Union Budget 2025-26 and India Post

The Union Budget 2025-26 is anticipated to include an additional financial package aimed at transforming India Post into a more customer-centric and digitized logistics organization, according to a government official.

Financial Discussions and Allocations

• Recent high-level meetings between the ministries of finance and communications discussed India Post's capital expenditure requirements.
• The Finance Ministry allocated Rs 25,378 crore to the Department of Post (DoP) for 2024-25, a 1.68% decrease from the previous year's Rs 25,814 crore allocation but a 21% increase from the 2022-23 allocation.

Infrastructure Development and Customer Satisfaction

The support aims to build relevant infrastructure and ensure customer satisfaction through effective services. The government remains optimistic about India Post's growth despite not specifying the quantum of additional assistance.

Expansion of Banking Services

• Union Finance Minister  announced plans to expand banking services in the northeastern states with over 100 new branches of India Post Payments Bank (IPPB).
• IPPB, launched in 2018 with 100% government equity, saw 26.8 million accounts opened in the current year, with 59% held by women and 77% located in rural India.

Government Schemes and Mandates

• IPPB supports various government schemes like MGNREGA, PM Kisan, Pahal, and others.
• Received mandates from major government agencies including Employees Provident Fund Organisation and Reserve Bank of India.

Expenditure Breakdown

• DoP's actual expenditure was Rs 22,015 crore in 2022-23, and revised expenditure was Rs 24,389 crore in 2023-24.
• Revenue expenditure, mainly for salaries and pensions, comprises over 95% of the budget at Rs 24,115 crore.
• Remaining Rs 1,262 crore allocated for capital expenditure, primarily on IT modernization (Rs 748 crore) and IPPB (Rs 250 crore).

Additional Industry Insights

• Industry seeks tax relief, capex boost, and reforms at pre-budget meetings.
• CII calls for a reduction in fuel excise and suggests consumption vouchers to boost demand.
• Reports indicate potential income tax rate cuts to enhance consumption.
• Steel ministry suggests increased customs duty to counter Chinese market threats.
• NATHEALTH urges the government to address healthcare gaps in the upcoming Budget.

Consumption Expenditure Growth in Sikkim and Meghalaya

Rural and urban regions of the northeastern states of India, particularly Sikkim and Meghalaya, have witnessed a notable increase in the Monthly Per Capita Consumption Expenditure (MPCE) during August 2023-July 2024.

Key Growth Statistics

• Rural Sikkim:
  • MPCE grew by 21.3% to reach Rs 9,377.
• Rural Tripura:
  • Growth of 20.2%.
• Rural Nagaland:
  • Growth of 17.4%.
• Rural Mizoram:
  • Growth of 14.2%.
• Urban Meghalaya:
  • MPCE increased by 21.9% to Rs 7,839.
• Urban Manipur:
  • Growth of 21.8%.
• Urban Sikkim:
  • Growth of 15.1%.

Consumption Inequality Reduction

The Gini coefficient, an indicator of income and consumption inequality, has shown a reduction:

• Rural Areas: Dropped from 0.266 in 2022-23 to 0.237 in 2023-24.
• Urban Areas: Reduced from 0.314 in 2022-23 to 0.284 in 2023-24.

Additional Insights

• Concerns have been raised by the RBI regarding the negative impact of crypto assets on financial stability.
• Stress in the microfinance sector has notably doubled from April to September, according to the RBI.
• The RBI Governor expressed high confidence in the economy's outlook.
• There is a flagged risk of secured loans due to slippages in smaller personal loans by the RBI.
• External debt has risen to $711.8 billion, marking a 4.3% increase from June, as reported by the Finance Ministry.

RBI Financial Stability Report on NBFCs

Loan Growth Moderation

• Loan growth of shadow banks moderated to 6.5% on a half year-on-half year basis by September 2024.
• Significant impact seen in upper-layer NBFCs, especially in NBFC-Investment credit companies, with 63.8% retail lending.
• Middle-layer NBFCs, excluding government-owned ones, showed robust growth in retail loan portfolios.

