Vishleshan for Regulatory Exams: Check Daily News Analysis 30th June 2025

To ace your preparation for the RBI, SEBI, or NABARD exam, you have to stay updated about key economic and regulatory updates. In today’s edition of Vishleshan, we delve into a significant topic: Overcounting the Output of Our Informal Sector and RBI’s Mandate Looks Unlikely to Include Climate Change. These issues are highly relevant for competitive exams and offer valuable insights into India’s evolving economic scenario. Keep reading to stay ahead with a clear understanding of these current updates.

ALSO CHECK: News Analysis of 27th June 2025 

Also, know why RBI Grade B Phase 1 Exam: The Silent Eliminator of 99% Aspirants & What is the Finance and Management Syllabus for RBI Grade B Exam?

Overcounting the Output of Our Informal Sector

Context: The statistical methods in use suggest that value addition in this sector may be lower than what India has officially recorded. Here is a deep delve into how we estimate the gross value added (GVA) by unorganized segments of major sectors like trade.

Source: Mint

The measurement of India’s Gross Domestic Product (GDP), particularly the contribution of its vast informal sector, has been a subject of intense debate. While the National Statistics Office (NSO) asserts improved data tracking for this segment, concerns persist regarding the accuracy of its estimated value added, especially since the 2015 GDP series revision. This discussion highlights the complexities of capturing the economic reality of an unorganized sector and the potential implications for the overall understanding of India’s economic growth.

Informal Sector, Labour Force, and Importance of Data:

The informal (or unorganized) segment of the economy refers to economic activities that are not officially regulated, recorded, or taxed by the government. It operates outside the purview of formal laws and regulations, often characterized by small-scale, unregistered enterprises and casual employment.

• It contributes 45% of India’s total Gross Value Added (GVA).
• It accounts for 33% of the non-agriculture sector.

Labour Force Involved in Informal Sector in India: The informal sector is a major employer in India. The article implicitly details its structure:

• Own-account enterprises: Businesses run without any regularly hired workers. They constitute the overwhelming majority: 88.6% in rural areas and 77.3% in urban areas.
• Establishments: Enterprises employing at least one paid worker. They make up 11.4% in rural areas and a combination of non-directory (20.6%) and directory (2.1%) establishments in urban areas.
• Directory establishments: Establishments with six or more workers. These represent a very small share, only 2.1% of urban trade sector enterprises.

Why is it important to gather data on the informal sector?

• Accurate GDP Estimation: Given its significant contribution to GVA, accurate measurement of the informal sector is crucial for reliable GDP data. The article’s core argument revolves around the accuracy of this data.
• Effective Policymaking: Without precise data, policies related to welfare, employment, taxation, and social security may be misdirected or ineffective.
• Understanding Economic Dynamics: Provides insights into employment trends, productivity levels, and income distribution within a large segment of the economy.
• Formalization Efforts: Helps in tracking the progress at formalizing the economy.

Analysis of the Article: Decoding the Statistical Haze Over Informal Trade

The article, building on T.C.A. Anant’s column, delves into the methodological nuances and potential overestimation in measuring the informal sector’s Gross Value Added (GVA) in India, particularly for the trade sector.

1. The “Statistical Haze” and Criticism of GDP Overestimation:

• Context: The article addresses criticisms that India’s GDP, especially after the 2015 series revision, may be overestimated, partly due to alleged mismeasurement of the informal sector. These criticisms often cite the impacts of demonetization, GST introduction, and the COVID-19 pandemic on the informal sector.
• Overall Argument: The author argues that such criticism requires “more careful analysis”. While acknowledging that the informal sector is tracked, the article raises concerns about the accuracy of the estimation methodologies.

2. The ‘Labour-Input Method’ and GVAPW (GVA per Worker):

• Methodology: For many non-agriculture sub-sectors, GVA for the base year (2011-12 for the current series) is estimated using the ‘labour-input method’. This involves multiplying GVA per worker (GVAPW) by the workforce. The source of GVAPW data for 2011-12 was the National Sample Survey (NSS) 67th Round (2010-11).
• Extrapolation for Later Years: For years after the base year, benchmark estimates are moved using “relevant selected indicators, like corporate growth, the volume/quantity index, sales tax and others”.

