Current Affairs – December 29, 2025

{GS2 – IR} India’s Diplomatic Headwinds in 2026 **

• Context (TH): After a turbulent 2025 marked by geopolitical shocks and policy surprises, India enters 2026 navigating diplomatic pressures amid global power shifts and regional instability.

Major Diplomatic Headwinds for India

• US Policy Volatility: High tariffs, H-1B visa curbs, and sanctions on Russian oil purchases under President Trump’s second term have strained India–US ties, evident in 25% tariffs and penalties on India.
• Russia–Ukraine Fallout: India’s discounted Russian oil imports invited EU–UK sanctions on Nayara Energy, exposing India to secondary sanctions risk despite strategic autonomy claims.
• Middle East Instability: Continued Gaza conflict stalled the India–Middle East–Europe Economic Corridor (IMEC), undermining India’s connectivity and energy-security ambitions.
• Global Rightward Shift: Rise of ultra-right governments in Europe and elsewhere has weakened multilateral consensus on trade, climate, and migration, affecting India-led coalitions.

Neighbourhood Fragility

• Pakistan Escalation: Operation Sindoor, the Pahalgam terror attack, weakened India’s diplomatic narrative on terrorism, while renewed F-16 clearances to Pakistan raised security concerns.
• China Dual Challenge: China’s military and diplomatic support to Pakistan during Operation Sindoor and unresolved LAC tensions continue to constrain trust-building.
• Bangladesh Backlash: Mob violence and anti-India sentiment following the killing of a right-wing leader, combined with political instability, have strained India’s influence.
• Nepal Political Volatility: Gen-Z–led protests in 2025 toppled the government, reviving nationalist rhetoric and policy uncertainty, which risks slowing India’s “Neighbourhood First” policy outcomes.
• Afghanistan Engagement Dilemma: India’s outreach to the Taliban regime raised concerns over legitimising a regime accused of systemic human rights and women’s rights violations.

Opportunities Amid Headwinds

• Strategic Autonomy Leverage: India’s balanced stance on Russia–Ukraine war enhanced its profile as a non-aligned mediator, reflected in continued energy access despite sanctions.
• China Engagement Window: Resumption of Kailash–Mansarovar Yatra, visa restoration, and water-data sharing indicate calibrated de-escalation after the 2024 Modi–Xi meet.
• Global South Leadership: India’s disaster aid to Sri Lanka after Cyclone Ditwah ($450 million) reinforced its image as a first responder in the Indian Ocean Region.
• Economic Diplomacy: Rising interest in India as a supply-chain alternative post-China-plus-one strategy strengthens India’s bargaining position in trade talks.
• Net Security Provider: India’s position as a net security provider in the Indian Ocean Region is reinforced through anti-piracy patrols and HADR operations, exemplified by Operation Sankalp.
• Afghanistan Strategic Opening: India’s calibrated engagement with the Taliban regime, including the 2025 visit of the Afghan Foreign Minister to Delhi, creates space to counter Pakistan’s influence.

Key Diplomatic Priorities for 2026

• Trade Diversification: Fast-track pending FTAs with EU, US, GCC, ASEAN, building on successful UK–India and Oman trade agreements signed in 2025.
• Neighbourhood Stabilisation: Deepen economic and infrastructure engagement with Bhutan, Sri Lanka and the Maldives, as seen in high-level visits and aid commitments in 2025.
• Energy Security: Maintain diversified oil sourcing from Russia, West Asia, Americas, mirroring India’s strategy that reduced crude import vulnerability during 2022–25 shocks.
• Technology Diplomacy: Leverage hosting of the AI Summit 2026 to shape global AI norms, following India’s G20 Digital Public Infrastructure leadership model.
• Multilateral Balancing: Use forums like BRICS, SCO and Quad to hedge against bloc politics, exemplified by India attending SCO despite India–China frictions.
• Diaspora & Mobility: Push back against restrictive visa regimes using economic leverage, as attempted through sustained high-level engagements in Washington.

