Part 3 — Inflation | Public Finance | External Sector

Chapter 1: Inflation

Chapter	Current Affairs	Static Topic
Inflation	New CPI Series (2024)	Calculation of Inflation Indices — WPI, CPI-AL, CPI-RL, CPI-IW
	Trends in WPI, CPI and Food Inflation	Momentum Effect and Base Effect
	Proposal to introduce PPI	PPI vs WPI
	Terms of Trade (Eco Survey)	GDP Deflator and Sectoral Deflator
	Deflation in China — Involution	—
	Increase in Inflation in Japan	—

1.1 Inflation — Static Concepts

Term	Definition
Inflation	Sustained increase in general price level. Aggregate Demand > Aggregate Supply.
Deflation	Sustained decrease in general price level
Disinflation	Inflation rate falling but still positive; prices rising, just slower
Reflation	Deliberate policy action to reverse deflation by increasing money supply or govt spending

Inflation Types:

Demand-pull — "Too much money chasing too few goods"
Cost-push — Rising input costs (oil, wages) push prices from supply side
Skewflation — Inflation concentrated in few specific commodities
Shrinkflation — Companies reduce product size instead of raising price
Imported inflation — Caused by rise in prices of imported goods (crude, commodities)
Stagflation — High inflation + stagnant growth + high unemployment (exception to Phillips Curve)

Combating Inflation: Monetary: ↑ repo, CRR, SLR; sell G-Sec. Fiscal: ↓ expenditure, ↑ taxes, ↓ subsidies.

Impact: Borrowers benefit (real value of debt falls). Lenders/fixed income hurt. Currency depreciates. Exports hurt (goods costlier abroad).

1.2 Inflation Indices

Index	Released By	Base Year
CPI-Combined, CPI-U, CPI-R, CFPI	NSO, MoSPI	2024 (revised from 2012)
WPI	Economic Advisor, DPIIT, Min of Commerce	2011-12
CPI-IW	Labour Bureau, Min of Labour	Used for DA of central govt employees
CPI-AL	Labour Bureau	Used for MGNREGA wages
CPI-RL, Wage Rate Index	Labour Bureau	—
Cost Inflation Index	CBDT, Min of Finance	For indexation of capital gains

CPI (2024 base) — Key Changes:

Items increased: 299 → 358 (goods: 259→308, services: 40→50)
New additions: Rural housing, online streaming, value-added dairy, barley, pen drives, babysitter, exercise equipment
Removed: VCR/DVD, radio, tape recorder, second-hand clothing
Based on HCES 2023-24 (Household Consumption Expenditure Survey)
Computer-assisted price collection replaces manual data

CPI-C Weightage Comparison:

Component	Old (2012)	New (2024)
Food & Beverages	45.86%	36.75%
Housing	10.07%	17.67%
Transport	—	8.80%
Health	—	6.10%
Clothing & Footwear	6.53%	6.38%

Key CPI Facts:

Includes goods + services + indirect taxes
Does NOT include capital goods
Used for inflation targeting (4% ±2%)
Food still highest weight, but reduced from ~46% to ~37%

WPI:

Weightage: Manufactured (64%) > Primary (23%) > Fuel & Power (13%)
Includes only goods, NOT services
Excludes indirect taxes; Includes capital goods
Ramesh Chand Panel formed to revise base and transition from WPI → PPI

WPI	PPI (Proposed)
Only goods	Both goods and services
Excludes indirect taxes	Excludes indirect taxes
Includes capital goods	Includes capital goods

1.3 Current Affairs — Inflation

Retail inflation at 1.54% in September (8-year low), 0.25% in October — below RBI's lower bound of 2%.
Below 4% target for 9 consecutive months, averaging 2.3%.
Low inflation = supply comfortably outstripping demand. Squeezes profit margins.
Food inflation drove most CPI movements — cereals have highest sub-weight (9.67%).
Inflation fell to ~3% in June 2025 (6-year low) aided by early monsoons, strong harvests.

