference for flexible work arrangements, influenced by caregiving
responsibilities. Findings from the Time Use Survey (TUS) 2024 highlight the dual burden of paid
and unpaid work borne by women, explaining lower participation in formal wage employment.

Insights from Time Use Survey (TUS) 2024

 Workforce participation increased since 2019:
■ Men (15–59 yrs): 75% (2024) vs 70.9% (2019)
■ Women (15–59 yrs): 25% (2024) vs 21.8% (2019)
 Women are primary caregivers:
■ 41% of women vs 21.4% of men engaged in caregiving
■ Women spent ~140 minutes/day, men ~74 minutes/day
 Unpaid work burden is disproportionately female:
■ Women: 363 minutes/day unpaid work
■ Men: 123 minutes/day unpaid work
 Dual work burden:
■ Women spend more total time in paid + unpaid work than men, constraining their labour market
choices and participation.
 The Time Use Survey (TUS) 2024 highlights the care sector’s significant potential to raise the
female labour force participation rate (FLFPR), reinforcing observations made in the Economic
Survey 2023-24. The findings support the Economic Survey 2024-25 recommendations to boost
women’s workforce participation through flexible work policies, removal of statutory restrictions,
availability of childcare facilities and crèches, industry-aligned skill development, and a long-
term, women-centric strategy to expand access to paid work.
 Over the past year, states have undertaken major labour reforms to enhance women’s employment.
Seventeen states/UTs have removed prohibitions on women working in designated hazardous
industries, while around 22 states/UTs now permit night-time work for women in factories,
and 33 states/UTs allow it in commercial establishments. These reforms expand employment
opportunities for women while improving labour market flexibility. A detailed assessment of these
reforms is provided in Chapter 16, Part II of the Economic Survey.
 Women are central to Viksit Bharat 2047, with development envisioned as women-led. Estimates
indicate that raising the female labour force participation rate (FLFPR) to ~55% by 2050 is critical
to sustaining high GDP growth. Despite gradual gains in paid work, persistent gender imbalances
highlight the need for shared domestic responsibilities and stronger care infrastructure.

Enhancing Female Labour Force Participation

 India has seen a strong rise in FLFPR, increasing from 23.3% (2017–18) to 41.7% (2023–
24), alongside a decline in unemployment from 5.6% to 3.2%, indicating greater inclusion and
empowerment.

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 Despite progress, structural barriers persist, including limited mobility, lack of affordable housing,
inflexible work arrangements, and the burden of unpaid care work, necessitating a multi-pronged
policy approach.
 Improving access to STEM:
■ Women with advanced degrees form only 2.9% of the employed female workforce (PLFS
2023–24), and women account for 43% of STEM enrolment (2021–22). Expanding women’s
participation in STEM can bridge skill gaps and improve access to high-productivity jobs.
 Improving urban mobility:
■ Mobility constraints significantly limit women’s urban employment. A World Bank study (2021)
found 31% cited commuting, 13% childcare, and 19% domestic duties as barriers. Policies
should focus on safe, affordable transport, women-friendly policing, more women drivers, and
gender-responsive urban infrastructure.
 Affordable housing for working women:
■ Expanding safe hostels and affordable rental housing improves access to urban jobs. Schemes
like Sakhi Niwas and Tamil Nadu’s Thozhi Hostels provide scalable models with gender-
responsive design.
 Care economy:
■ Strengthening Anganwadis, community crèches, and employer-supported childcare can
reduce unpaid care burdens while generating formal jobs for women.
 Skill development:
■ Industry-aligned skilling in manufacturing, renewable energy, digital services, and agro-
processing, along with returnship programmes and SHG–MSME integration, can support
women’s entry and re-entry into quality jobs.
 Flexibility in employment:
■ Promoting flexible and hybrid work, maternity benefits, equal pay, and workplace safety is
essential. The Labour Codes enable work-from-home for women post-maternity.
 Public–private partnerships:
 State initiatives such as Telangana’s WE-Hub, Kerala’s Kudumbashree, and Maharashtra’s
MAVIM demonstrate how partnership-based models can expand women’s participation in higher-
value work.
 Social norms and enablers:
■ Sustained efforts in gender sensitisation, shared caregiving, improved access to credit and
procurement, mentorship, and future-ready skills (digital, green jobs) are critical.
■ Enhancing women’s labour force participation is not only about inclusion—it is a key driver of
long-term economic growth, household welfare, and a resilient, inclusive economy on the
path to Viksit Bharat 2047.

The Unorganised Workforce

 Recent policy initiatives focus on identifying unorganised workers and integrating them with the
formal economy through welfare delivery and skilling. The Code on Social Security, 2020 (CSS)
defines unorganised workers as home-based, self-employed, or wage workers in the unorganised
sector, including organised-sector workers not covered under the Industrial Disputes Act, 1947.
 The e-Shram portal serves as a comprehensive platform, linking workers to job opportunities,
apprenticeships, skilling pathways, and social security. It integrates 18 welfare schemes, including
One Nation–One Ration Card, NSAP, NCS, and PMSYM, and shares registrant data with states/UTs
to enable targeted and widespread coverage.
 The National Career Service (NCS), launched in 2015, functions as a one-stop employment platform
connecting job seekers, employers, training providers, and counsellors. It offers free registration,
job matching, interviews, multilingual support, job fairs, and access to verified international jobs via
integration with eMigrate.

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 NCS integration with the Skill India Digital Hub (SIDH) enables pre-employment upskilling and
provides free online training in career and digital skills. The portal is linked with EPFO, ESIC, DigiLocker,
e-Shram, Udyam, and SIDH, and integrated with 30 State employment portals. Since inception,
NCS has registered 5.9 crore job seekers, 53 lakh job providers, mobilised ~8 crore vacancies,
recorded 200% growth in FY24, crossed 2.8 crore vacancies in FY25, and 2.3 crore by September
2025.

Employment in the Organised Manufacturing Sector

 The Annual Survey of Industries (ASI) shows strong performance in organised manufacturing. In
FY24, employment grew by 6% YoY, adding over 10 lakh jobs; over the last decade (FY15–FY24), the
sector added 57 lakh jobs at a 4% CAGR.
 Labour productivity improved, reflected in higher Net Value Added (NVA) per person and rising
emoluments per worker. While 77% of factories are small (<100 workers) employing 21%
of workers, 22% large factories employ 79% of the workforce and offer higher wages and
productivity. The number of large factories nearly doubled (97%) over the decade, with employment
in large units growing at 6% CAGR versus 2% in smaller ones—signalling better job quality.
 Geographically, seven states account for ~60% of manufacturing employment: Tamil Nadu (15%),
Gujarat (13%), Maharashtra (13%), Uttar Pradesh (8%), Karnataka (6%), Haryana (6%),
and Telangana (5%). States with a higher share of large factories also show higher productivity.
Additionally, eight industry groups contribute ~60% of organised manufacturing employment.

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Jobs in the unincorporated sector

Unincorporated Non-Agricultural Sector (QBUSE)
 As per QBUSE, the unincorporated non-agricultural sector comprises 7.9 crore establishments,
employing 12.9 crore workers. The share of working owners increased from 58.9% (2023-24) to 60%
in Q2 FY26, indicating a growing shift towards self-employment and entrepreneurship.
 Rural employment stood at 6 crore in Q2 FY26, highlighting the sector’s importance for rural livelihoods.
Women account for 28.7% of the workforce. Digitisation is accelerating, with internet usage by
business units rising from 26% (2023-24) to 39% in Q2 FY26, improving market access and efficiency.
Boosting Manufacturing Workforce Participation
 Manufacturing is central to self-reliance, global competitiveness, and value-chain integration. It
accounted for 11.4% of total employment (2023-24), employing ~5.2 crore workers—1.9 crore in
organised and 3.3 crore in unorganised manufacturing.
 Enhancing worker participation, inclusivity, and well-being is critical for productivity and long-term
growth, alongside capital and technology.

Building a Resilient and Productive Workforce

Workplace conditions strongly influence worker well-being, retention, and productivity, especially for
migrant workers. Evidence from civil society–private sector partnerships highlights the impact of holistic
interventions across three dimensions:
 Mental well-being (Buddy System): Pairing new migrant women workers with trained senior peers
reduced anxiety (–5.3%) and depression (–5.9%), increased productivity by 6.4% for new workers
and 12% for senior buddies, and lowered attrition.
 Financial well-being (Earned Wage Access – EWA): On-demand pay reduced reliance on high-
interest borrowing and led to a 20% decline in forgoing essential expenditures, improving financial
stability, retention, and productivity.
 Physical well-being (SRH Awareness): Workplace SRH training improved health behaviours,
contraceptive use, and reporting of harassment—enhancing health, confidence, and safety.

Catalysing Job Growth

1. Labour Codes: Framework for Reform
■ The four Labour Codes—Code on Wages (2019), Industrial Relations Code (2020), Code on Social
Security (CSS, 2020), and OSHWC Code (2020)—consolidate 29 central labour laws to simplify
compliance, enhance flexibility, and strengthen worker protection. Notified on 21 November 2025,
the Codes emerged from extensive tripartite consultations (2015–2019) and aim to balance ease of
doing business with worker welfare.
2. Key Provisions
■ The Codes introduce formal recognition of gig workers, mandatory appointment letters, portable
social security for migrants, equal benefits for fixed-term and contract workers, minimum and
national floor wages, and single-licence compliance for contract staffing, accelerating formalisation
and inclusive growth.
3. State-Level Reforms (UP Example)
■ 32 States/UTs have issued draft rules.
■ Uttar Pradesh now allows women to work night shifts with safeguards (transport, security, health
facilities, CCTV) and raised quarterly overtime cap to 144 hours.
■ Amendments permit women to work in all 29 hazardous sectors, supported by enhanced safety
infrastructure—boosting gender equality and workforce participation.

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4. Implementation Imperatives
■ While Codes provide a unified framework, effective outcomes require private sector investment,
system upgrades, policy alignment, and digital readiness.

Economics of the Labour Codes

 Rationale: Earlier regulation spanned 140+ laws, creating compliance complexity. Consolidation
simplifies processes and improves enforcement.
 Flexibility vs Regulation: Evidence shows overly rigid laws reduce investment, productivity, and
regular jobs, while flexible regimes boost employment, capital formation, and output.
 Female Labour Force Participation: Fewer restrictions correlate with lower female unemployment,
higher FLFPR, narrower wage gaps, and more women in leadership. Codes enable night work with
safeguards, equal pay, crèches, WFH, and expanded maternity benefits—potentially raising FLFPR
to ~33.7%.
 Formalisation: Appointment letters, equal benefits for FTE/contract workers, single pan-India
registration, National Floor Wage, and a shift to Inspector-cum-Facilitator reduce compliance burden.
SBI estimates formalisation rising from 60.4% to 75.5%.
 Employment Impact: Medium-term organised sector job gains of 1.0–2.2%, ~77 lakh jobs, and UR
falling to 1.9–2.9%; compliance cost cuts of 30–40% aid SME hiring.
 Social Security Expansion: Aggregator contributions fund insurance and pensions for gig workers;
portable UANs support migrant mobility—potentially covering 2.35 crore workers by 2030.
 Incomes & Growth: Higher disposable incomes and consumption (~₹75,000 crore) could add
~1.25% to GDP by 2029–30.
Bottom line: Labour Codes promise higher formalisation, employment, productivity, and FLFPR, aligning
worker rights with business competitiveness.

Gig Economy and Informal Workforce Dynamics

 Changing Employment Models: India’s labour market is shifting from traditional jobs to hybrid, flexible
arrangements driven by policy reforms, technology, and evolving employer–worker preferences.
 Policy Implications: Worker categories now span regular, contract, casual, self-employed, and gig
workers, varying by work nature, payment terms, hours, location, and access to benefits. With the rise
of the gig economy—marked by task-based work, digital payments, and weaker employer-employee
ties—policy must ensure economic security, fairness, and social protection in a flexible labour market.

