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OECD OECD Economics

2014 OECD ECONOMIC SURVEY OF INDIA

Stronger and better growth Delhi, 19 November 2014

The economy is recovering but more should be done to go back to a 8% growth rate or above:

1. Less subsidies, more investment in social and physical infrastructure and tax reform would contribute to fiscal consolidation and boost incomes for all

2. Structural barriers have hampered growth and job creation, especially in the manufacturing sector

3. Parts of the banking system are vulnerable

4. More and better jobs for women would raise equity and boost growth by over 2 percentage points

5. For most Indians, health care is poor

Main findings

1. Reduce energy subsidies and increase investment in social and physical infrastructure

2. Implement a broad national value-added tax (GST)

3. Introduce a simpler and more flexible labour law to cover more workers

4. Strengthen bank supervision and reduce bad loans

5. Extend female quotas to state and national parliaments and strengthen the implementation of gender-related laws

6. Increase public spending on preventive and primary health care, especially in rural areas and urban slums

Key recommendations

The Indian economy is turning around

The Indian economy slowed more than many other economies since the mid-2011, but is recovering faster Investment and exports are rebounding and should drive growth The manufacturing sector is key for future growth

-10

-5

0

5

10

15

2007 2008 2009 2010 2011 2012 2013 2014

Y-o-y % change

A. GDP growth¹

India BrazilIndonesia ChinaOECD average -25

-20-15-10-505

101520253035

2007 2008 2009 2010 2011 2012 2013 2014

Y-o-y % change B. GDP, exports and investment¹

GDPGross fixed capital formationExports of goods and services

- 10

- 5

0

5

10

15

20

25

2007 2008 2009 2010 2011 2012 2013 2014

Y-o-y % change C. GDP at factor costs²

GDP Agriculture Manufacturing Services

1. Nominal sector share in GDP. Data for China are for year 2011. 2. For India, data are for fiscal year 2013-14. Source: Indian Central Statistics Office, OECD calculation, and World Development Indicators database.

Key short-term challenges

Support the economic recovery by a sounder macroeconomic framework:

Reduce inflation further Cut the public deficit and debt further Improve the business climate Reduce bad loans

Inflation expectations remain high

Consumer price inflation has long been much higher than in other BRIICS Inflation expectations remain stubbornly high Adopting the flexible inflation-targeting framework will help to contain inflation expectations and thus support saving and investment decisions

1. The consumer price index (CPI) inflation is shown. Year 2014 is based on the data of the first nine months. Source: OECD Outlook 96 database and Reserve Bank of India.

0

2

4

6

8

10

12

14

2007 2008 2009 2010 2011 2012 2013 2014

Y-o-y % change

B. Inflation expectation and the actual CPI inflation

Inflation expectations: Current CPI

-202468

101214

2007 2008 2009 2010 2011 2012 2013 2014

Y-o-y % change

A. Inflation is higher than in other EMEs and the OECD area¹

India BrazilChina Indonesia

Public deficit and debt are still high

Despite fiscal consolidation at the central government, the public debt and debt are high Public spending efficiency and targeting should be improved. Subsidy reforms and the implementation of the unique identification number (Aadhaar) are key. India also needs to raise more revenue in a less distortive way – implementing the GST is essential

Source: Brazilian Ministry of Economics, CEIC, Chinese Ministry of Finance, IMF, OECD Analytical database, OECD Economic Outlook 96 database and World Bank.

0123456789

1011

2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14

% of GDP A. Recent developments in India

States' fiscal deficit Central government's fiscal deficit

0

20

40

60

80

100

120

0

20

40

60

80

100

120

CHL CHN IDN TUR ZAF MEX BRA IND OECD

% of GDP% of GDP B. General government debt in emerging countries, 2013 or latest year available

0123456789

0123456789

MEX CHN TUR IDN BRA CHL ZAF OECD IND

% of GDP% of GDP C. General government deficit in emerging countries, year 2013 or latest year

External vulnerability is a less immediate concern

The current account deficit has narrowed Gross foreign liabilities are low, though dominated by debt with a short-term component Net FDI is lower than in the late 2000s Competitiveness has deteriorated, threatening exports

1. Real effective exchange rate (REER) based on consumer prices. An increase implies a loss of competitiveness. 2. Or latest available figures. Source: India Ministry of Commerce and Trade, Reserve Bank of India, OECD - International trade and balance of payments database, OECD - National accounts database, Bank for International Settlements and IMF Balance of Payments Statistics.