Momentum Effect & Base Effect (Static):


Base Effect	Inflation calculation compares prices to the same month last year. If last year's price was abnormally high, this year’s inflation appears low (favourable base) and vice versa. Does NOT reflect current price changes.
Momentum Effect	Measures the month-on-month price change. Captures current price pressures regardless of what happened a year ago. True indicator of ongoing inflation trends.
Key Insight	Low YoY inflation can mask rising prices if base effect is favourable. Always check momentum alongside headline inflation.

GDP Deflator & Sectoral Deflator (Static):


GDP Deflator	= (Nominal GDP / Real GDP) × 100. Broadest measure of price change — covers ALL goods/services in economy (not just consumer basket like CPI).
Sectoral Deflator	GDP deflator calculated for individual sectors (agriculture, manufacturing, services). Shows which sectors face highest inflation.
Terms of Trade	Ratio of export prices to import prices. If export prices rise faster than import prices → improving ToT. Economic Survey noted Terms of Trade improving for services but deteriorating for agriculture.

Deflation in China — Involution (Current):

China experienced prolonged deflation (falling prices) in 2023–25 — CPI negative for multiple months.
Caused by: Weak domestic demand, property crisis, overcapacity in manufacturing, consumer pessimism.
Involution — Chinese term (nei juan): Firms compete by slashing prices and exploiting workers rather than innovating. Race to bottom.
Impact on India: Cheap Chinese goods flood markets → hurt Indian manufacturers → justifies anti-dumping duties and QCOs.

Increase in Inflation in Japan (Current):

Japan saw inflation rise to ~3-4% (2023–25) after decades of near-zero/deflation.
Caused by: Weak yen → costlier imports, global energy prices, wage growth (Shunto negotiations), end of ultra-loose monetary policy.
BoJ ended NIRP in March 2024 — first rate hike in 17 years.
Significance: Showed that even structurally deflationary economies can experience persistent inflation.

1.4 GDP & National Accounts


GDP	Market value of all final goods/services produced within domestic territory in a year
Methods	Expenditure: GDP(mp) = C + I + G + (X-M). Largest: PFCE (56%)
	Production: GDP(bp) = GVA of all sectors. Tertiary (55%) > Secondary (25%) > Primary (20%)
	Income: GDP(fc) = Wages + Interest + Profit + Rent
Price Concepts	Factor cost →[+Net Production Taxes]→ Basic price →[+Net Product Taxes]→ Market price
Nominal vs Real	Nominal = current prices; Real = constant prices (base year 2011-12). GDP Deflator = (Nominal/Real)×100
GNP → NI	GNP(mp) = GDP(mp) + NFIA. GNP(mp) →[-depreciation]→ NNP(mp) →[-net indirect taxes]→ NNP(fc) = National Income

Current Data:

Real GDP growth FY26: 7.4% (FAE by MoSPI). Medium-term: 7% (Economic Survey).
India = 4th largest economy ( $4.19T, overtook Japan). Top 5: US ($ 30T) > China ( $20T) > Germany ($ 5T) > **India ( $4.2T)** > Japan ($ 4T).
By PPP: China > US > India > Russia > Japan
Per capita GDP: $2,880 (2025) — 144th rank globally. HDI: 0.685 (medium development).
GFCF: 34-35% of GDP — heavy lifter of GDP.
BN Goldar Committee: revise base year from 2011-12 to 2022-23.
IMF gave India's NAS a grade 'C' — methodological weaknesses; outdated base year.

1.5 Production Indices

Index	By	Base	Details
IIP	NSO, MoSPI (monthly)	2011-12	Sector: Manufacturing (77.6%) > Mining (14.4%) > Electricity (8%). Excludes construction.
Eight Core Industries	DPIIT (monthly)	2011-12	40.27% weight in IIP. Refinery (28%) > Electricity (19%) > Steel (17%) > Coal (10%) > Crude (9%) > Gas (6%) > Cement (5%) > Fertiliser (2%)
PMI	S&P Global (monthly, private)	—	>50 = expansion; <50 = contraction. Manufacturing + Services. Leading indicator.

