Productivity and long term growth

Going for Growth 2016: India

 

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India needs to address a wide range of structural bottlenecks in order to sustain strong medium-term growth. The most binding bottlenecks include high labour informality, severe shortages in public infrastructure and low educational attainment. Informal employment is exacerbated by various rigidities affecting the formal labour markets such as onerous labour regulations and stringent employment protection, as well as high administrative and regulatory burdens on entrepreneurship, which hinder job creation.

1. Data refer to 2009 for Indonesia; 2010 for South Africa and China; 2012 for India. For China, the Figure is an official estimate for urban area.

Source: International Labour Organisation (ILO).

Previous Going for Growth recommendations include:

  • Reduce administrative and regulatory burdens on companies by simplifying rules and procedures, in particular, imposing maximum timelines to regulatory approval processes and implementing single-window clearance experiments more widely.
  • Further reduce barriers to formal employment by introducing a simpler and more flexible labour law which does not discriminate by size of enterprise and by easing provisions requiring government approval to terminate employment contracts.
  • Enhance access to, and quality of, the education system especially at the secondary level, notably by providing vocational training earlier in the cursus.
  • Promote more effective infrastructure-related regulations by monitoring the implementation of the land acquisition law and reviewing it if it fails to shorten the land acquisition process, and by simplify the regulatory approval process for large infrastructure projects through the imposition of clear timelines.
  • Undertake wide-ranging financial sector reforms by easing bank portfolio restrictions, including through the gradual reduction of the share of government bonds held by banks, by establishing a plan to phase out priority lending and by allowing greater foreign investors’ participation in the financial service sector and further promote the entry of new private banks.

 

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Recent policy actions in these areas include:

  • Under the Make in India and Start-up India initiatives, several measures are being implemented to improve the business environment, at both the central government and state levels. They include: the reduction in the number of forms required to start or operate a business, and their simplification; the introduction of online portals for some regulations and single-window clearance for imports and exports. A system of information and ranking on the implementation of business reform at the state level has also been introduced, fostering competition and the sharing of best practices across Indian states.
  • The Apprentices Act was amended, relaxing some rigid norms related to the hiring of apprentices. Also, the firm size threshold below which companies can lay off employees without prior government approval has been raised in some states. Furthermore, a unified online portal for 16 central government labour laws was launched while making labour inspection processes more transparent.
  • The Skill India Initiative, which includes an expansion in the quantity and scope of skill training programmes and financial incentives for youth attending and completing those programmes, was launched.
  • Measures that could encourage private investment in infrastructure were taken, such as relaxing FDI regulations in some sectors including railways, construction, air transport services; and regulatory reforms in the energy sector such as enhanced transparency in coal allocation, a partial privatisation of Coal India and the auctioning of oil and gas fields.
  • The Reserve Bank of India granted two universal bank licences and 21 bank licenses with a financial inclusion focus (11 payment banks and 10 small finance banks) in 2015, after a decade of no new entry.

The report also discusses the possible impact of structural reforms on other policy objectives (fiscal consolidation, narrowing current account imbalances and reducing income inequality). In the case of India, modernising labour laws can reduce income inequality from informal employment and labour market segmentation. Raising the quality of education and training systems would also reduce poverty and income inequality by promoting the economy’s ability to respond to new market opportunities and thus job creation.

Economic Policy Reforms 2016 

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