UPSC Daily Current Affairs: 17th August 2025 | Current Affairs & Hindu Analysis: Daily, Weekly & Monthly PDF Download

GS3/Environment

Health Hazards of Plastic Pollution

Why in News?

Recent negotiations among nearly 180 countries in Geneva aimed at establishing a binding international treaty to address plastic pollution ended without consensus. Although the United Nations Environment Programme (UNEP) has acknowledged the urgency of the issue through a resolution, a legally binding agreement is essential for compelling nations to take action. Deep divisions remain, with some countries advocating for a focus solely on plastic waste management, while others argue for addressing plastic production as well. A significant point of contention is whether developed nations should offer financial support to developing countries to implement these measures. Ultimately, the recognition of plastics’ impact on human health has stalled progress in drafting the treaty.

Key Takeaways

• Negotiations for a global treaty on plastic pollution have failed to reach an agreement.
• There is a critical division between focusing on waste management versus production of plastics.
• The health impacts of plastics are a major point of contention in treaty discussions.

Additional Details

• Increased Use of Plastic: Plastic has become emblematic of the industrialized economy, known for its versatility and low cost. It is derived mainly from fossil fuels and is used in a wide range of products, from medical equipment to disposable packaging.
• Challenges from Plastic: Plastics are persistent in the environment and are a significant source of litter. They consist of complex mixtures of polymers and over 16,000 chemicals, many of which are poorly understood in terms of their health and environmental impacts.
• Health Risks Identified by Studies: Research has linked exposure to chemicals in plastics to various health issues, including thyroid dysfunction, hypertension, and certain cancers. Most studies have been conducted in developed countries, indicating a need for global research.
• Microplastics and Human Health: Microplastics, defined as plastic fragments smaller than five millimeters, have been found in human blood, breast milk, and other biological systems, raising concerns about their potential health effects.
• India’s Approach to Plastic Management: India has not formally recognized the health risks of plastics, primarily treating the issue as a waste management challenge. Although some measures are in place to manage plastic waste, enforcement remains weak.

The ongoing challenges of plastic pollution emphasize the need for a coordinated global response that addresses both the production and health impacts of plastics, rather than merely focusing on waste management. Without a binding agreement, significant progress in mitigating these health hazards remains elusive.

GS2/International Relations

US-Russia Alaska Summit - Fallout and Strategic Concerns

Why in News?

The recent summit between US President Donald Trump and Russian President Vladimir Putin has garnered significant attention, with Trump rating the meeting a "10 out of 10." This summit aimed to explore avenues for resolving the ongoing conflict in Ukraine, involving two of the world's leading nuclear powers and carrying implications for global security, NATO relations, and the dynamics of the Ukraine crisis.

Key Takeaways

• Despite being described as "extremely productive," no formal agreement was reached during the summit.
• Both leaders recognized progress on various issues, with discussions of a potential trilateral meeting involving the US, Russia, and Ukraine.
• The summit underscored the importance of US-Russia relations as the world's top nuclear powers, aiming to reduce hostilities and seek a peace settlement in Ukraine.
• Trump suggested a comprehensive peace agreement for Ukraine, urging Ukrainian President Volodymyr Zelenskyy to negotiate with Russia.
• Putin supported Trump's views, expressing readiness to engage in dialogue to resolve the crisis and improve US-Russia relations.

India’s Strategic Dilemma Amid US-Russia Alaska Summit

• Trade tariffs and sanctions: The 25% tariff on Indian exports is part of the US's strategy to pressure Russia, with warnings of harsher sanctions against states supporting Moscow's war economy.
• India's refined petroleum exports sourced from Russian crude are under scrutiny, with claims that tariffs could affect purchasing decisions.
• Energy security vs. geopolitics: Since 2022, India has become a major buyer of discounted Russian crude, ensuring energy security but facing criticism from Western nations.
• The potential enforcement of tariffs may force India into a trade-off between maintaining energy affordability and sustaining export competitiveness.

