UPSC Mains Current Affairs for 3 February 2026

16th Finance Commission’s Warning On Rising Fiscal Risks

February 3, 2026

Fiscal Risks Latest News

The 16th Finance Commission has cautioned states against the rapid expansion of large, unconditional cash transfer schemes, which now account for over 20% of total state subsidy spending.

Understanding Cash Transfers in India

Cash transfers have increasingly become a preferred welfare instrument in India’s public finance framework.
These transfers involve direct monetary payments to beneficiaries, usually deposited into bank accounts using the Jan Dhan-Aadhaar-Mobile (JAM) trinity.
They are broadly classified into conditional and unconditional transfers. While conditional transfers are linked to outcomes such as education or health, unconditional cash transfers impose no performance or usage conditions.
Historically, unconditional transfers in India were limited to social security pensions and farmer income support schemes.
However, over the past decade, especially after improvements in digital delivery systems, states have expanded cash-based welfare to wider population groups.
This shift has altered the composition of state subsidies, raising questions about long-term fiscal sustainability.

Trends in State Subsidies and Cash Transfers

According to the 16th Finance Commission, large-group unconditional cash transfer schemes now constitute 20.2% of total state subsidy expenditure in the 2025-26 Budget Estimates, a sharp rise from just 3% in 2018–19.
This indicates a structural shift in how states allocate welfare spending.
The Commission notes that while pensions and farmer support accounted for nearly 84% of unconditional cash transfers in 2018-19, their share has fallen significantly.
By 2025-26, large-group schemes alone account for 47.4% of all unconditional transfers, overtaking traditional categories.
This reflects a growing preference for politically visible, broad-based cash schemes over targeted or merit-based subsidies.

State-Level Patterns and Key Schemes

The Commission highlighted Maharashtra, Odisha, and Jharkhand as states that have witnessed the steepest rise in such spending over the past two years.
Major schemes include:
- Majhi Ladki Bahin Yojana (Maharashtra): Rs. 1,500 per month to eligible women.
- Gruha Lakshmi (Karnataka): Rs. 2,000 per month to women heads of households.
- Lakshmir Bhandar (West Bengal): Monthly transfers to women beneficiaries across social categories.
In Maharashtra, spending on large-group cash transfers rose from 0.6% of total revenue expenditure in 2023-24 to 6.2% in 2025-26, while Jharkhand saw an increase from 0.8% to 13% over the same period.
Odisha recorded a jump from nil to 5.1%. These sharp increases indicate a rapid fiscal expansion rather than a gradual policy transition.

Fiscal Concerns Raised by the 16th Finance Commission

The Finance Commission has warned that the unchecked expansion of unconditional cash transfers can destabilise state finances in the long run.
Such schemes impose a recurring fiscal burden and reduce flexibility in budgetary allocations.
The Commission observed that many of these transfers are poorly targeted, expanding into large beneficiary bases that dilute their redistributive effectiveness.
A major concern is the crowding out of capital expenditure. Rising revenue spending on cash transfers limits states’ ability to invest in infrastructure, education, and health, which are critical for long-term growth.
The Commission also cautioned against financing these schemes through off-budget borrowings, guarantees, or revenue assignments, calling such practices fiscally imprudent due to reduced transparency in public accounts.

Recommendations for Reform

To address these risks, the 16th Finance Commission has recommended:
- Periodic and rigorous review of subsidy schemes.
- Rationalisation of beneficiary bases to ensure support reaches the most vulnerable.
- Introduction of sunset or exit clauses, especially for non-merit and general unconditional transfers.
- Discontinuation of off-budget financing mechanisms for welfare schemes.
The Commission emphasised that welfare policies must align with fiscal responsibility and deficit reduction goals, rather than becoming permanent entitlements without review.

Source: IE

Fiscal Risks FAQs

Q1: What share of state subsidies is now accounted for by cash transfers?

Ans: Cash transfers constitute about 20.2% of total state subsidy spending in 2025–26.

Q2: What type of cash transfers has grown the fastest?

Ans: Large-group unconditional cash transfer schemes have expanded the most.

Q3: Which states saw the sharpest rise in such spending?

Ans: Maharashtra, Jharkhand, and Odisha recorded the steepest increases.