{GS2 – IR} India’s ‘RCEP Minus China’ Strategy

• Context (TH): India has pursued bilateral Free Trade Agreements (FTAs) with all members of the Regional Comprehensive Economic Partnership (RCEP), excluding China.

• This policy enabled India to secure market access while safeguarding domestic industries and preserving strategic autonomy.

About the RCEP

• RCEP is the world’s largest FTA, creating an integrated market that covers about 30% of global GDP and population.
• The agreement was formally signed in 2020 and came into force on 1 January 2022.
• It aims to eliminate nearly 90% of tariffs over 20 years, adopt unified rules of origin, set modern trade disciplines, and strengthen Asia-Pacific supply chains.
• Members: It includes 10 ASEAN states plus China, Japan, South Korea, Australia, and New Zealand.
  • India participated in the initial negotiations but opted out in 2019.

India’s Reasons for Not Joining RCEP

• China Concern: India feared tariff circumvention by China through third-country routing, leading to a surge in Chinese goods entering the Indian market.
• Trade Imbalance: India already had a significant trade deficit with 11 of the 15 RCEP members, and joining was expected to widen this gap.
• Dairy & Agriculture: India’s dairy sector faced a threat from cheap dairy imports from New Zealand; farmers in southern India feared a price drop for plantation crops.
• Safeguard Gap: India’s demand for an Automatic Trigger Safeguard Mechanism (ATSM) to automatically raise tariffs during import surges was not accepted.
• Ratchet Clause: India’s demand for exemptions from irreversible tariff commitments was rejected, limiting policy flexibility during economic shocks.
• Base Year Issue: India objected to using 2014 as the base year for tariff reductions, preferring a more recent year to reflect current economic realities.

Read More > India’s Growing FTA Network | India-China Relations

{GS3 – IE} State of the Indian Economy in 2025 **

• Context (TH): The Indian economy faced a challenging year in 2025, as persistent global and domestic challenges offset the impact of supportive domestic policies.

Major Policy Actions in 2025

• GST Reform: GST 2.0 introduced a simplified two-slab structure of 5% and 18%, lowering rates on multiple goods, including cement, auto parts, and large appliances.
• Nuclear Reform: Parliament passed the SHANTI Bill 2025, allowing private participation in nuclear power to reach 100 GW of capacity by 2047.
• UK CETA: India signed the Comprehensive Economic and Trade Agreement (CETA) with the UK in 2025, granting duty-free access to 99% of Indian exports and easing professional mobility.
• Tax Changes: Budget 2025 increased the standard deduction and revised income tax brackets to boost Private Final Consumption Expenditure (PFCE).
• New Zealand FTA: The India-New Zealand Free Trade Agreement ensured zero-duty access for all Indian exports, particularly benefiting MSMEs and labour-intensive sectors.
• Labour Reforms: The Centre implemented four Labour Codes, mandating higher minimum wages and extending social security to over 15 million gig workers.

Economic Challenges Faced in 2025

• Tariff Shock: In August 2025, the United States imposed 50% tariffs on Indian exports, putting $87 billion in annual trade at risk.
• Oil Penalty: The US imposed an additional 25% tariff on Indian goods due to continued Russian oil imports, creating a 28-32% price disadvantage relative to China.
• FDI Outflows: Triggered by trade tensions, net foreign direct investment turned negative for three consecutive months, with $3.82 billion in outflows during August-October 2025.
• Currency Slide: The Indian Rupee depreciated to a historic low of ₹88.78 per US dollar, raising concerns about imported inflation and higher debt-servicing costs.
• Trade Gap: Merchandise trade deficit widened to $223 billion during April-November 2025 due to elevated energy prices and a global reorientation of supply chains.
• Margin Stress: Increased freight costs and tariff barriers led to a projected 10-18% compression in EBITDA across manufacturing sectors with high exposure to the US market.

