India must push more reforms for 10% growth

India must push more reforms for 10% growth

New Delhi: In its first economic survey on India, the Organization for Economic Cooperation and Development (OECD) said labour law reforms, resumption of privatization of public sector undertakings and easing of foreign investment norms in retail and insurance were essential if the country was to achieve 10% growth by 2011.

It also warned that India’s infrastructure was “seriously overstretched" and could derail the current growth trajectory.

The OECD’s 30 member countries are the richest economies, and include Japan and Korea from Asia.

Angel Gurria, OECD secretary general, who released the report at a seminar hosted jointly by OECD and Icrier, an independent economic think tank, said: “Our members have sent me with the mandate to engage more closely with India. It is up to India to decide if it wants to become a member at some later stage."

According to the survey, the special economic zones (SEZs), which allow for special provisions, will be able to effectively demonstrate the advantage of flexible labour laws.

To improve the quality of human capital, the report suggested that India should raise skill development and the quality of education by providing stronger incentives for attendance. The report, based on the experience of member countries of the OECD, suggests decentralization and introduction of vouchers for private education.

However, the survey’s central focus was on the need to revamp India’s still inflexible labour laws.

“If I was asked to suggest one thing, I would suggest labour market reforms," said Gurria. OECD’s own employment surveys in India indicate that laws governing regular employment contracts in India are stricter than those in Brazil, Chile, China in all but two OECD countries. They include restrictions, which require government approval to lay off a worker of a manufacturing plant employing more than a hundred people. This is why organized sector jobs shrunk 1% per year over 1997-2004, while the unorganised sector grew jobs at 8% a year, the report said.

Concurring, Rajiv Kumar, director, Icrier, said: “This is an idea whose time has come. If you go even to the outskirts of Delhi, the poverty and the poor infrastructure hits you in the face. How can we absorb all these unskilled people if we don’t allow our manufacturing industries to expand?"

There was quick political reaction to the study with major political parties, increasingly in a pre-election mode, trying to interpret the findings and recommendations to suit their positions.

Said G. Devarajan, national secretary of the All India Forward Bloc, a Left constituent: “This spectacular growth has failed to touch the majority of Indians. We reject most of what the OECD has said. By following its prescriptions, India would end up abandoning the concept of a welfare state altogether."

Santosh Bagrodia, Rajya Sabha member of the ruling Congress party from Rajasthan and chairman of the parliamentary standing committee on industry, said: “I don’t believe labour reforms is so serious an issue. We already have freedom of operations in most sectors."

Still, in a pointed reference to the Left’s reluctance to sign-off on some of the reforms suggested by the OECD, he added: “We can grow at faster than 10% if we keep politics out of economic development," Bagrodia added.

Rajiv Pratap Rudy, BJP spokesperson, said, “(The survey had) echoed our concerns. The Left parties have stalled every progressive move and the Prime Minister has admitted that he has been a failed reformer."

The survey also finds a correlation, using the examples of Gujarat, Andhra Pradesh and Uttar Pradesh, between labour reforms and employment growth. One way to avoid major legislative changes, which face major political opposition, could be to balance easier dismissals “by an increase in the extent of accrual-based severance payments," it suggests.

Alternatively, the government could go in for consolidation of the 46 Central and about 200 state labour laws. These reforms, the report argues, would allow small companies to grow bigger, enhance job growth and raise real wages, thus providing an alternative to poorly paid agricultural workers.

Addressing the seminar, finance secretary D. Subba Rao, maintained that the biggest challenge before policy planners was to improve governance and delivery of public services. “The growth potential is there. But moving along that trajectory is not inevitable," he added.

Richard Herd, OECD chief economist and lead writer of the survey, said: “We believe the SEZs are a major reason for a sharp rise in foreign investment into India last year and this year. That some of the big global names have moved into these zones show they are hoping to get much more (gain)."