Session 1-

Aditya Kalia
(VisionIAS)
Copyright © 2025 by Aditya Kalia
 Session 1 (06/02/25) Session 2 (07/02/25)

Ch1 - State of the Economy: Getting back into the

Ch3- External sector: Getting FDI right
fast lane

Ch 2- Monetary and financial sector Ch4- Prices and Inflation: Understanding the
developments: The Cart and the Horse dynamics

Copyright © 2025 by Aditya Kalia

 Ch1: State of the Economy

1.
• Aggregate global economy amidst uncertainties

2.
• Steady domestic economy

3.
• How are we faring in the challenging environment

4.
• Outlook for the coming year
 State of the Economy: Backdrop
The key feature of global environment – High uncertainty, Risks

1. Major elections in 2024

Facilitate growth, building
Expansionary policies inflation pressure Protectionist trade policies

2. Conflicts - Russia-Ukraine & Middle east

Supply side shock to commodity prices Energy and commodity prices volatile

3. Easing monetary conditions

Different pace of easing, DESPITE continuing
inflation Flow of capital across EMs
State of the Economy – Divergence of growth across
regions

Amongst advanced • High growth in US

economies (2.4%), v/s Low in
Europe (0.4%)
• High in services led
Amongst economies(UK, France) v/s
Europe Low in Manufacturing
(Germany)
• China continues to be
Amongst slow – Consumption,
EMEs Investment (Real estate
slowdown)
 State of the Economy
State of the Global Economy: GDP growth – Manufacturing- Services divide

Ques: What is the significance of Purchasing Managers’ Index (PMI)? Discuss the reasons
behind divergence in Manufacturing and Services PMI across countries during last few years.
 State of the Economy
State of the Global Economy: Inflation – Slowing disinflation- Slow rate cuts?

Although recent shocks like geopolitical conflicts and extreme weather have caused price
fluctuations, their impact has largely subsided, leading to more varied commodity prices. However,
escalating tensions continue to pose a risk of synchronized price increases, undermining the
effectiveness of inflation mitigation
 State of the Economy
State of the Global Economy: Monetary Policy– Uncertain inflation, uncertain
trajectory of rate cuts

In the short term, the US market expectations of the Federal Funds Rate (FFR) were much lower
than the actual FFR level for both 2023 and 2024. Similar uncertainty may persist over the course of
2025
 State of the Economy
State of the Global Economy: Fiscal policy – At what rate will the governments
borrow and spend? Bond Markets!!

Ques: What are the factors that affect the bond yields of the government bond? Discuss the role
of geopolitical risks in this regard for India.
The stock of import-restrictive measures within G20 economies continues to grow, now affecting 12.7 per cent of G20 imports—
more than three times the coverage of such measures in 2015. If uncertainty persists and trade-restrictive measures continue to rise,
they could increase costs and prices, deter investment, hinder innovation, and ultimately reduce global economic growth.
 State of the Economy
How has India fared? Impact and performance
1. Consider the following statements regarding India's
economic performance as per Economic Survey 2024-25:-
1. India's real GDP growth for FY25 is estimated at 6.4%.
2. Private final consumption expenditure at constant
prices is expected to grow by 7.3%.
3. Industrial sector's growth rate is driven by construction
activities, electricity, gas and water supply.
How many of the above statements are correct?
(a) Only one
(b) Only two
(c) All three
(d) None of the above
Aggregate demand: PFCE is estimated to grow by 7.3 per cent, driven by a rebound in rural demand. PFCE as a
share of GDP (at current prices) is estimated to increase from 60.3 per cent in FY24 to 61.8 per cent in FY25.
This share is the highest since FY03.
Gross fixed capital formation (GFCF) (at constant prices) is estimated to grow by 6.4 per cent.
 State of the Economy
How has India fared? Sectoral performance
 State of the Economy
How has India fared? Sectoral performance
 State of the Economy
How has India fared? Sectoral performance
Which of the following statements
What is the main reason for the Main reasons for the slowdown in
is/are correct regarding India's
slowdown in global manufacturing? Domestic manufacturing in Q2 FY25:-
economic performance in
manufacturing and services sectors?
a) Increased demand for services 1. Weak global demand – slow exports –
b) Weak external demand and supply trade restrictions
1. India continues to register the
chain disruptions 2. Supply chain disruptions due to
fastest growth in the manufacturing
c) High inflation rates above average monsoon – structural
Purchasing Managers' Index (PMI).
d) Reduced trade in energy commodities issues
2. The services sector is
3. Variation in festive season timings
expected to maintain growth at 7.2%.
(a) Only 1
(b) Only 2
(c) Both 1 and 2
(d) Neither 1 nor 2
 State of the Economy
AD = C + G + I + X-M