Q4: Why does the Finance Commission oppose off-budget financing of cash schemes?

Ans: It creates fiscal opacity and undermines budgetary transparency.

Q5: What key reform does the Commission suggest for cash transfer schemes?

Ans: Introducing sunset clauses and periodic reviews to ensure fiscal sustainability.

India–US Trade Reset – Reduced Tariffs, Strategic Bargains and the China Factor

February 3, 2026

India-US Trade Reset Latest News

After months of tariff-driven tensions, India–US economic relations have witnessed a significant thaw following a telephonic conversation between the Indian Prime Minister and the U.S. President.
The U.S. has agreed to reduce its reciprocal tariff on “Made in India” products to 18%, down sharply from an effective 50% imposed in 2025.
The announcement signals a possible reconfiguration of India–US trade ties amid global supply chain realignments and geopolitical churn.

Key Developments

Reduction in U.S. tariffs on Indian goods:
- The U.S. will reduce reciprocal tariffs on Indian exports from 50% to 18%.
- This includes rollback of 25% Liberation Day tariffs, and an additional 25% penalty imposed due to India’s import of Russian oil.
- The Indian PM termed this a boost to Make in India, improving market access for Indian exports.
Claim of a broader trade deal:
- President Trump announced that India and the U.S. have “agreed” to a trade deal.
- According to Trump, India has committed to reducing tariff and non-tariff barriers on U.S. goods (claimed to be moving towards “zero”), purchasing over $500 billion worth of U.S. products, including -
  - Energy (natural gas, coal),
  - Technology,
  - Agricultural goods, and
  - Nuclear equipment.
- For perspective, India’s total goods imports in FY25 were $720.24 billion.
Energy and geopolitics:
- Trump claimed that India has agreed to stop buying Russian oil, increase imports from the U.S. and potentially Venezuela.
- These assertions have not yet been officially confirmed by India’s Ministry of External Affairs (MEA).
- The claims link trade concessions to broader U.S. strategic objectives, including ending the Russia–Ukraine war.
Strategic timing and diplomatic context:
- The announcement coincided with External Affairs Minister S. Jaishankar’s visit to the U.S. (Feb 2–4).
- He is participating in the Critical Minerals Ministerial, focused on supply chain resilience, clean energy transition, and reducing dependence on China in critical minerals.
- India, the U.S., and other mineral-rich countries are expected to sign a non-binding framework covering mining, processing, recycling, and pricing mechanisms.

Strategic Significance

India as a counterweight to China:
- The tariff cut reinforces the U.S. view of India as a strategic ally and counterweight to China.
- With Western economies imposing anti-dumping duties and trade restrictions on Chinese products, India gains a relative advantage in accessing U.S. and EU markets.
Macroeconomic and market implications:
- The deal was seen as critical amid concerns over capital outflows, pressure on the rupee.
- Expectations include improved investor sentiment, potential strengthening of the rupee, and a positive market response.
India’s expanding trade footprint:
- With trade arrangements now in place with the U.S., UK, and EU, India is better positioned than many East Asian economies that rely heavily on Chinese investment.
- A tentative thaw in India–China trade relations adds another layer of complexity.

Challenges and Concerns

Ambiguity in the fine print:

- The actual benefits depend on the detailed terms of the agreement, which remain unclear.
- Past experience suggests that U.S. negotiations under President Trump tend to be extractive.
Energy and strategic autonomy: Any formal commitment to halt Russian oil imports could constrain India’s strategic autonomy and energy security.
Dependence on China: India’s imports from China exceeded $112 billion last year. China’s dominance in rare earth elements has already impacted Indian sectors such as automobiles.
Risk of Chinese retaliation: China has warned of consequences if trade agreements are concluded at its expense, raising concerns of indirect economic or supply-chain retaliation.
Domestic political reactions: The opposition criticised the move, alleging India had “capitulated” under U.S. pressure.

Way Forward

Clarity and transparency: India must ensure that commitments—especially on tariffs, energy imports, and non-tariff barriers—are clearly defined and mutually balanced.
Leverage export: Leverage improved access to the U.S. market to boost manufacturing, value-added exports, and employment.
Supply chain diversification: Use platforms like the Critical Minerals Ministerial to reduce dependence on China.
Strategic balancing: Maintain autonomy in energy sourcing and foreign policy while deepening ties with the West.
Domestic capacity building: Align trade gains with Make in India, PLI schemes, and MSME competitiveness.