Economic Outlook for 2026

• Base Revision: MoSPI is set to release a new CPI series (Base 2024 =100) and revised GDP–IIP data (Base 2022-23) to reflect the digital economy better.
• Export Mission: The government is planning an Export Promotion Mission to provide cheaper credit and non-tariff support for exporters targeting the EU and African markets.
• EU FTA: India-EU Free Trade Agreement negotiations are nearing completion and are expected to unlock a 450-million-consumer market for Indian services.
• Policy Shift: With the repo rate at 5.25%, the RBI is expected to shift from aggressive rate cuts to liquidity management to support growth.
• Market Diversification: India is actively pursuing Mission 500 to raise bilateral trade with the US to $500 billion by 2030 while expanding ties with the MERCOSUR and GCC blocs.
• Demand Revival: GST rate cuts are expected to take effect in 2026, leading to a significant rise in rural demand as essential goods become 7-13% cheaper.

{GS3 – IE} India’s Changing Oil Basket

• Context (TH): India’s crude oil import basket has undergone a strategic transformation over the last two decades, driven by geopolitics and the need to strengthen long-term energy security.

Evolution of India’s Oil Import Basket

• West Asia Dominance (Pre-2005): India relied overwhelmingly on West Asia, with over 70% of crude imports coming from Saudi Arabia, Iraq, Iran, Kuwait and the United Arab Emirates.
• Initial Diversification Phase (2005–2015): Imports gradually expanded to Africa and Latin America, with Nigeria and Angola together accounting for around 20% of imports by 2011–12.
• Iran Sanctions Impact (2010–2015): International sanctions led to a steady decline in Iran’s share from 11.3% (2011–12) to about 6% by 2015–16, forcing India to diversify suppliers.
• Temporary Iran Revival (2016–2017): Post-sanctions relief saw Iran’s share rebound to 12.7% in 2016–17, highlighting India’s preference for competitively priced and logistically efficient crude.
• Shift Towards the Americas & Africa (2017–2021): Renewed sanctions on Iran led to a 91.8% cut in Iranian imports by 2019–20, with India increasing sourcing from the Americas and Africa.
• Russian Oil Surge (Post-2022): Following the Ukraine conflict, Russia’s share jumped from below 2% (2021–22) to 21.6% (2022–23) and nearly 36% by 2024–25, driven by discounted prices.

Key Drivers Behind the Shift

• Geopolitical Adaptation: Sanctions on Iran and Russia reshaped sourcing patterns, compelling India to balance diplomacy with uninterrupted energy access.
• Economic Rationality: Discounted Russian crude, with prices falling from around $79/barrel (April 2022) to about $66/barrel (March 2025), improved refinery margins and helped contain inflation.
• Refinery Compatibility: Indian refineries are technically suited to process diverse crude grades, enabling rapid shifts without major capital expenditure.
• Energy Security Resilience: Reduced Middle East dependence from over 70% (pre-2005) to ~40–45% currently has lowered single-region supply shock risks.

Implications for India

• Current Account Support: Crude oil accounts for nearly 25–30% of India’s total merchandise imports, and cheaper diversified sourcing helped moderate the current account deficit during FY2023–25.
• Inflation Management: Fuel and light account for 6.84% of the Consumer Price Index (CPI); stable crude sourcing has cushioned pass-through effects and supported headline inflation control.
• Geopolitical Exposure Risk: Russia’s supply of ~35% of India’s crude imports (2024–25) increases vulnerability to secondary sanctions and shipping disruptions.
• Refinery Profitability: Indian refiners processed higher volumes of discounted crude, improving gross refining margins, $8–10 per barrel in parts of FY2023, compared to long-term averages of $4–6.

{GS3 – Infra} India’s Two Major Shipbuilding Initiatives **

• Context (PIB): The Ministry of Ports, Shipping, and Waterways (MoPSW) notified operational guidelines for two major shipbuilding initiatives.

• The schemes—Shipbuilding Financial Assistance Scheme (SBFAS) and Shipbuilding Development Scheme (SbDS)—seek to strengthen India’s domestic shipbuilding capacity.
• Objective: to position India among the top five global shipbuilding nations by 2047, aligning with the Maritime Amrit Kaal Vision 2047.