Reasons for fall in AD? GFCF Government:- Elections related Households:- Drop in real estate
growth slowed from 10.1% in H1 investment after rapid growth
FY24 to 6.4% in H1 FY25. Pvt Corporate:- Domestic political
Reasons? since FY21
timetable, global uncertainties and
overcapacity
 State of the Economy
Macro Stability- Central Govt finances

With private corporate savings hovering around 14 per cent of GDP, persistent general government dis-savings could
have implied a greater reliance on foreign funding. Prudent fiscal management in the last four years kept the overall
savings-investment gap from widening and ensured a comfortable financing of the current account deficit, even
though the household saving rate moderated
 State of the Economy
Macro Stability- Central Govt finances

3 imp features:-
1. Even though lower than budgeted capex
in FY25, it has rebounded in H2 FY25 –
despite reduction in non-debt receipts
2. despite the gross tax revenue (GTR)
increasing by 10.7 per cent YoY during
April-November 2024, the tax revenue
retained by the Union, net of devolution
to the states, hardly increased. This was
because of increased tax devolution,
which helped the states to manage their
expenditures smoothly
3. As of November, the deficit is well
within range, hence centre has ample
room to spend:- Avg Monthly capex to
rise from 75K Cr to 97K Cr. – 33%
increase
 State of the Economy
Macro Stability- State Govt finances
 State of the Economy
Macro Stability- State Govt finances

The revenue expenditure of the states grew

at 12 per cent (YoY) during April to
November 2024 (Chart I.42), with subsidies
and committed liabilities30 registering a
growth of 25.7 per cent and 10.4 per cent,
respectively (Chart I.43). With expenditure
on capital account for states declining by
5.6 per cent, total expenditure grew by 9.5
per cent. However, 11 states witnessed an
increase in capex.
 State of the Economy
Macro Stability- Inflation – moderating core, but volatile overall
 State of the Economy
Macro Stability-External sector

Within capital flows, gross foreign direct investment (FDI) inflows increased 17.9 per cent YoY in April – November 2024. Gross FDI inflows
during April – November in FY25 are higher than the levels witnessed in the corresponding period of any previous years except FY21. Net FDI
inflow declined over this period, primarily on account of the uptick in repatriation, which is higher by 33.2 per cent YoY after a growth of 51.5
per cent in FY24. The rise in repatriation through the channels of secondary sales and Initial Public Offerings (IPOs) by multinational companies
amid strong stock market performance points to investor confidence in profitable exits for direct investors
 State of the Economy
Macro Stability-Banking

RBI raised the risk weights on unsecured retail loans by 25 basis points. However, expansion in the segment continues to be broad-based, with
housing loans as the major contributor. Apart from personal loans, credit to the services sector is the other major driver of expansion in gross
bank credit. Industrial credit growth is picking up but remains below growth rates in other major sectors.
 State of the Economy
Macro Stability-Employment
Consider the following statements with reference to
India's employment trends:
1. India's unemployment rate has decreased in 2023-
24.
2. India's formal sector has expanded with rise in net
EPFO subscriptions in FY24.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

In Q2 FY25, the urban unemployment rate for people aged 15 years and above improved slightly to 6.4 per cent compared to 6.6 per cent in Q2
FY24. Both LFPR and WPR also increased during this period.
India's formal sector has expanded significantly, with net Employees’ Provident Fund Organisation (EPFO) subscriptions rising from 61 lakh in
FY19 to 131 lakhs in FY24.
 State of the Economy
Outlook

• Mario Draghi:- “The EU also benefitted from a favourable global environment. World trade
burgeoned under multilateral rules. The safety of the US security umbrella freed up defence
budgets to spend on other priorities. In a world of stable geopolitics, we had no reason to
be concerned about rising dependencies on countries we expected to remain our friends.
But the foundations on which we built are now being shaken. The previous global paradigm
is fading. The era of rapid world trade growth looks to have passed, with EU companies
facing both greater competition from abroad and lower access to overseas markets.”
• This is the global backdrop for India as it seeks to steady and sustain the growth
momentum that the economy has experienced post-Covid. The passing of the era of rapid
world trade growth clouds the outlook for India’s export growth because, historically, India’s
export growth has been a high beta play on global export growth. This means domestic
growth levers will be relatively more important than external ones in the coming years.
 Ch2: MONETARY AND FINANCIAL
SECTOR DEVELOPMENTS:
THE CART AND THE HORSE
1. Monetary Developments – Growth-Inflation Trade-off
2. Banking sector
3. Capital Markets
4. Insurance and Pension
5. Regulation
 Ch2: Monetary and financial sector
Monetary Developments

