Reforms in manufacturing, exports can bring India back to 8% growth: OECD

Modi’s reforms get a thumbs-up, but GST and other reforms must be implemented to ensure long term growth says OECD Bidhu Bhushan Palo | @TheDollarBiz

Increased productivity is the foundation for comparative advantage, says Ms. Catherine L Mann, Chief Economist, OECD (Pic. Source - OECD/Marco Illuminati)

India’s focus on manufacturing and move towards trade facilitation is a step in the right direction and implementation of reforms can help India’s Gross Domestic Product (GDP) get back on the 8% growth trajectory in coming years, according to the latest Organisation for Economic Co-operation and Development (OECD) Economic Survey of India. The Survey, presented in New Delhi by OECD Chief Economist Catherine L. Mann and Arvind Subramanian, Chief Economic Adviser to the Government of India, says that India’s GDP is recovering faster than many countries and is expected to grow by over 6.5% annually from FY2015-16. After touching a 10% growth rate in 2010, India’s GDP growth has slowed down to around 5% due to high inflation and a wide current account deficit. However, things are improving and sustained growth may help India rebound to 8% growth rate in future as well, says the report. According to Mann, “Reforms in the business environment, to labour markets and to infrastructure will bring economic growth back to the higher levels seen in the recent past, create good jobs and improve well-being for all Indians.” However, challenges remain. India lacks competitiveness in several manufacturing sectors, mainly due to procedural bottlenecks, complicated tax structure, and infrastructure and labour restrictions. OECD says that implementation of Modi’s reforms may help address some of the concerns. “Improved competitiveness comes from increases in productivity and also reduced inflation. Modi’s reforms, particularly to infrastructure and labour restrictions related to firm size will increase productivity; and increased productivity is the foundation for comparative advantage. The inflation targeting regime recommended for the Central Bank’s policy is designed to further reduce inflation,” Mann told The Dollar Business.

Source - OECD

Another challenge for India is declining exports. India’s exports grew at a double digit rate earlier this year, but have slowed down in October 2014. Mann says that export growth is a risk to the overall outlook for India and the government should also work on boosting domestic demand to offset this. “Continued slag global demand will weigh on India’s exports. This risk should increase the importance of creating the right environment of business and consumer confidence to bolster domestic demand,” she said. OECD also says that GST, a broad national value-added tax, and Trade Facilitation can help India improve its exports. According to Mann, “Trade facilitation improves the ability of firms to engage in global commerce by reducing the costs of customs, by improving trade infrastructure, etc. While reduced costs fosters both increases in imports and exports, the export expansion tends to be greater than imports. So, overall, trade facilitation improves the balance of payments.” She also says that GST can also boost India’s economy significantly. “India has a complex system of federal and state taxation structures. The GST is an opportunity to move in the direction of rationalising this complexity. Complex tax systems tend to lead to overall less revenue because of the many opportunities for evasion,” she says. Among other suggestions, OECD says that to sustain growth in the long term, India should switch subsidy spending to social and physical infrastructure; clean-up the banking system; create better quality jobs in the informal sector; reduce structural barriers to job creation, improve health care; and expand employment opportunities for women. “More and better jobs for women would raise equity and boost growth by over 2% points annually,” the OECD says.

This article was published on November 21, 2014.

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The Dollar Business Bureau - Nov 21, 2014 12:35 IST

Reforms in manufacturing, exports can bring India back to 8% growth: OECD

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