OECD Economic Outlook May 2019, Country Notes: India

150 

India Economic growth will regain strength and approach 7½ per cent by 2020. The new income scheme for small farmers will support rural consumption. Investment growth will accelerate as capacity utilisation rises, interest rates decline, and geopolitical tensions and political uncertainty are assumed to wane. Lower oil prices and the recent appreciation of the rupee will reduce pressures on inflation and the current account.

Monetary policy could be loosened somewhat as headline inflation remains well below target and inflation expectations are adjusting down. Rising public sector borrowing requirements reflect the implementation of new welfare schemes, sluggish tax revenue, and growing financial needs of public enterprises and banks.

Reducing the high public debt-to-GDP ratio would require improving the collection of the Goods and Services Tax and broadening the personal income tax base. Ensuring a swift resolution of bankruptcy processes would help contain non-performing loans and boost productivity by promoting the reallocation of resources to more productive firms and sectors. Improving the quality and timeliness of economic data, in particular on employment and public finances, would help in designing better policies.

Private activity weakens as spending plans are postponed India has the fastest growth among G20 economies. Export growth has held up well, with export orders growing steadily. The Goods and Services Tax (GST) administration has continued to improve, enabling exporters to get faster tax refunds, and ongoing efforts to improve trade infrastructure, logistics and processes are starting to pay off. Investment has continued to grow robustly, supported by hefty public sector projects. In contrast, private investment, in particular in manufacturing, has been affected by uncertainty ahead of the parliamentary elections, combined with persistent difficulties in financing projects, acquiring land and getting all the necessary clearances. Rural consumption, two-wheeler and tractor sales have slowed, driven by subdued agricultural prices and wages.

India 1 Investment and export growth remain solid

Headline inflation is well below target

Y-o-y % changes 25 Investment

Food & beverages

Exports

Core¹

Y-o-y % changes 18

Headline

16

20

14 15

12 10

10 0

0

8

5

6 4

0

2 -5 -10

0 2012

2013

2014

2015

2016

2017

2018

2012

2013

2014

2015

2016

2017

2018

-2

1. Core inflation excludes food, beverages and fuel.

Source: OECD Economic Outlook 105 database; and Central Statistics Office.

StatLink 2 https://doi.org/10.1787/888933934489

OECD ECONOMIC OUTLOOK, VOLUME 2019 ISSUE 1: PRELIMINARY VERSION © OECD 2019

ď ź 151

India: Demand, output and prices 2015

2016

Current prices INR trillion

India GDP at market prices Private consumption Government consumption Gross fixed capital formation Final domestic demand Stockbuilding1

137.7 81.3 14.4 39.6 135.2 5.7 140.9 27.3 30.4 - 3.2

Total domestic demand Exports of goods and services Imports of goods and services Net exports1 Memorandum items GDP deflator Consumer price index Wholesale price index2 General government financial balance3 (% of GDP)

_ _ _ _ _

Current account balance (% of GDP)

2017

2018

2019

2020

Percentage changes, volume (2012/2013 prices)

8.2 8.2 5.8 8.3 8.0 -1.0 8.0 5.1 4.4 0.1

7.2 7.4 15.0 9.3 8.8 0.2 9.9 4.7 17.6 -2.8

7.0 8.0 8.2 10.5 8.8 0.1 8.5 11.9 17.5 -1.7

7.2 8.2 9.6 7.7 8.2 0.0 7.3 6.2 6.8 -0.5

7.4 7.5 6.2 9.9 8.0 0.0 8.0 6.3 9.0 -1.0

3.1 4.5 1.7 -6.9 -0.6

3.8 3.6 2.9 -6.4 -1.8

4.2 3.4 4.3 -6.3 -2.4

4.1 3.2 3.1 -6.2 -2.4

4.3 4.2 4.3 -6.0 -2.7

Note: Data refer to fiscal years starting in April.