Conclusion

The reduction of U.S. tariffs on Indian goods to 18% marks a decisive reset in India–US trade relations and underscores India’s rising strategic relevance in a fragmented global trade order.
While the move opens significant economic and geopolitical opportunities, its long-term value for India will hinge on the fine print, preservation of strategic autonomy, and the ability to convert improved market access into sustained export-led growth.

Source: TH | IE

India–US Trade Reset FAQs

Q1: How does the reduction of U.S. reciprocal tariffs on Indian goods reflect the evolving India-US strategic partnership?

Ans: It signals U.S. recognition of India as a key strategic ally and counterweight to China.

Q2: What are the economic implications of the India–US trade reset for India?

Ans: Improved U.S. market access is expected to boost Indian exports, stem capital outflows, support the rupee, etc.

Q3: What are the concerns associated with India–US relations?

Ans: Linking trade concessions to energy and geopolitical commitments may constrain India’s strategic autonomy.

Q4: Why is the fine print of the India–US trade deal more important than the headline tariff reduction for India?

Ans: The real gains depend on detailed provisions on non-tariff barriers, sectoral access, and enforceable commitments.

Q5: How does the India–US trade agreement reshape India’s position in global supply chains?

Ans: The deal enhances India’s competitiveness, enabling deeper integration with global value chains.

Delhi Declaration 2026: What It Reveals About India’s Middle East Strategy

February 3, 2026

Delhi Declaration Latest News

India hosted the second India–Arab Foreign Ministers’ Meeting in New Delhi, bringing together 22 members of the League of Arab States a decade after the first such meeting in Bahrain.
The talks took place against a backdrop of heightened regional tensions in the Middle East, including strained US–Iran relations, growing differences between Saudi Arabia and the UAE, and renewed US-led efforts on the Israel–Palestine issue.
The resulting Delhi Declaration outlined shared positions and commitments between India and the Arab League, reaffirming India’s balanced and active approach to Middle East diplomacy while seeking to deepen political and strategic cooperation with Arab states.

Regional Conflicts and What the Delhi Declaration Signals

The Delhi Declaration strongly stresses respect for the sovereignty, unity and territorial integrity of Sudan, Libya and Somalia, while rejecting any external interference.
This reflects a shared India–Arab League position in favour of internationally recognised governments rather than rival or breakaway authorities.

Middle East Power Rivalries in the Background

These conflicts are shaped by a broader power tussle within the Middle East.
On one side are countries aligned with Saudi Arabia, and on the other a camp associated with the UAE and Israel, with US backing.
Though these camps are not officially acknowledged, their differences play out clearly in conflict zones.
Sudan: The UAE is widely accused of backing the Rapid Support Forces, which have fought the Sudanese government, set up a parallel authority, and carried out large-scale violence against civilians.
Libya: The UAE has long supported Khalifa Haftar’s Libyan National Army, which opposes the UN-recognised government in Tripoli. Saudi Arabia and other Arab states have instead focused more on reconciliation.
Somalia: Israel is the only UN member to recognise Somaliland, a breakaway region. The UAE’s acceptance of Somaliland passports in 2025 has gone against the wider Arab League position.
- India clearly rejected any recognition of Somaliland and aligned with the Arab League’s stance.

India’s Clear Alignment

India joined the Arab League in explicitly supporting recognised governments in Sudan and Libya and condemning violence against civilians.
This marks a firm diplomatic position amid regional divisions.

A Shift in Language on Yemen

On Yemen, India and the Arab League explicitly condemned Houthi attacks on shipping in the Red Sea.
This is a subtle but important shift for India, which in recent years avoided naming the Houthis directly.
The declaration’s emphasis on Yemen’s unity also aligns with Saudi Arabia’s stance against UAE-backed southern secessionist groups.

