By Dipankar De Sarkar, IANS
Paris : Praising India for making “a spectacular improvement” to its economy, a grouping of the world’s richest nations Tuesday said the country’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.
“Reforms have led to a spectacular improvement in economic performance,” the 30-nation Organisation for Economic Cooperation and Development (OECD) said in its first Economic Survey of India released Tuesday.
The OECD, which is based in Paris and acts as a forum for its member-states to deal with economic and social challenges, said market-based reforms since the 1980s have helped India reduce poverty in absolute terms – standing at 22 percent of the population in 2004 – 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,” the survey said.
But the survey warned that the states that are being left behind in economic performance needed to be pulled up.
“Fiscal transfers are playing a key role in income redistribution towards poorer states. In a country as large and diverse as India, a good system of revenue sharing across the country is essential,” it said.
“Without it, differences in government spending across states would be extremely large. Amongst the 20 largest states, incomes in the three richest states are three-and-a-half times higher than in the three poorest states, which have a combined population of over 300 million people,” the survey added.
Also, the system of tax-sharing and inter-governmental transfers that reduce spending inequalities has become very complex and also involves an excessive degree of central control over state investment outlays.
“The government should simplify the transfer system, improve its administration and make it more transparent. It should further increase incentives towards fiscal discipline, in particular by replacing the obligation for states to borrow from the National Small Saving Fund, and thereby increasing their use of the capital market,” it said.
Other challenges included tackling red tape; the need for state governments to become much better organised and build on improvements made at the national level; getting the new Competition Commission to start work as quickly as possible, and the need for a modern bankruptcy law to simplify the restructuring of insolvent firms.
“Privatisation of more publicly-owned firms should be resumed 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 said the government should continue its programme of increased discipline in public spending in order to make room for higher levels of private investment.
And spending on subsidies should be better targeted to help the poor. The survey also recommended 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 warned. 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 said. 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 called for the removal of the ban on foreign direct investment in retail trade. 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 claimed.
The OECD survey also highlighted a major social-sector gap in India – education. “To ensure higher incomes, India will need a better educated population,” it said.
The survey proposed ways of ensuring that all children complete at least eight years of schooling. Proposals include improving incentives for teachers and providing the poor with cash grants conditional on their children continuing at school.