Tuesday, October 23, 2007

Release of OECD India Economic Surveys Report, 9 October, 2007, Hotel Imperial, New Delhi, India

On 9 November, 2007, Angel Gurria, Secretary-General, OECD, released the first Economic Surveys, India Report, in the presence of D Subba Rao, Finance Secretary, Ministry of Finance, Government of India, Dr. Isher Judge Ahluwalia, Chairperson, Indian Council for Research on International Economic Relations (ICRIER), Rajiv Kumar, Director and Chief Executive, ICRIER and Salu Kapila.. The Report was released in Hotel Imperial, New Delhi (India). The Academic Foundation published the Indian Economic Survey of the OECD for the Indian market. The Report release ceremony were attended by Shambhu Ghatak and J Chittoor from the Centre for Science, Development and Media Studies (CSDMS, Noida).

Welcome session
In his opening presentation, Angel Gurria informed that the OECD Economic Survey provides an overview of economic policies in India and proposes a number of reforms. The Report is the result 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. He said that during the economic reforms in India, government control over business investment has been terminated; entry barriers to most industries have been lowered or eliminated; income tax rates have been reduced and public intervention in most forms of foreign trade has been ended, with tariffs being lowered markedly. Financial markets have been improved and the macro-economic environment made more stable. Globalisation and economic reforms also helped in the rise of IT (information technology) and ITES (IT-enabled services). Due to all these factors, India recently experienced growth rate of nearly 9.0%. While talking on reforms, Angel Gurria focused upon four major areas, namely: improving business environment; infrastructure development; public finances and labour market reforms. He also talked about red tapism in the government agencies, which hampers doing business in India. He talked on Fiscal Responsibility and Budget Management Act and the current state of fiscal consolidation. He asked for labour market reforms in India, in the backdrop of restrictive employment regulation in the formal sector, and the growing unorganised sector where much of the employment is created. Dr. Isher Judge Ahluwalia while speaking about the OECD Economic Survey, said that the Report lacked focusing on India's ailing agricultural sector. D Subba Rao said that the OECD Report is very comprehensive, and despite its limitations, has provided a road map of what is needed for India's future economic and social development.

The OECD Indian Economic Survey Report
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. But red tape still holds back business. The survey says state governments need to become much 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.

Chapter 1: India’s key challenges to sustaining high growth
The Indian economy has undergone a remarkable transformation over the past two decades. The growth rate of average incomes has increased from 1¼ per cent prior to 1980 to 7% by 2006. Between 1999 and 2004, the absolute number of people living under the national poverty line has fallen for the first time since Independence. Faster growth has been brought about by a paradigm shift in economic polices that has opened the economy to foreign trade and markedly reduced direct tax rates and government influence over most investment decisions. Despite this favourable performance, there is still much room for improving policy settings to further raise growth potential. This chapter first looks at India’s past reforms and the main sources of its improved growth performance and then identifies a number of key challenges that could make growth faster, more sustainable and more even across the country: i) making goods and service markets more competitive; ii) enhancing employment in the formal sector through broadranging labour market reforms; iii) further liberalising the banking sector; iv) improving public finances to achieve more rapid growth through a more ambitious fiscal consolidation, reducing subsidies and further reducing tax distortions; v) improving infrastructure and facilitating urbanisation by involving private players more intensely; and vi) upgrading the quality of educational outcomes through institutional reforms.

Chapter 2: India’s growth pattern and obstacles to higher growth
India’s growth performance has improved significantly over the past 20 years, but it has been uneven across industries and states. While some service industries, notably the information and communications technology (ICT) sector, have become highly competitive in world markets – yielding considerable gains for employees and investors – manufacturing industries have lagged and improved their performance only recently. A divergence in performance has taken place, with firms in those states and sectors with the best institutions gaining, and those in the more tightly regulated states and sectors falling further behind. As a result, the competitive landscape is uneven across sectors and states and a high degree of concentration continues in different industries. While this is partly the result of the legacy of licensing, change has been politically difficult, making it harder for the manufacturing sector than for the service sector to expand. The need for further institutional reforms is urgent, focusing on product and labour market regulations at the central and state levels.

