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OECD Economic Surveys: India 2017 (Volume 2017) PDF

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OECD Economic Surveys O E C INDIA D E c o n OECD Economic Surveys are periodic reviews of member and non-member economies. Reviews of member o OECD Economic Surveys m and some non-member economies are on a two-year cycle; other selected non-member economies ic are also reviewed from time to time. Each Economic Survey provides a comprehensive analysis of economic S u developments, with chapters covering key economic challenges and policy recommendations addressing r v these challenges. e INDIA y s India is the fastest-growing G20 economy, thanks to ambitious structural reforms and low commodity prices. Deregulation and improvement in the ease of doing business have boosted foreign investment. However, investment is still held back by the relatively high corporate income tax rates, slow land acquisition processes, stringent regulations, weak corporate balance sheets, high non-performing loans and infrastructure bottlenecks. Quality job creation has been low, due to complex labour laws. A comprehensive tax reform would promote inclusive growth: implementation of the Goods and Services Tax would support competitiveness, investment and economic growth as will reducing the corporate income tax rate and broadening the base. Property and personal income taxes could be reformed to raise more revenue, promote social justice and empower V FEBRUARY 2017 o sub-national governments. Ensuring clarity and certainty in tax legislation and employing more skilled lu m tax offi cers would strengthen the tax administration. Spatial disparities in living standards are large. e India is reforming relations across levels of government to empower the states and make policies more 2 0 responsive to local conditions. Some states have taken the lead in improving the ease of doing business 1 7 and now enjoy higher productivity and income. In rural areas, poverty rates are high and access to core public /4 services is often poor. Farm productivity is low owing to small and fragmented land holdings, poor input management, and ineffi cient market conditions. In urban areas, agglomeration benefi ts are quickly reduced by congestion costs, in particular air pollution and long commuting time. SPECIAL FEATURES: TAX REFORM; REGIONAL DEVELOPMENT IN Consult this publication on line at http://dx.doi.org/10.1787/eco_surveys-ind-2017-en. D This work is published on the OECD iLibrary, which gathers all OECD books, periodicals and statistical databases. IA Visit www.oecd-ilibrary.org for more information. Volume 2017/4 ISSN 0376-6438 2017 SUBSCRIPTION February 2017 (18 ISSUES) F e ISBN 978-92-64-26934-7 9HSTCQE*cgjdeh+ b 10 2017 04 1 P ru a r y 2 0 1 7 OECD Economic Surveys: India 2017 This document and any map included herein are without prejudice tothe status of or sovereigntyoveranyterritory,tothedelimitationofinternationalfrontiersandboundaries andtothenameofanyterritory,cityorarea. Pleasecitethispublicationas: OECD(2017),OECDEconomicSurveys:India2017,OECDPublishing,Paris. http://dx.doi.org/10.1787/eco_surveys-ind-2017-en ISBN978-92-64-26934-7(print) ISBN978-92-64-26935-4(PDF) ISBN978-92-64-26936-1(epub) Series:OECDEconomicSurveys ISSN0376-6438(print) ISSN1609-7513(online) OECDEconomicSurveys:India ISSN1999-088X(print) ISSN1999-0898(online) Revisedversion,March2017. Detailsofrevisionsavailableat:www.oecd.org/about/publishing/Corrigendum-EcoSurveyIndia2017.pdf. ThestatisticaldataforIsraelaresuppliedbyandundertheresponsibilityoftherelevantIsraeliauthorities.Theuse ofsuchdatabytheOECDiswithoutprejudicetothestatusoftheGolanHeights,EastJerusalemandIsraeli settlementsintheWestBankunderthetermsofinternationallaw. Photocredits:Cover©iStockphoto.com/BartoszHadyniak. CorrigendatoOECDpublicationsmaybefoundonlineat:www.oecd.org/about/publishing/corrigenda.htm. ©OECD2017 Youcancopy,downloadorprintOECDcontentforyourownuse,andyoucanincludeexcerptsfromOECDpublications,databasesand multimediaproductsinyourowndocuments,presentations,blogs,websitesandteachingmaterials,providedthatsuitable acknowledgementofOECDassourceandcopyrightownerisgiven.Allrequestsforpublicorcommercialuseandtranslationrightsshould besubmittedtorights@oecd.org.Requestsforpermissiontophotocopyportionsofthismaterialforpublicorcommercialuseshallbe addresseddirectlytotheCopyrightClearanceCenter(CCC)[email protected]çaisd’exploitationdudroitdecopie(CFC) [email protected]. TABLEOFCONTENTS Table of contents BasicstatisticsofIndia...................................................... 