RBI’s FREE-AI Committee Report

For Prelims: Reserve Bank of India, Artificial Intelligence, Digital public infrastructure, MuleHunter AI 

For Mains: Role of Artificial Intelligence in India’s financial sector, Balancing innovation and consumer protection in digital finance

Source: TH 

Why in News?

The Reserve Bank of India (RBI) has released the Framework for Responsible and Ethical Enablement of Artificial Intelligence (FREE-AI) Committee Report. It calls for 7 guiding sutras to promote responsible AI use in the financial sector while balancing innovation and risk mitigation. 

What are the RBI’s 7 Sutras for AI adoption Under FREE-AI? 

• Trust is the Foundation: Trust is non-negotiable and should remain uncompromised. Build Artificial Intelligence (AI) systems that are reliable, transparent, and inspire public confidence. 
• People First: AI should support human decision-making but defer to human judgment and citizen interest, prioritising welfare, dignity, and inclusion. 
• Innovation over Restraint: Encourage responsible innovation while avoiding unnecessary restrictions. 
• Fairness and Equity: AI outcomes should be fair and non-discriminatory. 
• Accountability: Accountability rests with the entities deploying AI and clearly define responsibilities for AI decisions and their impacts. 
• Understandable by Design: Make AI systems and their decisions interpretable for users and regulators. 
• Safety, Resilience, and Sustainability: Develop AI that is secure, adaptable, and sustainable in the long term. 

              

What Can be the Significance of AI in Finance? 

• Revenue Growth: AI is projected to drive significant revenue growth, with investments in financial services expected to reach Rs 8 lakh crore by 2027. 
• Efficiency and Personalization: AI can streamline repetitive and time-consuming tasks, enabling financial institutions to process large volumes of data more quickly and accurately, such as in loan application processing. 
• Financial Inclusion: AI uses alternative data (like utility bills, GST filings) to assess creditworthiness, enabling loans to “thin-file or new borrowers” excluded from traditional systems. 
• Innovation in Digital Infrastructure: AI enhances India's digital public infrastructure (e.g., Aadhaar, Unified Payments Interface) to provide personalized, adaptive financial services. 
• Better Risk Management: AI helps in fraud detection, early risk warnings, and improved decision-making, optimizing risk management processes. 
  • J.P. Morgan’s AI payment validation cut fraud, lowering account rejection rates by 15–20%. 
• Synergies with Emerging Tech: AI's integration with quantum computing and privacy technologies promises enhanced performance and security in finance. 

What are the Challenges of AI in Finance? 

• Model Bias and Risk: AI models can inherit biases from training data, leading to unfair decisions. The "black box" nature makes them hard to audit. 
• Third-Party Risks: Heavy reliance on a few vendors or cloud providers can cause service disruptions, software issues, and cyber vulnerabilities. 
• Regulatory and Liability Concerns: The lack of transparency in AI models complicates liability allocation in case of errors or biased outcomes. 
• Cybersecurity Threats: While AI can improve security, it also opens new attack routes like data poisoning, adversarial inputs, and deepfakes. 
• Ethical and Consumer Protection Issues: Algorithmic bias, privacy violations, and lack of transparency can undermine consumer trust and exclude vulnerable groups. 
• Risk of Non-Adoption: Not using AI can hurt competitiveness, reduce efficiency, slow financial inclusion, and leave systems exposed to AI-powered threats. 

India’s Policy Developments on AI in Finance  

• The RBI has introduced MuleHunter AI, developed by RBI Innovation Hub to help banks quickly detect mule accounts and curb digital frauds. 
  • RBI’s digital lending rules require auditable AI credit assessments with human oversight and robust grievance redressal for AI-driven decisions. 
• Securities and Exchange Board of India (SEBI) consultation paper in 2025 provides guidelines for responsible AI use in Indian securities markets. 
• IndiaAI Mission aims to foster AI innovation, enhance research, and improve access to computer infrastructure. 

What are the RBI’s Recommendations for AI in Finance? 