Cautious Tone on Syria

The declaration says little on Syria, limiting itself to praising counter-terrorism efforts against Islamic State.
This mirrors India’s careful and low-key engagement with post-Assad Syria, where contacts have remained largely diplomatic and exploratory.
Overall, the Delhi Declaration shows India tilting towards stability, recognised governments, and Saudi-aligned positions on key conflicts, while maintaining a balanced and cautious approach in especially sensitive theatres like Syria.

Principal Conflicts: What the Delhi Declaration Says — and Avoids

Silence on the US-Led Board of Peace - The Delhi Declaration makes no reference to the Donald Trump–led Board of Peace (BoP).
- Although several Gulf states have joined the BoP, India has not yet accepted the invitation extended, signalling caution about formally associating with the initiative.
Clear Preference on Israel–Palestine - Instead of the BoP, the declaration explicitly backs the Arab Peace Initiative (2002).
- This framework supports land-for-peace—Arab recognition of Israel in exchange for an independent Palestinian state based on pre-1967 borders.
- While the declaration also notes the outcomes of the 2025 Sharm el-Sheikh summit (the only place the US role is mentioned), the emphasis on the Arab Peace Initiative reveals India’s and the Arab League’s core preference.
Backing Peace, Not a New Framework - India and Arab states support efforts to end the violence in Gaza, including US mediation, but stop short of endorsing the broader logic of President Trump’s plan for resolving the Israel–Palestine issue. Both sides reiterate support for Palestinian sovereignty.
Avoiding Escalation with Iran - The declaration avoids mentioning the most destabilising flashpoint: the US military build-up around Iran and the risk of a wider conflict. This omission appears deliberate, allowing countries to manage bilateral approaches without public confrontation.
- Key Arab League states, led by Saudi Arabia, are working to discourage US military action against Iran.
- India’s outreach shows New Delhi’s effort to keep channels open with Iran while navigating US sanctions.
- Notably, India’s Budget 2026–27 carries no allocation for Chabahar Port, despite a 10-year operational agreement signed in 2024.
- This underscores India’s continued vulnerability to US sanctions and the careful balancing reflected throughout the Delhi Declaration.

What the Delhi Declaration Reveals About India’s Middle East Diplomacy

The Delhi Declaration reinforces cooperation between India and the Arab League across five core pillars—economy, energy, education, media, and culture—identified since their institutional engagement began in 2002.
It builds on robust India–Arab trade exceeding $240 billion, underscoring the economic depth of the partnership.
More broadly, the declaration crystallises India’s diplomatic approach to the Middle East and the Gulf.
While New Delhi maintains strong partnerships across competing geopolitical blocs, these ties remain transactional and compartmentalised, without altering India’s broader regional positions.
On sensitive geopolitical questions, India consistently favours long-standing, norm-based stances aimed at preserving regional stability and avoiding endorsement of actions that could deepen conflict or disruption.

Source: IE

Delhi Declaration FAQs

Q1: What is the Delhi Declaration?

Ans: The Delhi Declaration is a joint statement adopted at the India–Arab Foreign Ministers’ Meeting outlining shared positions on regional conflicts, sovereignty, and cooperation.

Q2: Why is the Delhi Declaration important for India’s Middle East policy?

Ans: The Delhi Declaration clarifies India’s balanced approach, supporting sovereignty, recognised governments, and regional stability without aligning with any one power bloc.

Q3: What conflicts are addressed in the Delhi Declaration?

Ans: The Delhi Declaration addresses Sudan, Libya, Somalia, Yemen, Israel–Palestine, and Syria, focusing on unity, non-interference, and protection of civilians.

Q4: What does the Delhi Declaration say about Israel and Palestine?

Ans: The Delhi Declaration supports the Arab Peace Initiative and Palestinian sovereignty while backing efforts to end violence without endorsing new external frameworks.

Q5: How does the Delhi Declaration reflect India’s diplomatic style?

Ans: The Delhi Declaration shows India’s preference for norm-based diplomacy, transactional partnerships, and avoiding actions that could destabilise the Middle East.

India US Trade Deal: How Trump Reshaped India’s Trade Strategy

February 3, 2026

India US Trade Deal Latest News

India and the United States announced a long-awaited trade deal, sharply reducing the tariff rate on Indian goods from a punitive 50% to 18%.
The agreement comes after months of negotiations that began in February, amid sustained pressure from the Trump administration on trade imbalances.