Strategic Significance of the US-Russia Alaska Summit

• This summit illustrates how secondary powers like India are influenced by negotiations between major powers.
• It reveals the ongoing tension between energy security and foreign policy autonomy for India.
• India's reluctance to fully align with Western sanctions complicates its relationship with the US.
• For global politics, the summit reinforces great power politics in conflict resolution, though a broader Western consensus remains uncertain.
• It may affect NATO-Ukraine strategy and Europe's security architecture while indicating a potential recalibration of US-Russia relations.

Way Ahead for India

• Diplomatic tightrope: India must balance its ties with Russia (in defense and energy) against its strategic partnership with the US, particularly concerning the Indo-Pacific.
• Growing partnership: Strengthening ties with the US and Europe in areas like trade and technology is essential for India.
• Ray of hope: There is optimism that Trump may postpone or cancel tariffs pending peace talks regarding Ukraine.

The summit represents a tentative yet crucial step towards peace negotiations in Ukraine. While progress was acknowledged, the absence of concrete outcomes highlights the fragility of diplomatic efforts in conflict resolution. While the summit may have provided Putin with symbolic legitimacy, it left India facing strategic and economic uncertainties. Moving forward, New Delhi must adeptly navigate the challenge of securing energy supplies from Russia while mitigating the impact of US secondary tariffs, all within the context of an evolving global order influenced by the Ukraine conflict.

GS2/Polity

Challenges Confronting the Election Commission of India

Why in News?

The Election Commission of India (ECI) is currently in the spotlight due to the Bihar Special Intensive Revision (SIR) exercise, which resulted in mass voter deletions and has drawn scrutiny from the Supreme Court regarding electoral roll transparency.

Key Takeaways

• The ECI is facing allegations of electoral roll discrepancies and manipulation.
• Recent Supreme Court interventions have raised questions about the ECI's credibility and autonomy.
• The appointment process for Election Commissioners has come under fire for potential bias.

Additional Details

• Constitutional Mandate: The ECI is a permanent constitutional body responsible for overseeing elections to the Parliament, state legislatures, and the offices of the President and Vice-President, ensuring free, fair, and impartial elections.
• Appointment Controversy: The Chief Election Commissioner and Other Election Commissioners (Appointment, Conditions of Service and Term of Office) Act, 2023 has changed the selection process, leading to concerns over independence due to a 2:1 government majority in the selection committee.
• Allegations of Voter Roll Manipulation: Various states, including Maharashtra and Karnataka, have seen allegations of discrepancies in voter lists. Calls for machine-readable voter rolls have been met with resistance from the ECI.
• Bihar SIR and Supreme Court Intervention: The Bihar SIR, initiated in June 2025, deleted 65 lakh names from electoral rolls, prompting the Supreme Court to require the ECI to publish booth-wise lists of deleted names and provide reasons for deletions.
• Challenges of Migrant Voters: Internal migrants face difficulties in voting due to the need to return to their registered constituencies, highlighting the need for a transparent and accessible voting system.
• Political Fallout: The controversy has led to protests, demands for accountability from opposition parties, and disruptions in Parliament.

The current challenges confronting the ECI highlight the crucial need for transparency, voter rights protection, cybersecurity, and safeguarding institutional independence in the electoral process.

GS3/Economy

New Income Tax Bill 2025 Passed in Parliament

Why in News?

Parliament has recently passed the New Income Tax Bill 2025, which aims to modernize and replace the outdated Income Tax Act of 1961. This new legislation is notably shorter, more streamlined, and clearer in its drafting, while also introducing several new provisions that could present challenges or raise concerns regarding their implications and implementation.

Key Takeaways

• The new Income Tax Bill has reduced the number of chapters from 47 to 23 and sections from 819 to 536.
• It aims to simplify the tax law, making it more accessible to citizens.
• New provisions expand taxpayer rights, such as updating returns for up to four years without penalties.