• Innovation Enablement: Establish high-quality financial sector data infrastructure as part of digital public infrastructure, integrated with AI Kosh. 
  • Create an AI Innovation Sandbox like GenAI Digital Sandbox, a secure test environment for financial institutions to trial AI models using anonymised data, with tools to detect bias or errors and ensure compliance with AML, KYC, and consumer protection norms. 
• Consumer Protection & Security:  Organizations should conduct proportionate AI red teaming through periodic and trigger-based tests and implement incident reporting frameworks with good-faith disclosure to manage AI risks effectively. 
• Capacity Building within REs: Develop structured training programs for AI governance and risk mitigation at all levels within institutions. 
  • Establish frameworks for exchanging AI use cases and best practices across the financial sector. 
• AI Incident Reporting: Create an AI incident reporting framework for timely detection and disclosure of AI-related issues. 

Conclusion 

The FREE-AI framework outlines how AI can be responsibly and ethically adopted in India’s financial sector, offering a roadmap for regulators, financial institutions, and technology providers to harness AI’s potential effectively. 

Drishti Mains Question:

Discuss the significance of the Reserve Bank of India’s “Seven Sutras” in balancing innovation with ethical safeguards in the adoption of Artificial Intelligence in the financial sector.

UPSC Civil Services Examination, Previous Year Questions (PYQs) 

Prelims

Q. With the present state of development, Artificial Intelligence can effectively do which of the following? (2020)

1. Bring down electricity consumption in industrial units  
2. Create meaningful short stories and songs  
3. Disease diagnosis  
4. Text-to-Speech Conversion  
5. Wireless transmission of electrical energy  

Select the correct answer using the code given below: 

(a) 1, 2, 3 and 5 only    

(b) 1, 3 and 4 only   

(c) 2, 4 and 5 only    

(d) 1, 2, 3, 4 and 5   

Ans: (b) 

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Mains: 

Q. Introduce the concept of Artificial Intelligence (AI). How does Al help clinical diagnosis? Do you perceive any threat to privacy of the individual in the use of AI in healthcare? (2023)

Semiconductor Industry in India

For Prelims: India Semiconductor Mission, Development of Semiconductors and Display Manufacturing Ecosystems in India, Semiconductor Fab. 

For Mains: India’s Semiconductor Industry, India Semiconductor Mission (ISM), Importance of Semiconductor Fabrication, Challenges and Way Forward 

Source: PIB 

Why in News? 

The Union Cabinet approved 4 new semiconductor projects in Odisha, Punjab, and Andhra Pradesh under the India Semiconductor Mission (ISM), bringing the total to 10 projects  across 6 states. 

What are the Key Trends and Opportunities Shaping the Growth of India's Semiconductor Market? 

• Market Size: India's semiconductor consumption market, valued at USD 52 billion in 2024-25, is expected to reach USD 103.4 billion by 2030 with  Compounded Annual Growth Rate (CAGR) of 13%. 
  • Mobile handsets, IT, and industrial applications account for approx 70% of revenue, while automotive and industrial electronics offer significant scope. 
  • Taiwan, South Korea, Japan, China, and the US dominate the semiconductor industry.  
  • India’s imports of Integrated circuits (ICs), memory chips, and amplifiers surged by 2,000%, 4,500%, and 4,800% from FY16–24, with China supplying nearly one-third of these imports.

• Key Opportunities for India: 
  • Large Market Potential: India has emerged as the world's second-largest market for 5G smartphones, trailing only behind China, holding a 13% share, behind China’s 32%. 
  • Surging Domestic Demand: Growing consumption of mobile devices, computers, and digital technologies, coupled with the 5G rollout and AI adoption, is driving strong demand for advanced semiconductors. 
  • Global Partnerships & Support: Collaborations with global semiconductor leaders and countries like US and Japan facilitate technology transfer and enhance India’s capabilities.  
    • Semicon India Programme and expansion of manufacturing and digitalisation strengthen India’s semiconductor ecosystem. 

 

What is the India Semiconductor Mission (ISM)? 

