UPSC CSE 2024/25

GS-3
MAINS MODULE
By Dr. Shivin Chaudhary
 MOBILIZATION OF RESOURCES

National Bank for Financing Infrastructure and Development (NaBFID)

The National Bank for Financing Infrastructure and Development (NaBFID) was established in
2021 as a development finance institution with the aim of financing, enabling, and
catalyzing the National Infrastructure Pipeline. NaBFID is expected to alleviate pressure on
banks, reduce the cost of capital, and meet the investment needs of a $5 trillion economy.

Global and Indian ● Global: Comparable institutions include the China

Examples Development Bank, the UK's Green Investment Bank, and
Germany's KfW.
● Indian: Examples include NABARD (Agriculture and Rural
Development), Industrial Finance Corporation of India
(Industrial Development), SIDBI and MUDRA (MSME
Development), EXIM Bank (Trade Development), and
National Housing Bank (Housing Infrastructure). IFCI was the
first development bank in India, established in 1948, with ICICI
and IDBI initially set up as development banks before
transitioning into commercial banks based on the Narasimhan
Committee's recommendations.

Assistance Development banks offer various forms of assistance to companies,

Provided by including:
Development Banks ● Providing long-term finance at concessional rates.
● Investing in shares of companies involved in infrastructure,
industrial, or housing projects.
● Offering partial credit guarantees for bonds issued by these
companies.

Benefits of ● Meeting Investment Needs: NaBFID is essential to achieving

Establishing the target of a $5 trillion economy by the end of 2024-25.
NaBFID for the ● Reducing Pressure on Commercial Banks: By providing
Indian Economy
long-term financing, NaBFID can help mitigate the
asset-liability mismatch and high NPAs that commercial banks
face due to their reliance on short-term deposits for long-term
infrastructure lending.
● Lowering Cost of Capital: Credit enhancements from
development banks like NaBFID can enable companies to
secure loans at lower interest rates, thereby reducing their
cost of capital.
● Reducing Foreign Currency Exposure: Currently, some
infrastructure and housing finance companies borrow from
 overseas markets, which exposes them to exchange rate
fluctuations. NaBFID could help reduce this exposure.

Strategies for ● Independence and Autonomy: Ensuring professionalism,

Ensuring NaBFID's autonomy, and robust control and audit mechanisms is vital to
Success avoid the lackluster performance seen in some public sector
banks.
● Enhanced Access to Long-Term Capital: The budget
allocation of Rs 20,000 crores in 2021-22 is insufficient for
India's vast infrastructure needs. Enhanced financing can be
achieved through:
○ Long-term credit from RBI to NaBFID via Long-term
Repo Operations (LTROs).
○ Designating bonds issued by NaBFID as eligible
securities for banks' Statutory Liquidity Ratio (SLR)
requirements, encouraging banks to invest in these
bonds.
○ Allowing NaBFID to borrow from international
institutions like the World Bank and ADB.
● Infusing Competition: To avoid inefficiencies associated with
a monopoly, it is necessary to encourage the private sector to
establish development banks and foster competition in
infrastructure financing.
● Enhancing the Investor Base: Facilitate easier investment in
NaBFID bonds by pension funds, insurance companies, and
mutual funds, and offer tax incentives for individuals investing
in these bonds.

Bad Banks (NARCL)

Context: ● The National Asset Reconstruction Company Ltd. (NARCL) and

India Debt Resolution Company Ltd. (IDRCL) were established by
the Government in July 2021 to enhance the distressed asset
market.
About National ● NARCL is established under the Companies Act and has
Asset received RBI registration to operate as an Asset Reconstruction
Reconstruction Company (ARC).
Company
● It is primarily owned by Public Sector Banks, with Canara
Limited (NARCL)
Bank as the sponsor, holding up to 12% of the shares.
● Funding: NARCL will be funded through a mix of equity and debt
from various banks and will operate for a finite period of 5 years.

About India Debt ● IDRCL is set up as an Asset Management Company (AMC)

Resolution specifically for handling Non-Performing Assets (NPAs).
Company Ltd. ● It is predominantly owned by Private Sector Banks (minimum
(IDRCL)
51%), with the remaining shares held by Public Sector Banks.
● The operational tenure of IDRCL will align with that of NARCL,
also lasting 5 years.

Relationship ● NARCL and IDRCL will work together under a debt management
Between NARCL agreement.
and IDRCL ● NARCL will aggregate and acquire stressed assets, while IDRCL
will exclusively provide management and resolution services for
these assets to NARCL.

Functioning of ● NARCL's Role: NARCL acquires distressed assets from banks,

NARCL providing immediate relief to bank balance sheets and freeing up
capital for further lending.
○ The Government guarantees the security receipts (SRs)
issued against these acquired assets.
● IDRCL's Role: IDRCL has an exclusive arrangement with
NARCL to resolve the assets acquired by NARCL.
○ It is responsible for identifying appropriate resolution
strategies for these assets and aiding NARCL in achieving
optimal resolution outcome.

Process of NPA Resolution by ARC and Role of the Government

● Buying NPAs:
○ Asset Reconstruction Company (ARC) purchases Non-Performing Assets
(NPAs) from banks.
○ Payment to banks is made in the form of 15% cash and 85% Security Receipts
(SR), as per the SARFAESI Act.
● Impact on Banks:
○ Reduction in NPAs on banks' balance sheets.
○ Lower provisioning requirements, unlocking capital.
○ Increased credit creation, fostering economic growth.
 ● NPA Recovery:
○ ARC recovers the NPAs through debt restructuring or by selling mortgaged
assets.
● Payment for Security Receipts:
○ ARC pays for the security receipts after deducting its management fee.
● Role of the Government
● The government provides a guarantee of ₹30,000 crores for the payment of
security receipts by NARCL.
● If NARCL is unable to sell the bad loan or sells it at a loss, the government
guarantee will cover the difference between the expected payment and the
actual amount raised, using the ₹30,000 crore fund.

Current Status of ● Has acquired 18 accounts with a total loan exposure of around
NARCL: ₹92,000 crore.
● Acquisitions include the ailing Srei Infrastructure Finance Ltd. and
Srei Equipment Finance Ltd. as resolution applicants.
● Offers for assets worth ₹1.25 lakh crore are in various stages of
acquisition.
● Due diligence and evaluations are underway for assets valued at
approximately ₹40,000 crore.

Impact of ● The government-backed company is expected to:

Establishment ○ Improve liquidity in the distressed asset market.
○ Enhance competition among market participants.

Arguments in Favour of Bad Bank

Improvement in ● Unlocking of Capital previously tied up in provisioning for NPAs
the Balance is released.
Sheets of Banks: ○ Leads to increased credit creation by banks.

Focus on Core ● Banks can concentrate on their primary functions of accepting

Banking deposits and lending.
Activities ● The responsibility of recovering bad loans is shifted to the
specialist Bad Bank.

Consolidation of ● Many NPAs are linked to large borrowers who owe money to
NPAs for multiple banks.
Efficient ● The current mechanism, where banks form a Committee of
Recovery Creditors (CoC), faces coordination issues and delays.
● A Bad Bank can take over these NPAs from multiple banks
simultaneously, improving efficiency and balance sheets.

Arguments Against Bad Bank

Superficial ● According to former RBI Governor Raghuram Rajan, setting up a

Solution to NPA Bad Bank merely shifts assets from one entity to another without
Problem addressing the root causes.
● NPAs have increased due to various factors such as political
interference, an increase in willful defaulters, and ineffective
recovery processes.
● A Bad Bank does not resolve these underlying issues.

Delays in ● Asset Reconstruction Companies (ARCs) may face delays in

Recovery recovering NPAs, which could affect the effectiveness of a Bad
Bank in resolving distressed assets.

Moral Hazard ● The presence of a Bad Bank ready to buy NPAs may discourage
banks from exercising due diligence in lending, leading to
reckless lending practices.

Pricing ● There is a challenge in determining the price for NPAs.

Dilemmas ● Higher pricing of loans could result in losses for the Asset
Reconstruction Company (ARC).
● Lower pricing could result in losses for the banks.

Challenges ● Low Onboarding of Bad Loans: As of September 2023, NARCL

Faced by NARCL made binding offers for 30 accounts with a total debt exposure of
₹1,69,910 crore, but onboarded only four accounts with an
exposure of ₹23,663 crore. This is a small fraction relative to the
overall NPA problem in the Indian banking sector.
 ● Human Resource Instability: The organization experienced four
changes in top management over the past year, raising concerns
about its stability and operational efficiency.

● Bank Apprehension: Banks are reluctant to sell NPAs to NARCL

due to the vintage nature of these loans (3-4 years old) and the
significant erosion in their value.

● Other Issues: Lack of a vibrant secondary market for Security

Receipts (SRs) and a robust turnaround mechanism for
purchased assets diminishes confidence among private investors.

Way Forward for Based on global experiences from countries such as the US, China, and
Ensuring the Sweden, the following strategies should be adopted to ensure the
Success of success of the National Asset Reconstruction Company Ltd. (NARCL):
NARCL
● Adequate Capitalization: NARCL must be well-capitalized to
manage NPAs worth ₹2 lakh crores effectively, similar to
successful bad banks globally.
● Defined Tenure: The bad bank should have a finite period to
resolve NPAs to avoid moral hazards and ensure banks maintain
diligence in lending.
● Realistic NPA Valuation: NPAs should be transferred to NARCL
at realistic values to reflect true market conditions, considering
the high haircuts often required.
● Timely Resolution: Quick resolution of NPAs is essential to
avoid delays in the payment of Security Receipts to banks and to
maintain financial stability.
● Professional Expertise: NARCL and IDRCL should be staffed
with top-notch professionals to ensure efficient and effective NPA
resolution.
● Reforms in PSBs: Reforms in Public Sector Banks are
necessary to address the root causes of NPAs, as suggested by
the P.J. Nayak Committee.
Role of IBC in Reviving Stalled Real Estate Projects and Strengthening Homebuyers’
Rights

Pre-2016 Situation ● The only remedy available for homebuyers whose projects
for Homebuyers were stalled was through Consumer Forums under the
Consumer Protection Act of 1986.
● In FY24, over 5,500 cases were filed with the National
Consumer Dispute Redressal Commission (NCDRC);
almost 21% were related to the housing sector.
● Resolutions through the consumer redressal route were
minimal.
● An estimated 4.1 lakh dwelling units in real estate projects
across India, involving ₹4.1 lakh crore, were under stress.

Introduction of New ● RERA Act (2016): Provided a dedicated grievance

Legislative mechanism for homebuyers.
Measures in 2016 ● IBC (2016): Introduced as a remedial route alongside
RERA and Consumer Forums, becoming the most favored
option. Over 1,500 real estate companies admitted into IBC
as of March 2024.

Challenges in ● Real estate companies have multiple projects across

Insolvency geographies with diversified business models, requiring the
Resolution for Real inclusion of claims from numerous homebuyers.
Estate Companies ● Cohesive efforts by judiciary, government, and market
entities were needed.

Key Amendments
and Developments ● Recognition of Peculiarities of the Real Estate Sector:
Under IBC The Insolvency Law Committee (March 2018)
recommended treating amounts raised from homebuyers as
financial debt due to its commercial effect akin to borrowing.
● Inclusion of Homebuyers as Financial Creditors:
○ Homebuyers were made a distinguished class of
creditors.
○ Homebuyers were allowed to participate in the
Committee of Creditors (CoC) through authorised
representatives.
● Regulation Against Frivolous Applications: Allowed
initiation of insolvency by a joint application of not less than
100 allottees or 10% of the total number of allottees under
the same project.
● Alignment with RERA: Resolution plans approved for real
estate projects were required to comply with the RERA Act,
 restoring sectoral law primacy for optimal oversight.

Innovative Judicial
and Market ● Reverse Corporate Insolvency Resolution Process
Responses (CIRP): Allowed corporate debtors to continue measures to
complete the project during the resolution process.
● Project-Specific Resolutions: Permitted targeting of
specific projects under the same corporate debtor for
resolution.
● Market Reactions: Several real estate companies
successfully resolved, leading to the progress of stalled
projects.

