Launch of the OECD Economic Survey of India


Remarks by Angel Gurría, OECD Secretary-General

New Delhi, Tuesday 14 June 2011
(As prepared for delivery)

Deputy Chairman Ahluwalia, Mr. Rangarajan, Distinguished guests, Ladies and gentlemen,

It is a great pleasure to be with all of you today to launch the second OECD Economic Survey of India. I was very pleased to launch our first Economic Survey of India here in Delhi almost four years ago.

Much has happened since then. One thing that has not changed, however, is that India has continued to be a standout performer in the global economy. India weathered the great recession far better than most, was at the forefront of the global economic recovery and, we are glad to see, now firmly back on a strong growth path.

This continued strong performance is no accident but rather testament to what can be achieved with good economic management. Like many emerging economies, India has benefitted enormously from reforms aimed at opening up the economy and making it more competitive. These have helped to make the Indian economy more resilient and lifted the long-run growth rate, which has been essential for reducing poverty and ensuring rising living standards. Lower barriers to international trade and investment have helped boost the performance of Indian firms.

Reducing the regulatory burden that firms face has allowed private sector dynamism to be introduced into new areas of the economy. A good example is mobile phones: freed from government controls, the ownership of mobile phones has soared and India now enjoys some of the lowest telephone call costs in the world.

Looking ahead, as we highlight in our Economic Survey, we believe that India can achieve still higher, even double-digit inclusive growth over the medium-term if reform momentum is sustained.

The Indian population is young and favourable demographic trends are conducive to an acceleration in growth in the years ahead. But to build on this demographic dividend more needs to be done.

Infrastructure still remains a problem, but the way forward is clear. Public private partnerships have helped speed up the construction of the road network. New privately run airports are opening across the country. The private sector is building mega-power projects. But key areas need change: the railway network and electricity distribution needs new operators. At the same time, where infrastructure has been opened to the private sector, loss-making public sector companies in these areas need to be rationalised.

Although private saving is set to rise further, it alone will not be sufficient to move growth to the next level. The government needs to reduce its call on private savings and budget deficits should be limited to financing public sector assets. The government took important first steps to reduce the budget deficit last year. However, as in many OECD countries, there is more work to do. In its budget this year the government laid out plans to cut the deficit further and these should be made into legally-binding targets.

It is possible for the government to reduce its deficit and make its expenditure more inclusive. In India, social assistance for the needy has rarely involved cash payments to the poor. Rather it has focused on providing subsidised food and energy, while providing farmers with cheap fertiliser and electricity. Unfortunately, these subsidies do not always reach their intended recipients. Inefficiencies and leakages plague the distribution system for rationed goods.

Improving the targeting of assistance is a difficult task but one that cannot be ignored. In this respect, the Unique Identification initiative represents an important step forward and should help improve the government’s capacity to aid the poor.

The government has also announced its intention to switch the delivery of some subsidies to cash transfers. We welcome this announcement and believe this change has the potential to yield significant benefits. Indeed, the government should consider going further in this direction by replacing other forms of in-kind subsidies, notably food, with cash transfers or perhaps food coupons.

In India, the cost of these subsidies does not always appear on the budget but, as economists are prone to saying “there is no such thing as a free lunch”. Where subsidies are not recorded on the budget the cost eventually finds its way back to the government and, therefore, ultimately the tax payer. We estimate that total spending on subsidies may be as high as 9% of GDP, only two-thirds of which is included in the budget. This represents substantial resources that must be deployed more effectively to aid the poor.

Reducing some subsidies, though, does not mean lessening government help for the poor. Redirecting some of the cost of subsidies to public spending on health care would do much to improve the earning capacity of the poor and start to remedy a situation of excessively high infant mortality. With the governments of only seven countries in the world spending less on health care than India, a major effort is needed in this area.

Moving growth to the next level also means ensuring that all Indians have access to quality education. As we note in a special chapter of our Economic Survey, significant progress has been made in lifting enrolment rates and expanding education infrastructure, including schools, colleges and universities. The government is targeting universal elementary education and the recent Right to Free Education Act should help in this respect.

Sound basic education is a key to expanding opportunity and employment. But the number of years that children stay in school should not be the only objective for the government. There is also a major challenge to lift the quality of education in schools. Systematic information on student performance can also aid policy makers identify priorities. In this respect, we are very pleased that two Indian states, Tamil Nadu and Himachal Pradesh, agreed to participate in the OECD Programme for International Student Assessment, or PISA. Given the size and diversity of India we hope that other Indian governments will come on board.

Promoting strong and inclusive growth also requires improving access to basic financial services. Such services are costly and often out-of-reach for many, especially the poor. Technology and non-bank financial institutions have helped and with the right approach to regulation more can be done. Given the surge in mobile phone ownership in India, there appears to be great potential to expand mobile phone banking, as has occurred in some other emerging economies. In many cases microfinance has been more successful in reaching the poor than the commercial banks. It is important that government intervention in this area strengthens and expands access. Efforts to improve financial literacy also have an important role to play.

Last but not least, moving to a new level of growth will require renewing the momentum of reforms. Barriers to international trade and investment remain high in some important sectors. The financial sector, though well capitalised, needs to be reformed by reducing controls over lending so that more loans flow to growing innovative companies and are not just invested in government bonds. Administrative barriers should be eased to further reduce the costs faced by new firms starting up and making it easier for existing firms to expand. Labour market regulations should be reformed to support the creation of more and higher quality jobs, including in the formal sector. Promoting good governance is also essential, both in the private and public sectors.

Deputy Chairman Ahluwalia, Mr. Rangarajan,

Ladies and gentlemen,
We at the OECD attach a great deal of importance to our burgeoning relationship with emerging countries, not least India. Later today the dialogue on how to better promote inclusive growth will continue at a joint OECD-NIPFP symposium. Through efforts such as this and the latest OECD Economic Survey I am confident that our relationship will continue to deepen, to our mutual benefit.

Thank you for your attention.


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