Presentation of the 2017 OECD Economic Report of India

2017 OECD ECONOMIC SURVEY OF INDIA Strong reforms are boosting inclusive growth Delhi, 28 February 2017

http://www.oecd.org/eco/surveys/economic-survey-india.htm http://oe.cd/1No

@OECDeconomy @OECD

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 2

Growth has been very strong Average annualised GDP growth rate between 2014 and 2016Q3

% 8 7 6 5

4 3 2 1

0 -1 -2

Brazil

Russia

South Africa

Chile

Mexico

Source: CSO; and OECD Economic Outlook 100 database.

Colombia

Turkey

Indonesia

China

India

3

Inflation is under control Consumer price index

Y-o-y % change

14 12 10 8 6 4 2 0

2012

Source: Reserve Bank of India.

2013

2014

2015

2016

4

The current account deficit has narrowed Current account balance % of GDP

% of GDP

0

0

-1

-1

-2

-2

-3

-3

-4

-4

-5

-5

-6

-6

-7

-7

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Source: Reserve Bank of India.

5

Exposure to external risks is relatively low External liabilities 2016Q3 or latest available

% of GDP 160

Foreign-currency

140

Total

120 100 80 60 40 20 0

India

China

Saudi Arabia

Russia

Indonesia

Turkey

Brazil

Mexico

South Africa

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.

6

Structural reforms are boosting growth Key reforms approved

Key ongoing reforms

Goods and Services Tax (GST)

Competitive and co-operative federalism

Financing system for the states

Subsidies (oil, food and fertilisers)

FDI deregulation

Financial inclusion

Bankruptcy laws

Corporate income tax

Inflation targeting

Tax evasion and compliance

Budget making process

Ease of doing business

Banks Labour regulations Source: OECD compilation.

7

India has been a top reformer FDI regulatory restrictiveness index, changes over the period 2011-16 0,04 (More restrictive)

0,02 0 -0,02

(Less restrictive)

Indonesia

Argentina

Russia

Germany

Colombia

Greece

Ireland

France

United Kingdom

Egypt

Morocco

United States

Brazil

Tunisia

Japan

Italy

South Africa

Chile

Costa Rica

OECD

Korea

Mexico

Turkey

Malaysia

China

-0,06

India

-0,04

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.

8

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 villages electrified in 2015-16 (out of the 18 452 unelectrified villages) 9

It is crucial to revive investment Investment to GDP ratio % 38 36

34 32 30 28

26 24 22 20

2007

2008

2009

Note: Gross fixed capital formation.

Source: Central Statistical Organisation.

2010

2011

2012

2013

2014

2015

2016

10

Non-performing loans are high Non-performing loans September 2016 or latest data available

% of gross advances 12 10 8 6

4

Source: Reserve Bank of India and IMF.

Russia

India

Brazil

South Africa

Turkey

Colombia

Indonesia

Philippines

Chile

Argentina

China

0

Malaysia

2

11

More progress on FDI is needed FDI regulatory restrictiveness index, 2016 or latest (higher scores indicate greater restrictiveness) 0,5 0,4 0,3 0,2

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.

Germany

Colombia

Greece

Argentina

Ireland

France

Costa Rica

Japan

Italy

South Africa

Chile

Turkey

United Kingdom

Egypt

Morocco

OECD

United States

Brazil

Korea

Russia

Mexico

Tunisia

Malaysia

India

Indonesia

0

China

0,1

12

0

Mizoram Megahlaya Kerala Nagaland Puducherry Daman & Diu Lakshadweep Delhi Goa Sikkim Manipur A & N Islands Chandigarh Assam Tripura Maharashtra Himachal Pradesh Tamil Nadu Uttarakhand Punjab Haryana Gujarat Karnataka Arunachal Pradesh Dadra & Nagar Haveli West Bengal Chhattisgarh India Jammu & Kashmir Odisha Madhya Pradesh Jharkhand Andhra Pradesh Uttar Pradesh Rajasthan Bihar

More social infrastructure is needed in some regions Illiteracy rate, persons of 15 years and above

% 45

40

35

30

25

20

15

10

5

Source: NSS Report No. 566: Status of Education and Vocational Training in India; and Census of India.