3. Specific Concerns in GVA Estimation (Case Study: Trade Sector):

• Contention on GVAPW Selection (2011-12 Base Year): The article argues that GVA estimates for unorganized segments of sectors like trade, hotels, restaurants, telecom, and services in the 2011-12 base year were made using a “palpably higher GVAPW for establishments in rural areas and directory establishments in urban areas”.
• Incorrect Assumption: This was based on the “professed reasoning that ‘…most of the establishments in urban areas are Directory Establishments’”. However, this contention was “not correct”, as directory establishments’ share in the urban trade sector was merely 2.1%.
• Disproportionate GVAPW Multiples:
  • In urban areas, the GVAPW of directory establishments was 2.40 times that of own-account enterprises (which form 77.3% share).
  • In rural areas, the GVAPW of establishments (11.4% share) was 2.31 times that of own-account enterprises (88.6% share).
• Resulting Overestimation: The author argues that the method adopted for the 2011-12 base year, which “took a thin slice of relatively productive businesses to represent the whole”, would have overcounted the value added per worker and would thus have resulted in a higher GVA figure”. This pattern is observed across other sectors as well.

4. Overestimation of Growth Rates in Subsequent Years (Post-2015-16):

• Dissonance between Indicators: The possibility of mismeasurement depends on the “dissonance between the chosen indicator and the sector itself”.

• GVAPW Growth vs. National Accounts: In the trade sector, there was a “significant decline in GVAPW growth among all categories of workers during 2015-22 in comparison with 2010-15”.
  • For rural own-account enterprises, GVAPW growth fell from 10.1% (2010-15) to 4.0% (2015-22).
  • For rural establishments, it fell from 5.8% to 4.8%.
  • For urban own-account enterprises, it fell from 10.3% to 2.5%.
  • For urban non-directory establishments, it fell from 10.3% to 2.3%.
  • For urban directory establishments, it fell from 6.2% to 4.4%.
• Contrasting with National Accounts: Despite this decline in GVAPW growth, “in the National Accounts, informal trade is seen to have grown annually at a rate of 10% over the period 2015-22”. This “wide gap” suggests that “subsequent growth rates in these informal segments have been overestimated in India’s National Accounts, particularly after 2015-16”. The author believes “the only debatable issue is the extent of this overestimation”.

5. Concerns about Agricultural Data:

• The article also raises concerns about potential overestimation in agriculture data (which generally receives less scrutiny). Drèze and Oldiges highlighted a “significant and increasing data gaps between the production of cereals (like wheat and rice) and all their known uses, reaching nearly 70 million tonnes in 2022-23,” enough to feed half a billion people for one year.
• India’s cereal gap started widening around 2008 and grew from 30 million tonnes in 2011 to enormously by 2022-23. The question is posed: “Is India’s cereal production overestimated?”.

6. Future Outlook and Recommendations:

• The Union Ministry of Statistics and Programme Implementation proposes to conduct its survey on the informal sector annually, which is a positive step for “tracking it more closely”.
• However, the “jury is still out on whether the informal sector is actually being tracked better”.
• The author advises that these new survey results should be analysed for their “utility in sectoral GVA estimation” before adoption, to avoid raising “more questions about the economy instead of delivering the clarity we hope for”. This calls for careful scrutiny of the methodology for informal sector data.

In conclusion, while the Indian government is indeed making efforts to track the informal sector more frequently, the article raises critical methodological concerns regarding the base-year GVA estimation and the subsequent growth rates, suggesting a probable overestimation of the informal sector’s contribution and overall GVA, particularly after 2015-16. These issues, alongside potential overestimation in agricultural production, highlight a “statistical haze” that needs to be cleared for a truly accurate understanding of India’s economic performance.

Ready to start your RBI Grade B journey? Start preparing with the courses below!

RBI’s Mandate Looks Unlikely to Include Climate Change

Context: Climate mandates for central banks have been opposed by Raghuram Rajan and others, but the risks posed by this crisis demand a response. Given India’s lengthy legislative process, the Reserve Bank of India is moving slowly but cautiously.