-202468

10121416

2007 2008 2009 2010 2011 2012 2013 2014

% of GDP

A. The current account deficit has recently narrowed

Current account deficitTrade deficitNet FDI

0

20

40

60

80

100

120

POL ZAF MEX TUR BRA RUS IDN CHN IND

% of GDP

B. Gross foreign liabilities are low

2013² 2007

0

10

20

30

40

50

60

70

80

TUR IND POL MEX RUS IDN CHN BRA ZAF

%

C. Debt accounts for a large share of gross foreign liabilities

2013² 2007

0.010.0120.0140.0160.0180.020.0220.0240.0260.028

75

80

85

90

95

100

105

USD for Rupee

(2010 = 100)

D. Competitiveness has deteriorated

Competitiveness indicator, (REER)¹2000-08 REER averageNominal exchange rate (RHS)

Banks are in poor shape and the private bond market is too small

1. In percentage of gross advances. The NPL ratio is the ratio between the value of non-performing loans (NPL) and the total value of the loan portfolio. 2. The Capital to risk-weighted assets ratio (CRAR) is equal to the capital of the bank divided by aggregated assets weighted for credit risk, market risk and operational risk. Source: IMF Financial Soundness Indicators database and Reserve Bank of India.

The banking sector is dominated by public banks. They are the least profitable and hold majority of distressed assets. The steady rise of distressed assets is a concern. Banks and financial institutions are required to invest a significant share of their financial holdings in government securities. The corporate bond market cannot meet long-term financing needs.

0 1 2 3 4 5 6 7 8 9 10

0

5

10

15

20

25

India

Braz

il

China

South

Afric

a

Philip

pines

Malay

sia

Turke

y

Colom

bia

Indon

esia

Arge

ntina

%%A. Soundness and profitability are low

2014 Q2 or latest available dataRegulatory capital to risk-weighted assetsReturn on assets (RHS)

0

2

4

6

8

10

12

14

16

Total Public sector Private sector Foreign

%B. Distressed assets are concentrated in

public sector banks¹, March 2014

Gross non-performing assetsRestructured loans

0.0

0.5

1.0

1.5

2.0

0

5

10

15

20

Public sector Private sector Foreign

%%C. Public sector banks are

underperforming, March 2013Capital assets ratio (LHS)²Return on assets (RHS)

0 5

10 15 20 25 30 35 40 45

Indon

esia

India

South

Afric

a

Braz

il

China

Russ

ia

% of GDPD. Bond market capitalisation (2011)

Private bond marketPublic bond market

Longer-term challenges

Reduce barriers to the growth of the manufacturing sector to create more and better jobs

Use more effective and better targeted social spending to make growth more inclusive

Increase economic opportunities for women

A jobless growth so far … while more people will enter the labour force

Employment creation has not kept up with the growing working age population and has benefitted mostly men Demographics will favour labour force growth up to the 2040s More than 100 million people may enter the labour force between 2010 and 2020, mainly a young and more educated cohort An increase in the very low female labour force participation would also raise the supply of workers

1. According to the ILO definition, working age population is made of individuals aged 15 or more. 2. The age dependency ratio is the ratio of the population younger than 15 or older than 64 to the working-age population, which is those aged 15-64. From 2015 World Bank projections are shown. 3.The labour force participation of women is equal to the percentage of working women aged 15-64 over the overall female population aged 15-64. Data refer to the simple average of the dependency ratio for each period. Source: ILO (2013), Key Indicators of the Labour Market (KILM) database, OECD (2014) Perspectives on Global Development and World Bank WDI databank.

