CURRENT AFFAIRS PRE-CUM-MAINS

FOR UPSC CSE 2025

DEC 2024 – BOOKLET-1
ECONOMIC GROWTH AND DEVELOPMENT
1. TABLE OF CONTENTS
1. Table of Contents ..................................... 0 11. Inflation and Issues ............................. 11
2. Syllabus ................................................... 1 1) Inflation: Causes and Consequences ... 11
3. PYQs ........................................................ 1 2) Food Inflation and Issues .................... 12
4. Main Topic: Growth Vision for New India 3) India’s Tomato and Onion Conundrum 14
(Already covered in previous booklet) .............. 2 4) Stagflation and Policy Response .......... 15
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5. V-Shaped Recovery .................................. 2 12. Tax – Reforms: GST ............................. 17
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6. Other types of Recession-Recovery Cycle .. 3

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1) PYQs ................................................... 17
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7. 2015 Change in GDP calculation Method.. 4 2) Basics about GST ................................. 17

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8. Potential GDP and Associated Issues ........ 5

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3) 7 years of GST – A Critical Analysis ...... 18

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9. Middle Income Trap ................................. 7

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4) GST Compensation Cess and Associated

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10. Policy Uncertainty and its impact on Issues ......................................................... 20

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Economy.......................................................... 8 13. More Topics in coming classes ............ 22

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 2. SYLLABUS
Indian Economy and issues relating to planning, mobilization of resources, growth, development and
employment

3. PYQS
i. What are the causes of persistent high food inflation in India? Comment on effectiveness of the monetary
policy of the RBI to control this type of inflation. [Mains 2024, 10 marks, 150 words]
ii. Faster economic growth requires increased share of manufacturing sector in GDP, particularly of MSMEs.
Comment on the present policies of the Government in this regard [Mains 2023, 10 marks, 150 words]
iii. Distinguish between 'care economy' and 'monetized economy'. How can care economy by brought into
monetized economy through women empowerment? [Mains 2023, 15 marks, 250 words]
iv. Explain the difference between computing methodology of India's GDP before the year 2015 and after the
year 2015. [Mains 2021, 10 marks, 150 words]
v. Do you agree that Indian economy has recently experienced a V-shaped recovery? Give reasons in support
of your answers [Mains 2021, 15 marks, 250 words]
vi. Define Potential GDP and explain its determinants. What are the factors that have inhibited India from
realizing its potential GDP? [Mains 2020, 10 marks, 150 words]
vii. Do you agree with the view that steady GDP growth and low inflation have left the Indian economy in good
shape? Give reasons and support of your arguments [Mains 2019, 10 marks, 150 words]
viii. How are the principles followed by the NITI aayog different from those followed by the erstwhile Planning
Commission in India? [Mains 2018, 15 marks, 250 words]
ix. Among several factors for India's potential growth, savings rate is most effective one. Do you agree? What
are the other factors available for growth potential? [Mains 2017, 10 marks, 150 words]
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x. Craze for gold in Indians have led to a surge in import of gold in recent years and put pressure on balance
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of payments and external value of rupee. In view of this, examine the merits of Gold Monetization Scheme.
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[12.5 marks, 200 words]

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Note: In the above list, we haven't included questions related to planning, employment and Inclusive
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Growth
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4. MAIN TOPIC: GROWTH VISION FOR NEW INDIA (ALREADY COVERED IN PREVIOUS BOOKLET)

5. V-SHAPED RECOVERY

- A V-shaped recovery refers to an economic cycle of

recession and recovery that resembles the letter 'V' in
charting. It is characterized by a quick and sustained
recovery in measures of economic performance after a
sharp economic decline.

- A V-shaped recession begin with a steep fall, but they hit

their trough and recovery quickly. This type of recession
is considered the best-case scenario.

- Did India achieve a V-shaped recovery post COVID-19?

» Economic Survey of India 2020-21 observed that inspite of unprecedented COVID-19 pandemic
and consequential challenges, the
industrial and infrastructure sector
were on fast paced V-shaped
recovery.
» Data supporting this:
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▫ The first two quarters of FY21
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saw a decline of 23.9% and

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5.7% but it was followed by

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Q3FY21 growth rate of 1.6%,

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Q4FY21 growth rate of 3.4%

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and Q1:FY21 a growth rate of

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21.6%.
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- Reasons:
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» Enhanced capital expenditure by government under Atmanirbhar Bharat Abhiyan, National

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Infrastructure pipeline.
§ For e.g. under AtmaNirbhar Bharat Abhiyan only government of India had announced a
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stimulus package of Rs 29.87 lakh crore.

» PLI Schemes introduced in 10 key sectors (by Jan 2021), under Atmanirbhar Bharat have
initiated the revival of manufacturing sector in the country.
» Resolute push on long pending reform measures such as reforming labor laws, rationalization
corporate tax, steps to promote ease of doing business for MSME sector etc.
» India has also emerged as an attractive destination for FDI; In FY19 India received US$44.37
billion, followed by US$49.98 billion in FY20. But in FY21, only in the first six months (April-Sep),
India was able to receive $US 30.0 billion.
» Vaccination drive led to effective opening up of economy.
» Pent-up demand also led to faster recovery.

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 - Some Concerns
» The recovery was more prominent in organized sector and service sector, but unorganized
sector and sector needing human interaction like hospitality, tourism etc continued to suffer
due to social distancing constraints.
» Therefore, there are suggestions by experts that the recovery is not V-shaped but K-Shaped.

