PROMOTING STRONG AND INCLUSIVE GROWTH IN INDIA Better Policies Series www.oecd.org/India OECD Paris 2, rue André Pascal, 75775 Paris Cedex 16 Tel.: +33 1 45 24 82 00 February 2017 ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT This document is published on the responsibility of the Secretary-General of the OECD. The opinions The OECD is a unique forum where governments work together to address the economic, social and expressed and arguments employed herein do not necessarily reflect the official views of OECD member environmental challenges of globalisation. The OECD is also at the forefront of efforts to understand and to countries. help governments respond to new developments and concerns, such as corporate governance, the information *** economy and the challenges of an ageing population. 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Contributors: Asees Ahuja, Geraldine Ang, Carlotta Balestra, Romina Boarini, Kelsey Burns, Elizabeth Fordham, Massimo Geloso Grosso, Alessandro Goglio, Guillaume Gruere, Caitlyn Guthrie, Ian Hawkesworth, Irène Hors, Chris James, Juliane Jansen, Isabelle Joumard, Przemyslaw Kowalski, Xavier Leflaive, Caroline Malcolm, Pascal Marianna, Sakshi Mishra, Fernando Mistura, Hermes Morgavi, Hildegunn Nordas, Jennifer Schappert, Mallika Singhal, Silvia Sorescu, Elena Tosetto, Frederic Wehrle, Robert Youngman, Ziga Zarnic. Isabelle Renaud provided production and administrative support. Photo credits: @ Shutterstock.com Corrigenda to OECD publications may be found on line at: www.oecd.org/publishing/corrigenda. OECD “Better Policies” Series © OECD 2017 The Organisation for Economic Co-operation and Development (OECD) aims to promote better policies for better lives by providing a forum in which governments gather to share experiences and seek solutions to You can copy, download or print OECD content for your own use, and you can include excerpts from OECD common problems. We work with our 35 members, key partners and over 100 countries to better understand publications, databases and multimedia products in your own documents, presentations, blogs, websites and what drives economic, social and environmental change in order to foster the well-being of people around the teaching materials, provided that suitable acknowledgment of the source and copyright owner is given. All world. The OECD Better Policies Series provides an overview of the key challenges faced by individual countries requests for public or commercial use and translation rights should be submitted to [email protected]. Requests and our main policy recommendations to address them. Drawing on the OECD’s expertise in comparing for permission to photocopy portions of this material for public or commercial use shall be addressed directly country experiences and identifying best practices, the Better Policies Series tailor the OECD’s policy advice to the Copyright Clearance Center (CCC) at [email protected] or the Centre français d’exploitation du droit to the specific and timely priorities of member and partner countries, focusing on how governments can make de copie (CFC) at [email protected]. reform happen. Foreword India has made unprecedented economic and social progress since the start of the post-liberalisation reforms in the early 1990s. GDP per capita increased by an average annual rate of 5.2% between 1990 and 2015, and it is expected to increase by 6.2% in 2016 and by 6.3% in both 2017 and 2018, making India the fastest growing of all G20 economies. This strong economic growth has lifted more than 160 million people out of extreme poverty: the share of the population living in extreme poverty has declined from almost 50% in the early 1990s to around 20% today. With improved sanitation and health services, life expectancy increased from 58 years in 1990 to 68 years in 2014, while child mortality dropped by more than 50%. India’s strong performance has been supported by major policy reforms. The change in the monetary policy framework aimed at anchoring inflation expectations helped bring down inflation and stabilise the currency. Together with the current government’s efforts to liberalise and simplify investment regulations, this helped spur capital inflows. Recent efforts to create better jobs and raise the quality and relevance of the education and training system are crucial for more inclusive growth. Health outcomes have benefited from improved cleanliness and sanitation, as well as reduced water risks. Underlying these achievements, there must be a continued focus on putting India’s economic success to the service of the well-being of its citizens. With a working age population that expands by around 14 million people every year, ensuring that everyone has access to a high-quality job is an important opportunity to boost productivity and growth in the coming years. More than nine in ten workers in India are in the informal sector, outside the reach of social protection schemes and labour market regulations. Despite an astonishing decline, child mortality