Considering the prevailing and Components of Broad Money=Currency with

expected inflation-growth the Public + Aggregate Deposits (Demand
dynamics, the committee, in its Deposits with Banks + Time Deposits with
October 2024 meeting, decided banks + ‘Other’ deposits with Reserve Bank.
to change the policy stance
from the ‘withdrawal of Sources of Broad Money=Net Bank Credit to
accommodation’ to ‘neutral’. Government + Bank Credit to Commercial
Sector + Net Foreign Exchange Assets of
In its December 2024 meeting, Banking Sector + Government's Currency
the MPC announced a cut in Liabilities to the Public- Banking Sector's Net
CRR to 4 per cent Non-Monetary Liabilities (Eg. Capital &
reserves of the banks).
 Monetary Policy: Banking

- NNPAs are 0.6%

- Restructured assets are 0.7%
- Almost of all of increase in capital with SCBs is from Tier1 capital (CET-1)
- NIM has declined due to increased cost of funds, RoE and RoA still improving
 Monetary Policy: Banking

- Improving credit cycle overall – Credit GDP gap

has been shrinking At the heart of this growth lies a
- Credit growth has slowed (refer
strong policy emphasis on financial
previous chapter) - gap narrowed to (-) 0.3 per cent in Q1 of FY25
from (-) 10.3 per cent in Q1 of FY23. Therefore, inclusion, as reflected in the
- *Merger of HDFC with HDFC Bank despite the double-digit growth in bank credit significant rise in RBI’s Financial
post-April 2022, the creditto-GDP ratio is below
the trend line, indicating that the recent growth in Inclusion Index from 53.9 in
bank credit is sustainable. March 2021 to 64.2 by March 2024
 Monetary Policy: Banking
Rural Banks & DFIs
NaBFID
Rural Intermediaries DFIs
Given the need for a long-term capital
Regional Rural Banks (RRBs), Rural Institutions such as Infrastructure Development provider with a holistic sectoral
Cooperative Banks (RCBs), SCBs, Small Finance Company (1997), India Infrastructure Finance mandate, as opposed to the niche
Finance Banks, NBFCs, Micro Finance Company Limited (IIFCL) (2006), and more recently, mandate of other DFIs, the National
Institutions, and local area banks. The system the National Bank for Financing and Infrastructure Bank for Financing and Infrastructure
supports rural India through a network of Development (NaBFID) (2021) have focused on Development (NaBFID) was established
banking outlets, which include branches and funding infrastructure development as an infrastructure-focused DFI
banking correspondents. through NaBFID Act, 2021

- (NABARD) oversees the performance Its financial objective is to lend or invest,

and health of RRBs and RCBs, focusing - IIFCL has accorded loan sanctions to projects
having around 31,000 km of highways (22 per directly or indirectly, and seek to attract
on aspects such as growth, the investment from private sector investors
composition of assets and liabilities, cent of India’s NH capacity), 95 GW of installed
energy capacity (23 per cent of India’s installed and institutional investors in
business structure (deposits and loans), infrastructure projects to foster
and profitability indicators capacity), 22 GW of installed renewable energy
capacity (11 per cent of India’s installed renewable sustainable economic development in
- As of 31 March 2024, there were 43 capacity) and 880 million tonnes of port capacity India. The developmental objective of
RRBs (sponsored by 12 SCBs) (35 per cent of India’s total port capacity) the institution is to coordinate with the
central and state governments,
regulators, financial institutions,
institutional investors, and other relevant
stakeholders
 Monetary Policy: Banking
Insolvency Law
Next steps:-
Outcomes of IBC:-
The next step towards insolvency and
1. Change in debtor behaviour - Till March, 2024, bankruptcy reform is to improve operational
28,818 applications for initiation of CIRPs of CDs efficiencies to speed up the resolution
Till September 2024, 1068 resolution
having underlying default of ₹10.2 lakh crore were process. This is especially important for
plans approved under the Code have MSMEs, for whom legal costs can prove to
withdrawn before their admission.
resulted in creditors realising ₹3.6 lakh be substantial. Improving time efficiencies in
crore, 161 per cent against liquidation 2. Forex hedging by firms - likelihood for currency the system comes down to using innovative
value and 86.1 per cent of the fair value mismatches in the corporate sector has reduced resolution routes such as the pre-pack
(based on 964 cases where fair value has after India’s bankruptcy reform arrangements for MSMEs, inter-disciplinary
been estimated). The haircut for 3. Reducing bond credit spread - IBC lowered the capacity building of resolution professionals
creditors relative to the fair value of credit spreads for bonds issued by non-financial across legal, financial and industry basics and
assets was around 14 per cent, while firms from FY17 to FY20 compared to the bonds minimising judiciary delays in proceedings.
relative to their admitted claims, it was issued by the finance firms in FY15 and FY16, Operational efficiencies require a balancing
act between fairness and fastness of
around 69 per cent
4. Exports - large sample of 4,434 firms between resolution. Further, improvements are also
2000 and 2020 and find that exporting firms in required to ensure the timeliness of the
India have benefitted from the bankruptcy reform insolvency and bankruptcy processes under
law by helping them better access credit and get the Code
out of financial constraints.
**Refer Box 2.1 for NCLT reforms
 Monetary Policy: Capital Markets
Equity v/s Debt Markets

