INTEGRATED MAINS AND PRELIMS MENTORSHIP (IMPM) 2025 Daily KEY
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Finance Commission (FC) and Carbon Border Adjustment Mechanism (CBAM) its significance for the UPSC Exam? Why are topics like World Trade Organization (WTO),rare earth minerals important for both preliminary and main exams? Discover more insights in the UPSC Exam Notes for October 17, 2025 |
Restoring fiscal space for the States
For Preliminary Examination: Current events of national and international Significance
For Mains Examination: GS III - Economy
Context:
The journey of Goods and Services Tax (GST) implementation has entered a major new stage with the latest restructuring of tax slabs, a move expected to pass on over ₹2 lakh crore in tax benefits to consumers. With this, the GST compensation cess stands abolished as it merges with the regular tax, marking the end of an era of compensation under GST
Read about:
Goods and Services Tax (GST)
Finance Commission (FC)
Key takeaways:
- The implementation of the Goods and Services Tax (GST) in India has entered a significant new phase with the recent overhaul of its tax slabs — a reform expected to deliver tax benefits worth over ₹2 lakh crore to consumers.
- This restructuring also marks the discontinuation of the GST compensation cess, which is now integrated into the standard tax system, effectively ending the compensation regime.
- The move is anticipated to stimulate domestic demand and, through higher consumption, offset potential revenue losses.
- However, several States have expressed dissatisfaction, arguing that the Centre has not accurately estimated the magnitude of the loss, which they fear could be substantially greater than projected. Their demand for continued compensation has, therefore, gone unaddressed.
- While earlier studies indicate that GST implementation benefited most States through generous compensation provisions, the post-compensation phase is likely to trigger fiscal concerns. The Centre’s ability to impose cesses and surcharges gives it a degree of fiscal control over States.
- Moreover, since the advent of GST has transferred a substantial portion of taxation authority from States to the GST Council—where the Centre holds a decisive role—there is growing advocacy for revisiting fiscal federalism to reinforce the principle of cooperative federalism.
- India’s fiscal policy, particularly concerning the sharing of revenue between the Union and the States, continues to evolve. Article 246 of the Constitution delineates taxation powers between the Union and the States through the Union and State Lists, with residuary powers vested in the Centre.
- Utilizing these powers, Parliament enacted the 92nd and subsequently the 101st Constitutional Amendments, introducing Service Tax and later, in July 2017, implementing GST.
- For the first time, GST established a destination-based tax structure, enabling both the Centre and the States to share a unified tax base. However, this shift has led to reduced fiscal autonomy for States, as decision-making now lies largely within the GST Council, where the Centre’s influence is dominant.
- Given India’s multi-level system of governance, fiscal asymmetry naturally arises between resource allocation and expenditure responsibilities. Typically, revenue-raising powers are centralized to ensure efficiency, while spending responsibilities are decentralized for better accountability and service delivery.
- To balance these disparities, mechanisms for fiscal transfers and redistribution are employed—requiring continuous adaptation in response to evolving fiscal realities.
- The constitutional framework governing Centre–State financial relations is outlined in Articles 268 to 293. The Finance Commission (FC), constituted under Article 280, is tasked with determining the distribution of resources among States.
- Nonetheless, certain States have voiced concerns that the FC’s criteria for tax devolution tend to disadvantage more progressive States. They also point to inconsistencies in the parameters and weightages adopted across successive Commissions.
- In addition to Finance Commission transfers, States receive funds through Centrally Sponsored Schemes (CSS), Central Sector Schemes, and previously through Planning Commission grants—discontinued after the Commission’s dissolution in 2014.
- While Article 275 provides for statutory grants recommended by the Finance Commission, Article 282 empowers the Union to make discretionary grants. However, some States allege that these financial flows lack fairness and transparency
Follow Up Question
Mains
1.“The post-compensation phase of the Goods and Services Tax (GST) has reignited debates on fiscal federalism in India.”
Discuss the implications of the GST restructuring and the abolition of the compensation cess on Centre-State financial relations. How can the principle of cooperative federalism be strengthened in the evolving fiscal landscape?
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Note: This is just a model answer and a Model Structure model
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Answer (D)
The Finance Commission of India is a constitutional body established under Article 280 of the Indian Constitution. Its primary function is to recommend how the net proceeds of taxes should be distributed between the Union and the States, and among the States themselves. Its key responsibilities include:
Now, analyzing each option:
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Indian iron and steel exporters face the highest CBAM levy
For Preliminary Examination: Current events of national and international Significance
For Mains Examination: GS III - Environment and Ecology
Context:
Indian exporters of iron and steel to EU may have to pay about €301 million (approximately ₹3,000 crore) in Carbon Border Adjustment Mechanism (CBAM) fees, the highest among all countries exporting similar products to the EU, an analysis by European non-profit think-tank Sandberg has found
Read about:
Carbon Border Adjustment Mechanism (CBAM)
Greenhouse gas (GHG) emissions
Key takeaways
- The Carbon Border Adjustment Mechanism (CBAM) is a policy tool introduced by the European Union (EU) to address the issue of “carbon leakage” — a situation where industries shift production to countries with weaker climate regulations to avoid the costs of reducing greenhouse gas emissions.
