Exclusive: Ahead of Budget, OECD lists out Indian economy’s ills, prescribes cures

Behind closed doors in Paris, the Organisation for Economic Co-Operation and Development (OECD), a strong forum of 35 countries, discussed India’s economic forecast in a meeting on 19 December, 2016. The confidential draft accessed by Firstpost shows inequality has drifted up. From healthcare to manufacturing to urbanisation, the report has pointed out problems, appreciated certain state efforts and made key recommendations for improving their effectiveness.

Manufacturing: Define timelines for approvals & simplify regulations

Acknowledging some of the Modi government’s efforts, the government document read, “The central government has recently reduced some barriers to FDI, made it easier to comply with some regulations, reformed the bankruptcy laws, supported investment in infrastructure sectors and put back on track several projects in particular roads. It added, “However, more needs to be done to unlock the potential of the organized sector…by international comparison India still struggles with administrative rules
for starting a business, dealing with construction permits, paying taxes and getting credit.”

 Exclusive: Ahead of Budget, OECD lists out Indian economy’s ills, prescribes cures


While the barriers to entry have been reduced as industrial licensing was dismantled and FDI regulations have been eased, the report stated that threshold effects in labour and tax regulations create incentives for firms to stay small while some regulations restrain competitive pressures or lock in resources in firms with low productivity.

Productivity in the manufacturing sector is particularly low compared to other emerging economies, partly reflecting the preponderance of very small firms (the so called ‘unorganised’ sector). It added that even in the organised sector, firms are relatively small. Some states were declared more successful in channelling resources to the most productive firms. Jharkhand, Orissa, Bihar, Madhya Pradesh and Delhi were among the best performers.

“If all states were to lower barriers to entrepreneurship to the level observed in the best performing state (Karnataka), labour productivity in the organised manufacturing sector would increase by almost one half,” was one of the many observations.

Overall, the empirical analysis suggests that recent efforts to simplify regulations and improve the ease of doing business in the context of Make in India initiative will have large positive impacts on productivity in the medium term. They should also help firms to create jobs in the organised sector and must be pursued with vigour.

Among the recommendations made were simplification of the bureaucratic procedures of securing regulatory approvals and environmental clearance for infrastructure projects, defining of timelines for all stages of granting approvals, relying more on single window clearance mechanisms and reviewing timelines within the Land Acquisition Bill to make land acquisition faster.

Urbanisation: Raise tax on immovable property, increase user charges for infrastructure

The urban population in India has increased rapidly and this trend is set to accelerate. The absolute poverty rate in rural areas at 26 percent in 2011/12 was almost twice the poverty rate in urban areas despite a faster decline since the mid-2000s.

Migration from rural to urban areas has so far been relatively slow compared to China and Indonesia, partly reflecting limiting job creation in cities, policies to support farmers’ income and the rural public employment programme. The share of the rural population, at 69 percent of the total population according to the Census, remains very high by international standards. However, as the report stated, the number of workers engaged in non-agricultural activities who cross the rural-urban boundary everyday has increased rapidly and rural/urban migration pressures are intensifying as the large gap in income.

It observed, unfortunately, that about half the farmers are unhappy with their economic conditions and more than two-thirds believe that life in cities would be better than in villages. Coupled with population growth, it added, that this will make the increase in the urban population one of the fastest in the world in the coming decades.

The report identified that the potential productivity and well-being gains associated with urbanisation have not been fully exploited in India. Job creation has taken place in urban areas and most of the jobs created in cities are salaried jobs, often offering better conditions than self-employed and casual work.

In contrast, rural areas have lost jobs. Wages in the organised sector are also significantly higher in urban than in rural areas. However, a striking figure for India is that productivity declines with city size, suggesting that congestion costs quickly exceed agglomeration benefits. The urbanisation process, as per the report, is driven by urban sprawl and not by urban density and new urban areas often lack basic infrastructure and public services such as water provision and sanitation, water draining systems in case of floods, and public transport.

The OECD concluded that one way to deal with this is to enable local governments to raise more taxes on immovable properties by helping them assess and update the value of properties and by giving them more autonomy to set the base rate and enforce taxes on immovable properties. Another way to make urban living simpler, as per the report, is to raise user charges for urban infrastructure while committing to better services and securing access of the poor to public services. In particular, rely more on road pricing and parking fees to increase local govt. revenue and reduce private car usage and pollution.

Agriculture: Digitise records, clarity of land titles & access to credit

OECD noted that agricultural loans have often failed to reach small farmers who continue to depend on expensive money lenders. It appreciated recent initiatives by the Modi government suggesting that soil health cards should be provided to all 140 million farm households within three years. OECD has recommended that this welcome initiative should be accompanied by a gradual replacement of fertiliser subsidies which mostly benefit fertilizer manufacturers, by a direct cash transfer that should be targeted at poor farmers.

Another observation that it made was that a wide range of input subsidies, price support and other supply –side programmes have been used to support farmers and stabilize consumption prices but have failed to boost productivity.

OECD recommended that national land records modernisation programmes, including the digitisation of land records, should proceed more rapidly. It feels that India must support farm consolidation to exploit economies of scale and to promote mechanisation by improving clarity of land titles. Digitisation of land rights would further allow better access to credit to fund investment and aligning the price of fertilsers, electricity and water with their true social costs (including pollution and scarcity), in its opinion, will promote a more sustainable use of natural resources.

India must, in its opinion, pursue efforts to deregulate and unify markets for agricultural products to support farmers’ income and invest more in rural infrastructure, such as roads connecting villages to market towns, crop storage infrastructure and access to sustainable irrigation technologies such as drip irrigation. Another landmark recommendation is to enable local governments to raise more taxes on immovable properties and raise user charges for urban infrastructure.

In a country that’s currently arguing over ‘public display of nationalism’, the OECD wants to see an ease of doing business at the central and state level further by continuing the benchmarking of states and by strengthening the sharing of best practices across states and the implementation of a national air quality strategy.

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Updated Date: Jan 18, 2017 18:11:20 IST