Equity
Issues to be addressed for liquid debt markets –
- Growth in listings on primary
markets 1. Entry Costs
- Growth in funds raised 2. Information asymmetry
- Growth in issue size per listing 3. Absence of secondary market
- Growth in QIPs E.g. no investment in less than AA rated bonds
by pension and insurance funds.
Debt
- CD issuances also at their highest
- Private placement is the preferred
way
 Monetary Policy: Capital Markets
Secondary Markets

CY 24 performance was subdued due to Which of the following statements correctly defines
outflows during last quarter (4.4% return the concept of 'financialization’?
overall) a) Financialization refers to the process where the
importance of financial markets, financial motives,
10 year performance is amongst the best financial institutions, and financial actors increases in
in the world (~8.8% USD terms) shaping economic and social outcomes.

Driven by strong profitability growth, b) Financialization refers to the reduction in the role of
financial markets and the increased dominance of
rapid traction of digital financial manufacturing industries in shaping policy and
infrastructure, expanding investor base macroeconomic outcomes.
and substantial reforms in products and
c) Financialization refers to the reduction of public
processes and private sector debt in advanced economies due to
less reliance on financial markets.
d) Financialization refers to a trend where financial
markets play a lesser role in determining the economic
outcomes of a country’s development and growth.
 Monetary Policy: Capital Markets
Secondary Markets – Risks to Indian Stock markets

Even as the resilience demonstrated by the Indian market, supported by growing retail participation, is promising, the risks
associated with a potential US market correction cannot be overlooked, given historical trends.
Historical data suggests that the Indian equity market has been notably sensitive to movements in the US market. The Nifty 50
has historically shown a strong correlation with the S&P 500, with analysis of daily index returns between 2000 to 2024 revealing
that in 22 instances when the S&P 500 corrected by more than 10 per cent, the Nifty 50 posted a negative return in all but one
case, averaging a 10.7 per cent decline. On the other hand, during 51 instances when the Nifty 50 experienced a correction of
over 10 per cent, the S&P 500 exhibited positive returns in 13 instances, with an average return of -5.5 per cent.
 Monetary Policy: Capital Markets
Insurance and Pensions

India’s insurance market has also continued its upward Which of the following is correct about the
trajectory. Total insurance premium grew by 7.7 per cent in insurance sector in India in FY24?
FY24, reaching ₹11.2 lakh crore, despite a slight decline in
insurance penetration from 4 per cent in FY23 to 3.7 per a) Life insurance penetration increased
cent in FY24. Life insurance penetration dropped marginally marginally
from 3 per cent in FY23 to 2.8 per cent in FY24, while non-
life insurance penetration remained stable at 1 per cent b) Non-life insurance penetration remained stable
at 1%
Insurance density in the country saw a modest rise from
USD 92 in FY23 to USD 95 in FY24 c) Total insurance premium fell by 7.7%

d) Life insurance penetration increased from 3%

to 3.7%
 Monetary Policy: Capital Markets
Insurance and Pensions

Unified Pension Scheme (UPS) for Government employees will be implemented along with the present NPS, and will be
effective from FY26. UPS has features of both old and new pension schemes to offer a wholesome retirement cushion to
the employees. The scheme offers a family pension, a guaranteed pension amount, and a minimum pension for all the
people working in government jobs.
1. It guarantees 50 per cent of the average basic pay of the past 12 months preceding the date of retirement as the
guaranteed pension for the employee, provided the employee has served the government for at least 25 years.
2. The minimum pension under the scheme is ₹ 10,000 per month for employees who have at least 10 years in the service
upon superannuation.
3. In case of death of the pensioner, 60 per cent of the pension amount (which he or she received right before the
demise), will be offered to the family
 Monetary Policy: Capital Markets
Regulators – Making them efficient and effective
Regulation of regulators? Mechanisms:-