9 Acronyms ................................................................. 11 Executivesummary......................................................... 13 Assessmentandrecommendations........................................... 17 Stronggrowthhasraisedincomesandreducedpovertybutinequalitiesremain.... 18 Indiaisgrowingfast,butprivateinvestmentisweak ........................ 21 Monetary,financialandfiscalpoliciestosetthefoundationforstrongergrowth.... 27 Acomprehensivetaxreformtopromoteinclusivegrowth .................... 38 Promotingstrongerandmoreinclusivegrowth.............................. 42 Achievingstrongandbalancedregionaldevelopment........................ 59 Bibliography............................................................ 65 Annex.Follow-uptopreviousOECDpolicyrecommendations .................... 69 Thematic chapters Chapter1.Makingincomeandpropertytaxesmoregrowth-friendlyandredistributive 75 Maincharacteristicsofthetaxsystem ..................................... 76 Thepersonalincometaxcouldraisemorerevenueandredistributemore ...... 81 Socialsecuritycontributionspenalisejobcreationintheformalsector......... 87 Propertytaxescouldhelpfinancebettermunicipalservices .................. 88 Companytaxation:cuttingratesandbroadeningthebasetoboostfirmgrowth andjobcreation ........................................................ 89 Thereisscopetoimprovetheeffectivenessofthetaxadministration andincreasecompliance................................................. 100 Recommendationsforreformingincomeandpropertytaxes...................... 104 Bibliography............................................................ 105 Chapter2.Achievingstrongandbalancedregionaldevelopment ................. 107 Introductionandmainfindings........................................... 108 Spatialinequalitiesarelarge.............................................. 109 Outputinequalityacrossstates:driversandpoliciestoaddressthem .......... 113 Makingthemostoutoftheurbanisationprocess............................ 130 Recommendationsforachievingstrongandbalancedregionaldevelopment ......... 136 Bibliography............................................................ 137 AnnexA.Spatialinequalities:acrossstatesorbetweenruralandurbanareas?..... 141 OECDECONOMICSURVEYS:INDIA©OECD2017 3 TABLEOFCONTENTS Boxes 1. Removinghigh-denominationcurrencynotes–“Demonetisation”.......... 22 2. TheGoodsandServiceTax(GST)....................................... 26 3. India’spublicdebt:isitsustainable?.................................... 35 4. ThedraftFY2017/18centralgovernmentBudgetandrelatedreforms....... 36 5. Reformingtheelectricitysector:theUDAYplananditslikelyimpacts ...... 45 6. Greengrowthchallenges ............................................. 63 1.1. TheGoodsandServiceTax(GST)bill ................................... 78 1.2. TheallocationoftaxingpowersacrosslevelsofgovernmentinIndia ....... 80 1.3. Optionsforraisingmorepersonalincometaxrevenue.................... 85 1.4. TheHinduUndividedFamily.......................................... 86 1.5. Taxingimmovableproperty-lessonsfromtheliterature andfromothercountries ............................................. 89 1.6. SpecialEconomicZonesinIndia....................................... 93 1.7. Taxratecalculationsforresidentandnon-residentcorporations........... 97 1.8. AcomprehensivepackageofmeasurestoaddressBEPS................... 99 1.9. KeyrecommendationsoftheTaxAdministrationReviewCommission(TARC) .. 103 2.1. UnderstandingdifferencesinGDPpercapitaacrosscountriesandstates.... 