GROWTH OF POTENTIAL INDIAN GDP PER CAPITA
 OVER THE LONGER TERM: % PER ANNUM 1951-2007 

Source: OECD

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.