- Conclusion:
» While experts may differ on whether the recovery was V-shaped or K-shaped, but the recovery
after COVID-19 pandemic definitely showed the resilience and inherent strength of India's
economy.

6. OTHER TYPES OF RECESSION-RECOVERY CYCLE

- L-shaped Recovery
An L-shaped recovery is characterized by a slow
rate of recovery, with persistent unemployment
and stagnant economic growth. It occurs following
an economic recession characterized by a more-
or-less steep decline, in the economy, but without
a corresponding steep recovery.

Examples: The Great Depression of the 1930s; The

Lost Decade in Japan (1991-2001); etc. om
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W-Shaped Recovery
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A W-shaped recovery refers to an economic

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cycle of recession and recovery that resembles

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the letter "W" in charting.

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It is characterized by sharp decline in GDP,

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output, employment etc. followed by sharp rise

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back upwards, followed by a sharp decline, and

ending with another sharp rise.
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It is also known as double-dip-recession.

This type of recession-recovery cycle can really

be painful because the brief recovery that
occurs can fool investors into getting back in too
early.

E.g. The US recovery of 1980s

- U-Shaped Recovery:

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 A U-shaped recovery refers to an economic cycle
of recession and recovery that resembles a U-
shape when charted.

It is characterized by sharp decline in GDP,

industrial output, employment etc, without a
clearly defined trough, but instead a period of
stagnation followed by a relatively healthy rise
back to its previous peak. It is similar to V-shaped
recovery, except that the economy spends a
longer time slogging along the bottom of the
recession rather than immediate rebounding.

- K-Shaped Recovery:
» A k-shaped recession is where parts of society experiences more of a V-shaped recession, while
other parts of the society experience a slower more protracted L-Shaped recession. (the shape
of K is denoting a divergence in the recovery path).
» The term arose from the economic recovery post COVID-19 pandemic.
▫ Here, central banks used exceptional monetary policy tools to generate asset bubbles
that protected the wealthier section of the society (i.e. asset owning), from the financial
effects of the pandemic.
▫ This recovery increases inequality, creates a great year for stock market, but a bear
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market for humans.
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7. 2015 CHANGE IN GDP CALCULATION METHOD

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- In 2015, The Ministry of Statistics and Program Implementation (MoSPI), GoI, introduced a new series
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of National Income Estimation (net method of calculating GDP). This was guided by international norms
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and is in sync with the UN System of National Accounts (SNA), 2008.

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- Key Changes Made:

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a. Earlier, GDP was calculated at Factor Cost at constant price, but after 2015, the GDP is being
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calculated at Market Price.

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b. The new method adopted GVA Method of GDP calculation: Under this first GVA at Basic Price
is calculated and from its GDP at market price is calculated.
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§ GVA Basic price = GVAFC + production taxes - production subsidies

§ Note: GVA at Basic Price is also called as GVA Producer's price.
§ GDPMP = GVABP + Product taxes - product subsidies (GDPMP = GVABP + Net Indirect
Taxes)
c. Base Year Change (From 2004-05 to 2011-12) was done in accordance with the recommendation
of National Statistical commission which had advised to revise base year every five years.
d. Shift from Establishment Approach to Enterprise Approach in calculating manufacturing
production.
e. Before 2015, the manufacturing sector performance was assessed using data from IIP and Annual
Survey of Industries, covering over 2 lakh factories.

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 § The enterprise approach (after 2015) is facilitated by MCA21 with Ministry of Corporate
Affairs. This ensures that more comprehensive data on corporate activities is considered
than older method.
§ These changes have increased the coverage of registered sector of manufacturing
f. Incorporation of Findings of NSSO Surveys -> better representation of activities in unorganized
sector
• The details of new NSS Surveys viz. Unincorporated Enterprises Surveys (2010-11) and
Employment & Unemployed Survey, 2011-12 are incorporated in the new series.
g. Steps were also taken to ensure better coverage of agriculture sector and financial sector.

- Significance of using GVA data

» The GVA data is crucial to understand how various sectors of real economy is performing. The
output or domestic product is essentially a measure of GVA combined with net taxes.
» It helps policy makers to make policy interventions, where needed.
» Further, GVA is an integral and necessary parameter in measuring a nation's economic performance
as per global standards.

- Other significance of the changes:

» India's GDP calculation in sync with global practice; increased size of economy; lower fiscal deficit;
more incentives to raise indirect taxes and reduce subsidies.
» Increase in share of manufacturing sector in overall GDP: Trading activities by manufacturing firms
are now included in sector's share. This change along with better data compilation has led to
manufacturing sector increase its share and so for other sectors. om

- Conclusion: Thus, the new method of GDP calculation introduced in 2015 is not only more robust as it
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incorporates broader range of indicators but is also more in sync with global standards and thus ensure
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better international comparison.

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8. POTENTIAL GDP AND ASSOCIATED ISSUES

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- It is the maximum sustainable level of GDP of an economy that is possible when all its resources - labor,
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capital, and technology - are fully and efficiently employed, without causing inflationary pressure.
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- It represents full employment GDP and gauges the economy's productive capability, especially at a
constant inflation rate.
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» Sustainability is the key concept here. Every economy has certain natural limits, determined by its
available labor force, technology, natural resources, and other limitations.