Chapter 3: Reforming India’s product and service markets
The degree of competition in product markets has been found to be an important determinant of economic growth in both developed and developing countries. This chapter uses the OECD’s indicators of product market regulation to assess the extent to which the regulatory environment in India is supportive of competition in markets for goods and services. The results indicate that although liberalisation has improved the regulatory environment to international best practices in some areas, the overall level of product market regulation is still relatively restrictive. In addition, estimating the product market regulation indicators for 21 Indian states shows that the relatively more liberal states have higher labour productivity, attract more foreign direct investment, and have a larger share of employment in the private formal sector in comparison to the relatively more restrictive states. The chapter goes on to review various aspects of India’s product market regulation and suggests a number of policy initiatives that would improve the degree to which competitive market forces are able to operate.

Chapter 4: Improving the performance of the labour market
Over the past decade, labour market outcomes have improved in India, with net employment rising markedly for the economy as a whole. However, these gains have arisen primarily in the unorganised and informal sectors of the economy, where productivity and wages are generally much lower than in the formal organised sector. It is only India’s organised sector that is subject to labour market regulation, and here employment has fallen. The role of employment protection legislation in affecting employment outcomes is controversial both in the OECD area and in India. This chapter looks at the impact of employment protection legislation and related regulation on the dynamics of employment in the organised sector of the economy, using newly constructed measures of national regulation and state labour reforms. We find that while reforms have taken some of the bite out of core labour laws, more comprehensive reforms are needed to address the distortions that have emerged.

Chapter 5: Reforming the financial system
This chapter examines the performance of India’s financial sector and compares its structure to that of other emerging economies. The financial sector went through a period of considerable re-organisation during the last 15 years. New regulators were introduced for all sectors of the market and this has boosted the development of highly efficient equity and commodity markets. The health of the banking sector has also improved and competition within the sector has increased. Nonetheless, costs remain high in a sector that is still dominated by public sector banks. The corporate bond market is still underdeveloped, as is the foreign exchange market. Considerable scope exists for improving efficiency in the financial sector by opening it to more foreign direct investment and removing a number of regulatory constraints that impede the development of a full set of financial markets.

Chapter 6: Improving the fiscal system
This chapter examines areas of government spending, taxation and fiscal federalism where further reforms are desirable to reduce economic distortions and improve the provision of public services. As to government spending, it finds that a large share is used to subsidise commercial undertakings, agriculture and food distribution and that there is much room to improve the quality of spending and target it better to reduce poverty. On taxes, which have undergone major reforms since the early 1990s, it points to the large number of loopholes and suggests that a broadening of the tax bases would allow further reductions in tax rates and make the system simpler and more efficient. Reforms of indirect taxes should focus on creating a common market within India so that goods can move between states without border controls. India’s federal structure has led to a well-developed system of tax-sharing and transfers, both through constitutionally empowered bodies and delivered through the annual budget. Overall, this transfer system has worked well; moving resources towards the poorest states, but the system has become very complex and, in the past, weakened fiscal discipline. Furthermore, it has not been able to create an effective local government system; this would be important for improving accountability and responsiveness to citizens’ needs as three-quarters of the population live in states with over 50 million inhabitants.

Chapter 7: Removing infrastructure bottlenecks
With high rates of economic growth and low public sector investment, India’s infrastructure is in short supply and potentially a major constraint on future growth. To alleviate fiscal constraints and improve infrastructure productivity, the government is turning increasingly to the private sector to finance and run infrastructure projects. In some infrastructure sectors in which the regulatory environment is conducive to private sector involvement, performance has improved significantly. However, although infrastructure policy is moving in the right direction in some sectors, there are still a number of ways in which the regulatory environment could be improved further. This chapter outlines a range of policy initiatives that would increase private sector participation and improve infrastructure service delivery to international standards. It begins by discussing the role of public-private partnerships in the provision of infrastructure services before moving on to review the regulatory environment in a number of infrastructure sectors with a focus on regulatory settings that constrain competition.

Chapter 8: Improving human capital formation
The provision of high-quality education and health care to all of the population is considered a core element of public policy in most countries. In India, the government is active in both education and health but the private sector also plays an important role, notably for heath, and to a lesser extent in education. At present, the quality and quantity of the outputs from education, and also form public health care, are holding back the process of economic development. Steps are being taken to draw more children into primary education and the chapter considers ways to keep children in school. The chapter also considers institutional changes that may help to improve the performance of the educational system and so boost human capital formation.

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