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The following OECD assessment and recommendations summarise chapter 3 of the Economic survey of India survey of India published on 9 October 2007.
Improving the business environment is essential for boosting the growth potential of the economy. Excessive regulation of markets is a barrier to the diffusion of technology and lowers the speed with which labour productivity catches up to the level of the best performing economies. According to new indicators presented in this Survey, there are a number of areas where reforms have already lowered regulatory barriers to international best practice. Nonetheless, overall, regulation is more restrictive than in Brazil, Chile and all OECD countries. Moreover, there are wide differences in the extent of regulation across states, which affect their respective economic performance.
Product market regulation is still relatively restrictive in India
The indicator score runs from 0-6, representing the least to most restrictive
There are a number of areas where barriers to competition need to be reduced. Innovation and responsiveness to changing market demands require the ability to create new firms quickly. All levels of government should lower the barriers to entrepreneurship by re engineering procedures to reduce administrative burdens on new and existing firms and reduce the extent of inspections, as well as the number of returns. A specific unit should be charged with undertaking regulatory impact analyses of existing and proposed laws. Reservation of specific product areas for small scale enterprises should be ended in line with the government’s timetable. It is important to ensure that there is a competitive environment for existing firms to operate in, including in those manufacturing industries which are still highly concentrated. There is an urgent need for the new Competition Commission to become a fully functioning agency capable of enforcing the competition law introduced in 2003. Finally, it is also a difficult and lengthy process to restructure or close insolvent or bankrupt companies. A modern bankruptcy law is needed which should also reduce the role of the courts.
Competition can also be increased through a further opening to the world economy. Recent tariff cuts need to be continued and to go beyond the government’s target of alignment with average ASEAN tariffs by 2010. The dispersion of tariffs rates is also high in India, a relic of past activist industrial policies. Reducing the dispersion of tariff rates (or, in the end, moving to one uniform tariff rate) would further increase efficiency. Barriers to foreign direct investment (FDI) have been lowered in the manufacturing sector, which has led to a marked increase in investment inflows. But restrictions still exist in a number of service areas and reducing these would benefit the Indian economy. For example, removing the cap on FDI in the insurance sector would allow a welcome expansion of the industries capital base. Lifting the ban on FDI in retail trading would help to improve productivity, supply chain management, reduce the exceptionally high rate of waste of agricultural produce and so lower retail prices and raise producer prices.
Should more of the public sector enterprises be privatised?
Public-sector ownership in industry is still extensive in India. In the so-called organised sector of the economy, state-owned enterprises produce 38% of business-sector value-added. There is a large tail of loss-making public enterprises, particularly at the state level and, on average, the productivity and profitability of publicly-owned firms have been lower than in the private sector. Privatisation would thus appear to offer considerable possibilities for improving productivity. However, the privatisation programme has stalled and, in any case, has involved mainly selling minority stakes, rather than transferring control. Government firms represent a small share of output in manufacturing, construction and non-financial services. Given the potentially competitive nature of these industries, government ownership should be reduced. Privatising firms in sectors where the government share of output is larger (banking, insurance, coal and electricity) would also be desirable but may need to be phased in (see below). In the meantime, public companies should be controlled by a government investment agency, rather than by a sponsoring ministry, so as to separate the ownership and policy-making functions.
How to obtain this publication
The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations. The complete edition of the Economic survey of India 2007 is available from:
For further information please contact the India Desk at the OECD Economics Department at firstname.lastname@example.org. The OECD Secretariat’s report was prepared in the Economics Department by Richard Herd, Paul Conway and Sean Dougherty, under the supervision of Willi Leibfritz. Research assistance was provided by Thomas Chalaux.