50 51 52 53 54 55 56 57 58 59 60

50 51 52 53 54 55 56 57 58 59 60

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

%% A. Employment creation has not kept up with the growing working age population

Ratio of employment to working age population¹

0102030405060708090

100

IND BRA CHN IDN MEX RUS ZAF OECD

B. The dependency ratio is projected to decline up to the 2040s²

1991-2050

01020304050607080

01020304050607080

IND BRA CHN IDN MEX RUS ZAF OECD

C. The labour force participation of women is low³

1991-1995 1996-20002001-2005 2006-2012

Manufacturing has created few and low quality jobs

Net job creation in the manufacturing sector has been poor Most new jobs are with firms with more than 10 employees and with temporary contracts and no social security benefits

1. Employment is based on usual principal and subsidiary status. 2. Informal workers are those with no social security benefits (Mehrotra et al., 2014). Source: OECD Labour market statistics, NSSO, Employment and unemployment survey, rounds no. 61 and 68; and Mehrotra et al. (2014).

-40

-30

-20

-10

0

10

20

30

Agriculture Construction Manufacturing Services and white-collar Total

Change in millions A. Employment creation¹ in the manufacturing sector has been low, 2005-12

-1

0

1

2

3

4

5

6

Formal Informal Total Formal Informal Total

Change in millions B. Most manufacturing jobs created over the period 2005-12 were informal²

Organised Unorganised

Manufacturing has not contributed much to the growth of GDP and exports

Productivity in the manufacturing sector tends to be low, reflecting the small size of firms Manufacturing has contributed little to GDP growth

1. The productivity is measured by gross value added at basic prices divided by the number of hours worked. This measure is then converted in current USD using the PPP conversion factor for GDP. 2. The productivity of labour is measured in terms of value added per worker. Value added is measured in rupees. Source: World Input Output Database and Worldbank WDI database; ASI 2010-2011 Summary results for the Organised sector, Key Results of Survey on Unincorporated Non-agricultural Enterprises (excluding construction) in India (2010-2011) Indian Central Statistics Office; OECD calculation.

05

101520253035

IND CHN BRA MEX RUS TUR IDN

USD PPP A. Value added per hour worked¹, 2009Manufacturing Services

0 200 400 600 800

1 0001 2001 400

Unor

ganis

edse

ctor 0-

14

15-1

9

20-2

9

30-4

9

50-9

9

100-

199

200-

499

500-

999

1000

-199

9

2000

-499

9

5000

+

Orga

nised

secto

r

Value added per worker

Number of employees

B. Productivity is low in smaller firms²

0 10 20 30 40 50 60 70

1980

-81

1981

-82

1982

-83

1983

-84

1984

-85

1985

-86

1986

-87

1987

-88

1988

-89

1989

-90

1990

-91

1991

-92

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-…20

00-0

120

01-0

220

02-0

320

03-0

420

04-0

520

05-0

620

06-0

720

07-0

820

08-0

920

09-1

020

10-1

120

11-1

220

12-1

320

13-1

4

%

C. Indian manufacturing has not risen as a share of GDPSectoral decomposition of GDP

Agriculture Manufacturing Industry non manufacturing Services

20

40

60

80

100

120

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

% D. Manufacturing exports in total merchandise exports Brazil China India South Africa

There are barriers to manufacturing growth

Labour regulations become relatively stringent and costly to comply with when firms grow The quality of infrastructure is below par Taxes are complex and costly to comply with The business environment is cumbersome and the outdated bankruptcy law makes it difficult to reallocate capital to most productive activities

Source: OECD Employment Protection Database, 2013 update; World Bank Online Database; PWC Paying Taxes, 2014 Report; World Bank Doing Business database.

