Content

1. Indians Least Aware of Artificial Intelligence: Pew Survey 2025
2. China’s WTO Complaint against India’s PLI Scheme
3. How Do Cyclones Form and How Are They Measured?
4. India’s Maritime Sector: Historic Transformation
5. Foreign Capital and Indian Banks
6. Debt of States

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According to a survey of 25 countries, Indians are least aware of AI

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Why in News ?

• Pew Research Center (2025) released a global survey on public awareness, attitudes, and trust toward Artificial Intelligence (AI) across 25 countries.
• India recorded the lowest AI awareness globally — highlighting a major knowledge gap despite the country’s growing AI ecosystem.

Relevance :

• GS Paper 3 – Science & Technology: Issues related to awareness, adoption, and ethical governance of Artificial Intelligence in India; Digital India and AI Mission linkage; societal impact of emerging technologies.
• GS Paper 2 – Governance: Role of digital literacy and inclusion in effective policy implementation.

Key Findings (India-Specific Data)

Parameter	India	25-Country Median	Remark
Heard or read a lot/little about AI	46%	81%	Lowest among all countries
Heard or read a lot about AI	14%	~50% (in developed nations)	Very low awareness
Awareness among youth (18–34 years)	19%	Much higher in others	2nd lowest globally
Concerned about AI’s increasing use	19%	Higher in most nations	Low concern reflects limited understanding
Trust in national AI regulation	~90%	Much lower elsewhere	Highest trust globally

Global Comparison

• High Awareness Countries: Japan, Germany, France, USA (~50% heard “a lot” about AI).
• Low Awareness Countries: India (14%), Kenya (12%).
• Correlation with GDP: Chart 5 shows a positive link between AI awareness and GDP per capita — wealthier countries tend to have higher AI literacy.

Overview

a. Awareness–Concern Paradox

• India’s low awareness (46%) contrasts sharply with high trust in regulation (90%).
• Indicates a top-down confidence in the state’s capacity rather than bottom-up understanding of AI’s implications.

b. Digital Literacy Divide

• Despite rapid smartphone and internet penetration, AI literacy remains shallow, particularly beyond urban, English-speaking populations.
• Reflects educational and linguistic barriers in technology adoption.

c. Youth Awareness Gap

• Even among 18–34 age group (digital natives), only 1 in 5 know much about AI — revealing a disconnect between exposure and comprehension.

d. Socioeconomic Correlation

• Higher-income economies show greater AI familiarity — suggesting that economic development and education quality are critical determinants of tech awareness.

e. Implications for Policy and Governance

• AI public literacy must become part of Digital India 2.0 and National AI Mission outreach.
• Without citizen-level understanding, AI ethics, privacy, and regulation debates may remain elitist and exclusionary.

Broader Context

• India ranks among top 10 globally in AI research output (NITI Aayog, 2024), yet bottom in public AI literacy — a paradox of “high innovation, low awareness”.
• Upcoming policies like IndiaAI Mission (₹10,371 crore, 2024) aim to democratize AI access and skill-building — aligning with these findings.

Way Forward

• AI Literacy Campaigns under NEP 2020 and Digital India programs.
• Incorporation of AI awareness modules in school curricula and Skill India.
• Public communication in regional languages via MyGov and BharatGPT initiatives.
• Media collaborations to improve accurate AI coverage and citizen understanding.

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China’s WTO Complaint against India’s PLI Scheme

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Why in News ?

• In October 2025, China filed a complaint at the World Trade Organization (WTO) against India.
• The allegation: India’s Production-Linked Incentive (PLI) schemes for specific sectors violate WTO subsidy rules and discriminate against imported goods, especially from China.

Relevance

• GS Paper 2 – International Relations: WTO dispute mechanism, India–China trade relations.
• GS Paper 3 – Economy: Industrial policy, subsidies, Make in India, Atmanirbhar Bharat, and global trade rules interaction.

What is the PLI Scheme?

• Launched: 2020 (under Aatmanirbhar Bharat).
• Objective: Boost domestic manufacturing, attract global investment, integrate MSMEs, and strengthen India’s role in global value chains.
• Mechanism: Financial incentives (3–13%) on incremental sales of goods produced in India compared to a base year.
• Coverage: 14 strategic sectors (e.g., auto, semiconductors, telecom, pharma, electronics, solar, textiles, batteries).