Chapter 2: Public Finance

Chapter	Current Affairs	Static Topic
Public Finance	Trends in Tax-to-GDP, Direct vs Indirect	Revenue & Capital accounts; Tax Buoyancy
	Trends in Deficits, New Fiscal Consolidation	Revenue/Effective Revenue/Fiscal/Primary Deficit
	RBI Report on State Finances 2025	Committed vs Development Expenditure
	GST Reforms 2.0	Revenue Neutrality, IDS, Anti-Profiteering, GSTAT
	16th Finance Commission	FC Composition; Central Divisible Pool
	Budget Announcements: IT Act 2025, STT, MAT etc	STT, CGT, Buyback Tax, MAT, TDS/TCS
	Global Taxes: GMCT, CBAM, Remittance Tax	BEPS, NTMs, Remittance Trends

2.1 Budget Structure

Revenue		Capital
Receipt	Expenditure	Receipt	Expenditure
Tax (direct, indirect) + Non-tax (dividends, interest, grants)	Interest, Grants, Subsidies, Salaries, Pensions	Non-debt (disinvestment, recovery, asset sale) + Debt (internal, external)	Loans given, capital goods, investment, loan repayment

Budget 2026-27: Total Receipts ≈ ₹36 lakh cr | Total Expenditure ≈ ₹53 lakh cr (budget size)

2.2 Deficits

Deficit	Formula	Budget 2026-27
Revenue Deficit	RR − RE	1.5% of GDP
Effective RD	RD − grants to states for capital assets	—
Fiscal Deficit	Total Exp − (RR + non-debt CR) = Borrowings	4.3% of GDP
Primary Deficit	FD − interest payments	0.7%

FRBM Act 2003:

Original targets: FD = 3% of GDP; RD = 0%
NK Singh Committee (2017): Shift anchor to Debt-to-GDP ratio (60%: 40% Centre + 20% States). FD path: 2.5% by 2023. Escape clause for calamity/war.
FD spiked to 9.2% of GDP during pandemic (2020-21), now declining to 4.4% (2025-26).
3% target achieved only ONCE since 2003.
Economic Survey argues for delay in strict fiscal targets due to geopolitical environment.

Debt-GDP Ratio (Mar 2026): Union Govt: 56% | States: 29%. Centre projects 50±1% by March 2031.

2.3 Taxes

Direct Taxes:

Tax	Detail
Corporate Tax	On net profits. MAT ensures minimum tax on book profits (reduced 15% → 14%).
Income Tax	New Income Tax Act 2025 (effective April 2026). Unified "Tax Year" replaces Previous/Assessment Year.
STT	On purchase/sale of securities. Increased on Options & Futures (Budget 2026-27).
TDS	Tax deducted by payer at source (salary, rent, interest). Consolidated under single section.
TCS	Tax collected by seller (scrap, minerals, LRS remittance).

Indirect Taxes:

Tax	Detail
GST	Destination-based. 101st Amendment (2016). Effective July 1, 2017.
GST Council	Art. 279A. Constitutional body. Union FM + all State FMs. Recommends rates, exemptions, laws.
GSTN	Not-for-profit IT backbone/portal.
GST 2.0	Simplified: 0% (exempt) → 5% (merit) → 18% (standard) → 40% (sin/luxury).
GSTAT	Statutory appellate body under CGST Act 2017. Principal Bench: New Delhi + 31 State Benches.
Excise	On manufacture. Subsumed under GST except petroleum, alcohol, tobacco.
Customs	On import/export at border. BCD + IGST.