1. Parliament, through the Committee on Sub-ordinate Legislations in the Rajya Sabha: It is mandated to examine if the
powers delegated under a law passed by the legislature have been duly exercised and are within the conferment or
delegation and not beyond.
2. Parliament, through the Standing Committee on Finance, can examine the performance of specific sectors and the
IRBs. The Committee, in 2024, examined the performance of the insurance sector
3. Department / Ministry administering the parent statute- These assessments deal with overall performance,
utilisation/expenditure of grants, compliance with parliamentary procedure and administrative matters regarding the
structure and composition of the IRBs. The quality of regulation usually falls beyond the ambit of regular evaluations.
4. The Comptroller and Auditor General’s (CAG) mandate includes the various audits of autonomous entities, including
IRBs. However, the scope of CAG’s financial compliance and financial audits do not include the IRB's regulation-
making processes. The quality of regulation is beyond the scope of these audits.
5. Judicial review – Once a regulation is challenged, the courts then review, ex-post, the implementation of the regulations.
Such reviews may cover the form, content or implementation of the regulation.
 Monetary Policy: Capital Markets
Regulators – Making them efficient and effective
Regulatory impact assessment (RIA):

One credible approach to RIA would be to set up an independent agency housed inside the regulator to evaluate the
regulations from all angles. This agency will report to the Board and not to the management. It can provide an impartial
and objective assessment of the regulatory processes and outcomes, including the economic and social impacts of
regulations. An economic and social cost-benefit analysis of regulations will prove useful to regulators in making them
effective and purposeful rather than broad-based, cumbersome, and inhibiting legitimate economic activity and risk-
taking. Such a move will signal that regulators are willing to live by the principles they expect regulatory entities to
follow. This will strengthen the credibility of the process regulators follow and improve the acceptance of the proposed
measures. Regulation in the financial sector must strike an optimal balance between the imperative of stability and the
goals of fostering innovation, efficiency, and competition. Given the country’s low financial literacy and lower-middle-
income status, ensuring stability is essential to prevent systemic risks and protect consumers. However, this should not
come at the expense of stifling creativity, innovation, or healthy market dynamics. At the same time, an excessive focus
on innovation and competition without adequate safeguards can lead to financial instability, resource misallocation, and
erosion of trust in the system. Striking this balance is particularly critical for India, considering its vast and diverse
economy, growing aspirations, and substantial investment needs to sustain high growth and development.
 Monetary Policy: Capital Markets
Challenge and Outlook – Increasing Financialisation
Often financial sector innovation may result in products that
do not add value to the real economy. Research also shows that
rapid financial sector growth tends to favour high collateral–
low productivity projects.
Often, financial booms are associated with the growth of
sectors such as construction, where the collateral is high, but
productivity growth is relatively low.
Greater levels of financial engineering can create complex
products whose risks are not apparent to the regular consumer.
At the same time, these products are designed so that the
lenders have little ‘skin in the game’.
Ultimately, the proliferation of such products can lead to an
event such as the financial crisis of 2008. In the run-up to the
crisis, mortgages were granted to people with little ability to
pay them back. In turn, lenders reduced their exposure to risk
by securitising these mortgages at multiple stages. When the
mortgage bubble burst, it, in turn, took down with it
instruments that were highly securitised, leading to the crises
 Ch3: External Sector: Getting FDI right
To strengthen its competitiveness and further integrate into global supply chains, the country can
focus on reducing trade-related costs and enhancing export facilitation to create a more vibrant
export sector.
1. Global Trade dynamics
2. Trend in India’s trade performance
3. Ease of Doing Business initiatives for exporters
4. BoP Position
 External Sector: Global Trade dynamics

IMF estimates that a one standard deviation increase in uncertainty

correlates with a 0.4 to 1.3 percentage point decrease in output growth.

