By Dipankar De Sarkar and Arvind Padmanabhan, IANS
Paris/New Delhi : Warning of a fall in India’s economic growth to eight percent in 2008, an alliance of the world’s wealthiest nations Tuesday said the country could sustain a 10-percent expansion if it pursues economic 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 globally Tuesday.
“The government’s target of reaching gross domestic product (GDP) growth of 10 percent is achievable if reforms continue,” said the survey that also gives a policy prescription for the Indian government in a wide range of areas.
Paris-based OECD, which acts as a forum for member-states to deal with economic and social challenges, said economic reforms since the 1980s have helped India reduce poverty – from 43 percent in 1983 to 27.5 percent in 2004.
“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.
At the same time, the survey pointed out that in the short run the tight money policy adopted by the Reserve Bank of India (RBI) that saw interest rates being hiked progressively could bring down growth to eight percent in 2008.
Releasing the report in New Delhi, OECD Secretary-General Angel Gurria said he had come with a definite mandate from the 30 members of the organisation to engage more closely with India.
India is not a member of the OECD but the organisation watches the country very closely, along with a handful of others like Brazil, China and South Africa, because of the size of its economy and future potential.
“Developments in India are today more sensitive to the movements in the world economy,” Gurria said, adding: “It is clear to us that undertaking a series of reforms will allow India to reach a sustainable growth rate of 10 percent.”
He specifically mentioned four areas where reforms were necessary to lift growth – improving the business environment, infrastructure, public finances and labour market reform.
While praising the overall performance of the Indian economy, the OECD’s survey also 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 focus on improving infrastructure.
“India’s infrastructure is seriously overstretched,” the survey warned. “The high rate of economic growth is at risk if infrastructure development does not increase and keep pace with demand.”
The report also called for the removal of the ban on foreign direct investment in retail. 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.