Indian economy showing signs of a turnaround: OECD

The OECD has upped its 2015-16 growth projection for India to 6.6 per cent. The Paris-based think tank had pegged it at 5.7 per cent in May. The growth had remained sub-5 per cent in the last two financial years. The OECD projects it to be 5.4 per cent this financial year.

Without structural reforms, the growth will remain below the 8 per cent rate achieved during the previous decade, the OECD Economic Survey of India has cautioned. It also warns that although absolute poverty has declined, it remains high, and income inequality has in fact risen since the early 1990s.

“India slowed more than many other countries since 2011, but is now recovering faster,” said an OECD release. “The Indian economy is showing signs of a turnaround. New reforms, some of which are included in the package presented by Prime Minister Narendra Modi, need to be implemented to put the country on a path to strong, sustainable and inclusive growth,” it added.

OECD Chief Economist Catherine L. Mann released the survey here on Wednesday. Also present was Chief Economic Adviser Arvind Subramanian. The decline in inflation in the first half of 2014 is encouraging but inflation expectations have remained stubbornly high, the survey notes. Consumer price inflation in India has remained much higher than that in the OECD area and in other BRICS, the survey says and recommends that monetary policy should err on the prudent side to restore confidence and avoid a rebound in inflationary pressures. Supply-side constraints in the food sector — including the lack of cold storage and refrigerated transport facilities — have also contributed to food price volatility, it says.

Fiscal consolidation

The budgeted 17 per cent increase in tax revenue seems optimistic, the survey says. Achieving a sustainable and quality fiscal consolidation would require streamlining the many tax breaks which undermine revenues and contribute to the complexity of the tax system, as well as other public finance reforms, it recommends. Improving the Income Tax Act by further broadening its base, including by abolishing the tax allowance for interest paid on housing and education loans.

Inefficient subsidy programmes for food, energy and fertilizers have increased steadily while public spending on health care and education has remained low, the survey says.

Key recommendations are: implementation of flexible inflation targeting; shifting public spending away from energy subsidies towards investments in physical and social infrastructure, and the implementation of a national value-added tax (GST) with only limited exemptions.

It further suggests that the current fiscal rules be extended to include spending ceilings and improving the accounting framework of the Centre and recommends spending reviews for core spending programmes with the view to improving their effectiveness and reconsidering the prohibition on using machines for MGNREGS projects.

With average growth above 8 per cent and the incidence of poverty cut in half, India experienced strong inclusive growth between 2003 and 2011, the survey says. This reflected gains from past structural reforms, strong capital inflows up to 2007 and the expansionary fiscal and monetary policies since 2009. These growth engines faltered in 2012, it says.

In 2014, the economy has shown signs of a turnaround. Fiscal consolidation at the Centre has been accompanied by a decline in both inflation and the current account deficit. Confidence has been boosted by on-going reforms to the monetary policy framework, with more weight given to inflation. The large depreciation in the rupee has also helped revive exports. Industrial production has rebounded and business sentiment has surged, triggered by a decline in political uncertainty.

Reducing macroeconomic imbalances further is key to sustaining consumer and investor confidence and to containing external vulnerabilities — this will require adhering to the fiscal road map and implementing the proposed changes to the monetary policy framework.

The think tank ups 2015-16 growth projection for the country to 6.6%

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