⚡ Quick Revision — Part 3: Inflation | Public Finance | External Sector

🗺️ Chapter Map

📊 Key Numbers — Flashcard

Metric	Value
CPI Base Year	2024 (from 2012)
CPI Items	358 (from 299)
WPI Base Year	2011-12
Inflation (Sep 2025)	1.54% (8-yr low)
GDP FY26 (Real)	7.4%
India Economy Rank	4th ($4.19T)
Per Capita GDP	$2,880 (144th rank)
Fiscal Deficit	4.3% of GDP
Revenue Deficit	1.5%
Primary Deficit	0.7%
Tax:GDP	India 17% vs OECD 34%
GST 2.0 Slabs	0% → 5% → 18% → 40%
16th FC Devolution	41%
External Debt	$746 bn (19.2% of GDP)
Forex Reserves	$725 bn
Merchandise Exports	$437 bn
Services Exports	$387 bn
FDI Gross	$80 bn
Remittances	$130 bn (#1 globally)

🔥 Inflation — Types at a Glance

Base Effect vs Momentum Effect

	Base Effect	Momentum Effect
Compares	Same month last year	Previous month
Problem	Can mask current pressures	True current trend
Trap	Low YoY ≠ low prices	Always check alongside headline

📈 Inflation Indices

Index	By	Base	Used For
CPI-Combined	NSO, MoSPI	2024	Inflation targeting (FIT)
WPI	Eco Advisor, DPIIT	2011-12	Wholesale prices
CPI-IW	Labour Bureau	—	DA of central govt
CPI-AL	Labour Bureau	—	MGNREGA wages

CPI Weight Shift (2012 → 2024)

Food:    45.86% → 36.75% ↓
Housing: 10.07% → 17.67% ↑

WPI vs PPI

WPI	PPI (Proposed)
Only goods	Goods + services
Manufactured 64% weight	—
Ramesh Chand Panel → transition to PPI

🇨🇳🇯🇵 Global Inflation Trends

	China (Deflation)	Japan (Inflation)
Trend	CPI negative (2023-25)	Rose to 3-4%
Cause	Property crisis, overcapacity	Weak yen, energy prices, wages
Term	Involution (nei juan)	Shunto wage negotiations
Impact on India	Cheap goods → anti-dumping	Ended NIRP March 2024

💰 GDP — Quick Formula Sheet

Method	Formula	Largest Component
Expenditure	C + I + G + (X-M)	PFCE (56%)
Production	Sum of GVA	Tertiary (55%)
Income	W + I + P + R	—

Nominal = current prices | Real = constant (base 2011-12)
GDP Deflator = (Nominal/Real) × 100 — broadest price measure
BN Goldar Committee → revise base to 2022-23
IMF grade: C (methodological weaknesses)

🏛️ Budget & Deficits

Deficit	Formula	2026-27
Revenue	RR − RE	1.5%
Fiscal	Total Exp − (RR + non-debt CR)	4.3%
Primary	FD − Interest payments	0.7%

FRBM: 3% FD target achieved only ONCE since 2003
NK Singh: Anchor = Debt-to-GDP 60% (40% Centre + 20% States)
Current: Centre 56%, States 29%

🧾 Taxes — Rapid Fire

Direct Taxes

Tax	Key
Income Tax	New IT Act 2025 (April 2026). Unified "Tax Year".
Corporate Tax	MAT reduced 15% → 14%. Excess MAT credit carry-forward ends.
STT	Increased on Options & Futures
CGT	STCG: 20%, LTCG: 12.5% (>₹1.25L). Indexation removed.
Buyback Tax	Shifted to shareholders (was on company)
TDS/TCS	TDS = deducted by payer. TCS = collected by seller.

GST 2.0

Concept	Key
Revenue Neutrality	RNR = 15-15.5% (Arvind Subramanian)
IDS	Input tax > Output tax → ITC refund burden
Anti-Profiteering	CCI handles (earlier NAPA)
RCM	Tax liability shifts to recipient
GST Council	Art 279A. 3/4th majority. Centre = 1/3, States = 2/3. Not binding (Mohit Minerals SC).