China’s Complaint: Core Allegation

• China challenges three PLI schemes as violating WTO’s Subsidies and Countervailing Measures (SCM) Agreement and Trade-Related Investment Measures (TRIMs) Agreement.

Challenged PLIs

Sector	Focus	Contested Clause
Advanced Chemistry Cell (ACC) Batteries	Large-scale battery manufacturing	25% Domestic Value Addition (DVA) requirement
Automobile & Auto Components (AAT)	Advanced Automotive Technology products	50% DVA requirement
Electric Vehicles (EVs)	Attracting global EV manufacturers	DVA-linked subsidy condition

China’s Argument

• The DVA requirement effectively rewards companies for using Indian-made goods instead of imported goods.
• Such “local content requirements” distort trade and constitute Import Substitution (IS) subsidies, which are prohibited under WTO law.

WTO Legal Framework

Subsidies and Countervailing Measures (SCM) Agreement

• Article 1: Defines a subsidy as a financial contribution by a government/public body that confers a benefit and is specific to an enterprise or industry.
• Types of Subsidies:
  • Prohibited Subsidies — Contingent upon:
    • (a) Export performance, or
    • (b) Use of domestic goods over imports (Import Substitution subsidies).
  • Actionable Subsidies — May be challenged if they cause adverse effects on trade.
  • Non-actionable Subsidies — Rare; typically for general R&D or regional development (now largely lapsed category).

Related WTO Provisions Violated (as per China)

Agreement	Article	Provision Allegedly Breached
GATT 1994	Article III:4	National Treatment — Imported goods must not be treated less favourably than domestic goods.
TRIMs Agreement	Article 2.1	Prohibits trade-related investment measures inconsistent with GATT Article III (e.g., local content requirements).

India’s Possible Defence

DVA ≠ Local Content Requirement

• The Domestic Value Addition clause focuses on value created within India, not mandatorily on use of Indian-origin goods.
• DVA can be achieved via assembly, design, software, or service inputs, even if raw materials are imported.

Developmental and Environmental Objectives

• PLI schemes aim at green industrialization, EV transition, and energy storage self-reliance, aligning with SDG goals — giving India policy space under Article XX of GATT (General Exceptions).

WTO’s Eroded Enforcement

• With the Appellate Body dysfunctional since 2019, even if a panel rules against India, China cannot enforce the verdict — creating a de facto policy buffer for India.

Dispute Settlement Process at WTO

Step	Description
Step 1: Consultations	60-day period for bilateral discussions.
Step 2: Panel Formation	If unresolved, a 3-member WTO panel examines the complaint.
Step 3: Panel Report	Findings submitted to the Dispute Settlement Body (DSB).
Step 4: Appeal	Normally to the Appellate Body (defunct since Dec 2019).
Step 5: Status Quo	Pending appeal → no binding enforcement; India can continue its PLIs.

Broader Implications

a. Strategic Context

• China’s move may reflect geo-economic rivalry, given India’s:
  • PLI-backed localization of EV and battery supply chains.
  • Exclusion of Chinese firms from certain PLI tenders (e.g., ACC batteries).

b. Industrial Policy vs WTO Rules

• Revives global debate: Can developing countries use industrial subsidies for technology catch-up?
• Highlights policy tension between “free trade” and “strategic autonomy”.

c. Precedent Risk

• If China’s challenge succeeds, it could embolden other WTO members to target India’s PLIs in semiconductors, solar, or telecom.

Theoretical & Legal Perspective

• Amartya Sen (development theory): argues for “capability building” — PLI aligns with structural transformation goals.
• Dani Rodrik (globalization paradox): developing nations need industrial policy space even within global trade rules.
• WTO law (Article XX & development clauses) recognizes this to an extent.

Key Takeaways

• China’s allegation: India’s PLI-linked DVA clauses = prohibited import substitution subsidies.
• India’s stance: DVA ≠ local content; PLIs serve legitimate developmental aims.
• WTO enforcement vacuum: ensures status quo; India faces no immediate penalty.
• Larger trend: Growing friction between industrial policy revival (India, US, EU) and WTO subsidy disciplines.