is still twice as frequent as in other major emerging markets, linked to continuing poor sanitation and hygiene. Even though the share of the population with access to improved sanitation has more than doubled since the early 1990s, 40% of the population still remain without such access. Upgrades to infrastructure undertaken today will pay off in many ways in the coming years. As the economy benefits from the increased opportunities of trade and investment, additional measures will also be needed to further ease restrictions and lower trade and non-trade barriers. This Better Policies Series report has been prepared to provide inspiration to the Government of India in its endeavours to actively bring forward reforms to ensure that development is sustainable, inclusive and environmentally responsible. It applies the OECD’s most innovative research and draws on the experience of OECD member and partner countries to explore new ideas and reform paths for India. The report highlights how India can sustain its fast economic growth by deepening integration into global value chains, fostering investment (including in infrastructure), and reducing water risks that threaten India’s big agricultural sector. It also suggests ways to ensure that no one is left behind by the country’s fast-paced growth and change, by promoting good-quality jobs, equipping people with the skills needed to succeed in life and ensuring that everyone has access to good-quality healthcare. The report also provides insights into recent achievements of the OECD-India partnership. In over 20 years of co-operation, both India and OECD members have benefited from an increasingly close relationship that has fostered mutual learning and enriched the global policy debate. India and OECD members share many goals, and this is reflected in India’s extensive and valued participation in many OECD committees and bodies. This has given India the opportunity to discuss major policy issues and challenges, exchange experiences with other countries and share views on economic, social and environmental policies. OECD member countries in turn have benefited from the greater knowledge gained through their engagement with India. The OECD is looking forward to further deepening its collaboration with India and supporting the government in its efforts to promote economic and social well-being, through rigorous analysis, peer learning and best practices. Together, we can design, develop and deliver better policies for better lives for all Indian citizens. Angel Gurría Secretary-General, OECD Contents 1. Introduction ................................................................................................................................ 1 2. Making India’s labour market more inclusive ............................................................................. 6 3. Fostering education and skills for the future ............................................................................ 10 4. Enhancing India’s healthcare system ........................................................................................ 13 5. Fostering India’s integration into global value chains .............................................................. 16 6. Promoting greater trade in services ......................................................................................... 19 7. Boosting investment in India .................................................................................................... 23 8. Addressing tax avoidance and evasion ..................................................................................... 27 9. Making infrastructure investments more efficient and effective ............................................ 29 10. Reducing water risks ............................................................................................................... 33 Bibliography .................................................................................................................................. 37 Key recommendations  Encourage job creation in the formal sector by reducing the administrative burden for dismissal faced by large firms, while strengthening the public employment service, training and re-employment support.  Support a more productive agricultural sector through technology transfer.  Strengthen accountability within the education sector, and raise the quality of teaching, including through better school infrastructure.  Ensure that the skills of the workforce are benchmarked against international standards, to further accelerate economic growth, foster innovation and sustain global competitiveness.  Encourage states to increase public spending on health, while introducing accountability mechanisms for healthcare outcomes, supported by a consolidated national information structure.  Extend the Rashtriya Swasthya Bima Yojana (RSBY) health insurance programme and ensure cost efficiency, by placing greater emphasis on primary-care services and ensuring that the services covered by RSBY are clearly defined at all levels of care.  