Higher uncertainty requires investors to seek more significant

compensation for risks, thereby raising risk premia and the overall cost of
finance. Additionally, uncertainty increases the likelihood of borrower
defaults, leading to higher capital costs. Moreover, uncertainty shocks in
advanced economies like the US have often led to lower output and
reduced prices

When faced with heightened uncertainty, it is typical of economic

agents to 'search' for more information. The Google Trends-based
RBI has developed a policy uncertainty index specifically for uncertainty index (India-GUI) leverages this behaviour to measure
India, utilising various global indices. This index leverages internet overall uncertainty by using internet search volumes for a list of
search data from Google Trends to assess policy uncertainty from keywords about fiscal, monetary and trade policy in India. The
domestic and international events. Furthermore, the index is policyrelated keywords are curated, based on mentions in central bank
updated in real-time. policy statements as well as coverage in the financial press.
External Sector: Global Trade dynamics
Trade growth but Nearshoring and Friendshoring

Friend shoring is calculated as trade-weighted political proximity as

measured by the United Nations voting patterns.

Nearshoring is calculated as the reverse of the trade-weighted average

distance in km.
E.g. increasing dependence of Vietnam and Russia on China
External Sector: Global Trade dynamics
Protectionism- Tariff measures
Free trade
Increased emphasis on free trade and enhanced
collaboration in international trade policies under
the WTO has reduced border tariffs among nations.
For instance, between 2000 and 2024, the average
tariff rates on dutiable items in India decreased from
48.9 per cent to 17.3 per cent, while in China, they
fell from 16.4 per cent to 8.3 per cent
Free trade Hypocrisy!!
 External Sector: Global Trade dynamics
Protectionism- Non-Tariff measures (NTM)

Free trade, but with our conditions

The Global Trade Alert database shows that between 2020 and 2024,
over 26,000 new restrictions related to trade and investments have
been globally imposed- less visible, harder to assess.

UNCTAD defines NTMs as policy measures that are not ordinary

customs tariffs but can still significantly impact international trade in
goods. These measures can affect either the quantities traded, prices, or
both. NTMs are classified into import-related and export-related
categories. Other includes ‘Pre-shipment inspection and other formalities,
Import-related NTMs are further classified as “technical” or “non- contingent trade protective measures, non-automatic import
technical.” Technical measures comprise sanitary and phytosanitary licensing, quotas, prohibitions, quantity-control measures and
measures (SPS), technical barriers to trade (TBT), and pre-shipment other restrictions not including sanitary and phytosanitary
inspections. measures or measures relating to technical barriers to trade,
Non-technical measures encompass traditional trade policies like quotas, measures affecting competition, trade-related investment
subsidies, and trade remedies, including those addressing unfair trade measures, distribution restrictions, restrictions on post-sales
practices. services, subsidies and other forms of supports, government
procurement restrictions, intellectual property and rules of origin
NTM- Europe the smiling bully:- CBAM & EUDR
NTM- Europe the smiling bully:- CBAM & EUDR
 External Sector: Global Trade dynamics
Protectionism- Non-Tariff measures (NTM)

NTMs can indirectly affect FDI through their

impact on imports. A firm might decide to bypass an Consider the following statements about non-tariff measures
NTM by engaging in FDI if the costs associated
with this approach are lower than the costs of (NTMs):
exporting. Additionally, NTMs can encourage 1) Agriculture and natural resources sectors are significantly
inward FDI to the country that imposes them, as affected by NTMs.
these measures raise barriers to market access.
2) NTMs have had minimal impact on manufacturing sectors.
Research has demonstrated that NTMs have a
positive impact on FDI. For example, if the average Which of the following options is correct?
number of NTMs applied to a product increases a) 1
from 2.5 to 3.5 NTMs per product, FDI could b) 2
increase by 12 per cent. Certain NTMs, such as
intellectual property rights, local content
c) Both
requirements, and TBT in specific sectors, appear to d) None
affect FDI significantly.
External Sector: India’s trade performance

Case Study: Textile exports (Refer Box III.3):

Diversified production chain in India v/s vertically integrated
chains in China & Vietnam.
Complex procedures such as accounting for each sq. cm of fabric
and buttons, etc.
Pre-shipment inspections required for imports, slowing down and
increasing cost of logistics
Lack of FTAs- US imposes 11% on Ind v/s 0%on Korea

Scope:- move towards Man made fibre(MMF) from Cotton i.e.