Types of WTO Subsidies (as per Agreement on Subsidies and Countervailing Measures – SCM Agreement)

Type of Subsidy	Also Known As	Description	Examples	WTO Treatment
1. Prohibited Subsidies	Red Box Subsidies	Directly linked to export performance or use of domestic goods over imports.	Export subsidies, Local content requirement subsidies.	Completely banned under WTO. Must be withdrawn immediately.
2. Actionable Subsidies	Amber Box Subsidies	Not outright banned but can be challenged if they cause: (a) injury to domestic industry, (b) nullify benefits under GATT, or (c) cause serious prejudice to another member.	Financial aid to specific industries causing export displacement or price undercutting.	Allowed unless proven to distort trade; subject to countervailing measures.
3. Non-Actionable Subsidies	Green Box Subsidies	Subsidies permitted as they have minimal or no trade distortion effects.	R&D funding, regional development aid, environmental adaptation subsidies.	Permitted, though the original “non-actionable” category expired in 2000, members still refer to such measures informally.

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How do cyclones form and how are they measured?

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 Why in News?

• Cyclone Montha (Oct 2025) recently made landfall along the Odisha–Andhra coast, highlighting the dynamics of tropical cyclone formation, prediction, and intensity estimation in the Indian Ocean.
• Renewed focus on the accuracy of cyclone forecasting, role of wind shear, and satellite-based observation in disaster preparedness.

Relevance

• GS Paper 1 – Geography: Physical geography – climatology, tropical cyclones, atmospheric circulation.
• GS Paper 3 – Disaster Management: Early warning systems, forecasting technologies, and mitigation measures.

What is a Cyclone? — Basic Definition

• A cyclone is a large-scale, low-pressure weather system characterized by inward-spiraling winds rotating around a central core called the eye.
• Classified by region:
  • Hurricanes (Atlantic, NE Pacific)
  • Typhoons (NW Pacific)
  • Tropical Cyclones (Indian Ocean & South Pacific)

Conditions Required for Cyclone Formation

1. Warm Sea Surface Temperature (SST) — above 26.5°C to a depth of ≥50 m for sufficient latent heat.
2. Coriolis Force — needed to initiate cyclonic rotation; absent within 5° latitude of the Equator.
3. Low Vertical Wind Shear — allows organized upward convection; high shear disrupts circulation.
4. Atmospheric Instability — encourages sustained convection and rising of moist air.
5. High Humidity — in mid-troposphere (5–7 km) to sustain cloud formation.
6. Pre-existing Disturbance — e.g., a low-pressure zone or tropical wave to trigger initial rotation.

Stepwise Process of Cyclone Formation

• Stage 1: Low-pressure area develops → convergence of moist air.
• Stage 2: Rising moist air condenses → releases latent heat, intensifying convection.
• Stage 3: Warm air rises, pressure drops → inflow of more moist air.
• Stage 4: Rotation begins under Coriolis effect → organized cyclonic circulation forms.
• Stage 5: Eye formation and eyewall intensification mark a mature cyclone.

Structure of a Cyclone

Feature	Description
Eye	Central calm zone (20–50 km wide), lowest pressure, clear skies, sinking air.
Eyewall	Surrounds the eye; most intense winds & rainfall occur here. Rising convective towers dominate this zone.
Rainbands	Outer spiral bands producing intermittent rain and gusts.
Outflow	High-altitude air diverging outward, maintaining cyclone balance.

Role of Wind Shear

• Vertical Wind Shear: Difference in wind speed/direction between lower and upper atmosphere.
• Low Wind Shear: Maintains vertical alignment → cyclone strengthens.
• High Wind Shear: Tilts vortex → disrupts convection → prevents intensification or leads to dissipation.
• Example: Monsoonal shear in Bay of Bengal often limits storm strengthening near the coast.

Observational Methods

1. Satellites (Primary Source in Indian Ocean):
   1. Infrared sensors: Estimate cloud-top temperatures → proxy for intensity.
   1. Visible imagery: Identifies eye formation and structure.
   1. Microwave sensors: Reveal rainfall distribution & internal dynamics.
   1. Scatterometers: Measure surface wind speeds over oceans.
2. Ocean Buoys: Record SST, pressure, wind speed, and humidity.
3. Ground-based Observations: Weather radars, coastal stations, Doppler radars track approach and landfall.
4. Aircraft Reconnaissance (“Hurricane Hunters” – Atlantic):
   1. Fly into storms to record wind, temperature, humidity, and pressure.
   1. Deploy dropsondes—instruments that transmit vertical profiles of atmospheric data while descending.

