Remarks by Angel Gurría,
New Delhi, India, 28 February 2017
(As prepared for delivery)
Mr Das, Ladies and Gentlemen,
I am delighted to be in Delhi to present the 4th OECD Economic Survey of India. I’d like to thank the Ministry of Finance for their excellent collaboration on the Survey and in the preparation for this launch.
We all recognise that India has been a star performer in gloomy times for the world economy. We launch about 25 OECD Economic Surveys every year, and it is not often that I get to announce growth figures of 7%.This is more than double the current global growth figure, and four times the OECD average. At the same time, inflation, the current account deficit, and the central government deficit have all been brought down in the past few years.
The acceleration of reforms has brought a new growth impetus
India’s strong performance is in part thanks to reforms introduced since 2014. It is now easier to do business in India: administrative requirements have been simplified, bankruptcy laws have been modernised, FDI regulations have been eased, and the Indian states have been given more powers to reform.
India has taken important steps to fight against illegal economic activity and promote tax compliance, including through demonetisation. Demonetisation has inflicted some short-term pain on the economy. However, it’s early days. The long-term effects will surely include important gains.
This is not a moment for resting on one’s laurels, however. Our main message today is that the reform momentum must be maintained so India can benefit from more inclusive growth. Progress is needed on many fronts, including making labour laws more flexible, bank recapitalisation, pricing of water and energy, easing stringent product market regulations and continuing to improve access to education, to mention just a few. Let me take a moment to highlight some of the core challenges discussed in the Survey, and share with you some of the recommendations that we make to meet those challenges.
Increasing tax revenues to expand access to quality public services
Firstly, India needs to finance access to quality public services for all, to reduce poverty and promote inclusive growth. Despite progress, too many Indians still lack access to reliable energy, health care and sanitation facilities. For example, almost 20% of the Indian population has no access to electricity.
Increasing tax revenues will help expand access to services. India raises only about 15% of GDP in tax revenue, around half the ratio in Brazil and roughly a third of the levels in advanced European countries. The implementation of the Goods and Services Tax will spur greater competitivenessand investment. Corporate income tax rates have been reduced for small companies and implementing the "base broadening-rate reducing" reform for all companies will help promote investment and job creation.
However, more revenue could be raised from property and personal income taxes, which are paid by too few people. Less than 6% of the population pay personal income tax. These taxes could also be fairer, with fewer exemptions and more progressive rates. Statutory rates are relatively low and kick in at high income levels. Specific tax reliefs, such as for housing investment, benefit primarily the well-off. Employing more skilled tax officers will be vital to strengthen tax administration and make the system fairer and more effective.
Strengthening macroeconomic resilience and growth
But it’s not just about raising revenues, it’s about spending. Spending needs on physical and social infrastructure are not being fully met, which is holding back private investment, contributing to sluggish job creation in the organised sector and undermining well-being.
While ensuring that the debt to GDP ratio returns to a declining path, India would benefit from investment in education and vocational training, particularly to get more women and youths into the workforce. Over 30% of youths aged 15-29 in India are not in employment, education or training (NEETs), which is more than double the OECD average and almost three times the rate in China.
In the area of physical infrastructure, spending to upgrade electricity and water infrastructure would improve well-being and catalyse corporate investment. India would also gain from setting energy and water prices high enough to cover economic costs for investors, while replacing blanket subsidies by better targeted household financial support.
Achieving strong and balanced regional development
In addition to raising revenues and improving spending, India also needs to promote regional development to reduce inequalities. Regional disparities are a problem almost everywhere, but in India they are particularly pronounced. GDP per capita in Bihar is about five times lower than in Haryana.
India has made progress tackling these disparities. The creation of NITI Aayog; the change from tied to untied central government grants to the states; and the new system ranking ‘ease of doing business’ in the Indian states' have all had positive effects.
However, in many states, rural poverty remains high. To raise productivity and living standards, India needs to promote farm consolidation. Many land holdings are too small to be economically viable. More than two-thirds of Indian farmers operate on a plot of less than one hectare. Improving the land registry and faster digitisation of land rights would help. But action on the rural front has to be complemented by effective policies for urban areas.
In the coming decades India will urbanise more than any other country. Well-managed urbanisation can improve well-being and support economic growth. However, urban citizens in India often suffer from high air pollution and lagging urban infrastructure. To overcome these challenges municipalities need more and clearer spending and taxing powers, so they can raise real estate taxes; rely more on road pricing and invest in public transport and other services.
Ladies and Gentlemen,
The Nobel Prize winning Indian physicist, C.V. Raman said "The true wealth of a nation consists not in the stored-up gold but in the intellectual and physical strength of its people."
India has lifted millions out of poverty and has carried out an impressive reform effort, but it has to keep up the momentum to confront the great challenges which lie ahead. It has to continue investing in its people, in their health and well-being, in their skills and opportunities. Because in India, as in the rest of the world, it is inclusive, people-centred growth that represents “the true wealth of a nation”. Count on the OECD to continue to support India in the design, implementation and delivery of better policies for better lives.