Credit Growth and Funding Sources

• Overall credit growth slowed to 16% from 22.1% year-on-year.
• Bank funding for upper-layer NBFCs dropped to 34.6% and for middle-layer NBFCs to 26.3%.
• NBFCs are turning to the bond market, especially private placements, and increasing foreign currency borrowings.

Cost and Risk Implications

• Growth in bank borrowings in NBFCs' liabilities fell from 26% to 17%, raising their cost of funds.
• RBI cautions that increased foreign currency borrowings could pose currency risks if unhedged.

Sector Health and Vulnerabilities

• NBFC sector remains healthy with strong capital buffers, robust interest margins, and improving asset quality.
• Write-offs are rising, with some NBFCs showing significantly higher write-offs.
• Upper-layer NBFCs are more vulnerable to liquidity issues due to higher short-term liabilities.

Stress Test Findings

• RBI's stress test on 162 NBFCs estimated a future GNPA ratio of 3.4% with a CRAR of 21.2%.
• Eleven NBFCs may fall below the minimum CRAR requirement of 15% under baseline conditions.
• CRAR may reduce by 70-100 basis points under medium to high-risk scenarios due to income losses and additional provisioning.

Liquidity Resilience

• One-year liquidity mismatch is expected to stay within 20%, but some NBFCs may experience higher mismatches under stress.

Impact of Crypto Assets on Financial Stability

The Reserve Bank of India (RBI) emphasizes the potential risks of widespread use of crypto assets, including stablecoins, on a country's macroeconomic and financial stability.

Potential Risks Highlighted by the RBI

• Excessive use of crypto assets could undermine the effectiveness of monetary policy.
• They pose fiscal risks and can circumvent capital flow management measures.
• Diverts resources from financing the real economy.
• Threatens global financial stability due to increasing linkages with traditional financial systems.
• Stablecoins, in particular, present potential "run risks" similar to traditional banking runs.

Recent Developments in Crypto Markets

The report notes significant growth in the value of virtual digital assets (VDAs) such as bitcoins, driven by geopolitical events.

• Bitcoin price surged to an all-time high of $108,316.
• Market capitalization of stablecoins increased, facilitating lending, borrowing, and trading of digital assets.

Challenges Posed by Distributed Ledger Technology (DLT) and Tokenisation

DLT-based tokenisation poses several financial stability vulnerabilities:

• Liquidity and maturity mismatches.
• Leverage and asset price quality concerns.
• Increased interconnectedness and operational fragilities.

Tokenisation involves creating digital representations of real-world assets using DLT, which can deepen links between traditional and decentralised financial systems.

Current Landscape in India

Major Indian crypto firms like CoinDCX and CoinSwitch have significant user bases, with 16 million and 20 million users respectively, indicating the growing interest in crypto assets in India.

Pre-Budget Meeting: Health and Education Focus

Health and education experts met with Union Finance Minister  to discuss several pressing issues ahead of the budget announcement.

Cancer Care Equipment

• Customs Duty Reduction: Experts emphasized the importance of reducing customs duty on imported radiation machines like linear accelerators, as they are crucial for cancer care and not available domestically.
• Expansion of Cancer Care: Discussions included expanding cancer care services to regional areas, though medical education was not discussed.

National Education Policy (NEP), 2020

• Implementation: Experts urged the government to expedite NEP 2020 implementation, focusing on vocational education and teacher training, especially in Anganwadis.
• Technology in Education: Leveraging technology, artificial intelligence, and digital education to increase the gross enrollment ratio and raise education allocations was discussed.

Health and Research Initiatives

• Health Expenditure: Increasing health spending and research on non-communicable diseases was emphasized by attendees from various departments.

Financial Stability Report Highlights

The Reserve Bank of India's (RBI) Financial Stability Report (FSR) addresses potential challenges and forecasts related to the banking sector and economic growth.