Cyclone Classification (IMD – North Indian Ocean)

Category	Wind Speed (km/h)
Low Pressure Area	<31
Depression	31–49
Deep Depression	50–61
Cyclonic Storm	62–88
Severe Cyclonic Storm	89–117
Very Severe Cyclonic Storm (VSCS)	118–165
Extremely Severe Cyclonic Storm (ESCS)	166–220
Super Cyclonic Storm	≥221

Cyclone Forecasting & Modeling

• Forecasting Challenges:
  • Small initial data errors → large track/intensity deviations.
  • Ocean–atmosphere coupling adds complexity.
• Tools Used:
  • Numerical Weather Prediction (NWP) models assimilating global data.
  • Dynamic models (e.g., ECMWF, GFS) simulate track, intensity, and rainfall.
  • IMD’s INCOIS & MOSDAC systems integrate satellite + ocean buoy data.
• Forecast Accuracy:
  • Track prediction improved to 3–5 days in advance with high confidence.
  • Intensity prediction remains less accurate (error ~15–25%).

Broader Analysis

• Improved Preparedness: Post-1999 Odisha super cyclone, India established IMD’s Regional Specialized Meteorological Centre (RSMC) and INSAT-based alert systems.
• Disaster Risk Reduction: Cyclone shelters, early warning dissemination, and community resilience have reduced mortality rates drastically.
• Climate Link: Warming oceans → increase in frequency of Very Severe Cyclones (VSCS), though total cyclone count remains stable.
• Data Gap: Absence of reconnaissance flights in Indian Ocean affects real-time accuracy; dependence on satellite estimates continues.

Conclusion

• Cyclones are heat engines of the tropics, driven by oceanic and atmospheric interactions.
• While track prediction has achieved notable precision, intensity estimation still faces uncertainty due to high wind shear, sea temperature variability, and data resolution.
• Sustained investment in ocean monitoring, AI-based modeling, and regional cooperation (like BIMSTEC & ESCAP) is essential for enhanced cyclone resilience.

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India’s Maritime Sector: Historic Transformation

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Why in News?

• Prime Minister Narendra Modi addressed the Maritime Leaders’ Conclave at India Maritime Week 2025 (Mumbai).
• Announced ₹2.2 lakh crore worth of initiatives for shipping, shipbuilding, and port-led development, including acquisition of 437 vessels.
• Stressed that India’s maritime capacity has doubled, and cargo movement in inland waterways has risen 700%.

Relevance

• GS Paper 3 – Infrastructure & Economy: Ports, shipping, inland waterways, logistics efficiency, Sagarmala, and Blue Economy.
• GS Paper 2 – Governance/Policy: Maritime policy reforms, PPP models, and environmental sustainability in port operations.
• GS Paper 2 – IR: Strategic maritime connectivity through BIMSTEC, IORA.

Background: Maritime Significance

• India’s 11,098 km coastline, 200+ ports, and 12 major ports form the backbone of trade—handling ~95% of India’s trade by volume and ~70% by value.
• The Sagarmala Programme (2015), Maritime India Vision 2030, and Amrit Kaal Vision 2047 aim to position India as a global maritime hub.

Key Announcements at the Conclave

• Investment Outlay: ₹2.2 lakh crore for modernization, shipbuilding, and port digitization.
• Fleet Expansion: Procurement of 437 vessels under Make in India to enhance coastal and international shipping capacity.
• Digital & Legal Reforms:
  • Introduction of modern, futuristic maritime laws replacing outdated colonial-era acts.
  • Focus on port sustainability, digitization, and safety enhancements.
• PPP Model Strengthening: Increased participation of private players in port operations and logistics.
• Financial Reforms: New credit and financing alternatives for shipbuilding and allied industries.

Major Achievements Highlighted

Indicator	Progress Achieved
Port Capacity	Doubled since 2014; JNPT now India’s largest container port.
Inland Cargo Movement	Increased by 700%, reflecting success of National Waterways policy.
Global Recognition	India’s ports rated among best in the developing world.
Logistics Performance Index (World Bank)	Significant improvement — India ranked 38th in 2023 (up from 54th in 2014).
Global Engagement	Participation from 85 countries at Maritime Week 2025, making it a global summit.