114 2.2. Minimumsupportpricesandtariff/bordermeasuresforagriculturalproducts.. 118 2.3. Organisedversusunorganisedmanufacturingsectors:definition andcontributiontojobandvalueaddedcreation ........................ 121 2.4. Themovetoamoreco-operativeandcompetitivefederalismframework.... 123 2.5. Rajasthan:recentpolicyreformstopromoteeconomicdevelopment ....... 124 2.6. Indiahaspioneeredurbanplanning:thecityofChandigarh............... 134 2.7. RecentinitiativestoimproveurbaninfrastructureinIndia ................ 135 Tables 1. Macroeconomicindicatorsandprojections.............................. 25 2. Shocksthatcouldaltereconomicperformance .......................... 26 3. Keypublicfinancedataforcombinedcentralgovernmentandstates....... 35 4. PastOECDrecommendationsonthemonetary,financial andfiscalpolicyframeworks.......................................... 38 5. Taxrevenue:levelandmix............................................ 39 6. PastOECDrecommendationsoncorporateincometax ................... 41 7. PastOECDrecommendationsoninfrastructureandland.................. 47 8. PastOECDrecommendationsonforeigndirectinvestment................ 49 9. PastOECDrecommendationsonimprovingthebusinessenvironment...... 49 10. PastOECDrecommendationsonlabourregulations ...................... 52 11. PastOECDrecommendationsoneducationandtrainingsystems .......... 55 12. PastOECDrecommendationsonprogrammestobettersupportthepoor andvulnerable ...................................................... 59 1.1. Taxrevenue:levelandmix............................................ 79 1.2. Reformoptionsforraisingmorepersonalincometaxrevenue:4scenarios .. 85 1.3. TheaveragetaxwedgedecreasesalongtheincomeladderinIndia......... 87 1.4. Majorincentivesgrantedtocompaniesunderthecentralgovernment incometax ......................................................... 91 1.5. Taxdepreciationratesandtrueeconomicdepreciationratesforselected assetsinIndia....................................................... 92 4 OECDECONOMICSURVEYS:INDIA©OECD2017 TABLEOFCONTENTS 1.6. Calculationoftheeffectivestatutorytaxrateforaresidentversus anon-residentcorporation............................................ 97 1.7. FDIinflowstoIndia.................................................. 100 2.1. Agriculturalhouseholds:sizeoflandholdings,income,investment andindebtedness.................................................... 119 A.1. Percentageofinequalityexplainedbydisparitiesacrossstates andtheurban/ruraldivide............................................ 142 Figures 1. Growthhasbeenstrongandpovertyhasdeclined........................ 19 2. Regionaldisparitiesarelargeandurbanpopulationisincreasingfast....... 20 3. Recentmacroeconomicdevelopments.................................. 23 4. Financialvulnerabilities .............................................. 24 5. Monetarypolicy:recentactionsandoutcomes........................... 28 6. Challengesinthebankingsector ...................................... 30 7. Stockandbondmarketcapitalisation .................................. 31 8. Internationalcomparisonsforfiscaloutcomes .......................... 33 9. Fiscaloutcomesforthecentralgovernmentandthestates................ 34 10. PublicdebttoGDPratiounderfourstylizedscenarios .................... 35 11. Themarginalincometaxrateskickinathighincomelevels............... 39 12. Thecombinedstatutorytaxrateoninternationaldividendspayments ishigh,2012 ........................................................ 41 13. Theinvestmentratehasfallen ........................................ 42 14. Infrastructureshouldimprove:thecaseofelectricity..................... 44 15. Registeringpropertytakestimeandiscostly ............................ 46 16. FDI:regulatoryrestrictivenessandinflows .............................. 48 17. Toofewjobsarecreated .............................................. 50 18. Employmentprotectionlegislationisstringent .......................... 51 19. Toolowliteracyrateandpublicspendingoneducationtoreap thedemographicdividend............................................ 