India

La rapide croissance économique que l’Inde a connue récemment se poursuivra probablement pour s’établir à près de 9 % sur l’exercice budgétaire 2006, malgré des résultats médiocres dans le secteur agricole. L’investissement a été particulièrement dynamique durant cette expansion, contribuant à une augmentation notable du potentiel de croissance de l’économie. Les politiques monétaire et budgétaire ont pris un tour plus restrictif, ce qui ralentira la croissance dans le secteur non agricole. Un retour à une récole normale devrait toutefois limiter la décélération de l’activité dans l’économie tout entière. L’inflation, mesurée par l’indice implicite des prix du PIB, semble devoir rester stable à 5 %, conformément aux objectifs officiels. Le solde de la balance courante est redevenu négatif (de 1.3 % du PIB en 2006) et le déficit paraît devoir atteindre 2.0 % du PIB durant l’exercice budgétaire 2008.

Recent rapid economic growth is expected to continue and be close to 9% in fiscal year 2006, despite a poor performance from the agricultural sector. Investment has been particularly buoyant during this expansion, contributing to a substantial increase in the economy’s potential growth rate. Monetary and fiscal policies have both become tighter, which will lead to slower growth in the non-agricultural sector. A return to a normal harvest, however, should limit the extent of the slowdown in the whole economy. Inflation, as measured by the GDP deflator, is expected to remain stable at 5%, in line with official objectives. The current account has moved back into a deficit of 1.3% of GDP in 2006 and seems likely to reach 2.0% of GDP in fiscal year 2008.

This chapter is based on an OECD review of agricultural policies in India undertaken in 2005. The Government of India did not participate in this review and it was therefore not possible for the draft report to undergo the in-country or OECD review process. Consequently, estimates of agricultural support for India are not available.

Ce chapitre s’appuie sur l’examen des politiques agricoles de l’Inde réalisé par l’OCDE en 2005. Le gouvernement indien n’ayant pas participé à cet exercice, il n’a pas été possible de soumettre le projet de rapport à l’examen effectué dans le pays ou au sein de l’OCDE. Les estimations du soutien agricole de l’Inde ne sont donc pas disponibles.

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.

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. 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.

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.

Over the past two decades, India has moved away from its former dirigiste model and has become a market-based economy. This process started in the mid-1980s and gathered substantial momentum at the beginning of the 1990s. Direct tax rates were significantly reduced, pervasive government licensing of industrial activity was almost eliminated, and restrictions on investment by large companies were eased. Furthermore, financial markets were reformed, with banks restored to health, entry barriers lowered, equity markets transformed and new supervisory bodies introduced. The process of reform has continued in this decade with a further opening of the economy to competition. The number of industries reserved for very small firms has been significantly reduced, and foreign suppliers have been encouraged to enter the market by a progressive lowering of tariffs to an average of 10% in 2007. The rules governing foreign direct investment have been markedly eased, notably in the manufacturing sector. Last but not least, fiscal discipline has been improved by the passage of fiscal responsibility laws for the central government and all but three of the 28 state governments.

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.

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.

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.

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.

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.

OECD's first economic survey of the Indian economy. It opens with a broad overview of economic developments over the past twenty years, showing how India has grown to become the third largest economy in the world. It then examines a series of specific policy areas including the unbalanced growth across states, competition policy and reforming India's product and service markets, improving the performance of labour markets, improving the financial system, improving the fiscal system, improving infrastructure, and upgrading the educational system. For each policy area, a series of recommendations is made. This book includes StatLinks, URLs linking tables and graphs to Excel® spreadsheets with the underlying data.

World leaders have pledged to act to change the energy future. Some new policies are in place. But the trends in energy demand, imports, coal use and greenhouse gas emissions to 2030 in this year’s World Energy Outlook are even worse than projected in WEO 2006.  China and India are the emerging giants of the world economy. Their unprecedented pace of economic development will require ever more energy, but it will transform living standards for billions. There can be no question of asking them selectively to curb growth so as to solve problems which are global. So how is the transition to be achieved to a more secure, lower-carbon energy system?  WEO 2007 provides the answers. With extensive statistics, projections in three scenarios, analysis and advice, it shows China, India and the rest of the world why we need to co-operate to change the energy future and how to do it.

The economy grew rapidly in the fiscal year (FY) 2006, expanding by 9.4%. Strong growth was fuelled by a good performance of the agricultural sector and continued strength of industrial output. In the first half of FY 2007, investment remained buoyant, leading to improvements in the supply potential of the economy. With higher interest and exchange rates, output growth is projected to gradually slow to 8.4% by 2009. The current account deficit is likely to widen from 1.1% of GDP in FY 2006 to 2.0% by 2009. Inflation, as measured by the GDP deflator, is expected to ease back somewhat over the projection horizon as increases in food prices moderate.