UPSC Mains – 2025: Paper-3: Economics & Development | Solutions

Q1. Distinguish between the Human Development Index (HDI) and the Inequality-Adjusted Human Development Index (IHDI) with special reference to India. Why is the IHDI considered a better indicator of inclusive growth? (10 marks, 150 words)

HDI vs IHDI

Introduction (with origins)

• Human Development Index (HDI), devised by Mahbub ul Haq drawing on Amartya Sen’s capability approach, has been published by UNDP since 1990. It summarises average achievements in health (life expectancy), education (schooling) and income (GNI per capita) using a geometric mean.
• Inequality-Adjusted HDI (IHDI), introduced by UNDP in 2010, “discounts” each HDI dimension by its within-country inequality. In a perfectly equal society, IHDI = HDI; the HDI − IHDI gap is the “loss due to inequality.”

Key differences (with India focus)

Aspect	HDI	IHDI	India – latest cues
What it measures	Average capability outcomes	Actual human development after inequality	India’s HDI rank 130/193 (2023); inequality reduces HDI by ~30.7%. UNDP
Method	Geometric mean of 3 dimension indices	HDI adjusted by inequality in health, education, income	2022 IHDI ≈ 0.444 (loss 31.1%); in 2023, with HDI ≈ 0.685, a 30.7% loss implies IHDI near 0.48 (approx). UNDP+1
What the gap shows	Not applicable	HDI–IHDI = inequality penalty	Large gap signals uneven access (gender, region, rural–urban). UNDP
Cross-country contrast	Compares averages	Compares shared outcomes	Bangladesh’s loss ~29.9% (2022) — close to India’s penalty. The Business Standard

Why IHDI is a better indicator of inclusive growth

1. Equity built in: It rewards not just rising averages but how widely gains are shared; two countries with the same HDI can differ sharply on IHDI if one’s gains are skewed. Human Development Reports
2. Diagnostic power: The “loss” can be decomposed by pillar (health/education/income) to target fixes—e.g., women’s work participation, foundational learning, primary health access—precisely where inequality bites in India. 
3. Policy accountability: Tracking HDI → IHDI at national/state level shows whether schemes convert into broad-based capability (e.g., if HDI rises but IHDI stagnates, inclusion is weak).
4. Real-life correspondence: India’s ~30–31% inequality loss means the typical person’s achieved development is far below the average—capturing lived disparities better than HDI alone. 

Way forward to raise HDI and shrink the HDI–IHDI gap (India)

• Universal Basic Services (quality first): Primary healthcare (NCD screening, HWCs), FLN in schools, safe water/sanitation; measure outcomes district-wise.
• Women’s economic agency: Child-care, safe transport, flexible work, skilling in high-growth sectors, equal pay enforcement—lift LFPR and household resilience.
• Spatial catch-up: Mission mode support to lagging/tribal/hill districts (teachers, nurses, mobile clinics, internet), and urban inclusion (slum upgradation, rental housing, transit).
• Income dispersion: Formalisation (EPFO/ESIC), MSME credit + apprenticeships, social-protection floors (maternity, disability, old-age).
• Quality & data: Public dashboards for learning outcomes, maternal/infant survival, water quality; disaggregate by gender, caste, disability, rural–urban.
• Fiscal & governance levers: Stable untied funds to local bodies; last-mile delivery through Digital Public Infrastructure with privacy-by-design.

Broader measurement lens & conclusion

• Origins recap: HDI (1990) measures level; IHDI (2010) adjusts for fairness. For a 360° view, pair them with Multidimensional Poverty Index (MPI) to track overlapping deprivations, Gender Inequality/Gender Gap indices for gender gaps, and selective use of Gini/consumption or Social Progress measures.
• Bottom line: Aim to raise the level and narrow the gap—i.e., push HDI up while reducing the HDI–IHDI loss through universal quality services, women-centric jobs, spatial inclusion, and outcome-based monitoring. HDI tells how high India rises; IHDI tells how many Indians rise with it—hence the better compass for inclusive development.

Q.11Explain how the Fiscal Health Index (FHI) can be used as a tool for assessing the fiscal performance of states in India. In what way would it encourage states to adopt prudent and sustainable fiscal policies? (15 marks, 250 words)

Intro: What is the Fiscal Health Index (FHI)?

Fiscal Health Index (FHI) is a composite scorecard that condenses a State’s public finances into a comparable, single indicator. Its purpose is to make fiscal capacity, quality and risks transparent for citizens, markets and inter-governmental bodies. In India, the concept draws on long-running analyses such as RBI’s State Finances: A Study of Budgets, Finance Commission–style performance triggers, and think-tank scorecards—now increasingly used to summarise capex push, debt trends and transparency.

2) Parameters (in brief)

• Solvency & sustainability: Debt/GSDP, interest/revenue, guarantees, off-budget liabilities.
• Stability & resilience: Fiscal deficit vs FRBM glide path, contingency/buffer funds, revenue volatility.
• Revenue quality: Own-tax buoyancy (GST, stamps, excise), non-tax effort, e-compliance.
• Expenditure quality: Capex share vs committed spends (salaries, pensions, interest), O&M, outcome focus.
• Service equity: Priority to health, education, nutrition; inclusion metrics.
• Transparency: Timely accounts, disclosure of liabilities, open procurement.

