OECD Economic Outlook, Volume 2018 Issue 1

India

Growth is increasing, making India the fastest‑growing G20 economy. Investment and exports, supported by the smoother implementation of the new goods and services tax (GST), are becoming major growth engines. Inflation will hover within the target band, with upside risks reflecting rising oil prices and an increase in housing allowance for public employees. The current account deficit will increase. Job creation in the formal sector will remain sluggish, leaving the vast majority of workers in low‑productivity, low‑paid activities.

Fiscal and monetary policies are projected to remain broadly neutral. To reduce the relatively high public debt‑to‑GDP ratio, containing contingent fiscal liabilities is key, including through better governance of public enterprises. Better risk assessment in banks would allow allocating financial resources to the best projects and avoiding a new increase in non‑performing loans. Investing more in education and training, combined with a modernisation of labour laws, would help create better jobs and make growth more inclusive.

The economy is rebounding after the transitory negative impacts of demonetisation and GST

Reforms are gradually paying off, as confirmed by the recovery in industrial production and investment after several weak years. With capacity utilisation rising, corporate earnings recovering and the recapitalisation of public banks, investment has revived. Private consumption has suffered from the confidence and employment shocks associated with demonetisation. However, a recovery is underway as suggested by the recent rebound in two‑wheelers sales and other vehicles. The number of employees eligible for social security benefits has been boosted by an amnesty scheme for companies, but still stands below 10% of total employees. Employment data are partial but suggest that overall job creation has been lacklustre.

India

Source: Central Statistics Office; and Reserve Bank of India.

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The drag on growth from exports is vanishing as foreign demand is rising and procedures to comply with the new GST have been adjusted to ease liquidity constraints faced by exporters. Pressures on the current account deficit are stemming from the rapid increase in imports, accompanying the recovery in import‑intensive investment, and oil prices. Core inflation is slightly above target, but relatively stable despite large price shocks associated with demonetisation and the GST implementation.

India. Demand, output and prices

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Structural reforms are key to make economic growth stronger and more inclusive

The central government pursues a medium‑term fiscal consolidation strategy, though the deficit target for FY 2018/19 at 3.3% of GDP has been slightly loosened to support the ongoing recovery. At the state level, the aggregated deficit has failed to adjust down, burdened by the increase in employees’ compensation and in debt‑service from ailing state electricity boards. The overall fiscal stance is appropriate as India’s public debt is sustainable over the medium run. However, the quality of public finance could be improved and support better inclusive growth if more resources were devoted to health, education and transport. Financing better quality public services would require broadening the base for property and personal income taxes to raise more tax revenue, securing more fiscal discipline at the state level and better risk management in public enterprises.

India

1. Excludes food, beverage and fuel prices.

Source: Central Statistics Office; and Reserve Bank of India.

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Strengthened credibility and effectiveness of monetary policy has kept inflation moderate. There is, however, little scope for monetary policy to ease as expectations have failed to adjust fully to the new low inflation environment and risks are on the upside, including from commodity prices and the proposed adjustment in agricultural prices.

The government launched a national health protection scheme in 2018 to provide insurance coverage to 100 million poor and vulnerable families, i.e. about 500 million beneficiaries, for secondary and tertiary care. It also envisages the creation of wellness and primary care centres to provide affordable and equitable health care through the country. The initiative is commendable but should be accompanied by efforts to train more doctors and nurses and by communication campaigns on lifestyle diseases, including those related to smoking and excess consumption of fat and sugar.

Bringing the banking system back to health is vital to support the recovery in investment. Recapitalisation of public banks is supporting loan revival. Recent measures to speed up the recognition of stressed assets will help improve the resolution of non‑performing loans which are large by international standards. Still, the effectiveness of bankruptcy laws and newly created debt recovery tribunals should be assessed. Reforms to improve bank governance are also needed to avoid a new build‑up of non‑performing loans. Better protecting the interest of minority stakeholders would put pressure on banks to take more prudent and independent decisions. Better risk management and auditing in public banks would contribute to the quality of banks’ portfolio. Public banks should also be given the ability to attract and retain talents, including through more freedom in setting employee compensation.

The new competitive and co‑operative approach to federalism is supporting reforms to improve the business climate and modernise labour laws. Benchmarking is emulating competition. Better assessing outcomes, in particular in terms of job creation, would be key to identify best practices and spur the modernisation of laws. Recent initiatives to improve the quality and timeliness of labour data should continue.

Growth is projected to accelerate

Growth will be supported by an acceleration in private investment as excess capacity diminishes, deleveraging by corporates and banks continues and infrastructure projects mature. Exports will strengthen thanks to competitiveness gains resulting from the implementation of the GST. Higher agricultural prices will raise rural incomes and consumption but put pressures on the fiscal deficit. Delays in cleaning banks’ balance sheets would risk weighing on investment, as would a faster‑than‑projected increase in interest rates in OECD countries. An increase in commodity prices would create pressures on inflation, the current account and the fiscal deficit while depressing private consumption. On the other hand, the modernisation of labour laws at the central government or state levels would promote job creation and make growth more inclusive.