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Gig Economy and Employment Challenges

 ~40% of gig workers earn <₹15,000/month; job insecurity worsened by AI/ML disruptions.
 Limited access to social security, credit, and productive assets keeps low-skilled workers in precarious
positions.
 Policy interventions:
■ Code on Social Security (CSS, 2020) formally recognises gig/platform workers and provides social
security schemes.
■ Algorithmic transparency, minimum per-hour/task earnings, and portability of benefits are key.
 Global practices:
■ Spain’s Rider Law (2021), EU Platform Workers’ Directive (2024), ILO (2025), and US city initiatives
ensure rights, fair wages, and protections.
 Worker segmentation:
■ High-skilled (27.5% by 2030) vs low-skilled (33.8% by 2030).
■ McKinsey categories: Free agents, Casual earners, Reluctants, Financially strapped.
 Policy goal: Move workers from necessity-driven gigs to choice-driven gigs through upskilling, asset
access, and financial planning.

Skill Ecosystem Overview

 Effective skilling requires integration across education, labour markets, and industry.
 Progress: Vocational/technical training increased from 8.1% (2017-18) to 34.7% (2023-24), but only
4.9% of youth have formal training.
 Coordination:
■ Horizontal (across ministries) and vertical (across government levels) integration is crucial.
■ SIDH portal centralises skill, education, employment, and entrepreneurship data, offering digital
skilling, verified credentials, and job matching.
 Outcome focus: Shift from enrolment numbers to employability, retention, and earnings uplift.

Making Skilling Work

1. Outcome-based incentives: Link provider funding to employment outcomes, retention, and earnings.
2. Employer engagement: Industry participation in curriculum design, apprenticeships, and assessment
ensures relevance.
3. Local labour market intelligence: Align courses with district-level demand; use stackable modules
and recognition of prior learning.
4. Professional placement services: Career counselling, verified job pipelines, relocation support.
5. Integrity mechanisms: Digital attendance, third-party assessments, and grievance redressal ensure
trust.
6. Vocational degree upgrades: Enhances status, mobility, and integration with higher education;
should complement outcome-oriented reforms.

Skilling Strategies for Youth

 Early vocational education: Integrate skills from middle/high school to improve school-to-work
(STW) transitions.
 International models: Germany, Switzerland, South Korea, USA, China—early exposure, dual/hybrid
training, industry involvement, government support.
 State initiatives:

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■ MP Skill GPS, Rajasthan Career Education, Maharashtra Career Portal, Odisha experiential learning,
Kerala ESTEEM, Meghalaya SPARK.
 National schemes:
■ Vocationalisation of School Education under Samagra Shiksha, Skill Education in grades VI–VIII
(CBSE), Kaushal Mela, project-based learning.

Vocational Education in Higher Education

 Reforms:
■ National Credit Framework (NCrF) enables credit transfer across academic, vocational, and work-
based learning.
■ Multiple entry-exit provisions allow modular accumulation of qualifications.
■ SWAYAM Plus offers digital industry-aligned courses (AI, data analytics, robotics).
 Apprenticeships:
■ PM-NAPS: 43.47 lakh apprentices, 51,000 establishments, 20% female participation.
■ Need to scale SMEs, reduce overlaps between NAPS and NATS, and expand into new-age/gig
sectors.

Industry-Driven Skilling
 Alignment: Curriculum, pedagogy, and assessment linked to real-world industry needs.
 Schemes:
■ PMKVY 4.0: NSQF-aligned courses, training in industrial premises, Rozgar/National Apprenticeship
Melas.
■ Flexi-MoU: Customised firm-led training.
■ PM Vishwakarma Kaushal Samman Yojana: 30 lakh artisans registered, 23.09 lakh trained,
access to e-vouchers, collateral-free loans, and e-commerce marketing.

ITI Reforms and Odisha Model

 National Scheme for Upgradation of ITIs: Upgrade 1,000 ITIs with smart classrooms, labs, digital
content, 169 NSQF trades including future skills (AI, IoT, 3D printing).
 Odisha’s approach: ‘Fix, Scale, Accelerate’
■ Fix: Address underutilisation, improve infrastructure, image reinvention, alumni engagement.
■ Scale: Expand short-term skilling (DDU-GKY), enhance trainee well-being, align with local labour
demand.
■ Accelerate: Advanced Training Institutes (e.g., Odisha World Skill Centre) for advanced technical
skills, teacher training, and industry collaboration.
 Outcome: ITIs repositioned as aspirational, high-quality, industry-linked institutions.

Innovative Financing Mechanisms for Skill Development

Public Funding Limitations and Need for Alternative Financing
 Public funding alone is insufficient for diverse skilling needs.
 Market failures (information gaps, credit constraints) limit skill acquisition.
 Government-designed financing models are needed to expand access, incentivize private sector
participation, and ensure broad economic benefits.

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NAPS 2.0: Direct Benefit Transfer for Apprentices

 25% of the prescribed stipend is directly transferred to apprentices via DBT.
 Benefits: transparency, reduced administrative burden, predictable cash flow.
 ₹1,110.64 crore released under this system as of October 31, 2025.

Credit-Based Financing
 Internationally, loans can incentivize training aligned with national priorities.
 India’s Model Skill Loan Scheme (2024):
■ Higher loan limits, expanded lending institutions, coverage for non-NSQF courses.

Outcomes-Based Financing
 Skill Impact Bonds (SIB) link funding to verified placement and retention outcomes.
 Aligns public objectives with private investment and incentivizes quality training and employment
outcomes.

Employer Co-Investment
 Employers contribute through mandatory or voluntary schemes (common in Europe and Asia).
 Example: Ireland’s Skillnet networks fund sector-specific collaborative training.
 In India: IT firms sponsor online courses; SSCs train 1.13 lakh candidates via industry funding in FY25.

Learner Choice, Quality, and Affordability

 Allowing learners to select courses improves engagement and completion.
 Ensuring inclusivity, quality, and affordability is crucial.

Skill Vouchers
 Demand-side financing instrument giving trainees autonomy in course selection.
 Examples: Germany, USA, Kenya, Singapore.
 In India:
■ Tamil Nadu scheme (2024): Vouchers ₹12k–₹25k for Adi Dravidar/Tribal students.
■ Maharashtra Vikalp Programme: Outcome-linked voucher redemption; 60% job retention.
 Encourages competition among providers and enhances trainee commitment.

Challenges in Skilling
 Weak foundational skills (literacy, numeracy, soft skills) limit employability.
 Low TVET quality: outdated curricula, poorly trained instructors, limited practical exposure.
 Misalignment with industry needs; traditional sectors underpaid; youth expectations mismatch.
 Infrastructure gaps, limited industry-academia collaboration, financial constraints.
 PMKVY challenges: data gaps, delays in funds, weak monitoring, low placements.

Need for Outcome-Oriented Evaluation

 Move beyond enrolment/certification metrics; focus on employability, earnings, retention.
 Use longitudinal tracking to assess post-training trajectories.
 Leverage digital infrastructure (SIDH, NCS, e-Shram) to link training records with employment
outcomes.

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Global Lessons for India

 Longitudinal outcome tracking: Singapore tracks employability and wages post-training.
 Employer-embedded systems: Germany/Switzerland link curriculum, workplace learning, and
assessment.
 Policy-based scaling: Korea reviews programs periodically, expanding strong interventions.

Policy Implications for India

 Use UAN, EPFO, ESIC data for longitudinal tracking.
 Implement outcome-linked financing to reward high-quality training institutions.
 Develop a data-driven skilling scorecard to track employment, retention, earnings, and training quality.

Outlook
 Employment Growth: India has seen strong employment growth, supported by structural reforms,
GST 2.0, labour reforms, and skilling initiatives. Rising labour force participation spans industry and
services.
 Evolving Work Landscape: Demographic shifts, technology, and gig economy expansion are
reshaping employment. Effective Labour Codes and flexible policies are key to formal jobs, worker
security, and inclusion, especially for women and gig workers.
 Skills Development: Modular, labour-market-responsive vocational pathways from school onward
can reduce skill mismatches. Targeted skilling for women and youth in high-productivity sectors is
critical for inclusive growth.
 Institutional Convergence: Integrating data from e-Shram, NCS, and SIDH can create a digital
infrastructure for coordinated, industry-driven skilling, improving job readiness and skill-industry
alignment.

Question For Practice

1. “Skilling the workforce is crucial for India’s demographic dividend and future economic growth.” Critically
examine the key challenges in India’s existing skill development ecosystem.
2. What institutional reforms are required to make skill development more inclusive, scalable, and
responsive to future skill needs?

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CHAPTER
13 RURAL DEVELOPMENT AND
SOCIAL PROGRESS: FROM
PARTICIPATION TO PARTNERSHIP

Chapter Overview:
The chapter highlights India’s journey towards inclusive growth under the vision of Sabka Saath, Sabka
Vikas, Sabka Prayas, Sabka Vishwas, seen in falling poverty, reduced inequalities, and better access to
basic services. Rural transformation has played a key role, supported by infrastructure development,
employment reforms, use of technology, and active community participation.
The chapter stresses that social mobility and equal opportunity are essential to break long-standing
inequalities. Government efforts in education, health, skills, and social protection seek to remove barriers
and empower vulnerable groups. Overall, the development approach is moving from state-led schemes
to community-driven initiatives, making growth more people-centric, inclusive, and sustainable.

Progress in Poverty alleviation and Inequality reduction

1. State’s approach to Poverty and Inequality- Poverty and inequality are major challenges, and
the Indian state aims to ensure equal opportunities, eliminate absolute poverty, and prevent rising
inequality so that everyone can realise their potential. Key measures include income support, social
protection, labour market regulation, and universal access to education, with education serving as the
main equaliser for social mobility.
2. Measuring Poverty: Global Benchmarks- The main global measure of poverty is the World Bank’s
International Poverty Line (IPL). It defines the minimum daily income needed to meet basic needs
such as food, clothing, and shelter. In June 2025, the World Bank revised the IPL from USD 2.15 to USD
3.00 per day (adjusted to 2021 purchasing power).
3. Poverty trends in India
■ With the revised IPL, the poverty rates for India in 2022–23 are 5.3 per cent for extreme poverty
and 23.9 per cent for lower-middle-income poverty.
■ The World Bank’s Multidimensional Poverty Measure shows that India’s non-monetary poverty
declined to 15.5% in 2022–23, indicating better living conditions.
■ These estimates corroborate the estimates of the Multidimensional Poverty Index (MPI) as
measured by NITI Aayog, which measures non-monetary poverty by considering factors such as
education, health, and living conditions.
■ NITI Aayog’s MPI fell sharply from 55.3% in 2005–06 to 14.96% in 2019–21 and further to 11.28%
in 2022–23.
■ The Tendulkar Committee-based estimates show that poverty reduced from 21.9% in 2011–12 to
4.7% in 2022–23 and 2.3% in 2023–24.
■ The decline is broad-based across states and in both rural and urban areas, reflecting the impact of
economic growth, redistributive welfare policies, and inclusive development efforts
4. Innovative state models for Poverty eradication and inclusive development
■ Alongside central government efforts, state governments have adopted innovative models to
eradicate poverty and promote inclusive development.

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■ As shown in Chart XIII.1, states with higher multidimensional poverty (MPI) in 2015–16 have
witnessed greater reductions in the headcount ratio by 2022–23. This indicates a decline in
inter-state disparities and convergence in multidimensional poverty levels over time.

■ Bihar – Satat Jeevikoparjan Yojana (SJY): Launched in 2018 for ultra-poor women, SJY follows
the Graduation approach by providing asset transfers, skill training, and livelihood assistance with
mentoring for 24 months. It also offers insurance, public entitlements, and crisis support to ensure
long-term self-reliance and income security.
■ Kerala Poverty Eradication Model: This model uses community-led identification of vulnerable
households with support from local governments, ASHA, Anganwadi, and Kudumbashree. It
ensures access to essential documents, health insurance, pensions, food, and medical care through
individual micro-plans and digital monitoring.
■ Samaveshi Aajeevika Yojana (National Level): Implemented by the Ministry of Rural Development
under Deendayal Antyodaya Yojana – National Rural Livelihoods Mission, this programme promotes
livelihoods for rural women. It uses the Graduation approach to achieve self-sufficiency and
economic empowerment.
5. Overall Significance
■ Effective community-based poverty reduction: The Bihar and Kerala models show that
community participation and continuous support help vulnerable households become self-reliant
and resilient, as seen in SJY beneficiaries maintaining stable incomes even during COVID-19.
■ Strengthening inclusive growth framework: These state-level innovations align with national
priorities of targeted social investment, strengthen social protection systems, and support inclusive
and sustainable growth, reflected in rising social sector expenditure and expanded social security.