About Shipbuilding Financial Assistance Scheme (SBFAS)

• The scheme provides graded support for small, large, and specialised vessels, with stage-wise disbursement tied to defined milestones and backed by security instruments.
• The government will provide 15–25% financial assistance per vessel, depending on vessel category.
• The scheme establishes a National Shipbuilding Mission to ensure coordinated planning and execution of all shipbuilding initiatives.
• Key Feature: It introduces Shipbreaking Credit Notes, giving shipowners 40% of scrap value as credit for scrapping vessels at Indian yards; this credit can be used for new vessel construction in India.

About Shipbuilding Development Scheme (SbDS)

• The scheme supports greenfield shipbuilding clusters, brownfield yard modernisation, and an India Ship Technology Centre under the Indian Maritime University.
• Greenfield Support: Greenfield shipbuilding clusters will receive 100% capital support through a 50:50 Centre–State special purpose vehicle.
• Brownfield Expansion: Existing shipyards are eligible for 25% capital assistance for dry docks, shiplifts, fabrication, and automation upgrades.
• Mechanism: Disbursements will be milestone-based and monitored by independent agencies.
• Key Feature: It includes a Credit Risk Coverage Framework that provides government-backed insurance against various risks, enhancing financial resilience.

Read More > India’s Shipbuilding Sector

{GS3 – Envi} Supreme Court stays 100-metre Aravalli Definition

• Context (IE): The Supreme Court has stayed the recent ruling that accepted a 100-metre height threshold for defining the Aravalli range.

• The Court ordered the formation of a new expert committee comprising independent, non-bureaucratic domain specialists to resolve ambiguities.

Key Areas to be Resolved

• Hill Threshold: Applying the 100-meter height criterion would exclude nearly 90% of the Aravalli Hills from protection (FSI analysis).
• Spatial Exclusion: The 500-metre proximity rule would exclude inter-hill areas, fragmenting ecological continuity across the range.
• Mining Impact: Mining in excluded but contiguous areas could compromise the stability and integrity of the protected Aravalli hills.

Read More > Recent Supreme Court Rulings on the Aravalli Range | Key Concerns of New Aravalli Benchmark

{GS3 – Envi} Revamped Distribution Sector Scheme (RDSS)

• Context (TH): Rajasthan is accelerating rooftop solar installations under the Revamped Distribution Sector Scheme (RDSS) to modernise power distribution infrastructure.

About Revamped Distribution Sector Scheme (RDSS)

• It is a major flagship initiative launched in 2021 by the Ministry of Power to improve the quality and reliability of power supply in India.
• Objective: to improve operational efficiency and financial sustainability of state-owned DISCOMs, ensuring reliable 24×7 affordable power.
• Key Targets: to reduce Aggregate Technical and Commercial (AT&C) losses to 12–15% and eliminate the Average Cost of Supply (ACS) and Average Revenue Realized (ARR) gap by 2024–25.
• Key Feature: RDSS follows a reform-based, results-linked model in which funding depends on meeting pre-qualification criteria and performance benchmarks.
• Nodal agencies: Rural Electrification Corporation (REC) and Power Finance Corporation (PFC) coordinate the implementation.

Key Components

• Infrastructure & Metering: The scheme prioritises prepaid smart meters, system metering, and upgrades to distribution infrastructure.
  • Smart metering is implemented through the TOTEX (Total Expenditure) model under Public–Private Partnership.
• Capacity Building: it supports training, process reforms, consumer awareness, and third-party evaluation to strengthen DISCOM capabilities.
• Feeder Segregation: Agricultural feeders are separated and later solarised under PM-KUSUM to provide reliable daytime power to farmers.

{GS3 – IS} Anti-Terrorism Conference 2025

• Context (TOI): 5^th edition of the annual Anti-Terrorism Conference organised by the National Investigation Agency (NIA), has concluded in New Delhi.