Additional Details

• Need for a New Income Tax Law: The Income Tax Act of 1961 had become increasingly complex and confusing due to multiple amendments over the decades, leading to a lack of clarity and potential harassment of taxpayers by officials.
• Streamlining the Legislation: The new Bill simplifies the language used, removing legal jargon and providing practical examples, making tax law far more accessible.
• Minimum Alternate Tax (MAT) and Alternate Minimum Tax (AMT): These provisions have now been separated into distinct sub-sections to improve clarity.
• The Bill introduces a new concept of a “tax year”, defined as April 1 to March 31, ensuring a clearer timeline for tax assessments.
• Digital Provisions: The Bill expands the definition of "virtual digital space," giving tax authorities broader powers during searches and seizures, which raises privacy concerns.
• Taxpayers are now legally required to provide “reasonable technical and other assistance,” including sharing passwords, which could lead to significant privacy issues.

In summary, while the New Income Tax Bill 2025 aims to simplify tax compliance and enhance clarity, it also introduces provisions that may raise serious concerns regarding privacy and the extent of authority given to tax officials. The government's justification is that in today's financial ecosystem, much critical financial information is stored digitally, necessitating these changes.

GS3/ Science and Technology

Semiconductor Industry in India

Why in News?

• The Union Cabinet has given the green light to four new semiconductor projects under the India Semiconductor Mission (ISM).
• These projects are set to take place in Odisha, Punjab, and Andhra Pradesh, bringing the total number of projects to ten across six states.

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

Market Size

• India’s semiconductor consumption market is projected to grow from USD 52 billion in 2024-25 to USD 103.4 billion by 2030, with a Compounded Annual Growth Rate (CAGR) of 13%.
• Approximately 70% of revenue comes from mobile handsets, IT, and industrial applications, while automotive and industrial electronics present significant growth opportunities.

Global Landscape

• Taiwan, South Korea, Japan, China, and the US are the dominant players in the global semiconductor industry.
• India’s imports of Integrated Circuits (ICs), memory chips, and amplifiers have surged dramatically, with increases of 2,000%, 4,500%, and 4,800% respectively from FY16 to FY24. China is a major supplier, accounting for nearly one-third of these imports.

Key Opportunities for India

Large Market Potential

• India is the world’s second-largest market for 5G smartphones, holding a 13% share, following China’s 32%.

Surging Domestic Demand

• There is a growing demand for mobile devices, computers, and digital technologies, driven by the rollout of 5G and the adoption of artificial intelligence (AI).

Global Partnerships and Support

• Collaborations with global semiconductor leaders and countries like the US and Japan are facilitating technology transfer and enhancing India’s capabilities.

Initiatives like the Semicon India Programme

• The expansion of manufacturing and digitalization efforts is strengthening India’s semiconductor ecosystem.

What is the India Semiconductor Mission (ISM)?

About ISM

• The India Semiconductor Mission (ISM) was approved in 2021 with the goal of enhancing India’s position in the global electronics value chain and establishing the country as a global manufacturing hub for semiconductors.
• ISM operates under the Ministry of Electronics and Information Technology (MeitY).

Objectives of ISM

• The mission aims to support chip design startups, promote indigenous intellectual property (IP) and technology transfer, and foster research and innovation in the semiconductor sector.
• By reducing import dependence, ISM seeks to strengthen India’s global semiconductor presence.

Mission Focus Areas

• Establishing chip manufacturing fabs (fabrication facilities)
• Creating packaging and testing units (ATMP/OSAT)
• Supporting chip design startups
• Training engineers and technical talent
• Attracting global semiconductor investments

Key Schemes under ISM

• Semiconductor Fabs Scheme. Offers up to 50% fiscal support for wafer fabrication units.
• Display Fabs Scheme. Provides up to 50% financial assistance for AMOLED/LCD display fabs to encourage domestic innovation.
• Compound Semiconductors & ATMP/OSAT Scheme. Offers 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, and Medium Enterprises (MSMEs) by providing financial support of up to Rs 15 crore per company across various stages of product development.