Tax Collection Order: Income Tax > Corporate Tax > GST > Excise > Customs

Key Tax Terms:

Tax:GDP — India: 17% (Centre 11% + States 6%); OECD avg: 34%
Tax Buoyancy — % change in tax revenue / % change in GDP
Laffer Curve — Beyond optimal rate, higher taxes reduce revenue
Pigouvian Tax — On negative externalities (pollution, tobacco)
Tobin Tax — On financial transactions (curb speculation)

2.3a GST — Detailed Static Concepts

Concept	Detail
Revenue Neutrality	GST rate should be set so that total revenue under GST = pre-GST revenue. Revenue Neutral Rate recommended by RNR Committee (Arvind Subramanian): 15-15.5%.
Inverted Duty Structure (IDS)	When tax on inputs > tax on output → manufacturer accumulates input tax credit → refund burden on govt. Example: Textiles (5% output, 12% input). GST 2.0 aims to rationalise to fix IDS.
Anti-Profiteering	If input costs fall due to GST, companies must pass on benefit to consumers via price reduction. Earlier: National Anti-Profiteering Authority (NAPA). Now: CCI handles anti-profiteering cases.
Reverse Charge Mechanism (RCM)	Liability to pay GST shifts from supplier to recipient. Applied when: Supplier is unregistered, specified services (legal, GTA), import of services.
Advance Ruling	Applicant can seek ruling on GST classification, rate, applicability before transaction. Given by Authority for Advance Ruling (AAR) in each state. Appeal to AAAR. Binding only on applicant and jurisdictional officer.

Types of GST Supply:

Type	Detail
Zero-Rated	GST rate = 0% AND input tax credit (ITC) available. Example: Exports, supplies to SEZs.
Nil-Rated	GST rate = 0% but ITC NOT available. Example: Fresh milk, fresh fruits.
Exempt Supply	Specifically exempted by govt notification. ITC NOT available. Example: Healthcare, education.
Key Trap	Zero-rated ≠ Nil-rated ≠ Exempt. Only zero-rated allows ITC refund.

Taxes Subsumed under GST:

Central: Excise, Service Tax, CVD, SAD, Central Sales Tax
State: VAT, Entertainment Tax, Luxury Tax, Entry Tax, Purchase Tax, Octroi
NOT subsumed: Customs (BCD), Excise on petroleum & alcohol, Stamp Duty, Electricity Duty

GST Council (Art. 279A) — Detailed:

Composition: Union FM (Chairperson) + Union MoS (Revenue) + FM of all States/UTs with legislature.
Decision: 3/4th majority of weighted votes. Centre = 1/3rd vote. States = 2/3rd vote.
Nature: Recommendations are not binding (SC ruling in Mohit Minerals case, 2022). But cooperative federalism demands compliance.
Key: Both Centre and States must agree → dual veto effectively exists.

2.3b Budget Tax Announcements — Detailed (Static + Current)

Tax	Static Concept	Budget 2026-27 Change
Capital Gains Tax (CGT)	Tax on profit from sale of capital assets. STCG (≤12 months for equity): 20%. LTCG (>12 months): 12.5% (above ₹1.25 lakh exemption).	Indexation benefit removed for all assets except real estate acquired before July 2024.
Buyback Tax	Tax on buyback of shares by company. Earlier: Company paid tax on buyback amount.	Shifted to shareholders — now treated as dividend income in shareholder’s hands.
MAT	Minimum Alternate Tax — ensures companies with book profits pay minimum tax even if zero tax liability under normal provisions.	MAT rate reduced 15% → 14%. Carry forward of excess MAT credit to end — companies lose accumulated credits.
Transfer Pricing	Rules to ensure transactions between related parties (parent-subsidiary, same group) are at arm’s length price (market price). Prevents profit shifting.	Safe Harbour rules for IT companies — predetermined margins accepted by tax dept without audit.
Black Money Act 2015	Penalises undisclosed foreign income/assets. 120% tax + penalty. Non-disclosure = prosecution (up to 10 years).	Foreign Asset Disclosure Scheme — one-time amnesty window with reduced penalties.
SEZ Act 2005	Special Economic Zones for export promotion. Tax holidays (100% IT exemption for 5 years, then 50% for next 5).	One-time exemption to SEZs from new minimum tax provisions.