Data are for 2011-12.

13

100 90 80 70 60 50 40 30 20 10 0 Bihar Uttar Pradesh Assam Jharkhand Orissa West Bengal Meghalaya India Arunachal Pradesh Rajasthan Madhya Pradesh Tripura Manipur Mizoram Chhattisgarh Maharashtra Nagaland A&N Islands Jammu & Kashmir Uttarakhand Gujarat Karnataka Haryana Andhra Pradesh Sikkim Tamil Nadu Dadra and Nagar Haveli Kerala Punjab Goa Puducherry Himachal Pradesh Chandigarh Delhi Daman and Diu Lakshadweep

Rural areas lack access to core infrastructure Households whose main source of lighting is electricity

% total

Source: Census of India 2011.

14

Public debt is high Public debt-to-GDP ratio, 2015 or latest year

% 100 90 80

70 60

50 40 30 20

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.

OECD

India

Brazil

Mexico

South Africa

China

Turkey

Indonesia

0

Chile

10

15

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 infrastructure

spending

on

physical

and

social

✓ 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 16

Tax reforms to make growth more inclusive

GST is a landmark reform but India needs to raise more revenue Tax revenue, 2015 or latest % of GDP 40 35 30 25

20 15 10

Source: OECD Economic Outlook 100 database; OECD Revenue Statistics database; World Bank; Reserve Bank of India; Central Statistical Organisation.

OECD

Brazil

Turkey

South Africa

Colombia

Chile

Mexico

China

India

Russia

0

Indonesia

5

18

The personal income tax raises little revenue

% of GDP

Revenues on income tax 2015 or latest year available

16

14 12 10 8 6

4 0

China India Indonesia Slovak Republic Czech Republic Russia Brazil Turkey Korea Poland Hungary Slovenia Estonia Latvia Japan Greece Israel Spain Portugal Ireland Netherlands France Luxembourg OECD United Kingdom South Africa Germany Switzerland Norway United States Austria Australia Italy Canada Sweden Belgium Finland New Zealand Iceland

2

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.

19

Combined corporate tax rates are high

India

United States

Argentina

Japan

France

Brazil

Indonesia

South Africa

Mexico

Korea

Germany

Canada

China

Australia

Turkey

Italy

Russia

Saudi Arabia

Combined statutory tax rates on international dividend payments in G20 countries, 2016

United Kingdom

% 50 45 40 35 30 25 20 15 10 5 0

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).

20

Reducing the corporate tax rate would attract FDI FDI net inflows in G20 countries, 2015 % of GDP 3

2

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.

Mexico

Canada

Turkey

China

India

United States

Indonesia

Australia

France

United Kingdom

Saudi Arabia

Italy

Russia

Argentina

Brazil

South Africa

Germany

Korea

0

Japan

1

21

More resources for the tax administration would raise tax compliance Citizens per tax administration employee 35 000 30 000

25 000 20 000

15 000 10 000

Note: Data for India relates to the CBDT. Source: OECD (2015), Tax Administration 2013: Comparative Information on OECD and other advanced and emerging economies.

India

Brazil

Indonesia

Non-OECD

South Africa

OECD

0

Russia

5 000

22

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.

23

Regional development

Regional disparities are large Regional variation in GDP per capita as a % of national average, 2013 (TL2) % 700 600

Minimum

Country average = 100

Maximum

500 400

300 200

ZAF CHN BRA IND COL IDN RUS

0

NOR IRL JPN SVN KOR CHE AUT DNK FIN GRC ESP PRT EST SWE NLD ITA TUR AUS NZL POL HUN LVA DEU FRA GBR BEL CAN CZE SVK CHL USA MEX

100

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.