Social sector expenditure trends

India follows the vision of ‘Sabka Saath, Sabka Vikas, Sabka Vishwas, Sabka Prayas’ for inclusive growth
with a focus on basic services and social welfare. The SDG National Indicator Framework (NIF) Progress
Report, 2025 assesses how government initiatives are driving large-scale progress towards achieving the
Sustainable Development Goals.

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1. Expansion of Social Protection and Basic Services

■ The population covered under social protection systems increased from 22% (2016) to 64.3%
(2025).
■ The rural population using improved drinking water rose from 94.6% (2015–16) to 99.6% (2024–
25).
■ Universal household electrification achieved in 2021–22.
■ 100% districts declared ODF in 2019–20.
■ Over 96% Swachh Bharat Mission (SBM) villages achieved ODF Plus status (as of Dec 2025).
2. Rising Social Services Expenditure (SSE)
■ The general government SSE has shown a rising trend since FY22.
■ From FY22 to FY26:
■ Social Services Expenditure grew at a CAGR of 12%.
■ Education expenditure grew at 11% CAGR.
■ Health expenditure grew at 8% CAGR.

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Transforming The Rural Economy

Rural development is central to India’s inclusive growth, with 6.65 lakh villages and 2.68 lakh Gram
Panchayats forming the backbone of the economy. While government initiatives focus on infrastructure,
agriculture, credit, and basic services, community empowerment and local participation remain the most
critical drivers of sustainable rural transformation.
1. Strengthening Rural Economy: NABARD latest Rural Economic Conditions and Sentiments Survey
(RECSS) (Nov 2025) indicates strong rural recovery with robust consumption, rising incomes and
investments, improved credit access, lower inflation, better infrastructure, and strong welfare support
2. Declining reliance on MGNREGS: Person-days fell from 389 crore (FY21) to 184 crore (FY26),
alongside a drop in rural unemployment from 3.3% to 2.5%.
3. Changing rural employment: Rising incomes, connectivity, digitalisation, and diversified livelihoods
have reduced dependence on wage-based safety nets.
4. Need for reform: Structural issues in MGNREGS led to the Viksit Bharat- Guarantee for Rozgar
and Ajeevika Mission (Gramin) Act, 2025, a comprehensive overhaul to align rural employment with
Viksit Bharat 2047.

Difference between MGNREGS and VB G-RAM G Act, 2025

Feature MGNREGS VB G-RAM G Act, 2025

Days of Employment 100 days of unskilled work per 125 days of unskilled work per rural
rural household household per financial year
Focus of Works Multiple scattered works with Four priority areas: water security, rural
limited strategic focus infrastructure, livelihoods, climate &
disaster resilience
Unemployment Allowance Payable, but with disentitlement Payable with clear accountability,
clauses disentitlement removed
Pause Window No explicit statutory ‘pause States can declare up to 60 days pause
window’ during peak farming seasons
Funding Approach Demand-based funding with Demand-driven with normative, state-
unpredictable allocations wise funding for equity
Local Planning Gram Panchayat-centred Gram Sabha-led Viksit GP Plans with
planning integrated planning
Wage Payment Often delayed Weekly or within 15 days
Administrative Capacity 6% admin expenditure ceiling 9% admin ceiling for staffing & training
Transparency & Monitoring Digital tools present but leakages GPS tracking, AI monitoring, social
exist audits every 6 months
Asset Creation Assets created locally Assets integrated into Viksit Bharat
National Rural Infrastructure Stack

Technology-Driven Rural Transformation

 SVAMITVA Scheme: Uses drone mapping to provide legal property cards in rural areas, covering
3.28 lakh villages and issuing 2.76 crore property cards, thereby strengthening land ownership and
financial inclusion.
 Namo Drone Didi: Trains rural women to operate drones for agricultural and mapping services, with
1,094 drones distributed, enhancing livelihoods and digital skills.

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 Digital Land Records (DILRMP): Achieved 99.8% digitisation of rural RoRs, 95.7% computerisation
of registration offices, and mapped 36.67 crore land parcels with ULPIN to improve land governance.
 Smart Villages (Satnavari Model): Demonstrates integrated use of AI farming alerts, solar
irrigation, drones, telemedicine, and digital classrooms to create intelligent village ecosystems.
 RuTAGe Smart Village Centre: Acts as a Panchayat-level tech hub supporting 15–20 villages with
IoT water monitoring, satellite agri-data, FinTech, and waste management solutions.

Village Commons in India

Village commons, or Common Property Resources (CPRs), are community-managed shared areas such as
grazing lands and water bodies used by villagers for daily needs and livelihoods. CPRs were first defined by
the National Sample Survey Organisation in its 1998 survey.
 Scale and Importance: The 2011 Census estimates that village commons cover about 15% of India’s
geographical area (around 6.6 crore hectares) and support the livelihoods of nearly 35 crore rural
people through vital ecosystem services.
 Degradation Challenge: These commons are rapidly degrading due to encroachment and misuse,
with degraded land rising to 29.8% of India’s area by 2018–19, adversely affecting agriculture and
water resources.
 Way Forward: Revival requires community participation, formal recognition of commons, digital
mapping (such as SVAMITVA), capacity building, and sustainable management aligned with Ostrom’s
principles

Capacity Building for Decentralised Governance

1. Strengthening Panchayati Raj Institutions (PRIs): Strong Gram Panchayats are essential for
sustainable rural development as they form the backbone of decentralised governance. Capacity building
in planning, financial management, leadership, and digital tools improves efficiency, accountability,
and service delivery, supported by institutions like NIRDPR: National Institute of Rural Development
and Panchayati Raj, SIRDs (or SIRDPR): State Institutes of Rural Development (and Panchayati Raj),
ETCs: Extension Training Centres.
2. Rashtriya Gram Swaraj Abhiyan (RGSA): RGSA, launched in 2018 and revamped in 2022, is a
centrally sponsored scheme to strengthen PRIs for achieving SDGs, with focus on Mission Antyodaya
and Aspirational Districts. It follows a whole-of-government approach, and in FY25 alone, over 35 lakh
participants were trained.
3. Digital Governance (e-Panchayat & e-Gram Swaraj): The e-Panchayat Mission digitises planning,
budgeting, and service delivery through e-Gram Swaraj, providing a single digital profile of each GP.
By FY25, 2.54 lakh GPs uploaded Gram Panchayat Development Plans (GPDPs), ₹2.77 lakh crore
transactions were processed via Public Financial Management System (PFMS), and AI tools like
SabhaSaar enabled 1.38 lakh AI-documented Gram Sabhas.

Panchayat Advancement Index (PAI):

 Grassroots Governance Tool: PAI is a composite index developed by the Ministry of Panchayati
Raj (MoPR) to assess and monitor the progress of over 2.5 lakh Gram Panchayats (GPs) in achieving
Localised Sustainable Development Goals (LSDGs).
 Comprehensive Indicator Framework: It is based on 435 local indicators mapped to 566 data
points, aligned with MoSPI’s National Indicator Framework, and organised across 9 LSDG themes
such as livelihoods, health, water, infrastructure, good governance, and women-friendly panchayats.
 Multidimensional Development Assessment: PAI captures social, economic, environmental,
and governance outcomes at the GP level, translating global SDG targets into measurable, locally
relevant indicators for planning and convergence.

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Rural Infrastructure and Well-being in India

1. Rural Road Connectivity – PMGSY (Pradhan Mantri Gram Sadak Yojana)
PMGSY, launched in 2000, aims to provide all-weather road connectivity to unconnected rural areas for
poverty reduction.

Achievements:
 PMGSY-I: 99.6% households connected; 1.63 lakh roads and 7,210 bridges completed.
 PMGSY-II: 6,612 roads completed to upgrade rural road networks.
 PMGSY-III: 12,699 roads built to link villages with markets, schools, and hospitals.
2. Tribal Infrastructure and Livelihoods
PM-JANMAN (Pradhan Mantri Janjati Adivasi Nyaya Maha Abhiyan):
■ Targets 75 PVTGs (Particularly Vulnerable Tribal Groups) in 28,700 habitations.
■ 2,495 roads sanctioned; focus on housing, health, education, and connectivity.
DA-JGUA (Dharti Abha – Janjatiya Gram Utkarsh Abhiyan):
■ Covers 63,000 tribal villages.
■ Improves water, housing, healthcare, and livelihoods in convergence with PMGSY-IV.
3. Green Development in Tribal Areas
■ India has about 1.45 lakh tribal villages, with tribals forming 8.9% of the population. Forest
ecosystem services are valued at ₹128 trillion annually.
■ PMJVM (Pradhan Mantri Janjatiya Vikas Mission) has set up 4,105 Van Dhan Vikas Kendras,
benefiting 12 lakh people.
■ The Forest Rights Act, 2006 strengthened community land and forest rights.
4. Smart Tribal Farming
■ Odisha: Integrated farming and farm ponds sharply increased incomes.
■ Madhya Pradesh: Community seed banks revived traditional crops.
■ Jharkhand: Solar irrigation improved crop diversification.
These reflect an indigenous agri-tech model, combining modern technology with traditional knowledge.
5. Rural Housing – PMAY-G (Pradhan Mantri Awaas Yojana – Gramin)
■ Target: 4.95 crore pucca houses by 2029.
■ 3.86 crore houses sanctioned; 2.93 crore completed.
■ Improves living conditions, dignity, health, and labour productivity.
6. Drinking Water – JJM (Jal Jeevan Mission)
■ Tap water coverage increased from 17% to 81.3% (2019–2025).
■ 15.74 crore rural households covered.
■ Leads to time savings, reduced disease burden, and lower drudgery for women.
7. Health and Rural Well-being
■ Rural healthcare access has improved through infrastructure expansion.
■ Child malnutrition is declining, but rural–urban gaps remain (NFHS-5).
■ Telemedicine and digital tools like ASHABot support frontline health workers.
■ SBCC (Social and Behaviour Change Communication) through SHGs (Self-Help Groups)
improves maternal and child health.

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8. Participatory Planning and Local Governance

■ Effective infrastructure depends on strong local planning and finance. PRIs (Panchayati Raj
Institutions) need stronger OSR (Own Source of Revenue).
■ Samarth App enables digital tax collection by Panchayats.
■ Meri Panchayat App improves transparency and citizen monitoring.
■ BHASHINI (Bharat SHared AI for Language INclusion) supports local-language digital
governance.

Key Schemes to Improve Social Justice

Education & Scholarships Pre-matric and post-matric scholarship schemes supported over 51
lakh SC students, with more than ₹4,700 crore released to improve
access to education.
Under SHREYAS (Scholarships for Higher Education for Young
Achievers Scheme), financial assistance was provided for higher
studies in India and abroad, benefiting over 5,400 students
Transgender & Beggar The SMILE (Support for Marginalised Individuals for Livelihood
Rehabilitation (SMILE) and Enterprise) scheme established Garima Grehs (shelter homes),
Transgender Protection Cells, Welfare Boards, and a national portal
issuing identity certificates. It also rehabilitated nearly 8,000 persons
engaged in begging across 181 cities.
Social Protection & Justice Schemes under the Protection of Civil Rights Act, 1955 and SC/ST
(Prevention of Atrocities) Act, 1989 aim to provide relief to over 87,000
atrocity victims and promote social integration through incentives for
inter-caste marriages.
Senior Citizens & SC The Atal Vayo Abhyuday Yojana supported senior citizens through
Development health, welfare, and helpline services. The Pradhan Mantri Anusuchit
Jaati Abhyuday Yojana (PM-AJAY) focused on SC development by
creating Adarsh Grams, hostels, and infrastructure

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Drug De-addiction & The National Action Plan for Drug Demand Reduction and Nasha
Awareness Mukt Bharat Abhiyaan set up rehabilitation centres, outreach
facilities, helplines, and sensitised over 25 crore people, strengthening
community-based drug prevention and treatment

Conclusion
Inclusive development means giving everyone equal opportunities, even if results are different, which helps
improve social mobility and economic efficiency. Government support through subsidies, direct transfers, and
social services has reduced inequality, especially for the poorest groups.
The future depends on strengthening rural economies using local innovation, sustainable methods, and
community participation. Technology, data-based policies, and shared responsibility between the government
and citizens are key to achieving long-term inclusive and people-centred growth.