Examples include:

○ Value Infracon India Private Limited: Creditors

received 98% of the claim value and 189% of the
asset’s liquidation value.
○ Ashiana Landcraft Realty Private Limited and
Anudan Properties Private Limited: Resolutions
yielded around 2.5 times the liquidation value.
○ Jaypee Infratech Limited: Resolved with a recovery
of 88% for creditors, with assets acquired at over
114% of liquidation value.

Government ● Special Window for Affordable and Mid-Income

Support through Housing (SWAMIH):
SWAMIH Fund ○ Established in 2019 with a target corpus of ₹12,500
crore.
○ Aimed at providing priority debt financing for stalled
housing projects, including those undergoing
resolution under the IBC.
○ As of April 2024:
■ Delivered 32,000+ homes.
■ Targeted delivery of 20,000 homes annually
for the next three years.

Impact of IBC and ● The seamless resolution process under IBC and improved
SWAMIH Fund liquidity through the SWAMIH Fund contributed to healthier
balance sheets for banks.
● Enhanced banks' ability to lend further, positively impacting
the overall financial stability and growth of the housing
sector.
 Chakravyuh Challenge

Concept of the ● The Chakravyuha challenge refers to the ability to

Chakravyuha enter but not exit, drawing from the legend in the
Challenge Mahabharata. It metaphorically describes the Indian
economy's situation, where there is significant ease of
entry but difficulty in exit, leading to adverse
consequences.

Importance of Entry ● A market economy requires both unrestricted entry and exit
and Exit in a Market of firms to ensure resources are utilized efiiciently. Entry
Economy allows for competition and innovation, while exit ensures
that resources are reallocated from ineBicient to productive
uses.

Historical Context ● Historically, India's economic reforms focused on

increasing entry by dismantling barriers, such as the
"license-quota-permit Raj". This led to liberalization in
industrial licensing, public sector monopolies, and
foreign direct investment, promoting market entry.

Current Scenario ● Despite progress in promoting entry, the Indian economy

faces significant challenges related to exit. The economy
has transitioned from "socialism with restricted entry to
'marketism' without exit"

Costs of Impeded Exit ● Impeded exit leads to substantial fiscal, economic, and
political costs. It affects not just the public sector and
manufacturing but also the private sector and agriculture
● Fiscal costs arise from government support to inefficient
firms through subsidies or loans, which strain public
finances
● Economic costs involve misallocation of resources, leading
to reduced productivity and investment due to stressed
assets on corporate and bank balance sheets
● Political costs manifest as difficulty in reforming the
economy, with benefits of impeded exit often favoring
influential groups, which can lead to perceptions of
favoritism

Reasons for Exit ● The exit problem in India arises due to interests (vested
Problem interests), institutions (both weak and overly strong
institutions), and ideas/ideology (such as entrenched
entitlements and protectionist policies)

Potential Solutions ● Introducing a new bankruptcy law to expedite exit processes

● Reforming the Prevention of Corruption Act to empower
bureaucrats and reduce their vulnerability.
 ● Utilizing technology and the JAM (Jan
Dhan-Aadhaar-Mobile) framework to address exit problems,
particularly in agriculture and subsidies.
● Highlighting social costs and benefits to promote
transparency in sectors like agriculture.

Policy ● Avoid exit through liberal entry by promoting competition via

Recommendations private sector entry, which can mitigate inefficiencies
without confronting entrenched public sector interests
directly.
● Implementing a strategic approach to privatize public sector
firms, possibly converting challenges into opportunities,
such as using resources from privatization for employee
compensation and retraining.

Social Stock Exchange (SSE)

Social Stock Exchange (SSE) is a separate segment of the existing Stock Exchange that can
help Social Enterprise(s) to raise funds from the public through the stock exchange
mechanism.

About Social Stock ● Announced in the Union Budget of FY20.

Exchange (SSE) ● Aimed at leveraging the transparency and rigour of equity
markets for social welfare.
● SSE is designed under SEBI's regulatory framework.
● Allows social enterprises and voluntary organisations to raise
capital in the form of equity and debt.

Progress and ● SEBI approved the framework for SSE.

Current Status of ● NSE and BSE have received in-principal approvals to create
SSE separate SSE segments.
● As of April 2024:
○ 51 NPOs registered on BSE.
○ 50 NPOs (11 undergoing renewal) registered on NSE.
○ 9 NPOs have raised a total of ₹12.4 crore through SSE
for projects in education, livelihood generation, and skill
development.

Need for a Social ● Addresses the financing gap for socio-development goals.
Stock Exchange ● Provides alternative fund-raising instruments for social
enterprises like NGOs and NPOs.
 ● Facilitates a transparent and regulated environment for
outcome-driven philanthropy.
● Enables direct fund-raising from private sector, corporates,
and individuals, including High Net Worth Individuals (HNIs).
● Aligns with global trends towards socially responsible
investments.

Operationalisation ● Uses Zero Coupon, Zero Principal (ZCZP) instruments for

of SSE funding, similar to donations without promising returns.
● Contributions via ZCZPs qualify for tax exemption under
Section 80G of the Income Tax Act, 1961.
● Fund-raising is project-specific, linked to clear, predefined
milestones.
● Regulated by SEBI (ICDR) Regulations, 2018, which outline
activities like poverty eradication, healthcare promotion,
education, and environmental sustainability.

Eligibility and ● NGOs/NPOs must disclose past social audit reports to prove
Requirements for expertise in social sector projects.
Listing on SSE ● Minimum of 3 years of experience in executing social sector
projects is required.
● Organisations must provide an Annual Impact Report within 90
days of the fiscal year end, audited by a social auditor.

Impact of PMJAY on Credit Market Outcomes

Mitigation of ● Catastrophic health expenses can lead to impoverishment and

Healthcare Costs increased debt, which PMJAY aims to alleviate.

Reduction in NPA ● PMJAY implementation led to a 3.7 to 4.0 percentage point

Rates reduction in Non-Performing Assets (NPA) rates in
microfinance loans.
● This reduction accounts for a 34.1% to 34.6% decrease in NPA
rates, indicating significant economic impact.

Impact on Small ● Similar reductions in NPA rates were observed in eligible small
Agricultural Loans agricultural loans, reflecting PMJAY's broad economic impact.

Policy Implications ● PMJAY's success underscores the potential benefits of health

insurance schemes in improving household financial behavior
and economic stability, particularly in emerging economies.
 Corporate Bond Market

About Bonds: ● Corporate bonds are debt securities issued by private and
public corporations. Companies issue corporate bonds to
raise money for a variety of purposes, such as building a new
plant, purchasing equipment, or growing business.

Current Status of ● India's corporate debt stands at 17% of GDP, which is

Corporate Bond significantly lower compared to 123% in the US and 19% in
Market in India China.
● Increase in Outstanding Corporate Bonds: The quantum of
outstanding corporate bonds increased by 5.5 per cent
year-on-year to ₹45 lakh crore, which is 15.5 per cent of GDP,
at the end of March 2024.
● Corporate Debt Market Growth: The corporate debt market
in India is described as going from strength to strength. During
FY24, the value of corporate bond issuances increased to
₹8.6 lakh crore from ₹7.6 lakh crore during the previous
financial year.
● Public Issues and Private Placements: The number of
corporate bonds public issues in FY24 was the highest for any
financial year so far, with the amount raised (₹19,167 crore) at
a four-year high. Private placements remained the preferred
channel for corporates, accounting for 97.8 per cent of total
resources mobilised through the bond market.

Need to Develop the ● Investment Requirements: The Economic Survey 2018-19

Corporate Bond emphasized the need for India to transition from a
Market: consumption-driven to an investment-driven economy,
with private sector investments playing a crucial role.
● Reducing Government and Bank Burden: The absence of a
robust corporate bond market in India increases the financial
burden on banks and the government to fund infrastructure
projects like roads, ports, and airports.
● Addressing Asset-Liability Mismatch: Banks typically use
short-term deposits to fund long-term infrastructure projects,
leading to a mismatch between assets and liabilities.
● Minimizing Foreign Currency Risks: A developed corporate
bond market allows companies to secure long-term funding in
local currency, reducing exposure to foreign currency risks.
● Long-Term Financial Assets: An active corporate bond
market could provide institutional investors like insurance
 companies and pension funds with high-quality long-term
financial assets.
● Diversifying Funding Sources: A more developed corporate
bond market would give companies access to alternative and
diverse funding sources beyond traditional bank loans.
● Lowering Financing Costs: A strong bond market can lead
to reduced borrowing costs for businesses, making capital
more affordable.
● Supporting Infrastructure Development: A vibrant bond
market would help finance large-scale infrastructure projects,
aligning with India’s developmental goals.
● Enhancing Global Competitiveness: A well-established
bond market enhances India’s competitiveness globally by
providing sophisticated financial infrastructure that attracts
international investors.
● Risk Management: Corporate bonds offer companies tools to
manage risks, such as hedging against interest rate
fluctuations and other financial uncertainties.

Reasons for the ● Narrow Investor Base: The demand for corporate bonds is
Underdeveloped mainly from institutional investors, with retail investors
Bond Market in representing only a small fraction (3%) of the market.
India:
● Government Securities Dominance: Government bonds
make up nearly half of the bond market, overshadowing
corporate bonds.
● Challenges for Foreign Investors: Although investment
limits for foreign portfolio investors (FPIs) in corporate bonds
have been increased, the market’s liquidity constraints prevent
full utilization of these enhanced limits.
● Lack of Long-Term Bonds: The market is dominated by
bonds with maturities of 2-5 years, failing to meet the needs of
long-term investors like pension and insurance funds.
● Absence of Risk Management Instruments: The market
lacks interest rate and credit derivatives that can efficiently
transfer risks associated with interest rate movements.
● Taxation Issues: Stamp duties on corporate bonds vary
across states and have not been standardized.

Way Forward Various expert committees, including the R. H. Patil Committee

(2005), the Percy Mistry Committee (2007), and the H.R Khan
Committee on Corporate Bond Market, have provided key
recommendations for developing India’s corporate bond market:
 ● Simplifying Bond Issuance: To encourage corporates to
raise funds through bonds, the process of public issuance
should be made quicker, cheaper, and more straightforward.
● Expanding the Investor Base:
○ Investment opportunities in corporate bonds for
provident, pension, gratuity funds, and insurance
companies should be expanded.
○ Retail investors should be encouraged to participate in
the corporate bond market through stock exchanges
and mutual funds.
○ Corporate bond investments should be considered part
of the total bank credit when calculating banks'
credit-deposit ratios.
● Centralized Bond Database: Establishing a central database
for all corporate bond issuances that is accessible to all
investors at no cost.
● Municipal Bond Market: Providing fiscal support, such as
bond insurance, to encourage municipalities to issue bonds.

Indian Government Bonds in the JP Morgan Index

Overview ● Economic Survey 2023-24: The JP Morgan global composite

Purchasing Managers’ Index (PMI) registered an uptick since
October 2023 with quicker expansion across both
manufacturing and service sectors. The JP Morgan global
manufacturing PMI has been improving and stood at a
23-month high in May 2024.

Advantages of ● Lower Borrowing Costs: Including Indian government bonds

Indian Government in this global index will expand India's bond market, helping to
Bonds in the JP mobilize resources at a lower cost.
Morgan Index ● Reduction in Domestic Interest Rates: Since interest rates in
India are often tied to government securities (g-secs), a
decrease in g-sec rates could lead to lower interest rates in the
broader banking sector.
● Increase in Forex Reserves: The inclusion is expected to
attract around $30 billion into India's sovereign bond market
within a year, significantly boosting the country's foreign
exchange reserves.
 ● Strengthening the Corporate Bond Market: With the
government borrowing less domestically due to foreign
investments, more space will be available for corporate bonds,
thereby deepening the corporate bond market in India.
● Internationalization of the Rupee: This move will enhance
investor confidence in the Indian currency, aiding in the goal of
making the rupee more widely used internationally.