focus on technical textiles (requires R&D)
* national technical textiles mission (NTTM)
*PM-MITRA – PM-Mega integrated textile region and
apparel parks
 External Sector: India’s trade performance
Case Study: e-commerce exports (Refer Box III.4):
Customers increasingly prefer customised products from skilled
artisans, and India can leverage its rich tradition of handcrafted items to
meet this demand. Additionally, exporters can increase their profits by
reducing costs associated with intermediaries like agents and
shopkeepers, making e-commerce a lucrative option for selling
products

*Niryat Bandhu scheme,

*financial assistance to e-commerce exporters under the Market Access
Initiative (MAI) scheme,
*export and packing credit
India’s share in global services exports has more than doubled, reaching *e-commerce export hubs
around 4.3 per cent in 2023 from 1.9 per cent in 2005. In *Bharat Mart in Dubai provides Indian MSMEs affordable access to the
‘Telecommunications, Computer, & Information Services’, India Gulf Cooperation Council, African, and CIS markets, enhancing
commands 10.2% of the global exports market (ranking 2nd largest exports to these regions
exporter in the world), reflecting its strong position in IT outsourcing,
software development, and digital services. The ‘Other Business • *Also refer other EoDB measures like e-BRC, Trade Connect e-
Services sector’ also plays a crucial role, with India holding 7.2% of the Platform by DGFT (platform providing exporters with near real-time
world share (ranking 3rd largest exporter in the world), driven by its access to critical trade-related information & connecting them to key
expertise in professional and consulting services. government entities such as the Indian Missions abroad, the DoC,
Poor performer:- travel and transport Export Promotion Councils
External Sector: Balance of Payments Account
Current Account Balance
External Sector: Balance of Payments Account
Capital Account
 External Sector: Balance of Payments Account
Capital Account

Net FDI to India during the first eight months Which of the following is correct regarding Foreign Direct Investment
of FY25 stood at USD 0.48 billion compared (FDI) in India?
to USD 8.5 billion in the corresponding period 1) India has surpassed USD 1 trillion in FDI inflows from April 2000 to
of FY24.95 Similarly, for FY23, the figure September 2024.
stood at USD 19.8 billion. For FY24 as a 2) Gross FDI inflows have decreased in recent years due to global
whole, the net FDI was USD 10.1 billion. uncertainties.
The last two financial years have indeed seen a) 1
much larger repatriation from India. The b) 2
amounts were USD 29.3 billion and USD 44.5 c) Both
billion, respectively, in FY23 and FY24. In the d) None
current year, up to November, the repatriation
amount is USD 39.6 billion. At this rate, the
full-year figure might exceed last year’s figure.
External Sector: Balance of Payments Account
Capital Account: FPI flows
External Sector: Balance of Payments Account
Forex reserves
The reserves are sufficient to External Sector cover approximately 90
per cent of India’s external debt of USD 711.8 billion as of
September 2024, reflecting a strong buffer against external
vulnerabilities.

4th globally, following China, Japan, and Switzerland. Supported by

net positive capital inflows, India’s forex reserves witnessed a notable
increase of USD 27.1 billion in 2024. FCA constituted the bulk of
this increase

The import cover stood at 10.9 months as of December 2024,

significantly surpassing the IMF's recommended three month import
cover for emerging economies.

The BoP surplus of USD 63.7 billion in FY24, supplemented by a

modest valuation gain of USD 4.3 billion, was the key driver of this
improvement. In H1 of FY25, forex reserves rose by USD 59.4
billion, driven by a BoP surplus of USD 23.9 billion and a valuation
gain of USD 35.5 billion.
External Sector: Balance of Payments Account
Exchange Rates
External Sector: Balance of Payments Account
External Debt
 External Sector: Balance of Payments Account
Challenges to CAD
India runs a CAD, and its investment needs are much larger considering the size of its economy. Supplementing domestic savings
with reasonably large foreign savings expands the scope for capital formation. If, for various reasons, capital flows are going to be
problematic, it raises questions as to the level of sustainable CAD for India. It may not be 2.5 per cent to 3 per cent as before, but it
is much lower.
Developed countries, too, are wooing investments, and India is not competing with other emerging economies alone. So, India has
two options:-
1. We must pull out all the stops wooing FDI and making itself more attractive for foreign investors. India has been doing so. For
example, most sectors in the country are open for foreign investors under the automatic route. The large amount of
repatriations, as witnessed in the data, also suggests that it is easy to transfer the returns on investment made in India. However,
there is room to improve tax certainty and tax stability in matters such as APA (Advance Pricing Agreement). India has
simplified many of its laws, rules and regulations over the years leading to a regime shift in terms of the ease of doing business
compared to yester years. At the same time, all statutory and regulatory authorities must bear in mind that international
investors benchmark countries cross-sectionally and not longitudinally. That will determine the success of the government’s
goal to make global companies produce in India for the world, making India a part of the global supply chain.
2. To make the available and existing investments deliver more. In other words, if the investment rate cannot be increased because
of capital constraints, then investment efficiency has to go up. That is where deregulation and ‘Ease of Doing Business’ come
into play. Therein lies the clue to improving India’s investment efficiency.
 Ch4: Prices and Inflation: Understanding
the dynamics