Question For Practice

1. India’s approach to rural development is shifting from state-led welfare to community-driven
partnership.” Critically examine this statement in the light of recent initiatives in rural employment,
technology-driven governance, and capacity building of Panchayati Raj Institutions. (250 words)
2. Discuss how targeted social protection, rural infrastructure, and decentralised governance have
contributed to poverty reduction and inclusive growth in India. Highlight the role of technology and
local institutions in sustaining these gains. (250 words)

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EVOLUTION OF THE AI
CHAPTER
14 ECOSYSTEM IN INDIA

Chapter Overview
This chapter explains how Artificial Intelligence is transforming the global economy and suggests a
practical path for India. Instead of copying costly models from advanced countries, India should build its
AI strategy based on its own strengths and limitations. A bottom-up, sector-specific approach can create
jobs and support inclusive growth. Open systems, responsible data use, and a supportive government
role can help India use AI in a balanced, people-centric, and sustainable way.

Artificial Intelligence in India’s Economic Context

1. Global AI is highly concentrated: Over 70% of data centres and most frontier AI models are located
in High-Income Countries, creating technological and economic asymmetries. India risks remaining a
mere user unless it builds its own AI capabilities.

2. Need for a bottom-up AI model – Due to limited access to high-end compute, capital and frontier
research, India should follow a bottom-up approach based on distributed innovation, state coordination
and sectoral solutions.
3. Application-led AI over frontier models – Frontier models are fiscally unsustainable for India; small,
task-specific AI for health, agriculture, governance, education and finance offers higher social and
economic returns.
4. India’s structural strengths – India has one of the largest AI-skilled workforces and rich domestic
datasets, but weak training-data ecosystems constrain full value extraction.

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5. Frugal and decentralised AI – India should prioritise low-cost, energy-efficient and decentralised AI
systems deployable on local devices, aligning innovation with resource constraints.
6. Digital inclusion via language AI – Initiatives like BHASHINI and AI4Bharat promote regional-
language and voice-based AI, enhancing digital inclusion and rural outreach.
7. Open-source & public digital goods – Open and interoperable AI reduces vendor lock-in and retains
data value; the IndiaAI Mission should treat AI as a public digital good like UPI and Aadhaar.
8. AI-OS and governance role of the state – A national AI Operating System with shared datasets, cloud
infrastructure and standards is needed, with the government acting as facilitator, not just regulator.
9. Labour impact & capital–labour trade-off – AI may raise productivity but favour capital over labour;
skill upgradation is essential to ensure labour augmentation and inclusive growth.
[Link] autonomy with global integration – India must reduce dependence on foreign chips and
platforms while remaining integrated with global AI networks to achieve technological sovereignty
without isolation.

HUMAN CAPITAL FOR AI

1. Dual Skill Requirement: Algorithms + Software Engineering- India needs talent skilled in both
algorithmic understanding and software engineering to build, fine-tune and scale AI models.
These are largely tacit, hands-on skills, best acquired through real-world experience, diaspora return
and industry–academia collaboration.
2. Industry-Integrated and Flexible Education System- AI talent must be developed through early
industry exposure, flexible university curricula and lateral entry of practitioners. The Viksit Bharat
Shiksha Adhishthan Bill, 2025 enables institutions to adapt courses to evolving industry needs.
3. Earn-and-Learn and Experiential Pathways- India must integrate formal education with work
experience through credit-based apprenticeships and fellowships starting as early as high school.
Supported by NEP 2020, Academic Bank of Credits and National Credit Framework, this ensures
continuous skill development.
4. Foundational and Human-Centric Skills for Future Jobs- As AI automates routine tasks, long-
term employability depends on foundational skills (literacy, numeracy, reasoning) and human-
centric sectors like healthcare, geriatric care, education and skilled trades. AI will raise demand for
experience-intensive roles, not eliminate human value

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Governance, Institutional Architecture and Data in India’s AI Ecosystem

Evolving Governance of Artificial Intelligence

 Artificial Intelligence is advancing faster than regulatory frameworks, posing global governance
challenges. While the EU follows a comprehensive EU AI Act, China uses sector-specific laws and the
US relies on voluntary principles.
 For India, AI governance must align with national development priorities and labour market realities,
building on MeitY guidelines. The core principle is that AI should promote human welfare and inclusive
growth. Hence, India must calibrate the pace and sequencing of AI adoption through an AI Economic
Council.

AI Economic Council
 The AI Economic Council is a coordinating authority, not a conventional regulator, guided by
technological as well as moral, social and economic imperatives.
 It aligns AI deployment with India’s developmental priorities and labour-market realities, rather
than focusing only on technological efficiency.
Core Principles:
1. Human Primacy and Economic Purpose- AI must serve human welfare and economic inclusion.
Every major AI policy or deployment should show clear social and economic benefits such as job
creation, productivity gains, or better public services.
2. Labour-Market Sensitivity by Design- AI policies must reflect India’s labour realities—high
informality, skill diversity, regional differences, and weak safety nets. Labour impact
assessments should be done in advance, with proper mitigation and transition plans.
3. Sequencing over Speed- AI adoption should be phased according to readiness. AI uses can be
classified as deploy now, pilot, or defer, based on the availability of skills, data, legal frameworks, and
labour adjustment capacity.
4. Co-evolution of Technology and Human Capital- AI growth must go hand in hand with education
reforms, vocational training, reskilling and recognition of skills. Skill policy should be as
important as technology policy.

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5. Ethical Non-Negotiables and Public Interest Safeguards-Clear ethical limits must be set against
misuse of surveillance, worker monitoring, algorithmic bias, and opaque decision-making. AI
must protect fairness, accountability and human dignity.

Data as a Strategic Resource: A Proposed Framework

 Data is now a core factor of production like capital and labour; India has 100+ crore broadband
users, creating both a huge AI market and a rich base of human-generated data.
 While India’s data scale is a comparative advantage, multinationals dominate AI leading to offshore
value capture; hence India must balance openness with control and shift from localisation to
accountable portability and economic alignment.

Objectives of India’s Data Governance Framework

 Preserve cross-border data flows to support innovation, investment and global integration, while
ensuring regulatory oversight over Indian personal data regardless of processing location.
 Promote domestic value retention and technological sovereignty through auditability and
traceability of large-scale data use.

Risk-Based Data Categorisation and Graduated Obligations

 Build on the Digital Personal Data Protection (DPDP) Act, 2023 by introducing functional data
categorisation, with special focus on behavioural, transactional and inferred datasets used for AI
training.
 Adopt a risk-based regulatory approach: low-risk data flows freely, while high-risk data faces
stricter transparency and audit requirements.

Incentivising Localisation through Mirrored Data

 Replace mandatory localisation with mirrored data copies within India, ensuring oversight without
disrupting global AI operations.
 Compliance will be proportionate and risk-weighted, scaling with firm size, data sensitivity and
economic impact.

Domestic Value Retention Mechanisms

 Firms must contribute via local model training, AI R&D funding, and data/compute sharing, along
with support to AI labs, skilling and university partnerships.
 This menu-based compliance system ensures value extracted from Indian data leads to value
creation within India.

Regulating AI Firms through Accountability

 Regulation prioritises transparency over territorial control, requiring provenance records, model
documentation and impact assessments.
 Compliance is linked to access to government datasets, public procurement and national AI
missions.

AI Safety and Risk Governance

1. AI as a High-Risk General-Purpose Technology- AI must be treated like nuclear energy or
pharmaceuticals, where progress coexists with serious risks. Hence, India needs not only enabling
institutions but also constraining institutions, such as the proposed AI Safety Institute under
MeitY, to analyse emerging risks, regulatory gaps and build safety awareness.

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2. Transparency and Public Safety Evaluations- Continuous and anticipatory AI safety evaluations
must be made public to reduce the information gap between developers and users. Independent
assessments (e.g., AI Lab Watch) show that big-tech firms often obscure their evaluation methods
and safeguards, making sovereign oversight essential.
3. Emerging and Endogenous Risks of AI- AI risks arise not only from misuse but also from deployment
dynamics, such as:
■ AI–CRISPR convergence, lowering barriers for biosecurity threats, and
■ Social sycophancy, where AI reinforces harmful behaviour, increases user dependence, and
reduces corrective human action.
4. Institutionalised Testing, Global Cooperation and Red Lines- India must institutionalise red-
teaming and scenario-based testing, and cooperate with bodies like the UK AI Security Institute
and US NIST AI Risk Framework. Certain applications must be non-negotiably restricted, including
predictive policing, facial recognition misuse, emotion inference and behavioural classification, with
strong whistle-blower protections to expose hidden risks
Conclusion:
Artificial Intelligence presents India not with a single policy choice, but a set of strategic decisions under
uncertainty and resource constraints. India’s late-mover status offers the advantage of learning from global
mistakes, enabling resource-efficient and inclusive AI design
Rather than pursuing frontier models, India’s strength lies in application-led innovation, domestic data and
human capital. However, openness must be matched with regulation, safety and accountability to ensure AI
drives broad-based productivity and dignified employment.

Question For Practice

1. India’s comparative advantage in the Artificial Intelligence era lies not in replicating frontier models,
but in pursuing a bottom-up, application-led strategy.” Discuss this statement in the context of India’s
economic structure, resource constraints and development priorities. (250 words)
2. Examine the role of governance, data regulation and human capital in ensuring that Artificial Intelligence
promotes inclusive and sustainable development in India. How can India balance openness with
technological sovereignty in the AI ecosystem? (250 words)

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CHAPTER
15 URBANISATION: MAKING INDIA’S
CITIES WORK FOR ITS CITIZENS

Chapter Overview:
India’s cities drive economic growth and innovation but face challenges like congestion, environmental
stress, housing shortages and uneven services. Despite contributing most of national output, supply-
side constraints in land, housing and mobility limit inclusive urban outcomes. Fragmented governance
and weak fiscal autonomy further reduce city effectiveness.
The chapter argues that urbanisation must be treated as critical economic infrastructure, supported
by stronger institutions, better governance and civic responsibility, so that people-centric planning can
transform growth into improved quality of life and shared prosperity.

Classification of Cities in India (RBI)

The Indian Paradox of Urbanisation

1. Scale without Performance- India has some of the world’s largest urban agglomerations (Mumbai,
Delhi, Bengaluru, Chennai, Hyderabad), but urban population growth has not translated into
proportional gains in productivity, liveability, or global economic influence.
2. Lack of Global City Role- Unlike global cities (New York, London, Shanghai, Singapore), Indian cities
do not function effectively as nodes in global production networks, finance, logistics, and
knowledge systems, despite India’s large economic size.
3. Failure to Internalise Agglomeration Economies- Urbanisation yields growth only when supported
by efficient labour markets, strong infrastructure, and institutional coordination. In India,
underinvestment in transport, housing, water, sanitation, and governance has weakened these
benefits.
4. Density Leading to Congestion, Not Productivity- High population density manifests as congestion,
informalisation, and infrastructure stress, diluting agglomeration gains—hence raising the
structural question of why India’s growth has not produced globally competitive cities.

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Trends in India’s Urbanisation

1. Census Definition of Urban Areas- As per the Census of India, a settlement is classified as urban if
it has:
■ Population greater than 5,000

■ At least 75% of the male workforce engaged in non-agricultural activities

■ Population density above 400 persons per square kilometre

■ All statutory towns notified by the government

2. Top-Heavy Urban Structure- India’s urbanisation is dominated by large cities:

■ Over 70% of the urban population lives in Class I cities (population above 1 lakh).

■ 52 metropolitan cities (population above 10 lakh) account for about 42.3% of the total urban
population (2011).
3. Rapid Metropolitan Expansion- Higher population growth rates in large urban agglomerations
have led to the rapid expansion of metropolitan regions, reinforcing a metro-centric and highly
concentrated urban system.
4. Slowing Urbanisation Trend- As per Census data, India’s urbanisation rate is lower than the average
of Lower Middle-Income Countries (LMICs) and Low-Income Countries (LICs), which is unusual for
a fast-growing economy and indicates structural peculiarities in India’s development path.

Urban Governance Deficit in Indian Cities

1. Fragmented Institutional Structure- Indian cities are governed by multiple bodies like Urban Local
Bodies (ULBs), Development Authorities, state departments and parastatal agencies. This division of
powers leads to poor coordination and weak urban governance, unlike global cities that have unified
city governments.
2. Mismatch between Responsibility and Authority- ULBs are responsible for city outcomes, but
important powers such as land use, policing and utilities remain with state governments. Mayors are
held accountable but lack real decision-making power, resulting in weak leadership.
3. Infrastructure without Institutional Reform- Cities are expected to create jobs and growth, but
policies limit density and land use. Big projects like metros and flyovers are built without reforms in
housing and planning, making infrastructure costly but less productive.