Initiatives to Promote India’s Semiconductor Industry

• Production Linked Incentive (PLI) scheme. Aimed at large-scale electronics manufacturing and IT hardware to boost domestic production and exports.
• Scheme for Promotion of Manufacturing of Electronic Components and Semiconductors (SPECS). Strengthening the ecosystem for component and semiconductor manufacturing.
• Electronics Manufacturing Clusters (EMC & EMC 2.0). Developing infrastructure and ecosystem for electronics manufacturing.
• Public Procurement (Preference to Make in India) Order, 2017. Prioritizing domestically manufactured products in government procurement.
• Tax Reforms. Rationalizing tariffs, exempting basic customs duty on capital goods, and providing other incentives.
• Foreign Direct Investment (FDI) Policy. Allowing 100% FDI in electronics manufacturing, subject to applicable laws and regulations.

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

• Infrastructure and Innovation Challenges. Semiconductor fabrication is a complex process involving 500 to 1,500 intricate steps in cleanroom environments. This requires advanced infrastructure, cutting-edge technology, and a skilled workforce. The high costs associated with setting up fabs, conducting research and development, and acquiring specialized equipment pose significant challenges. Additionally, India’s reliance on imported components and intellectual property (IP) hampers innovation and technological self-sufficiency.
• Skilled Workforce Gap. Currently, India has around 220,000 semiconductor professionals. However, there is a projected shortfall of 250,000 to 350,000 skilled workers needed across the semiconductor value chain by 2027. This gap includes various roles in design, manufacturing, and testing.
• Technology and Global Competition. Global semiconductor production is predominantly led by Taiwan and South Korea, which account for 80% of chip foundries. Companies like ASML in the Netherlands dominate extreme ultraviolet (EUV) lithography, while firms such as Nvidia and ARM are leaders in chip design. This concentration of technology and expertise limits India’s access to advanced semiconductor technologies and enhances competition.
• Environmental and Regulatory Challenges. Semiconductor manufacturing involves the use of hazardous chemicals, toxic metals, and requires substantial energy, raising environmental concerns. Compliance with environmental regulations adds to the operational costs. Furthermore, the semiconductor industry faces complex regulatory frameworks, intellectual property issues, export controls, and policy uncertainties, which complicate manufacturing operations.

What Steps Should India Take to Strengthen Its Semiconductor Industry?

• Skill Development. India should establish specialized training programs focused on chip design, fabrication, and testing to address the skilled workforce gap in the semiconductor industry.
• Boost R&D and Indigenous IP. Increasing investments in research and development is crucial. Supporting indigenous product design and developing intellectual property will enable startups and smaller companies to compete globally.
• Incentives and Policy Support. Strengthening government initiatives like the India Semiconductor Mission (ISM) and state-level policies, such as the UP Semiconductor Policy 2024, will attract investments and promote semiconductor manufacturing in India.
• Chip Diplomacy and Niche Focus. Promoting international collaboration, referred to as "chip diplomacy," and focusing on niche technologies like Micro-Electro-Mechanical Systems (MEMS) and sensors will help position India in specialized segments of the global semiconductor market.
• Private Sector Participation and Strategic Opportunities. Encouraging private sector investments and collaborations, such as the Tata-PSMC fab project in Gujarat, will strengthen India’s semiconductor capabilities. Leveraging geopolitical shifts, such as US-China tensions, can also expand India’s semiconductor footprint.

Conclusion

India’s semiconductor sector is on a rapid growth trajectory, driven by initiatives like the India Semiconductor Mission (ISM), Production Linked Incentive (PLI) schemes, and rising domestic demand. Strengthening infrastructure, enhancing technology, and building a skilled workforce will be pivotal in positioning India as a global hub for semiconductor manufacturing and design.