Source: Mint

The increasing severity and unpredictability of climate change have sparked a global debate on whether central banks, traditionally focused on price stability and economic growth, should formally integrate climate considerations into their legal mandates. While the Reserve Bank of India (RBI) currently operates with an explicit dual mandate, the escalating financial risks posed by climate change are compelling it and other central banks worldwide to develop frameworks for assessing and mitigating these risks, even if formal mandate changes are still a subject of contention and political mobilization.

Climate Finance:

To understand the financial dimensions of climate action, it’s essential to define these terms:

Climate Finance:

• What: Refers to local, national, or transnational financing drawn from public, private, and alternative sources to support mitigation and adaptation actions that will address climate change. Its purpose is to reduce greenhouse gas emissions and enhance sinks, as well as to reduce the vulnerability of human and ecological systems to the negative impacts of climate change.
• Scope: Specifically focused on climate change. It covers financial flows that support climate-specific projects and programs (e.g., renewable energy projects, flood defenses, climate-resilient agriculture).
• Objective: To enable the transition to a low-carbon, climate-resilient economy.

Green Finance:

• What: A broader term that encompasses financial investments flowing into sustainable development projects and initiatives that are environmentally friendly. It includes financing for a wider range of environmental objectives beyond just climate change.
• Scope: Includes climate change projects, but also other environmental objectives such as biodiversity conservation, pollution control, waste management, sustainable land use, and water management.
• Objective: To achieve broader environmental sustainability and promote green economic growth.

How is it different from Green Finance?

• Scope: Climate finance is a subset of green finance. All climate finance is green finance, but not all green finance is climate finance.
• Focus: Climate finance has a specific focus on mitigating greenhouse gas emissions and adapting to climate impacts. Green finance has a wider focus on various environmental benefits.

Climate Finance Principles/Policies:

International bodies and domestic regulators are increasingly developing frameworks for climate finance and climate-related financial risk management.

UN-Affiliated Bodies (e.g., UNEP, UNFCCC):

• United Nations Environment Programme (UNEP): Played a significant role in advocating for green and climate finance. The article mentions a “recent policy brief from the United Nations Environment Programme provides a landscape analysis within the Asia-Pacific region of climate-related risks in financial regulation and supervision”.
• UN Framework Convention on Climate Change (UNFCCC): Establishes the overarching international framework for climate action, including principles for climate finance, such as the commitment by developed countries to mobilize $100 billion per year for developing countries.
• Principles: Key principles often include:
  • Common but Differentiated Responsibilities and Respective Capabilities (CBDR-RC): Acknowledges that developed countries, historically major emitters, have a greater responsibility to provide climate finance.
  • Transparency and Accountability: Ensuring that climate finance flows are measurable, reportable, and verifiable.
  • Accessibility: Making finance accessible to developing countries.

Domestic Regulators (RBI and SEBI):

• Reserve Bank of India (RBI):
  • Mandate: The RBI’s legal remit explicitly includes “price stability and growth patronage”.
  • Climate Risk Framework: RBI has been “working to develop a climate risk framework that will help borrowers, lenders and the regulator assess and develop risk mitigation tools”.
  • Draft Disclosure Framework (February 2024): RBI released a “draft disclosure framework for regulated entities (REs) on climate-related financial risks” in February 2024.
    • Purpose: To address “inadequate information about climate-related financial risks [that] can lead to mispricing of assets and misallocation of capital”.
    • Four Disclosure Areas: Under the draft guidelines, REs need to make climate-related disclosures in four areas: governance, strategy, risk management, and metrics and targets.
  • Progress: The conversion of this draft into final guidelines is a “work-in-progress even after 16 months,” indicating the “difficulty in pinning down exact metrics”.
• SEBI (Securities and Exchange Board of India):
  • SEBI has also introduced Business Responsibility and Sustainability Reporting (BRSR) for listed entities, mandating disclosures on environmental, social, and governance (ESG) performance, including climate-related aspects. It regulates green bonds and other sustainable finance instruments.

Analysis of the Article: Decoding the Debate on Central Bank Climate Mandates

The article delves into the growing global debate on whether central banks should include climate change in their legal mandates, examining the risks involved, India’s current position, and the arguments for and against such a shift.