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4. Economic Centrality but Political Peripherality- Indian cities contribute around 70% of GDP but
have very low own revenue. With limited financial autonomy, they depend on higher governments and
function mainly as implementing agencies rather than independent economic units.

Land, Housing, Mobility, and Sanitation & Waste Management – Binding Constraints
1. Land as Dead Capital
Land in Indian cities often fails to function as productive capital due to regulatory and institutional
constraints.
■ Regulatory constraints: Low Floor Space Index (FSI) / Floor Area Ratio (FAR) under restrictive
Development Control Regulations (DCRs) limit vertical growth, forcing horizontal expansion,
increasing land prices and infrastructure costs.
■ Land governance issues: Unclear titles, fragmented records and high transaction costs prevent
efficient land markets and the use of land as collateral.
■ Reform initiatives: Digital India Land Records Modernisation Programme (DILRMP), Unique Land
Parcel Identification Number (ULPIN / Bhu-Aadhaar), National Generic Document Registration
System (NGDRS) and state platforms like Bhu Bharati (Telangana) and Bhu Suraksha (Karnataka)
aim to digitise land records, but without integrated planning, higher FSI may worsen congestion and
service stress.
2. Housing and Density Constraints
Indian cities face acute housing shortages despite inefficient land use and low urban density.
■ Urban sprawl: Low FSI pushes affordable housing to peripheral areas lacking public transport,
sanitation and job access.
■ Economic impact: Long commuting times and higher household transport costs reduce labour
productivity and encourage informal settlements.
■ Policy direction: Transit-Oriented Development (TOD) with higher density near transit hubs, mixed
land use and employment clustering (e.g., Chennai Master Plan, Ministry of Housing and Urban
Affairs (MoHUA) TOD Guidelines).
3. Mobility as an Economic Constraint
Urban mobility determines how efficiently labour, goods and services move within cities.
■ Structural problem: Excessive dependence on private vehicles leads to congestion, as roads are
used more for parking than for moving people.
■ Economic costs: Traffic congestion causes massive productivity losses (e.g., Bengaluru commuters
lose ~117 hours annually; Uber–Boston Consulting Group (BCG) estimates $22 billion per year loss
in four metros).
■ Reform focus: Expansion of high-capacity public transport such as Metro Rail and Regional Rapid
Transit System (RRTS) (e.g., Delhi–Meerut Namo Bharat RRTS), along with stronger bus systems,
first–last mile connectivity, walking and cycling infrastructure, and congestion pricing.
4. Sanitation and Waste Management Constraints
Urban sanitation directly affects public health, environmental quality and productivity.
■ Achievements: Swachh Bharat Mission (Urban) eliminated open defecation and expanded door-
to-door waste collection to 98%.
■ Persistent gaps: Poor segregation at source, inadequate recycling, legacy dumpsites and weak
behavioural compliance.
■ Behavioural reforms: Indore model shows success through citizen participation, Self-Help Groups
(SHGs), awareness campaigns and strict enforcement.

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5. Water and Sewage Stress

Water and wastewater management remains a critical urban bottleneck.
■ Low treatment levels: India generates 112 billion litres per day of wastewater, but only 28% is
treated and 8% reused.
■ Institutional gaps: Less than 27% households connected to sewerage; underinvestment in
Operations and Maintenance (O&M).
■ Circular water economy: Reuse of treated water for industry and construction under Atal Mission
for Rejuvenation and Urban Transformation (AMRUT) 2.0 and Jal hi Amrit, with potential market of
₹2.4–3.2 lakh crore by 2047.

Civic Order without a Social Contract

1. Civic order depends on the social contract, not just infrastructure – Urban quality of life is shaped
by the credibility of rules, predictability of services, and institutional trust; cooperation works when
institutions make compliance rational and worthwhile.
2. Behaviour change programmes face limits due to weak institutions – Despite Swachh Bharat’s
infrastructure and awareness efforts, uneven enforcement, unreliable services, and uncertain penalties
lead to conditional compliance.
3. Sharp divide between private and public spaces – Citizens maintain private property well but
neglect common spaces, reflecting low confidence in collective systems and shared benefits.
4. Civic behaviour is institutional, not cultural – Surveys show people value public responsibility but
abandon it for convenience when institutions are unreliable; civic order is an institutional equilibrium.
5. Global cities institutionalise cooperation; Indian cities rely on appeals – Clear rules, visible
penalties, quality services, and coordinated enforcement sustain civic order abroad, while fragmented
authority and weak capacity in India undermine accountability.

The New City: Liveable, Creative, Interconnected

1. Liveability is multi-dimensional – It includes education, health, housing, water, sanitation, waste,
mobility, safety, and recreation, not just physical infrastructure.
2. Tier-2 and newer cities perform better – Cities like Pune, Indore, and Raipur rank high due to lower
population pressure and better planned growth; greenfield cities like Amaravati offer opportunities for
proactive urban design.
3. Liveability is about people, not just assets – It depends on how cities support people’s time, choices,
creativity, and reduce daily friction.
4. Agglomeration matters more than infrastructure alone – Cities grow faster through education,
talent concentration, and interconnectedness than through heavy infrastructure investments.
5. Human capital drives urban growth – Examples like Boston and Bengaluru show that skilled
workforce and institutions lead to higher income and population growth.

Planning, Governance and Financing

1. Urban financing is shifting to performance-linked projects – The Urban Infrastructure
Development Fund (UIDF) of ₹10,000 crore (Union Budget 2023–24) supports Tier-2 and Tier-3
cities, while the Urban Challenge Fund (UCF) of ₹1 lakh crore (Union Budget 2025–26) co-finances
up to 25% of project costs with at least 50% from bonds, banks and Public–Private Partnerships
(PPPs), moving away from entitlement-based grants.
2. Urban planning is becoming outcomes-based – Cities must move from scheme-compliance to a
balance-sheet mindset, with every million-plus city preparing a 20-year City Spatial and Economic

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Plan (CSEP) (updated every 5 years) and adopting rule-based planning approvals using Floor Space
Index (FSI), height and mixed-use norms.
3. Cities must strengthen their own finances – This requires property tax reforms, user charges linked
to service quality and land value capture, supported by Geographic Information System (GIS)
revaluation; fiscally strong cities can issue municipal bonds and receive performance-linked block
grants.
4. Integrated metropolitan governance is essential – Streamlined institutions, dedicated urban project
units and time-bound approvals reduce execution risks, and cities must own outcomes rather than act
as pass-through agencies.

Reimagining Physical Infrastructure

1. India needs $840 billion in 15 years for urban infrastructure, but the main problem is lack of
coordination, as infrastructure is built as isolated assets instead of integrated systems.
2. Urban systems must be integrated – Metros should follow Transit-Oriented Development (TOD),
roads must include parking management and pedestrian priority, and drainage must be planned at city
scale.
3. Infrastructure must be climate-responsive – Funding should depend on city climate plans, enforcing
rainwater harvesting, grey-water reuse and climate-responsive building codes.
4. Nature-based solutions are crucial – Lakes, wetlands and green spaces should be used for flood
control and heat reduction, making urban infrastructure circular and climate-resilient

Way Forward: Non-Tangible Aspects of Future Cities

1. Time as the central urban resource – Future cities must minimise time lost in commuting, service
access and uncertainty by promoting compact, mixed-use neighbourhoods where daily needs are
within short travel distances.
2. Streets as social infrastructure – Urban design should shift from road-widening to street-making,
prioritising safety, walkability, interaction and public life through pedestrian-friendly and low-traffic
streets.
3. Creative and inclusive urban spaces – Cities must encourage art, culture, innovation and informal
activities by protecting spaces for expression and integrating informality through in-situ upgrading
rather than displacement.
4. Participatory and aspirational governance – Urban governance should involve citizens in
decision-making, foster civic ownership, and move cities from survival-oriented to possibility-oriented
environments that inspire aspiration and creativity.

Conclusion
India stands at a critical point in its urbanisation journey. While cities drive productivity and innovation,
they also face congestion, informality and governance challenges. The future depends on an integrated
approach that combines better land use, public transport, transit-oriented development, and resource-
efficient urban systems.
However, infrastructure alone is not sufficient. Strong governance, sound city finances, predictable
enforcement and a credible civic compact are essential. When cities are planned and governed around the
everyday needs of citizens, urbanisation can become a driver of shared prosperity and better quality of life.

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Question For Practice

1. India’s urban problem is not merely one of infrastructure deficit but of weak institutions and governance.”
Critically examine this statement in the context of India’s urbanisation experience.
2. Urbanisation in India has led to density without productivity. Analyse the major structural constraints in
land, housing, mobility and sanitation that prevent Indian cities from realising agglomeration economies.
Suggest suitable policy measures.

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FROM IMPORT SUBSTITUTION

CHAPTER
16.1 TO STRATEGIC RESILIENCE AND
STRATEGIC INDISPENSABILITY

Macroeconomic Strength: India enters the second half of the 2020s with robust macroeconomic
fundamentals, including resilient growth, financial stability, and policy autonomy. These achievements are
crucial amid global challenges.
 Strategic Resilience vs. Strategic Indispensability:
■ Strategic Resilience: The ability to absorb shocks and maintain stability.
■ Strategic Indispensability: The goal to evolve into a global source of reliability, capability, and
value. India’s future economic strength hinges on its capacity to build durable capabilities, reduce
vulnerabilities, and integrate deeply into global systems.
 Institutional Capacity: State capacity is vital in shaping India’s future. The chapter emphasizes the
need for institutional incentives that encourage experimentation and adaptive learning. Overcoming
bureaucratic risk aversion and procedural inefficiencies is key.
 Deregulation and Compliance Reduction: This ongoing reform is aimed at reorienting the state from
low-value policing to facilitation and problem-solving, enhancing state capacity.
 Conclusion: India’s strategic transition depends on strengthening state institutions to convert economic
resilience into long-term global influence, ensuring sustainable growth and competitiveness.

India’s Economic Performance and Government Reforms

 Post-COVID Economic Performance:
■ India’s economy has performed exceptionally well post-pandemic, with growth rates that are
among the highest globally.
■ The potential growth rate is expected to rise to 7.0% in the coming year.
■ Key indicators are positive:
■ Banking system and credit intermediation remain strong.
■ Capital formation is above 30% of GDP.
■ Current account deficit is low, and foreign exchange reserves are ample.
■ Agricultural sector performing well, aided by favorable monsoons and a good Rabi crop.
■ Rural consumption is rising, with positive real wage growth.
■ Urban consumption is more cautious, though fiscal transfers have increased disposable income.
 Government Reforms:
■ Public Investment: Continued investment in infrastructure, with states receiving 50-year interest-
free loans.
■ Labour Reforms: Introduction of four labour codes to ensure flexibility for employers and fair
treatment for workers.
■ Tax Reforms: Raised the minimum tax threshold to Rs. 12 lakhs for individuals, offering
significant tax relief.
■ GST Reform: Simplified to two slabs, boosting household purchasing power.

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■ Opening Sectors: Insurance and nuclear power sectors opened to foreign investments.
 Strategic Resilience:
■ Investment in self-sufficiency in critical minerals and semiconductors.
■ Efforts to expand exports with new market access and a five-year export promotion package.
India’s well-executed reforms position the economy for sustainable growth despite global uncertainties.

Global Uncertainties and Economic Shifts

The post-WWII global order began unraveling in the new millennium, with significant disruptions like:
 End of the TMT bubble in the early 2000s.
 China’s WTO entry in 2001, turning it into a manufacturing powerhouse.
 The 2008 Global Financial Crisis, which severely impacted the financial sector and global confidence
in the U.S. dollar.
 Monetary Policy Response:
■ Developed nations relied on short-term monetary tools to stabilize demand, lowering interest
rates to zero and purchasing government bonds.
■ This increased financialisation, making manufacturing-centric economies vulnerable to social and
economic disruptions.
 Impact of COVID-19:
■ The pandemic exacerbated economic challenges, increasing public sector debt and highlighting
the vulnerabilities of the global order.
■ China’s rise as a manufacturing giant, coupled with declining growth and rising debt, reshaped
political dynamics.
 “QE Infinity Trap”:
 Alberto Gallo’s warning on quantitative easing showed that ultra-loose monetary policies created
dependence on accommodation, inflating asset prices and compressing real yields, contributing to
global uncertainty.