2.3c Global Taxes (Current + Static)

Tax	Detail
Global Minimum Corporate Tax (GMCT)	Under OECD Pillar 2 — minimum 15% tax on MNEs with revenue >€750 million, regardless of where profits are booked. Prevents race to bottom. STTR (Subject to Tax Rule) allows source countries to tax if recipient country taxes below 9%. India has signed but implementation pending.
CBAM (Carbon Border Adjustment Tax)	EU’s carbon tariff — imports taxed based on carbon content of production. Effective from 2026. Affects Indian exports of steel, aluminium, cement, fertilisers. India opposes — calls it disguised protectionism and NTM.
USA’s Remittance Tax	Proposed 5% tax on outward remittances from US. Would impact Indian diaspora — US is India’s #1 remittance source. Could reduce India’s inward remittances ($130 bn).

BEPS (Base Erosion and Profit Shifting) — Static:

OECD/G20 initiative to prevent MNEs from shifting profits to low-tax jurisdictions.
Pillar 1: Reallocation of taxing rights to market jurisdictions (where consumers are). Partial shift from “where production happens” to “where sales happen.”
Pillar 2: Global minimum 15% tax (GMCT above).
India’s concern: Pillar 1 may reduce India’s equalisation levy revenue. India introduced 2% Equalisation Levy in 2020 on digital advertising (Google tax).

Non-Tariff Measures (NTMs) — Static:

Trade barriers other than tariffs: SPS (food safety), TBT (technical standards), QCOs, Anti-dumping duties, Countervailing duties, Import licensing, Rules of Origin.
India increasingly using QCOs (Quality Control Orders) — mandate BIS certification for imports. Applied to 750+ products.
CBAM is considered an NTM by developing countries.

2.4 16th Finance Commission

	14th FC	15th FC	16th FC
Vertical Devolution	42%	41%	41%

Horizontal Devolution (16th FC): Income distance (42%) > Population 2011 (17%) > Contribution to GDP (10%) > Area (10%) > Demographic Performance (10%) > Forest (10%)

FC — Composition & Qualifications (Static):


Constitutional Basis	Article 280 — President constitutes FC every 5 years (or earlier).
Composition	Chairman + 4 members appointed by President.
Chairman Qualification	Person with experience in public affairs.
Members	HC Judge (or qualified), Person with knowledge of finance/accounts, Person with experience in financial matters, Person with knowledge of economics.
Tenure	As specified by President in order of constitution.
Recommendations	Advisory in nature — not binding on government. But conventionally followed.

Central Divisible Pool (Static):

Included (Shared with States)	NOT Included (Retained by Centre)
Income Tax	Cess (education, health, GST compensation)
Corporate Tax	Surcharge (income above threshold)
GST (CGST)	Customs duty
Excise on non-petroleum items	Duties on Union List items
Service Tax (now subsumed in GST)	Revenue from Union Territories

Key point: Cess and surcharge are NOT part of divisible pool → States don’t get a share. Centre’s increasing reliance on cess/surcharge reduces effective devolution.

16th FC Discontinued: Revenue deficit grants, sector-specific grants, state-specific grants. Grants recommended: ₹9.47 lakh crore for local bodies + disaster management.