• About: ISM, approved in 2021, aims to boost India’s global electronics value chain presence and establish it as a global manufacturing hub. 
  • It operates under the Ministry of Electronics and Information Technology (MeitY). 
• Objective: To support chip design startups, promoting indigenous IP and technology transfer, fostering research, innovation, and industry-academia collaboration. 
  • It aims to reduce import dependence to strengthen India’s global semiconductor presence. 
• Mission Focus: 
  • Set up chip manufacturing fabs 
  • Create packaging and testing units (ATMP/OSAT) 
  • Support chip design startups 
  • Train engineers and technical talent 
  • Attract global semiconductor investments 
• Key Schemes under ISM: 
  • Semiconductor Fabs Scheme: Providing up to 50% fiscal support for wafer fabrication(fabs) units. 
  • Display Fabs Scheme: Up to 50% financial assistance for AMOLED/LCD display fabs to promote domestic innovation. 
  • Compound Semiconductors & ATMP/OSAT Scheme: Up to 50% support for compound semiconductors, MEMS/sensors, silicon photonics, and downstream packaging/testing facilities. 
  • Design Linked Incentive (DLI) Scheme: Promotes semiconductor design startups and Micro Small Medium Enterprises (MSMEs) by financial support  up to Rs 15 crore per company  across product development stages.  

Initiatives to Promote India’s Semiconductor Industry in India 

• Production Linked Incentive (PLI) scheme: PLI for large-scale electronics manufacturing and IT hardware to boost domestic production and exports. 
• Scheme for Promotion of Manufacturing of Electronic Components and Semiconductors (SPECS): Strengthened component and semiconductor manufacturing ecosystem. 
• Electronics Manufacturing Clusters (EMC & EMC 2.0): Developed infrastructure and ecosystem for electronics manufacturing. 
• Public Procurement (Preference to Make in India) Order, 2017: Prioritizes domestically manufactured products in government procurement. 
• Tax Reforms: Rationalization of tariffs, exemption of basic customs duty on capital goods, and other incentives. 
• FDI Policy: Allows 100% FDI in electronics manufacturing, subject to applicable laws/regulations. 

What are the Key Challenges to India’s Semiconductor Industry? 

• Infrastructure & Innovation Challenges: Semiconductor fabrication involves 500–1,500 complex steps in cleanrooms, requiring advanced infrastructure, technology, and skilled talent.  
  • High costs of fab setup, R&D, and equipment, coupled with India’s weak semiconductor research and dependence on imported components and IP, limit innovation and technological self-reliance. 
• Skilled Workforce Gap: India currently employs about 220,000 semiconductor professionals, but the industry faces a projected shortfall of 250,000 to 350,000 skilled workers by 2027 across the semiconductor value chain 
• Technology & Global Competition: Taiwan and South Korea dominate global semiconductor production (80% of chip foundries), while ASML (Netherlands) controls EUV lithography, and Nvidia and ARM lead chip design, limiting India’s access to advanced technologies. 
• Environmental & Regulatory Challenges: Semiconductor manufacturing uses hazardous chemicals, toxic metals, and high energy, creating environmental risks and added compliance costs.  
  • Complex regulations, IP issues, export controls, and policy uncertainty increase operational challenges for manufacturers. 

What Steps Should India Take to Strengthen Its Semiconductor Industry? 

• Skill Development: Establish specialized training programs in chip design, fabrication, and testing to build a skilled workforce. 
• Boost R&D & Indigenous IP: Increase investment in research and development, support indigenous product design, and develop intellectual property, enabling startups and smaller companies to compete globally. 
• Incentives & Policy Support: Strengthen government initiatives like India Semiconductor Mission (ISM) and state-level policies (e.g., UP Semiconductor Policy 2024) to attract investments and promote semiconductor manufacturing. 
• Chip Diplomacy & Niche Focus: Promote international collaboration (“chip diplomacy”) and focus on niche technologies like MEMS and sensors to position India in specialized segments of the global market. 
• Private Sector Participation & Strategic Opportunities: Encourage private investment and collaborations, such as Tata-PSMC fab in Gujarat. 
  • Leverage geopolitical shifts (US-China tensions) to expand India’s semiconductor footprint. 

Conclusion 

India’s semiconductor sector is growing rapidly, driven by ISM, PLI, and SEMICON India, rising domestic demand, and global partnerships. Strengthening infrastructure, technology, and skills will be key to making India a global hub for semiconductor manufacturing and design. 

Drishti Mains Question:

Examine the growth potential of India’s semiconductor sector and suggest measures to overcome key challenges for self-reliance.