» When GDP falls short of its natural limit, it means the country is failing to live upto its economic
potential. When GDP exceeds that natural limit, inflation is likely to follow. Therefore, Potential GDP
is also sometimes referred to as Natural GDP.

- Determinations of Potential GDP:

» Labour Force: The size of the labor force, its education, skills etc also plays a crucial role in
determining the maximum possible sustainable output and hence potential GDP.

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 » Capital stock - Quantity of capital in the from of machinery, equipment and infrastructure;
quality of capital and investment (i.e. creation of new capital) is another key determinant of
potential GDP.
» Technological Advancements:
§ Investment in R&D fosters innovation and advancements and contributes to increase in
potential GDP
§ Technological progress also leads to improved productivity and output.
» Natural Resources: For e.g. a country with large deposits of natural resources like fossil fuels,
mineral etc. has higher potential GDP when compared to a country poor in resources.
» Governance and Institutional structure also determines the potential GDP. It will ensure ease
of doing business and lead to improved investments.

- What does the potential GDP reveal about the health of the economy?
» If real GDP is less than potential GDP (i.e. if output gap is negative), it means demand for goods
and services is weak. It's a sign that economy may not be at full employment.
§ Here, central banks may consider lowering of interest rates to stimulate income.
» If the real GDP exceeds potential GDP (i.e. if the output gap is positive), it means that the
economy is producing above its sustainable limits, and the aggregate demand is outstripping
aggregate supply. In this case, inflation and price increase are likely to follow.
§ Here, the central banks may consider increasing the interest rates to control inflation.
» Thus, potential GDP provides policy makers an important benchmark when making decisions
about monetary policy.
» The, Central Bank (fed in USA) wants to keep real GDP aligned with potential GDP.
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• Source: Potential GDP (wallstreetmojo.com)

- Challenges and Way Forward (Already Covered)

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9. MIDDLE INCOME TRAP

- Example Question
» Why do countries fall into middle income trap? Suggest some measures to help India avoid this trap
[15 marks, 250 words]

- What is Middle Income trap?

§ Middle income trap is a situation for Middle Income Countries where they are not able to move
up to the Higher income status due to the operation of several adverse factors.
§ In an early stage of development, simple mobilization of Labour and capital suffice to
escape from abject poverty. But after reaching middle income stage, countries seem to
get stuck there as they lost their competitive edge in terms of low labor cost and are
unable to compete with advanced economies.
§ Many developing countries like Turkey, Brazil, Argentina, South Africa, Russia etc. have
remained trapped in the middle-income category for long.
§ Japan, South Korea, Taiwan, Israel, Latvia, Poland etc. are very few countries which
have escaped the middle income trap. China is most likely to become an high income
country if it doesn't stumble.
§ India is also a middle-income country with GNI per capita of around $2,000 presently and
with stagnant growth, some economists have warned that India risks falling into a middle
income trap. "No country which has been in a middle income trap has been able to come
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§ The World Bank defines a middle-income country as one with Gross National Income (GNI) per
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capita of $1,000 - $12,000 in 2011 prices. It is further divided into lower middle income countries
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(around $4000) and Upper Middle Income Countries ($4,00 to $12000).

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- Why do countries fall in middle income trap? / Why is India at Risk?

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» Non-changing growth strategies:

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§ If a country is not able to make a timely transition from resource-driven growth, with
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low-cost labor and capital, to productivity driven growth, it might find itself trapped in
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the middle-income zones.

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» Further, India's declining investment rate, high level of capital concentration in the corporate
sector, and lack of good infrastructure access are deeply concerning indicator.
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» Lack of institutional, human and technological capital to carve out niches higher up the value-
added chain.
» Increased inequalities and stagnation of Middle-class population
§ Middle class population is responsible for most of the consumption, there stagnation
leads to stagnation in growth.
» Backlash against globalization; Wars; Protectionism
§ Globalization had helped Japan, South Korea etc. to escape the trap. But due to recent
focus on protectionism, India may not be able to get the same benefits.
» Global Warming, Climate Change and other environmental factors may also lead to subdued
developmental rate in India.
§ Climate change has already started impacting Agri-production.

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- Way Forward:
- Transforming from diversification to specialization in production
» Specialization helped various Asian countries to reap economies of scale and offset the cost
disadvantages associated with higher wages.
» Focus on new emerging technologies and innovation conducive policies
» Developing good social-safety net and skill training programs.
- Ease of Doing Business has to be the focus
» Land and Labor Reforms by bringing in more flexibility into it.
» Tax Reforms - Simplify direct taxation (already a lot of steps have been taken in 2019-20)
- Reform Banking Sector
» Reform state banks, remove NPAs into a bad bank and let the IBC process take its course
there
- Invest more in human capital
» Skilling and reskilling to make Indian workforce relevant for future work is the need of the
hour.
- Strengthening institutional capacity of states:
» Countries such as South Korea, Taiwan etc. which were poor in 1945 and are now prosperous
saw growth coming as a result of improvement in state capability.
§ In the middle-income market economy, a different level of institutional quality is
required. When both firms and government mature, there is a need of creation of
complex contracts, contract enforcement, economic regulation, and institutions that
intermediate and channel the conflict between social groups. If the institutional
capacity is weak, the growth stalls.
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» Decentralized governance/solution to common problems

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- Social Security to people who haven't benefitted from India's growth.