GS3/ Environment and Ecology

Wildfires

• Surface Fire: This type of fire burns along the ground, consuming dry leaves, twigs, and grasses found on the forest floor.
• Underground/Zombie Fire: These are low-intensity fires that burn organic matter beneath the surface. They spread slowly and often go undetected, sometimes persisting for months.
• Canopy/Crown Fire: This fire spreads through the upper tree canopy and is often intense and difficult to control.
• Controlled Deliberate Fire: These are planned burns conducted by forest agencies to reduce fuel loads and support ecosystem health.

Causes of Wildfires: Wildfires can be caused by various factors, including:

• Geography: Regions with a Mediterranean climate are highly susceptible to wildfires, especially during the hot and dry summer months. The combination of high temperatures, low humidity, and dry winds increases the risk of wildfires. For example, the Sirocco wind, which blows from the Sahara Desert to southern Europe, heightens wildfire risk.
• Climate Change: Factors such as dry spells, erratic monsoons, unseasonal heat waves, and El Niño events can dry out vegetation and increase its flammability.
• Human-Induced Factors: Activities such as slash-and-burn agriculture, agricultural expansion, infrastructure projects, tourism, and waste mismanagement can trigger both accidental and deliberate fires.
• Weak Fire Management & Technology: Inadequate surveillance, outdated response systems, lack of AI-based prediction, and poor weather-based forecasting can delay control efforts for wildfires.
• Biodiversity Loss & Flammable Vegetation: Areas with dry deciduous forests, pine needles, bamboo groves, and monoculture plantations can act as natural fuel for wildfires, reducing native biodiversity.
• Deforestation & Habitat Fragmentation: Activities such as infrastructure development, mining, unregulated grazing, and weak policy enforcement can degrade forests, intensify human-wildlife conflict, and harm ecosystems.

Impacts of Wildfires: Wildfires can have severe impacts on various aspects of the environment and human life, including:

• Air Pollution & Climate Change: Wildfires release harmful gases such as CO₂, PM2.5, and Methane, which worsen air quality and contribute to global warming.
• Biodiversity & Habitat Loss: The destruction of forests by wildfires can kill wildlife, threaten endangered species, and disrupt ecosystems. For instance, a study found that wildfires in Brazil in 2020 killed nearly 17 million animals, including reptiles, birds, and primates, leading to significant biodiversity loss.
• Human Health Risk: Smoke inhalation from wildfires can cause respiratory problems, eye irritation, heat-related injuries, and mental stress in affected populations.
• Economic Damage: Wildfires can cause property destruction, high firefighting costs, and agricultural losses, putting a strain on economies.
• Soil & Water Degradation: Wildfires can lead to erosion and ash runoff, which pollutes water sources and harms aquatic life and drinking water supplies.

Wildfires in India: Wildfires are a significant concern in India, with a considerable portion of the country’s forest cover being prone to frequent forest fires. 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, while 7.85% was very highly fire prone.

In recent years, forest fire incidents have surged in mountain regions, with significant increases reported in:

• Himachal Pradesh: 1,339% increase
• Jammu & Kashmir: 2,822% increase
• Uttarakhand: 293% increase

Common Wildfire Control Material & Method

• Pink Fire Retardant:. chemical mixture used to slow or suppress wildfires, primarily containing ammonium phosphate-based slurry and various salts.
• The Bambi Bucket:. firefighting tool used by helicopters to tackle wildfires in hard-to-reach areas by dropping water onto the fire from a specially designed bucket.

What Steps are Needed to Tackle Wildfires? To effectively tackle wildfires, several steps and measures can be implemented: 1. Integrated Fire Management:

• Employ prescribed burning and fuel load reduction techniques to lower the risk of uncontrolled fires.
• Create firebreaks and enforce strict fire safety regulations to prevent fire outbreaks.
• Raise public awareness about fire risks and safety measures to enhance community preparedness.