 Institutional & Infrastructure Advances

1. Vizhinjam Deep Water Transshipment Port (Kerala)
   1. India’s first deep-water container hub, operational in 2025.
   1. Reduces dependence on Colombo/Singapore for transshipment.
2. JNPT (Mumbai)
   1. Handling capacity doubled, significant automation and digitization achieved.
3. Kandla Port (Deendayal Port, Gujarat)
   1. Emerging as a leading dry cargo port under Sagarmala initiatives.
4. Inland Waterways Development
   1. Operationalization of National Waterway-1 (Ganga) and multimodal terminals under Jal Marg Vikas Project.

Policy and Reform Landscape

• Sagarmala Programme (2015):
  • Port modernization, connectivity, industrialization, and coastal community development.
  • ₹6.5 lakh crore worth of projects identified; over 200 completed.
• Maritime India Vision 2030:
  • Aims to reduce logistics cost to 8–9% of GDP (currently ~13%).
  • Targets 400 MTPA additional port capacity and 5 million direct jobs.
• Harit Sagar Guidelines (2023):
  • Promote green shipping, renewable port operations, and waste-to-wealth initiatives.
• Shipbuilding Financial Assistance Policy (2024–31):
  • Provides subsidies to boost domestic shipbuilding capacity.

Strategic & Geoeconomic Importance

• India’s maritime sector underpins the Blue Economy, contributing ~4% of GDP.
• Strengthens India’s role as a “lighthouse economy” amid global trade disruptions.
• Enhances energy security through port-based LNG terminals and coastal shipping.
• Supports Atmanirbhar Bharat via localized ship design, construction, and repair facilities.

Challenges

• Global Competition: China, Singapore, and UAE dominate transshipment markets.
• Logistics Costs: Still higher than global average (~13% vs. global 8–9%).
• Technological Lag: Need for greater automation, AI-driven port management, and cyber-resilience.
• Environmental Concerns: Marine pollution, dredging impacts, and carbon emissions remain issues.

Way Forward

• Integrated Maritime Strategy 2047: Aligns security, sustainability, and growth goals.
• Blue Economy 2.0 Framework: Focus on deep-sea mining, green ports, and circular economy.
• Regional Cooperation: BIMSTEC and IORA to enhance maritime domain awareness and connectivity.
• Skill Development: Maritime Skill Councils and specialized training in shipbuilding and ocean engineering.

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Foreign Capital and Indian Banks

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Why in News?

• In the past 24 months, India’s banking sector — once a tightly protected domain — has witnessed major inflows of foreign capital.
• Global financial institutions such as Sumitomo Mitsui (Japan), Emirates NBD (UAE), Zurich Insurance (Switzerland), Blackstone (US), and Abu Dhabi International Holding Company (UAE) have acquired stakes in Indian banks, insurers, and NBFCs.
• This signals global investor confidence in India’s financial system but also raises concerns about regulatory balance and foreign exposure.

Relevance

• GS Paper 3 – Economy: Banking reforms, FDI/FPI inflows, financial sector liberalization, and regulatory architecture.
• GS Paper 2 – Governance: RBI’s regulatory role, policy safeguards, and balance between openness and sovereignty.

Historical Context

• The Indian banking sector was traditionally protected from foreign ownership due to sovereignty and stability concerns.
• Liberalization began gradually post-1991, with RBI guidelines allowing controlled Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI) in banking and NBFCs.
• Post-2016, after the bad loan crisis and banking clean-up under Insolvency and Bankruptcy Code (IBC), India’s banks became healthier and attractive to foreign investors.

Why Foreign Investors are Interested ?

• Strong macro fundamentals: India’s GDP growth ~7%, stable inflation, and rising domestic credit demand.
• Untapped potential: Financial penetration remains low — only ~40% adults have formal credit access.
• Rising consumption and digital transformation: Fintech-led credit and payment ecosystem expanding rapidly.
• Banking reforms:
  • NPA ratio reduced sharply from 11.5% (2018) to below 4% (2025).
  • Recapitalization and mergers created stronger balance sheets.
• Policy stability: RBI and Finance Ministry allow up to 74% foreign ownership in private insurers and up to 49% in private banks (automatic route).
• Improving Logistics & Taxation: GST, Insolvency Code, and digital governance improved investor sentiment.