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10. POLICY UNCERTAINTY AND ITS IMPACT ON ECONOMY

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- Example Question:
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a. Economic Policy Uncertainty (EPU) deters both domestic and foreign investment. In this light
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suggest some measures to reduce Economic Policy Uncertainty in India. [10 marks, 150 words]
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- How is economic Policy Certainty Achieved?

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o A nation state that ensures predictability of policy action, provides forward guidance on policy
action, maintains broad consistency in actual policy with the forward guidance, reduce
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ambiguity and arbitrariness in policy implementation creates Economic Policy Certainty.

- Advantages of Economic Policy Certainty:

» Investors flock to these jurisdictions to invest in these environments.

- How is Economic Policy Uncertainty Measured?

» A globally recognized attempt at quantifying economic policy uncertainty Economic Policy
Uncertainty (EPU) Index.
• The index quantifies newspaper coverage of policy related economic uncertainty. It has
been made possible by advancement of data analytics in general and, text analytics in
particular.

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- Impact of Uncertainty on Investment:
» Since investment is forward looking, future expectation plays an important role in decision to
invest. Increase uncertainty decreases the chances of investment.
» Since Fixed Investment is irreversible, uncertainty exacerbates risk aversion, increases the
premium demanded for assuming risk, and eventually dampens investment.

- Economic Policy Uncertainty in India:

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When measured using EPU index, Economic Policy Uncertainty was the highest in 2011-12
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coinciding with the years of policy paralysis.

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- It has reduced significantly over the last decade and has secularly decline from July 2012 onwards,
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though with intermittent episodes of elevated uncertainty in between. This include the taper
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tantrum in 2013.
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- Thus it is clear the EPU captures the economic policy uncertainty as expected.
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ESI's analysis also shows that EPU correlates strongly with macroeconomic stability, volatility in
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exchange rate, stock market and inflation, and other macro-economic variables. This also shows
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aptness of economic policy uncertainty index to be used as a yardstick for measuring impact of
uncertainty with investment.
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- Conclusion and Policy Recommendation

» While economic uncertainty stemming from uncontrollable factors (like Monsoon), Pandemic
(COVID-19) remain beyond the control of policy makers, they can control economic policy
uncertainty.
» Reducing EPU is critical because it deters both domestic and foreign investment.
» Key steps to reduce EPU
▫ Promote Policy Certainty: top level policy makers must ensure that their policy actions
are predictable, provide forward guidance and on the stance of policy, maintain broad
consistency in actual policy with the forward guidance and reduce
ambiguity/arbitrariness in policy implementation.

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 § To ensure predictability, the horizon for which policy will not change should be
specified. While this will lead to some constraint in policy making, but it would
go a long way in ensuring policy certainty.
▫ EPU index must become an important index that policymakers at the highest level
monitor on a quarterly basis.
§ Government should also encourage creation of EPU sub-indices in areas like
taxation, monetary policy, banking policy etc.
▫ Quality Assurance of process in policy making, which reflect the adage of "Document
what you do, but more critically do what you document" must be implemented by
government.
§ Quality assurance process with significantly reduce economic policy uncertainty.

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 11. INFLATION AND ISSUES

1) INFLATION: CAUSES AND CONSEQUENCES

- Example Questions:
» Discuss the main reasons of high inflation in India in recent past. Suggest key measures to
stabilize inflation in India. [15 marks, 250 words]

- Introduction:
» Inflation refers to rate of increase in the average price of goods and services in an economy. The
recent past have seen an increase in inflation in both advanced and emerging economies
including India.

- Reasons for Rise in Inflation:

» Demand Side Factors:
▫ Expansionary Fiscal Policy has led to rise in aggregate expenditure. E.g. Atmanirbhar
Bharat, PMGKAY etc.
▫ Expansionary Monetary Policy by RBI in 2020 and 2021 ensured easy credit flow in the
market. Though, this has changed in 2022, with RBI tightening the policy rates.
▫ Pent up Demand during COVID-19 has also fueled consumer spending

» Supply Side Factors:

▫ High logistical cost in India, especially cost of storage and grading, due to infrastructural
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constraints.
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▫ Disruption in global supply chain due to COVID-19 lockdowns in countries like China,
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war in Europe and rising price of freight cost.

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▫ Agri-commodities like fruits, vegetables and edible oils have pushed the food side
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inflation.
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§ India's huge dependency on vegetable oil import and disruptions in edible oil
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availability due to temporary disruptions in Indonesia.

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▫ Shortage of Industrial Raw materials like pharma-ingredients, semi-conductors, rare

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earth metals etc.

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▫ Increasing Crude Oil Prices has not only increased the price of transportation but it also
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has cascading effect on other sectors. The crude oil prices increased due to:
§ Disruptions due to Russia-Ukraine war and sanctions imposed on Russia
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§ Supply Cut by OPEC+ Countries

§ Rise in demands due to revival of economy

- While both, demand side and supply side factors are responsible for the rise of inflation in India, the
supply side factors are more prominent.

▫ Negative Impact of Inflation:

o Increase in prices of basic goods and services impact the vulnerable and poor section the most
and creates further inequality.
o Negatively hampers Investment: Withdrawal of FPIs from the country.

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 ▫ For e.g. in 2022 when inflation increased all over the world, India saw record withdrawal
of FPIs.
o Impacts Economic Growth and Employment: With inflation, RBI would increase policy rates,
leading to borrowing becoming more expensive.
o Inflation causes depreciation of rupee which further contributes to Current Account Deficits.