Banking Sector Challenges

• Projected increase in bad loans and potential decline in capital buffers under stress scenarios.
• Concerns over microfinance and consumer credit stress.
• Sharp rise in write-offs among private sector banks could mask asset quality deterioration.
• Small finance banks face higher retail lending impairments, with a GNPA ratio of 2.7%.
• 50% of credit card and personal loan borrowers have other existing loans.
• Unhedged external commercial borrowings (ECBs) remain high at $65.49 billion (34.4% of total ECBs).
• Foreign currency borrowing by NBFCs poses currency risks if unhedged.

Economic Growth Projections

• Economy expected to grow by 6.6% in FY25.
• Growth aided by rural consumption, government investments, and strong service exports.
• Mutual funds have indicated their ability to withstand redemption pressures

Risk Factors

• Irrational market exuberance could be fueled by monetary easing and accommodative conditions.
• Cyberattack risks highlighted due to reliance on AI tools like ChatGPT.
• Potential risks from softened industrial activities, global spillovers, and protective trade policies.

Stress Test Scenarios

• Bad loan ratio could rise to 3% by March 2026, from 2.6% in September 2024.
• Capital adequacy ratio may decline to 16.5% in March 2026 under baseline, and further in high-risk scenarios.
• Key financial ratios for banks, insurance, and finance companies are expected to stay above regulatory requirements until 2026.

The report underscores the need for close monitoring of financial vulnerabilities and stresses the importance of maintaining economic resilience in the face of potential shocks.

Emerging Risks from AI in the Financial Sector

The Reserve Bank of India (RBI) has highlighted significant emerging risks associated with the increasing use and adoption of Artificial Intelligence (AI) in the financial sector.

Key Concerns

• Cyber Risks:
  • Generative AI may raise the risk of cyber threats, such as sophisticated phishing attacks using deepfakes.
  • The widespread availability of AI services, like ChatGPT, could potentially be exploited for cyberattacks.
• Financial Stability:
  • AI evolution and adoption pose risks to financial stability due to enhanced interconnectedness and reliance on shared technology and service providers.
• Market Risks:
  • AI adoption in capital markets may lead to increased market speed and volatility, especially under stress, due to highly correlated AI trading strategies.
  • Leverage-funded trades could amplify market stress through fire sales and feedback loops.
• Market Concentration:
  • Risks of market concentration within the financial sector and with third-party service providers of cloud and AI services are high.
  • High technological penetration and concentration can lead to nonlinear risk transitions, posing systemic risks.

Regulatory Response

The RBI urges regulators to update their skills and tools, adapting frameworks to address and mitigate emerging risks from AI technologies.

AI Regulation Committee

• An eight-member panel has been established by the RBI to develop a framework for the responsible and ethical use of AI.
• The committee will analyze current AI adoption in financial services and review global regulatory and supervisory approaches.
• Recommendations will include governance aspects for the responsible, ethical adoption of AI models in the financial sector.

Systematic Deregulation and Reform of Business Laws

The central government has urged states to implement a "systematic deregulation" or "line-by-line reform" of laws, aimed at simplifying the processes for businesses to open, run, grow, or exit. This initiative was discussed at the National Conference of Chief Secretaries held from December 13-15, with the aim to attract investments, create jobs, and stimulate growth.

Key Areas for Deregulation

• Restrictions on increasing women's employment.
• High electricity tariffs.
• Complex land and building zone/construction regulations.

Employment of Women

• The Centre recommends adopting zero prohibition regimes for working women, similar to countries like Vietnam, Philippines, Malaysia, and Singapore.
• Bihar prohibits women from working at night, while states like Karnataka, Maharashtra, and Telangana allow it conditionally.
• Women are barred from certain industries deemed "dangerous," impacting their potential income.

Regulatory Standards and Industry Expansion

• Rigid zoning laws and worker schedules are seen as hindrances compared to more flexible standards in countries like Japan and South Korea.
• Examples of stringent regulations include minimum road width requirements for factories and parking space regulations.
• Industrial buildings in India lose about 50% of land due to stringent building standards.