- Essentially, CBAM ensures that imported goods into the EU face a carbon price equivalent to what EU producers pay under the EU’s Emissions Trading System (ETS).
- Under the EU’s climate policies, industries within the region are required to purchase carbon credits for every tonne of carbon dioxide they emit. This system creates a financial incentive to adopt cleaner technologies and reduce emissions.
- However, if foreign producers exporting to the EU are not subject to similar carbon pricing in their home countries, they gain a cost advantage. The CBAM aims to neutralize this imbalance by imposing a carbon tariff on such imports.
- The mechanism initially covers carbon-intensive sectors such as iron and steel, cement, aluminum, fertilizers, electricity, and hydrogen—areas that are both energy-intensive and highly traded globally. Importers in the EU will need to report the embedded emissions of their products and purchase corresponding CBAM certificates to cover these emissions. The price of these certificates will mirror the price of carbon within the EU’s ETS.
- For developing countries, including India, CBAM raises significant concerns. It could act as a trade barrier by making exports to the EU more expensive if domestic producers cannot demonstrate low carbon footprints. This may also pressure developing economies to adopt stricter climate measures and carbon accounting mechanisms to maintain export competitiveness.
- In essence, the CBAM represents a major step in linking global trade with climate policy. While it supports the EU’s goal of achieving net-zero emissions by 2050, it also introduces new dynamics in international trade, prompting debates on climate justice, fairness, and the responsibilities of developed versus developing nations in combating global warming
Additional Information
- According to a recent analysis by the European think tank Sandberg, Indian exporters of iron and steel to the European Union (EU) may incur approximately €301 million (about ₹3,000 crore) in charges under the Carbon Border Adjustment Mechanism (CBAM)—the highest liability among all nations exporting similar products to the bloc.
- The CBAM functions as a carbon levy imposed on European importers who purchase goods from countries where production generates higher carbon emissions per tonne than comparable goods produced within the EU.
- Sandberg’s newly released online calculator estimates that Russia will face the second-highest CBAM costs at €240 million, followed by Ukraine (€198 million) and China (€194 million).
- The study further reveals that when India’s exports of aluminium and cement are included alongside iron and steel, its total CBAM liability amounts to around €330 million, equivalent to roughly 1.05% of the value of all traded goods.
- However, it also highlights a potential opportunity — Indian industries could increase revenues by about €510 million if they adopt cleaner and more energy-efficient technologies, thereby offsetting nearly €180 million in net costs.
- India has, however, consistently voiced opposition to the CBAM, with several industry associations labelling it a form of “non-tariff barrier” that could adversely affect the competitiveness of Indian exports in European markets
Follow Up Question
Mains
1.“The European Union’s Carbon Border Adjustment Mechanism (CBAM) represents a new intersection between climate policy and international trade.”
Critically examine the implications of CBAM for India’s exports and its alignment with the principles of climate justice and the WTO framework. Suggest measures India can adopt to mitigate its economic and environmental impact.
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Note: This is just a model answer and a Model Structure model
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1.Which of the following adopted a law on data protection and privacy for its citizens known as ‘General Data Protection Regulation’ in April, 2016 and started implementation of it from 25th May, 2018? (UPSC CSE 2019)
(a) Australia
(b) Canada
(c) The European Union
(d) The United States of America
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Answer (c)
The General Data Protection Regulation (GDPR) is a comprehensive data protection law adopted by the European Union (EU) in April 2016, and it came into effect on 25th May 2018. It establishes strict rules on how personal data of EU citizens can be collected, processed, stored, and transferred — both within the EU and by entities outside it that handle EU residents’ data. The GDPR gives individuals greater control over their personal information through rights such as:
It also mandates organizations to obtain explicit consent for data processing and to report data breaches promptly. The regulation has become a global benchmark for privacy and data protection laws, influencing similar frameworks in several countries, including India’s Digital Personal Data Protection Act, 2023 |
- The World Trade Organization (WTO) serves as the sole global body responsible for establishing and overseeing the rules governing international trade among nations.
- Established in 1995, the WTO operates under the collective management of its 164 member countries. Decisions within the organization are made through consensus, and every member nation holds the power to veto any proposal, ensuring equal participation in the decision-making process.
- The primary objective of the WTO is to promote the free flow of trade across borders. This is achieved through the negotiation and implementation of trade agreements that are collectively discussed and signed by member states.