2.4a Committed vs Development Expenditure (Static)

	Committed Expenditure	Development Expenditure
What	Non-discretionary, legally binding spending	Discretionary spending on growth-enhancing activities
Examples	Interest payments, pensions, salaries, subsidies, loan repayments	Capital investment, infrastructure, education, health, R&D
Nature	Rigid — cannot be easily reduced	Flexible — first to be cut during fiscal stress
Concern	Rising committed expenditure crowds out development spending

RBI Report on State Finances 2025 (Current):

States in revenue surplus: Declined from 19 (2018-19) to 11 (2024-25).
Collective revenue deficit of states rose from 0.1% to 0.7% of GDP.
Key concerns: Rising committed expenditure (salaries, pensions, interest), populist cash transfers, lower own-tax revenue.
Recommendations: Rationalise subsidies, improve GST compliance, enhance non-tax revenue, capital expenditure efficiency.

2.5 Government Debt

Internal debt (95%) >> External debt. Long-term >> Short-term. Fixed interest >> Variable.
External debt (Sept 2025): $746 bn | Debt-to-GDP: 19.2%
- Non-govt (78%) >> Govt (22%); Long-term (80%) >> Short-term (20%)
- By instrument: Loans (34%) > Deposits (22%) > Trade Credit (18%) > Debt Securities (17%)
- By currency: USD (54%) > INR (31%) > Yen (6%) > SDR (5%) > Euro (3%)

Chapter 3: External Sector

Chapter	Current Affairs	Static Topic
External Sector	Trends in BoP components	Components of BoP
	Trends in Exports/Imports	—
	LPG, LNG, Crude Oil imports; Steel; Electronics	—
	Trends in FDI: Decline in Net FDI	FDI vs FPI; Automatic vs Approval; Prohibited sectors
	IMF reclassifies India's exchange rate	Exchange rate systems

3.1 Balance of Payments

Current Account	Capital Account
Goods, Services, Income (wages/interest/dividend/profit), Transfers (remittance/gift/donation)	Investment (FDI/FPI), Loans (govt/private), Bank Deposits

BoP Identity: Current A/c + Capital A/c + Official Reserve Transaction = 0. Surplus → reserves ↑; Deficit → reserves ↓.

3.2 Trade Data

	Value	Global Share
Merchandise Exports	$437 bn	1.8%
Services Exports	$387 bn	4.3%
Merchandise Imports	$702 bn	2.8%
Services Imports	$195 bn	2%

Top Trading Partners: US (132) > China (127) > UAE (100) > Russia (68) > Saudi (41) Top Export Destinations: US (86) > UAE (36) > Netherlands (22) Top Import Sources: China (113) > Russia (64) > UAE (63) Biggest Trade Deficit: China (99) > Russia (59) > UAE (26) Trade Surplus: US (40) > Netherlands (17)

Major Exports: Refined petroleum, Engineering goods, Gems & Jewellery, Pharma, Textiles Major Imports: Crude Oil, Gold, Electronics, Machinery, APIs, Vegetable Oils

Trade-Specific Current Affairs:

Item	Key Data
Crude Oil	Import dependency: >85%. Cost: $137 bn (FY25). Russia’s share: 35.8% (from <2% in 2021-22). West Asia share now under 45%.
LPG	60% imported. 90% through Strait of Hormuz. 2 underground caverns (Mangaluru, Visakhapatnam).
LNG	India = 4th largest LNG importer. Long-term contracts + spot purchases.
Gold	Gold import bill spiked to $14.72 bn in October due to price spike. India = 2nd largest gold consumer (after China).
Steel	India became net importer of steel in FY25 — cheap Chinese steel imports surged. Safeguard duty imposed.
Electronics	Electronics exports crossed $30 bn — driven by PLI scheme for mobile phones. Apple, Samsung manufacturing in India.
Defence	India = world’s 4th largest defence spender. Defence imports declining as indigenous production rises (HAL, BEL, DRDO). Target: Defence exports $5 bn by 2025.