Pursue further trade facilitation reforms, focussing on simplifying and harmonising trade documents, streamlining procedures and strengthening domestic and cross-border agency co-operation.  Extend the trade and investment liberalisation efforts observed in the mobile telephone market to fixed-line telecommunications, to stimulate entry and investment in broadband Internet and support trade in goods and services.  Foster investment by promoting responsible business conduct and further easing restrictions on foreign direct investment.  Progressively adjust the pricing of infrastructure services to ensure their financial sustainability.  Empower local governments to take responsibility for infrastructure projects, and ensure that higher levels of government provide incentives for cross-jurisdictional co-ordination.  Redirect farm-support policies from water and other inputs towards supporting increased innovation, sustainability and productivity on farms and, where necessary, providing support to low-income households among resource-poor farms. 1 PROMOTING STRONG AND INCLUSIVE GROWTH IN INDIA – 1 Introduction India’s economy continues to grow at an impressive rate, with projected annual GDP growth of 7.5% in 2017-18. India will thus remain the fastest-growing G20 economy. Unprecedented growth in exports in services since the 1990s has made India a global leader in this sector. Inflows of foreign direct investment (FDI) grew at three times the annual world average rate in the last decade, reflecting the success of efforts to attract international investment and gradually loosen restrictions to foreign investment. India’s economic successes are being translated into increased well-being for its population. As GDP per capita has more than doubled in ten years, extreme poverty has declined substantially. Access to education has steadily improved, and life expectancy has risen. Multiple opportunities present themselves for India, and the right mix of policies is needed to take advantage of them. India has made advances in integrating in global value chains and developing a competitive advantage in fields such as information and communication technology. Now is the time to secure continued progress by boosting competition and further lowering barriers to trade and investment. Looking to the future, it will be vital to fully tap into the potential offered by India´s young population. This means investing in the large numbers of young people entering the labour market. Likewise, the rapid pace of development must be matched with the upgrades to infrastructure necessary to support it. India has made great strides in improving the Building on past successes, India can further well-being of its population improve the well-being of its citizens India has been on a high growth trajectory since This laudable development notwithstanding, the it undertook post-liberalisation reforms in the potential for further progress is still enormous. In early 1990s. On average, GDP per capita 2015, India’s GDP per capita level was 43% of the increased by 5.2% annually between 1990 and average of the other BRIICS countries. With 55% 2015. Recent years have also seen a decline in of the population below 30 years of age, creating both inflation (from 9.9% in 2012 to 5.2% in quality jobs for its large emerging workforce will 2016) and the current account deficit (from 4.8% be crucial to increase well-being and reduce in 2012 to 0.8% in 2016). India’s strong growth poverty. Around eight workers in ten are in performance is continuing. GDP per capita vulnerable growth is estimated at 6.3% in 2016 and the economy is expected to continue growing at that rate in 2017-18, meaning that India will remain FIGURE 1.1. INDIA’S ECONOMY IS GROWING STRONGLY the fastest-growing G20 economy (Figure 1.1). Expected annual GDP per capita growth, India has also made significant progress in other 2016-18 areas of well-being. The share of the population 7 living in extreme poverty (defined as persons living on less than USD 1.9 per day) has declined 6 substantially, from almost 50% in the early 5 1990s to around 20% today. Income inequality, 4 as measured by the Gini coefficient (which scores 0 when everybody has identical incomes 3 and 1 when all the income goes to one person) 2 is similar to other emerging markets, but much higher than in OECD countries (Figure 1.2). Life 1 expectancy in India increased from 63 years in 0 2000 to 68 years in 2014, just below the -1 average of 69 years of the other BRIICS countries (Brazil, Russia, India, Indonesia, China -2 AFSGARANXNUSARRNND and South Africa) (Figure 1.3, Panel A), and child RAURTBRAEPEUSUODHN BZRAIGFCMJDAUTKICI mortality dropped by more than 50% over the Source: OECD Economic Outlook Database. same period. 