- Key steps that can be taken to fight inflation:

» Prudent Fiscal Policy: Government needs to direct more expenditure towards capital creation
and reduce the wasteful expenditure.
» RBI's monetary policy should be tightened whenever there is a inflation.
» Logistical Reforms to reduce logistic cost of Indian industries and businesses. Effective
implementation of National Logistic Policy, 2023.
• Focus on Transportation and storage infrastructure (especially in rural areas) for
perishable commodities.
» Increasing India's participation in global supply chain with diversified sources to prevent
sudden shortages.
» Rational and Stable Trade Policy:
• Knee jerk reaction to price rise in the form of ban on exports of wheat, and imposed
restrictions on sugar exports etc. may help consumers in short run, but in long run it
creates problems as producers are discouraged.
» Long term consistent import policy would be crucial.
• A knee jerk reaction to price rise in the form of import duty/tariff etc. may help
consumers in short term, but in long term it sends wrong signals to domestic producers
and create and environment of uncertainty.
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» Initiating and Implementing Structural Reforms like labor law reforms, swamitva, land use
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clarity, ease of doing business etc. This will reduce cost of production and counter supply side
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inflation.
» Reduce dependence on imported fossil fuels. This can be done by increased focus on renewable
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energy in the country.

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» Encouraging MSME to scale up to reduce cost of production.

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» Agriculture Reform (Already discussed)

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2) FOOD INFLATION AND ISSUES

Introduction: Definition:
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» Food inflation refers to average increase in prices of food items wrt to the prices last year.

- Introduction: Data:
» As per a study by the Hindu, the average cost of home-cooked vegetarian thali in Maharashtra
increased by 71% in the last five years, whereas average monthly salary earned by a person
through regular employment in the state increased by only 37%. This shows that the food
inflation in India generally remains high.

- Main Causes:

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 » Increasing cost of agricultural input: Seeds, fertilizers, machinery, labor cost, fuel prices etc are
all becoming expensive.
» Consistently Rising MSP: Union cabinet has announced a 2.4% to 7% hike in the MSP for the
Rabi crop 2024.
• For e.g. a HSBC research report found that MSP hikes may nudge up inflation by 0.2%.
» Imported Inflation: For e.g. the surge in edible oil inflation in Oct24 was driven by steep 27%
rise in global prices due to supply chain disruption in Southeast Asia.
» Poor Supply Chain Management: Poor transportation, storage and processing infrastructure
leads to a lot of wastage of perishable food items causing supply chain issues.
» Seasonality: For e.g. price of Tomato rises almost every year in July because of less harvesting
in the season.
» Climate Change and associated issues:
• It is causing variability in climatic conditions for e.g. excess pre-harvest rainfall, uneven
monsoon etc.
• Further, there is strong co-relation between temperature rise and inflation. As earth
heats up, crop yield falls. Indeed, scientists and researchers project that a 2.5 - 4.9 degree
Celsius increase in temperature across the country would lead to a decrease in wheat
yields of 41-52%, and a fall in rice yield of 32-40%.
• For e.g. heatwave of March 2022 led to drop in sugarcane yield by 30%.

- Impact:
» Poverty and Inequality: Vulnerable section suffers the most as a large part of their income is
spent on food items.
» Increases overall inflation of the economy. Food constitute around 45% weight of CPI-C.
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• For e.g. a 10.9% spike in food prices in Oct24 lifted India's retail inflation to a 14-month
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high of 6.2%.
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» Hampers economic growth: For e.g. CPI-C breaching 6% mark in October, reduces the scope of
repo-rate cut.
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- Way Forward:
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» Measures for bringing stability in Food prices:

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▫ Ensuring stability in production: Reforming agriculture sector with improved irrigation

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facilities, ensuring suitable inputs, in the from of HYV of seeds, fertilizers etc; market
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reform to assure right prices for farmers, ensuring agri-credit for infra improvement etc.
▫ Adapting agriculture to climate change will be crucial: Steps like watershed
management, drought resistant variety of crops etc will be very important here.
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▫ Steps for promotion of pulse and oilseed production to reduce import dependency.
▫ Improving infrastructure associated with transport, cold storage etc.
▫ Food processing has immense potential in controlling food inflation by storing processed
food during high production time.
▫ Strengthening strategic food reserves: Government should increase the buffer stock
considering increasing population and their increasing food demand.
» ESI 2023-24 has suggested that price of food be taken out of the inflation target that RBI is
mandated with. I.e. RBI should target core inflation (instead of headline inflation, which is the
practice right now).

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3) INDIA’S TOMATO AND ONION CONUNDRUM

- Practice Questions:
» Discuss the key reasons for regular price shocks in Tomato and Onion in India

- Introduction:
» Onion and Tomato are two of the three most consumed vegetables in India. But the prices of
onion and tomatoes fluctuate regularly. Sometimes, we see instances of farmers dumping truck
load of tomatoes due to low prices and the very next year we see tomato prices going sky-high.