Potential Risks
● Currency Appreciation: Increased foreign inflows could lead
to the appreciation of the Indian rupee, potentially making
Indian exports less competitive.
● Exposure to Global Volatility: The Indian bond market and
currency could become more volatile during global economic
uncertainties due to foreign ownership of Indian government
securities.
● Monetary Policy Challenges: As demand for g-secs from
foreign investors grows, the need to stabilize g-sec yields may
conflict with the central bank's primary goal of controlling
inflation.
 EXTERNAL SECTOR

Trends in External Trade

(Source: Economic Survey 2023-24)

Global Trade ● In 2023, global trade volume contracted by 1.2% after a 3%

Dynamics expansion in 2022. The value of world merchandise trade fell 5% in
2023, but this was offset by a substantial increase in trade in
commercial services, which rose by 9% to USD 7.5 billion.

India's Trade ● Despite global challenges, India's overall exports in FY24 surpassed
Performance the FY23 record, growing by 0.23%. However, overall imports in
FY24 declined by 4.9%. During the first two months of FY25, overall
exports increased to USD 133.6 billion, compared to USD 122.4
billion in the corresponding period of the previous year.

Merchandise ● India's merchandise exports witnessed contraction in H2 of FY23

Trade and H1 of FY24 due to ongoing geopolitical tensions, but there is
evidence of a trend reversal in H2 of FY24. Merchandise exports
registered positive growth, although they contracted in FY24
compared to FY23. The merchandise trade deficit narrowed to USD
238.3 billion in FY24 from USD 264.9 billion in the previous fiscal
year.

India's Global ● India's share in global goods exports was 1.8% in FY24, with global
Trade Share services exports rising to 4.3% in FY23. This indicates a gain in
market share in global exports of goods and services.

Major Export ● In FY24, the combined share of Asia and Africa in India’s total
Destination exports rose to 52%, with UAE, Singapore, China, Russia, and
Australia being major export partners.
 Product-specific Export success stories (Economic Survey 2023-24 )

Toy Exports ● India's toy industry, traditionally a net importer, has seen a
significant increase in exports.
● According to data from the Directorate General of Commerce
Intelligence and Statistics (DGCI&S), toy exports from India
registered a Compound Annual Growth Rate (CAGR) of 15.9%
between FY13 and FY24.
● This growth, alongside declining imports, has shifted India from
a deficit to a surplus nation in toy trade.
● India's import bill for toys from China decreased from USD 214
million in FY13 to USD 41.6 million in FY24, reducing China's
share in India's toy imports from 94% in FY13 to 64% in FY24.
This indicates enhanced competitiveness of India in the
international toy market.

Smartphone ● The domestic production and export of smartphones in India

Exports have been increasing, particularly after the introduction of the
Production Linked Incentive (PLI) scheme in 2020.
● In FY24, smartphone exports increased by 42.2%
year-on-year, making it one of India's top five export items.
● India became the world's sixth-largest smartphone exporter in
2022, up from 23rd in 2014, with exports accounting for over
31% of total smartphone production in FY24.

Footwear Exports ● The Indian footwear and leather industry plays a significant
role as a foreign exchange earner. India's footwear exports
grew from USD 1.9 billion in FY21 to USD 2.5 billion in FY24.
● The government has implemented measures such as Quality
Control Orders and the continuation of the ‘Indian Footwear
and Leather Development Programme’ to boost exports.
● The Indian footwear market, valued at USD 26 billion, is
projected to reach USD 90 billion by 2030.

Export-Led Model of Development

About it ● India's aspiration to become a $5 trillion economy by 2024 is

closely linked to adopting an export-oriented development
strategy.
● Increased integration into global value chains (GVCs) is
crucial for attracting investment, creating jobs, boosting exports,
and sustaining economic growth.
 ● To support this strategy, NITI Aayog has introduced the Export
Preparedness Index for Indian states.

Important Aspects ● Stagnant Global Share: India’s share in global exports has
of India’s Trade remained around 1.6% over the past decade.
● Dependency on Imports: India relies heavily on imports for
critical goods such as pulses, oilseeds, electronic goods, and
active pharmaceutical ingredients (APIs), highlighting a lack of
self-sufficiency.
● Current Account Deficit: India’s imports surpass its exports,
contributing to a current account deficit.
● Export Composition: India’s export basket is dominated by
capital-intensive goods like petroleum products and gems,
rather than labor-intensive goods such as textiles and leather.
● Forex Reserves: While forex reserves are at an all-time high,
this is largely due to volatile foreign portfolio investment (FPI)
inflows rather than export surpluses.
● GVC Integration: Unlike China, India has struggled to integrate
into global value chains.

Need for an ● Empirical Evidence: Countries such as Japan, South Korea,

Export-Led Model and Singapore have sustained higher economic growth through
export-led strategies. Recently, both China and Vietnam have
benefitted from such approaches.
● Shift from Consumption to Export-Driven Growth: India’s
growth has been primarily driven by domestic demand, which
constitutes 60% of GDP, while exports account for only 12%.
Relying solely on domestic demand can lead to a widening
trade deficit.
● Global Economic Conditions: With declining exports from
China due to the US-China trade war and rising labor costs,
India has an opportunity to capture a larger share of global
markets.
● Boosting Make in India: By integrating “Assemble in India
for the World” into the Make in India initiative, India aims to
increase its export market share to 3.5% by 2025 and 6% by
2030, potentially creating 4 crore jobs by 2025 and 8 crore by
2030.
● Innovation and Efficiency: Exporters need to innovate and
adopt new technologies to enhance competitiveness and export
performance.

Challenges in Boosting Exports

Supply-Side ● Dominance of Small Firms: MSMEs, which account for 40%
Issues of exports, face challenges related to land, labor, capital, and
outdated technology.
● High Logistics Costs: India’s logistics costs are 14% of GDP,
higher than the 8-10% range in developed nations, reducing
competitiveness.
● Trade Facilitation: Poor trade facilitation, as measured by the
"Trading Across Borders" indicator, increases export costs
and delays.
● Low R&D Investment: India spends only 0.7% of GDP on
R&D compared to higher investments by other countries,
affecting innovation and manufacturing quality.
● Market Intelligence: Lack of market intelligence can lead to
mismatches between Indian products and global consumer
preferences.
● Export Clusters: Insufficient focus on identifying and
developing potential export clusters within states.
● Coordination Issues: Lack of effective coordination among
various government departments involved in export promotion.
● Adverse Impact of FTAs: Some free trade agreements have
led to inverted duty structures, discouraging domestic
manufacturing.

Policy Instability ● Incentive Delays: Delays in announcing incentives under

schemes like RoDTEP affect exporters.
● Export Bans: Ad-hoc export bans on agricultural commodities
impact India’s reputation as a reliable supplier.

Demand-Side ● Protectionist Policies: Rising protectionist measures and high

Challenges import duties in exporting countries affect competitiveness.
● Competitor Advantages: Goods from countries like
Bangladesh and Vietnam enter export markets with lower or
zero customs duties, making Indian goods less competitive.
● WTO Norms: Strict sanitary and phytosanitary measures by
importing countries can hinder exports, as seen with basmati
rice and pesticide residues.
Geopolitical Tensions and Shipping Disruptions:
● "Attacks on shipping in the Red Sea and drought in the
Panama Canal have resulted in trade flows being re-routed,
increasing journey time and costs. India’s merchandise trade
relies heavily on maritime trade, so disturbances in major
shipping routes can impact its economy." These disruptions
 have increased shipping costs and affected trade routes critical
for India's imports and exports.
● Commodity Price Volatility: "Fluctuations in commodity
prices, especially for critical imports like oil, metals, and
agricultural products, can impact India's trade balance and
inflation levels." This volatility presents a risk, particularly for
industrial commodities, and additional trade restrictions could
escalate food prices.
● Trade Policy Changes: "Changes in trade policies by major
trading partners or geopolitical developments can affect India's
export opportunities and market access." The report notes that
new export restrictions by WTO members have increased
significantly since 2020, affecting food, feed, and fertilizers.
● Demand from Major Trading Partners: "Fall in demand from
major trading partners: As per the DGCIS data, the US was
India’s second-largest trading partner in FY24 after China.
However, the USA’s overall import volume declined by 1.7 per
cent in 2023 compared to a growth of 8.6 per cent in 2022, as
per OECD." This decline has significantly influenced export
growth in trading partners, including India.
● Trade Costs: "Extended detours around the Cape of Good
Hope have led to a significant surge in ocean freight rates,
reaching up to USD 10,000 per 40-foot container." The increase
in shipping costs due to rerouting and other factors has added
financial burden to India's trade activities.
● emergence of new practices in international trade such as
‘decoupling’, ‘derisking’, ‘reshoring’, ‘nearshoring’, and
‘friend sharing’ and the growing narrative of deglobalisation

Government ● Export Targets and Monitoring: The government sets export

Initiatives targets and monitors them, followed by course corrections. This
helps in directing efforts towards achieving specific export
goals.
● Export Credit Insurance and Support for MSMEs: Provision
of export credit insurance services for short-term as well as
medium and long-term exports, and encouraging banks to
provide affordable and adequate export credit to micro, small,
and medium enterprises (MSME) exporters
● Streamlining Trade Processes: Initiatives like Turant
Customs, Single Window Interface for Facilitation of Trade
(SWIFT), pre-arrival data processing, and e-Sanchit streamline
 trade processes, enhancing transparency and promoting
cooperation among stakeholders.
● Technological Initiatives by CBIC: Technological initiatives
include the phased implementation of an electronic cash ledger,
enabling electronic clearances at Land Customs Stations, and
the use of Electronic Certificates of Origin.
● Postal Bill of Export Automation System: Developed by the
Department of Posts (DoP) for electronic filing and processing
of PBE, eliminating the need for exporters to visit Foreign Post
Offices.
● PM GatiShakti National Master Plan and National Logistics
Policy (NLP): Launched to boost efficiency and lower logistics
costs, including digital reforms like the Unified Logistics
Interface Platform (ULIP) and the Logistics Data Bank.
● Railway Track Electrification and NLP Marine: Initiatives
such as railway track electrification and the launch of NLP
Marine for port-related logistics.
● Sagarmala Scheme: Promotes port-led development by
leveraging India's long coastline and navigable waterways,
enhancing maritime trade infrastructure.
● Districts as Export Hubs (DEH) Initiative: Launched to foster
balanced regional development and promote the sale of
products from each district in domestic and international
markets.

Way Forward

● Changing Composition of Export Basket: India is focusing on shifting the

composition of its export basket, enhancing trade-related infrastructure, and improving
quality consciousness and product safety considerations in the private sector. A stable
policy environment is expected to play a significant role in driving India's rise as a
global supplier of goods and services. (ES 2023-24)
● Promotion of E-commerce Exports: The government is promoting e-commerce
exports through initiatives like the District Export Hub (DEH), collaborating with
e-commerce partners, Export Promotion Councils, and relevant government
departments to educate MSMEs about e-commerce exports. (ES 2023-24)
● Focus on Competitiveness and Quality: India needs to improve its competitiveness
in various product areas and focus on quality consciousness and policy stability to turn
challenges into opportunities. (ES 2023-24)
● Enhance Trade Competitiveness: Improve access to production factors (land, labor,
capital), reduce logistics costs, and enhance ease of doing business.
 ● Reorient SEZs: Rename SEZs as Employment and Economic Enclaves and focus on
job creation and GDP growth, with incentives tied to value addition and technology
adoption.
● Protect Domestic Markets: Implement effective technical regulations and trade
safeguards to protect domestic industries from cheap imports.
● Improve Coordination: Foster regular inter-ministerial meetings and interactions with
state governments to enhance trade facilitation.
● Support MSMEs: Provide support to MSMEs for better access to resources and
technology to boost exports.
● Increase Access to Finance: Improve access to formal finance for small firms, which
is currently below global benchmarks.
● Integrate into GVCs: Attract large anchor firms to set up operations in India through
simplified labor laws, PLI incentives, and competitive tax policies.

Foreign Trade Policy (FTP) 2023

Overview ● The Government of India introduced a new Foreign Trade Policy

(FTP) effective from April 1, 2023, replacing the previous FTP
2015-20.
● Unlike previous policies, this new policy does not follow a fixed
five-year cycle but is designed to be flexible and responsive to
changing global and domestic circumstances.

