3.

DEVELOPMENTS IN INDIVIDUAL OECD AND SELECTED NON-MEMBER ECONOMIES

INDIA
With projected annual growth of 7.5% in 2017-18, India will remain the fastest
growing G20 economy. Private consumption will be supported by the hike in public
wages and pensions and by higher agricultural production, on the back of a return to
normal rain fall. Private investment will revive gradually as excess capacity in some
sectors diminishes, infrastructure projects mature, corporates deleverage, banks clean
their loan portfolios, and the Goods and Service Tax (GST) is implemented.
Despite commendable fiscal consolidation efforts at the central government level,
the combined debt of states and central government remains high compared with other
emerging economies. Inflation expectations are adjusting down only slowly. Overall
there is little room for accommodative policies, although some monetary impulse is still
to come, as recent cuts in policy rates are yet to be reflected fully in lower lending rates.
Repairing public banks balance sheets and improving their governance would support
the revival in investment. Creating more and better jobs will require policies to improve
the ease of doing business further, in particular faster and more predictable land
acquisition, and upgrading social and physical infrastructure.
Despite the high public deficit compared with other emerging economies, there is
room to make public finance more growth-friendly and inclusive. The ongoing landmark
GST and subsidy reforms are promising. The government plan to cut the corporate
income tax rate while broadening the base is also welcome. More revenue could be
raised from the personal income tax, and its redistributive impact enhanced, to finance
higher spending on health, education, housing, transport and water infrastructure and
make growth more inclusive.

Steady private and public consumption growth

India has become the fastest-growing G20 economy, with growth rates hovering
around 7.5%. Private consumption in urban areas is buoyed by an increase in public wages

India

Investment has been weak Some signs of a rebound in exports

Y-o-y % changes % of managers Y-o-y % changes
30 55 30
Gross fixed capital formation, volume
Expected increase in capacity utilisation
25 50 25

20
20 45
15
15 40
10
10 35
5
5 30
0

0 25 -5

-5 20 -10
2010 2011 2012 2013 2014 2015 2016 2010 2011 2012 2013 2014 2015

1. Percentage of managers interviewed expecting an increase in capacity utilisation.

Source: Central Statistical Office; and Reserve Bank of India.
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3. DEVELOPMENTS IN INDIVIDUAL OECD AND SELECTED NON-MEMBER ECONOMIES

India: Demand, output and prices

2013 2014 2015 2016 2017 2018

Current prices Percentage changes, volume

INR trillion (2012/2013 prices)

GDP at market prices 112.7 7.2 7.6 7.4 7.6 7.7

Private consumption 65.1 6.2 7.4 7.6 8.1 7.5
Government consumption 11.5 12.8 2.2 8.3 4.9 6.8
Gross fixed capital formation 35.6 4.9 3.9 0.7 4.7 7.3
Final domestic demand 112.3 6.5 5.8 5.7 6.8 7.4
Stockbuilding1 3.8 0.1 0.0 0.0 0.0 0.0
Total domestic demand 116.1 6.9 8.0 5.9 7.7 7.9
Exports of goods and services 28.5 1.7 -5.2 4.5 4.6 5.2
Imports of goods and services 31.9 0.8 -2.8 -2.3 5.4 6.3
Net exports1 - 3.4 0.2 -0.5 1.5 -0.2 -0.2
Memorandum items
GDP deflator _ 3.3 1.1 3.8 4.4 4.3
Consumer price index _ 5.9 4.9 5.2 5.2 4.6
Wholesale price index (WPI)2 _ 2.0 -2.5 3.2 4.0 4.2
General government financial balance3,4 _ -6.5 -7.2 -7.0 -6.6 -6.4
Current account balance3 _ -1.3 -1.1 -0.8 -0.9 -0.9
Note: Data refer to fiscal years starting in April.
1. Contributions to changes in real GDP, actual amount in the first column.
2. All commodities index.
3. As a percentage of GDP.
4. Gross fiscal balance for central and state governments.
Source: OECD Economic Outlook 100 database.