2. Community & Tribal Participation:

• Involve local communities, Van Panchayats, and tribal groups in wildfire management efforts.
• Provide training and livelihood incentives to these groups to encourage early detection and response to wildfires.
• Incorporate traditional conservation practices of local communities for effective fire management.

3. Advanced Technology & Early Warning:

• Utilize AI predictive models to anticipate potential wildfire outbreaks.
• Implement satellite monitoring and drone surveillance for real-time monitoring of fire-prone areas.
• Establish real-time alert systems to facilitate rapid containment of wildfires.

4. Ecosystem Restoration & Resilience:

• Promote the planting of fire-resistant species to enhance ecosystem resilience to wildfires.
• Establish green firebreaks and engage in climate-resilient forestry practices.
• Restore wetlands and promote sustainable agroforestry practices to reduce fire risks.

5. Policy Enforcement & Eco-Sensitive Development:

• Enforce no-go zones for activities such as mining and infrastructure development in fire-prone areas.
• Implement watershed management practices and promote sustainable tourism to minimize fire risks.
• Utilize blockchain technology for transparent conservation funding and ensure eco-sensitive development practices.

GS3/ Economy

Cess and its Role in Union Finance

Why in News?

The Comptroller and Auditor General (CAG) has highlighted a shortfall of Rs 3.69 lakh crore in transferring cess collections to their intended funds. This raises concerns about the purpose and proper utilization of such levies.

What is the Purpose of Levying a Cess?

About:. cess is an additional tax imposed by the Government of India for a specific purpose, as recognized under Article 270 of the Constitution. It is levied on top of existing taxes or duties listed in the Union List.

• Purpose: Cess is different from regular taxes because it is earmarked for a designated purpose. The law imposing a cess must clearly state its purpose, which should be for a Union purpose and outside the State List (List II) of the Seventh Schedule.
• Cesses are named after their intended purpose, such as Education Cess or Swachh Bharat Cess, and must be used solely for that purpose. They cannot be 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. These proceeds are excluded from the divisible pool of taxes and remain under the Union’s control.

Surcharge

• About: Article 271 of the Indian Constitution allows Parliament to impose a surcharge on certain taxes and duties for Union purposes. This surcharge is an additional levy on existing taxes and duties, often referred to as a “tax on tax.”
• Applicability: The surcharge is typically applied to individuals, companies, and other taxpayers in specific income brackets, usually when their income exceeds Rs 50 lakh in a financial year. The rate of the surcharge varies based on income level and type of income.
• Purpose and Nature: The surcharge is progressive in nature, meaning higher earners contribute more. It aims to promote social equity and address income disparity by increasing the total tax liability for high-income taxpayers.
• Cess vs. Surcharge: Both cess and surcharge are credited to the Consolidated Fund of India (CFI) and are not shared with the states. However, they differ in usage. Surcharge is spent like other taxes, while cess must be allocated separately and used only for its specific purpose.
• The 13th and 14th Finance Commissions supported the exclusion of surcharge from the divisible tax pool but recommended reducing the Centre’s reliance on surcharge revenues.

How do Tax and Cess Differ in Purpose and Usage?

GS3/ Economy

RBI’s FREE-AI Committee Report

Why is it Newsworthy?

The Reserve Bank of India (RBI) has published the Framework for Responsible and Ethical Enablement of Artificial Intelligence (FREE-AI) Committee Report. This report proposes seven guiding principles to encourage the responsible use of AI in the financial sector, aiming to balance innovation with risk management.

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

1. Trust is the Foundation: Trust is essential and should not be compromised. AI systems must be reliable, transparent, and build public confidence.

2. People First: AI should assist human decision-making but prioritize human judgment and the welfare, dignity, and inclusion of citizens.

