2017 OECD Economic Survey of India

1. 2017 OECD Economic Survey of India Delhi, 28 February 2017 Strong reforms are boosting inclusive growth http://www.oecd.org/eco/surveys/economic-survey-india.htm http://oe.cd/1No @OECDeconomy @OECD

2. Main messages • India is undertaking major reforms • Prosperity is rising quickly, but growth could be more inclusive • Comprehensive tax reform, building up on the landmark GST reform, would lift all boats • Reducing regional inequality is key

3. Growth has been very strong Source: CSO; and OECD Economic Outlook 100 database.

4. Inflation is under control Source: Reserve Bank of India.

5. The current account deficit has narrowed Source: Reserve Bank of India.

6. Exposure to external risks is relatively low Note: Foreign-currency external liabilities are approximated by the sum of a positive difference between debt securities issued by nationals and residents from the BIS debt securities database (a proxy for off-shore external bond liabilities) and external liabilities for financial derivatives and other investments (the latter includes bank loans) from the IMF international investment position database. Source: Reserve Bank of India; Bank for International Settlements; and OECD calculations.

7. Structural reforms are boosting growth Source: OECD compilation.

8. India has been a top reformer Note: The FDI Regulatory Restrictiveness Index reflects the situation at end 2016 for India and at end 2015 for other countries. Data for Costa Rica refer to the period 2012-15. Source: OECD FDI Regulatory Restrictiveness Index database.

9. Inclusiveness stands high on the agenda • 1.1 billion unique identification numbers (Aadhaar) created to better target support to the poor • 276 million bank accounts opened for the poor since August 2014 • 34 million toilets built since October 2014 •  7 108 villageselectrified in 2015-16 (out of the 18 452 unelectrified villages)

10. It is crucial to revive investment Note: Gross fixed capital formation. Source: Central Statistical Organisation.

11. Non-performing loans are high Source: Reserve Bank of India and IMF.

12. More progress on FDI is needed Note: The FDI Regulatory Restrictiveness Index reflects the situation at end 2016 for India and at end 2015 for other countries. Data for Costa Rica refer to the period 2012-15. Source: OECD FDI Regulatory Restrictiveness Index database.

13. More social infrastructure is needed in some regions Source: NSS Report No. 566: Status of Education and Vocational Training in India; and Census of India. Data are for 2011-12.

14. Rural areas lack access to core infrastructure Source: Census of India 2011.

15. Public debt is high Data for India are revised estimates by the Reserve Bank of India for the fiscal year 2015-16. Source: OECD Economic Outlook 100 database; Reserve Bank of India; Brazilian ministry of economy; and World Bank World Development Indicators database.

16. Key recommendations to strengthen macroeconomic resilience and growth • Strengthen public banks' balance sheets by recapitalisation, bank consolidation and lowering the 51% government share • Increase public spending on physical and social infrastructure • Gradually extend the subsidy reform to other products including fertilisers and food • Raise more revenue, especially from property and personal income taxes, to ensure that government debt to GDP return to a declining path

17. Tax reforms to make growth more inclusive

18. GST is a landmark reformbut India needs to raise more revenue Source: OECD Economic Outlook 100 database; OECD Revenue Statistics database; World Bank; Reserve Bank of India; Central Statistical Organisation.

19. The personal income tax raises little revenue Note: Social security contributions are not included. Source: OECD Economic Outlook 100 database; OECD Revenue Statistics database; World Bank; Reserve Bank of India; Central Statistical Organisation.

20. Combined corporate tax rates are high Note: Foreign source income is assumed to be exempted in the residence countries. For India, the 45% rate comprises the 30% CIT rate on corporate profits, plus 12% surcharge on CIT and 3% earmarked tax (on CIT and surcharge amount), plus the 15% dividend distribution tax. Source: Thomas et al. (forthcoming).

21. Reducing the corporate tax rate would attract FDI Note: FDI net inflows are the value of inward direct investment made by non-resident investors in the reporting economy net of repatriation of capital and repayment of loans. Source: OECD FDI main aggregates database.

22. More resources for the tax administration would raise tax compliance Note: Data for India relates to the CBDT. Source: OECD (2015), Tax Administration 2013: Comparative Information on OECD and other advanced and emerging economies.

23. Key recommendations to ensure taxes better support inclusive growth • Remove the tax expenditures that benefit the rich most (e.g. those related to housing investment) and freeze the income thresholds from which rates apply. • Enable municipalities to raise more real estate taxes. • Implement the reduction in the corporate income tax rate from 30% to 25% while broadening the base. • Increase the number and training of staff employed in the tax administration.

24. Regional development

25. Regional disparities are large Note: Regions in OECD member countries have been classified according to two territorial levels to facilitate international comparability. The territorial level 2 (TL2) consists of macro-regions, states in the case of India. Source: OECD Regional Statistics database.

26. There is little evidence that poor states are catching up Note: The population data are from Census 2001 and 2011. For the other years, population was estimated by linear interpolation and extrapolation. Source: Central Statistics Office; and NSSO.

27. Rural poverty is very high in some states Note: Poverty is calculated by using the Tendulkar methodology, which expresses the poverty line in terms of monthly per capita consumption expenditure based on a mixed reference period. Data refer to FY 2011-12. Source: Reserve Bank of India.

28. Productivity differences across states contribute to regional inequalities Note: Labour productivity is measured as the ratio of value added (GDP) per worker. Source: CSO; and OECD Economic Outlook 100 database.

29. Agriculture still employs many Notes: Employment data for China refer to the primary sector (including farming, forestry, animal husbandry and fishery). Source: NSSO; National Bureau Statistics of China; and World Bank.

30. Agriculture productivity is low Notes: Employment data for China refer to the primary sector (including farming, forestry, animal husbandry and fishery). Source: NSSO; National Bureau Statistics of China; and World Bank.

31. States’ ability to tailor public policies is high Source: CSO; and OECD Economic Outlook 100 database.

32. Urban population will increase fast in India Note: Forecasted data are shown in red. Source: United Nations, Department of Economic and Social Affairs, Population Division (2014).

33. Urbanisation gains are not fully exploited Note: Productivity is calculated as a median value added per worker in the organised manufacturing sector. Source: NSSO, Employment and unemployment survey, round No. 68; and World Bank Enterprise survey 2014.

34. Local air pollution is high Note: Indian cities are marked in red. The other selected cities are marked in blue. PM2.5 refers to particulate matter less than 2.5 micrometers in diameter; these fine particles are particularly damaging to health as they can penetrate deep into the lungs when inhaled. Source: World Health Organisation, Ambient Air Pollution Database, May 2016.

35. Key recommendations for a strong and balanced regional development • Continue efforts to improve universal access to core public services • Continue the benchmarking of states and strengthen the sharing of best practices, in particular on labour regulations and land laws • Enable reforms in land ownership laws, improve the land registry and step up the digitisation of land records • Give municipalities more and clearer spending and taxing powers

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