Broader Economic Impact

• Capital infusion: Strengthens bank balance sheets and credit creation.
• Technology transfer: Global banks bring advanced risk management, compliance, and fintech tools.
• Competition boost: Drives efficiency, lower lending costs, and product innovation.
• Insurance penetration: With Zurich and Abu Dhabi entries, India’s insurance sector deepens.
• Boost to Atmanirbhar Bharat: Long-term capital supports MSMEs and infrastructure financing.

Risks and Concerns

• Regulatory exposure: Excessive foreign control in sensitive financial sectors could affect sovereignty.
• Profit repatriation: May limit domestic reinvestment of banking profits.
• Market volatility: FPIs can exit quickly during global shocks, creating liquidity risk.
• Concentration risk: Acquisition of multiple mid-sized banks by few global players could reduce competition.
• Macroeconomic imbalance: Strong inflows can appreciate rupee, affecting export competitiveness.

Policy and Regulatory Safeguards

• RBI Regulations:
  • Cap on aggregate foreign investment in private sector banks at 74%.
  • Prior approval needed beyond 49%.
  • Fit-and-proper criteria for foreign shareholders.
• Government Reforms:
  • Liberalized FDI in insurance (2021) and NBFCs.
  • Simplified ownership norms for foreign banks operating in India.
• Macroprudential Monitoring: RBI and SEBI coordination to mitigate capital flight or contagion risks.

Conclusion

• The surge in foreign capital inflows reflects India’s transition from protectionism to confidence in its banking ecosystem.
• India is evolving into a global financial destination, balancing foreign participation with sovereign oversight.
• Going forward, maintaining prudential regulation, capital adequacy, and domestic control will be key to ensuring sustainable, inclusive financial growth.

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Debt of States

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Why in News?

• RBI’s October 2025 Review and a Business Line article highlighted rising concerns over the debt sustainability of Indian States.
• States’ aggregate debt-to-GSDP ratio stands at ~28.8% (2024–25 BE) — below the 15th Finance Commission’s ceiling (30.9%), yet with wide inter-State disparities.
• Experts caution that a “one-size-fits-all” fiscal target by Finance Commissions may not ensure true debt sustainability given differing State growth rates and fiscal capacities.

Relevance

• GS Paper 3 – Economy: Fiscal federalism, debt sustainability, Finance Commission targets, and macroeconomic stability.
• GS Paper 2 – Polity & Governance: Centre–State fiscal relations, role of RBI and Finance Commission in debt management.

Conceptual Basics

What is State Debt?

• Borrowings by State governments to finance fiscal deficits — through market loans, National Small Savings Fund (NSSF) loans, and institutional borrowings.
• Represents outstanding liabilities on State finances.

Key Measures:

• Debt-to-GSDP ratio: Indicator of fiscal health; ratio of total outstanding debt to the State’s Gross State Domestic Product.
• Fiscal Deficit: Excess of total expenditure over total revenue and non-debt receipts.
• Revenue Deficit: When revenue expenditure exceeds revenue receipts.

Legal and Policy Framework

Provision / Committee	Key Recommendations / Provisions
FRBM Act, 2003 (and Amendments)	Mandates fiscal discipline and debt targets for Centre & States.
N.K. Singh FRBM Review Committee (2017)	Recommended overall public debt ≤ 60% of GDP by 2023 (Centre 40%, States 20%). Advocated fiscal deficit as key operating target.
15th Finance Commission (2020)	Set State fiscal deficit ≤ 2.8% of GSDP and debt ≤ 30.9% by 2024–25. Targeted revenue surplus. Included escape clause for emergencies.
Article 293(3), Constitution	States must obtain Central consent to raise loans if they owe any outstanding loan to the Centre.

Data Overview

Indicator	2011–12	2020–21	2024–25 (BE)
States’ Debt-to-GSDP (%)	22.8	31.0	28.8
15th FC Threshold (%)	—	—	30.9
Range Across States (%)	16.3 (Odisha) – 57 (Arunachal Pradesh)	—	—

Interpretation:

• Aggregate State debt appears manageable, but fiscal stress varies sharply across States.
• Odisha, Maharashtra, Karnataka show prudent fiscal management.
• Punjab, West Bengal, Kerala, Rajasthan, and Andhra Pradesh exhibit high and potentially unsustainable debt ratios.