3) Using FHI to assess fiscal performance

• Benchmarking/league tables: Simple ranks create peer pressure and show “value for money”.
• Early-warning dashboard: Flags rising interest burden, slipping capex, power-sector dues, or opaque borrowings.
• Policy targeting: Identifies leakages (e.g., DISCOM arrears) → metering, payment discipline, better subsidy design.
• Market signalling: Better FHI can reduce SDL spreads; weak FHI alerts lenders/investors.

4) How FHI encourages prudent & sustainable policy (with cues/data)

• Rewards quality, not just size: Protecting capex and O&M after shocks speeds recovery; many States used 50-year, interest-free capex loans effectively.
• Penalises opacity: Bringing off-budget debt on books improves credibility.
• Aligns incentives: Like past 0.5% of GSDP conditional borrowing (ONORC, power reforms), FHI-linked headroom/untied grants can reward reform and transparency.
• Controls risk: Tracks committed expenditure (often >50% of revenue spend in some States) to avoid crowding-out of social and capex.

5) Way forward

• Standard template & weights, quarterly state dashboards.
• Independent validation (CAG-aligned) of off-budget/PPP/guarantees.
• Link a slice of borrowing space/grants to FHI improvement (capex quality, revenue effort, transparency).
• Add outcome lens: Publish health/education outputs alongside spend to keep budgets results-oriented.

Conclusion: A credible FHI becomes both compass and contract—it fairly measures fiscal health and steadily nudges States toward prudent, sustainable, and inclusive public finance.

2) Parameters (in brief)

• Solvency & sustainability: Debt/GSDP, interest/revenue, guarantees, off-budget liabilities.
• Stability & resilience: Fiscal deficit vs FRBM glide path, contingency/buffer funds, revenue volatility.
• Revenue quality: Own-tax buoyancy (GST, stamps, excise), non-tax effort, e-compliance.
• Expenditure quality: Capex share vs committed spends (salaries, pensions, interest), O&M, outcome focus.
• Service equity: Priority to health, education, nutrition; inclusion metrics.
• Transparency: Timely accounts, disclosure of liabilities, open procurement.

3) Using FHI to assess fiscal performance

• Benchmarking/league tables: Simple ranks create peer pressure and show “value for money”.
• Early-warning dashboard: Flags rising interest burden, slipping capex, power-sector dues, or opaque borrowings.
• Policy targeting: Identifies leakages (e.g., DISCOM arrears) → metering, payment discipline, better subsidy design.
• Market signalling: Better FHI can reduce SDL spreads; weak FHI alerts lenders/investors.

4) How FHI encourages prudent & sustainable policy (with cues/data)

• Rewards quality, not just size: Protecting capex and O&M after shocks speeds recovery; many States used 50-year, interest-free capex loans effectively.
• Penalises opacity: Bringing off-budget debt on books improves credibility.
• Aligns incentives: Like past 0.5% of GSDP conditional borrowing (ONORC, power reforms), FHI-linked headroom/untied grants can reward reform and transparency.
• Controls risk: Tracks committed expenditure (often >50% of revenue spend in some States) to avoid crowding-out of social and capex.

5) Way forward

• Standard template & weights, quarterly state dashboards.
• Independent validation (CAG-aligned) of off-budget/PPP/guarantees.
• Link a slice of borrowing space/grants to FHI improvement (capex quality, revenue effort, transparency).
• Add outcome lens: Publish health/education outputs alongside spend to keep budgets results-oriented.

Conclusion: A credible FHI becomes both compass and contract—it fairly measures fiscal health and steadily nudges States toward prudent, sustainable, and inclusive public finance.

Q.12 Discuss the rationale of the Production Linked Incentive (PLI) scheme. What are its achievements? In what way can the functioning and outcomes of the scheme be improved? (15 marks, 250 words)

What is PLI, its purpose & genesis

• Definition: Time-bound, output-linked incentives for firms that raise incremental production/exports in notified sectors.
• Purpose: Break India’s sub-scale, high-cost trap; anchor global OEMs, deepen supply chains, reduce import dependence, and create jobs.
• Genesis: Launched April 2020 (mobiles/e-components, APIs, medical devices), later expanded to 14 sectors with ~₹1.97 lakh-crore outlay. Press Information Bureau+1

Why it was needed

• Small plant sizes, logistics/power cost disadvantages, tariff inversions, and import reliance in critical inputs (electronics, APIs, solar, batteries). PLI provides a predictable, measurable carrot to cross the scale/learning curve.

Achievements (objective, with data)

• Economy-wide: By Mar 2025—₹1.76 lakh crore investments realized; ₹16.5 lakh crore production/sales; 12 lakh jobs; ₹21,534 crore incentives disbursed (12 sectors).
• Electronics (mobiles): Smartphone exports surged; mobiles climbed into India’s top export basket; Apr–Dec 2024 exports ≈ US$15.3 bn (↑46% YoY).
• Green/strategic capacity: Solar manufacturing expanded (modules, cells; upstream lines commissioning under PLI); ACC battery scheme targets 30 GWh with phased domestic value addition.
• APIs/Med-tech: Dozens of projects to localise KSMs/APIs and medical devices, reducing supply-risk exposure.