1. Global Inflation
2. Domestic Inflation
3. Special case of Vegetable and Pulses
Global Inflation Dynamics
Domestic Inflation
Domestic Inflation – role of extreme weather events
 Domestic Inflation – Case of Tomato and Onion

Fresh onions generally last about 2-3 months when Unlike onions, tomatoes have short crop cycles and are highly perishable,
stored in a cool, dry, and well-ventilated place, with their creating challenges in storage and transportation and leading to supply
shelf life further extendable under a dehumidified shortages and price spikes. Fresh tomatoes have a shelf life of only about
environment. Thus, onions produced in one year - 1-2 weeks when stored properly. Tomato production is mainly
specifically Rabi onions harvested from March onwards concentrated in states such as Madhya Pradesh, Andhra Pradesh,
are typically available for consumption in the following Karnataka, Gujarat and Odisha. This regional concentration makes the
year, influencing inflation dynamics in that year supply chain vulnerable to disruptions in any of these areas. Similar to
onions, a major portion of tomato production - more than 65% occurs in
the Rabi season.
 Domestic Inflation – Case of Tomato and Onion
Tomato prices typically rise from July to September, the
lean production season coinciding with the monsoon,
adding to challenges related to distribution and increased
transit losses. Onion prices tend to increase from October
to December, representing a lean season for onion
production. India's status as the major producer and
consumer of onion and tomato significantly limits the
potential to import during times of seasonal supply and
demand imbalances. Given that India and China contribute
about half of the total production of onion10, the import
options for India during periods of demand-supply
imbalances are quite limited. The next eight major
Price pressures are not fundamentally due producing countries only contribute around 18 per cent of
to a shortfall in production but to post- the production. Also, the highly perishable nature of
tomatoes restricts import options from neighbouring
harvest losses, seasonal production, and countries, which are not significant producers of tomatoes.
regional dispersion in production Consequently, India faces challenges in importing these
essential commodities.
 Domestic Inflation – Case of Tur Dal

Price pressure IS fundamentally due a

To meet the demand for tur, the country imported 7.7 lakh
shortfall in production.
tonnes of tur in FY24, mainly from Mozambique,
A major Kharif pulse, tur is harvested from Tanzania, Malawi, and Myanmar.
November to January, with its price impact
mainly observed in the subsequent financial
year
Domestic Inflation – Steps taken

Consider the following pairs:

1. Bharat Brand: Sale of wheat flour and rice.
2. Operation green: To stabilize prices of
Tomato, Onion, and Potato (TOP) crops.
3. Price Stabilization Fund (PSF): To stabilize the
prices of Indian Rupee.
How many of the above pairs are correctly
matched?
(a) Only one
(b) Only two
(c) All three
(d) None
 Domestic Inflation – Way forward
1. India faces a persistent deficit in the production of pulses and oilseeds, along with frequent fluctuations in
tomato and onion production, leading to price pressures. To address this, focused research is needed to develop
climate-resilient crop varieties, enhancing yield and reducing crop damage. Efforts to expand the area under
pulses in rice-fallow regions are likely to help.

2. Promoting extension activities is crucial. Farmers should receive training on best practices, the use of high-yield
and disease-resistant seed varieties, and targeted interventions to improve agricultural practices in the major
growing regions for pulses, tomatoes, and onions.

3. Implementing robust data collection and analysis systems to monitor prices, stocks, and storage and processing
facilities is essential in various tiers of government. This data should be used to identify areas for improvement
and make informed policy decisions. High-frequency price monitoring data for essential food items collected by
various agencies within the country may be linked to quantify and monitor price build-up at each stage from the
farm gate to the final consumer.
 Thank You!
(Until Next Time )

Copyright © 2025 by Aditya Kalia