Hostel and Power Tariff Regulations

• Restrictions on setting up worker hostels vary across states, with some like Bihar not allowing them at all.
• The industrial power tariff in states like Telangana and Maharashtra is significantly higher than the cost of supply, increasing operational costs.

Administrative Challenges

• "Arbitrary" administrative actions and lack of representation and redressal mechanisms are identified as key issues.
• Short duration validity of 'No Objection' certificates for fire safety and absence of third-party certification are concerns.

Phased Approach to Deregulation

Phase 1

• Reduce compliance burden to save time and cost.
• Streamline system and process flow.
• Digitisation of processes.
• Provide incentives to key sectors.

Phase 2

• Liberalise standards and controls to improve feasibility.
• Set legal safeguards for enforcement.
• Reduce tariffs and fees for government utilities.
• Use risk-based regulation involving third parties.

Overview of Small Language Models (SLMs) in AI

By 2025, Small Language Models (SLMs) are anticipated to significantly influence the field of artificial intelligence. SLMs are poised to drive the democratization and business impact of AI due to their unique advantages.

Characteristics and Advantages of SLMs

• Smaller Datasets: SLMs operate using smaller datasets, making them highly effective for organizations focusing on internal data analysis.
• Cost-Effective and Efficient: They require less computational power, are easier to train, and are more cost-effective compared to Large Language Models (LLMs).
• Specific Task Suitability: SLMs are better suited for specific, often critical tasks, allowing for deeper impact within organizations.

SLMs in 2024 and 2025

Throughout 2024, SLMs achieved significant adoption due to their suitability for mass usage and democratization of AI. They will gain prominence in 2025, especially in sectors requiring high accuracy and privacy, like healthcare and finance.

Use Cases for SLMs

• Healthcare:
  • Enhancing patient interaction and support.
  • Transcribing patient interactions and data entry for electronic health records.
  • Providing preliminary diagnostic support.
• Banking and Finance:
  • Offering personalized financial advice.
  • Enhancing fraud detection systems.
  • Improving document analysis and processing.

Future Developments and Impact

• SLMs are expected to integrate into business processes and run on edge devices, allowing user-controlled data exchanges.
• They will be pivotal for real-time GenAI applications on mobile, IoT, and edge devices.
• Open-source initiatives will continue to aid in fine-tuning SLMs using LLMs, enhancing their capabilities.

Initiative for Enhancing Women's Labour Force Participation in India

India is launching a pioneering initiative to boost the participation of adolescent girls in the labour market through door-to-door mobilisation for skills training.

Project Overview

• The Ministry of Skills Development and Entrepreneurship (MSDE) is collaborating with the Ministry of Women and Child Development (MWCD) on this pilot project.
• The aim is to prepare adolescent girls for the workforce at an early age, covering 3,800 girls across 27 districts in 19 states.
• Training will focus on non-traditional job roles such as IT, hospitality, and green jobs.

Incentives and Supports

• Incentives include boarding and lodging costs, conveyance allowance, a one-time travel cost, and a post-placement stipend.
• Soft skills training and holistic development programs, including health and wellness, career counseling, and job placements, will be provided.

Project Goals and Expansion

• The primary goals are to increase female workforce participation, empower women, and instill entrepreneurial skills.
• Success could lead to project expansion to more districts and states.

Current Status and Training

• The ministry has already enrolled 2,200 girls; 1,346 have been identified for batch formation across 21 training centers in 15 districts.
• Job roles include non-clinical caretaker for mother and newborn, play school facilitator, and care home supervisor, among others.

Statistical Context

• As per the Periodic Labour Force Survey by MoSPI, women's labour force participation in India increased from 23.3% in 2017-18 to 41.7% in 2023-24.
• This is still below the global average of over 53% and the male participation rate of over 75% in India.