Broad ● Export Growth: Aim to increase India’s total exports to $2 trillion

Objectives by 2030, with equal contributions from merchandise and services
sectors.
● Globalization of Indian Rupee: Promote the Indian Rupee as a
global currency and facilitate international trade settlements in INR.
● Grassroots Export Promotion: Engage states and districts more
actively in promoting exports.
● E-Commerce Focus: Streamline processes to boost exports
through e-commerce platforms.

Key Pillars of the Policy

Pillar 1: ● Continue existing schemes like RoDTEP, Advance Authorisation,

Incentive to and Export Promotion Capital Goods (EPCG).
Remission ● Speed up approval processes for these schemes to just 1 day
through an automatic route.

Pillar 2: Ease ● Support for MSMEs: Reduce user charges for MSMEs under key
of Doing export schemes.
Business
 ● Simplified Certification: Introduce self-certification for Certificates
of Origin under various FTAs to lower transaction costs.
● Amnesty Scheme: One-time amnesty for resolving
non-compliance with export obligations.
● Merchanting Trade: Allow Indian intermediaries to engage in
merchanting trade without goods entering India, enabling India to
develop as a global merchanting hub.

Pillar 3: ● District Export Hubs: Identify and promote export-oriented

Collaboration products/services from all districts, and prepare District Export
Among Action Plans (DEAPs).
Stakeholders
● Towns of Export Excellence (TEE): Four new towns—Faridabad,
Moradabad, Varanasi, and Mirzapur—added to the existing 39
TEEs.
● Status Holder Certification: Rationalize the criteria for
recognizing exporters as "Status Holders" who excel in international
trade and provide them with benefits like 24x7 customs clearance.

Pillar 4 : Focus ● E-Commerce Exports:

on Emerging ○ Establish E-Commerce Export Hubs (ECEHs) under a
Areas Public-Private Partnership (PPP) model to provide facilities
like storage, packaging, and certification.
○ Launch Dak Niryat Facilitation Kendras across the
country to support artisans, MSMEs, and others in
accessing international markets.
○ Extend all FTP benefits to e-commerce exports.
● Streamlining SCOMET Policy:
○ Regulate the export of dual-use items (Special Chemicals,
Organisms, Materials, Equipment, and Technologies) that
have both civilian and military applications.
○ Align India’s export controls with international commitments
and streamline licensing to make the export of SCOMET
items more competitive.

Recent FTAs

India-EFTA ● The India-EFTA Trade and Economic Partnership Agreement (TEPA)

TEPA focuses on deeper economic engagement with the EFTA countries,
which include Switzerland, Norway, Iceland, and Liechtenstein.
● It marks India's first FTA with any European country.
EFTA:
European ● The agreement is innovative and well-balanced, covering two-way
Free Trade trade in goods and services, as well as bilateral investments.
Association ● It demonstrates India’s strong commitment to trade liberalisation
amidst rising protectionism globally.

India-Australi ● The India-Australia Economic Cooperation and Trade Agreement

a ECTA (ECTA) is expected to increase bilateral trade in goods and
services from USD 27.5 billion in 2021 to USD 45 billion in five
years.
● It will benefit various labour-intensive sectors in India by providing
immediate market access at zero duty to 98.3% of tariff lines,
accounting for 96.4% of India’s exports to Australia in value terms.
● Australia has offered 135 sub-sectors to India, and India has offered
103 sub-sectors to Australia, enhancing investment opportunities in
sectors like computer-related services, telecom, construction, health,
and environmental services.

India-UAE ● The UAE is a significant trade partner for India, and the India-UAE
CEPA Comprehensive Economic Partnership Agreement (CEPA) gives
preferential access to labour-intensive products.
● Bilateral trade between India and the UAE in FY24 was USD 83.7
billion, with the UAE as India’s second-largest export destination.
● The CEPA is expected to boost bilateral trade in goods to USD 100
billion within five years.
● It features a unique annex on pharmaceuticals to facilitate
access to Indian pharmaceutical products and includes
provisions for digital trade, government procurement, and data
usage.

India-Mauritiu ● India has been one of the largest trading partners of Mauritius, with
s CECPA significant growth in trade over the years.
● The India-Mauritius Comprehensive Economic Cooperation and
Partnership Agreement (CECPA), signed in February 2021, is India’s
first trade agreement with an African country.
● It covers trade in goods, services, rules of origin, and various
trade-related measures.
● Mauritius benefits from preferential market access to India for
products like frozen fish, specialty sugar, and mineral water, among
others.
 Global Capability Centres (GCCs) in India

Origin of GCCs Initial Setup:

● 1985: Texas Instruments established the first GCC in
Bengaluru.
● 1990s: Other companies, including airlines and technology
firms, began setting up GCCs in India.

Evolution:
● Initially known as 'captive centres', now referred to as Global
In-House Centres (GICs) or GCCs.
● 2012: Approximately 760 GCCs operational in India.
● 2016: Number surpassed 1,000.
● March 2023: Over 1,600 GCCs in India.

Future Projections ● By 2028: Estimated 2,100 GCCs in India.

● Market size projected to reach USD 90 billion.
● Employment of 3.2 million people, with revenues expected to
grow to USD 121 billion by 2030.

Role of GCCs Service Provision:

● Operate across IT, BPO, engineering, and software product
development.
● Key industry verticals include banking, financial services,
software, telecom, semiconductors, aerospace, automotive, oil
and gas, healthcare, and pharma.
Contribution to GDP:
● GCCs account for over 1% of India’s GDP, with growth
expected.

Government Strategic Initiatives:

Support for GCCs ● Digital India and business-friendly policies streamlined online
approvals and licensing.
● Tax regulations, compliance procedures, flexible labour laws,
and single-window clearance systems improved.

State Government Actions:

● Karnataka, Telangana, Tamil Nadu: Launch of R&D policies
targeting auto, electronics, pharma, and life sciences.
● Telangana: Major contributor to India's pharma production with
over 1,000 life sciences companies.
 ● Karnataka Digital Economy Mission (KDEM): Aims to boost
digital economy contribution to USD 300 billion by 2026.
● Expansion of tech clusters beyond state capitals like Mysuru,
Mangalore, and Hubballi, generating 5,000 jobs.

Partnership with Collaboration Efforts:

Startups ● Over 15 incubators and 40 accelerators established.
● Integration with start-ups through innovation labs, hackathons,
and incubators.
● Increased partnerships in healthcare and pharma sectors.

Expansion to Factors Driving Expansion:

Tier-II Cities ● Reverse migration during the pandemic.
● Cost advantages and improved infrastructure in tier-II cities.
● 22% of GCC centres established in tier-II cities during H1 of
2023.

Rising Global International Players:

Demand for India ● Increased R&D/innovation centres from Asia-Pacific,
particularly Japan and South Korea.
● India remains a preferred GCC location due to talent and cost
advantages.

Way Forward Government Role:

● Facilitate GCC entry by identifying new business models,
simplifying processes, and ensuring trust and data security.
● Continue supporting GCC expansion to sustain economic
growth and attract global players.

Districts as Export Hubs

Overview & ● Economic Potential: Each Indian district has economic

Objective potential comparable to that of a small country.
● Objective: Transform districts into export hubs by leveraging
their unique identities and prospects in the global market

Launch ● Initiative: Districts as Export Hubs (DEH) initiative launched in

August 2019.
● Aim: Foster balanced regional development, boost
manufacturing, and promote exports from urban and rural
areas.
● Foreign Trade Policy 2023: Reiterates DEH's role in India's
export efforts.
Focus @ 75 ● Objective: Provide targeted support to 75 districts to boost
Initiative exports.
Key Events:
● Vanijya Saptah: Series of workshops for educating and
empowering local exporters.
● Dubai Expo 2020: Showcased Indian products globally; notable
success includes Ladakh's apricots entering Dubai
supermarkets.
● Marine Buyer-Seller Meet: Connected Indian marine product
exporters with international buyers.
● Marketing and Branding Workshops: Assisted exporters in
enhancing product presentation.

DEH Initiative ● Promotion of Financial Inclusion:

Components ○ Provide logistical and infrastructural support.
○ Engage all districts in developing a global market
commodity.
● Approach: Bottom-up strategy to link production units directly
with national export obligations.

Institutional ● State Export Promotion Committees (SEPC): Established in

Mechanism all States/UTs.
● District Export Promotion Committees (DEPC): Created to
prepare and update District Export Action Plans (DEAPs).
○ DEAPs: Identify bottlenecks and necessary
interventions.
○ Progress: 567 districts have prepared DEAPs.
○ Unique Products: 304 unique products identified across
13 sectors; includes 14 services distributed across over
100 districts.

E-Commerce ● Collaboration: DEH initiative works with e-commerce partners,

Exports Export Promotion Councils, and Government departments.
● Focus: Educate MSMEs on e-commerce exports, digital
cataloguing, and global sales.
● Events: 10 outreach events in Faridabad, Moradabad,
Ludhiana, Jodhpur, Bangalore, Ahmedabad, Hyderabad,
Mumbai, Jamshedpur, and Varanasi in Q1 2024.
● Purpose: Provide hand-holding, capacity-building, and training
for businesses to succeed globally.

Further ● Collaboration: DGFT partnered with Exim Bank to boost

Enhancements exports under ODOP and DEH initiatives.
● Exim Bank Study: Identified 59 middle export districts with
potential.
● Support: DGFT and Exim Bank will work in 20 districts.
○ GRID Program: Aims to address sector-specific
challenges and provide support.
○ Proposal: Exim Bank to prepare a detailed proposal for
collaborative implementation.
 MANUFACTURING SECTOR

Manufacturing Sector in India

Overview
● Growth and Realignment: Despite challenges like the
pandemic, the manufacturing sector achieved an average
annual growth rate of 5.2% over the last decade. This growth
was propelled by significant contributions from sub-sectors
including chemicals, wood products and furniture, transport
equipment, pharmaceuticals, and machinery and equipment.
● Employment: It employs approximately 27 million workers in
the Indian labor force. A large portion of manufacturing
employment is in the unorganized sector (around 70%).
Employment is heavily concentrated in small firms.
● The expansion in steel, machinery and equipment, wood
products, and transport equipment indicates a focus on capital
formation, especially within the public sector.
● Manufacturing Share and Input Contribution: In FY23,
manufacturing accounted for 14.3% of the total gross value
added (GVA) at current
prices. However, the
sector's output share
was 35.2%, signifying
substantial backward
and forward linkages not
fully captured in its
value-added share.
Manufacturing activities
contribute roughly 50%
to inter-industry
consumption and
supply nearly 50% of inputs across productive activities such
as agriculture, industry, and services.

Significance of the ● Economic Growth: A strong manufacturing sector stimulates

Manufacturing growth in other sectors like agriculture and services through
Sector various linkages.
● Economic Contribution: Average annual growth rate of 5.2%
over the last decade, despite pandemic disruptions. Significant
contributions from chemicals, wood products, transport
 equipment, pharmaceuticals, and machinery. Key in capital
formation, especially in the public sector.
● Export Promotion: Manufacturing significantly contributes to
India's export earnings, helping to improve the trade balance.
● Technological Advancements: The sector fosters innovation,
leading to better efficiency, quality, and product development.
● Supply Chain Development: Manufacturing boosts the
development of supply chains, creating additional jobs and
business opportunities.
● Infrastructure Development: The sector drives the need for
infrastructure such as transportation networks, power supply,
and logistics.
● Attracting FDI: A vibrant manufacturing sector attracts foreign
investments, bringing in capital, technology, and expertise.
● Economic Linkages: Strong backward and forward linkages
within the economy. In FY23, manufacturing's share of gross
value added was 14.3%, but output share was 35.2%. Accounts
for about 50% of inter-industry consumption and supplies nearly
50% of inputs for all sectors (agriculture, industry, services).
● Job Creation: Provides a foundation for generating low and
semi-skilled jobs and Supports grassroots-level development.

Government ● Make in India Action Plan: Aims to increase the manufacturing

Initiatives to sector's contribution to 25% of GDP.
Boost ● National Manufacturing Policy 2011: Seeks to create 100
Manufacturing
million additional jobs by 2022.
● Infrastructure Development: Initiatives like National
Investment and Manufacturing Zones (NIMZs), SEZs, Industrial
Corridors, and dedicated freight corridors.
● Policy Reforms: Changes in MSME definitions, consolidation
of labor laws into 4 labor codes, reduction in corporate tax rates,
and increased FDI limits in various sectors.
● Aatma Nirbhar Bharat: Promotes domestic industries through
the "Vocal for Local" campaign and protective tariffs.
● Incentive Schemes: Includes PLI Scheme, Start-up India,
Stand-up India, MUDRA, and various MSME development
programs.

