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The following is the Executive summary of the OECD assessment and recommendations, taken from the Economic survey of India, published on 9 October 2007.
India has undergone a profound shift in economic management
Since the mid-1980s successive reforms have progressively moved the Indian economy towards a market-based system. State intervention and control over economic activity has been reduced significantly and the role of private-sector entrepreneurship increased. To varying degrees, liberalisation has touched on most aspects of economic policy including industrial policy, fiscal policy, financial market regulation, and trade and foreign investment.
Overall, reform has had a major beneficial impact on the economy
Annual growth in GDP per capita has accelerated from just 1¼ per cent in the three decades after Independence to 7½ per cent currently, a rate of growth that will double average income in a decade. Potential output growth is currently estimated to be 8½ per cent annually and India is now the third largest economy in the world. Increased economic growth has helped reduce poverty, which has begun to fall in absolute terms.
Areas that have been liberalised have responded well
In service sectors where government regulation has been eased significantly or is less burdensome – such as communications, insurance, asset management and information technology – output has grown rapidly, with exports of information technology enabled services particularly strong. In those infrastructure sectors which have been opened to competition, such as telecoms and civil aviation, the private sector has proven to be extremely effective and growth has been phenomenal. At the state level, economic performance is much better in states with a relatively liberal regulatory environment than in the relatively more restrictive states.
Significant problems remain and the next round of reforms needs to focus on a number of key areas
In labour markets, employment growth has been concentrated in firms that operate in sectors not covered by India’s highly restrictive labour laws. In the formal sector, where these labour laws apply, employment has been falling and firms are becoming more capital intensive despite abundant lowcost labour. Labour market reform is essential to achieve a broader-based development and provide sufficient and higher productivity jobs for the growing labour force. In product markets, inefficient government procedures, particularly in some of the states, acts as a barrier to entrepreneurship and needs to be improved. Public companies are generally less productive than private firms and the privatisation programme should be revitalised. A number of barriers to competition in financial markets and some of the infrastructure sectors, which are other constraints on growth, also need to be addressed. The indirect tax system needs to be simplified to create a true national market, while for direct taxes, the taxable base should be broadened and rates lowered. Public expenditure should be reoriented towards infrastructure investment by reducing subsidies. Furthermore, social policies should be improved to better reach the poor and – given the importance of human capital – the education system also needs to be made more efficient.
Reform must continue if government is to achieve its growth targets
The government’s target of reaching GDP growth of 10% in 2011 is achievable if reforms continue. In addition, if the relatively restrictive states improve their regulatory frameworks towards that of the better-run states, growth will be more inclusive and income gaps across states will narrow. The impressive response of the Indian economy to past reforms should give policy makers confidence that further liberalisation will deliver additional growth dividends and foster the process of pulling millions of people out of poverty.
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.