- The reasons for price shocks of Onion and Tomato can be divided under three heads:
i. Seasonality: It refers to varying pattern of production of these crops during different months of
a year.
• 70% of tomatoes and 70% of onions are grown in Rabi season (this feeds people from
March where prices will be low). But by July-Aug there is an upward trend in prices.
ii. Irregular Shocks: These shocks originate from:
• Uncertain weather conditions and Unpredictable weather events.
• For e.g. in 2023, despite ample stock of onion in the country, a high proportion
of bad quality onions due to a prolonged period of excess summer heat had made
good quality onions expensive.
• Disease/pests.
iii. Poor Infrastructure -> lots of wastage
• Lack of proper cold storage and transportation facilities lead to a large percentage of
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perishable food items getting wasted.
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Some steps which have been taken:

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i. Mission on Integrated Development of Horticulture envisages holistic development of

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horticulture and provides assistance of 50% of total cost of Rs 1.75 lakh per unit for low cost
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onion storage structure having a capacity of 25 tonnes each.

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ii. Scheme for Agriculture Marketing and Infrastructure for rural godowns: It enables small
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farmers to enhance their holding capacity to sell their produce at remunerative prices and avoid
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distress sale.
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iii. Operation Greens - Initially it was focused on the integrated development of Tomato, Onion
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and Potato (TOP) value chain. It provided 50% subsidy on transportation and storage. Later it
has been extended to other vegetables and fruits as well.
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iv. Kisan Rail and Krishi Udan are also focused on speedy movements of perishables.
v. Immediate/Temporary steps:
• In Aug 2023, GoI imposed a 40% duty on Onion exports

- Seasonality can be dealt with policy actions:

» Incentivize production during lean season
» Investment in better storage and processing facilities.
» Better supply chain management and cutting of wastage.

- Other steps that can be taken:

» Promote Food Processing Industries

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4) STAGFLATION AND POLICY RESPONSE

- Introduction:
» Situation when inflation runs high and economic growth either stagnates or shrinks is called
stagflation. The slowdown in economic activities lead to businesses to shed jobs and the
resultant situation is termed as 'stagflation'.
» This is opposite to business cycle explanation of inflation which suggested that high inflation
should be accompanied by high GDP growth rate.

- Causes of Stagflation:
» It takes place when there is a sudden supply shock (i.e. increase in the input prices) in the
economy.
§ A classic example of stagflation is the period of 'oil shock' of the early 1970s when an
embargo led by oil producer carte OPEC caused the price of crude to almost quadruple
in a period of six months. This led to both inflation and recession.

- Impacts:
» It reduces income, increases unemployment and reduces the standard of living. It makes
recovery very difficult.

- How stagflation should be tackled?

» The first step in stagflation crisis should be focused on increasing demand through
expansionary policies in short run. Decline in economic growth has to be controlled.
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» Then, we have to focus on Structural changes to deal with the supply shock.
▫ Efforts had to be taken towards:
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i. Improving Infrastructure
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ii. Enhancing labour productivity

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iii. Efficient Resource Utilization

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iv. Diversify input sources and replace the expensive sources with inexpensive once.
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▫ These steps will increase supply because of reduction in cost of production.

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- Therefore, we can say that supply side inflation can be controlled by a mix of cyclical and structural
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policies.
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- What had led to raising of concerns regarding stagflation during FY21 and FY22?
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• COVID-19 lock down led to economic slowdown. Later, when several initiatives were launched
to fight this lockdown, it led to substantial increase in liquidity fueling inflation.
• Then, the ongoing War in Europe has also led to 'Supply shock' in commodities ranging from oil
and gas to foodgrains, edible oils and fertilizers.

- Is India vulnerable to stagflation?

» RBI has said that India's economy is better placed than any other country to avoid the risk of
potential stagflation.
▫ While, there are problems globally in both developed and developing countries, India's
economy, however, is better placed to skirt the risks of a potential stagflation given that

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 most constituents of GDP has surpassed pre-pandemic levels and domestic economic
activity was gaining strength.

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 12. TAX – REFORMS: GST

1) PYQS

1. Explain the rationale behind the Goods and Services Tax (Compensation to States) Act of 2017. How has
COVID-19 impacted the GST compensation fund and created new federal tensions? [Mains 2020, 15 marks,
250 words]

2. Enumerate the indirect taxes which have been subsumed in the Goods and Services Tax (GST) in India. Also,
comment on the revenue implications of the GST introduced in India since July 2017 [Mains 2019, 15 marks,
250 words]

3. Discussion the rationale for introducing Good and services tax in India. Bring out critically the reasons for
delay in roll out for its regime [Mains 2013, 10 marks, 150 words]

2) BASICS ABOUT GST

- Introduction
» The GST is the most important indirect tax reform in recent years and it carried VAT to its logical
conclusion. It was passed by Parliament in Aug 2016 through the 101st Constitutional
Amendment Act and was rolled out from 1st July 2017.

- Key Features:
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» It has subsumed several indirect taxes at central and state level and acts as one indirect tax for
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the whole nation on the supply of goods and services.

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▫ Central taxes that GST has replaced

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» Excise Duties: Central Excise Duty (except few fossil fuels and tobacco), Duties of
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Excise (medicinal and toilet preparation) and Additional duties of excise (goods
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of special importance)
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» Custom Duties: Additional duties of custom (commonly known as

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Countervailing duty) and Special additional duty of custom (SAD)

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» Service Tax
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» Cesses and surcharges in so far as they relate to supply of goods and services.
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▫ State Taxes that GST has subsumed

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» State VAT (except few fossil fuels and tobacco), Central Sales Tax, Purchase Tax,
Luxury Tax, Entry tax (all forms), Entertainment Tax (other than those levied by
local bodies), Tax on advertisement, Tax on lotteries, betting and gambling, State
Cesses and surcharges.
» Avoids Cascading of taxes through input tax credit (ITC) mechanism.

