Economic Policy Reforms 2019

India

Income per capita is growing fast, as productivity catches up, but remains well below both advanced and other major emerging-market economies. Women participation into the labour force is low while most workers are employed in low-productivity activities with no formal job contract and social insurance.

Absolute poverty has declined. However, inequality remains large, with wide dispersion in compensation packages and large rural/urban divide in access to public services. Air pollution is very high in many cities and water shortage is acute in some regions.

The ongoing subsidy reform promotes equity but the tax system redistributes little. The replacement of multiple indirect taxes levied by the states and central government by the Goods and Services Tax contributes to make India a single market, thus, raising competition and scale economies. Benchmarking states on the ease of doing business and quality of public services promotes the reform process.

Reviving investment is key to boosting growth. This will require improving further the ease of doing business and bringing banks back to health. Investing more in education and training, combined with a modernisation of labour laws, would help creating more and better jobs. More investment in public services, such as health care and infrastructure is needed to provide all Indians with access.

Growth performance, inequality and environment indicators: India

Source: Panel A: OECD, Economic Outlook and Productivity Databases; Panel B: World Bank, PovcalNet; OECD, National Accounts Database and International Energy Agency (IEA), Energy Database; Panel C: OECD, National Accounts and Productivity Database.

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Policy indicators: India

Source: Panel A: International Monetary Fund (IMF), Financial Soundness Indicators Database; Panel B: OECD, Health Database.

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Beyond GDP per capita: India

Source: Panel A: World Bank, PovcalNet; Panel B: OECD, Environment Database.

Note: For the explanation of the sets of indicators above, please go to the metadata annex at the end of this chapter.

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India: Going for Growth 2019 priorities

Simplify and modernise labour laws to create more and better jobs for all. Growth has created little jobs and most existing jobs are not covered by labour laws and social insurance.

• Actions taken: Rules for fixed-term contracts were softened in 2018 and workers with fixed-term contracts were given access to the same social insurance benefits as permanent workers. Maternity leave was extended to 6 months and crèche facility was made mandatory for establishments with 50 or more employees. A National Career Service portal was launched in 2017 linking all employment exchanges of the country to facilitate posting of jobs and to provide employment related services (including career counselling and vocational guidance). Efforts to improve the quality and timeliness of employment data are going on.

• Recommendations: Reduce barriers to formal employment further by introducing a simpler and more flexible labour law, which does not discriminate by size of enterprise or gender. Foster competition among states in the ease of creating jobs. Produce timely data on employment to help design better policies.

Reduce administrative and regulatory burdens on business. Despite simplification efforts, regulations remain complex, making it difficult to start a business and forcing firms to stay below efficient size to avoid regulatory burdens.

• Actions taken: In 2017 the Goods and Services tax replaced a multiplicity of indirect taxes levied by states and the central government. The Insolvency and Bankruptcy Code was amended in 2017 and now provides a time-bound process to resolve insolvency of companies and individuals. Some cities also simplified the number of procedures for construction projects.

• Recommendations: Simplify further administrative and regulatory procedures. In particular, impose maximum timelines and “silent is consent” rules to regulatory approval processes and implement single-window clearance experiments more widely.

Enhance access to, and quality of, social infrastructure. Public spending on health and education is low, making it difficult for poor families to access quality services.

• Actions taken: Efforts to bring down the average number of pupils per classroom have continued. In 2018 the government launched a national health protection scheme to provide insurance coverage to 100 million poor families for secondary and tertiary care and envisages the creation of wellness and primary care centres. Efforts to achieve universal sanitation coverage have continued.

• Recommendations: Continue improving access to education, especially at the secondary level and improve the quality of education. Provide vocational training earlier in the curriculum. Train more doctors and nurses. Launch communication campaigns on lifestyle diseases, including those related to smoking and excess consumption of fat and sugar.

Pursue financial sector reforms. Bringing the banking system back to health is vital to support the recovery in investment.

• Actions taken: Efforts to speed up the recognition and resolution of non-performing loans and other stressed assets have been pursued. A large recapitalisation programme for public banks was launched in October 2017. Several public banks were merged in 2017.

• Recommendations: Improve the governance of public banks to avoid a new build-up of non-performing loans. Give public banks the ability to attract and retain talent, including through more freedom in setting employee compensation. Establish a plan to phase out priority lending.

Improve physical infrastructure and promote an efficient use of energy and water resources. Many households still do not have access to electricity and water sanitation while industrialisation and population growth will exacerbate demand pressures.

• Actions taken: Efforts to provide electricity access to all have continued with the last village electrified in 2018. A programme to provide “last-mile electricity connectivity” to all rural and urban households was launched in 2017.

• Recommendations: Upgrade electricity and water infrastructure and pursue efforts to provide access to all. Set energy and water prices high enough to cover economic costs for investors and replace price subsidies by better targeted household financial support. Rely more on road pricing and parking fees to restrain private car usage and reduce pollution.