Why the Variation?

• Economic Structure: Industrialized States have broader tax bases → higher repayment capacity.
• Fiscal Management Quality: Revenue vs capital expenditure discipline.
• Borrowing Purpose: Productive (infrastructure) vs unproductive (revenue spending).
• Growth Differential: States with higher GSDP growth can sustain higher debt (positive Domar gap).
• Interest Rate Structure: RBI facilitates borrowings; hence variation mainly from growth differentials.

Five Criteria for Debt Sustainability (As per Authors)

Criterion	Meaning / Indicator	Relevance
1. Domar Gap: (GSDP Growth – Interest Rate)	Positive gap = solvency; negative = rising debt stress.	Measures sustainability in dynamic sense.
2. Debt Buoyancy: (Growth of GSDP – Growth of Debt)	If GSDP grows faster → improving fiscal health.	Reflects debt absorption capacity.
3. Debt-to-GSDP Ratio	Stock variable showing overall debt burden.	Traditional measure used by Finance Commissions.
4. Debt-to-Revenue Receipts Ratio	Indicates actual repayment capacity.	High ratio = poor serviceability.
5. Capital Expenditure-to-Debt Ratio	Shows productivity of borrowings.	Captures “quality of debt use.”

Weightage in Composite Index:

• Criteria (1) + (2): 30% (Domar & buoyancy)
• Criteria (3) + (4): 30% (repayment capacity)
• Criterion (5): 40% (asset quality)

Key Empirical Findings (2021–25)

• Positive Domar Gap: GSDP growth exceeded interest rate by ~8 percentage points, indicating overall solvency.
• Debt/Revenue Receipt Ratio:
  • 0.8 for Arunachal Pradesh (healthy)
  • 3.6 for Punjab (critical stress)
• Debt/Asset Ratio (Cumulative Capex):
  • 0.39 (assets < debt) in West Bengal, Punjab, Kerala — poor resource use.
  • 2.9 in Arunachal Pradesh — high asset creation relative to debt.
• Fiscal Sustainability Index (2021–25 avg):
  • <0.2: Punjab, West Bengal (very weak)
  • 0.2–0.6: 10 States (moderate)
  • 0.6–0.8: 15 States (good)
  • 0.9: Odisha (excellent fiscal prudence)

Economic Implications

Positive Effects of Moderate Debt

• Stimulates Keynesian multiplier through higher public investment.
• Crowds in private investment via infrastructure development.
• Deepens domestic debt markets and enhances financial inclusion.

Negative Effects of Excessive Debt

• Crowds out private investment (higher interest rates).
• Creates policy uncertainty and reduces fiscal flexibility.
• Increases interest burden → lowers capital expenditure.
• Impacts intergenerational equity by shifting repayment burden.

Policy Concerns

• One-size-fits-all FC targets ignore structural and income differences.
• High-debt States risk fiscal dominance → reduced policy autonomy.
• Off-budget borrowings by States (e.g., guarantees, special purpose vehicles) often underreported, masking true debt levels.
• Revenue expenditure bias: Large share of borrowings used for populist schemes rather than productive assets.

Way Forward

Focus Area	Recommended Approach
Differentiated Debt Targets	Calibrate limits based on GSDP growth, revenue base, and asset use efficiency.
Performance-linked Transfers	Finance Commission to allocate block grants with KPIs for fiscal discipline.
Debt Transparency	Mandate full disclosure of contingent liabilities and guarantees.
Quality of Expenditure	Prioritize capital over revenue spending.
Fiscal Risk Management	Institutionalize State Fiscal Councils for oversight (as per NK Singh Committee).
Borrowing Reforms	Link borrowing ceilings to capital formation outcomes.

Conclusion

• Aggregate State debt appears stable, but hidden stress exists in several fiscally weaker States.
• Debt sustainability cannot be judged solely by debt/GSDP ratio — requires a multi-parameter, State-specific approach.
• Policy must shift focus from “how much is borrowed” to “how debt is used and serviced.”
• A fiscally responsible yet flexible framework is essential for long-term macroeconomic stability and intergenerational equity.