Challenges with ● Physical Infrastructure and Logistics: India's industrialisation

Manufacturing has been held back by the absence of robust physical
Sector (ES infrastructure and logistics. Although improvements have been
2023-24)
 made, these remain areas where further development is
necessary.
● Regulatory Environment: Intrusive and cumbersome licensing
requirements on capacity creation and expansion have
historically inhibited growth. Although many of these restrictions
have been lifted, the need for further deregulation persists.
● Investment in Research and Development (R&D): The
private sector needs to invest more in quality through R&D
spending to boost competitiveness.
● Skill Levels of Workforce: Improving the skill levels of the
workforce is essential, with an emphasis on vocational
education and industry-academia collaboration.
● Dependence on Imported Machinery: The manufacturing
sector is heavily dependent on imported machinery, which acts
as a significant constraint.
● Fragmented Industry Structure: The fragmented nature of
certain sectors, such as textiles, contributes to inefficiencies and
high transportation costs.
● External Competition: The dominance of China in
manufacturing poses a threat, as emerging economies
introduce import restrictions to protect domestic manufacturers.
● Failure to Capitalize on Low-Cost Manufacturing: Despite a
large population, India has not fully leveraged its human
resources for low-cost manufacturing.
● Small and Stagnant GDP Contribution: The sector's
contribution to GDP has remained low and stagnant.
● Skewed Composition: The sector is more focused on skill and
capital-intensive activities.
● Dominance of Unorganized Sector: A significant portion of
manufacturing employment is in the unorganized sector.
● Concentration in Small Firms: Employment is heavily
concentrated in small enterprises.

Way Forward
● Focus on Coastal Economic Zones (CEZs): Promote port-led
industrialization by fast-tracking CEZs, similar to China's
success with SEZs.
● Focus on Sunrise Sectors: Leverage new-age technologies
like AI, robotics, and big data to capitalize on the opportunities
of Industry 4.0.
● Boosting Innovation through Start-Ups: Create a supportive
ecosystem for start-ups with access to finance, markets, and tax
incentives.
 ● Attracting Foreign Investment through Plug-and-Play
Model: Provide investors with pre-cleared land and
infrastructure to start production quickly.
● Facilitating Investment: Reforms in public sector banks,
strengthening the corporate bond market, and improving the
financial health of NBFCs.
● Government Support: Financial support for manufacturing
clusters and streamlined approvals for investors.
● Extending PLI Scheme: Expand the PLI scheme to other
sectors.
● Focus on Quality Standards: Improve standards and
productivity to boost exports, with oversight from the Bureau of
Indian Standards.
● Renegotiating FTAs: Adjust trade agreements to favor Indian
manufacturing and address the inverted duty structure.
● Skilling India: Enhance collaboration between government,
industry, and academia to improve workforce employability and
align engineering education with industry needs.

Recommendations by ES 2023-24:

● Deregulation and Private Sector Involvement: Public policy

should focus on boosting competitiveness through deregulation.
It encourages the private sector to think long-term and invest in
quality through R&D spending.
● Incentivizing R&D and Innovation: Across industries, there is
a common requirement to incentivize R&D and innovation, with
a focus on improving the skill levels of the workforce.
● Government-Industry-Academia Collaboration: The survey
suggests active collaboration between industry and academia,
with an emphasis on vocational education in curriculums to
meet the skill shortage more effectively. This can help in
upskilling the workforce, which is crucial for the manufacturing
sector.
● Supply Chain Management and Market Access: For sectors
with scattered production units, such as textiles and MSMEs,
addressing supply chain management constraints and ensuring
market access are vital.
● Updating Industrial Statistics: The survey recommends
upgrading the statistics on industry to aid policymaking, by
updating the index of industrial production and providing regular
indicators of the dynamics of production and employment in
MSMEs.
 Low skill manufacturing

Job Creation as a ● India's central challenge is creating jobs. The need is to

Central Challenge generate jobs that are formal and productive, provide
substantial employment relative to investment, and have
potential for broader social transformation and export growth.
● The apparel and leather sectors meet many of these criteria,
making them suitable candidates for targeting

Employment ● The apparel and leather sectors offer tremendous

Opportunities for opportunities for job creation, especially for women.
Women ● These sectors are labor-intensive, with the apparel sector
being the most labor-intensive, followed by footwear.
● Apparels are significantly more labor-intensive compared to
other sectors like autos and steel, oBering more jobs per unit
of investment

Social ● The opportunity for women in these sectors implies potential

Transformation for social transformation. For instance, in Bangladesh, the
expansion of the apparel sector has positively affected female
education, total fertility rates, and women's labor force
participation

Export and Growth ● Historically, successful economic growth take-offs in post-war

Opportunities East Asia have been associated with rapid expansion in
clothing and footwear exports.
● The average annual growth of apparel exports in these
economies was exceptionally high. India has underperformed
in its growth phase relative to these East Asian economies,
particularly in the leather sector, presenting an opportunity for
improvement.

Comparative ● India has a potential comparative advantage due to cheaper

Advantage and more abundant labor.
● However, this advantage has been nullified by other factors,
such as logistics, labor regulations, and tax and tariff policies,
which need addressing to improve competitiveness

Opportunity Due to ● Rising labor costs in China mean that China is gradually
Rising Costs in vacating its dominant position in these sectors, providing
China India with an opportunity to capture the space. However, the
space is being quickly filled by competitors like Vietnam,
Bangladesh, and Indonesia, indicating the urgency for India to
act fast

Job Creation and ● The apparel sector is highly labor-intensive, oBering

Labor Intensity significant job creation potential. It is noted to be 80-fold
more labor-intensive than the auto sector and 240-fold
more labor-intensive than the steel sector. The leather
 goods sector also oBers considerable job opportunities with
33- fold and 100-fold more labor intensity than autos and
steel, respectively.
● These sectors provide "bang-for-buck" in terms of jobs
created relative to investment, making them suitable
candidates for targeting to address India's central challenge
of creating jobs.

Opportunities for ● There is a notable opportunity for women in these sectors,

Women which can lead to broader social transformation. In
Bangladesh, for example, the expansion of the apparel sector
positively impacted female education, total fertility rates, and
women's labor force participation.

Export and Growth ● Historically, rapid economic growth in East Asia has been
Potential associated with expansions in clothing and footwear exports.
For instance, successful East Asian economies had
exceptional growth in apparel and leather exports alongside
GDP growth booms averaging between 7-10 percent.
● The report highlights that rapid export growth in these
sectors could generate about half a million additional
direct jobs every year.

Global Market ● Rising labor costs in China mean that China is vacating its
Dynamics dominant position in these sectors, creating an opportunity
for India to step in. However, this opportunity is also
available to competitors like Vietnam and Bangladesh,
which necessitates urgent action from India to capture this
space.
● India is well-positioned to take advantage of China's
deteriorating competitiveness due to significantly lower
wage costs in most Indian states compared to China.

Policy and ● Easing restrictions on labor regulations, negotiating Free

Competitive Trade Agreements (FTAs) with major partners such as the
Challenges EU and UK, and ensuring that the GST rationalizes current
tax policy are necessary steps to prevent India from ceding
this space to competitors.
● The apparel and leather sectors face common challenges
such as logistics, labor regulations, and tax & tariB policy
issues, which need to be addressed to enhance
competitiveness.

Comparative ● Despite a large cattle population, India's share of global

Advantage cattle population and exports of cattle hides is low and
declining, indicating a loss of potential comparative
advantage. Addressing this could further boost the leather
 sector's growth potential.

Common
Challenges: ● Logistics: India faces logistical challenges compared to its
competitors. The costs and time involved in transporting
goods from the factory to the destination are higher than in
other countries. This is exacerbated by the need for
trans-shipment through Colombo due to the lack of very large
capacity containers (VLCC) at Indian ports, which increases
travel costs and reduces flexibility for manufacturers.
● Labor Regulations: Although labor costs are a source of
comparative advantage for India, rigid labor regulations
negate this benefit. Issues include regulations on minimum
overtime pay , mandatory contributions that act as de facto
taxes for low-paid workers in small firms, lack of flexibility in
part-time work, and high minimum wages in some cases
(Minimum Wages Act 1948 mandates payment of overtime
wages at twice the rate of ordinary rates of wages of the
worker)
● Tax and Tariff Policies: Tax and tariff policies create
distortions in the apparel and footwear sectors, hindering
export competitiveness. For instance, high tariffs on yarn
and fiber increase clothing production costs. Domestic
taxes also favor cotton-based over man-made fiber
production, despite global demand shifting towards the
latter.
● Discrimination in Export Markets: Competitor countries like
Bangladesh, Vietnam, and Ethiopia enjoy better market
access through lower tariffs in major importing markets. For
example, Bangladesh exports enter the EU mostly duty-free,
while Indian apparel exports face tariffs of 9.1 percent.
● Market shift: global demand for footwear is shifting away from
leather footwear and towards non leather footwear. This shift
can be attributed to a host of factors like physical comfort,
aesthetics and price affordability which work in favor of non
leather shoes as opposed to leather shoes.

Policy ● Easing Labor Regulations: Easing restrictions on labor

Recommendations regulations is essential. Current labor costs and regulations
hinder India's competitiveness, with obstacles like high
minimum wages, rigid overtime pay, and lack of flexibility in
part-time work.
● Labor Law Reforms: Offering employees choices in statutory
deductions, such as deciding their contribution to the
Employee Provident Fund (EPF) and selecting between EPFO
or National Pension Scheme (NPS), could boost formal
employment.

● Negotiating Free Trade Agreements (FTAs): FTAs with

 major partners like the EU and UK are crucial to avoid losing
market space to competitors like Vietnam and Bangladesh,
potentially creating substantial jobs in the apparel, leather, and
footwear sectors.
● Tax and Tariff Rationalization: Rationalizing the Goods and
Services Tax (GST) to avoid bias against man-made fibers in
apparel and non-leather footwear is necessary, as current
policies favor cotton and leather, contrary to global demand
trends.
● Logistics Improvements: Addressing logistics challenges,
such as high costs and long transport times, by improving port
efficiency and reducing reliance on trans-shipment through
other countries can lower costs and enhance manufacturing
flexibility.
● Addressing Comparative Disadvantages: The leather and
footwear sector faces challenges due to policies preventing
the conversion of India's comparative advantage in cattle into
export opportunities. Reforms are needed to fully leverage
cattle abundance.
● Addressing Discrimination in Export Markets: Competitor
nations like Bangladesh and Vietnam enjoy better market
access in key markets like the EU. Negotiating an FTA with
the EU could mitigate this disadvantage for India.
 Structural Labour Reforms

Constraints on formalisation

● Regulation-Induced Taxes and Compliance Costs:

○ Two significant barriers to formal sector job creation are regulation-induced
taxes on formal workers and the spatial mismatch between workers and jobs.
○ Medium-sized formal sector manufacturing firms identify "dismissal norms
under the Industrial Disputes Act" and the "cumbersome nature of compliance
with labor regulations" as major obstacles to growth.
● Regulatory "Cholesterol":
○ The slow pace of labor reform has led firms to hire contract workers to navigate
the complex regulatory environment, which includes numerous regulations that
encourage rent-seeking behavior.
○ Firms subcontract the management of regulations to contract labor firms as a
strategy to handle "regulatory cholesterol".
● Spatial Mismatch:
○ High living costs in cities make labor-intensive manufacturing uncompetitive,
and high transport costs and weak connectivity prevent commuting from
suburban areas, creating a spatial mismatch between firms and workers.
● Cultural and Demand-Side Constraints on Female Labor Force Participation:
○ The apparel industry, which employs many female workers, faces challenges
such as cultural norms that discourage women from working outside the home.
○ Less attention has been given to demand-side explanations that emphasize
the availability of jobs as a determinant of female labor force participation.
● Informal Sector Dominance:
○ The apparel sector is dominated by informal firms, which are far less
productive than formal sector firms, highlighting a significant challenge in
moving workers to more productive, formal sector jobs.
● Incentives to Use Contract Labor:
○ Higher rigidity in labor laws encourages firms to use contract labor, which grew
faster in states with more rigid labor laws.
○ This indicates that firms resort to contract labor to manage labor regulations
more flexibly.