UPSC Civil Services Examination, Previous Year Question (PYQ) 

Prelims:

Q. Which one of the following laser types is used in a laser printer? (2008)

(a) Dye laser  
(b) Gas laser  
(c) Semiconductor laser  
(d) Excimer laser  

Ans: (c)

Q. With reference to solar power production in India, consider the following statements: (2018)

1. India is the third largest in the world in the manufacture of silicon wafers used in photovoltaic units.  
2. The solar power tariffs are determined by the Solar Energy Corporation of India.  

Which of the statements given above is/are correct?

(a) 1 only  
(b) 2 only  
(c) Both 1 and 2  
(d) Neither 1 nor 2  

Ans: (d)

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Mains

Q. Why is nanotechnology one of the key technologies of the 21st century? Describe the salient features of Indian Government’s Mission on Nanoscience and Technology and the scope of its application in the development process of the country. (2016)

Cess and its Role in Union Finance

Source: TH  

Why in News? 

The Comptroller and Auditor General (CAG) has flagged a Rs 3.69 lakh crore shortfall in transferring cess collections to their intended funds, bringing into focus the purpose and proper utilisation of such levies.

What is the Purpose of Levying a Cess? 

• About: A cess, recognized under Article 270 is an additional tax levied by the Government of India for a specific purpose. It is levied on top of existing taxes or duties listed in the Union List. 
• Purpose: Cess is distinct from regular taxes as it is earmarked for a designated purpose. The purpose of a cess must be clearly stated in the law imposing it and should be for a Union purpose, outside List II (State List) of the Seventh Schedule. 
  • Cesses are named after their purpose (like Education Cess or Swachh Bharat Cess) and must be used only for that purpose, without being diverted for general government expenditure. 
• Role in Union Finance:  Proceeds from a cess, along with surcharges levied by the Union, are credited to the Consolidated Fund of India and are excluded from the divisible pool of taxes, remaining under the Union’s control. 

Surcharge 

• About: Article 271 of the Indian Constitution empowers Parliament to impose a surcharge on certain taxes and duties for Union purposes.  
  • This surcharge is in addition to the existing taxes and duties, often referred to as a “tax on tax.” 
• Applicability:  Applied to individuals, companies, and other taxpayers in certain income brackets. Usually applicable when income exceeds Rs 50 lakh in a financial year. 
  • The rate varies based on income level and type of income. 
• Purpose and Nature: It is progressive in nature (higher earners contribute more), it promotes social equity and addresses income disparity 
  • Increases total tax liability for high-income taxpayers. 
• Cess vs. Surcharge:  Both Cess and surcharge are credited to Consolidated Fund of India (CFI) and are not shared with the states but differ in usage.  
  • Surcharge is spent like other taxes, while cess must be allocated separately and used only for its specific purpose.  

The 13^th and 14^th Finance Commissions upheld the exclusion of surcharge from the divisible tax pool, but recommended reducing the Centre’s dependence on surcharge revenues. 

How do Tax and Cess Differ in Purpose and Usage? 

Aspect	Tax	Cess
Definition	Government levy on income, property, etc.	Additional levy on an existing tax or duty for a specific purpose
Revenue Use	Goes to Consolidated Fund, used generally	Credited to Consolidated Fund but used only for designated purpose
State Sharing	Shared with states	Generally, not shared with states
Examples	Income Tax, GST, Corporate Tax	Swachh Bharat Cess, Education Cess, Krishi Kalyan Cess

UPSC Civil Services Examination Previous Year Question (PYQ)

Prelims

Q. The sales tax you pay while purchasing a toothpaste is a (2014)

A. tax imposed by the Central Government 

B. tax imposed by the Central Government but collected by the State Government 

C. tax imposed by the State Government but collected by the Central Government 

D. tax imposed and collected by the State Government 

Ans: (D) 

Wildfires

Source: TOI 

Why in News? 

Wildfires in Albania, Greece, Italy, Portugal, Spain, and Turkey have resulted in fatalities and forced thousands to evacuate the affected regions.

What are the Key Facts Regarding Wildfires? 