Challenges & shortcomings

• Disbursal frictions/under-performance in some sub-schemes → funds returned/slow payouts; working-capital strain. 
• Shallow localisation risk (assembly bias) if tooling/materials/R&D don’t deepen; uneven MSME supplier upgrading; testing/metrology gaps.
• Exposure to global demand cycles; need for green standards (energy/recycling) across PLI lines.

Scope for improvement & way forward

• Link higher slabs to domestic value-addition, exports, and design/R&D, not output alone.
• Time-bound, tech-enabled disbursal (GST/e-invoice/APIs + standard audits); real-time dashboards.
• Supplier-upgrading funds for MSMEs (tool rooms, testing labs, metrology), tighter cluster logistics & reliable power.
• Green conditionalities (renewable usage, recycling take-back) and clear sunset + glide path to avoid dependence.

Suggestive conclusion
With sharper metrics and faster execution, PLI can move India from assembly to capability—locking in productivity, resilient exports and quality jobs while keeping the fiscal outlay efficient. 

Q.16 India aims to become a semiconductor manufacturing hub. What are the challenges faced by the semiconductor industry in India? Mention the salient features of the India Semiconductor Mission. (15 marks, 250 words)

Intro: What are semiconductors & where they’re used

Semiconductors are materials whose conductivity can be precisely controlled, enabling integrated circuits (chips). Chips power phones, computers, cars/EVs, 5G, medical devices, defence, data centres and AI. The global chip market is about US$600–650 bn (2024) and rising; even a small share is strategic for growth and security.

India’s aim: becoming a manufacturing hub

India has launched the India Semiconductor Mission (ISM) with an outlay of ₹76,000 crore to build wafer fabs, display fabs, ATMP/OSAT (assembly–test–packaging) and a domestic chip-design ecosystem. Early moves include Micron’s ATMP plant in Sanand (Gujarat) and a Tata foundry at Dholera with a global partner—signalling a shift from intent to execution and anchoring clusters in western India.

Why India is aiming for this (core rationale)

• Economic scale-up: Reduce electronics import bill; capture value in a fast-growing market; create high-productivity jobs.
• Strategic resilience: Lower exposure to global supply disruptions; secure trusted hardware for critical infrastructure.
• Demand pull at home: Smartphones, auto/EV, renewables, smart grids, and AI/data centres create predictable local demand.
• Move up the value chain: Leverage India’s strong design talent and electronics assembly base to build design-to-silicon capability.

Key challenges (why this is hard) — with facts

• Very high capex & long gestation: A modern 28–40 nm fab can cost US$8–12 bn with 3–5 years to ramp; revenues are cyclical.
• Ecosystem gaps: Local depth in specialty gases/chemicals, spares & equipment vendors, EDA/IP access, and yield-learning experience is limited.
• Infrastructure intensity: Fabs need continuous 80–120 MW clean power, 10–20 MLD ultrapure water, ISO-class cleanrooms, and fast logistics/customs.
• Talent & R&D: Shortage of experienced process, equipment and yield engineers; limited national testing/metrology infrastructure.
• Policy execution: Single-window clearances, time-bound incentive disbursal, and export-control compliance must be tight.

Salient features of the India Semiconductor Mission

• Uniform 50% fiscal support (Central) for semiconductor and display fabs; up to 50% for compound semiconductors and ATMP/OSAT.
• Design-Linked Incentive (DLI): support to fabless design (EDA tool access, MPW shuttles, and sales-linked support) to grow Indian IC/SoC/IP firms.
• Single nodal agency with state co-support (land/power/water, additional incentives); cluster approach (e.g., Dholera–Sanand).

Way forward (practical & time-bound)

1. Start where demand is: Prioritise 28–65 nm nodes, power/analog/auto chips and SiC/GaN for EVs, chargers and grids.
2. Deepen clusters: Shared utilities (green power PPAs, UPW plants), fast customs, and national testing/metrology centres.
3. Build the supplier stack: Targeted support for gases/chemicals/capital-goods; align with SPECS/PLI to localise inputs.
4. Talent pipeline: VLSI & packaging programs, fab-operator academies, and DLI-enabled EDA cloud for startups; internships with anchor fabs/OSATs.
5. Rule-based disbursal: API-verified claims (GST/e-invoice), fixed timelines, public dashboards.
6. Stable demand: Long-term procurement by public/strategic buyers; export facilitation; encourage automotive-grade quality systems (IATF, PPAP).
7. R&D & legacy modernization: Fund process R&D and upgrade legacy lines to create yield-learning at home.

Conclusion

India’s push is about growth, jobs, resilience and technology sovereignty. With 50% capex support, design incentives and cluster logistics already in place, the next mile is supplier depth, skilled manpower and time-bound execution. If India moves from assembly to capability at 28–65 nm and power/analog first, it can meet domestic demand and secure a foothold in a critical global industry.