Contract Labor

Impact of ● Growth of Contract Labor: Contract labor usage has increased

Contract Labor globally, including in India. Contract workers in registered
manufacturing rose from 12% in 1999 to over 25% in 2010. This
growth is particularly notable in states with more rigid labor laws
and in large plants subject to the Industrial Disputes Act (IDA)
 ● Boost to Manufacturing GDP: The easing of constraints on
larger firms, partly through the use of contract labor, is
estimated to have boosted manufacturing GDP annually by
0.5% between 1998-99 and 2011-12.
● Shift in Employment Structure: There has been an increase
in staffing agency employment, leading to a greater number of
large plants and reduced marginal and adjustment costs
among large firms.

Advantages of ● Navigating Regulatory Challenges: Firms use contract labor to

Contract Labor navigate "regulatory cholesterol" by subcontracting compliance
responsibilities to contract labor firms, thus allowing them to
remain small enough to avoid certain labor laws.
● Flexibility and Growth: Contract labor allows larger firms,
previously constrained by labor laws, to expand and increase
productivity, contributing to overall economic growth.

Disadvantages ● Higher Costs: Hiring contract workers can be more

of Contract expensive than regular workers—about 14% more
Labor expensive according to the Indian Cellular Association
● Lack of Loyalty and Investment in Training: Contract
workers may not feel as much loyalty to the company,
reducing employers' incentives to invest in their training. This
lack of training can hurt a firm's productivity in the long run as
contract workers do not accumulate "firm-specific human
capital"
● Worker Protection and Rights: There is a concern about the
impact of contractualization on worker protection and rights,
which needs to be considered in any overall assessment of
contract labor.

Dynamic of competitive federalism is at work, with states competing to attract

employment-intensive, high-quality companies

Impact of ● Attracting Investment: States are under pressure to become

Competitive attractive destinations for private investment, which is crucial
Federalism for job creation and economic growth. States like Rajasthan
have amended labor laws to attract large employers and
high-growth industries.
● Job Creation: The entry of large manufacturing companies can
create numerous "good jobs" in the formal sector, thus
improving employment prospects and wages.
● Economic Growth and Development: The kind of products
manufactured matters significantly. Manufacturing products like
mobile phones can enhance local know-how and supply chain
networks, bringing states closer to the global frontier and
 enabling the production of more complex products in the future.

Advantages of ● Increased Productivity: The competition among states can

Competitive lead to improved compliance and worker welfare through
Federalism innovations like Haryana’s proposed online filing of returns for
labor laws.
● Diverse Solutions: Firms and workers are coming up with
varied solutions to deal with obstacles, indicating flexibility and
adaptability in the labor market.
● Empowerment of States: States have the autonomy to amend
labor laws to create a more favorable business environment,
which can lead to economic growth and job creation.

Disadvantages of ● Potential for "Race to the Bottom": There is a risk of

Competitive competitive federalism becoming "too competitive," leading to a
Federalism scenario where states might offer excessive concessions,
potentially eroding labor protections.
● Regulatory Challenges: While some states are improving
labor regulations, there is a concern about the balance
between attracting investment and maintaining adequate
worker protection.
● Inconsistency Across States: Different states adopting
varying labor regulations can lead to inconsistencies and
complexity for companies operating in multiple states,
potentially complicating business operations.

Relocation and High-Tech Manufacturing

Impact: ● Demographic Dividend and Job Creation: India is in the midst

of its demographic dividend, where the working-age population
is increasing. To capitalize on this, the economy needs to create
"good jobs" that are safe, productive, and well-paying.
● Relocation of Apparel Firms: The trend of relocating
labor-intensive manufacturing, such as apparel, to smaller cities
is noted. This model helps spread economic development to
underdeveloped areas and reduces spatial mismatches in the
labor market.
● Female Labor Force Participation: Relocating apparel
manufacturers to rural areas can increase female labor force
participation, as the industry typically employs many female
workers.

Advantages of ● Commercial and Social Benefits: Relocating to second- and

Relocation and third-tier towns reduces costs for firms and creates suitable jobs
High-Tech for women in rapidly urbanizing towns.
Manufacturing ● Increased Productivity: Formal sector apparel firms are
substantially more productive than their informal counterparts,
 with labor productivity being about 15 times higher.
● Competitive Federalism: States compete to attract
employment-intensive, high-quality companies, encouraging
manufacturing that provides many "good jobs".
● Economic Complexity: High-tech manufacturing, such as cell
phone production, can improve the quality of India’s export
basket and enable transitions to other high value-added
products in the future.

Disadvantages of ● Market Share Loss: India is losing market share in the global
Relocation and apparel industry to countries like Bangladesh and Vietnam,
High-Tech indicating challenges in maintaining competitiveness
Manufacturing ● Challenges in Informal Sector: The informal sector dominates
India's apparel industry, with many small establishments that are
less productive compared to the formal sector Regulatory
Challenges: Labour regulations and spatial mismatches pose
challenges to formal sector job creation. Regulations can act as
taxes on formal workers, and high living costs in cities make
labor-intensive manufacturing uncompetitive.

Adopting a "Relocation" Business Model

Overview Some formal sector apparel manufacturers are adopting a relocation

strategy, moving operations to second- and third-tier towns and cities.

Benefits of ● Spreading economic development to underdeveloped areas.

relocating include ● Reducing the spatial mismatch in the labor market.
● Improving competitiveness by accessing lower-cost labor.

Impact on Female ● The apparel industry predominantly employs female workers;

Labour Force around 70% of employees in India's largest apparel exporter
Participation (LFP) are women.
● Locating apparel manufacturers in rural areas can address low
female labor force participation:
○ Provides suitable jobs that are flexible, located close to
home, and utilize women's comparative advantage in
garment production.
○ Addresses the deficit of "suitable jobs" in rapidly
urbanizing areas, which has contributed to a decline in
female LFP.
● The relocation model is beneficial for manufacturers, enhances
female participation in the labor market, and fosters economic
growth.

Potential ● Studies estimate that India's GDP could grow by an

Economic and additional 1.4% annually if women participated in the
Social Benefits economy as much as men.
● Gainful employment for women, especially paid employment, is
associated with several positive outcomes:
○ Increased agency at the household and societal levels.
○ Greater investments in children’s health and education.
● The relocation model offers significant social externalities by
fostering inclusive growth and supporting women's employment
opportunities.

Employees' Provident Fund (EPF)

Overview ● The role of the central government in India's labor market can
be examined through the example of the Employees'
Provident Fund (EPF). The EPF is a significant mechanism in
India's labor market regulation and reflects the central
government's influence in formal sector employment.:

Creation and ● Established by The Employees’ Provident Funds &

Structure of EPF: Miscellaneous Provisions Act, 1952. Workers must contribute
at least 12% of their basic salary to the EPF, managed by the
Employees Provident Fund Organisation (EPFO).

Employer ● Employers contribute 12% of employees' basic salary, with

Contributions 70% allocated to the Pension Scheme (EPS) and 30% to the
EPF.

Worker Preferences ● A survey shows that 70% of workers prefer receiving

and Challenges contributions in cash, indicating potential liquidity constraints
or issues with the EPF. High transaction costs and difficulties
managing multiple accounts, especially for job changers, are
significant challenges.

High Transaction ● There are 9.23 crore inoperative accounts out of 15 crore total
Costs and accounts, with ₹44,000 crore lying idle, reflecting high
Inoperative transaction costs.
Accounts

Recent ● The EPFO has reduced transaction costs through electronic

Improvements transfers and universal account numbers, which are portable
between employers.

Administrative ● Employers pay an administrative charge of 0.85% of the

Costs and Tax worker's salary, recently reduced from 1.10%. EPF
Status contributions have EEE tax status, offering little benefit to
low-income contributors below the tax threshold.
Policy ● Policymakers should consider offering lower earners the
Recommendation choice to contribute to the EPF, similar to higher earners, to
introduce competition and improve EPFO service standards.

PLI Scheme

Overview: ● In alignment with India's vision of becoming 'Atmanirbhar'

(self-reliant) and achieving the goal of a $5 trillion economy, the
government has introduced Production Linked Incentive (PLI)
Schemes across 14 key sectors.
● With a substantial financial outlay of Rs. 1.97 lakh crore (over
US$26 billion), these schemes aim to enhance India’s manufacturing
capabilities, boost exports, and position Indian companies as global
competitors by attracting investments in critical sectors and
advanced technologies.

Data and ● Investments, Productions and Employment: Over ₹1.28 Lakh

Facts Crore of investment was reported until May 2024, which has led to
(Economic production/sales of ₹10.8 Lakh Crore and employment generation
Survey
(direct & indirect) of over 8.5 Lakh.
2023-24)
● Exports: Export boosted by ₹4 Lakh Crore, with significant
contributions from sectors such as large-scale electronics
manufacturing, pharmaceuticals, food processing, and telecom &
networking products.
● PLI Scheme for White Goods (ACs and LED Lights) with a total
outlay of ₹6,238 Crore was approved by the Government. .

Key Sectors 1. Mobile Manufacturing and Specified Electronic Components

under PLI 2. Critical Key Starting Materials/Drug Intermediaries & Active
Schemes Pharmaceutical Ingredients (APIs)
3. Manufacturing of Medical Devices
4. Automobiles and Auto Components
5. Pharmaceutical Drugs
6. Specialty Steel
7. Telecom & Networking Products
8. Electronic/Technology Products
9. White Goods (ACs and LEDs)
10. Food Products
 11. Textile Products: MMF segment and Technical Textiles
12. High-Efficiency Solar PV Modules
13. Advanced Chemistry Cell (ACC) Battery
14. Drones and Drone Components

Key Details of ● Objective: The PLI scheme is designed to enhance domestic

the PLI manufacturing and attract large-scale investments in India.
Scheme ● Strategy: Incentives are provided based on incremental sales of
goods manufactured in India, encouraging both domestic and foreign
companies to set up production units.
● Incentives: Companies can receive incentives ranging from 4% to
7% on incremental sales over the base year of 2019-20, for a
duration of 5 years.
● Eligibility: Only companies that meet specific thresholds in
incremental sales and investments qualify for the incentives.
● Duration: The scheme is valid for 5 years.

Purpose of ● Attract Investment: The PLI schemes aim to attract significant

PLI investments in key sectors, focusing on modern technologies and
efficiency.
● Boost Manufacturing: By promoting economies of scale, the
schemes are expected to substantially enhance India’s
manufacturing output.
● Global Competitiveness: The initiatives are designed to make
Indian manufacturers more competitive globally.
● Economic Growth: The PLI schemes are anticipated to drive
production, employment, and economic growth over the next five
years.

Benefits of ● Focus on Output: Unlike previous schemes focusing on inputs, the

PLI Scheme: PLI scheme links incentives directly to increased production and
investment.
● Outcome-Based: Incentives are only disbursed after production,
which is expected to significantly boost India’s manufacturing output.
● Ease of Administration: The scheme is straightforward to
implement, relying on clear, objective criteria.
● Global Value Chains: The scheme aims to create ‘champions’ in
various sectors, enabling these firms to integrate into global value
chains.
● Technology Adoption: The scheme incentivizes the adoption of
advanced technologies, particularly in sectors like Automobiles,
fostering innovation and global competitiveness.
 ● MSME Linkages: The PLI scheme strengthens connections with
MSMEs, promoting inclusive growth and job creation.
● Self-Reliance: By boosting domestic production of critical goods,
the scheme reduces dependency on imports and positions India as a
potential exporter.
● Employment Generation: The scheme is expected to create
large-scale employment, especially in traditional, labor-intensive
sectors.
● Attracting Foreign Investment: The scheme aims to attract foreign
companies, particularly those exiting China, by offering favorable
conditions for establishing operations in India.