1. The Growing Clamour for Climate Mandates:

• Reason: The demand for including sustainability objectives in central bank mandates stems from the “increasingly self-evident and material effects of climate change”.
• Three-Cornered Risk Matrix for Financial System: Climate change poses risks that directly affect financial institutions and stability:
  • Physical Risks: To assets through extreme weather events (e.g., floods, droughts, heatwaves, wildfires). These can damage collateral, disrupt operations, and increase insurance claims.
  • Transition Risks: For high-carbon projects slow in reducing their carbon footprint. As economies transition to net-zero, these assets may become “stranded” or lose value due to policy changes, technological shifts, or market preferences.
  • Liability Risks: Arising from weather-related losses or legal actions against emitters for their contribution to climate change.
• Impact on Financial Stability: All these risks “have a way of affecting financial institutions and eventually financial stability”. Central banks are being forced to deploy “monetary policy as well as micro- and macro-prudential instruments to manage these risks”.
• Visible Marker of Climate Change: “The fickle and unpredictable nature of the weather lately has become a visible and undeniable marker of climate change”.
  • Asia’s Temperature: A recent World Meteorological Organization report found Asia’s 2024 average temperature 1.04° Celsius above the 1991-2020 average, making it the warmest or second-warmest year on record.
  • India’s Unpredictable Weather: India experienced “unpredictable blow-hot-blow-cold weather pattern,” with early rains in Mumbai and missed heatwaves in Hyderabad in May 2025. This “has adverse effects on communities and economies, especially the farming sector”.

2. Regional Landscape of Climate Mandates in Central Banks:

• Supervisory Guidelines: “Most central banks in the region have issued supervisory guidelines on climate risk management”.
• No Capital Adjustments: A common feature shared by RBI with most central banks in the region is that “there are no capital adjustments required for REs based on climate-related issues”.
• Formal Risk Management Guidelines: Compared to RBI’s 16-month-old draft, “many central banks in the region already have formal risk management guidelines and climate risk disclosure norms in place”.
• Explicit Inclusion in Mandates: Central banks in Malaysia, the Philippines, Singapore, and New Zealand have explicitly included climate change and sustainability objectives in their mandates.
• Tacit Integration: Central banks in China, South Korea, Thailand, and Indonesia show a “somewhat tacit integration of the same objectives”.
• Outliers (Neither Explicit nor Implicit): India, Japan, and Australia are outliers, with “neither explicit nor implicit integration of sustainability objectives in their legal remit”.

3. Arguments For and Against Including Climate Change in Central Bank Mandates:

• Argument Against (Former RBI Governor Raghuram Rajan): In a 2023 article, Raghuram Rajan argued against including climate change in central bank mandates, citing:
  • Limited Central Bank Effectiveness: Central banks have limited tools to combat climate change, which is fundamentally a fiscal and structural issue.
  • Distraction from Primary Mandates: It could “detract them from their primary mandates” (like price stability), potentially diluting their focus and effectiveness in core areas.
• Argument For (Crisis Logic): The article presents a “compelling logic that even climate change is a crisis and should be recognized as such,” similar to how central bank mandates changed after the 2008 financial crisis.
  • Systemic Risk: Climate risks are increasingly seen as systemic financial risks, falling within the purview of central banks’ financial stability mandates.

4. India’s Path Forward:

• Amending RBI Act: Changing the central bank’s mandate in India would involve “amending the RBI Act”. This “requires political mobilisation” and implies “an investment of time”.
• Exploring Implicit Measures: Meanwhile, the “RBI seems to be exploring the alternative of integrating implicit measures, gingerly but surely”. This refers to its work on the climate risk framework and disclosure guidelines, even without an explicit mandate change.

In conclusion, while the global clamour for central banks to adopt climate mandates grows due to the undeniable financial risks of climate change, India’s RBI, like some other key economies, remains an outlier with no explicit or tacit integration in its legal remit. Despite arguments against mandate expansion, the RBI is proactively developing climate risk management frameworks and disclosure norms, navigating the complexities of unquantifiable risks and stakeholder inputs. The decision to formally change its mandate remains a political and legislative hurdle, but the central bank is implicitly addressing climate-related financial risks within its existing powers.