OECD’s Growth Alarm
Feb 21 2014
India needs to pursue labour reforms, quality education for robust growth
The report assesses and compares progress that countries have made on structural reforms since 2012 and takes a fresh look at what else can be done to revive growth and make it more inclusive. The OECD report for 2014 said India needs to address its infrastructure shortfalls, pervasive state controls in business activities and unequal access to quality education in order to maintain robust growth.
India also needs to reconsider its overtly stringent labour regulations, which hinder job creation in the formal sector and leave most workers with no formal labour contracts and social coverage. In nine quarters, India’s economic growth rate declined from 7.5 per cent in the first quarter of 2011-12 to 4.4 per cent in the first quarter of 2013-14, OECD said. In his interim budget speech last week, P Chidambaram claimed the decline in growth had been arrested and the growth cycle had turned in from the second quarter of this financial year at 4.8 per cent.
With the CSO’s advance estimate pegging growth at 4.9 per cent of GDP for whole of 2013-14, the growth in third and four quarters should at least be 5.2 per cent, Chidambaram said, and added that the economy was more stable than two years ago and that growth would pick up further in 2014-15. OECD’s “going for growth” recommendations for India include an increase in the provision and efficiency of education services by enhancing teacher effectiveness and increasing teaching resources and autonomy in schools.
It said some of these measures have already been highlighted in previous OECD reports as well. It said India should reduce the onerous dismissal restrictions applied to large firms in order to increase dynamism and formal employment in the labour market. There should also be a reduction in the barriers to foreign trade and investment by reducing foreign ownership restriction in various industries and pursuing common tariff rates among manufactured products. India should also promote more effective infrastructure-related regulations by streamlining the land acquisition process and reducing regulatory uncertainty to promote private investment.
It emphasised the need to undertake wide-ranging financial sector reforms, such as easing of bank portfolio restriction and allowing greater participation of foreign investors in the financial services sector. Outlining his 10-point economic agenda for the new government, Chidambaram earlier this week listed financial sector reforms as one of the agenda items that needed to be pursued vigorously.
The OECD welcomed the setting up of the cabinet committee on investment to speed up stalled projects, particularly in the infrastructure sector. It said the reform of the land acquisition law would reduce uncertainty and help in removing infrastructure bottlenecks. In his interim budget, Chidambaram said swift decisions taken by the CCI and the project monitoring group at the PMO ensured clearance to 296 projects with total investment of Rs 6.6 lakh crore till mid-January.
The OECD welcomed easing of FDI rules for certain sectors in the recent past. They included opening up of multibrand retail to FDI, allowing 26 per cent FDI in pension, raising FDI cap to 100 per cent in telecom and to 49 per cent in civil aviation. The report also discusses the possible impact of structural reforms on other policy objectives (fiscal consolidation, rebalancing the current account and reducing inequality in incomes). In the case of India, a more inclusive education system can help reduce severe poverty and inequality, while labour market reforms would help reduce informality, it said.
Chidambaram through severe expenditure compression brought down fiscal deficit for 2013-14 to 4.6 per cent of GDP, which was lower than the budget estimate of 4.8 per cent. He also reined in current account deficit and brought it down to $45 billion for this financial year from the earlier projection of $70 billion through import compression, particularly gold imports.
On the global situation, the OECD report said adopting ambitious and comprehensive structural reform agendas would offer governments the best chance for a return to strong, sustainable and balanced economic growth that will create jobs and reduce inequality.
The OECD shows that most governments have continued to enact reforms, despite the challenges posed by a subdued growth environment, and highlighted actions that they can still take to boost productivity, raise public sector efficiency, improve educational outcomes and strengthen labour markets.