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AI Boom and Energy Demand

 AI Boom:
■ The global focus is shifting towards Artificial Intelligence (AI), reshaping industries such as work,
security, and education.
■ AI development has been resource-intensive, significantly increasing electricity consumption by
data centres.
 Energy Impact:
■ Energy demand has led to grid instability, power disruptions, and rising energy costs.
■ The push for intermittent energy sources like solar and wind further complicates the energy
supply.
 Regulatory Challenges:
■ Frugal AI is still not viable on a global scale.
■ The U.S. government has restricted states from regulating AI.

Projected rise in electricity consumption by data centres

Source: IEA1

Surge in Copper Demand

 Increased Copper Demand:
■ Surge in power demand leads to higher copper prices, up nearly 20% in 2025.
■ Supply constraints are emerging due to natural and nationalistic factors.

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Copper prices reach historic highs amid surging demand

Source: Bloomberg2

Global Economic Shifts and India’s External Accounts

 Pax Silica Declaration:
■ The U.S. has launched the Pax Silica Declaration with like-minded countries, focusing on building
the AI ecosystem by investing in energy, critical minerals, and high-end manufacturing for the
future.
 GENIUS Act (2025):
■ The GENIUS Act allows regulated private institutions to issue U.S. dollar-backed stablecoins
starting January 2027. This has the potential to disrupt capital flows to emerging economies,
including India.
 India’s External Accounts:
■ India has prudently managed its external accounts with rising foreign exchange reserves,
manageable external debt, and successful crisis navigation.
■ India relies heavily on portfolio flows and debt inflows, which are volatile and subject to global
liquidity cycles, geopolitical tensions, and external factors.
■ In times of global risk aversion, capital retrenches, leading to currency depreciation as capital
inflows fall short.
 Trade Imbalances:
■ India faces a trade deficit, with a surplus in services trade insufficient to offset the goods trade
deficit. Increased trade restrictions and the need for local production contribute to currency
vulnerabilities.

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Global Economic Shifts and India’s Strategic Response

 Hainan Free Trade Port (FTP):
■ In December 2025, China launched the Hainan FTP, a bold economic experiment transforming the
entire island into a special trade and business area.
■ The free trade port allows imports without customs duties and facilitates goods with at least
30% local processing to be sold across China without additional tariffs.
■ This new economic zone aims to boost trade, investment, and logistics, with minimal friction for
the movement of goods, people, capital, and services.
 Impact on India:
■ The Hainan FTP creates a low-tariff, services-heavy economic space in the Indian Ocean and
South China Sea, influencing future supply-chain routes, tourism, and investment patterns.
■ India faces a structural shift in global trade, requiring strategic adaptation to the evolving economic
dynamics in the region.
 Global Economic Uncertainty:
■ The global economic landscape is transitioning from open trade and predictable rules to one
defined by strategic considerations. Economic relationships are increasingly contested and
asymmetric, with countries like China using trade to assert production dominance.
■ India must navigate these shifts, relying on institutional and strategic capacity to build resilience
and leverage global opportunities.
 Geopolitical and Economic Uncertainty:
■ As geopolitical uncertainties rise, India must prepare for a prolonged period of disruptions.
Similar to the interwar years, India faces an unpredictable global environment, requiring a proactive
policy framework.
■ The ongoing trade frictions and financial instability in major economies necessitate flexible
learning and strategic autonomy to adapt to evolving global realities.
 Institutional Capacity Building:
 India must focus on institutional capacity to navigate the strategic complexities of the 21st century.
This requires patience, institution-building, and a balance between protection and competition.
 Building competitiveness and learning from global trade dynamics will be crucial for India’s long-term
growth and strategic positioning.

Swadeshi and Strategic Economic Policy

 Shift in Strategic Context:
■ The global environment has changed, with export controls, technology denial regimes, and
carbon border mechanisms signaling the end of naïve globalization.
■ In this context, Swadeshi (self-reliance) becomes an essential policy tool for economic sovereignty.
It is both a defensive strategy to mitigate external shocks and an offensive one to build national
capabilities.
 Conditions for Import Substitution:
■ Swadeshi is not a blanket policy but a disciplined strategy.
■ Import substitution is justified when:
■ Domestic production is feasible but hindered by non-economic factors (e.g., regulatory
burdens).
■ Temporary protection helps in learning, scaling, and productivity gains.

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■ The industry is strategically critical or subject to export discipline.

■ Permanent protection is unsuitable for sectors where India is cost-competitive, already exporting,
or where protection raises economy-wide costs.
 Framework for Indigenisation:
■ A disciplined approach is necessary, emphasizing productivity-enhancing investment and
export orientation.
■ Differentiated priorities: Some goods require early attention due to global supply risks, while
others can develop competitiveness over time.
■ Protection should not foster inefficiency or shield poor-quality producers.

Tiered Approach to Indigenisation

 Tier I: Critical Vulnerabilities with High Strategic Urgency:
■ Includes goods and technologies like defence systems, energy security components, and public
health essentials.
■ The focus is on assured availability under stress, not short-term efficiency.
■ Domestic production may be justified, even if initially costly, with the goal to establish minimum
assured capacity within a set timeframe.
 Tier II: Economically Feasible Capabilities with Strategic Payoffs:
■ Involves goods where domestic production is feasible but hindered by coordination failures,
historical practices, or early scale disadvantages.
■ Indigenisation should focus on accelerating capability formation, learning by doing, and export
integration.
■ Support must be time-bound, performance-linked, and conditional on cost convergence and
productivity improvement.
 Tier III: Low Strategic Urgency or High-Cost Substitution:
■ Includes goods where import dependence does not cause systemic vulnerability and domestic
substitution is economically costly.
■ Indigenisation is generally unwarranted; diversified sourcing or contractual safeguards should
be prioritized.

From Import Substitution to Strategic Resilience: A Tiered Framework for Strategic Indigenisation

Indigenization – High Urgency Sectors

HIGH URGENCY HIGH FEASIBILITY LOW-MEDIUM FEASIBILITY
Macro/Security exposure is Near-term capability build is Requires phased, long- horizon
significant realistic effort
TIER 1 (NON-NEGOTIABLE) TIER 1 (STRATEGIC CORE)
Objective: Rapid domestic scale- Objective: Vulnerability reduction,
up not full substitution
Policy stance: Demand assurance, Policy stance: Diversification,
procurement alignment, partnerships, selective reshoring,
standards, time-bound support learning curves
Products: Oils & pulses, Fertiliser Products: Magnets, Battery cells
inputs, APIs, Power electronics, & cathodes, Solar wafers & cells
Industrial chemicals, Telecom
equipment

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Indigenisation — Developmental / Capability-Build Sectors

LOW-MEDIUM URGENCY HIGH FEASIBILITY LOW-MEDIUM FEASIBILITY
Exposure manageable; Near-term capability build is Requires phased, long- horizon
development goals dominate realistic effort
TIER 2 (SELECTIVE DEEPENING) TIER 2/3 (LONG-HORIZON
Objective: Competitiveness CAPABILITY)
upgrading Objective: Ecosystem and talent
Policy stance: Gradual formation
localisation, clusters, exports, Policy : Co-engineering, test-
firm learning beds, procurement-linked
Products: Cranes, Industrial learning, no near-term localisation
machinery, EV drivetrains, mandate
Medical devices (non-critical) Products: TBMS, Rail signalling,
Defence electronics, Electrolysers

National Input Cost Reduction Strategy and Advanced Manufacturing

 Input-Cost Reduction for Competitiveness:
■ For India to be competitive globally, input costs (raw materials, intermediates, energy, logistics,
and compliance) must be lowered.
■ Resilience strategies fail if they elevate costs across the economy. Protecting final goods while
keeping input costs high harms scalability and international competitiveness.
■ The National Input Cost Reduction Strategy aims to reduce these costs, ensuring affordability
and reliability in inputs, thus strengthening competitiveness without undermining exports.
 The Problem of Tariff Inversion:
■ Tariff inversion (higher duties on intermediates than finished goods) hampers domestic value
addition and export competitiveness. This structural issue requires reforms that reduce protection
and correct trade distortions.
 Strategic Framework for Input-Cost Reduction:
■ Rule-based approach to input-cost reduction should focus on widely used inputs, avoiding
protectionism once domestic capacity exists.
■ A structured distortion audit can guide policy, identifying when inputs should be protected and
when they should face competitive pressure.
 Indigenisation and Input-Cost Reduction Coexistence:
■ Indigenisation can coexist with input-cost reduction when support is targeted and linked to
performance and export exposure.
■ Disciplined support ensures efficiency, rather than turning indigenisation into blanket protection.
 Advanced Manufacturing as a Stress Test:
■ Advanced manufacturing goes beyond expanding output—it exposes weaknesses in
infrastructure, governance, and regulatory systems.
■ Advanced manufacturing forces firms and institutions to meet global standards in cost control,
reliability, and process improvement.
■ Manufacturing’s integration into supply chains requires reliable infrastructure, including
ports, transport, power quality, and dispute resolution. Weaknesses in these areas become
immediately visible.

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 Learning, Scale, and Competition:

■ Manufacturing capability is built through learning—repeated process improvements, supplier
development, and upgrading.
■ Unconditional support leads to shelter, while performance-linked support promotes learning
and competitiveness, especially through export exposure.
 Contrast with Services-led Growth:
■ Unlike services, which can thrive in isolated infrastructures, manufacturing depends on a fully
integrated public system and supply chains.
■ Weak logistics and regulatory failure are immediately visible and detrimental in manufacturing,
pushing firms to improve continuously.

Lessons from East Asia’s Success

 Countries like Japan, South Korea, Taiwan, and China are often cited as success stories in industrial
policy and Swadeshi.
 The key lesson is not merely state intervention but how the state intervened and more importantly,
how it exited.
 These economies thrived because their systems were designed to learn from mistakes and reallocate
resources when necessary.
 Relevance for India:
■ For India, the lesson lies in understanding the state capacity architecture behind East Asia’s
success. Without this, similar policies may yield different results.

Japan’s Post-War Industrialisation Model

 Bureaucratic Authority:
■ Japan’s industrialisation was driven by a powerful bureaucracy, especially the Ministry of
International Trade and Industry (MITI).
■ Bureaucrats had long tenures, sectoral specialisation, and discretion in policy design,
encouraging calculated risk-taking.
 Incentive Structure:
■ Support to firms was performance-based, tied to export growth, technological upgrading,
and scale.
■ Failure to meet expectations led to the withdrawal of support, ensuring accountability.
 Outcome-Oriented:
■ Japan’s model focused on outcomes rather than processes, with real-time feedback from the
industry shaping policy adjustments.

South Korea’s Industrial Policy and Lessons for India

 Disciplined Industrial Policy:
■ South Korea promoted national champions, provided directed credit, and protected domestic
markets early on, but with explicit expectations and severe consequences for non-performance.
 Failure Tolerance:
■ Failure aligned with national goals did not end careers, but persistent underperformance led
to withdrawal of support and restructuring of firms.
 Political Economy:
■ The system prevented “zombie” firms reliant on protection and enforced predictable discipline.

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 Lesson for India:

■ Discipline must be visible, predictable, and enforced, even when politically inconvenient.

Singapore’s Model of Speed, Flexibility, and Credibility

 Global Value Chains:
■ Singapore focused on becoming indispensable within global value chains by prioritizing
reliability, speed, and regulatory credibility.
 Regulatory Flexibility:
■ Regulatory agencies were empowered to waive or adapt rules to facilitate investment and
innovation.
■ Speed of execution was valued over formal perfection, but strict enforcement followed once
standards were set.
 Lesson for India:
■ Regulatory friction is a critical competitiveness variable. Even well-designed industrial policies
can fail if approvals and dispute resolution are slow or uncertain.

Vietnam’s Manufacturing Success

 Cost Reduction:
■ Vietnam focused on reducing regulatory and transaction costs, making it attractive for global
supply chains.
■ Competitiveness is driven by cost structures, regulatory efficiency, and labour productivity,
not just protection.