• About: Wildfire is an uncontrolled fire in forests, grasslands, brushlands, or tundra, spread by wind and terrain, and sustained by fuel, oxygen, and heat. 
• Classification: 
  • Surface Fire: Burns along the ground, consuming dry leaves, twigs, and grasses on the forest floor. 
  • Underground/Zombie Fire: Low-intensity fires burning organic matter beneath the surface, spreading slowly and often undetected, sometimes persisting for months. 
  • Canopy/Crown Fire: Spreads through the upper tree canopy, often intense and hard to control. 
  • Controlled Deliberate Fire: Planned burns by forest agencies to reduce fuel loads and support ecosystem health. 
• Causes:  
  • Geography: Mediterranean climate regions are highly susceptible to wildfires, particularly during the hot, dry summer months, due to the combination of high temperatures, low humidity, and dry winds (E.g., Sirocco- hot wind that blows from the Sahara Desert to southern Europe and increases wildfire risk).  
  • Climate Change: Dry spells, erratic monsoons, unseasonal heat waves, and El Niño events dry vegetation and increase flammability. 
  • Human-Induced Factors: Slash-and-burn, agricultural expansion, infrastructure projects, tourism, and waste mismanagement trigger accidental and deliberate fires. 
  • Weak Fire Management & Technology: Inadequate surveillance, outdated response systems, lack of AI-based prediction, and poor weather-based forecasting delay control efforts. 
  • Biodiversity Loss & Flammable Vegetation: Dry deciduous forests, pine needles, bamboo groves, and monoculture plantations act as natural fuel, reducing native biodiversity. 
  • Deforestation & Habitat Fragmentation: Infrastructure, mining, unregulated grazing, and weak policy enforcement degrade forests, intensify human-wildlife conflict, and harm ecosystems. 
• Impacts: 
  • Air Pollution & Climate Change: Wildfires release CO₂, PM2.5, Methane and other toxic gases, worsening air quality and contributing to global warming. 
  • Biodiversity & Habitat Loss:  Forest destruction kills wildlife, threatens endangered species, and disrupts ecosystems. 
    • A study estimates that in 2020, wildfires in Brazil claimed the lives of nearly 17 million animals, including reptiles, birds, and primates, while causing severe biodiversity loss. 
  • Human Health Risk:  Smoke inhalation leads to respiratory problems, eye irritation, heat-related injuries, and mental stress in affected populations. 
  • Economic Damage:  Property destruction, firefighting costs, and agricultural losses strain economies. 
  • Soil & Water Degradation:  Erosion and ash runoff pollute water sources, harming aquatic life and drinking water. 
• Wildfires in India:  
  • According to the India State of Forest. Report (ISFR) 2021, more than 36% of the country’s forest cover was estimated to be prone to frequent forest fires. 2.81% of the country’s forest cover was extremely prone to fires, whereas 7.85% of forest cover is found to be very highly fire prone. 
  • Forest fire incidents have surged in mountain regions: Himachal Pradesh by 1,339%, Jammu & Kashmir by 2,822%, and Uttarakhand by 293% (ISFR 2023). 

Common Wildfire Control Material & Method 

• Pink Fire Retardant is a chemical mixture designed to slow or suppress wildfires. 
• It mainly contains an ammonium phosphate-based slurry, with salts like ammonium polyphosphate and toxic metals such as chromium and cadmium. 
• The Bambi Bucket is a special container hung under a helicopter, filled by dipping it into a water source like a river or pond, and emptied over a fire through a bottom valve. 
• It is especially useful for tackling wildfires in hard-to-reach areas, and helicopters worldwide often use it to fight forest fires.

What Steps are Needed to Tackle Wildfires? 

• Integrated Fire Management: Use prescribed burning, fuel load reduction, firebreaks, strict fire safety regulations, and public awareness to prevent uncontrolled fires. 
• Community & Tribal Participation: Involve local communities, Van Panchayats, and tribal groups with training, livelihood incentives, and traditional conservation for early detection and response. 
• Advanced Technology & Early Warning: Apply AI predictive models, satellite monitoring, drones, and real-time alerts for rapid containment. 
• Ecosystem Restoration & Resilience: Support fire-resistant species, green firebreaks, climate-resilient forestry, wetland restoration, and sustainable agroforestry. 
• Policy Enforcement & Eco-Sensitive Development: Enforce no-go zones for mining/infrastructure, use watershed management, sustainable tourism, and blockchain for transparent conservation funding. 