1 2 http://dx.doi.org/10.1787/888933439263

and pensions by over 20% in 2016 and 2017. The return to normal weather conditions, after
two years of a poor monsoon, is raising agricultural production and consumption in rural
areas. Exports bounced back early in 2016 and export orders are growing. However, private
investment has remained weak, dragged down by low capacity utilisation and the weak

India
Inflation has hovered around 5% Public deficits and debt remain high
Y-o-y % change % of GDP % of GDP
18 12 100
CPI Central governments fiscal deficit
16 Food and beverages States fiscal deficit
10 Public debt 90
14

12 8 80

10
6 70
8

6 4 60

4
2 50
2

0 0 40
2012 2013 2014 2015 2016 2007-08 09-10 11-12 13-14 15-16
08-09 10-11 12-13 14-15
1. Data for the fiscal year 2015-16 are provisional.
Source: Reserve Bank of India; and Controller General of Accounts.
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 3. DEVELOPMENTS IN INDIVIDUAL OECD AND SELECTED NON-MEMBER ECONOMIES

financial position of some corporations. Job creation in the organised sector has also
remained subdued.
Robust growth has been accompanied by a decline in inflation and the current account
deficit. The disinflation process has been supported by the change in the monetary policy
framework aimed at anchoring inflation expectations, the governments active
management of food stocks to minimise spikes in food prices and lower commodity prices.
The decline in merchandise imports, driven by weak (import-intensive) business
investment, and lower gold imports have kept the current account deficit to below 1.5%
of GDP.

Little room for expansionary macroeconomic policies but a role to play for structural
reforms
The combined deficit and debt of the central government and states are high
compared with other emerging market economies. The ongoing subsidy reform improves
the targeting and effectiveness of social programmes and should be extended to other
products, in particular food, fertiliser, water and electricity. The increase in public wages
and pensions, combined with the need to recapitalise public banks, will leave little room in
this and next years budgets for higher public investment. In the longer term, the
government should aim to raise public spending on education, health, water, energy and
transport infrastructure to improve access for all to core basic services and to reduce
bottlenecks to investment. Higher revenue from property and the personal income tax
could finance additional spending.
The Reserve Bank of India has cut policy rates by 175 basis points since December
2014. Going forward, there is little room for significant further cuts since the rise in public
sector wages, still high inflation expectations and firmer commodity prices will make
reaching the 4% mid-range inflation target challenging. However, even in the absence of
more cuts, some monetary impulse is still to come as monetary policy transmission has
been slow and incomplete so far.
The governments success in passing key structural reforms is boosting growth
prospects but effective implementation is key. The Goods and Services Tax (GST) should
replace a myriad of consumption and sales taxes. By reducing tax cascading, the GST will
boost competitiveness, investment and economic activity in the medium term. The
government aims to implement the GST from April 2017, which is ambitious given the
number of key parameters still to be agreed upon, the still complex legislative process
involved and the required IT infrastructure to be developed. However, the projections
assume that this objective will be met.
The new Bankruptcy Code should facilitate time-bound closure of businesses and the
reallocation of resources to more productive firms and prevent the build-up of non-
performing loans. Implementing the Code and reducing delays will require improving
judicial institutions. Recent cuts in administrative requirements for hiring are most
welcome. They should be accompanied by efforts to modernise labour laws, including at
the state level, to boost quality job creation. Recent efforts to raise power generation
capacity, including the focus on renewable energy, are promising. Adjusting utility prices to
ensure they cover costs would make supply more responsive to demand conditions.

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3. DEVELOPMENTS IN INDIVIDUAL OECD AND SELECTED NON-MEMBER ECONOMIES

Growth is projected to remain strong and investment to revive

Buoyant private consumption will revive investment as excess capacity diminishes,
deleveraging by corporates and banks continues and infrastructure projects mature. The
implementation of the GST from April 2017 should lower the price of capital goods and lift
investment although it may have short-term adverse effects on prices and demand for
services which will likely be subject to a higher rate of tax. The revival of (import-intensive)
corporate investment and lower remittance flows will weigh on the current account deficit.
Robust FDI inflows should, however, mitigate Indias external vulnerability.
Further structural reform is a clear upside risk for growth. Some states have taken the
lead in reforming land and labour market regulations but it is still unclear whether others
will follow suit. There are also downside risks to the projections. Rolling out the GST later
than projected may delay the investment recovery. Slower efforts to clean up banks
balance sheets and to recapitalise public banks would raise uncertainties and hurt
investment. An increase in commodity prices would raise inflation, dampen private
consumption and weigh on both the current account and fiscal deficits. Weak demand in
major trading partners will affect exporting sectors. Geopolitical risks could escalate,
affecting business sentiment and creating pressures on public (military) spending.

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