0

1

2

3

4

5

6

USA

CAN

GBR

NZL

HUN

CHE

IRL

AUS

JPN

EST

SVK

MEX

ESP

OECD IS

LGR

CBE

LDN

KAU

TPO

L EU TUR

NOR

LUX

KOR

ISR

FIN

SVN ITA

SWE

CHL

FRA

DEU

NLD

CZE

PRT

BRA

ZAF

RUS

CHN

IND

IDN

A. Employment protection legislation is highly restrictive, 2013

0

10

20

30

India Brazil Mexico Indonesia South Africa World Chile OECD China Korea

In % of the outputB. Electric Power Transmission and Distribution (T&D) losses

1990 2000 2010 2011

0100200300400500

Unite

dKi

ngdo

m

Cana

da

Fran

ce

Unite

d Stat

es

Russ

ia

South

Afric

a

Colom

bia

Germ

any

Indon

esia

Italy

Japa

n

China

Arge

ntina

Braz

il²

Hours per year C. Time to comply with taxes for small and medium-sized enterprises

Consumption tax Labour tax Corporate income tax

736

490

1374

India

OECD

ARG

AUSAUTBEL

BRA

CAN

CHLCHN

COLCZE

DNK

EST

FIN

FRA

DEU

GRCHUN

ISL

INDIDN

IRL

ISRITA

JPNKOR

LUX

MEX

NLDNZL

NOR

POLPRT

RUS

SVKSVN

ZAF

ESP SWE

CHE

TUR

GBRUSA

0

20

40

60

80

100

0 1 2 3 4 5

Recovery rate (cents on the dollar)

Time (years)

D. There is scope to improve the insolvency legislation and debt-recovery rates

Women’s economic participation is low

• Gap with men is over 50%

• Regional differences are large – more women work in the southern states

• More than half of working women are paid or unpaid self-employed

• Women wages are often half on men’s at similar education levels

Notice: Data refer to working age population (15 to 64 years). The gap is male minus female participation rate. Source: ILO, Economically Active Population, Estimates and Projections (6th edition, October 2011); and NSSO, Employment and Unemployment Survey, Rounds no. 43, 50, 55, 61, 66 and 68.

0

10

20

30

40

50

60

70

Illiterate Literate Primary Middle Secondary Graduate

%B. LFPR by education - urban

2000 2005 2010 2012

0

10

20

30

40

50

60

70

Illiterate Literate Primary Middle Secondary Graduate

% C. LFPR by education - rural

2000 2005 2010 2012

0

10

20

30

40

50

60

RUS CHN OECD average ZAF BRA IDN IND

% A. Gap in male-female labour force participation rate

Low participation reflects complex factors

• Social status of staying home

• Discriminatory labour laws

• Weak implementation of gender-related laws

• Bias in inheritance laws affects access to collateral

• Jobless growth

1. Data refer to working age population (15 to 64 years). Source: OECD, Gender, Institutions and Development Database 2012; and NSSO, Employment and unemployment survey, rounds no. 55, 61, 66 and 68.

Net increase in…. 2000 2012 Change 2000-12

Working age population 304 403 99 Labour force Employment 123 129 6 Unemployment 2 3 1 Remaining outside labour force In education 18 42 24 Not in education 161 229 68

Working age population 326 427 101 Labour force Employment 274 343 69 Unemployment 7 8 1 Remaining outside labour force In education 32 61 29 Not in education 13 15 2

Unemployment rate by education¹

Employment trendsMillions, 15-64 years of age

Female

Male

0

5

10

15

20

25

30

35

Illiter

ate

Liter

ate

Prim

ary

Midd

le

Seco

ndar

y

Grad

uate

% B. Urban female2000 2005 2010 2012

0

5

10

15

20

25

30

35

Illiter

ate

Liter

ate

Prim

ary

Midd

le

Seco

ndar

y

Grad

uate

% C. Rural female2000 2005 2010 2012

00.20.40.60.8

1Discriminatory Family Code

Restricted Physical Integrity

Son BiasRestricted Resources andEntitlements

Restricted Civil Liberties

A. Social institutions and gender index (SIGI)

BrazilChinaIndiaSouth Africa

Health and well-being can be vastly improved

Health outcomes have improved but remain below par Poor living conditions – including low access to sanitation – play a role Public resources invested in health care are limited, unequally spread, and quality is often an issue 1. Nearest available year.