Implementatio ● Stage of Implementation: The PLI schemes have been notified by

n and MSME the respective Ministries/Departments and are at various stages of
Impact implementation.
● MSME Ecosystem: The PLI schemes are expected to positively
impact the MSME sector, as large anchor units will create new
supplier/vendor bases, many of which will be MSMEs.
● MSME Participation: Of the 733 applications approved under
various PLI schemes, 176 MSMEs are beneficiaries in sectors such
as Bulk Drugs, Medical Devices, Pharma, Telecom, White Goods,
Food Processing, Textiles, and Drones.

Challenges of ● High Manufacturing Costs: India’s manufacturing sector faces

PLI Scheme: challenges such as high costs due to land, capital, labor productivity,
and logistics, which may deter foreign investment despite the
incentives.
● Impact on Domestic Companies: The uniform incentives may
favor foreign companies with larger resources, potentially
disadvantaging domestic firms.
● Incentive Limits: The total incentives a company can receive are
capped by the government’s financial outlay, limiting the benefits for
over-performing companies.
● Limited Scope: The scheme is sector-specific and does not cover
some important labor-intensive industries like Leather. It is also
restricted to a few large companies, limiting its overall impact.
● Rent-Seeking Behavior: There is a risk of rent-seeking behavior
among private companies, as seen in the pre-liberalization era, with
some companies already seeking delays in meeting initial targets.
● Protectionism Concerns: Increased customs duties and protective
measures may lead to reduced competition and an inward-focused
economy.
Way Forward The PLI scheme has the potential to transform India’s manufacturing sector,
but its success depends on addressing underlying structural challenges.
Reforms that unlock the full potential of the economy are crucial to
maximize the benefits of this initiative.

Special Economic Zones (SEZs)

About SEZs ● Special Economic Zones (SEZs) are designated areas within a
country where economic laws differ from the general economic laws
of the nation. These zones are considered duty-free enclaves and
are treated as foreign territories for trade, duties, and tariffs.
● In India, the Special Economic Zones Act of 2005 was enacted to
establish, develop, and manage SEZs. This law also allows for the
creation of International Financial Services Centres and Free Trade
and Warehousing Zones, such as the GIFT City in Gujarat.

Objectives of ● Generate additional economic activity.

SEZs ● Promote exports of goods and services.
● Attract investment from both domestic and foreign sources.
● Create employment opportunities.
● Develop infrastructure facilities.
● Provide a globally competitive and hassle-free environment for
companies engaged in exporting goods and services.

Benefits to ● Tax holidays.

SEZs ● Exemption from import duties.
● Single-window clearance for central and state approvals.

Evaluation of ● Approval and Performance: The Department of Commerce has

SEZs in India approved the establishment of 417 SEZs, with 349 being notified.
Over 14 years (2005-06 to 2018-19), exports from SEZs have
increased by more than 30 times, and nearly 20 million employment
opportunities have been created since 2006.
● Sectoral Performance: Although SEZs were initially intended to
promote manufacturing-led exports, they have been more effectively
leveraged by companies in the services sector. The manufacturing
sector has not seen similar export-led growth.
● Regional Disparity: There is uneven regional distribution of SEZs,
contributing to regional disparities.
 ● Export and Investment Trends: The value of exports from SEZs
has been steadily increasing, and investments have also grown,
though the growth rate has slowed.
● Operational Challenges: SEZs face complexities in conducting
both domestic and international business within the same units,
impacting their viability for manufacturing.
● Policy Uncertainty: Government policies, such as the withdrawal
of Minimum Alternate Tax and Dividend Distribution Tax exemptions
and the announcement of sunset dates, have created uncertainty.
● Regulatory and Procedural Issues: SEZs are subject to multiple
regulatory authorities (e.g., direct tax, indirect tax, exchange
controls, state governments, SEZ authorities) that are not always
aligned, leading to procedural delays and infrastructural bottlenecks.

SEZ ● China: Focused on a limited number of large zones to achieve

Experience in agglomeration benefits, maintaining a long-term focus on these
Other zones.
Countries

Recommendat ● Framework Shift: Rename SEZs as "Employment and Economic

ions of Baba Enclaves (3Es)" to emphasize their role in promoting broader
Kalyani economic activities and job creation, not just exports.
Committee
● Incentives: Link incentives to specific parameters such as
committed investment, job creation, inclusivity (e.g., jobs for
women), value addition, and technology adoption, rather than just
export performance.
● Demand-Driven Approach: Transition from a supply-driven to a
demand-driven approach, with a focus on a few large, high-quality
zones of excellence, similar to the Institutes of Eminence in the
education sector.
● Strategic Location: Develop SEZs near ports and in key
manufacturing hubs such as industrial corridors.
● Manufacturing Competitiveness: Increase the competitiveness of
3Es by providing essential infrastructure like high-speed multimodal
connectivity, business services, and utility infrastructure.
● Ease of Doing Business: Create an integrated online portal for
new investments, streamline operational requirements, and simplify
exit processes.
● Infrastructure Development: Invest in high-quality infrastructure
within or linked to SEZs, such as high-speed rail, express roadways,
airports, shipping ports, and warehouses.
● Integrated Development: Promote integrated industrial and urban
development with "walk to work" zones, coordinated by both state
and central governments.
● Unified Regulation: Establish a unified regulator for International
Financial Services Centres (IFSCs).
● Export Duty Exemptions: Exempt export duties on goods supplied
to SEZ developers and used in the manufacture of exported goods.
● Infrastructure Status: Grant SEZs infrastructure status to improve
access to finance and enable long-term borrowing.
● MSME Participation: Encourage MSME participation in 3Es and
support manufacturing-enabling service providers in these zones.
● Dispute Resolution: Establish arbitration and commercial courts
for efficient dispute resolution.
● Sector-Specific Rules: Formulate separate rules and procedures
for manufacturing and service SEZs.
 Startup Ecosystem in India

Context: ● The Department-Related Parliamentary Standing Committee on

Commerce recently presented a report on the "Ecosystem of
Startups to Benefit India."

Data ● Number: From around 300 startups in 2016, the number of

(Economic DPIIT-recognised start-ups increased to more than 1.25 Lakh by
Survey end-March 2024.
2023-24)
● Decentralized Growth: More than 45 per cent of the recognised
start-ups are emerging out of Tier 2/3 cities.
● Inclusion: More than 47 per cent of the recognised start-ups have
at least one woman director.
● Patents: Start-ups filed more than 12,000 patent applications from
2016 to March 2024.
● Government Finance: Under Fund of Funds for Start-ups, more
than ₹10,500 Crore has been committed to more than 135
Alternative Investment Funds, which invested more than ₹18,000
Crore in start-ups by the end of FY24.

Startups in ● Definition: In India, a startup is defined as an entity that has been

India in operation for less than 10 years and has an annual turnover of
less than ₹100 crore.
 ● Funding Sources: These entities typically rely on a mix of
personal savings, crowdfunding, angel investors, and venture
capital for their growth.
● Growth: India’s startup ecosystem has seen significant growth,
with the number of recognized startups rising from 428 in 2016 to
98,119 by April 2023.
● Global Standing: India now ranks as the 3rd largest startup
ecosystem in the world and is home to
● Ecosystem Strengths in India (ES 2023-24):
○ Large pool of start-ups and unicorns (108 unicorns (startups
valued at $1 billion or more), collectively valued at $340.80
billion as of May 2023).
○ High scalability potential.
○ Significant AI talent pool, comprising 16% of the global AI
talent, showcasing rapid adoption and innovation in AI
skills.

Factors ● Consumption Patterns and Internet Penetration: Changes in

Contributing to consumer habits and increased internet access facilitated the
the Growth of growth of retail tech start-ups.
Start-ups (ES ● Sector-Specific Drivers:
2023-24) ○ Banking, financial services and insurance (BFSI): Surge
in start-ups since 2016, influenced by innovations such as
UPI.
○ SaaS (Software as a Service): Growth due to demand for
scalable cloud solutions, resulting in 21 unicorns since
2014.
○ HealthTech and EdTech: Accelerated growth during the
pandemic due to the increased need for teleconsultation
and remote learning solutions.

Role of ● Employment Generation: With 112 million people in the 20-24

Startups in age group, the startup culture is providing employment
Indian opportunities, especially in the absence of sufficient government
Economy jobs.
● Decentralization of Economic Growth: Around 47% of
recognized startups are based in Tier 2 and Tier 3 cities, spreading
economic growth beyond major urban centers.
● Attracting Investments: Many multinational corporations and
high-net-worth individuals are keen on investing in startups, e.g.,
Hero Motocorp’s investment in Ather Energy, an e-vehicle startup.
● Research and Development (R&D): Startups have contributed to
advancements in emerging technologies. For instance, NewSpace
 Research and Technologies is supplying the Indian Armed Forces
with swarm drones and loitering munitions.
● Democratizing Technology: Fintech startups are making financial
solutions more accessible in remote areas and smaller cities, e.g.,
Paytm’s sound box simplifies transaction verification without the
need to check bank balances frequently.

Government ● Start-up India Initiative: Promotes growth by connecting Indian

Initiatives for start-ups with global ecosystems and facilitating cross-border
the Startup incubation and acceleration programs.
Ecosystem ● Support for Intellectual Property Protection (SIPP): Helps
startups file for patents, designs, and trademarks with the
assistance of registered facilitators, covering statutory fees.
● The Bharat Startup Knowledge Access Registry aims to bring
together diverse stakeholders in the startup ecosystem.
● Expedited Exit for Startups: Allows startups to wind up
operations within 90 days, compared to 180 days for other
companies.
● Strengthening Capital Flow
○ Fund of Funds for Start-ups: ₹10,000 crore corpus to
support start-ups at various stages (early, seed, growth) and
reduce dependence on foreign capital.
○ Start-up India Seed Fund Scheme: Launched in 2021,
provides financial support for proof of concept, prototype
development, product trials, market entry, and
commercialization.
○ Credit Guarantee Scheme for Startups (CGSS): Provides
guarantees on loans extended by Member Institutions (MIs)
up to a specified limit.
● National Deep Tech Start-up Policy (NDTSP):
○ A comprehensive framework to support deep tech start-ups.
○ Addresses barriers like limited funding, infrastructure
constraints, and risks of cutting-edge technologies.
○ Proposes funding mechanisms, awareness programs,
streamlined approval processes, IP protection, and
monitoring mechanisms.
● Support for Deep Tech Ecosystem
○ DPIIT-Recognized Start-ups: Over 1.25 lakh
DPIIT-recognized start-ups span across various sectors,
including over 13,000 in AI, IoT, Robotics, and
Nanotechnology.
 ○ Deep Tech Adoption: Mainstream technologies include AI
(70%), Big Data & Analytics (48%), IoT Hardware (42%),
AR/VR & Mixed Reality (6%), and Blockchain (6%).

Challenges in ● Geographical Concentration: Over 80% of unicorns are

India's Startup concentrated in Bengaluru, Delhi NCR, and Mumbai.
Ecosystem ● Low Women Participation: Despite 47% of recognized startups
having at least one woman director, women are underrepresented
in leadership roles such as CEOs or partners.
● Regulatory Hurdles: Startups face difficulties due to complex and
outdated regulations that make legal processes, compliance, and
approvals challenging.
● Access to Funding: Securing sufficient funding can be difficult,
particularly for early-stage startups, as access to venture capital
and angel investments is often limited.
● Low Intellectual Property Rights (IPR): Only 11% of patent
applications filed by startups have been granted patents.

Recommendati ● Technology in Agriculture: Promote the use of advanced

ons of technologies like the Internet of Things (IoT) and data analytics in
Committee- agriculture to increase productivity, optimize resource use, and
Department-Rel improve decision-making.
ated ● Funding for Women Entrepreneurs: Establish dedicated funding
Parliamentary opportunities to ensure consistent access to capital for women
Standing entrepreneurs.
Committee on ● Global Standards: Implement dynamic testing and certification
Commerce’s standards that align with global best practices.
report on the ● Skill Development: Address the skill gap by encouraging
"Ecosystem of industries to collaborate with educational institutions to develop
Startups to customized courses.
Benefit India." ● R&D Collaboration: Encourage partnerships between startups
and research institutions for joint innovation and research and
development (R&D) initiatives.

