India's economy could achieve growth of 10 per cent in 2011 if the government persists with reforms, including privatisation of state firms, the OECD said on Tuesday.
In its first survey of the Indian economy, the Paris-based Organisation for Economic Co-operation and Development said India needed to relax its labour laws, remove a cap on foreign investment in the insurance sector and undertake wide-ranging reforms to boost growth and reduce poverty.
"The impressive response of the Indian economy to past reforms should give policymakers confidence that further liberalisation will deliver additional growth dividends," the OECD said in the report released in New Delhi.
The Indian economy, Asia's third-largest, has grown at an average 8.6 per cent in the past four years but reforms such as further opening the economy to foreign investment and the privatisation of state firms have stalled due to opposition from supporters of the ruling coalition.
The economy is expected to grow by 8.5 per cent in the financial year ending in March 2008, according to the Reserve Bank of India (RBI), slowing from 9.4 per cent in the previous fiscal year.
The OECD restated it expected economic growth to slow to 8 per cent in 2008 due to the effect of higher interest rates.
International ratings agency Standard and Poor's said the Indian economy is likely to grow 8.6 per cent in the fiscal year ending in March 2008, slower than 9.4 per cent in 2006-07 but a notch higher than the RBI's forecast.
"Overall, while global developments have made the environment more risky, the strength of domestic demand is expected to keep the Indian economy on a relatively high growth trajectory," S&P said in a report on Tuesday.
OECD said India's privatisation programme needed to be revitalised as there were many loss-making state enterprises and both the productivity and profitability of publicly owned firms had been lower than those in the private sector.
"Privatisation would thus appear to offer considerable possibilities for improving productivity. Privatising firms in sectors where the government share of output is larger (banking, insurance, coal and electricity) would also be desirable," it said.
Reforms and politics
Indian Prime Minister Manmohan Singh put sales of stakes in state firms on hold last year due to pressure from communist allies who provide the government with a majority in parliament.
The OECD said India was on track to meet its fiscal deficit target of 3 per cent of GDP by 2008-09, but there was a need to raise the savings rate further and improve the quality of spending.
It called for the insurance and retail sectors to be opened up further. The government has expressed its intention to raise the cap on foreign direct investment (FDI) in the insurance sector to 49 per cent from 26 per cent but this has also been blocked by the left.
"Lifting the ban on FDI in retail trading would help to improve productivity, supply chain management, reduce the exceptionally high rate of waste of agriculture produce and so lower retail prices and raise producer prices," the OECD said.
Modern retailing faces political obstacles because of fears that millions of small shopkeepers could lose their livelihoods in the fragmented but fast-growing sector, forecast to double in size by 2015 from an estimated $350 billion.
India limits foreign, multiple-brand retailers to wholesale or franchise and licence operations. Talk of easing foreign investment rules has cooled in recent months, prompting Tesco Plc and Carrefour to shelve their plans for India.