3.3 FDI & FPI

	FDI	FPI
Nature	Investment in assets (direct control, ≥10% equity)	Portfolio investment (securities, no control)
Duration	Long-term	Short-term ("hot money")
Regulator	DPIIT, MoCI (primary); RBI (secondary)	SEBI (FPI Regulations 2019)
Law	FDI Policy 2020; FEMA (Non-debt) Rules 2019	SEBI (FPI) Regulations 2019
Routes	Automatic (>90% inflows) + Govt Approval	FAR (unlimited G-Sec), VRR (retention route)

FDI Prohibited Sectors: Lottery, Chit Funds, Gambling, Cigarette manufacturing, TDR trading, Nidhi Company, Real Estate, Atomic energy*, Railway operations (partly).

FDI Source: Singapore (30%) > Mauritius (17%) > US (11%) FDI Flow: $70 bn (FY24) →$ 80 bn (FY25). Gross FDI-to-GDP: 3.1% (2020-21) → 2.1% (2024-25). Net FDI only $353 million — rise in OFDI and disinvestment. Manufacturing share dropped to 12%. Press Note 3 (2020): Land-border countries need govt approval. Relaxed: <10% beneficial ownership in select manufacturing sectors → automatic route. Insurance: FDI raised from 74% to 100% (Sabka Bima Act).

3.4 Forex Reserves

Component	Value
Foreign Currency Assets	$573 bn
Gold	$128 bn
SDR	$19 bn
Reserve Tranche Position	$5 bn
Total (Feb 2026)	$725 bn

Global Ranking: China ( $3.6T) > Japan ($ 1.4T) > Switzerland ( $1T) > Russia ($ 826B) > India ($725B) Import Cover: 11-12 months

3.5 Exchange Rate & Currency


India's regime	Managed float (RBI intervenes to smoothen volatility)
Appreciation causes	Exports, capital inflows, lower imports, weak USD, US Fed lowering rates
Depreciation causes	High imports, capital outflows, inflation, strong USD, US Fed raising rates
NEER	Weighted average vs 40 currencies (base 2015-16). ↑NEER = appreciation
REER	NEER adjusted for inflation. ↑REER = ↓trade competitiveness
LRS	Up to $250,000/year per resident individual for current/capital account. Not available to corporates/firms/HUF/trusts.
Convertibility	Fully convertible on Current Account. Non-fully on Capital Account.
Exorbitant Privilege	Benefits US derives from USD as global reserve currency

Types of Exchange Rate Systems (Static):

System	Detail
Fixed (Pegged)	Currency value fixed to another currency/gold by govt. No market fluctuation. Example: Bretton Woods (1944-1971), Hong Kong dollar pegged to USD.
Floating (Free Float)	Exchange rate determined entirely by market forces (demand & supply). No govt intervention. Example: US Dollar, Euro, British Pound.
Managed Float (Dirty Float)	Primarily market-determined but central bank intervenes to smoothen excessive volatility. India follows this — RBI buys/sells forex to stabilise rupee.
Crawling Peg	Currency pegged but allowed to gradually adjust within a narrow band. Central bank periodically resets the peg.
Crawl-like Arrangement	IMF’s reclassification of India’s regime. Suggests India’s exchange rate moves within a narrow range (not truly floating). IMF argues RBI’s interventions effectively create a crawl-like pattern.
Currency Board	Strictest form of peg — domestic currency fully backed by foreign reserves. No discretionary monetary policy. Example: Hong Kong.

IMF Reclassifies India (Current):

IMF reclassified India’s exchange rate from “floating” to “crawl-like arrangement” in its Annual Report on Exchange Arrangements.
India disputes this — maintains it follows a managed float with interventions only to curb volatility, not target a specific rate.
Implication: “Crawl-like” suggests India manipulates its currency — could invite US scrutiny (currency manipulator watchlist).