The Entrepreneurial State and India’s Strategic Evolution

East Asia’s success stems from an entrepreneurial state that experiments, takes risks, and absorbs
failures.
 Key features:
■ Outcome-oriented bureaucracy: Focus on results, not rule-following.
■ Failure tolerance: Accepts errors, but not stagnation.
■ Credible withdrawal: Exit is as crucial as entry.
India must transition from intelligent import substitution to strategic resilience and strategic
indispensability by building national strength and buffers to withstand global shocks.

Table XVI.1: Proposed Conceptual Definitions

Concept Definition Core Objective
Import Substitution An economic strategy that promotes domestic To reduce import dependence by
production of goods that were previously producing domestically what was
imported. earlier imported.
Strategic Resilience A broader capability of an economy or system To ensure continuity, adaptability,
to withstand external shocks, including and security of critical supply
geopolitical, economic, technological, or chains and capacities under
environmental, and continue functioning. stress.
Strategic Integration of the economy with global To take on global leadership and
Indispensability systems in a way that makes an economy enable leverage in geopolitical
fundamentally important to the global system negotiations and conflicts
and gets others interested and invested in its
continued functioning.

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Table XVI.2. From Import Substitution to Strategic Indispensability: A Comparative Perspective

Dimension Import Substitution Strategic Resilience Strategic
Indispensability
Economic Focus Mainly sectoral Systemic (spans energy, Global-embedding
(manufacturing, food, data, health, national industries
consumer goods, defence, infrastructure, and technologies as
intermediate goods). and technology). indispensable nodes in
global networks.

Table XVI.3. Policy Logic and Risk Orientation across Import Substitution, Strategic Resilience and
Strategic Indispensability
Import Substitution Strategic Resilience Strategic
Indispensability
Underlying Assumption Domestic capacity Global interdependence Global interdependence
can replace imports will persist; risk can be shaped; national
effectively. management through power lies in being a
redundancy and node that others cannot
diversification is bypass.
essential.
Policy Tools Tariffs, local content Supply chain mapping, Building horizontal
mandates, subsidies, redundancy planning, and ecosystem
protective measures. friend-shoring, efficiencies to enhance
stockpiling, dual competitiveness, aim for
sourcing, R&D security. global dominance
Risk Focus Trade deficit, industrial Systemic vulnerabilities, Global influence
underdevelopment. including energy or relevance, over-
shocks, pandemics, exposure to external
cyberattacks, and rule-making or
geopolitical coercion. technology ecosystems

India’s Path to Aatmanirbhar Bharat and Viksit Bharat

 Simultaneous Stages:
■ India’s challenge is to pursue import substitution, strategic resilience, and strategic
indispensability simultaneously due to the rapid global changes.
■ The goal is to transition towards Viksit Bharat in a period of accelerated flux.
 Beyond Resilience:
■ Aatmanirbhar Bharat is not just a defensive response to disruptions, but a proactive strategy to
shape global outcomes.
■ Self-sufficiency and resilience are necessary, but shaping global influence is the ultimate goal.

From Resilience to Influence - India’s Power Gap in Asia

India’s Position in the Lowy Institute’s Asia Power Index
 Resilience vs Influence:
■ The Asia Power Index (2025) distinguishes between resources and influence, introducing the
concept of a Power Gap to measure the divergence between expected and realized influence.

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 India’s Performance:
■ India is now a major power in Asia, with steadily growing power and improved rankings in
economic relationships.
■ India has surpassed China as the leading destination for inward investment in Asia, after the
U.S..
■ However, India ranks 3rd in overall power but 10th in economic relationships, showing a negative
Power Gap (–4.0).
 Moving from Resilience to Influence:
■ India’s challenge is to transition from absorbing stability to becoming a source of stability and
opportunity.
■ Competitiveness, export capability, and global integration are key to India’s influence in a
fragmented world.

Strategic Indispensability and Economic Power

 Highest Form of Economic Power:
■ The highest form of economic power is influence without coercion, where others align with
India’s interests because it benefits them.
 Strategic Indispensability:
■ India’s goal is to achieve strategic indispensability, where global firms depend on Indian
production, leading to global influence.
 “Buying Indian Without Thinking”:
■ The transition from thinking about buying Indian to buying Indian automatically marks India’s
attainment of strategic indispensability.
■ Swadeshi should focus on producing high-quality goods at competitive prices, as emphasized
by the Prime Minister.

Swadeshi and Export Capability

Swadeshi should focus on creating export capability, not just reducing imports Import growth is
inevitable and desirable as incomes rise and economies diversify, as shown by China’s import growth
with rising per-capita income.

Currency Strength and Export Capability

 Currency Vulnerability and Growth:
■ As India grows, import growth leads to currency vulnerability, necessitating a strong and
stable currency.
■ Hard currency is not just about monetary orthodoxy but relies on trade balances, capital flows,
risk perceptions, and geopolitics.
 Export Capability and Currency Behavior:
■ Hard-currency behavior emerges when a country can reliably earn foreign exchange through
exports, not capital inflows.
■ India’s currency remains structurally soft due to a growing trade deficit and lack of sufficient
export capabilities.
 Manufacturing Exports as Key:
■ Manufacturing exports, unlike service exports, are critical for creating supplier ecosystems,
generating employment, and achieving trade surpluses.

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China’s

■ Service exports are vital but have limitations in terms of employment intensity and backward
linkages.

Route to Strategic Indispensability Through Global Value Chains

 Manufacturing Export Capability:
■ Manufacturing export capability takes time and relies on scale, reliability, and integration into
global value chains (GVCs).
 Attracting Multinational Firms:
■ Global trade is concentrated around multinational networks, emphasizing the importance of
attracting global firms to India.
■ Foreign Direct Investment (FDI) from global brands in sectors like electronics and automotive is
crucial for ecosystem formation.
 Role of Multinational Brands:
■ Global brands orchestrate ecosystems, driving supplier networks and standards, which accelerates
export capability and transforms exports into endogenous growth.
■ This shift is the fastest route from Swadeshi to strategic indispensability.

The Role of the State in India’s Development

 State’s Role:
■ The state must be firm in enforcing discipline, flexible in adapting policies, and fair in allocating
support. Balancing these traits ensures that protection does not become entitlement, policies
respond to feedback, and legitimacy is maintained.
 India’s Diversity as Strength:
■ India’s diverse states can specialize according to their unique endowments, with a national
Swadeshi strategy encouraging competition and the dissemination of best practices.
 Journey from Resilience to Indispensability:
■ This journey requires patience, discipline, and institutional courage. Alignment between intent
and execution is crucial for achieving Aatmanirbhar Bharat.

Conclusion:
India’s journey toward Aatmanirbhar Bharat and Viksit Bharat involves a multi-faceted strategy
combining resilience, export capability, and strategic indispensability. It requires disciplined institutional
reforms, active state intervention, and the development of manufacturing exports to ensure sustained
growth and global influence, positioning India as a key global player.

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Question For Practice

1. “India’s economic transition today is not merely from import substitution to self-reliance, but from
strategic resilience to strategic indispensability.” Critically examine this statement in the context of
India’s macroeconomic performance, global economic uncertainties, and the evolving role of the state.
2. Discuss the rationale and limitations of India’s tiered approach to indigenisation. How can India
avoid the pitfalls of protectionism while building manufacturing capability, reducing input costs, and
integrating into global value chains?

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BUILDING STRATEGIC
RESILIENCE AND STRATEGIC
CHAPTER
16.2 INDISPENSABILITY: THE ROLE
OF THE STATE, THE PRIVATE
SECTOR AND THE CITIZENS

Why is State Capacity the Binding Constraint Today?

India’s economic development over the past three decades reflects institutional resilience and
adaptive competence. The country has combined sustained growth, democratic continuity, macroeconomic
stabilisation, and incremental policy reform. This achievement rests not only on markets and entrepreneurship
but also on a capable State, which balances stability with change in a diverse society marked by rising
expectations.
Today, India faces a new phase of development, shaped by global fragmentation, strategic blocs,
selective access to technology, and capital flows influenced by geopolitical risk. While stability and democratic
legitimacy remain essential, they must now be complemented by the capacity to coordinate institutions,
act confidently under uncertainty, and learn continuously.
State capacity, in this context, is the ability of the government to “get the right things done”, encompassing
both policy design and execution. Weak development outcomes often arise not from a lack of ideas or
resources but from institutional incentive problems, including:
 Bureaucratic risk-aversion due to retrospective audits and judicial scrutiny
 Diffused responsibilities weakening ownership of outcomes
 Regulatory emphasis on compliance rather than facilitation
 Private-sector and citizen caution shaped by institutional signals
These interlinked constraints highlight why state capacity is the binding constraint on India’s development
today.

Entrepreneurial Governance
A modern, high-capacity state must be entrepreneurial—able to act under uncertainty, structure risk,
and learn systematically. India’s institutional environment, however, often penalises visible experimentation:
 Temporary measures become permanent (hysteresis), raising the cost of adjustment
 Accountability systems prioritise procedural correctness over learning
 Incentives discourage bold, reversible action

Key principles for entrepreneurial governance include:

 Bounded experimentation: mission-based teams, regulatory sandboxes, and pilot schemes
 Legal and institutional protection for good-faith decisions
 Learning-oriented accountability distinguishing error from malfeasance
 Political signalling that reversible failure and course correction are acceptable

Learning Requires Institutional Forgiveness

Policies in uncharted areas—industrial strategy, technology governance, social policy—cannot be
optimised ex ante. High-capacity states focus on institutional memory rather than blame, allowing
officials to:

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 Learn from errors without jeopardising careers

 Ensure accountability is context-aware, proportionate, and forward-looking
 Distinguish between good-faith errors, design failures, and malfeasance
In democracies like India, forgiveness must be institutionalised, protecting officials from vexatious
prosecution while enabling robust decision-making under uncertainty.

Organisational Design and Governance Capacity

Effective state capacity depends on how responsibilities, authority, and outcome ownership are
structured:
 Traditional functional structures concentrate expertise but often blur priorities when multiple roles
coexist
 Mission- or outcome-oriented structures with clear ownership of results enhance capability
 Coordination mechanisms must align incentives without excessive centralisation
 Continuity and institutional memory are crucial where learning matters
The State Support Mission (SSM) of NITI Aayog exemplifies this approach:
 Establishing State Institutions for Transformation (SITs) for long-term planning, evidence-based
policymaking, and strategic reform
 Promoting cross-state learning and partnerships with knowledge institutions such as IITs, IIMs, and
central universities
 Enhancing monitoring, evaluation, and data-driven governance
Such initiatives align organisational design with strategic outcomes, translating entrepreneurial governance
principles into practical, state-level capacity-building.

Culture, Coordination, and the Entrepreneurial State

India’s social trust is strongest within families, castes, and local networks, limiting the scale of transactions.
Bureaucratic integration and the entrepreneurial state mitigate these constraints by:
 Replacing personal networks with predictable rules and procedures
 Facilitating market access, cluster formation, and early investment in strategic sectors
 Mobilising cultural assets like aspiration and perseverance for development and scale, without
requiring rupture from local loyalties
This demonstrates that state capacity is not about overriding culture but making it less binding,
enabling coordinated action across broader networks.

State Capability as a Human System: Culture, Skills, and Execution (Mission Karmayogi)
 State capability is ultimately a human system: Institutional structures, platforms, and coordination
units create the architecture for collective action, but effectiveness depends on how these institutions
are inhabited and exercised by individuals. Civil servants’ interpretation of roles, judgment, and
citizen engagement increasingly determine public outcomes.
 Historical imprint of India’s administrative system: Designed for command, compliance, and
hierarchy, the administrative system prioritized order and control, which over time expanded to
developmental functions. Governance has often been rule-bound and impersonal, whereas citizens
now expect the State to be accessible, responsive, and fair.
 Participatory ethos and citizen partnership: Initiatives like Jan Bhagidari, aligned with Sabka
Saath, Sabka Vikas, Sabka Vishwas, Sabka Prayas, and concepts like Nagrik Devo Bhava and
Antyodaya, emphasise partnership, trust, empathy, fairness, and collective effort in public
service.