Source: OECD (2014), Health Database; World Bank (2014), World Development Indicators Database; and WHO (2014), Public Health and Environment Database.

83.2

82.5

82.1

82.1

81.5

81.3

81.0

81.0

81.0

80.7

80.2

78.9

78.7

76.5

75.6

75.2

75.2

74.8

74.6

74.4

74.2

74.1

73.7

70.7

70.3

70.2

66.4

66.3

56.1

0

20

40

60

80

100

120

Japa

nSp

ainAu

strali

aFr

ance

Cana

daKo

rea

Germ

any

Irelan

dUn

ited…

Gree

ceOE

CD Chile

Unite

d Stat

esEs

tonia

Viet

Nam

China

Hung

ary

Malay

siaTu

rkey

Mexic

oTh

ailan

dSr

i Lan

kaBr

azil

Indon

esia

Bang

lades

hRu

ssian

Fed

.Pa

kistan Ind

iaSo

uth A

frica

A. Life expectancy at birth 2012 ¹ 1970 ¹

0

10

20

30

40

50

60

70

1990 1995 2000 2005 2010

%B. Rural population with access to improved sanitation

China IndiaIndonesia South AfricaBrazil

0

2

4

6

8

10

12

Russ

ian F

ed.

Germ

any

Austr

alia

OECD

Fran

ce

Unite

d…

Cana

da

Unite

d Stat

es

Japa

n

Mexic

o

Kore

a

Braz

il

Chile

Turke

y

China

Malay

sia

Viet

Nam

Philip

pines

Pakis

tan

South

Afric

a

India

Sri L

anka

Myan

mar

Thail

and

Bang

lades

h

Indon

esia

Camb

odia

Per 1 000 personsC. Number of doctors and nurses

2012 or latest year available

Doctors Nurses

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Key recommendations to strengthen the monetary and fiscal policy frameworks

• Implement flexible inflation targeting • Pursue fiscal consolidation while avoiding

one-off measures and cuts in growth-enhancing spending

• Shift public spending away from energy subsidies towards investment in physical and social infrastructure.

• Implement a national value-added tax (GST) with only limited exemptions

Recommendations to raise the effectiveness of the financial sector

• Strengthen bank supervision by early recognition of asset deterioration and stricter provisioning standards

• Wind down bank lending obligations to priority sectors and gradually reduce the proportion of government bonds required to be held by banks and institutional investors (statutory liquidity ratio)

• Further ease restrictions on bond market investments by foreign institutional investors

• In promoting financial inclusion, rely further on mobile banking and branching through local businesses, allow MFIs to take deposits

Key recommendations to improve labour market performance

• Reduce barriers to formal employment by introducing a simpler and more flexible labour law which does not discriminate by size of enterprise

• Continue improving access to education, especially at the secondary level, and better focus on the quality of education at all levels. Provide better and earlier vocational training

Recommendations to improve the quality of infrastructure

• Impose clear timelines, rationalise documentation, and implement single-window clearance

• Improve the land registry. Assess and amend as needed the new land acquisition law. The government should review the timelines within the Bill and aim to make land acquisition faster

Recommendations to improve the business environment

• Continue improving the business environment and opening up the economy

• Strengthen governance of state-owned enterprises, and reduce public ownership over time

• Further simplify regulations and reduce administrative burdens on firms. Introduce a modern bankruptcy law

Key recommendations to increase female economic participation

• Extend female quotas to state and national parliaments

• Further modernise labour laws to ensure equal work opportunities for women

• Enhance the implementation of gender-related laws

• Expand secondary and higher education for women and skills training for female entrepreneurs

Key recommendations to improve health outcomes for all

• Increase public spending on health care with particular focus on preventive and primary care, especially in rural areas and urban slums

• Expand the number of health professionals and up-skill professionals located in rural areas

• Strengthen the management of public health care facilities and ensure that private facilities and their employees meet minimum quality standards