25

There is little evidence that poor states are catching up Weighted and unweighted Ginis across states over time 0,3 Unweighted Gini coefficient

Weighted Gini coefficient

0,28

0,26

0,24

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.

2013-14

2012-13

2011-12

2010-11

2009-10

2008-09

2007-08

2006-07

2005-06

2004-05

2003-04

2002-03

2001-02

2000-01

0,2

1999-2000

0,22

26

Rural poverty is very high in some states

% 70

Rural poverty rate across states, with poverty line measured in terms of per capita consumption expenditure

60 50 40

30 20

0

Lakshwadeep Daman and Diu A&N Islands Chandigarh Goa Punjab Himachal…

Kerala Sikkim Andhra Pradesh Jammu &…

Uttarakhand Haryana Meghalaya Delhi Tamil Nadu Rajasthan Tripura Puducherry Nagaland Gujarat West Bengal Maharashtra Karnataka All India Uttar Pradesh Assam Bihar Mizoram Orissa Madhya Pradesh Manipur Arunachal…

Jharkhand Chhattisgarh Dadra &…

10

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.

27

Productivity differences across states contribute to regional inequalities Labour productivity as a ratio of all India productivity 4,0

3,5

States

Union territories

3,0

2,5 2,0 1,5 1,0

0,0

Bihar Uttar P. Manipur Assam Madhya P. Andhra P. Jharkhand J&K Chattisgarh Orissa Tripura Meghalaya Rajasthan West Bengal Mizoram Nagaland India Arunachal P. Karnataka Kerala Tamil Nadu Punjab Uttarakhand Himachal P. Gujarat Maharashtra Haryana Puducherry A&N Islands Delhi Chandigarh Goa

0,5

Note: Labour productivity is measured as the ratio of value added (GDP) per worker.

Source: CSO; and OECD Economic Outlook 100 database.

28

Agriculture still employs many Share of agriculture in total employment 2014 or latest year available

% 60 50 40 30 20 10 0

South Africa

OECD

Russia

Mexico

Brazil

Turkey

China

Indonesia

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.

India 29

Agriculture productivity is low Productivity in agriculture 2014 or latest year available

1990 PPP USD per employee 60 000 50 000

40 000 30 000 20 000 10 000 0

India

China

Indonesia

Mexico

Brazil

Turkey

South Africa

Russia

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.

OECD 30

States’ ability to tailor public policies is high Spending autonomy The higher the indicator, the higher the level of fiscal autonomy of sub-national government 0,7 0,6 0,5 0,4

0,3 0,2

India

Germany

Belgium

United States

Mexico

Australia

Brazil

Switzerland

Canada

Russia

Spain

South Africa

Austria

Argentina

0

Italy

0,1

Source: CSO; and OECD Economic Outlook 100 database.

31

Urban population will increase fast in India Average annual increase in urban population Millions of persons 12 10 8 6 4

Note: Forecasted data are shown in red.

Source: United Nations, Department of Economic and Social Affairs, Population Division (2014).

2010 - 2050

2000 - 2010

1990 - 2000

1980 - 1990

1970 - 1980

1960 - 1970

0

1950 - 1960

2

32

Urbanisation gains are not fully exploited Productivity in the organised/formal manufacturing sector in cities Rupees 900 000 850 000 800 000 750 000 700 000 650 000 600 000 550 000 500 000

Less than 50.000

50.000 to 250.000

Over 250.000 to 1 million

Over 1 million City population

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.

33

Local air pollution is high Average annual concentration of fine particulates (PM2.5) in selected cities µg/m³ 250 Patna Delhi

200

150

100

50

Beijing

Moscow

Mexico city

Bangalore Bruxelles Mumbai Wien Hyderabad Paris Shanghai Berlin Johannesburg Rio de Janeiro Istanbul Amsterdam Milan Barcelona Santiago London Warsaw Budapest

National guideline (40 µg/m³ annual mean) WHO guideline (10 µg/m³ annual mean)

Los Angeles

Montreal

0 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.

34

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 35

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