Drishti Mains Question

Examine the factors contributing to the rising frequency and severity of wildfires, and propose strategies for their effective mitigation.

UPSC Civil Services Examination Previous Year Question (PYQ) 

Prelims

Q. Consider the following: (2019)

1. Carbon monoxide 
2. Methane 
3. Ozone 
4. Sulphur dioxide 

Which of the above are released into the atmosphere due to the burning of crop/biomass residue? 

(a) 1 and 2 only 

(b) 2, 3 and 4 only 

(c) 1 and 4 only 

(d) 1, 2, 3 and 4 

Ans: (d) 

Q. In the grasslands, trees do not replace the grasses as  a part of an ecological succession because of (2013)

 (a) insects and fungi 

 (b) limited sunlight and paucity of nutrients 

 (c) water limits and fire 

 (d) None of the above 

Ans: (c) 

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Mains

Q. Most of the unusual climatic happenings are explained as an outcome of the El-Nino effect. Do you agree? (2014)

State Health Regulatory Excellence Index

Source: PIB 

The Union Health Ministry has launched the State Health Regulatory Excellence Index (SHRESTH). 

• SHRESTH, developed by the Central Drugs Standard Control Organization (CDSCO), is a virtual gap assessment tool for states to evaluate their current status and progress toward maturity certification, aiming to ensure drug safety, quality, and efficacy across all states and UTs. 
• Key Features of SHRESTH: 
  • State Classification: States are categorized as Manufacturing States and Primarily Distribution States/UTs. 
  • Assessment Criteria: The SHRESTH Index evaluates states on aspects like human resources, lab testing capacity, licensing activities, surveillance, and responsiveness to public grievances. 
  • Monitoring and Accountability: States submit monthly data to the CDSCO, which compiles and scores the index, and shares the results with the states and UTs each month. 
• Global Standards: SHRESTH aims to be in line with the World Health Organization’s (WHO) Global Benchmarking Tool (GBT) Maturity Level 3 (ML3), reinforcing India’s position as the “Pharmacy of the World.” 
  • WHO’s GBT assesses the regulatory maturity (on four levels (ML1–ML4)) of national systems for medicines, vaccines, blood products, and medical devices, ensuring high-quality, consistent regulation worldwide. 
  • India has achieved ML3 in 2024, which reflects a stable, well-functioning, and integrated regulatory system. 

Read more: Reforming India's Pharmaceutical Sector 

Income Tax Bill, 2025

Source: IE

Both houses of the Parliament passed the Income Tax Bill, 2025, which seeks to simplify, rationalise, and shorten the existing Income Tax 1961 Act. 

• The Bill defines virtual digital space as any digital environment including email, social media, online accounts, cloud servers, websites, and digital platforms.  
  • If retained, tax authorities could access or bypass passwords to investigate potential tax evasion or under-reported income, with companies potentially required to assist. 
• It replaces the dual concepts of ‘assessment year’ and ‘previous year’ with a uniform ‘tax year’, defined as 1st April 1 to 31st March. 
• The Bill clarifies there will be no Tax Collected at Source (TCS) on Liberalised Remittance Scheme (LRS) remittances for education purposes financed by financial institutions. 
  • Individuals with no tax liability can seek a nil Tax Deduction at Source certificate in advance. 
• The applicability of the Alternate Minimum Tax (AMT) for Limited Liability Partnerships (LLPs) has been aligned with the existing provisions of the IT Act. 
  • AMT ensures that individuals benefiting from tax deductions and exemptions pay at least the minimum amount of tax. 

Income Tax 

• It is a direct tax on the income earned by individuals, companies, or other entities during a financial year. For individual taxpayers in India, it is levied according to progressive tax slabs.  
• These slabs may vary under the new tax regime or with applicable rebates and deductions. 
• According to the Central Board of Direct Taxes, India’s gross direct tax collections for 2025-26 stood at Rs 7.99 lakh crore, down 1.9% from Rs 8.14 lakh crore in FY 2024-25. 

Read more:  Challenges and Reforms in India’s Taxation System