India’s economy is coming out of its worst slowdown in a quarter-century, but implementation of new reforms will be key to putting it on a strong and sustainable growth path of 8 per cent, the OECD said on Wednesday.
India’s growth rate, which has languished at below five per cent for the last two fiscal due to high interest rates, stubborn inflation and weak investment, will grow by 6.6 per cent in 2015-16, up from its last forecast of 5.7 per cent growth in May, the Paris-based think-tank said.
The economy is to expand by 5.4 per cent this fiscal, OECD said adding India was recovering faster than other economies which faced slowing growth.
GDP growth would edge higher to 6.8 per cent in 2016-17.
But to achieve 8 per cent growth, India will have to switch subsidy spending to social and physical infrastructure, bring in tax reforms, clean up the banking system to free up funds for infrastructure and reduce structural barriers for job creation by bringing in labour reforms, it said.
OECD pushed for early implementation of the goods and services tax (GST) to improve public finances and also stressed on the need for India to improve the quality of its fiscal consolidation both by the Centre and the states.
“The Indian economy is showing signs of a turnaround. New reforms, some of which are included in the package presented by Prime Minister Narendra Modi, need to be implemented to put the country on a path to strong, sustainable and inclusive growth,” said the OECD Economic Survey of India released.
“Key reforms in the business environment, to labour markets and to infrastructure will bring economic growth back to the higher levels seen in the recent past, create good jobs and improve well-being for all Indians,” she added.
Predicting inflation to fall to 5.4 per cent in next fiscal and nudge higher to 5.6 per cent in the following year, the OECD Survey stressed on the need for India to adopt a flexible inflation targeting framework.
Inflation in 2014-15 was pegged at 6.9 per cent.
The survey released by OECD Chief Economist Catherine L Mann, found India slowed more than many other countries since 2011, but is now recovering faster.
“Structural reforms would raise India’s economic growth. In their absence, however, growth will remain below the 8 per cent rate achieved during the previous decade,” it said.
For the current fiscal 2014-15, OCED projects an economic growth of 5.4 per cent for India.
“The Indian economy is coming out of some tough times in recent years, with a steep decline in growth, stubbornly high inflation and a wide current account deficit, but the situation is now improving,” said Mann.
OECD said investment and exports are driving the rebound in India, but growth will be sustained at a stronger pace if further steps are taken.
“In the near term, stable and lower inflation and smaller deficits are needed,” it said.
It said structural bottlenecks have taken a toll on economic growth and on the manufacturing sector in particular.
“Structural improvements to the business climate are crucial for medium term growth, and in the longer-term, health improvements and increased female participation in the labour market will sustain strong and inclusive growth.”
It said infrastructure bottlenecks, cumbersome business environment; complex and distorting taxes, inadequate education and training and outdated labour laws are increasingly impending growth and job creation.
OCED said India should formally adopt a flexible inflation-targeting framework, which will help contain inflation expectations and provide support for saving and investment.