2007 OECD Economic Surveys: India 2007

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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.

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Improving the fiscal system

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.

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