Rural entrepreneurship

What is Rural Rural entrepreneurship refers to the creation and management of

Entrepreneurship businesses in rural areas, often focusing on utilizing local resources
? and talent to create economic opportunities and improve livelihoods. It
encompasses a wide range of activities, including agriculture,
handicrafts, small-scale manufacturing, and services.

Need for Rural ● Economic Development: It plays a crucial role in driving

Entrepreneurship: economic growth in rural areas, providing employment, and
reducing poverty.
● Livelihood Generation: By promoting self-employment and
small enterprises, rural entrepreneurship helps diversify income
sources for rural households.
● Empowerment of Women and Marginalized Groups:
Initiatives like the Deendayal Antyodaya Yojana - National Rural
Livelihood Mission (DAY-NRLM) have empowered women to
access self-employment and skilled wage employment
opportunities.
● Utilization of Local Resources: Rural entrepreneurship
encourages the efficient use of local resources and skills,
leading to sustainable development.

Challenges in ● Unorganized Sector Employment: Predominant employment

Rural in the non-farm, unorganized sector with low productivity and no
Entrepreneurship premium for skilling.
● Lack of Entrepreneurship in Education: Entrepreneurship is
not included in the formal education system.
● Lack of Mentorship and Finance: There is a lack of
mentorship and inadequate access to finance for start-ups.

Government ● Deendayal Antyodaya Yojana - National Rural Livelihood

Initiatives Mission (DAY-NRLM)
○ Empowers poor households through self-employment
and skilled wage employment.
○ Covers 7135 blocks in 742 districts across 28 states and
6 UTs.
○ Supports women-led enterprises in diverse sectors (e.g.,
solar panels, sanitary pads, soaps).
● Lakhpati Didis Initiative
○ Launched in 2023 to uplift three crore SHG households
to an annual income of ₹1 lakh within three years.
○ Focuses on diversified livelihoods, district planning, and
capacity building.
● Saras Aajeevika Portal and eSARAS Mobile App
○ Launched in 2023 to market handcrafted SHG products,
promoting rural women as entrepreneurs.
● Start-Up Village Entrepreneurship Programme (SVEP) and
Aajeevika Grameen Express Yojana (AGEY)
○ SVEP: Supports rural enterprises with business
knowledge and startup financing.
○ AGEY: Provides affordable rural transport services; 2333
vehicles operational in 26 states.
● Rural Self Employment Training Institute (RSETI) Scheme
○ Provides skill training, credit, and mentorship for rural
youth (18-45 years) to promote entrepreneurship.
○ Since 2009, 50.72 lakh candidates trained; 36.23 lakh
 settled as entrepreneurs/apprentices.
● Financing Rural Entrepreneurship
○ NABARD: Promotes Micro Entrepreneurship
Development Programs (MEDPs) and Livelihood &
Enterprise Development Programs (LEDPs).
○ Provides training and financial support to SHGs and
micro-entrepreneurs.
● SARAS Mela: Facilitates direct market access for SHG
products in urban areas, enhancing artisans’ profits.
● Deen Dayal Upadhyaya Grameen Kaushalya Yojana
(DDU-GKY): Skills rural youth for sustainable employment; 16.5
lakh candidates trained, 10.48 lakh placed.

Way Forward ● RSETIs: The extensive presence (591 RSETIs across 577
districts) and tri-partnership model (banks, state governments,
central government) can converge efforts across various
government programs, such as skilling, livelihood diversification,
and farm mechanization.
● SHGs: Potential to scale into larger enterprises with
professional support and management. Example: Mobilization of
tribal women to manage solar lamp factories and retail shops in
Dungarpur, Rajasthan, with support from Prof. Chetan Solanki
(IIT Bombay) and the Ministry of New and Renewable Energy.

Pharmaceuticals

Data ● India's pharmaceutical market is valued at USD 50 billion and is

the world's third-largest by volume. It offers around 60,000
generic brands across 60 therapeutic categories, accounting for
20% of global generic drug exports by volume.
● The domestic turnover of the pharma sector in FY24 is ₹4,17,345
Crores, with exports amounting to ₹2,19,439 Crores and imports
at ₹58,440 Crores.
● India has high rates of quality compliance with 703 US
FDA-approved facilities, 386 European GMP-compliant plants,
and 2,418 WHO-GMP-approved plants.
● The pharmaceutical industry in India is expected to reach USD
130 billion by 2030.

Challenges of the ● Import Dependency: India heavily relies on imports for many
Pharma Sector in antibiotic Active Pharmaceutical Ingredients (APIs), especially
India those produced through fermentation. This dependency stems
from the lack of cost-effective options for domestic API
manufacturing compared to imports.
● Cost-Competitiveness: The domestic production of APIs is not
as cost-competitive as imported alternatives, making it
 challenging for local manufacturers to compete in the market.
● Infrastructure and R&D Limitations: Although there have been
significant improvements in domestic infrastructure and R&D
capabilities, the sector still faces challenges in scaling up these
advancements to meet global standards.
● Need for Biopharmaceutical Manufacturing Capabilities:
While export growth in the past 5-6 decades has been driven by
consistent innovation, sustaining this growth will require India to
enhance its capabilities in biopharmaceutical manufacturing.
● Skill Advancement and Innovation: The future growth of the
pharma industry, expected to reach USD 130 billion by 2030, will
depend heavily on advancing skills, fostering innovation, and
integrating new technologies within the sector.
● Establishing a Robust Supply Chain: The pharma sector
needs to develop a strong and resilient supply chain to support
the next phase of growth, ensuring the efficient and reliable
delivery of pharmaceutical products domestically and globally.

Schemes ● Production-Linked Incentive (PLI) Scheme for Bulk Drugs: To

boost domestic manufacturing of Key Starting Materials (KSMs),
Drug Intermediates (DIs), and Active Pharmaceutical Ingredients
(APIs) by attracting large investments and reducing import
dependence on critical APIs.
● Pradhan Mantri Bhartiya Janaushadhi Pariyojana (PMBJP):
To provide quality generic medicines at affordable prices to the
masses, especially the poor and underprivileged. Over 12,500
Pradhan Mantri Bhartiya Janaushadhi Kendras (PMBJKs) have
been established across all districts in India to distribute generic
medicines.
● Scheme for the Promotion of Bulk Drug Parks: To establish
three bulk drug parks with world-class Common Infrastructure
Facilities (CIF) to lower the manufacturing costs of bulk drugs
and improve India's competitiveness and drug security.

Way Forward The report "Indian Pharmaceutical Sectorial System of Innovation"

highlights several key recommendations to enhance the sector's
innovation capacity:
● Promoting Joint Research: Encouraging collaborative research
among industry players to foster strategic partnerships rather
than competition within the sector.
● Enhancing Industry-Academic Collaboration: Strengthening
interactions between the industry and academic institutions to
support applied research, with a focus on increased participation
from public knowledge-based institutions.
● Facilitating Knowledge Exchange: Reducing communication
barriers among knowledge-based institutions to promote better
knowledge exchange and collaboration in research, particularly
by involving Tier 2 and Tier 3 institutions.
● Supporting Human Capital Development: Encouraging
 secondments and placements between academic institutions and
industry to better align human capital development with industry
needs.
● Improving Communication Channels: Strengthening
communication and collaboration among knowledge-based
institutions and intermediaries, especially industry associations,
to foster a more cohesive innovation ecosystem.
● Expanding Funding Opportunities: Increasing access to
funding from venture capital and angel investors to support the
entire innovation process, from ideation to market.
● Promoting a Coordinated Government Approach: Enhancing
knowledge sharing among government bodies to adopt an 'all of
government approach' to innovation, leading to more coordinated
joint research efforts in strategic areas.

Electric Mobility

Facts ● The Electric Mobility Promotion Scheme 2024 (EMPS 2024) was
introduced with an outlay of ₹500 Crore for a period of 4 months
till July 2024. This scheme aims to accelerate the adoption of e2
wheelers and e3 wheelers, including registered e-rickshaws,
e-carts, and L5.

Challenges ● The consistency of the E-Mobility policy with the required and
optimal energy mix between traditional and renewable sources.
● Ensuring grid stability for E-Mobility to become pervasive.
● Developing or acquiring storage technology at affordable costs
for the share of renewable energy in power generation to rise.
● Challenges posed by dependence on China for critical minerals,
which are crucial raw materials needed for E-Mobility and
renewable energy generation.
● Implications of replacing internal combustion engine vehicles with
e-vehicles, particularly on the sale of petrol and diesel and the
tax revenues that such sale generates for Union and State
governments.

Initiatives ● The PLI Scheme for automobile and auto components has a
budgetary outlay of ₹25,938 Crore from FY23 to FY27 to support
the E-mobility sector. It includes a champion OEM incentive
scheme and a component champion incentive scheme.
● The National Programme on Advanced Chemistry Cell (ACC)
Battery Storage was approved in May 2021, with a budgetary
outlay of ₹18,100 Crore, aiming to enhance manufacturing
capabilities of ACCs by setting up Giga scale ACC and battery
manufacturing facilities.
 ● The Scheme to Promote Manufacturing of Electric Passenger
Cars in India (SPMEPCI) was approved in March 2024.

Way Forward ● Consistency with Energy Policy: Ensure the consistency of the
E-Mobility policy with the required and optimal energy mix
between traditional and renewable sources.
● Focus on Domestic Capacity Building: India should focus on
building domestic capacity to reduce dependency on critical
minerals from other countries.
● Financial Resources and International Cooperation:
Availability, affordability, and accessibility of financial resources
are essential for the green transition, and international
cooperation in R&D is necessary to tackle challenges in
renewable energy and storage technologies.
● Strategic Management of Phasing Out Traditional Fuels:
Address the implications of replacing internal combustion engine
vehicles with electric vehicles on fuel sales and government tax
revenues. Additionally, manage the phasing down of coal
concerning bank balance sheets and the freight revenues of the
Indian Railways.

Electronics Manufacturing Sector

Data ● Growth of Electronics Sector: India's electronics manufacturing

sector has grown significantly since 2014, contributing 4% to India's
total GDP in FY22.
● Global Market Share: Accounted for an estimated 3.7% of the global
market share in FY22.
● Domestic Production: Domestic production of electronic items
increased to ₹8.22 lakh Crore in FY23.
● Exports: Exports rose to ₹1.9 lakh Crore in FY23.
● CAGR in Electronics Production: The Compound Annual Growth
Rate (CAGR) in the production of electronics goods from FY18 to FY23
was 16.19%.
● CAGR in Exports: Exports increased by 35.7% from FY18 to FY23.
● Domestic Value Addition (DVA): Significant increase in domestic value
addition, employment, wages, and salaries in the mobile manufacturing
segment since FY17; DVA rose from 8.7% (FY17-FY19) to 22%
(FY20-FY22).

Challenges ● The participation in global value chains (GVC) has been limited by high
service link costs, suggesting the need for a comprehensive policy
approach to lower transaction costs and reduce import tariffs for
intermediate inputs.
● Import dependency on critical inputs like coal, petroleum, steel, and
machinery raises concerns about the domestic cost of production amid
global uncertainties.
Initiatives ● Scheme for Promotion of Manufacturing of Electronic Components
and Semiconductors (SPECS): The SPECS scheme offers a financial
incentive of 25 percent on capital expenditure for electronic goods, with
approved investments of ₹12,638 Crore and committed incentives of
₹1758 Crore as of March 2024.
● Modified Electronics Manufacturing Clusters (EMC 2.0): The EMC
2.0 Scheme extends financial assistance for electronics manufacturing
projects and has attracted ₹40,429 Crore in investment, generating
employment for 5.02 lakh individuals.
● Production Linked Incentive Scheme (PLI) for Large Scale Electronics
Manufacturing
● PLI IT Hardware

Way ● To enhance participation in global value chains, it is critical to reduce

Forward service link costs and transaction costs, potentially through lowering
import tariffs for intermediate inputs.
● The industry should focus on expanding and deepening the
manufacturing ecosystem by encouraging localization of components
and sub-assemblies.
● Emphasizing skilling programs aligned with evolving industry needs,
such as those related to 5G technologies, can support the workforce in
adapting to technological advancements.