1. Contributions to changes in real GDP, actual amount in the first column.

2. WPI, all commodities index.

3. Gross fiscal balance for central and state governments.

Source: OECD Economic Outlook 105 database.

StatLink 2 https://doi.org/10.1787/888933935458

India 2 The share of stressed loans is declining

Credit is rising sharply

% of gross advances 15

Y-o-y % changes 20

Restructured loans

Nominal

Gross non-performing loans

Real

12

15

9

10 0

0

6

5

3

0

0

Mar 2012

Mar 2013

Mar 2014

Mar 2015

Mar 2016

Mar 2017

Mar 2018

Sep 2018

2012

2013

2014

2015

2016

2017

2018

-5

Source: Reserve Bank of India.

StatLink 2 https://doi.org/10.1787/888933934508

OECD ECONOMIC OUTLOOK, VOLUME 2019 ISSUE 1: PRELIMINARY VERSION Š OECD 2019

152 

Structural reforms are needed to sustain job creation and incomes Fiscal policy is supporting consumption demand. While revenue from the corporate income tax is buoyant, thanks to measures to improve compliance, revenue from the GST and the personal income tax is below target. Adding to temporary spending pressures ahead of the elections, various welfare schemes targeting the poor are being implemented. These include a new hospital insurance scheme, the creation of primary health care centres, retirement pensions for workers of the unorganised/informal sector, and an income support scheme for small land-holding farmers. These measures will contribute to reducing poverty and improving access to quality public services. Fiscal space for most states is limited. Given the relatively high public debt and to avoid crowding-out private investment, additional spending should be partly financed by winding down ineffective spending programmes, such as fertiliser subsidies which benefit more large farms and contribute to soil and water degradation. Additional tax revenue could also be raised by limiting the use of exemptions and reduced rates for the GST and by removing tax rebates in the personal income tax system that mostly benefit the rich.

With inflation well below the mid-band point target, inflation expectations adjusting down, and existing slack, there is room for a cut in policy rates. With banks’ health gradually improving, as evidenced by the recent decline in stressed assets, lending rates should adjust more swiftly, and support the revival of business investment. To avoid a new build-up of non-performing loans, public banks’ governance should be improved to ensure sound portfolio decisions. Implementing strict norms for defaulting borrowers and time-bound resolution of insolvency procedures are also key to promoting sound debtors’ behaviour.

Removing structural bottlenecks to the manufacturing sector is key to promoting job creation in more productive and better-paid activities. Infrastructure has improved, in particular in energy supply and roads.

Replacing the plethora of state and cascading sales taxes by the GST has made India a single market and exports more competitive on foreign markets, as taxes on inputs can be deducted. To help firms grow and become more productive, product and labour market regulations, together with administrative processes, should be streamlined and modernised further. Experiences in some states look promising. However, the lack of comprehensive and timely data, including on employment, makes it difficult to assess the benefits of reforms. Manufacturing output, exports and jobs would also benefit from a reduction in tariff and non-tariff barriers to trade. The process of land acquisition and administrative clearances should be made easier and predictable to facilitate greenfield investment.

Growth is projected to rise Accommodative monetary policy and additional fiscal support will boost economic growth, despite subdued demand from partner countries. Rural consumption will revive, as the new income support scheme for small farmers is being fully implemented. Subdued inflation is also contributing to boost households’ purchasing power. Private investment will accelerate once uncertainty related to the election wanes, capacity utilisation rises, and financing conditions improve. Exports would suffer only marginally from the planned withdrawal of US preferential duties, as the products concerned account for only a small share of India’s export basket. Conditional on a good monsoon, food inflation will remain moderate, thanks to better supply and distribution networks. However, rising oil prices are a risk to inflation. Preserving the Reserve Bank’s credibility in targeting inflation remains key to anchor inflation expectations. The exacerbation of geopolitical tensions and rising oil prices would weigh on economic activity.

OECD ECONOMIC OUTLOOK, VOLUME 2019 ISSUE 1: PRELIMINARY VERSION © OECD 2019