3. Innovation over Restraint: Foster responsible innovation without imposing unnecessary restrictions.

4. Fairness and Equity: Ensure AI outcomes are fair and non-discriminatory.

5. Accountability: Clearly define responsibilities for AI decisions and their impacts, holding deploying entities accountable.

6. Understandable by Design: AI systems and their decisions should be interpretable by users and regulators.

7. 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? 

1. Revenue Growth: AI is expected to significantly boost revenue, with investments in financial services projected to reach Rs 8 lakh crore by 2027.

2. Efficiency and Personalization: AI can streamline repetitive tasks, enabling financial institutions to process large data volumes more quickly and accurately, such as in loan application processing.

3. Financial Inclusion: AI leverages alternative data like utility bills and GST filings to assess creditworthiness, facilitating loans to "thin-file or new borrowers" excluded from traditional systems.

4. Innovation in Digital Infrastructure: AI enhances India’s digital public infrastructure (e.g., Aadhaar, Unified Payments Interface) to offer personalized and adaptive financial services.

5. Better Risk Management: AI aids in fraud detection, early risk warnings, and improved decision-making, optimizing risk management processes. For instance, J.P. Morgan’s AI payment validation reduced fraud and account rejection rates by 15–20%.

6. Synergies with Emerging Tech: The integration of AI with quantum computing and privacy technologies promises enhanced performance and security in the finance sector.

 What are the Challenges of AI in Finance? 

1. Model Bias and Risk: AI models may inherit biases from training data, leading to unfair decisions. Their "black box" nature makes them difficult to audit.

2. Third-Party Risks: Relying heavily on a few vendors or cloud providers can result in service disruptions, software issues, and cybersecurity vulnerabilities.

3. Regulatory and Liability Concerns: The lack of transparency in AI models complicates the allocation of liability in case of errors or biased outcomes.

4. Cybersecurity Threats: While AI can enhance security, it also introduces new attack vectors such as data poisoning, adversarial inputs, and deepfakes.

5. Ethical and Consumer Protection Issues: Algorithmic bias, privacy violations, and lack of transparency can erode consumer trust and exclude vulnerable groups.

6. Risk of Non-Adoption: Failing to adopt AI may harm competitiveness, reduce efficiency, slow financial inclusion, and leave systems vulnerable to AI-powered threats.

 India’s Policy Developments on AI in Finance 

1. The Reserve Bank of India (RBI) has launched MuleHunter AI, an initiative by the RBI Innovation Hub to assist banks in swiftly identifying mule accounts and combating digital fraud.

2. The RBI’s regulations on digital lending mandate that AI-based credit assessments be auditable, involve human oversight, and include robust mechanisms for addressing grievances related to AI-driven decisions.

3.. consultation paper from the Securities and Exchange Board of India (SEBI) in 2025 outlines guidelines for the responsible use of AI in Indian securities markets.

4. The IndiaAI Mission aims to promote AI innovation, enhance research efforts, and improve access to computational infrastructure for AI development.

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

1. Innovation Enablement: Build a high-quality financial sector data infrastructure, integrated with AI Kosh, as part of the digital public infrastructure.

2. AI Innovation Sandbox: Create a secure testing environment for financial institutions to trial AI models using anonymized data, ensuring compliance with AML, KYC, and consumer protection norms.

3. Consumer Protection & Security: Implement regular AI red teaming and incident reporting frameworks to manage AI risks effectively.

4. Capacity Building within REs: Develop structured training programs for AI governance and risk mitigation across all levels within institutions.

5. Frameworks for AI Best Practices: Establish frameworks for sharing AI use cases and best practices across the financial sector.

6. AI Incident Reporting: Create a framework for timely detection and disclosure of AI-related issues.

Conclusion: The FREE-AI framework provides a comprehensive approach for the responsible and ethical adoption of AI in India’s financial sector, serving as a guide for regulators, financial institutions, and technology providers to leverage AI’s potential effectively.