54 20. Financialandhumanresourcesinthehealthcaresector.................. 56 21. ImpactofindividualcharacteristicsonfinancialinclusioninIndia andotherBRIICS .................................................... 58 22. Spatialdisparitiesarelarge ........................................... 60 23. Lowproductivityintheagriculturalsector .............................. 61 24. Airpollutionincities................................................. 62 25. GreengrowthindicatorsforIndia...................................... 63 1.1. Taxrevenueislow ................................................... 77 1.2. Thetaxmix:indirecttaxesandstates’owntaxesaccountforalargeshare.. 78 1.3. Thepersonalincometaxraiseslittlerevenue............................ 82 1.4. Thepersonalincometaxhaslittleredistributiveimpact .................. 83 1.5. Corporateincometax:highstatutoryrateandmanydistortions ........... 90 1.6. Internationalaspectsforthecorporateincometax....................... 96 1.7. UnfinalisedtaxdisputesinIndia,BRIICSandOECDcountries.............. 101 1.8. TaxadministrationcapacityinIndiaiscomparativelylow................. 102 2.1. Incomeinequalityacrossstatesislarge................................. 109 2.2. Thereislittleevidenceofcatchingupoflaggingstates.................... 110 2.3. Therural/urbanincomedivideislarge.................................. 111 OECDECONOMICSURVEYS:INDIA©OECD2017 5 TABLEOFCONTENTS 2.4. Accesstopublicservices:therural/urbandivide ......................... 112 2.5. GapsinGDPpercapitaacrossstatesarelargelyduetoproductivity differences.......................................................... 115 2.6. Explaininggrowthpatternacrossstatesovertheperiod2000-01to2011-12.. 116 2.7. Agriculture:akeyfactorbehindincomedispersionacrossstates........... 117 2.2. Pricesofkeyagriculturalproducts ..................................... 118 2.3. Firms,employment,valueaddedandproductivityinorganised andunorganisedmanufacturing....................................... 121 2.10. Taxandspendingautonomyofthestates:Indiacomparedwith13other federations ......................................................... 122 2.11. Thequalityofphysicalandsocialinfrastructurevariessignificantly acrossstates........................................................ 126 2.12. Productmarketindicatorsandstates’performance ...................... 128 2.13. Indianfirmstendtobesmall ......................................... 129 2.14. Somestatesdobetterthanothersinallocatingresourcesacrossfirms fromtheorganisedsector............................................. 129 2.15. Theurbanisationprocesswillaccelerate................................ 130 2.16. Potentialurbanisationgainsarenotfullyexploited....................... 132 2.17. Urbanisationchallenges:infrastructureshortagesandlocalairpollution.... 133 6 OECDECONOMICSURVEYS:INDIA©OECD2017 ThisSurvey was prepared inthe EconomicsDepartment by IsabelleJoumard, underthesupervisionofPirittaSorsa.Statisticalresearchassistancewasprovided by Hermes Morgavi with general administrative assistance provided by Anthony Bolton and Brigitte Beyeler. The Survey also benefitted from contributions at different stages by Hugo Bourrousse, Jean-Marc Fournier; Daniela Glocker, Peter Hoeller,PaulO'Brien,UrbanSilaandAlastairThomas. The Survey was discussed at a meeting of the Economic and Development Review Committee on 19December2016 and is published on the responsibility of theSecretaryGeneraloftheOECD. Follow OECD Publications on: http://twitter.com/OECD_Pubs http://www.facebook.com/OECDPublications http://www.linkedin.com/groups/OECD-Publications-4645871 http://www.youtube.com/oecdilibrary OECD Alerts http://www.oecd.org/oecddirect/ This book has... StatLinks2 A service that delivers Excel ® files from the printed page! Look for the StatLinks2at the bottom of the tables or graphs in this book. To download the matching Excel® spreadsheet, just type the link into your Internet browser, starting with the http://dx.doi.org prefix, or click on the link from the e-book edition.

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