2 – PROMOTING STRONG AND INCLUSIVE GROWTH IN INDIA FIGURE 1.2. INCOME INEQUALITY IN INDIA IS SIMILAR TO THAT OF OTHER EMERGING ECONOMIES Gini coefficient, 2013 or latest available year 1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 5 most OECD 5 most equal ZAF COL CHN IND CRI BRA unequal average OECD OECD countries countries Note: Preliminary estimates for non-OECD countries. Sources: OECD Income Distribution Database; OECD calculations using data from the LIS Data Center, the China Family Panel Study and the Encuesta Nacional de Hogares for Costa Rica. employment, well above the figures seen in other breakthrough in transforming India into an emerging markets (Figure 1.3, Panel B). Despite an integrated market. astonishing decline, child mortality is still twice as Public spending is being directed towards more common as in the other BRIICS countries. Further productive investments in social services and improvements in health outcomes will require physical infrastructure. Financial inclusion better sanitation and hygiene. Even though the schemes and programmes to upskill the share of the population with access to improved population, improve labour market conditions sanitation has increased significantly, at 40% it and foster the development of small businesses remains well below the 75% average of the other are being introduced to make growth more BRIICS countries (Figure 1.3, Panel A). Poor inclusive. In 2015, India introduced its National housing conditions as well as severe air pollution Policy for Skill Development and (among the BRIICS countries, air pollution in Entrepreneurship, to improve the quality of India is second only to China) also weigh on skills training, make education more responsive health outcomes. to employers’ needs and increase access to The current government has embarked on an education for disadvantaged groups. ambitious reform agenda to make this happen The Government of India is also implementing To further improve the well-being of its citizens, policies to promote cleanliness and sanitation, the Government of India is undertaking as well as to reduce water risks. The draft important structural reforms. The inflation National Health Policy tabled a commendable targeting framework that was put in place reform agenda and proposed increasing public helped push back inflation and stabilise the spending on healthcare from 1% to 2.5% of GDP rupee. Together with improvements in the by 2020, but the 2016-17 budget has not business environment, particularly in significantly increased resources for the manufacturing activities, this helped spur trade healthcare sector. The central government has and international investment inflows. For also drafted a model groundwater bill that example, the Government of India reduced FDI proposes ways for communities to reduce their restrictions and non-trade barriers, and eased groundwater usage and launched pilot business regulations in a number of sectors. In programmes to decouple agriculture subsidies addition, the implementation of the centralised from inputs. Goods and Services Tax represents a PROMOTING STRONG AND INCLUSIVE GROWTH IN INDIA – 3 FIGURE 1.3. HOW’S LIFE IN INDIA? A. Selected positive well-being outcomes B. Selected negative well-being outcomes (the higher the score the better) (the lower the score the better) India OECD Other BRIICS India OECD Other BRIICS Employment rate Vulnerable employment 100 100 75 Access to 75 Life improved satisfaction 50 50 sanitation 25 25 0 Homicides 0 Child mortality Change in Life forest area expectancy at birth Voter turnout Air pollution Note: “Other BRIICS” is the weighted average of the values for Brazil, China, Indonesia, Russia and South Africa, except for “vulnerable employment”, “voter turnout” and “homicides” where data for China are not available. Well-being data are provided for OECD and BRIICS countries for reference. The comparison with these countries has limitations, given the differences in GDP per capita. Source: OECD Better Life Initiative 2016. In order to encourage the implementation of reforms at the state level, the central government has introduced a system of co-operative federalism where states’ efforts are showcased and benchmarked. State governments are also being endowed with greater fiscal means and responsibilities to encourage reforms at a subnational level. India can partner with the OECD to design and implement better policies for better lives Building on the experience of other countries and the OECD’s tools to identify structural reform priorities (Boxes 1.1 and 1.2), this report presents a set of reform options to help the Government of India in its ambitious reform 4 – PROMOTING STRONG AND INCLUSIVE GROWTH IN INDIA agenda. Deepening India’s integration into global value chains (GVCs) will be essential for the country to sustain its strong growth performance. To this end, the government should build on existing reform efforts and further improve the enabling environment for international trade (Chapter 5) and investment (Chapter 7). Special attention may be warranted on services sectors, as greater competition in services such as distribution and finance will not only improve the economic performance of these sectors