GST Supply Types — TRAP ALERT

Type	ITC?	Example
Zero-Rated	✅ YES	Exports, SEZ
Nil-Rated	❌ No	Fresh milk, fruits
Exempt	❌ No	Healthcare, education

Taxes NOT Subsumed under GST

Customs (BCD), Excise on petroleum & alcohol, Stamp Duty, Electricity Duty

🌐 Global Taxes

Tax	What
GMCT	OECD Pillar 2 — 15% minimum on MNEs (>€750M revenue)
CBAM	EU carbon tariff — affects Indian steel, aluminium, cement
US Remittance Tax	Proposed 5% — impacts India (#1 recipient from US)
BEPS	Pillar 1: tax where sales happen. Pillar 2: min 15%. India's equalisation levy at risk.

🏦 16th Finance Commission

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

Horizontal: Income Distance (42%) > Pop 2011 (17%) > GDP Contribution (10%) > Area (10%) > Demographic (10%) > Forest (10%)

Central Divisible Pool

✅ Shared	❌ NOT Shared
Income Tax, Corporate Tax, CGST	Cess, Surcharge, Customs

Art 280 — constituted every 5 years by President
Chairman + 4 members — recommendations advisory (not binding)

🌍 External Sector — BoP

Trade Data

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

Top Partners: US (132) > China (127) > UAE (100) Biggest Deficit: China (99) > Russia (59) Surplus with: US (40) > Netherlands (17)

Critical Trade Items

Item	Key Fact
Crude Oil	>85% imported. Russia: 35.8%
Steel	India = net importer FY25 (cheap Chinese)
Electronics	Exports crossed $30 bn (PLI scheme)
Gold	Import bill: $14.72 bn (Oct)

💱 FDI vs FPI

	FDI	FPI
Control	≥10% equity, direct	No control, portfolio
Duration	Long-term	Short-term ("hot money")
Regulator	DPIIT + RBI	SEBI
Route	Automatic (>90%) + Govt	FAR, VRR

Prohibited: Lottery, Gambling, Chit Funds, Cigarettes, TDR, Nidhi, Real Estate, Atomic Energy

Source: Singapore (30%) > Mauritius (17%) > US (11%) Net FDI: Only $353 mn — rise in OFDI

Exchange Rate Systems

System	India?
Fixed (Pegged)	❌
Floating	❌
Managed Float	✅ India follows this
Crawl-like	IMF reclassified India as this (India disputes)

⚠️ Top 10 Traps — Part 3

#	Trap	Reality
1	GDP measured one way	Three methods: Expenditure, Production, Income
2	GDP Deflator = CPI	Deflator covers ALL goods/services; CPI = consumer basket only
3	WPI includes services	WPI = goods only. PPI will cover both.
4	CPI base = 2012	Revised to 2024
5	Food weight ~46%	Now ~37% (2024 base)
6	FD 3% target regularly met	Met only once since FRBM 2003
7	All taxes in divisible pool	Cess + surcharge NOT shared
8	Zero-rated = Nil-rated = Exempt	Only zero-rated allows ITC
9	FDI = FPI	FDI = direct ≥10%; FPI = portfolio "hot money"
10	India has full capital convertibility	Only current account is fully convertible

Last-Minute Recall Strip: CPI base 2024 | Items 358 | Inflation 1.54% | GDP 7.4% | India 4th ( $4.19T) | Per capita **$ 2,880** | FD 4.3% | RD 1.5% | PD 0.7% | Debt-GDP Centre 56% | Tax:GDP 17% | GST 2.0 0→5→18→40 | FC 41% | External Debt $746bn** | Forex **$ 725bn | Exports $437bn** | Services **$ 387bn | FDI Net $353mn** | Remittance **$ 130bn (#1) | Oil import >85% | Russia crude 35.8% | GMCT 15% | CBAM 2026 | STCG 20% | LTCG 12.5% | MAT 14% | RNR 15-15.5%