India''s
annual economic growth could reach a sustainable 10 per cent and be spread more
evenly across the country if it pursues ambitious and wide-ranging reforms, says
a new OECD report. The message, in a nutshell is, India needs more economic reforms
to widen the benefits from growth. 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, 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. The
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,. Gurría said, "is a clear sign of a changing OECD,
which is working to become a hub for dialogue on global issues." The
report, 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," 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, 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
to help improve productivity 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.
also see : General
reports on Economy
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