» It is applicable on supply of goods and services instead of earlier concept of tax on the
manufacture or sale of goods or on provision of services. It is a destination-based tax
(Consumption based tax). Earlier indirect taxes were origin based.
» GST is a dual tax and centre and states are simultaneously levying it on a common base.
» An integrated GST (IGST) is levied on inter-state supply of goods and services.

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 » Imports of goods or services are deemed as supply of goods or services or both, in the course
of inter-state trade or commerce and thus attract IGST.
» Exports are zero-rated.
▫ The GST paid in the entire value chain and the IGST paid at the border is refunded/credited
back to the suppliers. So, effectively there is not tax on exports and hence we can say that
exports are "zero rated" supplies.
▫ Supplies to SEZs are also zero rated.

» GST Council is a federal Constitutional authority created to give recommendations on the rates
of taxes on different goods and services. It is chaired by Union Finance Minister.

» Some exceptions:
▫ GST is applicable on all goods and services except alcohol for human consumption.
§ This is the only item mentioned as an exception, all other sectors/goods will be
included under GST.
▫ GST on petroleum products would be applicable from a date to be recommended by GST
Council.
▫ Tobacco and Tobacco products are subjected to GST. In Addition, the centre would
continue to levy central excise duty.
▫ Electricity: As per the notification dated 28th June 2017 - 'Transmission or distribution
of electricity by an electricity transmission or distribution utility' are taxable under GST@
'NIL'.
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- Advantages of GST
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▫ For Business and Industry-> Easy compliance (online filing, single tax, less chance of
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harassment); Uniform tax rate (common national market, easy expansion); Removal of
cascading (reduction of total tax payment); Increase competitiveness; gain for manufacturers
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and exporters.
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▫ Advantages of Government (Center and State) -> Easy administration (Single Tax, end to end
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IT system); Better control over leakage (robust IT infra, simple tax structure -> easy compliance);
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Improved tax base; A more transparent basis for apply WTO's National Treatment Principle;
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Higher revenue efficiency (less cost of administration); Spur economic growth; Reduced
corruption; Promote cooperative federalism (In GST system center and states work together
for the nation's benefit).
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▫ For Consumers/citizens -> Cheaper goods and services; Higher revenue efficiency-More money
with government -> More social initiatives; increased resource for resource consuming states
(as this is a destination-based tax).

3) 7 YEARS OF GST – A CRITICAL ANALYSIS

- Intro: Define
- Intro: Given context – GST completing 7 years in July 2024
- Positives:

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 ▫ Tax base and tax buoyancy has increased:
§ Average monthly GST collections has increased to 1.68 lakh crore in 2023-24. [Total: 20.18
lakh crores]
§ Number of GST taxpayers have increased from 70 lakh in FY18 to around 1.4 crores in FY24.
§ Small businesses and informal sectors initially faced some issues, but many of them jumped
to the tax net to take advantage of ITC.
§ GSTN, as a common technology platform has simplified tax compliance. It provides a one stop
solution where key business process registration, payment of duties and filing of returns are
done online in a transparent manner.
§ Action taken against tax evaders, including steps being taken by tax authorities, has resulted
in better compliance and helped push the growth in GST collection.
§ Tax buoyancy has enhanced for both state governments and Union.

▫ Facilitated free movement of goods and services and Increased efficiency of logistic supply chain:
§ As per ESI 2023-24, GST has reduced logistics cost significantly with a 30% reduction in travel
time.
§ Earlier, check posts served as bottlenecks that not only involved a lot of waiting time but were
also breeding spot for corruption - as tax varied from state to state, city to city and even local
bodies.

▫ Reduced compliance burden for businesses

▫ Reduced Tax Burden on common citizen: Overall tax on many essential use items have come
down. Further, with input tax credit the cascading has been reduced.
§ For e.g. reduction in food inflation is one of the key features of GST regime.
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▫ Push for Cooperative federalism: GST Council has played a crucial role in forging a national
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consensus on key issues related to tax regime - rates, exemptions, business, processes, and
movement of ITC.
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▫ System has evolved to simplify tax compliance for MSME sector: For e.g., threshold exemption
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limit was increased form 20 lakh to 40 lakh for goods and Quarterly Returns and Monthly Payments
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(QRMP) system was introduced.

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Tax Evasion has reduced:

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§ E-Invoicing has become an integral part of doing business in India.

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§ The GST number that can track every supply chain transaction has helped to address
fraudulent claim.
§ Coordination between CBIC and CBDT has increased to ensure easy compliance.
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- Negatives/Limitations
▫ Federal Issues:
§ Fiscal Autonomy reduces for states and ULBs - states now have limited scope to raise their
own revenue. ULBs are also much weaker and more dependent on state grants.
§ Advanced Economies like USA have also not moved onto GST path yet: It is mostly due to
their federal structure and federal autonomy.
§ It harms the producer state and reward the consumer state in terms of revenues.
§ States like TN which have invested heavily in their manufacturing ecosystem are now facing
revenue challenges. GST compensation period has also ended. After the end of GST

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 compensation, fiscal strain is expected in state budget as the median growth rate of
subsumed tax in many states are much lower than 14%.
▫ GST Council decides the increase or decrease of tax rates . Earlier, these powers were only with
Parliament/state legislatures.