FDI Instruments Eligible (Static):

Equity shares (most common)
Fully, compulsorily and mandatorily convertible debentures
Fully, compulsorily and mandatorily convertible preference shares
NOT eligible: Non-convertible debentures, partly paid shares, warrants (unless FDI policy specifically permits)

NRI Accounts:

NRE	NRO	FCNR(B)
Foreign earnings in INR	India-earned income in INR	Foreign earnings in foreign currency

Nostro = Our account with you (Indian bank's account in foreign bank, foreign currency) Vostro = Your account with us (Foreign bank's account in Indian bank, usually INR)

3.6 Trade Agreements

Stages: PTA → FTA → CEPA/CECA → Customs Union → Common Market → Economic Union

India's 8 Trade Deals since 2021:

Mauritius CECPA (2021) — India's first trade deal with Africa
UAE CEPA (2022)
Australia ECTA (2022)
EFTA TEPA (2022)
UK CETA (2025)
Oman CEPA (2025)
New Zealand FTA (2025)
EU FTA (2026) — "mother of all trade deals"

Remittances: India = world's highest recipient ($130 bn). Sources: US > UAE > UK > Singapore > Saudi.

🎯 Trap vs. Reality — Part 3

#	Trap	Reality
1	GDP is measured using only one method	India uses three methods: Expenditure, Production (GVA), Income. CSO primarily uses production and expenditure.
2	Real GDP includes price changes	Real GDP is measured at constant prices (base year 2011-12) — it removes inflation effect.
3	GDP Deflator is same as CPI	GDP Deflator covers all goods/services produced; CPI tracks only a consumer basket. Deflator is broader.
4	WPI includes services	WPI includes only goods, not services. PPI (proposed) will cover both.
5	CPI base year is 2012	CPI base year revised to 2024 (from 2012). New series uses HCES 2023-24.
6	Food weight in CPI is ~46%	With new 2024 base, food weight reduced to ~37%. Housing weight increased to ~18%.
7	Fiscal Deficit target of 3% has been regularly met	3% target achieved only once since FRBM Act 2003. Repeatedly deferred.
8	Finance Commission is a permanent body	FC is constituted every 5 years by the President. It is constitutional (Art 280) but not permanent.
9	GST has 4 rate slabs	After GST 2.0 reforms (Sep 2025): 0% → 5% → 18% → 40% (simplified from 5/12/18/28).
10	All taxes are part of Central Divisible Pool	Cess and surcharge are NOT shared with states. Only basic taxes go into divisible pool.
11	FDI and FPI are the same	FDI = direct control (≥10% equity, long-term); FPI = portfolio (no control, "hot money").
12	Singapore/Mauritius FDI means actual investment from those countries	Much FDI from these countries is round-tripping — Indian/foreign capital routed through low-tax jurisdictions.
13	Higher nominal GDP = real economic growth	Nominal GDP rises even if only prices rise. Real GDP strips out inflation to show true growth.
14	FRBM mandates FD must be exactly 3%	FRBM sets targets, not rigid mandates. Escape clause allows breach during calamity/war/structural reforms.
15	India has full capital account convertibility	India has convertibility only on current account. Capital account is partially convertible.

Quick Revision Markers:

CPI base: 2024 (from 2012); items: 358 (from 299)

WPI base: 2011-12; Ramesh Chand Panel → transition to PPI

Inflation: 1.54% (Sep 2025, 8-year low); below target for 9 months

FIT: 4% ± 2% (under review)

GDP FY26: 7.4% (Real); India = 4th largest ($4.19T)

Per capita: $2,880; PPP rank: 3rd

FD: 4.3% of GDP; RD: 1.5%; PD: 0.7%

Debt-GDP: Centre 56%, States 29%

Tax:GDP: India 17% vs OECD 34%

16th FC: Vertical 41%; grants ₹9.47 lakh cr

GST 2.0: 0% → 5% → 18% → 40%

External debt: $746 bn; Debt-GDP: 19.2%

Forex: $725 bn; Import cover: 11-12 months

FDI: Gross $81B, Net$ 353M; Source: Singapore (30%)

Merchandise exports: $437 bn**; Services: **$ 387 bn

Remittances: India #1 ($130 bn)

Trade deals since 2021: 8 (latest: EU FTA 2026)