OECD asks India to improve fiscal administration

OECD asks India to improve fiscal administration

Venkat Raman
Auckland, December 30, 2019

India Gate is a landmark of Delhi (Wikimedia Commons)

The Organisation for Economic Cooperation and Development (OECD) has asked the Indian government to establish an independent Fiscal Council and adopt measures to improve fiscal administration.

The Paris-based 36-Member Organisation said in its December 2019 Report recommended that creation of the Fiscal Council should be accompanied by greater transparency on off-budget transactions and contingent liabilities.

“The government should also consider raising more tax revenue by removing tax expenditures that mostly benefit the rich. Freezing nominal personal income tax brackets and improving compliance should also be considered,” the Report said.

According to the OECD, India’s monetary policy should remain accommodative so long as inflation is set to remain comfortably close to target.

Among the other recommendations which the Organisation believes would lift the performance of the Indian economy are (a) reducing the spread between administered rates on small savings and market rates to improve monetary policy transmission (b) harmonising legislation on public procurement across government departments and (c) closely monitor asset quality of non-banking financial companies.

 

Rising global importance

The OECD Report acknowledges India’s rising importance in the global economy and the country’s outstanding performance in some services.

“Exposure to trade has surged after the reduction in tariff barriers in the early 1990s. In the information and technology sector, India’s export market share has boomed, creating many skilled employment opportunities and attracting foreign investment. India is also performing well in some complex, skill and capital-intensive goods such as transport vehicles and pharmaceuticals. The India Diaspora, the largest in the world, is an asset in developing new markets,” the Report said.

It also cited a few deficiencies that tend to pull back the economy.

Labour-intensive exports are lagging behind, the country’s market share in world exports of garments has stalled, despite clear comparative advantages and know-how.

Trade barriers

Successive governments in India have been reluctant to remove import tariffs on agricultural, farming, dairy and meat products. This has also been a thorn in the flesh of a Free Trade Agreement between India and New Zealand.

New Zealand exporters constantly complain their high rates of tariff are a disincentive to boosting their trade prospects with India.

The OECD Report has recommended that further reduction in trade barriers would boost manufacturing exports and jobs and improve living standards.

“Import duties disproportionately affect low- income households’ purchasing power and weigh on firms’ competitiveness. Although India has preferential trade agreements, their depth is limited. Restrictions to services trade imposed both by trading partners on India’s exports and by India on its imports are high,” it said.

Since services are key inputs for other sectors, restrictions have a negative impact, in particular on manufacturing and more widely on income.

Benefits for India

OECD estimates suggest that India would be the single largest beneficiary of a multilateral  cut in services trade restrictions. In the absence of  a multilateral move, OECD simulations suggest that modernisation of India’s regulations affecting services trade would contribute to the success of the ‘Make in India’ initiative, despite restrictions in its exports in partner markets.

“However, political economy considerations are a constraint,” it said.

Existing challenges

The Report said that creation of quality jobs, under-employment and income inequality remain challenges for the Indian government.

“The employment rate has declined and is low, especially for women. When women have a job, they are often paid less. Labour laws are complex; some are particularly stringent for industrial firms, and most of them kick in when firms grow, deterring formal job creation. In practice, most workers are not covered by core labour laws and social security. Recent efforts to streamline labour regulations into four codes are welcome. To boost job creation and thus improve equity, efforts to modernise labour regulations should continue,” it said.

Air Pollution-Out of ten most polluted cities, India has nine (OECD Picture)

High Pollution

The Report said that air pollution is high and will increase in the absence of bold action. India is vulnerable to climate change. Most Indians are exposed to high air pollution. Out of the ten cities most affected by air pollution in the world, as measured by the concentration of fine particulates, nine are Indian.

“The poor often burn wood, dung and crop residues to cook, contributing to indoor and outdoor air pollution, a major cause of premature deaths, also harming child development. Power plants, industry, transport and agriculture also contribute.”

Promoting competitiveness

According to the OECD, addressing domestic structural bottlenecks is key to supporting India’s competitiveness. Efforts to improve the quality and reliability of electricity provision, roads and ports should continue, it said.

“Further modernising labour regulations will allow firms to grow and exploit economies of scale. India has improved the ease of doing business and is loosening restrictions on foreign investment. Extending success stories from states and special economic zones to the rest of the country would promote further India’s competitiveness and attract investors.”

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