- In addition to formulating trade norms, the WTO functions as a platform for dialogue and dispute resolution, helping nations negotiate trade-related rules and resolve economic conflicts amicably.
- The Ministerial Conference stands as the organization’s highest decision-making authority, convening roughly once every two years. All member countries take part in this conference, which has the authority to make decisions on every issue covered by the WTO’s multilateral trade agreements.
- According to China’s Ministry of Commerce, India’s recent policy initiatives allegedly breach several World Trade Organization (WTO) commitments, particularly the principle of national treatment, and constitute import substitution subsidies that are not permitted under WTO rules.
- The ministry contends that these measures provide undue advantages to India’s domestic electric vehicle (EV) sector while adversely affecting China’s commercial interests, as reported by PTI.
- The complaint has emerged at a time when China is attempting to expand its EV exports to India, coinciding with ongoing efforts by both nations to restore normal diplomatic and trade relations after a five-year suspension following the Eastern Ladakh border standoff. With India representing one of the world’s largest automobile markets, Chinese EV companies view it as a crucial destination for increasing their overseas sales.
- Amid challenges such as domestic overcapacity, shrinking profit margins, and intense price competition, Chinese EV manufacturers, including BYD, are turning their focus toward international markets in Asia and the European Union.
- China remains India’s second-largest trading partner. In 2024–25, India’s exports to China declined by 14.5% to USD 14.25 billion, while imports grew by 11.5% to USD 113.45 billion, resulting in a widened trade deficit of USD 99.2 billion.
- Meanwhile, India has introduced a range of initiatives to strengthen its domestic EV ecosystem, notably through the Electric Vehicle Policy and the Production-Linked Incentive (PLI) scheme, both aimed at boosting local manufacturing and reducing import dependency
Discuss the implications of this development for India’s EV manufacturing strategy, its WTO commitments, and its broader trade relationship with China. Suggest measures India can adopt to balance domestic industrial growth with international trade obligations.
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Note: This is just a model answer and a Model Structure model
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Answer (A)
The terms Amber Box, Blue Box, and Green Box are classifications under the World Trade Organization (WTO) related to agricultural subsidies as per the Agreement on Agriculture (AoA). These categories distinguish the extent to which domestic support measures distort trade.
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- The term “rare earths” is somewhat misleading. Except for the unstable element promethium, most of these elements are relatively abundant in the Earth’s crust. For instance, cerium ranks as the 25th most common element—more plentiful than gold, silver, or tungsten—despite being labeled as “rare.”
- The “rare” designation stems from two main reasons. First, while these elements exist in moderate quantities, they rarely occur in concentrated deposits, making extraction both technically difficult and economically expensive.
- Second, the global supply chain is highly concentrated—over 60% of mined rare earths originate from China, which also controls around 90% of global processing capacity, according to the International Energy Agency (IEA).
- China’s dominance in this sector dates back to Deng Xiaoping’s 1987 statement likening the nation’s rare earth reserves to West Asia’s oil. Since then, Beijing has integrated rare earth control into its industrial and trade strategy, often using it as an economic lever.
- China’s restrictions on heavy rare earths like terbium and dysprosium—scarcer and more valuable—illustrate its efforts to weaponize trade. The U.S.–China trade tensions during the Trump era further motivated Beijing to use rare earths as a bargaining tool in negotiations.
- Although countries such as Brazil, Australia, and India possess substantial reserves, mining remains limited due to environmental concerns and economic non-viability, given that rare earth extraction is highly polluting.
- Recently, China expanded its export control list, adding five more rare earth elements—holmium, erbium, thulium, europium, and ytterbium—bringing the total restricted to 12 elements.
- For India, the immediate impact of these curbs is moderate since its domestic consumption is relatively low. However, imports are rising—from 1,848 tonnes in 2019–20 to 2,270 tonnes in 2023–24, with China supplying 65% and Hong Kong 10%. Sectors such as electric vehicles (EVs) and electronics have been most affected by China’s recent restrictions.
- To reduce dependence, India is seeking to expand its rare earth capacity. In November 2024, it auctioned seven seabed blocks in the Andaman Sea for exploration of polymetallic nodules and crusts, which may hold valuable heavy rare earth deposits, marking a step toward securing long-term strategic autonomy in critical minerals
Discuss the geopolitical and economic dimensions of rare earth dependence on China. How can India reduce its vulnerability and build a sustainable rare earth ecosystem?
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Note: This is just a model answer and a Model Structure model
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1.Recently, there has been a concern over the short supply of a group of elements called ‘rare earth metals’. Why? (2012)
- China, which is the largest producer of these elements, has imposed some restrictions on their export.
- Other than China, Australia, Canada and Chile, these elements are not found in any country.
- Rare earth metals are essential for the manufacture of various kinds of electronic items and there is a growing demand for these elements.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3
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Answer (c)
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