Trump’s Trade Deficit Push and India’s Action

A major driver behind the negotiations was President Donald Trump’s repeated concern over India’s goods trade surplus with the US.
Even before taking office, Trump flagged the deficit as a priority issue, setting the tone for tougher trade engagement with India.

Also Read: India–US Trade Reset

India Steps Up US Imports

Recent trade data indicate that India responded by increasing imports from the US, helping narrow the trade gap.
According to the Commerce and Industry Ministry, India’s goods trade surplus with the US almost halved, falling from $3.17 billion in April to $1.73 billion in November.

Impact of High US Tariffs

The imposition of 50% tariffs from August 2025 led to a noticeable decline in Indian exports to the US.
Exports fell from $6.86 billion in August to $6.30 billion in October, with labour-intensive sectors such as garments, footwear and sports goods hit the hardest.
At the same time, imports from the US rose sharply, increasing from $3.60 billion in August to $4.84 billion in October.
Encouragingly, Indian exports rebounded in November, rising 22%, driven mainly by electronic goods that remained outside the tariff net.

Also Read: India-US Relations

US Crude Gains as Trade Tensions Reshape Energy Flows

The additional 25% US tariffs became one of the most contentious issues in India–US trade ties, delaying the agreement.
This disrupted negotiations, pushing total US tariffs on India to 50%, even as Washington eased duties on China after a truce.
Amid these trade strains, India ramped up crude oil imports from the US. This shift was reinforced by US sanctions on Russian oil majors Lukoil and Rosneft, which reduced Russia’s ability to export oil to India.
Trade data show the US share in India’s oil imports rose to 7.48% between April and October, up from 4.43% a year earlier.
In contrast, Russia’s share declined from 37.88% to 32.18%, highlighting a clear rebalancing in India’s crude sourcing.

Energy and Nuclear Convergence in India–US Ties

Indian public sector refiners have signed a one-year agreement to import American LPG, covering about 2.2 million tonnes per annum, close to 10% of India’s total LPG imports.
- LPG is a key cooking fuel, with over 60% of India’s requirement met through imports, traditionally sourced from Gulf countries.
The US has steadily strengthened its energy footprint in India. It is now the fifth-largest supplier of crude oil to India, accounts for nearly 10% of crude imports, and is the second-largest supplier of LNG.

Nuclear Reforms and Foreign Investment

Alongside deeper energy trade, India has opened its nuclear sector to foreign investment.
This move aligns with the Trump administration’s push for expanding nuclear power capacity, including existing plants and small modular reactors, signalling a broader strategic convergence in clean and secure energy.

Policy Reset to Cushion Trade Shock

Uncertainty over the India–US trade deal led to capital outflows and a rethink of industrial policy.
To protect MSMEs, the government rolled back several quality control orders (QCOs) that were hurting competitiveness and removed the 11% duty on cotton to support the textile sector hit by US tariffs.
At the same time, India fast-tracked trade negotiations with major markets to reduce dependence on any single partner.
Talks were concluded with New Zealand, a deal was signed with Oman, and negotiations are underway with the European Union, the GCC, and the Russia-led Eurasian Economic Union (EAEU).

Source: IE

India US Trade Deal FAQs

Q1: Why was the India US trade deal in the news?

Ans: The India US trade deal reduced US tariffs on Indian goods from 50% to 18% after months of negotiations influenced by Trump’s trade deficit concerns.

Q2: How did Trump influence the India US trade deal?

Ans: Trump pressured India over trade imbalances, leading India to increase US imports, especially crude oil, LPG, and LNG, to narrow the deficit.

Q3: What impact did US tariffs have on Indian exports?

Ans: US tariffs sharply reduced Indian exports, particularly labour-intensive goods, though electronics exports rebounded as they remained outside the tariff net.

Q4: How did energy trade shape the India US trade deal?

Ans: Energy became central to the India US trade deal as India increased crude, LPG, and LNG imports from the US amid sanctions on Russian oil.

Q5: What policy changes did India make due to the trade deal uncertainty?

Ans: India rolled back quality control orders, removed cotton duties, and accelerated FTAs with the EU, GCC, and others to reduce trade vulnerability.