▫ Criticism of keeping some items out of GST Net.

§ This goes against the principle of 'One nation one tax'. It also allows continuance of cascading.
§ Further, sectors like airline industry is not able to get credit for taxes paid of jet fuel.
§ Major black money generating sector such as real estate are out of the GST regime
▫ Multiple Rates and Cess -> not a simple tax
▫ Large businesses/units are reluctant to purchase from MSME sector as they don't get ITC.
▫ Rate inversion is an issue which hampers ITC benefits for some players.
▫ Tax Evasion is emerging as a major issue.
§ For e.g. in FY24, Tax evasion of Rs 2.01 lakh crore was detected, nearly double of 1.01 lakh
crore detected in FY23.

- Way Forward:
▫ GST structure needs to be further simplified and rationalized:
§ This was recommended both by 15th Finance Commission and the Revenue Neutral Rate
Report.
▫ New structure should have lesser number of tax slabs (preferably 2, but at max 3).
▫ National Institute of Public Finance and Policy has also recommended a three rate
framework of 8%, 15% and 30%.
▫ Petroleum products should be brought under GST regime. This should be followed by inclusion of
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real estate and electricity sector.

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§ To compensate any immediate loss to states, the GST Cess can be used to compensate these
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states.
▫ Elimination of rate inversion should be prioritized
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▫ Differentiate between serious and non-serious offences

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▫ To increase the attractiveness of MSME sector by large enterprises, amend the law to provide
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that all units buying from unregistered GST suppliers would have to pay duty on a reverse charge
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basis.
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▫ Finally, GST Council's working needs tweaking.

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§ During Vajpayee regime, Yashwant Sinha established a culture of consensual decision

making on indirect taxes. He did this by requiring the Empowered Committee of State
Finance Ministers to be headed by a finance minister from an opposition-run-state
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government, such as Asim Das Gupta from WB and Sushil Modi from Bihar. This spirit can
be translated in GST Council's functioning as well.
- Conclusion: The above changes in the GST regime can ensure that GST becomes the so called 'Good and
simple tax'.

4) GST COMPENSATION CESS AND ASSOCIATED ISSUES

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- Practice Questions: Describe the system of GST (Compensation to States) Act 2017. Why is the levy of
GST compensation cess being continued till 2026. [10 marks, 150 words]

- Need: To compensate states which would be losing tax revenues due to introduction of GST system.

- GST Compensation to States Act, 2017

» As per section 7 of the GST (Compensation to States) Act 2017, loss of revenue to the state on
account of implementation of GST should be payable during the transition period of five years.
» States' tax revenue of FY16 was considered as the base year and 14% growth every year was
assumed to measure the compensation to each state.
» Generation of this extra revenue was done through GST Compensation Cess. It is levied on
luxury and sin goods.
§ SUV Vehicles (more than 4 meters) are charged 50% of tax, of which GST rate is 28% and
the compensation cess is 22%.
§ Aerated drinks, Pan Masala, tobacco products are also covered under this cess.
§ The collected compensation cess flows to the Consolidated Fund of India and then
transferred to the Public Account of India, where a GST Compensation Cess Fund has
been created.

- End of GST compensation regime but continuation of Compensation Cess till March 2026:
» In 2022, GST council decided to extend the time for levy of GST compensation cess by nearly 4
years till 31st March 2026. This has been done to repay the loans taken in the last two fiscal
years to make up for the shortfall in their revenue collection.
» Note: In order to meet the resource gap of states due to short release of compensation, the
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Centre has borrowed and released Rs 1.1 lakh crore in 2020-21 and Rs 1.59 lakh crore in 2021-
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Several states were seeking an extension of the GST Compensation to states (Covid-19 pandemic;
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Capex needs; GSTN took its time to stabilize)

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- Opposing Extension of GST compensation to states:

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§ If compensation regime is continued for long, it will lead to laxity in states' bureaucracy. It will
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- In Sep 2024, at 54th meeting of the GST Council, it has created a 10 member GoM, chaired by Minister
for Finance Pankaj Chaudhary, to decide on the taxation of luxury, sin, demerit goods once the
compensation cess ends in March 2026. The GoM will submit its report by 31st Dec 2024
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» Why discontinuation of compensation cess may not be possible?

§ Discontinuation may reduce the effective tax rates on demerit, sin and luxury goods
(such as cigarettes, SUVs, pan masala, and tobacco items).
» But, its continuation as cess will be disadvantageous to states as states don't get a share in
cess. Further, increasing GST rates won't be suitable as it will further increase the number of
GST slabs.
» Possible Options:
§ Instituting a Green Cess - the proceeds of this can be used to finance green infra projects
and the energy transition requirements given that the government's contribution and
intervention will be critical for transition in key sectors in order to achieve India's climate

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 goals by 2030. The Council may also need to create a vertical and horizontal devolution
formula.

13. MORE TOPICS IN COMING CLASSES

- Increasing Investment
- Issues related to External Sector – Forex Reserves, FPI, FDI, Export and issues, de-dollarization

- Issues of Banking Sector

- Planning and associated issues

- Employment, Skill Development and Entrepreneurship

- Inclusive Growth

- Government Budgeting

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