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 Mission Karmayogi:
■ Shapes bureaucratic culture towards citizen-centric service, focusing on how civil servants
engage with citizens and how feedback informs institutional learning.
■ Moves governance from static compliance to adaptive, learning-oriented systems, enabling
incremental learning, role clarity, and internalisation of new practices.
■ Reinforces analytical and administrative support, investing in high-quality teams, skilled
staff, and well-resourced technical functions.
 Execution and team flexibility: Effective governance benefits from flexible, project-oriented teams;
senior officials assembling teams around clear objectives improves focus, accountability, and speed,
particularly when supplemented with young professionals and domain specialists.
 Technology and human capabilities: Automation and AI enhance efficiency, but governance
increasingly relies on human judgment, ethical reasoning, collaboration, and systems thinking.
Mission Karmayogi aligns individuals with dynamic capability frameworks, embedding continuous
learning, competency mapping, and domain-specific capacity building.
 Values-driven reform: The mission combines modern administrative practices with ethical anchors,
highlighting duty, service, collective purpose, pride in service, self-reflection, collaboration, and
citizen-centric orientation. It positions public service as a vocation rather than a transactional role,
reinforcing trust between institutions and citizens.

The Regulatory State as a Core Component of State Capacity:

 Regulation as a key interface: Regulators act as interfaces between the State and the economy,
providing public goods, protecting consumers, enabling market development, and enforcing
rules. They exercise legislative, executive, and quasi-judicial powers, resembling government
authority.
 Advantages and risks: Regulatory governance provides specialisation, continuity, and insulation
from political pressures, but raises concerns about accountability, concentration of authority,
and procedural fairness. Effective regulation requires coherent institutional design anchored in
public interest, not ad hoc solutions.
 Regulators as mini-states: Regulators often perform multiple roles simultaneously—lawmaker,
investigator, judge—without clear procedural separation. Credibility depends on checks and balances,
rule-making, enforcement, and accountability.
 Building regulatory capacity:
■ There is a gap in human resources capable of functioning in a market economy.
■ Regulators need experts who balance freedom with oversight, while businesses need
professionals who use freedom responsibly for growth.
■ Establishing Schools of Regulatory Studies can cultivate a dedicated cadre skilled in regulatory
design and implementation, improving ease of doing business.
 Responsible regulation:
■ Recruitment should attract young professionals for long-term expertise, with service until
standard retirement age to ensure continuity and independence.
■ State hierarchies often allow repeated revisions without accountability, undermining the
resolution process. Commercial approvals should be final, while oversight for misconduct
continues.
■ Regulatory processes must respect timelines. Delays impose economic costs; statutory frameworks
should enable deemed approvals and enforceable deadlines, as exemplified by Competition
Commission of India (Amendment) 2023.

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 Principles for effective regulation:

■ Certainty, accountability, and finality in commercial transactions.
■ Strict timelines and enforceable consequences for authorities failing to act.
■ Shift from discretionary, open-ended processes to rule-based, time-bound procedures.

Regulatory Capacity as Institutional Design

Regulatory capacity depends on how formal powers are structured, exercised, and constrained.
 Key principles:
■ Clarity in rulemaking and guidance: Distinguish regulations from subordinate instructions;
follow transparent, consultative processes.
■ Separation within authority: Ensure internal discipline between quasi-legislative, executive,
and quasi-judicial roles.
■ Boards as accountability anchors: Governing boards provide oversight, independence,
professional diversity, with fixed tenures and safeguards.
■ Proportionality in enforcement: Calibrate penalties based on intent, scale, and harm; ensure
reasoned determinations and safeguards.
■ Due process: Enforce full disclosure and reasoned adjudication.
■ Democratic anchoring and transparency: Publish regulations and orders; maintain
parliamentary oversight.
■ Delegated capacity: Use principal-agent hierarchies, bounding delegation and monitoring for
accountability (example: Securities Markets Code, 2025).

The Private Corporate Sector and Nation-Building:

 Corporate sector as a structural participant: Even a well-designed regulatory framework cannot
generate state capacity in isolation. The private corporate sector shapes the political-economic
equilibrium, influencing whether the state upgrades capacity or governs through discretion.
 Intermediate historical position:
■ Indian corporates do not emulate East Asian developmental partners that demand state
competence, nor the Western arm’s-length, rules-bound model.
■ Instead, they operate in a hybrid zone with rents, uneven enforcement, and political mediation
substituting for market discipline.
 Three structural characteristics of the Indian corporate sector:
■ Low willingness for long-term risk absorption: Firms often prefer regulatory arbitrage,
protected margins, and firm-specific accommodations over productivity, scale, or learning-by-
doing. This externalises risk to the state, generating demand for discretion and corroding rule-
based institutions.
■ Short capital allocation horizons: Investments are low in R&D, cautious in frontier manufacturing,
and concentrated in real estate-linked, regulated, or quasi-monopolistic sectors. Factors include
family control, succession focus, weak managerial labor markets, and underdeveloped long-
horizon capital, limiting corporates’ ability to pressure the state for institutional upgrading.
■ Incentives under competition: When protection and rents are unavailable, firms must compete
on productivity, quality, and exports, which creates a direct interest in strong, predictable,
impartial public institutions.
 Corporate sector as part of society: State capacity is not shaped by firms alone. Institutions rely
on citizen compliance, fairness expectations, and engagement with formal systems. The private
sector should thus be understood as both a collection of enterprises and a society of citizens,
contributing to Viksit Bharat.

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Profit, Capability, and National Purpose – International Precedents

Firms in post-war and developmental contexts acted not just for profit but as partners in national
projects, blending commercial incentives with national purpose.
 Examples:
■ USA: GM, Ford, Caterpillar supported the Marshall Plan; Bell Labs, IBM, RCA invested in
technology and research aligned with national objectives.
■ West Germany: Siemens, BASF, Volkswagen embraced vocational training, codetermination,
and export orientation, contributing to social stability and reconstruction.
■ Japan: Keiretsu firms like Toyota and Sony coordinated investments and exports to advance
national industrial upgrading.
 East Asia:
■ Korea: Chaebols internalised export-national missions.
■ Taiwan: SMEs reinvested in skills and technology, strengthening collective competitiveness.
■ Singapore: Private firms aligned with excellence and global credibility, contributing to national
reputation.
 Key principle: Successful national transformation occurs when firms act as trustees of broader
societal goals, embedding profit within a moral economy of capability, workforce development,
and social stability.
 Implications for India: Firms should embrace long-term investment, formalisation, and
productivity as collective goods, aligning corporate strategy with nation-building and societal
trust.

Citizens, Norms, and the Social Foundations of Capability:

 Citizens as co-creators of state capacity:
■ Beyond firms, citizens shape state capacity through daily norms that determine whether systems
rely on enforcement or can operate via internalised responsibility.
■ The cost of enforcement rises when rules must be policed rather than internalised, consuming
scarce administrative bandwidth.
 Everyday behaviours and development:
■ Citizen contribution is expressed in daily habits: learning, work discipline, care for self and others,
handling setbacks, and long-term thinking.
■ Modern technology and AI shift value toward human judgment, care, discipline, and skill, which
underpin reliability in large systems (ports, hospitals, power grids).
■ Lifelong learning, humility, and adaptability are critical for sustaining capability.
 Self-care and societal reliability:
■ Physical and mental health, managing attention, and resisting constant distractions enable
sustained effort and mature decision-making.
■ Development requires trade-offs: small acts of delayed gratification, compliance, and patience
cumulatively reduce friction in public systems.
■ Public vs. private spaces: India shows care in private spaces but weaker norms in public commons;
raising the moral status of the commons strengthens institutional capacity.
 Responsible citizen behaviour:
■ Awareness of public money, borrowing, and intergenerational costs reinforces responsible
action.

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■ Citizens do not need to be saints, but steadiness, skill, and maturity enable complex systems to
function without constant policing.
 Delayed gratification as productive capability:
■ Sustained effort over time builds skill, judgment, and reliability; shortcuts undermine long-term
capability.
■ Examples: sports, queue-jumping, informal compliance, unsafe construction — convenience-
focused behaviour imposes diffuse systemic costs.
■ Growth at higher development levels depends more on reliability than ingenuity. Citizens
accepting delayed gratification allow institutions to experiment, learn, and adapt, reducing the
long-term cost of building capability.
Thus, we can say that State capacity is co-produced. Reliable citizens reduce the need for enforcement,
increase institutional trust, and create the foundations of durable societal capability. Impatience and
shortcut-seeking behaviour undermine both learning and state effectiveness.

Deregulation – Institutional Capability in Action

 State capacity in practice: State capacity manifests not only in internal reforms but at the interface
between the State and economic actors, where coordination failures, procedural rigidities, and risk
aversion are most visible. Deregulation provides a concrete test of institutional capability, integrating
cross-agency coordination, discretionary decision-making, iterative learning, and reorientation from
policing to problem-solving.
 Operationalisation of deregulation: States, as rule-making authorities, influence key sectors
including land, building, labour, utilities, and local commerce. Regulatory mandates—permits, fees,
inspections, price/quantity controls—impose time, effort, and uncertainty on enterprises. Systematic
review of such regulations forms the basis for institutional responses and compliance reduction.

State-level innovations and best practices:

 States have gone beyond common templates, internalising deregulation as a continuous governance
process.
 Land reforms: Andhra Pradesh & Uttarakhand removed land conversion requirements; Assam, J&K,
Odisha, Puducherry, Tripura introduced negative lists for mixed land use zones.
 Building reforms: Haryana, Madhya Pradesh, Odisha, Tamil Nadu, Uttar Pradesh, Uttarakhand
liberalised bye-laws, simplified setbacks, FAR, parking, and plot area norms.
 Third-party inspections and self-certification: Chhattisgarh, Mizoram, Rajasthan, Tripura, UP for
building plans; Andaman & Nicobar, Andhra Pradesh, Goa, Tamil Nadu, Uttarakhand for environmental
clearances.
 Labour reforms: Bihar, Gujarat, Odisha, Maharashtra, Telangana expanded employment opportunities
for women.
 Fire safety and decriminalisation: Streamlined inspections and repealed outdated provisions,
reinforcing trust-based regulation.

Impact of deregulation – case studies:

 Andaman & Nicobar Islands: Online Change in Land Use process expedited approvals, boosted
tourism capacity, and improved credit flows.
 Tripura: Comprehensive reforms in land, building, labour, utilities, and overarching statutes facilitated
MoU implementation and increased investment inflows.

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Outcomes and lessons:

 Reduced compliance burden, faster approvals, digitalisation, and improved predictability for businesses.
 Demonstrates that continuous deregulation strengthens state capacity by redirecting administrative
energy from routine policing to problem-solving.
 Phase I success led to Phase II (January 2026), expanding reforms to additional areas including
environment, education, health, and labour.
 Reinforces India’s tradition of the ‘entrepreneurial state’—facilitating activity, ensuring neutrality, and
providing ecosystem-wide public goods.

Visionary Bureaucracy: India’s Software Industry

 Produce and Protect Era (1960s–early 1980s):
■ State-owned enterprises, import substitution, heavy controls.
■ Resulted in fragmented production and weak outcomes despite public investment.
 Shift to Industry Promotion (mid-1980s):
■ Focus on enabling private entry, reducing regulatory barriers, and lowering ecosystem costs.
■ Measures: recognise software as an industry, ease foreign exchange/import restrictions, invest
in technical education, expand telecom, create technology parks with single-window clearances.
 Administrative Flexibility:
■ Officials encouraged private and foreign participation; approvals granted even by breaking
restrictive rules (e.g., Texas Instruments, Citibank).
 Ecosystem-Oriented Approach:
■ Neutral policies supporting multiple firms; promoted competition and global integration.
Thus, India’s growth and macroeconomic stability have held up well, but future success depends on the
depth of state capacity. Strategic resilience requires the State to anticipate vulnerabilities and act effectively,
while strategic indispensability demands building capabilities that others rely on globally.
State capacity is strengthened when firms compete through productivity and innovation, and citizens
support shared systems. Initiatives like deregulation show that simplifying rules enhances governance.
Moving from Swadeshi to strategic resilience and indispensability requires strong institutions, disciplined
indigenisation, outward orientation, and effective risk management.

Question For Practice

1. Discuss how entrepreneurial governance, institutional learning, regulatory reform, and organisational
design can enhance state capacity in an era of uncertainty and global fragmentation.
2. “India’s transition from strategic resilience to strategic indispensability depends as much on citizens
and firms as on the State.” Discuss this statement in light of the roles played by bureaucratic capability,
regulatory institutions, corporate behaviour, and civic norms in strengthening state capacity.

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