Key Outcomes

• The Union Home Minister called for the creation of an “impenetrable anti-terror grid” on the national level and a common anti-terror squad (ATS) structure across states.
• A “360-degree strike” plan against organized crime was announced and the shift from a “Need to Know” to a “Duty to Share” approach in intel-sharing among security agencies was emphasized.
• The mandatory use of platforms like National Intelligence Grid (NATGRID) and National Integrated Database on Arrested Narco-offenders (NIDAAN) was encouraged.
• An updated NIA crime manual, an Organised Crime Network Database and a comprehensive database for lost and looted weapons were launched.

Read More > India’s First National Counter-Terrorism Policy

{Prelims – IR} China Released Draft Rules for Anthropomorphic AI

• Context (TH): The Cyberspace Administration of China issued draft rules mandating psychological health safeguards for users of AI systems.

• Scope: The rules apply to anthropomorphic or companion AI systems that simulate human emotions, personalities, and interactive behaviours.
• Policy Objective: The draft framework aims to prevent psychological addiction, deepfake fraud, and deviations from ideological standards.
• Disclosure Mandate: Providers must inform users at login and every two hours of continuous use that they are interacting with artificial intelligence.
• User Monitoring: Companies will assess users’ emotional well-being and potential dependency risks as part of service delivery.
• Safety Clearance: Firms are required to complete security assessments and submit reports to provincial authorities before deploying ‘humanlike’ AI features.

{Prelims – Geo} Dulhasti Stage-II Hydropower Project *

• Context (TT): The Centre has approved the 260-MW Dulhasti Stage-II hydropower project on the Chenab River in Kishtwar district, Jammu and Kashmir.

About Dulhasti Stage-II Project

• Type: Run-of-the-river hydropower project on the Chenab basin developed by National Hydroelectric Power Corporation Ltd (NHPC) under a BOOT framework.
• Capacity: 260 MW (2 × 130 MW), designed for large-scale grid supply with an annual Generation of approximately 803 million units.
• Extension Project: Builds upon the existing 390-MW Dulhasti Stage-I, operational since 2007.

{Prelims – S&T} AI-Based Decision Support System for Air Pollution Control

• Context (IE): The Delhi government has partnered with IIT Kanpur to develop an AI-enabled Decision Support System (DSS) for air pollution control.

• Management Approach: The DSS will shift Delhi’s air pollution management from seasonal firefighting to continuous, science-led, year-round governance.
• Data Fusion: The platform integrates ground-based sensors with satellite imagery to provide a comprehensive view of regional and local air quality.
• Granular Source: It uses hyper-local source apportionment to pinpoint specific pollution sources instead of citywide average measurements.
• Decision Timing: Policy actions will be based on real-time pollution data and measurable outcomes, preventing delays after pollution spikes.
• Trend Analysis: The DSS will continuously monitor pollution trends and predict future levels to support early, preventive interventions.
• Whole-of-Government: Multiple departments, such as Environment, Transport, Municipal Corporation of Delhi, and NCR districts, will use a shared data platform.

{Prelims – Defence} INS Vaghsheer *

• Context (ET): President Droupadi Murmu undertook a submarine sortie onboard INS Vaghsheer from the Karwar naval base in Karnataka.

• President Murmu is the second Indian President to undertake a submarine sortie, the first one being President APJ Abdul Kalam in 2006.

About INS Vaghsheer

• It is the sixth and final Kalvari (Scorpene)-class submarine inducted in 2025 under Project-75, built indigenously in India under technology transfer from France’s Naval Group.
  • The other 5 Kalvari-class submarines are INS Kalvari, INS Khanderi, INS Karanj, INS Vela & INS Vagir.
• It is a diesel-electric powered attack submarine, designed for anti-surface and anti-submarine warfare, intelligence gathering, surveillance, and special operations.
• It is armed with wire-guided torpedoes, anti-ship missiles, mine-laying capability, and has advanced stealth features such as low radiated noise and refined hydrodynamic design.
• It is among the quietest conventional submarines globally, and is planned for future integration of Air Independent Propulsion (AIP) to enhance submerged endurance.

Read More > Samudrayaan Mission