India needs more economic reforms to widen benefits from growth, says OECD report

 

09/10/2007 - India’s annual economic growth could reach a sustainable 10 percent and be spread more evenly across the country if it pursues ambitious and wide-ranging reforms, says a new OECD report.

In its first Economic Survey of India, the OECD says market-based reforms since the 1980s have helped reduce poverty and average incomes are expected to double within the next decade. Economic growth is currently running at a sustainable eight percent a year. India is now the world’s third largest economy behind the US and China when measured in terms of real prices and purchasing power.

Presenting the report at a seminar organised by the Indian Council for Research on International Economic Relations (ICRIER) in New Delhi, OECD Secretary-General Angel Gurría emphasised that India’s success over the past two decades is largely the result of reforms that give a greater role to the private sector while reducing the presence of the state in economic affairs.  Participants in the ICRIER seminar included Finance Secretary D. Subba Rao and the chair of ICRIER, Dr Isher Judge Ahluwalia.

The reforms, Mr. Gurría said, “have allowed India to benefit from globalisation. The share of exports in GDP has risen dramatically, almost tripling in the past two decades. India is now well- known for its growth in IT services exports. More recently, it has benefited from the outsourcing of business processes.  We estimate that in 2006, India was the fourth largest exporter of IT and IT enabled services, up from 16th place as recently as 2003.”

Nonetheless, he noted, the OECD survey points to a number of areas where India’s economy could benefit from further reforms. “Undertaking a series of economic reforms would allow India to reach a sustainable growth rate of 10 percent,” he said. Among these, he cited four major areas for possible action: improving the business environment; infrastructure; public finances and labour market reform.

Publication of the OECD’s first-ever report on the Indian economy follows a decision by OECD member countries in May to engage more closely with a number of major emerging economies, including India, Brazil, China, Indonesia and South Africa. This decision, Mr. Gurría said, “is a clear sign of a changing OECD, which is working to become a hub for dialogue on global issues.”

The report, Mr. Gurría noted, was the fruit of extensive discussions between the staff of the OECD and a wide range of experts in India both in the central and state governments and in the private sector. In addition, he observed, it had benefited from an exchange of views between officials from India and OECD member governments.  “This is one of the strengths of the OECD,“ Mr. Gurría said. “It provides a forum where public policies can be compared, based on the shared experience of our 30 democracies.”

Drawing on that experience, Mr. Gurría noted, the report makes a number of specific recommendations. Red tape, for example, still holds back business. The survey urges state governments to become better organised and build on improvements made at the national level. The new Competition Commission needs to start work as quickly as possible now that it has full legal backing. A modern bankruptcy law is also needed to simplify the restructuring of insolvent firms.

Privatisation of more publicly-owned firms should resume to help improve productivity and profitability. In the meantime, public companies should be controlled by a government investment agency rather than by a sponsoring ministry, in order to separate ownership and policy-making.

The report says the government should continue its programme of increased discipline in public spending. This will make room for higher levels of private investment. Spending on subsidies should be better targeted to help the poor. The survey also recommends reducing tax exemptions to allow more money to be transferred to fund public services in urban areas.

“India’s infrastructure is seriously overstretched,” the survey warns.  The country’s “high rate of economic growth is at risk if infrastructure development does not increase and keep pace with demand.” Electricity shortages are one such brake on growth. To boost investment in this area consumers should pay for all of their electricity, the report says. Business should no longer be forced to subsidise consumers by paying overly high electricity prices.

Banks should be gradually moved out of the public sector while the government should stop directing bank lending. These moves would improve allocation of capital and boost growth. More foreign competition is needed in financial services.

The report calls for the removal of the ban on foreign direct investment in retail shops. This would help improve productivity and supply chain management, reduce the high rates of waste of farm products and lower prices for the consumer. 

Labour market laws need to be reformed so that more people can benefit from economic growth. Existing laws are pushing jobs into low productivity small-scale firms. Reform would help ensure that India benefits fully from its abundant labour, the report says.

To ensure higher incomes, India will need a better educated population. The OECD survey proposes ways of ensuring that all children complete eight years of schooling through such schemes as improving incentives for teachers and providing the poor with cash grants dependent on their children continuing at school.

For more information or to obtain a copy of the OECD Economic Survey of India, journalists are invited to contact the OECD Media Division (tel: + 331 4524 9700). Additional information is also available on the OECD website at www.oecd.org/india.

The report can be purchased in paper or electronic form through the OECD’s Online Bookshop. Subscribers and readers at subscribing institutions can access the online version via SourceOECD.

 

 

 

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